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ACCESSION NUMBER: 0000070530-02-000012
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20020526
FILED AS OF DATE: 20020816
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: NATIONAL SEMICONDUCTOR CORP
CENTRAL INDEX KEY: 0000070530
STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674]
IRS NUMBER: 952095071
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-06453
FILM NUMBER: 02741068
BUSINESS ADDRESS:
STREET 1: 2900 SEMICONDUCTOR DR
STREET 2: PO BOX 58090
CITY: SANTA CLARA
STATE: CA
ZIP: 95052-8090
BUSINESS PHONE: 4087215000
MAIL ADDRESS:
STREET 1: 2900 SEMICONDUCTOR DR
CITY: SANTA CLARA
STATE: CA
ZIP: 95052-8090
</SEC-HEADER>
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<TYPE>10-K
<SEQUENCE>1
<FILENAME>form10k_081202.txt
<DESCRIPTION>ANNUAL REPORT TO FY02 NATIONAL SEMICONDUCTOR
<TEXT>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 26, 2002
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 Number: 1-6453
NATIONAL SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2095071
(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
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Common stock, par value New York Stock Exchange
$0.50 per share Pacific Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
--Continued on next page--
<PAGE>
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of National as
of June 28, 2002, was approximately $4,059,592,390. Shares of common stock held
by each officer and director and by each person who owns 5 percent or more of
the outstanding common stock have been excluded because these persons may be
considered to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the registrant's common stock, $0.50 par
value, as of June 28, 2002, was 180,799,043.
DOCUMENTS INCORPORATED BY REFERENCE
Document Location in Form 10-K
-------- ---------------------
Portions of the Proxy Statement for the Annual Meeting of Part III
Stockholders to be held on or about October 18, 2002.
Portions of the Company's Registration Statement on Form S-3, Part IV
Registration No. 33-48935, which became effective October 5, 1992.
Portions of the Company's Registration Statement on Form S-3, Part IV
Registration No. 33-52775, which became effective March 22, 1994.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 333-57029, which became effective June 17, 1998.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 33-61381, which became effective July 28, 1995.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 333-53801, which became effective May 28, 1998.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 333-09957, which became effective August 12, 1996.
Portions of Cyrix Corporation's Registration Statement on Form S-3, Part IV
Registration No. 333-10669, which became effective August 22, 1996.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 333-48424, which became effective October 23, 2000.
Portions of the Proxy Statement for the Annual Meeting held Part IV
September 26, 1997.
Portions of the Company's Post Effective Ammendment No. 1 Part IV
on Form S-8 to Registration Statement on Form S-4,
Registration No. 333-38033-01 whichBecame effective November 18, 1997.
Portions of the Company's Registration Statement on Form S-8, Part IV
RegistrationNo. 333-23477 which became effective March 17, 1997.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 333-63614, which became effective June 22, 2001.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 333-70040, which became effective September 24, 2001.
The Index to Exhibits is located on pages 72-74.
<PAGE>
ITEM 1. BUSINESS
The statements contained in this report that are forward-looking are based on
current expectations and estimates. Actual results may differ materially from
our forward-looking statements. Forward-looking statements involve a number of
risks and uncertainties. These 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 wireless, personal computer and
communications infrastructure industries, the effects of legal and
administrative cases and proceedings, and other risks and uncertainties that we
may discuss from time to time in our other reports and filings with the SEC.
General Our strategy is to provide systems on a chip for our key trendsetting
data highway partners, using our analog expertise as a starting point for
forward integration. We design, develop, manufacture and market a wide array of
semiconductor products, including a broad line of analog, mixed-signal and other
integrated circuits. These products address a variety of markets and
applications, including:
o wireless communications; o power management;
o flat panel and CRT displays; o imaging;
o information appliances; o local and wide area networks;
o personal systems; o consumer.
National was originally incorporated in the state of Delaware in 1959 and our
headquarters have been in Santa Clara, California since 1967.
Recent Acquisitions
In April 2002, we acquired the Finnish company Fincitec Oy, and its related
company, ARSmikro OU, based in Estonia. These two companies develop low-voltage,
low-power application specific integrated circuits for battery-powered devices.
We made this acquisition to strengthen our development capabilities for power
management circuits for the portable market and to expand our suite of
integrated and discrete silicon solutions for handheld devices, including cell
phones, personal digital assistants, digital cameras and similar electronic
devices. In June 2001, we acquired Wireless Solutions Sweden AB, a former
subsidiary of Allgon AB. Wireless Solutions is a developer of wireless solutions
ranging from telemetry to mobile phones to wireless networking, including
BluetoothTM. This acquisition should help us to deliver complete wireless
reference designs, including silicon chipsets, hardware and software. These
acquisitions were accounted for using the purchase method of accounting.
Products
Semiconductors are integrated circuits (in which a number of transistors and
other elements are combined to form a more complicated circuit) or discrete
devices (such as individual transistors). In an integrated circuit, various
components are fabricated in a small area or "chip" of silicon, which is then
encapsulated in plastic, ceramic or other advanced forms of packaging and
connected to a circuit board or substrate.
We manufacture an extensive range of analog intensive, mixed-signal and
digital products, which are used in numerous vertical markets. While no precise
industry standard exists for analog and mixed-signal devices, we consider
products which process analog information or convert analog to digital or
digital to analog as analog and mixed-signal devices.
We are a leading supplier of analog and mixed-signal products, serving both
broad based markets such as the industrial and consumer market, and more
narrowly defined markets such as wireless handsets; displays, imaging and human
interface; information infrastructure and information appliances. Our analog and
mixed-signal devices include:
o amplifiers and regulators; o image sensors;
o power monitors and line drivers; o radio frequency;
o audio amplifiers; o display drivers and signal
processors.
Other products with significant digital to analog or analog to digital
capability include products for local area and wireless networking and wireless
communications, as well as products for personal systems and personal
communications, such as input/output devices. We use the brand name 'Super I/O'
to describe our integrated circuits that handle system peripheral and
input/output functions on the personal computer motherboard.
Corporate Organization; Product Line Business Units
We are comprised of various product line business units which are combined to
form groups. In fiscal 2002, our operations were organized in the following five
groups: the Analog Group, the Information Appliance and Wireless Group, the
Displays Group, the Wired Communications Group and the Custom Solutions Group.
Analog Group: Analog products are a vital technology link that connects the
physical world with digital information. They are used to enable and enrich the
experience of sight and sound of many electronic applications. In addition to
the real world interfaces, analog products are used extensively in power
management and signal conditioning applications.
We have achieved a leadership position with our power management
technology. Our diverse portfolio of innovative intellectual property enables us
to develop building block products, application specific standard products and
full custom large-scale integrations for our key customers in applications such
as wireless handsets and flat panel displays. In signal path applications, our
innovative and high-performance building blocks and application specific
standard products allow our customers to differentiate their systems.
The Analog Group designs, develops and manufactures a wide range of
products including:
o Power management products (power conversion, regulation and conservation);
o High-performance operational amplifiers;
o High-performance analog-to-digital converters;
o High efficiency audio amplifiers;
o Thermal management products.
With our leadership in small and innovative packages and process
technology, we are focusing on high growth markets that require portability,
such as cellular telephones and wireless handheld devices. We are using our
analog expertise as the initial point to integrate systems on a chip aimed at
the wireless, displays, notebook computer and information appliance markets.
Current offerings include audio subsystems and a complete power management unit
for the GSM wireless product applications. We are increasing our penetration
into the top tier original equipment manufacturer customer base in the wireless
and display market segment. Nearly 42 percent of the Analog Group's revenues are
derived from original equipment manufacturers, while the remaining 58 percent
come from authorized distributors worldwide.
The Enhanced Solutions business unit, which is part of the Analog Group,
supplies integrated circuits and contract services to the high reliability
market, which includes avionics, defense, space and the federal government.
Displays Group: The Displays Group consists of our Flat Panel Displays and
CRT Displays business units. We are a leader in analog video processing
solutions for the displays market. The Displays Group develops and manufactures
various products that provide higher resolution and brighter color for flat
panel monitors, CRT monitors and notebook TFT displays.
The Flat Panel Displays business unit provides a variety of innovative
products for notebook TFT displays and flat panel monitors. Our products include
a variety of timing controllers, low voltage differential signal (LVDS) data
receivers, LVDS transmitters and column drivers. In the notebook TFT displays
segment, we maintain approximately 40% market share in the integrated LVDS
receiver and timing controllers. The Flat Panel Displays business unit also
continues to expand its position in the discrete LVDS market. Recent new product
introductions include a new family of column drivers that use the industry
standard reduced swing differential signaling (RSDS) digital interface
technology. The Flat Panel Displays business unit continues to drive towards
integration by developing a scaler chip targeted at high-end notebooks and
stand-alone flat panel monitors. We are also developing new product offerings
for the mobile handset market.
The CRT Displays business unit offers a variety of video drivers and
pre-amplifiers that go into CRT monitors. While unit volume of CRT monitors is
generally expected to decline over time due to the increasing penetration of
flat panel displays, the size of the overall market and the benefits of video
neckboard integration continue to drive innovation at the integrated circuit
level. Our product offerings include the integrated low cost family of CMOS
pre-amplifiers with on-screen display, high gain drivers and integrated bias
clamp.
Information Appliance and Wireless Group: The Information Appliance and
Wireless Group consists of our Information Appliance, Wireless and Advanced I/O
business units. The Information Appliances business unit focuses on providing
easier access to the internet with our Geode product family of silicon and
system solutions. The Geode technology merges complex functionality, such as
processing, system logic, graphics, audio and video decompression on to one
highly integrated device. Built around the core of the x86 microprocessor, this
technology allows for optimized power, performance and price. Coupled with our
analog and mixed-signal communication capabilities, this technology allows us to
offer efficient flexible solutions, making communication and information access
easier. The Information Appliance business unit focuses on serving three market
segments:
o Enterprise thin-clients that are computer systems with low power
consumption and minimal memory that leverage application software from a
centralized server;
o Personal access devices that are lightweight, hand held internet access
terminals;
o Interactive TV set-top boxes that provide internet access through the
television.
The Wireless business unit delivers solutions that perform the radio,
baseband controller, power management and related functions primarily for
handsets and base stations in the cellular and cordless telephone markets. The
Wireless business unit leverages three technologies:
o Global Systems for Mobile Communications;
o BluetoothTM;
o Digital Cordless Telephone technology.
Our GSM chipset solution combines the radio transceiver, digital baseband,
analog baseband and power management into one solution. Our BluetoothTM enabled
product offering provides wireless connectivity between various consumer and
commercial applications. The newest generation of BluetoothTM devices and the
wide personal access BluetoothTM module offers a highly integrated solution for
future applications. Our digital cordless technology allows us to offer some of
the most flexible system solutions available today for the digital cordless
telephone. With a unique baseband platform, one single baseband chip supports
combined voice/data, repeaters, base stations and handsets.
The Advanced I/O business unit provides input/output, including our Super
I/O product, and manageability solutions to the server, desktop client, mobile
client and the emerging trusted client market segments. We have recently
introduced products that address remote server management and security
technology for future generations of customers.
Wired Communications Group: The Wired Communications Group consists of the
Enterprise Networks and Network Interface business units. The Enterprise Network
business unit provides complete solutions for networking security and networking
management. Combining state-of-the-art analog and digital technologies,
Enterprise Network products include ultra-low power physical layer devices,
wire-speed packet processors, cost effective switch fabrics and highly scalable
next-generation EthernetMAXTM products. In fiscal 2002, we announced our
collaboration efforts with Vitesse Semiconductor for developing end-to-end
solutions to accelerate adoption of high-performance and cost-effective gigabit
ethernet technologies. Vitesse Semiconductor is a designer and supplier of
innovative, high-performance integrated circuits and optical modules used in
next generation networking and optical communications equipment. As a result of
the collaboration efforts, we introduced a high-performance, low power,
cost-effective 16-port gigabit ethernet switch, which is a complete gigabit
switch solution for enterprise networking systems. By leveraging our innovation,
technology breadth of building blocks and our analog expertise, we now offer a
complete end-to-end solution, the Gigabit MAC and Gigabit PHY for network
interface cards, and the Gigabit Switch system solution.
In fiscal 2002, we formed a strategic relationship with iReady Corporation
to deliver the industry's first fully integrated line-speed transport off-load
solution, the EthernetMAX core (Media Access Xcclerator). iReady is a leader in
hardware accelerated internet protocol processing. This strategic partnership is
aimed at delivering next-generation semiconductor solutions for the Gigabit
Ethernet and iSCSI storage networking markets. iSCSI, a new IP-based storage
networking standard for linking data storage facilities, is expected to help
bring about rapid development of the storage area network market by increasing
the capabilities and performance of storage data transmission.
The Network Interface business unit is focused on the development of
high-speed differential interconnect products for infrastructure equipment that
support wireless, telecom, data networking and professional video applications.
Our products are used in backplane and cable intraconnects within these systems.
Custom Solutions Group: Custom Solutions supplies a range of
application-specific and standard integrated circuits for targeted customers in
the telecommunications, automotive and consumer electronics markets. This group
engages with other internal product line business units to facilitate the
exchange and acquisition of intellectual property to deliver systems-on-a-chip
solutions for key strategic partners. The breadth of Custom Solutions product
offerings include:
o Custom-specific designs that provide systems-on-a-chip solutions;
o A wide range of CMOS image sensors specifically designed for a variety of
commercial and industrial imaging applications;
o CR16 core and ARM 7 processors, combined with dedicated application
specific software to address the device connectivity market;
o General-purpose 8-bit and 16-bit microcontrollers to address a wide variety
of applications in the communication, consumer and automotive segments.
Worldwide Marketing and Sales and Central Technology and Manufacturing
Group. Separately from our business operating groups, our corporate structure
includes centralized Worldwide Marketing and Sales and a Central Technology and
Manufacturing Group.
Worldwide Marketing and Sales is structured around the four major regions
of the world where we operate -- the Americas (North and South Americas),
Europe, Japan and Asia Pacific -- and unites our worldwide sales and marketing
organization.
CTMG manages all production, including manufacturing requirements that are
outsourced, and Central Support Technology. Central Support Technology includes
process technology, which provides pure research and process development
necessary for many of our core production processes, packaging technology and
leading edge research. CTMG provides a range of process libraries, product cores
and software that is shared among our product lines to develop system level
solutions. It is also responsible for the selection and usage of common support
tools, including integrated computer-aided design for design, layout and
simulation.
Segment Financial Information and Geographic Information.
For segment reporting purposes, each of our product line business units
represents an operating segment as defined under Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. Business units that have similarities, including economic
characteristics, underlying technology, markets and customers, are aggregated
into segments. Under the criteria in SFAS No. 131, only the Analog segment and
the Information Appliance segment are considered reportable segments. All other
segments are included in the caption 'All Others.' For further financial
information on these segments, refer to the information contained in Note 13,
'Segment and Geographic Information,' in the Notes to the Consolidated Financial
Statements included in Item 8.
Marketing and Sales
We market our products globally to original equipment manufacturers through a
direct sales force. Major OEMs include:
o Hewlett Packard; o Nokia;
o IBM; o Samsung;
o LG Electronics; o Siemens;
o L.M. Ericsson; o Sony;
o Motorola; o Sony - Ericsson Mobile Communication.
There has been an increasing trend in the technology industry where OEMs use
contract manufacturers to build their products and original design manufacturers
to design and build products. As a result, our design wins with major OEMs,
particularly in the personal computer and cellular phone markets, can ultimately
result in sales to a contract manufacturer. In addition to our direct sales
force, we use distributors in our four business regions, and approximately 47
percent of our total worldwide revenues are channeled through distributors. In
an increasing portion of our distribution sales, the distributor acts as the
logistics partner for our OEM customers and their contract manufacturers. In
line with industry practices, we generally credit distributors for the effect of
price reductions on their inventory of our products and, under specific
conditions, we repurchase products that we have discontinued.
Our comprehensive central facilities in the United States, Europe and
Singapore handle customer support. These customer support centers respond to
inquiries on product pricing and availability, customer technical support
requests, order entry and scheduling.
We augment our sales effort with application engineers based in the field.
These engineers are specialists in our product portfolio and work with customers
to identify and design our integrated circuits into customers' products and
applications. These engineers also help identify emerging markets for new
products and are supported by our design centers in the field or at
manufacturing sites.
Customers
We are not dependent upon any single customer, the loss of which would have a
material effect on our operating results. The distributor Avnet accounted for
approximately 10 percent of total net sales in fiscal 2002 as a result of its
acquisition of EBV in Europe. No one customer or distributor accounted for 10
percent or more of total net sales in fiscal 2001 or 2000.
Backlog
Consistent with industry practice, we frequently revise semiconductor backlog
quantities and shipment schedules under outstanding purchase orders to reflect
changes in customer needs, and therefore we do not believe it is meaningful to
disclose the amount of backlog at any particular date.
Seasonality
Generally, we are affected by the seasonal trends of the semiconductor and
related industries. We typically experience lower sales in our third fiscal
quarter, primarily due to customer holiday schedules. Sales usually reach a
seasonal peak in our fourth fiscal quarter. During fiscal 2002, this typical
trend did not occur. While business conditions for the semiconductor industry
were weak in fiscal 2002, we experienced sequential quarterly growth in sales as
new orders improved throughout the fiscal year. Revenue in our third fiscal
quarter, which is typically down, grew slightly over sales in the preceding
second fiscal quarter.
Manufacturing
The design of semiconductor and integrated circuit products is shaped by general
market needs and customer requirements. Following product design and
development, we generally produce integrated circuits in the following steps:
o Wafer Fabrication. Product designs are compiled and digitized by state
of the art design equipment and then transferred to silicon wafers in
a series of complex precision processes that include oxidation,
lithography, chemical etching, diffusion, deposition, implantation and
metallization.
o Wafer Sort. The silicon wafers are tested and separated into
individual circuit devices.
o Product Assembly. Tiny wires are used to connect the electronic
circuits on the device to the stronger metal leads of the package in
which the device is encapsulated for protection.
o Final Test. The devices are subjected to a series of vigorous tests
using computerized circuit testers and, for certain applications,
environmental testers such as burn-in ovens, centrifuges, temperature
cycle or moisture resistance testers, salt atmosphere testers and
thermal shock testers.
o Coating. Certain devices in the analog portfolio are designed to be
used without traditional packaging. In this case, the integrated
circuit is coated with a protective material and mounted directly onto
the circuit board.
We conduct product design and development work predominantly in the United
States. Wafer fabrication is concentrated in two facilities in the United States
and one in Scotland. Nearly all product assembly and final test operations are
performed in facilities in Southeast Asia. For capacity utilization and other
economic reasons, we employ subcontractors to perform certain manufacturing
functions in the United States, Europe, Israel, Southeast Asia and Japan.
Our wafer manufacturing processes span Bipolar, Metal Oxide Silicon,
Complementary Metal Oxide Silicon and Bipolar Complementary Metal Oxide Silicon
technologies, including Silicon Germanium. We are focusing our wafer fabrication
processes to emphasize integration of analog and digital capabilities to support
our strategy to develop system-on-a-chip products. Bipolar processes primarily
support our standard products. The width of the individual transistors on a chip
is measured in microns; one micron equals one millionth of a meter. As products
decrease in size and increase in functionality, wafer fabrication facilities
must be able to manufacture integrated circuits with sub-micron circuit pattern
widths. This precision fabrication carries over to assembly and test operations,
where advanced packaging technology and comprehensive testing are required to
address the ever increasing performance and complexity embedded in current
integrated circuits.
We have a long-term technology licensing agreement with Taiwan
Semiconductor Manufacturing Company (TSMC). This licensing agreement allows us
to gain access to a variety of TSMC's advanced sub-micron processes for use in
our wafer fabrication facility in Maine as desired, if and when those processes
are developed by TSMC. Our arrangement with TSMC will enable us to gain access
ultimately to TSMC's 0.10-micron process technology. These advanced process
technologies should accelerate the development of high performance digital and
mixed-signal products that support our target markets.
Raw Materials
Our manufacturing processes use certain key raw materials critical to our
products. These include silicon wafers, certain chemicals and gases, ceramic and
plastic packaging materials and various precious metals. We also rely on
subcontractors to supply finished or semi-finished products which we then market
through our sales channels. We obtain raw materials and semi-finished or
finished products from various sources, although the number of sources for any
particular material or product is relatively limited. We feel our current supply
of essential materials is adequate. However, shortages have occurred from time
to time and could occur again. Significant increases in demand, rapid product
mix changes or natural disasters could affect our ability to procure materials
or goods.
Research and Development
Our research and development efforts consist of pure research in metallurgical,
electro-mechanical and solid-state sciences, manufacturing process development
and product design. Research functions and development of most process
technologies are done by CTMG's process technology group. Total R&D expenses
were $441.0 million for fiscal 2002, or 30 percent of sales, compared to $435.6
million for fiscal 2001, or 21 percent of sales, and $386.1 million for fiscal
2000, or 18 percent of sales. These amounts exclude in-process R&D charges of
$1.3 million related to the acquisitions of Fincitec, ARSmikro and Wireless
Solutions Sweden in fiscal 2002, $16.2 million related to the acquisitions of
innoComm Wireless and Vivid Semiconductor in fiscal 2001 and $4.2 million
related to the acquisition of Algorex in fiscal 2000. These in-process R&D
charges are included in our consolidated statements of operations as a component
of special items.
During fiscal 2002, we expended 75 percent of our R&D spending toward new
product development and 25 percent toward the development of process and support
technology. Compared to fiscal 2001, this represents an increase in spending of
13 percent toward development of process and support technology and a 6 percent
reduction in spending toward new product development.
Patents
We own numerous United States and non-U.S. patents and have many patent
applications pending. We consider the development of patents and the maintenance
of an active patent program advantageous to the conduct of our business.
However, we believe that continued success will depend more on engineering,
production, marketing, financial and managerial skills than on our patent
program. We license certain of our patents to other manufacturers and
participate in a number of cross licensing arrangements and agreements with
other parties. Each license agreement has unique terms and conditions, with
variations as to length of term, royalties payable, permitted uses and scope.
The majority of these agreements are cross-licenses in which we grant broad
licenses to our intellectual property in exchange for receiving a license; none
are exclusive. The amount of income we have received from licensing agreements
has varied in the past, and we cannot precisely forecast the amount and timing
of future income from licensing agreements. On an overall basis, we believe that
none of the license agreements is material to us, either in terms of royalty
payments due or payable or intellectual property rights granted or received.
Employees
At May 26, 2002, we employed approximately 10,100 people of whom approximately
4,600 were employed in the United States, 1,300 in Europe, 4,100 in Southeast
Asia and 100 in other areas. We believe that our future success depends
fundamentally on our ability to recruit and retain skilled technical and
professional personnel. Our employees in the United States are not covered by
collective bargaining agreements. We consider our employee relations worldwide
to be favorable.
Competition and Risks
In addition to the risks discussed below and elsewhere in this 'Business'
section, see the 'Outlook' section included in Item 7, 'Management's Discussion
and Analysis,' for further discussion of other risks and uncertainties that may
affect our business.
Conditions inherent in the semiconductor industry cause periodic
fluctuations in our operating results. Rapid technological change and frequent
introduction of new technology leading to more complex and more integrated
products characterize the semiconductor industry. The result is a cyclical
environment with short product life, price erosion and high sensitivity to the
overall business cycle. Substantial capital and R&D investment are also required
to support products and manufacturing processes. As a result of these industry
conditions, we have experienced in the past and may experience in the future
periodic fluctuations in our operating results. Shifts in product mix toward, or
away from, higher margin products can also have a significant impact on our
operating results. As a result of these and other factors, our financial results
can fluctuate significantly from period to period. For example, we incurred a
loss in fiscal 2002, while we generated net income in fiscal 2001 and 2000.
Prior to that we experienced substantial losses in fiscal 1999 and 1998. We
generated net income in fiscal 1993 through 1997, while we incurred losses in
fiscal 1989 through 1992.
Our business will be harmed if we are unable to compete successfully in our
markets. Competition in the semiconductor industry is intense. We compete with a
number of major corporations in the high-volume segment of the industry. These
include several multinational companies whose semiconductor business may be only
part of their overall operations, such as IBM, Motorola, Koninklijke (Royal)
Philips Electronics, NEC and Toshiba. We also compete with a large number of
corporations that target particular markets such as Texas Instruments, ST
Microelectronics, Maxim, Analog Devices, Linear Technology, Intel and LSI Logic.
Competition is based on design and quality of products, product performance,
price and service, with the relative importance of these factors varying among
products and markets. We currently see significant competition in the networking
market from both large established companies such as Intel and Lucent, as well
as newer companies such as Broadcom and Marvell Technology.
We cannot assure you that we will be able to compete successfully in the
future against existing or new competitors or that our operating results will
not be adversely affected by increased price competition. We may also compete
with several of our customers, particularly customers in the networking and
personal systems markets.
We face risks from our international operations, many of which are beyond
our control. We conduct a substantial portion of our operations outside the
United States, and our business is subject to risks associated with many factors
beyond our control. These factors include:
o fluctuations in foreign currency rates;
o instability of foreign economies;
o emerging infrastructures in foreign markets;
o support required abroad for demanding manufacturing requirements;
o foreign government instability and changes; and
o U.S. and foreign laws and policies affecting trade and investment.
Although we have not experienced any materially adverse effects from our
foreign operations as a result of these factors in the last year, one or more of
these factors has had an effect on us in the past and we could be affected by
them in the future. In addition, although we seek to hedge our exposure to
currency exchange rate fluctuations, our competitive position relative to
non-U.S. suppliers can be affected by the exchange rate of the U.S. dollar
against other currencies, particularly the Japanese yen.
Environmental Regulations
To date, our compliance with federal, state and local laws or regulations that
have been enacted to regulate the environment has not had a material adverse
effect on our capital expenditures, earnings, competitive or financial position.
For more information, see Item 3, "Legal Proceedings" and Note 12, "Commitments
and Contingencies" in the Consolidated Financial Statements in Item 8. However,
we could be subject to fines, suspension of production, alteration of our
manufacturing processes or cessation of our operations if we fail to comply with
present or future government regulations related to the use, storage, handling,
discharge or disposal of toxic, volatile or otherwise hazardous chemicals used
in our manufacturing processes.
ITEM 2. PROPERTIES
We conduct manufacturing, as well as process research and product development,
in our wafer fabrication facilities located in Arlington, Texas; South Portland,
Maine; and Greenock, Scotland. As part of our consolidation of our wafer
manufacturing operations in Greenock, Scotland, we closed our 4-inch wafer
fabrication facility in October 2000. The manufacturing processes from our
4-inch wafer fabrication facility were transferred to our 6-inch wafer
fabrication facility at the same site, as well as to our manufacturing facility
in Arlington, Texas. Wafer fabrication capacity utilization during fiscal 2002
ran at 55 percent, as production activity was reduced considerably by low demand
in the semiconductor industry. This compares with wafer fabrication capacity
utilization for fiscal 2001 of 69 percent when business conditions were much
stronger, particularly in the first half of the fiscal year. We expect our
captive manufacturing capacity and our third-party subcontract manufacturing
arrangements to be adequate to supply our needs in the foreseeable future.
Our assembly and test functions are performed primarily in Southeast Asia.
These facilities are located in Melaka, Malaysia and Toa Payoh, Singapore.
Our principal administrative and research facilities are located in Santa
Clara, California. Our regional headquarters for Worldwide Sales and Marketing
are located in Santa Clara, California; Munich, Germany; Tokyo, Japan; and
Kowloon, Hong Kong. We maintain local sales offices and sales service centers in
various locations and countries throughout our four business regions. We also
operate small design facilities in various locations in the U.S., including:
Austin, Texas Grass Valley, California Rochester, NY
Calabasas, California Irvine, California Salem, New Hampshire
Chandler, Arizona Longmont, Colorado San Diego, California
Federal Way, Washington Nashua, New Hampshire Santa Clara, California
Fort Collins, Colorado Norcross, Georgia South Portland, Maine
Fremont, California Phoenix, Arizona Tucson, Arizona
and at overseas locations including China, Estonia, Finland, Germany, India,
Israel, Japan, the Netherlands, Sweden and the United Kingdom. In general, we
own our manufacturing facilities and lease most of our sales and administrative
offices.
ITEM 3. LEGAL PROCEEDINGS
Tax Matters
We have settled with the IRS all outstanding issues relating to our federal tax
liability for the 1986-1996 fiscal years. After taking into account
overpayments, deficiencies, and loss and credit carryovers, the tax deficiency
for these years was approximately $3.4 million. We have paid this amount to the
IRS. The interest amount on the deficiency has been finalized. The IRS has begun
examination of our tax returns for fiscal years 1997 through 2000. We believe we
have made adequate tax payments and/or accrued adequate amounts in our financial
statements to cover all years in question.
Customs Proceedings
In April 1988, we received a notice from the U.S. Customs Service in San
Francisco alleging that we had underpaid duties of approximately $19.5 million
on goods we had imported from our foreign subsidiaries from June 1, 1979 to
March 1, 1985. We had been contesting the notice in various proceedings since
1988. The amount of the alleged underpayment was reduced to approximately $3.6
million by the Assistant Commissioner of Customs in March 1998. The underpayment
was subject to penalties computed as a multiple of the underpayment. In July
2001, the Customs Service accepted our offer to settle the matter for $2.5
million, which we had previously paid to the Customs Service. The matter is now
concluded.
Environmental Matters
1. National has been named to the National Priorities List (Superfund) for our
Santa Clara, California site and we have completed a remedial
investigation/feasibility study with the Regional Water Quality Control
Board, which is acting as agent for the EPA. We have agreed in principle
with the RWQCB on a site remediation plan. We were sued by AMD, which
sought recovery of AMD's cleanup costs in the Santa Clara, California area
under the RWQCB remediation orders. AMD alleged that certain contamination
for which the RWQCB had found AMD responsible was originally caused by
National. The settlement of this case was completed in fiscal 2002 and the
matter is now concluded. In addition to the Santa Clara site, National has
been designated as a potentially responsible party by federal and state
agencies for certain sites with which we may have had direct or indirect
involvement. These designations are made regardless of the extent of our
involvement. These claims are in various stages of administrative or
judicial proceedings and include demands for recovery of past governmental
costs and for future investigations and remedial actions. In many cases,
the dollar amounts of the claims have not been specified and the claims
have been asserted against a number of other entities for the same cost
recovery or other relief as is sought from us. We also retained liability
for environmental matters arising from our former operations of Dynacraft,
Inc. and the Fairchild business but we are not currently involved in any
legal proceedings relating to those liabilities. We accrue costs associated
with environmental matters when they become probable and reasonably
estimable. The amount of all environmental charges to earnings, including
charges relating to the Santa Clara site remediation, which did not include
potential reimbursements from insurance coverage, has not been material
during the last three fiscal years. We believe that the potential liability
for environmental matters, if any, in excess of amounts already accrued in
our financial statements will not have a material effect on our financial
position or results of operations.
2. In March 2001, the U.S. Environmental Protection Agency served us with an
administrative complaint, compliance order and notice of opportunity for
hearing. The complaint alleged that the EPA found certain violations of the
Resource Conservation and Recovery Act in an inspection conducted in August
1999 at the Maine facility. In October 2001, we entered into a Consent
Agreement and Final Order with the EPA settling this matter. We have agreed
to pay a penalty of $42,120 and undertake certain environmental projects at
the Maine plant costing at least $156,296. We will also submit reports
about the environmental projects to the EPA. The matter is now concluded.
Other
1. In November 2000, a derivative action was filed in the U.S. District Court
in Delaware against us, Fairchild Semiconductor International, Inc. and
Sterling Holding Company, LLC, by Mark Levy, a Fairchild stockholder. The
action was brought under Section 16(b) of the Securities Exchange Act of
1934 and the rules issued under that Act by the Securities and Exchange
Commission. The plaintiff sought disgorgement of alleged short-swing
insider trading profits. We had originally acquired Fairchild common and
preferred stock in March 1997 at the time we disposed of the Fairchild
business. Prior to its initial public offering in August 1999, Fairchild
had amended its certificate of incorporation to provide that all Fairchild
preferred stock would convert automatically to common stock upon completion
of the initial public offering. As a result, our shares of preferred stock
converted to common stock in August 1999. Plaintiff has alleged that the
acquisition of common stock through the conversion constituted an
acquisition that should be "matched" against our sale in January 2000 of
Fairchild common stock for purposes of computing short-swing trading
profits. The action seeks to recover from us on behalf of Fairchild alleged
recoverable profits of approximately $14 million. In February 2002, the
judge in the case granted the motion to dismiss filed by us and our
co-defendants and dismissed the case, ruling that the conversion was done
pursuant to a reclassification which is exempt from the scope of Section
16(b). Plaintiff has appealed the dismissal of the case.
2. In January 1999, a class action suit was filed against us and a number of
our suppliers in California Superior Court by James Harris and other former
and present employees claiming damages for personal injury. The complaint
alleges that cancer and/or reproductive harm were caused to employees as a
result of alleged exposure to toxic chemicals while working at the company.
Plaintiffs claim to have worked at sites in Santa Clara and/or in Greenock,
Scotland. In addition, one plaintiff claims to represent a class of
children of company employees who allegedly sustained developmental harm as
a result of alleged in utero exposure to toxic chemicals while their
mothers worked at the company. Although no specific amount of monetary
damages is claimed, plaintiffs seek damages on behalf of the classes for
personal injuries, nervous shock, physical and mental pain, fear of future
illness, medical expenses and loss of earnings and earnings capacity. At
the present time, the court has required the Scottish employees to seek
their remedies in Scottish courts. Plaintiffs presently seek a
certification of a medical monitoring class which we oppose. Discovery in
the case is proceeding and we intend to defend this action vigorously.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT *
Name Current Title Age
- ---- ------------- ---
Kamal K. Aggarwal (1) Executive Vice President, Central 64
Technology and Manufacturing Group
Jean-Louis Bories (2) Executive Vice President and General Manager, 47
Information Appliance Group
Lewis Chew (3) Senior Vice President, Finance and Chief 39
Financial Officer
John M. Clark III (4) Senior Vice President, General Counsel 52
and Secretary
Brian L. Halla (5) Chairman of the Board, President and 55
Chief Executive Officer
Detlev J. Kunz (6) Senior Vice President and General Manager, 51
Worldwide Marketing and Sales
Donald Macleod (7) Executive Vice President and Chief 53
Operating Officer
Suneil V. Parulekar (8) Senior Vice President, Analog Group 54
Ulrich Seif (9) Senior Vice President and Chief 44
Information Officer
Edward J. Sweeney (10) Senior Vice President, Human Resources 45
* all information as of May 26, 2002
Business Experience During Last Five Years
(1) Mr. Aggarwal joined National in November 1996 as the Executive Vice
President of the Central Technology and Manufacturing Group. Prior to
joining National, Mr. Aggarwal had held positions at LSI Logic as Vice
President, Worldwide Logistics and Customer Service and Vice President,
Assembly and Test.
(2) Mr. Bories joined National in October 1997. Prior to becoming Executive
Vice President and General Manager of the Information Appliance Group in
September 1999, he held positions as Executive Vice President and General
Manager of the Cyrix Group and as Senior Vice President, Core Technology
Group. Prior to joining National, he had held positions at LSI Logic as
Vice President and General Manager, ASIC Division; Vice President,
Engineering/CAD; Director, Advanced Methodology; and Director, 500K
Program.
(3) Mr. Chew joined National in May 1997 as Director of Internal Audit and was
made Vice President and Controller in December 1998 and Acting Chief
Financial Officer in April 2001. Prior to joining National, Mr. Chew had
been a partner at KPMG LLP. Mr. Chew was named Senior Vice President,
Finance and Chief Financial Officer in June 2001.
(4) Mr. Clark joined National in May 1978. Prior to becoming Senior Vice
President, General Counsel and Secretary in April 1992, he held the
position of Vice President, Associate General Counsel and Assistant
Secretary.
(5) Mr. Halla joined National in May 1996 as Chairman of the Board, President
and Chief Executive Officer. Prior to that, Mr. Halla held positions at LSI
Logic as Executive Vice President, LSI Logic Products; Senior Vice
President and General Manager, Microprocessor/DSP Products Group; and Vice
President and General Manager, Microprocessor Products Group.
(6) Mr. Kunz joined National in July 1981 and has held a number of marketing
positions since then. Prior to becoming Senior Vice President and General
Manager, Worldwide Marketing and Sales in July 2001, he had held positions
in the company as the Regional Vice President and General Manager, Europe;
European Sales and Distribution Director; Director of European
Communications and Consumer Product Marketing; and Manager, European
Telecom Business Center.
(7) Mr. Macleod joined National in February 1978 and was named Executive Vice
President and Chief Operating Officer in April 2001. Prior to that, he had
been Executive Vice President, Finance and Chief Financial Officer since
June 1995 and had previously held positions as Senior Vice President,
Finance and Chief Financial Officer; Vice President, Finance and Chief
Financial Officer; Vice President, Financial Projects; Vice President and
General Manager, Volume Products - Europe; and Director of Finance and
Management Services - Europe.
(8) Mr. Parulekar joined National in January 1989. Prior to becoming Senior
Vice President, Analog Products Group in April 2001, he held positions as
Vice President, Amplifier/Audio Products; Product Line Director,
Amplifier/Audio Products; Director of Marketing, Mediamatics; Director of
Strategy, Communications and Consumer Group; and Director of Marketing,
Power Management Group.
(9) Mr. Seif first joined National in January 1980 and had held a number of
positions in MIS related operations when he left the company in 1996 to
become the Chief Information Officer and Vice President of Information
Services at Cirrus Logic. He returned to National in May 1997 as the Chief
Information Officer and Vice President of Information Services and was made
Senior Vice President and Chief Information Officer in April 2001.
(10) Mr. Sweeney first joined National in February 1983 and had held a number of
human resources positions and was serving as Vice President, Human
Resources for the Central Technology and Manufacturing Group when he left
the company in 1998 to become the Vice President of Human Resources at
Candescent Technologies Corporation. He later became the Vice President of
Human Resources at Vitria Technology Inc. Mr. Sweeney rejoined National in
May 2002 as Senior Vice President, Human Resources.
Executive officers serve at the pleasure of our Board of Directors. There
is no family relationship among any of our directors and executive officers.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
During the past three fiscal years, we have not sold any unregistered
securities.
See information appearing in Notes 7, Debt; Note 9, Shareholders' Equity;
and Note 15, Financial Information by Quarter (Unaudited) in the Notes to the
Consolidated Financial Statements included in Item 8. Our common stock is traded
on the New York Stock Exchange and the Pacific Exchange. Market price range data
are based on the New York Stock Exchange Composite Tape. Market price per share
at the close of business on July 26, 2002 was $18.47. At July 26, 2002, the
number of record holders of our common stock was 8,134.
The following table summarizes share and exercise price information about
our equity compensation plans as of May 26, 2002.
<TABLE>
<CAPTION>
Number of Securities To Weighted Average
Be Issued Upon Exercise Exercise Price of Number of Securities Remaining
Plan Category of Outstanding Options, Outstanding Options, Available For Future Issuance
Warrants, and Rights Warrants and Rights Under Equity Compensation Plans
- --------------------------------------- ------------------------- -------------------------- --------------------------------
<S> <C> <C>
Equity Compensation plans approved by
Shareholders:
Option Plans 11,372,224 $27.75 4,960,975
Employee Stock Purchase Plans - - 7,334,621
Director Stock Plan 114,376
Equity Compensation plans not
approved by Shareholders:
Option Plans (1) 31,427,410 $28.58 32,279,236
Restricted Stock Plan - - 1,073,250
401K and Profit Sharing Plans - - 6,102,626
- --------------------------------------- ------------------------ -------------------------- --------------------------------
Total 42,799,634 51,865,084
=============== =============
</TABLE>
(1) Includes options assumed in the acquisitions of Mediamatics, Cyrix and
ComCore and options issued as part of the consideration paid in the
acquisition of innoComm.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from audited
consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations and should be read in
conjunction with 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' in Item 7 and the consolidated financial statements
and related notes thereto in Item 8.
<TABLE>
FIVE-YEAR SELECTED FINANCIAL DATA
<CAPTION>
Years Ended May 26, May 27, May 28, May 30, May 31,
In Millions, Except Per Share Amounts 2002 2001 2000 1999 1998
----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $ 1,494.8 $ 2,112.6 $ 2,139.9 $ 1,956.8 $ 2,536.7
Operating costs and expenses 1,652.6 1,887.3 1,795.1 3,040.6 2,682.5
----------- ----------- ------------ ------------ -----------
Operating income (loss) (157.8) 225.3 344.8 (1,083.8) (145.8)
Interest income (expense), net 21.3 52.0 15.3 (2.2) 22.3
Other income, net 13.1 29.8 282.4 0.6 23.8
----------- ----------- ------------ ------------ -----------
Income (loss) before income taxes and
extraordinary item (123.4) 307.1 642.5 (1,085.4) (99.7)
Income tax expense (benefit) (1.5) 61.4 14.9 (75.5) (1.1)
----------- ----------- ------------ ------------ -----------
Income (loss) before extraordinary item $ (121.9) $ 245.7 $ 627.6 $ (1,009.9) $ (98.6)
=========== =========== ============ ============ ===========
Net income (loss) $ (121.9) $ 245.7 $ 620.8 $ (1,009.9) $ (98.6)
=========== =========== ============ ============ ===========
Earnings (loss) per share:
Income (loss) before extraordinary item:
Basic $ (0.69) $ 1.40 $ 3.62 $ (6.04) $ (0.60)
=========== =========== ============ ============ ===========
Diluted $ (0.69) $ 1.30 $ 3.27 $ (6.04) $ (0.60)
=========== =========== ============ ============ ===========
Net income (loss):
Basic $ (0.69) $ 1.40 $ 3.58 $ (6.04) $ (0.60)
=========== =========== ============ ============ ===========
Diluted $ (0.69) $ 1.30 $ 3.24 $ (6.04) $ (0.60)
=========== =========== ============ ============ ===========
Weighted-average common and potential common
shares outstanding:
Basic 177.5 175.9 173.6 167.1 163.9
=========== =========== ============ ============ ===========
Diluted 177.5 188.4 191.7 167.1 163.9
=========== =========== ============ ============ ===========
FINANCIAL POSITION AT YEAR-END
Working capital $ 669.3 $ 803.2 $ 791.1 $ 324.2 $ 514.6
Total assets $ 2,288.8 $ 2,362.3 $ 2,382.2 $ 2,044.3 $ 3,100.7
Long-term debt $ 20.4 $ 26.2 $ 48.6 $ 416.3 $ 390.7
Total debt $ 25.9 $ 55.6 $ 80.0 $ 465.6 $ 444.6
Shareholders' equity $ 1,781.1 $ 1,767.9 $ 1,643.3 $ 900.8 $ 1,858.9
- -------------------------------------------------------- ----------- ------------ ------------ ------------ -----------
OTHER DATA
Research and development $ 441.0 $ 435.6 $ 386.1 $ 471.3 $ 482.0
Capital additions $ 138.0 $ 239.5 $ 168.7 $ 317.5 $ 655.8
Number of employees (in thousands) 10.1 10.3 10.5 11.6 13.0
- -------------------------------------------------------- ----------- ------------ ------------ ------------ -----------
</TABLE>
National has not paid cash dividends on the common stock in any of the years
presented above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in the outlook section and within certain sections of
management's discussion and analysis are forward-looking based on our current
expectations and management's estimates and actual results may differ
materially. The forward-looking statements reference a number of risks and
uncertainties. Other risks and uncertainties include, but are not limited to,
the general economy, the changing environment of the semiconductor industry,
competitive products and pricing, growth in the wireless, PC and communications
infrastructure industries, regulatory and international conditions, the effects
of legal and administrative cases and proceedings, and other risks and
uncertainties that we may detail from time to time in our reports and filings
with the SEC. The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto:
o Critical Accounting Policies
We believe the following critical accounting policies are those policies that
have a significant effect on the determination of our financial position and
results of operations. These policies also require us to make our most difficult
and subjective judgments:
1. Revenue Recognition
We recognize revenue from the sale of semiconductor products upon shipment,
provided title and risk of loss have passed to the customer, the fee is fixed or
determinable and collection of the revenue is reasonably assured. Service
revenues are recognized as the services are provided or as milestones are
achieved, depending on the terms of the arrangement. We record at the time of
shipment a provision for estimated future returns. Approximately 47 percent of
our semiconductor product sales are sold through distributors. We have
agreements with our distributors for various programs, including pricing
adjustments based on resales, scrap allowances and volume incentives. The
revenue we record for these distribution sales is net of estimated provisions
for these programs. When determining this net distribution revenue, we must make
significant judgments and estimates. Our estimates are based upon historical
experience rates, inventory levels in the distribution channel, current economic
trends and other related factors. To date the actual distributor activity has
been consistent with the provisions we made based on our estimates. However,
because of the inherent nature of estimates, there is always a risk that there
could be significant differences between actual amounts and our estimates. Our
financial condition and operating results are dependent on our ability to make
reliable estimates and we believe that our estimates are reasonable. However,
different judgments or estimates could result in variances that might be
significant to reported operating results.
Intellectual property income is not classified as revenue. This income is
classified as non-operating income and is recognized when the license is
delivered and no further obligations to the other party exist.
2. Inventories
Inventories are stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out basis, or market. We reduce the carrying value of
inventory for estimated obsolescence or unmarketable inventory by an amount that
is the difference between its cost and the estimated market value based upon
assumptions about future demand and market conditions. Our products are
classified as either custom, which are those products manufactured with
customer-specified features or characteristics, or non-custom, which are those
products that do not have customer-specified features or characteristics. We
evaluate obsolescence by analyzing the inventory aging, order backlog and future
customer demand on an individual product basis. If actual demand were to be
substantially lower than what we have estimated, we may be required to
write-down inventory below the current carrying value. While our estimates
require us to make significant judgments and assumptions regarding future
events, we believe our relationships with our customers, combined with our
understanding of the end-markets we serve, provide us the ability to make
reliable estimates. We also evaluate the carrying value of inventory for lower
of cost or market on an individual product basis, and these evaluations are
based on the difference between net realizable value and standard cost. Net
realizable value is determined as the selling price of the product less
estimated cost of disposal. When necessary, we reduce the carrying value of
inventory to the lower of cost or the net realizable value. If actual market
conditions and resulting product sales were to be less favorable than what we
have projected, additional inventory write-downs may be required.
3. Impairment of Goodwill, Intangible Assets and Other Long-lived Assets
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that their carrying value may not be recoverable from the
estimated future cash flows expected to result from their use and eventual
disposition. Our long-lived assets subject to this evaluation include property,
plant and equipment. We assess the impairment of goodwill annually in our fourth
fiscal quarter and whenever events or changes in circumstances indicate that it
is more likely than not that an impairment loss has been incurred. Intangible
assets other than goodwill are reviewed for impairment whenever events or
changes in circumstances indicate that its carrying value may not be
recoverable. Other intangible assets subject to this evaluation include acquired
patented and unpatented technology. We are required to make judgments and
assumptions in identifying those events or changes in circumstances that may
trigger impairment. Some of those factors we consider include:
o Significant decrease in the market value of an asset
o Significant changes in the extent or manner for which the asset is being
used or in its physical condition
o A significant change, delay or departure in our business strategy related
to the asset
o Significant negative change in the business climate, industry or economic
conditions
o Current period operating losses or negative cash flow combined with a
history of similar losses or a forecast that indicates continuing losses
associated with the use of an asset
In view of the recent general economic decline, we are periodically
evaluating whether an impairment of our identifiable intangible assets and other
long-lived assets has occurred. Our evaluation includes an analysis of estimated
future undiscounted net cash flows expected to be generated by the assets over
their remaining estimated useful lives. If the estimated future undiscounted net
cash flows are insufficient to recover the carrying value of the assets over the
remaining estimated useful lives, we will record an impairment loss in the
amount by which the carrying value of the assets exceeds the fair value. We
determine fair value based on discounted cash flows using a discount rate
commensurate with the risk inherent in our current business model. If, as a
result of our analysis, we determine that our identifiable intangible assets or
other long-lived assets have been impaired, we will recognize an impairment loss
in the period in which the impairment is determined. Any such impairment charge
could be significant and could have a material adverse effect on our financial
position and results of operations, if and when the impairment is recorded.
Major factors that influence our cash flow analysis are our estimates for future
revenue and expenses associated with the use of the asset. Different estimates
could have a significant impact on the results of our evaluation.
We performed a goodwill impairment review upon initial adoption of the new
accounting rules for goodwill as of the beginning of fiscal 2002. We also
performed an annual review for goodwill impairment in our fourth fiscal quarter.
Our impairment review is based on comparing the fair value to the carrying value
of the reporting units with goodwill. The fair value of a reporting unit is
measured at the business unit level using a discounted cash flow approach that
incorporates our estimates of future revenues and costs for those business units
with goodwill. We use a discount rate that is commensurate with the risk
inherent in the current business model for each business unit with goodwill.
Reporting units with goodwill include our wireless, displays and power business
units that are operating segments within our Analog reportable segment and our
wired communications group that is reported within other operating segments. The
estimates we have used are consistent with the plans and estimates that we are
using to manage the underlying businesses. If we fail to deliver new products
for these business units, if the products fail to gain expected market
acceptance, or market conditions for these businesses fail to improve, our
revenue and cost forecasts may not be achieved and we may incur charges for
goodwill impairment, which could be significant and could have a material
adverse effect on our financial position and results of operations.
o Overview
We recorded net sales of $1.5 billion in fiscal 2002. This compares to $2.1
billion in both fiscal 2001 and fiscal 2000. The decline in sales for fiscal
2002 came from lower demand seen broadly across semiconductor markets, as
business conditions in the semiconductor industry remained weak throughout the
fiscal year.
In contrast, market conditions were very strong in the first half of fiscal
2001. As we entered into the second half of fiscal 2001, market conditions for
the semiconductor industry quickly weakened. As a result, we experienced growth
in sales for the first half of fiscal 2001 over sales for the first half of
fiscal 2000. This was essentially offset by a sharp decline in sales for the
second half of fiscal 2001, resulting in year over year flat sales.
In fiscal 2002, we recorded a net loss of $121.9 million. This compares to
net income of $245.7 million in fiscal 2001 and $620.8 million in fiscal 2000.
Our operating results for fiscal 2002 have been primarily affected by lower
sales as a result of slower demand from the overall economic slowdown.
The net loss for fiscal 2002 included $9.3 million of special items. The
special items included $1.3 million for in-process R&D charges related to the
acquisitions of Fincitec Oy, ARSmikro OU and Wireless Solutions Sweden AB (See
Note 4). Special items also included a net charge of $8.0 million related to
cost reduction actions (See Note 3). Net income for fiscal 2001 included special
items of $51.9 million, including $16.2 million for in-process R&D charges
related to acquisitions during the year (See Note 4) and a $35.7 million net
charge for cost reduction actions (See Note 3).
For fiscal 2000, net income included special items of $55.3 million.
Special items in fiscal 2000 included a $26.8 million gain from the sale of
assets of the Cyrix PC microprocessor business (See Note 3) and a $4.2 million
in-process R&D charge related to an acquisition (See Note 4). Special items also
included credits of $14.7 million related to restructuring of operations (See
Note 3) and $18.0 million related to an indemnity agreement with Fairchild
Semiconductor that expired in March 2000 (See Note 5). In addition to these
special items, fiscal 2000 net income included a $270.7 million gain from our
sale of shares of Fairchild stock and an extraordinary loss of $6.8 million (net
of taxes of $0.4 million). We sold the shares of Fairchild stock as part of an
initial public offering and a secondary offering that Fairchild completed during
the year. We recorded the extraordinary loss in connection with the early
redemption of our 6.5 percent convertible subordinated notes due 2002.
o Sales
The following discussion is based on our reportable segments described in Note
13 to the consolidated financial statements.
Our sales for fiscal 2002 declined significantly year on year, as market
conditions for the semiconductor industry remained weak compared to fiscal 2001.
Although we saw a slight increase in unit volume in the second half of fiscal
2002, the sales decline for the year was primarily due to a decreased volume of
shipments. Lower average selling prices were also a factor, as we saw a shift in
product mix toward lower priced products and took some pricing actions under
programs to gain increased market share in target areas.
The Analog segment, which represents 75 percent of our total sales,
experienced a decline in sales of 26 percent for fiscal 2002 from sales for
fiscal 2001. The decline in fiscal 2002 was due to a drop in unit volume
together with decreases in average selling prices. Average selling prices were
down due to shifts in product mix as well as some decline in prices,
particularly on multisource products, which tend to be viewed as commodity
products. Within the Analog segment, sales of application-specific wireless
products, including radio frequency building blocks, declined in fiscal 2002 by
36 percent from sales in fiscal 2001. In the broad-based analog markets, sales
of power management and amplifier products were also down in fiscal 2002 from
sales in fiscal 2001 by 33 percent and 30 percent, respectively. Only sales of
display products increased in fiscal 2002. Those sales increased by 6 percent
over sales in fiscal 2001, as a large increase in unit volume more than offset
decreases in average selling prices.
Sales for fiscal 2002 for the Information Appliances segment declined 12
percent from sales for fiscal 2001. The decline was primarily driven by lower
unit volume, as average selling prices increased slightly. Since a large part of
our portfolio of information appliance products is still consumed in the PC
marketplace, the year-to-year slowdown in demand for personal computers and
PC-related products had a significant effect in the decline in sales for the
Information Appliance segment. In addition, the market adoption of emerging
information appliances that are not PCs has been slower than expected.
For fiscal 2002, sales declined in all geographic regions compared to sales
for fiscal 2001. The decreases were 46 percent in the Americas, 40 percent in
Europe, 32 percent in Japan and 2 percent in the Asia Pacific region. Sales for
fiscal 2002 as a percentage of total sales increased to 44 percent for the Asia
Pacific region, while decreasing to 25 percent in the Americas and 21 percent in
Europe. Sales as a percentage of total sales held at 10 percent in Japan.
Foreign currency-denominated sales in fiscal 2002 were unfavorably affected by
foreign currency exchange rate fluctuations as the Japanese yen, pound sterling
and euro all weakened against the dollar, but the impact from this was minimal
since less than a quarter of our total sales for fiscal 2002 was denominated in
foreign currency.
Sales overall for fiscal 2001 were flat compared to sales for fiscal 2000.
For the first half of fiscal 2001, we experienced growing sales as a result of
higher volumes while average selling prices were relatively flat. Our sales
declined significantly in the second half of fiscal 2001, as market conditions
for the semiconductor industry quickly weakened. The decline was shown in
reduced shipments, as average selling prices remained relatively the same.
Fiscal 2001 sales for the Analog segment were flat compared to sales in
fiscal 2000. Sales of analog products led the growth in sales for the first half
of fiscal 2001 with an increase of 25 percent over sales for the comparable
first half of fiscal 2000. This growth was attributable to higher unit volume
combined with slightly higher average selling prices. A significant decline in
sales for analog products in the second half of fiscal 2001 essentially offset
the growth experienced in the first half of the fiscal year. Analog product
sales in the second half of fiscal 2001 declined 21 percent compared to sales in
the comparable second half of fiscal 2000, mainly due to a sharp drop in unit
volume while average selling prices remained fairly stable. Sales of
application-specific wireless products, including radio frequency building
blocks, grew 3 percent in fiscal 2001 over fiscal 2000. This was driven by sales
growth of 24 percent in the first half of fiscal 2001 over the comparable first
half of fiscal 2000 followed by a decline of 16 percent in sales for the second
half of fiscal 2001. Sales of amplifiers, interface and power management
products also grew in fiscal 2001 by 7 percent, 5 percent and 2 percent,
respectively, over sales in fiscal 2000. This was driven by sales growth in the
first half of fiscal 2001 of 39 percent, 42 percent and 31 percent,
respectively, over the comparable first half of fiscal 2000. Declines in the
second half of the fiscal year of 20 percent, 23 percent and 22 percent,
respectively, from the comparable second half of fiscal 2000, partially offset
the growth in the first half of the fiscal year.
Sales in fiscal 2001 for the Information Appliance segment declined by 5
percent from sales in fiscal 2000 due to decreases in both unit shipments and
average selling prices. While the Information Appliance segment experienced an
18 percent growth in sales for the first half of fiscal 2001 over the comparable
first half of fiscal 2000, it was more than offset by a 25 percent decline in
sales for the second half of fiscal 2001 from the comparable second half of
fiscal 2000. The slowdown in demand for personal computers and PC-related
products contributed to the decline in sales for the Information Appliance
segment since a large part of the portfolio of information appliance products is
still consumed in the PC marketplace. The slower than expected adoption of
emerging information appliances that are not PCs also had a negative impact on
growth. The fiscal 2000 comparison excludes sales from the Cyrix PC
microprocessor unit, which we sold in September 1999.
Compared to sales in fiscal 2000, fiscal 2001 sales increased in Japan by
11 percent and in the Asia Pacific region by 2 percent, while sales decreased in
the Americas by 8 percent and in Europe by 1 percent. As the Japanese yen and
most European currencies weakened against the dollar, foreign currency exchange
rate fluctuation had an unfavorable impact on foreign currency-denominated sales
for fiscal 2001. However, this impact was minimal since less than a quarter of
our total sales was denominated in foreign currency. Sales for fiscal 2001 as a
percentage of total sales increased to 32 percent in the Asia Pacific region and
10 percent in Japan, while declining to 33 percent in the Americas and remaining
flat at 25 percent in Europe.
o Gross Margin
Gross margin as a percentage of sales was 37 percent in fiscal 2002 compared to
49 percent in fiscal 2001 and 46 percent in fiscal 2000. The erosion in gross
margin was primarily driven by lower factory utilization. Wafer fabrication
capacity utilization during fiscal 2002 ran at 55 percent, as production
activity was reduced considerably by the weakened business conditions in the
semiconductor industry. This compares with wafer fabrication capacity
utilization for fiscal 2001 of 69 percent when business conditions in the
semiconductor industry were much stronger, particularly in the first half of the
fiscal year. We also saw lower margins from some products in fiscal 2002, caused
mostly from a shift in product sales mix and to a lesser extent from pricing
pressure, which also impacted the lower gross margin.
The increase in gross margin for fiscal 2001 was primarily driven by
improved product mix, as we shipped more high contribution analog and wireless
products, combined with improved manufacturing efficiency and higher factory
utilization during the first half of fiscal 2001. Wafer fabrication capacity
utilization in the first half of fiscal 2001 ran at 88 percent, but dropped to
53 percent in the second half of the fiscal year when business conditions in the
semiconductor industry quickly deteriorated and production activity was
significantly reduced. For the year as a whole, wafer fabrication capacity
utilization was 69 percent compared to 75 percent in fiscal 2000.
o Research and Development
Research and development expenses in fiscal 2002 were $441.0 million, or 30
percent of sales, compared to $435.6 million in fiscal 2001, or 21 percent of
sales, and $386.1 million in fiscal 2000, or 18 percent of sales. These amounts
exclude in-process R&D charges of $1.3 million in fiscal 2002, $16.2 million in
fiscal 2001 and $4.2 million in fiscal 2000 related to acquisitions (see Note
4). The in-process R&D charges are included in the consolidated statements of
operations as a component of special items. Higher R&D expenses for fiscal 2002
result mainly from a license agreement with Taiwan Semiconductor Manufacturing
Company. The agreement, which began in fiscal 2001, allows us to gain access to
a variety of TSMC's advanced sub-micron processes for use in our Maine facility
as desired, if and when those processes are developed by TSMC. These advanced
process technologies are expected to accelerate the development of high
performance digital and mixed-signal products in the markets for wireless
handsets, displays, information appliances and information infrastructure.
During fiscal 2002, we devoted approximately 75 percent of our R&D effort
towards new product development and 25 percent towards the development of
process and support technology. Compared to fiscal 2001, this represents a 6
percent decrease in spending for new product development and a 13 percent
increase towards the development of process and support technology. While
spending for new product development declined slightly, we continue to focus our
R&D investment on our key strategic programs. We continue to invest in the
development of new analog and mixed-signal technology-based products for
applications in the wireless handsets, displays, information appliances and
information infrastructure markets. We also continue to devote resources towards
developing new cores and integrating those cores with other technological
capabilities to create system-on-a-chip solutions.
The increase in R&D expenses for fiscal 2001 reflected increased investment
in the development of new analog and mixed-signal technology-based products for
applications in the wireless handsets, displays, information appliances and
information infrastructure markets, as well as in the process technologies
needed to support these products.
o Selling, General and Administrative
Selling, general and administrative expenses in fiscal 2002 were $260.9 million,
or 18 percent of sales, compared to $324.7 million in fiscal 2001, or 15 percent
of sales, and $309.4 million in fiscal 2000, or 15 percent of sales. The fiscal
2001 SG&A expenses included a $20.5 million expense associated with the
charitable donation of equity securities that were part of our investment
portfolio. We donated the securities to establish the National Semiconductor
Foundation. The fiscal 2001 SG&A expenses also included goodwill amortization of
$13.0 million. We no longer record goodwill amortization since adopting new
accounting rules beginning in fiscal 2002. Excluding these expenses, SG&A
expenses for fiscal 2002 declined 10 percent from SG&A expenses for fiscal 2001.
Overall the decline in fiscal 2002 expenses reflects actions that we implemented
in the second half of fiscal 2001 to reduce our spending in response to weakened
business conditions, combined with our efforts to further control spending as
business conditions remained weak throughout fiscal 2002. These actions reduced
payroll and employee benefit expenses, as well as discretionary selling and
marketing program expenses.
The increase in SG&A expenses for fiscal 2001 compared to fiscal 2000 is
primarily due to the $20.5 million donation expense that we recorded in fiscal
2001. Excluding that expense, SG&A expenses in fiscal 2001 actually declined by
two percent from SG&A expenses in fiscal 2000. Actions that we implemented to
reduce spending in the second half of fiscal 2001 in response to weakened
business conditions contributed to the decline in these expenses for fiscal
2001. The effect of those cost reduction actions was largely offset by higher
pay rates in fiscal 2001 over fiscal 2000.
o Cost-Reduction Programs and Restructuring of Operations
For fiscal 2002, we recorded a charge of $12.5 million for cost-reduction
actions associated with the plan we announced in May 2002 to reposition our
resources. This charge was partially offset by a credit of $4.5 million of
remaining reserves that were no longer needed for previously announced actions
because the activities were completed in fiscal 2002 at a lower cost than
originally estimated. See Note 3 of the consolidated financial statements for a
more complete discussion of these charges, as well as other activity during
fiscal 2002 related to previously announced actions.
o Charge for Acquired In-Process Research and Development
In connection with our acquisitions during fiscal 2002 of the combined companies
of Fincitec Oy and ARSmikro OU, and separately of Wireless Solutions Sweden AB,
$0.2 million and $1.1 million of the total purchase price for each acquisition
were respectively allocated to the value of in-process R&D. In connection with
our acquisitions during fiscal 2001 of Vivid Semiconductor and innoComm
Wireless, $4.1 million and $12.1 million of the total purchase price for each
acquisition were respectively allocated to the value of in-process R&D. In
connection with the acquisition of Algorex in fiscal 2000, we allocated $4.2
million of the total purchase price to the value of in-process R&D. These
amounts were expensed upon acquisition because technological feasibility had not
been established and no alternative uses existed for the technologies.
Fincitec OY and ARSmikro OU develop low-voltage, low-power
application-specific integrated circuits for battery-powered devices. The
acquisition is expected to strengthen our development capabilities for power
management circuits for the portable market. It should help us expand our suite
of integrated and discrete silicon solutions for handheld devices, including
cell phones, personal digital assistants, digital cameras and similar electronic
devices. Wireless Solutions Sweden AB is a developer of wireless solutions
ranging from telemetry to mobile phones to wireless networking, including
Bluetooth. This acquisition should help us to deliver complete wireless
reference designs, including silicon chipsets, hardware and software. InnoComm
is a developer of chipsets for wireless networking applications. Its expertise
in short-range wireless technologies such as Bluetooth and HomeRF is intended to
complement our existing base of design and product expertise. We intend to use
Vivid's technologies and analog engineering resources to increase our strength
in creating silicon solutions for the flat-panel display market. Algorex is a
provider of high performance digital signal processing products, architecture
and software technologies for the wireless communication markets and these
technologies should enhance our future capability to provide complete chipset
solutions for the cellular phone and wireless information appliance markets.
For each acquisition, the fair value of the in-process R&D was based on
discounted projected net cash flows expected to be derived after successful
completion of the existing R&D projects. Estimates of future cash flows from
revenues were based primarily on market growth assumptions, lives of underlying
technologies and our expected share of market. Gross profit projections were
based on our experience with products that were similar in nature or products
sold into markets with similar characteristics. Estimated operating expenses,
income taxes and capital charges were deducted from gross profit to determine
net operating income for the in-process R&D projects. Operating expenses were
estimated as a percentage of revenue and included sales and marketing expenses
and development costs to maintain the technology once it has achieved
technological feasibility. We discounted the net cash flows of the in-process
R&D projects using probable adjusted discount rates that approximated the
overall rate of return for each acquisition as a whole and reflected the
inherent uncertainties surrounding the development of in-process R&D projects.
o Interest Income and Interest Expense
For fiscal 2002, we earned net interest income of $21.3 million compared to
$52.0 million in fiscal 2001 and $15.3 million in fiscal 2000. The decrease in
fiscal 2002 was primarily due to lower average interest rates on lower average
cash balances during fiscal 2002 compared to fiscal 2001. Offsetting interest
expense was slightly lower for fiscal 2002 as we continued to reduce our
outstanding debt balances. The increase in net interest income for fiscal 2001
over fiscal 2000 was due to both higher average cash balances and slightly
higher interest rates in fiscal 2001 than in fiscal 2000. In addition, interest
expense in fiscal 2001 was significantly lower than in fiscal 2000 due to lower
debt, since we repaid our $258.8 million convertible subordinated notes in
November 1999.
o Other Income, Net
Other income, net was $13.1 million for fiscal 2002, compared to $29.8 million
for fiscal 2001 and $282.4 million for fiscal 2000. The components of other
income, net for fiscal 2002 included $11.6 million of net intellectual property
income, a $2.1 million net gain from equity investments and $0.6 million from
other miscellaneous losses. Net intellectual property income for fiscal 2002
included a gain of $8.3 million from the settlement of a patent infringement
lawsuit. The remaining intellectual property income was from a number of
individually small agreements. Beginning in fiscal 2002, equity in losses of
investments accounted for under the equity method was included in net gain from
equity investments. Other income, net for fiscal 2001 and 2000 has been
re-characterized to conform with this classification. Other income, net for
fiscal 2001 included a net gain from equity investments of $23.5 million and net
intellectual property income of $6.3 million. The net gain from equity
investments for fiscal 2001 included a gain of $20.5 million from the
distribution of equity securities that were part of our investment portfolio,
which we donated to establish the National Semiconductor Foundation. An expense
for the same amount associated with the donation was included in SG&A expenses
for fiscal 2001. Net intellectual property income for fiscal 2001 included $2.4
million from a single significant licensing agreement with a Korean company and
the remainder from a number of individually small agreements. Other income, net
for 2000 included a net gain from equity investments of $269.6 million, $11.5
million of net intellectual property income and other miscellaneous income of
$1.3 million. Net intellectual property income for fiscal 2000 related primarily
to two significant licensing agreements.
o Income Tax Expense
We recorded an income tax benefit of $1.5 million in fiscal 2002, compared to
income tax expense of $61.4 million in fiscal 2001 and $14.9 million in fiscal
2000. The fiscal 2002 tax benefit represented an expected refund of U.S. taxes
as a result of the new federal tax act, which was partially offset by taxes due
on international income. The effective tax rate for fiscal 2002 was one percent
compared to effective tax rates of 20 percent for fiscal 2001 and two percent
for fiscal 2000. Our ability to realize net deferred tax assets ($84.4 million
at May 26, 2002) is primarily dependent on our ability to generate future U.S.
taxable income. We believe that it is more likely than not that forecasted U.S.
taxable income will be sufficient to utilize these tax assets. However, it is
always possible that we will not be able to meet our expectations of future U.S.
taxable income.
o Foreign Operations
Our foreign operations include manufacturing facilities in the Asia Pacific
region and Europe and sales offices throughout the Asia Pacific region, Europe
and Japan. A portion of the transactions at these facilities is denominated in
local currency, which exposes us to risk from exchange rate fluctuations. Our
exposure from expenses at foreign manufacturing facilities is concentrated in
pound sterling, Singapore dollar and Malaysian ringgit. Where practical, we
hedge net non-U.S. dollar denominated asset and liability positions using
forward exchange and purchased option contracts. Our exposure from foreign
revenue is limited to the Japanese yen and the euro. We hedge up to 100 percent
of the notional value of outstanding customer orders denominated in foreign
currency, using forward exchange contracts and over-the-counter foreign currency
options. A portion of anticipated foreign sales commitments is, at times, hedged
using purchased option contracts that have an original maturity of one year or
less.
o Financial Market Risks
We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange rates. To mitigate these risks, we use derivative
financial instruments. We do not use derivative financial instruments for
speculative or trading purposes.
Due to the short-term nature of the major portion of our cash portfolio, a
series of severe cuts in interest rates, such as those recently experienced,
does have a significant impact on the amount of interest income we can earn from
our cash portfolio. An increase in interest rates benefits us due to our large
net cash position. An increase in interest rates would not necessarily increase
interest expense due to the fixed rates of our existing debt obligations.
A substantial majority of our revenue and capital spending is transacted in
U.S. dollars. However, we enter into transactions in other currencies, primarily
the Japanese yen, euro and certain other Asian currencies. To protect against
reductions in value and the volatility of future cash flows caused by changes in
foreign exchange rates, we have established programs to hedge our exposure to
these changes in foreign currency exchange rates. Our hedging programs reduce,
but do not always eliminate, the impact of foreign currency exchange rate
movements. An adverse change (defined as 15 percent in all currencies) in
exchange rates would result in a decline in income before taxes of less than $5
million. This calculation assumes that each exchange rate would change in the
same direction relative to the U.S. dollar. In addition to the direct effects of
changes in exchange rates, these changes typically affect the volume of sales or
the foreign currency sales price as competitors' products become more or less
attractive. Our sensitivity analysis of the effects of changes in foreign
currency exchange rates does not factor in a potential change in sales levels or
local currency selling prices.
All of the potential changes noted above are based on sensitivity analyses
performed on our balances as of May 26, 2002.
o Liquidity and Capital Resources
As of May 26, 2002, cash, cash equivalents and marketable debt securities were
$844.4 million, slightly down from $869.4 million at May 27, 2001. Cash and cash
equivalents decreased $136.5 million in fiscal 2002 compared to increases of
$39.0 million in fiscal 2001 and $360.1 million in fiscal 2000. We describe the
primary factors contributing to these changes below:
We generated cash from operating activities of $100.3 million during fiscal
2002 compared to $488.2 million in fiscal 2001 and $399.7 million in fiscal
2000. We generated cash from operating activities in fiscal 2002 because the
noncash components of our net loss, primarily depreciation and amortization,
were greater than the reported net loss and the negative impact from changes in
working capital components. Decreases in accounts payable, accrued expenses and
other liabilities more than offset the positive effect to working capital from a
decrease in inventories. For fiscal 2001, operating cash was generated primarily
from net income adjusted for noncash expenses, which was partially offset by a
negative impact from changes in working capital components. The negative impact
from changes in working capital components was softened as the decreases in
accounts payable and accrued liabilities were substantially offset by the
positive effect to working capital from a decrease in receivables. For fiscal
2000, net income adjusted for noncash items was negatively affected by changes
in working capital components primarily due to increases in receivables and
inventories.
Our investing activities used cash of $323.3 million in fiscal 2002,
compared to $298.6 million used in fiscal 2001. In fiscal 2000 our investing
activities generated cash of $207.5 million. Major uses of cash in fiscal 2002
included investment in property, plant and equipment of $138.0 million, net
purchases of available-for-sale securities of $111.5 million and the
acquisitions of Fincitec Oy, ARSmikro OU and Wireless Solutions Sweden AB for a
total of $42.1 million, net of cash acquired (See Note 4). Major uses of cash in
fiscal 2001 included investment in property, plant and equipment of $239.5
million and the acquisitions of innoCOMM and Vivid for a total of $99.1 million,
net of cash acquired (See Note 4). In contrast, proceeds of $286.0 million,
primarily from the sale of Fairchild Semiconductor stock, and $75.0 million from
the sale of the Cyrix PC microprocessor business were the main contributors to
cash generated from our investing activities in fiscal 2000. This was partially
offset by our investment in property, plant and equipment of $168.7 million in
fiscal 2000.
Our financing activities generated cash of $86.5 million for fiscal 2002,
while they used cash of $150.6 million in fiscal 2001 and $247.1 million in
fiscal 2000. The primary source of cash was from the issuance of common stock
under employee benefit plans in the amount of $107.1 million in fiscal 2002,
which was partially offset by repayment of $20.6 million of our outstanding debt
balances. The primary use of cash in fiscal 2001 was for our repurchase of 8.3
million shares of common stock on the open market for $194.4 million. All of
these shares were retired during fiscal 2001. This more than offset cash inflow
of $68.2 million from the issuance of common stock under employee benefit plans.
For fiscal 2000 the primary use of cash was for the payment of $265.8 million to
redeem our 6.5 percent convertible subordinated notes. Other debt repayment of
$114.7 million was offset by proceeds of $133.4 million from the issuance of
common stock under employee benefits plans during fiscal 2000.
Management foresees substantial cash outlays for plant and equipment
throughout fiscal 2003, with primary focus on new capabilities that support our
target growth markets, as well as improvements to provide more capacity in
selected areas and also better manufacturing efficiency and productivity. Based
on current economic conditions, the fiscal 2003 capital expenditure level is
expected to be higher than the fiscal 2002 level. However, we will continue to
manage capital expenditures consistent with ongoing business conditions. We
expect existing cash and investment balances, together with existing lines of
credit, to be sufficient to finance capital investments planned for fiscal 2003.
Our cash and investment balances are dependent on continued collection of
customer receivables and the ability to sell inventories. Although we have not
experienced major problems with our customer receivables, continued and
significant declines in overall economic conditions would probably impact sales
and may lead to problems with customer receivables. In addition, major declines
in financial markets would probably cause reductions in our cash equivalents and
marketable investments.
The following table provides a summary of the effect on liquidity and cash
flows from our contractual obligations as of May 26, 2002:
<TABLE>
<CAPTION>
(in millions) Fiscal Year: 2008 and
2003 2004 2005 2006 2007 thereafter Total
--------------- ---------- --------- --------- -------- ------------- ----------
Contractual obligations:
<S> <C> <C> <C> <C> <C> <C> <C>
Debt obligations $ 5.5 $20.4 $ - $ - $ - $ - $ 25.9
Noncancellable
operating leases 16.5 14.1 11.7 7.9 6.0 9.9 66.1
Fairchild manufacturing
agreement 20.0 - - - - - 20.0
Licensing agreements:
TSMC 32.0 32.0 32.0 19.0 - - 115.0
Other 12.8 7.9 0.4 0.3 0.3 0.6 22.3
--------------- ---------- --------- --------- -------- ------------- ----------
Total $86.8 $74.4 $44.1 $27.2 $6.3 $10.5 $249.3
=============== ========== ========= ========= ======== ============= ==========
Commercial Commitments:
Standby letters of credit
under bank multicurrency
agreement $18.6 $ - $ - $ - $- $ - $ 18.6
=============== ========== ========= ========= ======== ============= ==========
</TABLE>
o Recently Issued Accounting Standards
At the beginning of fiscal 2002, we adopted SFAS No. 133, 'Accounting for
Derivative Instruments and Hedging Activities.' The adoption of this statement
did not have a material impact on our financial statements as described in Note
1 to the consolidated financial state' at the beginning of fiscal 2002. The
impact of adoption of this statement is described in Note 1 to the consolidated
financial statements.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
'Business Combinations' and SFAS No. 143, 'Accounting for Asset Retirement
Obligations.' SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001, and eliminates
the use of the pooling-of-interests method. We adopted SFAS No. 141 in fiscal
2002 and applied its provisions to acquisitions closed after June 30, 2001. SFAS
No. 143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. We are currently analyzing this statement and have not yet
determined its impact on our consolidated financial statements. This Statement
will be effective for our fiscal year 2003.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, 'Accounting for the Impairment or Disposal of Long-Lived Assets,' which
replaces SFAS No. 121, 'Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of.' Although SFAS No. 144 retains the
basic requirements of SFAS No. 121 regarding when and how to measure an
impairment loss, it provides additional implementation guidance. SFAS No. 144
also supersedes the provisions of APB Opinion No. 30, 'Reporting Results of
Operations,' pertaining to discontinued operations. Separate reporting of a
discontinued operation is still required, but SFAS No. 144 expands the
presentation to include a component of an entity, rather than strictly a
business segment. We are currently analyzing this statement and have not yet
determined its impact on our consolidated financial statements. This statement
will be effective for our fiscal year 2003.
In April 2002, the Financial Accounting Standard Board issued SFAS No. 145,
'Rescission of FASB Statements No. 4, 44, 64, Amendment of FASB No. 13, and
Technical Corrections.' Among other provisions, SFAS No. 145 rescinds SFAS No.
4, 'Reporting Gains and Losses from Extinguishment of Debt.' Accordingly, gains
or losses from extinguishment of debt shall not be reported as extraordinary
items unless the extinguishment qualifies as an extraordinary item under the
criteria of APB No. 30. Gains or losses from extinguishment of debt that do not
meet the criteria of APB No. 30 should be reclassified to income from continuing
operations in all prior periods presented. This statement will be effective for
our fiscal year 2003. We do not expect the adoption of SFAS 145 to have a
material impact on our financial position or results of operations.
o Outlook
Rapid technological change and frequent introduction of new technology leading
to more complex and more integrated products characterize the semiconductor
industry. The result is a cyclical environment with short product life, price
erosion and high sensitivity to the overall business cycle. Substantial capital
and R&D investment are also required to support products and manufacturing
processes. As a result of these industry conditions, we have experienced in the
past and may experience in the future periodic fluctuations in our operating
results. Although semiconductor market conditions for fiscal 2002 continued to
be weak compared to that in fiscal 2001, we experienced sequential quarterly
growth in new orders in each of our fiscal 2002 quarters. The sequential
improvement was driven by new orders for our products that are aimed at wireless
handsets, displays, notebook computers and other electronic devices. Our 13-week
backlog as we entered the first quarter of fiscal 2003 was greater than it was
at the beginning of the previous quarter. This was driven by a strong pattern of
new orders we saw in the second half of fiscal 2002. As order levels have
improved, the aging of orders has become more normalized as our customers place
more orders further out in time. Consequently, this affects the amount they
place in turns orders, which are orders received with delivery requested in the
same quarter. Based on expectations of turns orders for the quarter, our outlook
is for first quarter fiscal 2003 sales to be around the same level as in the
fourth quarter of fiscal 2002, when we reported sales of $419.5 million.
Historically, sales in our first quarter have usually been flat or down from the
preceding fourth quarter. Weekly orders in July compared to June have improved,
but the expected level of sales for the fiscal 2003 first quarter remains
dependent on receiving the anticipated turns orders in the remaining August
period. We also expect our gross margin percentage for the first quarter of
fiscal 2003 to be comparabale with the fourth quarter of fiscal 2002. Overall,
we expect to remain profitable for the first quarter of fiscal 2003. In May
2002, we announced a plan to reposition our resources, including a shift of more
sales and marketing resources to the Asia Pacific region to support growing
opportunities in that region as sales in the region grew to 44 percent of total
sales in fiscal 2002 from 32 percent in fiscal 2001. If we are unsuccessful in
growing those market opportunities or if the economic environment in the region
declines, our future sales may be unfavorably affected. Our focus is to continue
to introduce new products, particularly more highly integrated system-on-a-chip
products and higher-margin analog products that are targeted towards wireless
handsets, displays, information appliances and information infrastructure. If
the development of new products is delayed or market acceptance is below
expectations, future gross margin may be unfavorably affected. The wireless
handset market continues to be important to our future growth plans. New
integrated chipsets are being developed to provide added dollar content in
targeted entry-level handsets. New products are also being developed to address
new features and functionality in handsets, such as color displays and image
capture. Due to high levels of competition, as well as complex technological
requirements, there is no assurance that we will ultimately be successful in
this targeted market. Although the number of wireless handsets sold worldwide is
a large market, near-term growth trends are highly uncertain and difficult to
predict with accuracy. Delayed introduction of next-generation wireless base
stations also negatively impacts potential growth in the wireless handset
market. There is also uncertainty related to the standards that ultimately will
be adopted for the next-generation wireless base stations. As a result, we
remain cautious on near-term trends in our wireless-related businesses. We
continue to hold numerous design wins for our highly integrated information
appliance products, but end-user adoption of the various devices that utilize
our products has been slower than anticipated. A design win is when a customer
has chosen our semiconductor product and designed it into their device. It is
not yet clear which form factors, specific customers' products or customers'
business models will ultimately be successful in this emerging market. Revenue
for our information appliance products is dependent on the outcome and the
timing of product acceptance trends. We believe that continued focused
investment in research and development, especially the timely development and
market acceptance of new products, is a key factor to our successful growth and
our ability to achieve strong financial performance. Our product portfolio
generally has short product life cycles. Successful development and introduction
of new products are critical to our ability to maintain a competitive position
in the marketplace. We will continue to invest resources to develop new cores
and integrate those cores with our other capabilities to create system-on-a-chip
products that leverage our leading edge analog and mixed-signal technology. We
will also continue to prioritize our investments by focusing on applications in
the wireless handsets, displays, information appliances and information
infrastructure markets, as well as in process technologies needed to support
those products. Given the uncertainty in the current economic climate, it is
difficult to accurately predict at this time our financial performance beyond
the first quarter of fiscal 2003. Assuming no significant improvement in the
economy, we anticipate R&D spending for fiscal 2003 to be slightly higher than
the fiscal 2002 level driven by increased investments in our key focus areas.
Overall SG&A expense is expected to be slightly higher than the fiscal 2002
level due to higher payroll and employee costs, but we will continue to align
our cost structure with current business conditions. We have made and will
continue to make strategic business acquisitions or investments in order to gain
access to key technologies that can augment our existing technical capability or
enable us to achieve faster time to market. These can involve risks and
uncertainties that may unfavorably impact our future financial performance. We
cannot assure you that we will be able to integrate and develop acquired
technologies as expected. If the technology is not developed in a timely manner,
we may be unsuccessful in penetrating target markets. With acquisition activity,
there are risks that future operating results may be unfavorably affected by
certain acquisition related costs, such as but not limited to, in-process R&D
charges and incremental R&D spending. Because of significant international
sales, we benefit overall from a weaker dollar and are adversely affected by a
stronger dollar relative to major currencies worldwide. Changes in exchange
rates, and in particular a strengthening of the U.S. dollar, may unfavorably
affect our consolidated sales and operating results. Although we attempt to
manage short-term exposures to foreign currency fluctuations, we cannot assure
you that our risk management activities will fully offset the adverse financial
impact resulting from unfavorable movements in foreign exchange rates. From time
to time, we have received notices of tax assessments from certain governments of
countries in which we operate. We cannot assure you that these governments or
other government entities will not serve future notices of assessments on us, or
that the amounts of such assessments and our failure to favorably resolve such
assessments would not have a material adverse effect on our financial condition
or results of operations. In addition, our tax returns for certain years are
under examination in the U.S. While we believe we have sufficiently provided for
all tax obligations, we cannot assure you that the ultimate outcome of the tax
examinations will not have a material adverse effect on our future financial
condition or results of operations. The September terrorist attacks on the U.S.
and subsequent associated events have created additional uncertainty on the
state of the U.S. economy overall. Although we did not experience any immediate
direct adverse effect on our operations from the terrorist attacks, the
longer-term and indirect consequences from this catastrophic event are not yet
known. There can be no assurance that the economic and political climate will
improve in the near future. If the slow business conditions in the global
economy continue or become more severe, our future sales and operating results
will be negatively impacted.
<TABLE>
Appendix to MD&A Graphs
(3 yrs)
<CAPTION>
2002 2001 2000
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales per Employee $150.2 $201.2 $198.0
Net Operating Margin
as a Percent of Sales (10.6)% 10.7% 16.1%
Operating Costs and Expenses
(As a Percent of Sales):
Selling, General, and
Administrative 17.5% 15.4% 14.5%
Research and Development 29.5% 20.6% 18.0%
Cost of Sales 63.0% 50.9% 54.0%
Net Property, Plant,
And Equipment $737.1 $832.8 $822.0
Stock Price Ending $ 32.13 $ 28.12 $ 49.63
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See information/discussion appearing in subcaption 'Financial Market Risks' of
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 and in Note 1, 'Summary of Significant Accounting
Policies,' and Note 2, 'Financial Instruments,' in the Notes to the Consolidated
Financial Statements included in Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Page
----
Financial Statements:
- ---------------------
Consolidated Balance Sheets at May 26, 2002 and May 27, 2001 32
Consolidated Statements of Operations for each of the years in the
three-year period ended May 26, 2002 33
Consolidated Statements of Comprehensive Income (Loss) for each of the years
in the three-year period ended May 26, 2002 34
Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended May 26, 2002 35
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended May 26, 2002 36
Notes to Consolidated Financial Statements 37-64
Independent Auditors' Report 65
Financial Statement Schedule:
For the three years ended May 26, 2002
Schedule II -- Valuation and Qualifying Accounts 69
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 26, May 27,
In Millions, Except Share Amounts 2002 2001
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 681.3 $ 817.8
Short-term marketable investments 18.1 5.0
Receivables, less allowances of $37.8 in 2002 and $45.1 in 2001 131.7 123.4
Inventories 145.0 195.5
Deferred tax assets 58.7 97.2
Other current assets 38.3 36.1
------------- --------------
Total current assets 1,073.1 1,275.0
Property, plant and equipment, net 737.1 832.8
Long-term marketable debt securities 145.0 46.6
Long-term marketable equity securities 46.4 18.5
Goodwill 173.3 132.1
Other assets 113.9 57.3
------------- --------------
Total assets $2,288.8 $2,362.3
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5.5 $ 29.4
Accounts payable 123.7 126.4
Accrued expenses 226.7 262.9
Income taxes payable 47.9 53.1
------------- --------------
Total current liabilities 403.8 471.8
Long-term debt 20.4 26.2
Other noncurrent liabilities 83.5 96.4
------------- --------------
Total liabilities $ 507.7 $ 594.4
Commitments and contingencies
Shareholders' equity:
Common stock of $0.50 par value. Authorized 850,000,000 shares.
Issued and outstanding 180,361,609 in 2002 and 173,806,633 in 2001 $ 90.2 $ 86.9
Additional paid-in capital 1,415.3 1,294.7
Retained earnings 310.5 432.4
Unearned compensation (12.8) (13.9)
Accumulated other comprehensive loss (22.1) (32.2)
------------- --------------
Total shareholders' equity $1,781.1 $1,767.9
------------- --------------
Total liabilities and shareholders' equity $2,288.8 $2,362.3
============= ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended May 26, May 27, May 28,
In Millions, Except Per Share Amounts 2002 2001 2000
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $1,494.8 $2,112.6 $2,139.9
Operating costs and expenses:
Cost of sales 941.4 1,075.1 1,154.9
Research and development 441.0 435.6 386.1
Selling, general and administrative 260.9 324.7 309.4
Special items 9.3 51.9 (55.3)
------------ ------------ ------------
Total operating costs and expenses 1,652.6 1,887.3 1,795.1
------------ ------------ ------------
Operating income (loss) (157.8) 225.3 344.8
Interest income, net 21.3 52.0 15.3
Other income, net 13.1 29.8 282.4
------------ ------------ ------------
Income (loss) before income taxes and extraordinary item (123.4) 307.1 642.5
Income tax expense (benefit) (1.5) 61.4 14.9
------------ ------------ ------------
Income (loss) before extraordinary item (121.9) 245.7 627.6
Extraordinary loss on early extinguishment of debt,
net of taxes of $0.4 million - - 6.8
------------ ------------ ------------
Net income (loss) $ (121.9) $ 245.7 $ 620.8
============ ============ ============
Earnings (loss) per share:
Income (loss) before extraordinary item:
Basic $(0.69) $1.40 $3.62
Diluted $(0.69) $1.30 $3.27
Net income (loss):
Basic $(0.69) $1.40 $3.58
Diluted $(0.69) $1.30 $3.24
Weighted-average common and potential common
shares outstanding:
Basic 177.5 175.9 173.6
Diluted 177.5 188.4 191.7
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Years Ended May 26, May 27, May 28,
In millions 2002 2001 2000
------------- ------------- --------------
<S> <C> <C> <C>
Net income (loss) $(121.9) $245.7 $620.8
Other comprehensive income (loss), net of tax:
Unrealized gain on available-for-sale securities 32.6 32.6 206.0
Reclassification adjustment for realized gain included in
net income (loss) (9.4) (21.3) (224.6)
Minimum pension liability (12.7) (16.0) (6.2)
Derivative instruments:
Unrealized loss on cash flow hedges (0.4) - -
------------- ------------- --------------
Other comprehensive income (loss) 10.1 (4.7) (24.8)
------------- ------------- --------------
Comprehensive income (loss) $(111.8) $241.0 $596.0
============= ============= ==============
</TABLE>
The tax effects of other comprehensive income (loss) components included in each
of the years presented above were not significant.
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Additional Retained Other
Common Paid-In Earnings Unearned Comprehensive
In Millions Stock Capital (Deficit) Compensation Loss Total
------- ------------- ----------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at May 30, 1999 $84.5 $1,268.1 $(434.1) $(15.0) $ (2.7) $ 900.8
Net income - - 620.8 - - 620.8
Issuance of common stock under option, 4.1 130.6 - - - 134.7
purchase, and profit sharing plans
Unearned compensation relating to issuance of 0.1 8.2 - (8.3) - -
restricted stock
Cancellation of restricted stock - (6.0) - 2.7 - (3.3)
Amortization of unearned compensation - - - 8.0 - 8.0
Issuance of common stock upon conversion of a 0.1 7.0 - - - 7.1
convertible subordinated promissory note
Other comprehensive loss - - - - (24.8) (24.8)
- ------------------------------------------------ --------- ------------- ----------- ----------------- ---------------- ------------
Balances at May 28, 2000 88.8 1,407.9 186.7 (12.6) (27.5) 1,643.3
Net income - - 245.7 - - 245.7
Issuance of common stock under option, 2.2 70.0 - - - 72.2
purchase, and profit sharing plans
Unearned compensation relating to issuance of 0.1 7.4 - (7.5) - -
restricted stock
Cancellation of restricted stock - (2.8) - 2.0 - (0.8)
Amortization of unearned compensation - - - 4.2 - 4.2
Proceeds from sale of put warrants - 0.4 - - - 0.4
Stock compensation charge - 2.0 - - - 2.0
Purchase and retirement of treasury stock (4.2) (190.2) - - - (194.4)
Other comprehensive loss - - - - (4.7) (4.7)
- ------------------------------------------------ --------- ------------ ------------ ----------------- ---------------- ------------
Balances at May 27, 2001 86.9 1,294.7 432.4 (13.9) (32.2) 1,767.9
Net loss - - (121.9) - - (121.9)
Issuance of common stock under option, 3.0 108.6 - - - 111.6
purchase, and profit sharing plans
Unearned compensation relating to issuance of - 3.1 - (3.1) - -
restricted stock
Cancellation of restricted stock - (0.9) - 0.8 - (0.1)
Amortization of unearned compensation - - - 3.4 - 3.4
Stock compensation charge - 0.1 - - - 0.1
Issuance of common stock upon conversion of 0.3 9.7 - - - 10.0
convertible subordinated promissory notes
Other comprehensive income - - - - 10.1 10.1
- ------------------------------------------------ --------- ------------ -------------- ----------------- ---------------- ----------
Balances at May 26, 2002 $90.2 $1,415.3 $ 310.5 $(12.8) $ (22.1) $1,781.1
- ------------------------------------------------ --------- ------------ -------------- ----------------- ---------------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended May 26, May 27, May 28,
In Millions 2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $(121.9) $245.7 $620.8
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 230.4 243.3 263.8
Gain on investments (9.4) (30.6) (272.5)
Loss on disposal of equipment 4.4 3.1 11.9
Donation of equity securities - 20.5 -
Deferred tax provision 18.0 27.6 (12.1)
Noncash special items (2.3) 21.9 (55.3)
Other, net 0.2 0.3 1.6
Changes in certain assets and liabilities, net:
Receivables (6.4) 135.2 (86.7)
Inventories 51.0 (2.6) (57.0)
Other current assets - 0.8 (8.3)
Accounts payable and accrued expenses (32.9) (138.9) (9.7)
Income taxes payable (5.2) (33.7) 9.0
Other noncurrent liabilities (25.6) (4.4) (5.8)
------------ ------------ ------------
Net cash provided by operating activities 100.3 488.2 399.7
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (138.0) (239.5) (168.7)
Sale of equipment - - 8.6
Sale and maturity of available-for-sale securities 88.6 48.2 151.2
Purchase of available-for-sale securities (200.1) (28.0) (115.1)
Disposition of Cyrix PC microprocessor business - - 75.0
Sale of investments 11.2 34.8 286.0
Purchase of nonmarketable investments, net (26.3) (14.9) (8.5)
Business acquisitions, net of cash acquired (42.1) (99.1) (22.2)
Funding of benefit plan (14.9) (2.4) -
Other, net (1.7) 2.3 1.2
------------ ------------ ------------
Net cash provided by (used by) investing activities (323.3) (298.6) 207.5
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of convertible subordinated notes - - (265.8)
Repayment of debt (20.6) (24.4) (114.7)
Issuance of common stock, net 107.1 68.2 133.4
Purchase and retirement of treasury stock - (194.4) -
------------ ------------ ------------
Net cash provided by (used by) financing activities 86.5 (150.6) (247.1)
------------ ------------ ------------
Net change in cash and cash equivalents (136.5) 39.0 360.1
Cash and cash equivalents at beginning of year 817.8 778.8 418.7
------------ ------------ ------------
Cash and cash equivalents at end of year $ 681.3 $817.8 $778.8
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include National Semiconductor Corporation
and our majority-owned subsidiaries. All significant intercompany transactions
are eliminated in consolidation.
Our fiscal year ends on the last Sunday of May. The fiscal years ended May
26, 2002, May 27, 2001 and May 28, 2000 were all 52-week years.
Revenue Recognition
- -------------------
We recognize revenue from the sale of semiconductor products upon shipment,
provided title and risk of loss has passed to the customer, the fee is fixed or
determinable and collection of the revenue is reasonably assured. We record at
the time of shipment a provision for estimated future returns. Approximately 47
percent of our semiconductor product sales are sold through distributors. We
have agreements with our distributors for various programs, including pricing
adjustments based on resales, scrap allowances and volume incentives. The
revenue we record for these distribution sales is net of the estimated
provisions for these programs. Service revenues are recognized as the services
are provided or as milestones are achieved, depending on the terms of the
arrangement. Intellectual property income is not classified as revenue. This
income is classified as non-operating income and is recognized when the license
is delivered, collection is reasonably assured and no further obligations to the
other party exist.
Inventories
- -----------
Inventories are stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out basis, or market. We reduce the carrying value of
inventory for estimated obsolescence or unmarketable inventory by an amount that
is the difference between its cost and the estimated market value based upon
assumptions about future demand and market conditions.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are recorded at cost. We use the straight-line
method to depreciate machinery and equipment over their estimated useful life
(3-5 years). Buildings and improvements are depreciated using both straight-line
and declining-balance methods over the assets' remaining estimated useful life
(3-50 years), or, in the case of leasehold improvements, over the lesser of the
estimated useful life or lease term.
We capitalize eligible costs to acquire or develop software used
internally. We use the straight-line method to amortize software used internally
over its estimated useful life (3-5 years). Effective May 26, 2002, and for all
years presented, we reclassified software used internally to property, plant and
equipment. Prior to this, we had classified software used internally on the
consolidated balance sheets in other assets.
We review the carrying value of property, plant and equipment for
impairment whenever events and circumstances indicate that the carrying value of
an asset may not be recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. If our estimate of future
undiscounted net cash flows is insufficient to recover the carrying value of the
assets over the estimated useful life, we will record an impairment loss in the
amount by which the carrying value of the assets exceeds the fair value.
Goodwill
- --------
Goodwill represents the excess of the purchase price over the fair value of
identifiable net tangible and intangible assets acquired in a business
combination. We adopted SFAS No. 142, 'Goodwill and Other Intangible Assets,'
and discontinued amortizing goodwill as of the beginning of fiscal 2002. Instead
we evaluate goodwill for impairment on an annual basis and whenever events or
changes in circumstance suggest that it is more likely than not that an
impairment loss has been incurred.
Upon adoption of this financial standard, we established reporting units
based on operating segments as defined by our current segment reporting
structure and assigned all existing goodwill to the reporting units. As of May
26, 2002, we have four reporting units that contain goodwill. During fiscal
2002, we evaluated goodwill impairment as of the date of adoption and in our
fourth fiscal quarter, which has been selected as the period for our recurring
annual evaluation for all reporting units. In each evaluation, we completed the
first step of the goodwill impairment test and determined that no potential
impairment existed. As a result, we did not recognize a transitional or other
impairment loss in fiscal 2002.
Income Taxes
- ------------
We determine deferred tax liabilities and assets at the end of each period based
on the future tax consequences that can be attributed to net operating loss and
credit carryovers and differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, using
the tax rate expected to be in effect when the taxes are actually paid or
recovered. The recognition of deferred tax assets is reduced by a valuation
allowance if it is more likely than not that the tax benefits will not be
realized.
Earnings (Loss) per Share
- -------------------------
We compute basic earnings (loss) per share using the weighted-average number of
common shares outstanding. Diluted earnings (loss) per share are computed using
the weighted-average common shares outstanding after giving effect to potential
common shares from stock options based on the treasury stock method, plus other
potentially dilutive securities outstanding, such as convertible subordinated
notes.
For all years presented, the reported net income (loss) was used in our
computation of basic and diluted earnings (loss) per share. A reconciliation of
the shares used in the computation follows:
<TABLE>
<CAPTION>
Years Ended
May 26, May 27, May 28,
(In Millions) 2002 2001 2000
--------------- ---------------- ---------------
<S> <C> <C> <C>
Weighted-average common shares outstanding used
for basic earnings (loss) per share 177.5 175.9 173.6
Effect of dilutive securities:
Stock options - 12.5 18.1
--------------- ---------------- ---------------
Weighted-average common and potential common shares
outstanding used for diluted earnings (loss) per share 177.5 188.4 191.7
=============== ================ ===============
</TABLE>
As of May 26, 2002, we had options outstanding to purchase 36.9 million
shares of common stock with a weighted-average exercise price of $28.24, which
were excluded from the fiscal 2002 computation of diluted earnings per share
because their effect was antidilutive. These options could potentially dilute
the computation of earnings per share in the future. As of May 27, 2001, we had
options outstanding to purchase 10.0 million shares of common stock with a
weighted-average exercise price of $53.58, which were excluded from the fiscal
2001 computation of diluted earnings per share because their effect was
antidilutive. As of May 28, 2000, we had options outstanding to purchase 8.4
million shares of common stock with a weighted-average exercise price of $59.49,
which were excluded from the fiscal 2000 computation of diluted earnings per
share because their effect was antidilutive.
Currencies
- ----------
The functional currency for all operations worldwide is the U.S. dollar. We
include gains and losses arising from translation of foreign currency financial
statement balances into U.S. dollars in current earnings. We also include gains
and losses resulting from foreign currency transactions in current earnings.
Financial Instruments
- ---------------------
Cash and Cash Equivalents. Cash equivalents are highly liquid instruments with a
remaining maturity of three months or less at the time of purchase. We maintain
cash balances in various currencies and in a variety of financial instruments.
We have not experienced any material losses related to any short-term financial
instruments.
Marketable Investments. Debt and marketable equity securities are classified
into held-to-maturity or available-for-sale categories. Debt securities are
classified as held-to-maturity when we have the positive intent and ability to
hold the securities to maturity. We record held-to-maturity securities, which
are stated at amortized cost, as either short-term or long-term on the balance
sheet based upon contractual maturity date. Debt and marketable equity
securities not classified as held-to-maturity are classified as
available-for-sale and are carried at fair market value, with the unrealized
gains and losses, net of tax, reported in shareholders' equity as a component of
accumulated other comprehensive loss. Gains or losses on securities sold are
based on the specific identification method.
Nonmarketable investments. We have investments in nonpublicly traded companies
as a result of various strategic business ventures. These nonmarketable
investments are included on the balance sheet in other assets. For nonmarketable
investments in which we have less than 20 percent voting interest and where we
do not have the ability to exercise significant influence or control, we record
these at cost and periodically review them for impairment. For nonmarketable
investments in which we do have the ability to exercise significant influence,
but do not hold a controlling interest, we record these using the equity method.
Under the equity method we record our proportionate share of income or loss from
these investments in nonoperating income based on our share of voting interest
in the investment.
Derivative Financial Instruments. As part of our risk management strategy we use
derivative financial instruments, including forwards, swaps and purchased
options, to hedge certain foreign currency and interest rate exposures. Our
intent is to offset gains and losses that occur from our underlying exposure
with gains and losses on the derivative contracts used to hedge them. As a
matter of company policy, we do not enter into speculative positions with
derivative instruments. The criteria we use 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.
At the beginning of fiscal 2002, we adopted Statement of Financial
Accounting Standards No. 133, 'Accounting for Derivative Instruments and Hedging
Activities,' as amended by SFAS No. 138, 'Accounting for Certain Derivative
Instruments and Certain Hedging Activities.' SFAS No. 133 requires companies to
record derivatives on the balance sheet as assets or liabilities measured at
fair value. We record all derivatives on the balance sheet at fair value. Gains
or losses resulting from changes in the values of these derivatives are
accounted for based on the use of the derivative and whether it qualifies for
hedge accounting. The cumulative effect of adoption of this statement was
immaterial to both our financial position and results of operations. See Note 2
to the Consolidated Financial Statements for a full description of our hedging
activities and related accounting policies.
Fair Values of Financial Instruments
- ------------------------------------
The carrying amounts for cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued expenses approximate their
fair values due to the short period of time until their maturity. Fair values of
long-term investments, long-term debt, interest rate derivatives, currency
forward contracts and currency options are based on quoted market prices or
pricing models using prevailing financial market information as of May 26, 2002
and May 27, 2001. The estimated fair value of debt was $26.8 million at May 26,
2002 and $62.4 million at May 27, 2001. See Note 2 to the Consolidated Financial
Statements for fair values of marketable securities and derivative financial
instruments.
Employee Stock Plans
- --------------------
We account for our stock option plans and our employee stock purchase plans in
accordance with the intrinsic method of Accounting Principles Board Opinion No.
25, 'Accounting for Stock Issued to Employees.'
Use of Estimates in Preparation of Financial Statements
- -------------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain amounts in prior years' consolidated financial statements and notes to
consolidated financial statements have been reclassified to conform to the
fiscal 2002 presentation. Net operating results have not been affected by these
reclassifications.
Note 2. Financial Instruments
Marketable Investments
- ----------------------
Our policy is to diversify our investment portfolio to reduce risk to principal
that could arise from credit, geographic and investment sector risk. At May 26,
2002, investments were placed with a variety of different financial institutions
and other issuers. Investments with a maturity of less than one year have a
rating of A1/P1 or better. Investments with a maturity of more than one year
have a minimum rating of AA/Aa2.
At May 26, 2002, we held $17.7 million of available-for-sale securities and
$605.5 million of held-to-maturity securities, which are classified as cash
equivalents on the consolidated balance sheet. These cash equivalents consist of
the following (in millions): bank time deposits ($178.0), institutional money
market funds ($167.0) and commercial paper ($278.2).
At May 27, 2001, we held $48.7 million of available-for-sale securities and
$723.2 million of held-to-maturity securities, which are classified as cash
equivalents on the consolidated balance sheet. These cash equivalents consist of
the following (in millions): bank time deposits ($193.3), institutional money
market funds ($105.1) and commercial paper ($473.5).
Marketable investments at fiscal year-end comprised:
<TABLE>
<CAPTION>
(In Millions) Gross Gross
Amortized Unrealized Unrealized EstimatedFair
Cost Gains Losses Value
------------- ------------- ------------- -------------
2002
<S> <C> <C> <C> <C>
SHORT-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Corporate notes $ 18.0 $ 0.1 $ - $ 18.1
------------- ------------- ------------- -------------
Total short-term marketable investments $ 18.0 $ 0.1 $ - $ 18.1
============= ============= ============= =============
LONG-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Debt securities:
Government debt securities $ 144.5 $ 0.5 $ - $ 145.0
------------- ------------- ------------- -------------
Equity securities 8.8 38.9 $(1.3) 46.4
------------- ------------- ------------- -------------
Total long-term marketable investments $ 153.3 $ 39.4 $(1.3) $ 191.4
============= ============= ============= =============
2001
SHORT-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Certificates of deposit $ 5.0 $ - $ - $ 5.0
------------- ------------- ------------- -------------
Total short-term marketable investments $ 5.0 $ - $ - $ 5.0
============= ============= ============= =============
LONG-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Debt securities:
Government debt securities $ 14.0 $ 0.1 - $ 14.1
Corporate notes 32.0 0.5 - 32.5
------------- ------------- ------------- -------------
46.0 0.6 - 46.6
------------- ------------- ------------- -------------
Equity securities 4.1 15.4 (1.0) 18.5
------------- ------------- ------------- -------------
Total long-term marketable investments $ 50.1 $ 16.0 $(1.0) $ 65.1
============= ============= ============= =============
</TABLE>
Net unrealized gains on available-for-sale securities of $38.2 million at
May 26, 2002 and $15.0 million at May 27, 2001 are included in accumulated other
comprehensive loss. The related tax effects are not significant.
Scheduled maturities of investments in debt securities were:
<TABLE>
<CAPTION>
(In Millions)
----------------
<S> <C>
2003 $ 18.1
2004 15.0
2005 130.0
----------------
Total $163.1
================
</TABLE>
Gross realized gains on available-for-sale securities were $8.1 million,
$25.5 million and $224.6 million for fiscal 2002, 2001 and 2000, respectively.
We realized impairment losses for other than temporary declines in fair value of
available-for-sale securities in fiscal 2002 of $0.2 million and in fiscal 2001
of $4.2 million. Gross realized losses on available-for-sale securities were not
material for fiscal 2000. We recognized gross realized gains from nonmarketable
investments of $1.5 million, $22.4 million and $48.4 million in fiscal 2002,
2001 and 2000, respectively. These gains come primarily from the sale of shares
in connection with initial public offerings and acquisitions by third parties.
Although we recognized $12.7 million of gross impairment losses on nonmarketable
investments in fiscal 2001, no such losses were recognized in either fiscal 2002
or 2000.
Derivative Financial Instruments
The objective of our foreign exchange risk management policy is to preserve the
U.S. dollar value of after-tax cash inflow in relation to non-U.S. dollar
currency movements. We are exposed to foreign currency exchange rate risk that
is inherent in orders, sales, cost of sales, expenses and assets and liabilities
denominated in currencies other than the U.S. dollar. We enter into foreign
exchange contracts, primarily forwards and purchased options, to hedge against
exposure to changes in foreign currency exchange rates. These contracts are
matched at inception to the related foreign currency exposures that are being
hedged. Exposures which are hedged include sales by subsidiaries, and assets and
liabilities denominated in currencies other than the U.S. dollar. Our foreign
currency hedges typically mature within one year.
We measure hedge effectiveness for foreign currency forward contracts by
comparing the cumulative change in the hedge contract with the cumulative change
in the hedged item, both of which are based on forward rates. For purchased
options, we measure hedge effectiveness by the change in the option's intrinsic
value, which represents the change in the forward rate relative to the option's
strike price. Any changes in the time value of the option are excluded from the
assessment of effectiveness of the hedge and recognized in current earnings.
We designate derivative instruments that are used to hedge exposures to
variability in expected future foreign denominated cash flows as cash flow
hedges. We record the effective portion of the gains or losses on the derivative
instrument in accumulated other comprehensive loss as a separate component of
shareholders' equity and reclassify amounts into earnings in the period when the
hedged transaction affects earnings. Derivative instruments that we use to hedge
exposures to reduce or eliminate changes in the fair value of an asset or
liability denominated in foreign currency are designated as fair value hedges.
The gain or loss on the derivative instrument, as well as the offsetting gain or
loss on the hedged item attributable to the hedged risk, is included in selling,
general and administrative expenses.
We are also exposed to variable cash flow that is inherent in our
variable-rate debt. We use an interest rate swap to convert the variable
interest payments to fixed interest payments. We designate this derivative as a
cash flow hedge. For interest rate swaps, the critical terms of the interest
rate swap and hedged item are designed to match up, enabling us to assume
effectiveness under SFAS No. 133. We recognize amounts as interest expense as
cash settlements are paid or received.
We report hedge ineffectiveness from foreign currency derivatives for both
forward contracts and options in current earnings. We also report
ineffectiveness related to interest rate swaps in current earnings. Hedge
ineffectiveness was not material for fiscal 2002. No cash flow hedges were
terminated as a result of forecasted transactions that did not occur. The
effective portion of all changes in derivatives is reported in the same
financial statement line item as the changes in the hedged item.
At May 26, 2002, the estimated net amount of existing gains or losses from
cash flow hedges expected to be reclassified into earnings within the next year
was $0.4 million. For fiscal 2002, net realized losses recognized from cash flow
hedges were $0.2 million and fair value hedges were $0.5 million.
Fair Value and Notional Principal of Derivative Financial Instruments
The table below shows the fair value and notional principal of derivative
financial instruments as of May 26, 2002 and May 27, 2001. The notional
principal amounts for derivative financial instruments provide one measure of
the transaction volume outstanding as of year-end and do not represent the
amount of the exposure to credit or market loss. The estimates of fair value are
based on applicable and commonly used pricing models using prevailing financial
market information as of May 26, 2002 and May 27, 2001. The fair value of
interest rate swap agreements represents the estimated amount we would receive
or pay to terminate the agreements taking into consideration current interest
rates. The fair value of forward foreign currency exchange contracts represents
the present value difference between the stated forward contract rate and the
current market forward rate at settlement. The fair value of foreign currency
option contracts represents the probable weighted net amount we would expect to
receive at maturity. The credit risk amount shown in the table represents the
gross exposure to potential accounting loss on these transactions if all
counterparties failed to perform according to the terms of the contract, based
on the then-current currency exchange rate or interest rate at each respective
date. Although the following table reflects the notional principal, fair value
and credit risk amounts of the derivative financial instruments, it does not
reflect the gains or losses associated with the exposures and transactions that
the derivative financial instruments are intended to hedge. The amounts
ultimately realized upon settlement of these financial instruments, together
with the gains and losses on the underlying exposures, will depend on actual
market conditions during the remaining life of the instruments.
<TABLE>
<CAPTION>
Carrying Notional Estimated Credit
(In Millions) Amount Principal Fair Value Risk
-------------- ----------- ------------- -------------
2002
<S> <C> <C> <C> <C>
INTEREST RATE INSTRUMENTS
Swaps:
Variable to fixed $ - $ 18.2 $ - $ -
============== =========== ============= =============
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts:
To sell dollars:
Pound sterling $ 0.1 $ 6.5 $ 0.1 $ 0.1
Singapore dollar - 4.4 0.1 0.1
-------------- ----------- ------------- -------------
Total $ 0.1 $ 10.9 $ 0.2 $ 0.2
============== =========== ============= =============
Purchased options:
Japanese yen $ - $ 23.0 $ - $ -
============== =========== ============= =============
2001
INTEREST RATE INSTRUMENTS
Swaps:
Variable to fixed $ - $ 19.4 $ - $ -
============== =========== ============= =============
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts:
To buy dollars:
Japanese yen $ - $ 3.1 $ - $ -
============== =========== ============= =============
To sell dollars:
Pound sterling $ (0.3) $ 16.0 $ (0.4) $ -
Singapore dollar (0.2) 9.7 (0.2) -
-------------- ----------- ------------- -------------
Total $ (0.5) $ 25.7 $ (0.6) $ -
============== =========== ============= =============
Purchased options:
Japanese yen $ 0.1 $ 18.0 $ 0.2 $ 0.2
Other - 4.5 - -
-------------- ----------- ------------- -------------
Total $ 0.1 $ 22.5 $ 0.2 $ 0.2
============== =========== ============= =============
</TABLE>
Concentrations of Credit Risk
Financial instruments that may subject us to concentrations of credit risk are
primarily investments and trade receivables. Our investment policy requires cash
investments to be placed with high-credit quality counterparties and limits the
amount of investments with any one financial institution or direct issuer. We
sell our products to distributors and original equipment manufacturers involved
in a variety of industries including computers and peripherals, wireless
communications, automotive and networking. We perform continuing credit
evaluations of our customers whenever necessary and we generally do not require
collateral. Our top ten customers combined represented approximately 38 percent
of total accounts receivable at May 26, 2002, and approximately 27 percent at
May 27, 2001. One of our distributors accounted for approximately 10 percent of
total net sales in fiscal 2002 as a result of its acquisition of another
distributor located in Europe. No one customer or distributor accounted for 10
percent or more of total net sales in fiscal 2001 and 2000. Historically, we
have not experienced significant losses related to receivables from individual
customers or groups of customers in any particular industry or geographic area.
Note 3. Cost Reduction Programs and Restructuring of Operations
Fiscal 2002
Included as a component of special items in the consolidated statement of
operations for fiscal 2002, we reported a net charge of $8.0 million related to
the actions described below:
In May 2002, we announced a plan to reposition our resources and reduce
costs. The plan scales back efforts in some wireless networking technologies,
such as the IEEE 802.11 technology standard, and narrows investment in the
set-top box portion of our information appliance business. We will also
reallocate investment to support our growing opportunities in the wireless
handset and flat-panel display markets, and our broadening capability in the
analog power management area. We are also shifting more sales and marketing
resources to Asia Pacific to support growth in that region. The plan resulted in
a net reduction of approximately 150 positions from our global workforce, which
is expected to be completed prior to the end of fiscal 2003. In connection with
these actions, we recorded a charge of $12.5 million. The charge includes $8.5
million for severance, $3.2 million for other exit related costs and $0.8
million for the write-off of equipment related to activity that was eliminated
as part of the repositioning. Other exit costs primarily represent facility
lease obligations related to closure of sales offices and design centers.
Noncash charges related to write-off of equipment. The total charge was
partially offset by a credit of $4.5 million of remaining reserves that were no
longer needed for previously announced actions because the activities were
completed in fiscal 2002 at a lower cost than originally estimated. Fiscal 2001
Included as a component of special items in the consolidated statement of
operations for fiscal 2001, we reported a net charge of $35.7 million comprised
of the items described below:
In May 2001, we announced a cost-reduction program that included the
elimination of approximately 790 positions worldwide. This action was taken due
to continued weakness in the semiconductor industry experienced during the
second half of fiscal 2001. As a result, we recorded a net charge of $33.4
million. The charge included $25.5 million for severance, $4.2 million for other
exit related costs and $4.8 million for the write-off of equipment related to
activity that was eliminated as part of the cost-reduction program. The charge
was partially offset by a credit of $1.1 million of residual restructure
reserves for activities that were completed in fiscal 2001. The noncash portion
totaled $6.8 million, consisting of the write-off of equipment and $2.0 million
for noncash severance relating to stock options.
In August 2000, we recorded a $2.3 million restructure charge in connection
with the consolidation of the wafer manufacturing operations in Greenock,
Scotland. This charge represented additional severance costs associated with the
termination of certain remaining employees who were originally scheduled to
depart the company upon final closure of the 4-inch wafer fabrication facility.
The closure of the 4-inch wafer fabrication facility and the transfer of
products and processes to the 6-inch wafer fabrication facility on the same site
were substantially completed by the end of September 2000.
Fiscal 2000
Included as a component of special items in the consolidated statement of
operations for fiscal 2000, we reported a $14.7 million credit from
restructuring of operations related to the actions described below:
For all activities related to restructuring actions we announced in May
1999 that were substantially completed during fiscal 2000, we recorded a credit
of $9.0 million for severance and other exit-related costs for which reserves
were no longer required. The May 1999 actions included our decision to exit the
Cyrix PC microprocessor business, the elimination of approximately 1,126
positions worldwide and the closure of the 8-inch development wafer fabrication
facility in Santa Clara, California. In connection with the closure of the Santa
Clara wafer fabrication facility, we also recorded a credit of $2.6 million from
the final disposition of related equipment.
In September 1999, we completed the sale of the assets of the Cyrix PC
microprocessor business to VIA Technologies. The sale included the MII x86
compatible microprocessor and successor products. We retained the integrated
Media GX microprocessor, which forms the core of the GeodeTM family of solutions
for the information appliance market. Assets sold included inventories, land,
buildings and equipment, primarily located in Richardson, Texas; Arlington,
Texas; Mesa, Arizona; and Santa Clara, California. Some PC
microprocessor-related manufacturing assets in Toa Payoh, Singapore were also
included. Proceeds from this transaction were $75.0 million, of which $8.2
million represented reimbursement to us for certain employee retention costs
incurred solely as a result of completing the sale. The remaining $66.8 million
represented payment for the assets sold. We recorded a gain of $26.8 million on
the sale.
In September 1999, we also announced we would retain full ownership of our
semiconductor manufacturing facility in Greenock and ceased our efforts
originally announced in October 1998 to seek an investor to acquire and operate
that facility as an independent foundry business. As a result, we recorded a
credit of $3.1 million from the reduction of the restructure reserve related to
a penalty that would no longer be incurred.
The following table provides a summary of the activities related to our cost
reduction and restructuring actions included in accrued liabilities for the
years ended May 26, 2002 and May 27, 2001:
<TABLE>
<CAPTION>
(In Millions) 2002 2001
-------------- ---------------
<S> <C> <C>
Beginning balance $30.3 $19.1
Cash payments (20.8) (17.7)
Cost reduction program charges 11.7 30.0
Credit for residual reserves (4.8) (1.1)
-------------- ---------------
Ending balance $16.4 $30.3
============== ===============
</TABLE>
During fiscal 2002, we paid severance of $14.6 million to 473 employees in
connection with the cost reduction action announced in May 2001. We also paid
$6.2 million for other exit-related costs during fiscal 2002. Those costs were
primarily associated with restructuring actions we originally announced in
fiscal 1999. As of May 26, 2002, no amounts had yet been paid in connection with
the actions announced in May 2002.
Note 4. Acquisitions
Fiscal 2002
In April 2002, we acquired the Finnish company Fincitec Oy and ARSmikro OU,
based in Estonia. These two related companies develop low-voltage, low-power
application specific integrated circuits for battery-powered devices. We expect
this acquisition to strengthen our development capabilities for power management
circuits for the portable market and to expand our suite of integrated and
discrete silicon solutions for handheld devices, including cell phones, personal
digital assistants, digital cameras and similar electronic devices. The
acquisition was accounted for using the purchase method with a purchase price of
$15.6 million for all of the outstanding shares of the combined companies'
common stock. In connection with the acquisition, we recorded a $0.2 million
in-process research and development charge, which is included as a component of
special items in the consolidated statement of operations for fiscal 2002. The
remainder of the purchase price was allocated to net assets of $1.0 million,
intangible assets of $0.8 million and goodwill of $13.6 million based on fair
values.
In June 2001, we acquired Wireless Solutions Sweden AB, a leading developer
of wireless solutions ranging from telemetry to mobile phones to wireless
networking, including Bluetooth. This acquisition was intended to help us
deliver complete wireless reference designs, including silicon chipsets,
hardware and software. The acquisition was accounted for using the purchase
method with a purchase price of $27.7 million for all of the outstanding shares
of Wireless Solutions common stock. In connection with the acquisition, we
recorded a $1.1 million in-process research and development charge, which is
included as a component of special items in the consolidated statement of
operations for fiscal 2002. The remainder of the purchase price was allocated to
net liabilities of $1.0 million and goodwill of $27.6 million based on fair
values.
Fiscal 2001
In February 2001, we acquired innoComm Wireless, a developer of chipsets for
wireless networking applications based in San Diego, California. InnoComm's
expertise ranges from short-range wireless technologies, such as Bluetooth and
HomeRF, to full wireless local area networking based on the IEEE 802.11
standard, which allows interoperability for wireless LANs similar to how
ethernet allows interoperability of wired LANs, and the acquisition was intended
to complement our existing base of design and product expertise. The acquisition
was accounted for using the purchase method with a purchase price of $118.8
million. Of the total purchase price, $74.3 million was paid in cash upon the
closing of the transaction. A liability of $44.5 million was recorded, primarily
representing two installments to be paid twelve and twenty-four months after the
closing date. In connection with the acquisition, we recorded a $12.1 million
in-process research and development charge, which is included as a component of
special items in the consolidated statement of operations for fiscal 2001. The
remainder of the purchase price was allocated to net assets of $0.2 million and
intangible assets of $106.5 million based on fair values. The intangible assets
consist primarily of goodwill. Under terms of employee retention arrangements,
we also expect to pay a total of approximately $18.3 million to innoComm
employees upon the completion of their first and second year service
anniversaries. These amounts are being charged ratably to operations over the
related service periods.
In July 2000, we acquired the business and assets of Vivid Semiconductor, a
semiconductor company based in Chandler, Arizona. Vivid's technologies and
analog engineering resources are expected to expand our strengths in creating
silicon solutions for the flat-panel display market. The acquisition was
accounted for using the purchase method with a purchase price of $25.1 million
in cash. In connection with the acquisition, we recorded a $4.1 million
in-process research and development charge, which is included as a component of
special items in the consolidated statement of operations for fiscal 2001. The
remainder of the purchase price was allocated to net assets of $1.3 million and
intangible assets of $19.7 million based on fair values. The intangible assets
consist primarily of goodwill.
Fiscal 2000
In December 1999, we acquired Algorex, a provider of high performance digital
signal processing products, architecture and software technologies for the
wireless communication markets. These technologies should enhance our future
capability to provide complete chipset solutions for the cellular phone and
wireless information appliance markets. The acquisition was accounted for using
the purchase method with a purchase price of $21.5 million. In connection with
the acquisition, we recorded a $4.2 million in-process research and development
charge, which is included as a component of special items in the consolidated
statement of operations for fiscal 2000. The remainder of the purchase price was
allocated primarily to goodwill.
The amount allocated to the in-process research and development charge for each
of these acquisitions was determined through an established valuation technique
used in the high technology industry. The research and development charge was
expensed upon acquisition because technological feasibility had not been
established and no alternative uses exist. The costs of research and development
to bring the products to technological feasibility are not expected to have a
material impact on future operating results.
Pro forma results of operations related to these acquisitions have not been
presented since the results of their operations were immaterial in relation to
National.
Note 5. Consolidated Financial Statement Details
<TABLE>
<CAPTION>
(In Millions) 2002 2001
-------------- ---------------
RECEIVABLE ALLOWANCES
<S> <C> <C>
Doubtful accounts $ 7.5 $ 7.3
Returns and allowances 30.3 37.8
-------------- ---------------
Total receivable allowances $ 37.8 $ 45.1
============== ===============
INVENTORIES
Raw materials $ 6.4 $ 8.1
Work in process 86.9 113.8
Finished goods 51.7 73.6
-------------- ---------------
Total inventories $ 145.0 $ 195.5
============== ===============
PROPERTY, PLANT AND EQUIPMENT
Land $ 23.3 $ 21.7
Buildings and improvements 524.2 520.6
Machinery and equipment 1,774.1 1,778.1
Internal-use software 87.5 86.9
Construction in progress 47.8 98.7
-------------- ---------------
Total property, plant and equipment 2,456.9 2,506.0
Less accumulated depreciation and amortization 1,719.8 1,673.2
-------------- ---------------
Property, plant and equipment, net $ 737.1 $ 832.8
============== ===============
ACCRUED EXPENSES
Payroll and employee related $ 115.6 $ 123.7
Cost reduction charges and restructuring of operations 16.4 30.3
Other 94.7 108.9
-------------- ---------------
Total accrued expenses $ 226.7 $ 262.9
============== ===============
ACCUMULATED OTHER COMPREHENSIVE LOSS
Unrealized gain on available-for-sale securities $ 38.2 $ 15.0
Minimum pension liability (59.9) (47.2)
Unrealized loss on cash flow hedges (0.4) -
-------------- ---------------
$ (22.1) $ (32.2)
============== ===============
</TABLE>
<TABLE>
<CAPTION>
(In Millions) 2002 2001 2000
------------- ------------- --------------
<S> <C> <C> <C>
SPECIAL ITEMS - Income (expense)
Cost reduction charges and restructuring of operations $ (8.0) $ (35.7) $ 14.7
In-process research and development charges (1.3) (16.2) (4.2)
Gain on disposition of Cyrix PC microprocessor business - - 26.8
Other - - 18.0
------------- ------------- --------------
$ (9.3) $ (51.9) $ 55.3
============= ============= ==============
</TABLE>
For fiscal 2000 special items, a credit to reduce the excess portion of a
contingent liability related to an indemnity agreement with Fairchild
Semiconductor that expired in March 2000 is included in Other. The agreement was
connected with the disposition of the Fairchild business in fiscal 1997.
<TABLE>
<CAPTION>
(In Millions) 2002 2001 2000
------------- ------------- --------------
<S> <C> <C> <C>
INTEREST INCOME, NET
Interest income $ 25.2 $ 57.3 $ 33.2
Interest expense (3.9) (5.3) (17.9)
------------- ------------- --------------
Interest income, net $ 21.3 $ 52.0 $ 15.3
============= ============= ==============
OTHER INCOME, NET
Net intellectual property income $ 11.6 $ 6.3 $ 11.5
Gain on investments, net 2.1 23.5 269.6
Other (0.6) - 1.3
------------- ------------- --------------
Total other income, net $ 13.1 $ 29.8 $ 282.4
============= ============= ==============
</TABLE>
Beginning in fiscal 2002, equity in losses of investments accounted for
under the equity method is included in gain (loss) on investments, net. The
presentation of $3.8 million in fiscal 2001 and $2.9 million in fiscal 2000 of
such losses previously reported in selling, general and administrative expenses
in fiscal 2001 and 2000, respectively, has been re-characterized to conform to
this classification.
Note 6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for fiscal 2002 are as follows
(in millions):
<TABLE>
<CAPTION>
Analog Segment All
Others Total
--------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balances at May 27, 2001 $130.4 $1.7 $132.1
Goodwill acquired during fiscal 2002 41.2 - 41.2
--------------- -------------- --------------
Balances at May 26, 2002 $171.6 $1.7 $173.3
=============== ============== ==============
</TABLE>
Other intangible assets, which are included in other assets on the consolidated
balance sheet, will continue to be amortized and consist of the following (in
millions):
<TABLE>
<CAPTION>
Weighted-Average Weighted-Average
Amortization Amortization
Period Period
May 26, (Years) May 27, (Years)
2002 2001
---------------- --------------- ------------ ----------------
<S> <C> <C> <C> <C>
Patents $4.9 5.0 $4.9 5.0
Unpatented technology 0.8 2.4 - -
---------------- ------------
5.7 4.9
Less accumulated amortization 1.7 0.8
---------------- ------------
$4.0 4.6 $4.1 5.0
================ ============
</TABLE>
We expect annual amortization expense in the following fiscal years to be (in
millions):
<TABLE>
<CAPTION>
<C> <C>
2003 $1.4
2004 1.4
2005 1.0
2006 0.2
--------
$4.0
========
</TABLE>
Annual amortization expense was (in millions):
<TABLE>
<CAPTION>
2002 2001 2000
------------ ----------- -----------
<S> <C> <C> <C>
Goodwill amortization $ - $ 13.0 $ 5.3
Patent and technology amortization 0.9 0.8 -
------------ ----------- -----------
Total amortization $ 0.9 $ 13.8 $ 5.3
============ =========== ===========
</TABLE>
Adjusted net income (loss) and net income (loss) per share exclusive of
amortization expense related to goodwill was (in millions, except per share
amounts):
<TABLE>
<CAPTION>
2002 2001 2000
------------ ----------- -----------
<S> <C> <C> <C>
Net income (loss) - as reported $(121.9) $245.7 $620.8
Add back:
Goodwill amortization - 13.0 5.3
------------ ----------- -----------
Net income (loss) - adjusted $(121.9) $258.7 $626.1
============ =========== ===========
Basic earnings (loss) per share - as reported $ (0.69) $ 1.40 $ 3.58
Add back:
Goodwill amortization - 0.07 0.03
------------ ----------- -----------
Basic earnings (loss) per share - adjusted $ (0.69) $ 1.47 $ 3.61
============ =========== ===========
Diluted earnings (loss) per share - as reported $ (0.69) $ 1.30 $ 3.24
Add back:
Goodwill amortization - 0.07 0.03
------------ ----------- -----------
Diluted earnings (loss) per share - adjusted $ (0.69) $ 1.37 $ 3.27
============ =========== ===========
</TABLE>
Note 7. Debt
Debt at fiscal year-end consisted of the following:
<TABLE>
<CAPTION>
May 26, May 27,
(In Millions) 2002 2001
------------- ------------
<S> <C> <C> <C>
Unsecured promissory note at 1.2% $18.2 $19.4
Notes secured by equipment at 7.0% - 8.0% 6.8 21.5
Convertible subordinated promissory notes - 10.0
Note secured by real estate at 12.6% - 4.6
Other 0.9 0.1
------------- ------------
Total debt 25.9 55.6
Less current portion of long-term debt 5.5 29.4
------------- ------------
Long-term debt $20.4 $26.2
============= ============
</TABLE>
The unsecured promissory note, which is due August 2004, is denominated in
Japanese yen (2,408,750,000). Interest is based on 1.125 percent over the
3-month Japanese libor rate and is reset quarterly. Under the terms of the note,
we are also required to comply with the covenants set forth under our
multicurrency credit agreement.
Notes secured by equipment are collateralized by the underlying equipment.
Under the terms of the agreements, principal and interest are due monthly over
various original maturity periods ranging from four to five years. Maturities of
loans under these agreements range from November 2002 to November 2003. These
financing agreements contain certain covenant and default provisions that
require us to maintain a certain level of tangible net worth and permit the
lenders cross-acceleration rights against certain other credit facilities.
The convertible subordinated promissory notes were issued in connection
with a retention arrangement related to the acquisition of ComCore Semiconductor
in fiscal 1998. They were issued to each of the founding shareholders of ComCore
for a total of $15.0 million. As a result of the termination of one ComCore
founding shareholder during fiscal 2000, we issued 247,104 shares of common
stock upon the conversion of one of the promissory notes. In fiscal 2001, we
issued 617,760 shares of common stock to the two remaining ComCore founding
shareholders upon conversion of the remaining $10.0 million promissory notes.
The remaining note secured by real estate was assumed as part of the
repurchase of the equity interest in our Arlington, Texas, facility, which we
sold and leased back prior to 1990. The note was fully repaid in March 2002.
Our outstanding debt obligations mature in future fiscal years as follows:
<TABLE>
<CAPTION>
Total Debt
(In Millions) (Principal Only)
-------------------
<S> <C> <C>
2003 $ 5.5
2004 20.4
-------------------
Total $ 25.9
===================
</TABLE>
We have a multicurrency credit agreement that provides for multicurrency
loans, letters of credit and standby letters of credit. The total amount of
credit under the agreement is $35.0 million. The agreement expires in October,
2002 and we expect to renew or replace it prior to expiration. At May 26, 2002,
we had utilized $18.6 million of the credit available under the agreement. This
agreement contains restrictive covenants, conditions and default provisions
that, among other terms, restrict payment of dividends and require the
maintenance of financial ratios and certain levels of tangible net worth. At May
26, 2002, under the most restrictive of these covenants, $206.0 million of
tangible net worth was unrestricted and available for payment of dividends on
common stock.
Note 8. Income Taxes
Worldwide pretax income (loss) from operations and income taxes consist of the
following:
<TABLE>
<CAPTION>
(In Millions) 2002 2001 2000
------------- ------------- ------------
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM
U.S. $(168.6) $231.0 $589.3
Non-U.S. 45.2 76.1 53.2
------------- ------------- ------------
$(123.4) $307.1 $642.5
============= ============= ============
INCOME TAX EXPENSE (BENEFIT)
Current:
U.S. federal $ (26.9) $ 20.2 $ -
U.S. state and local 0.4 0.4 -
Non-U.S. 7.0 13.2 27.0
------------ ------------ -------------
(19.5) 33.8 27.0
Deferred:
U.S. federal and state 15.0 22.3 -
Non-U.S. 3.0 5.3 (12.1)
------------ ------------ -------------
18.0 27.6 (12.1)
------------ ------------ -------------
Income tax expense (benefit) $ (1.5) $ 61.4 $ 14.9
============ ============ =============
</TABLE>
The fiscal 2002 tax benefit represented a refund of U.S. taxes of $11.5
million as a result of the new federal tax act effective March 9, 2002, which
was partially offset by $10.0 million of taxes due on international income.
The tax effects of temporary differences that constitute significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
May 26, May 27,
(In Millions) 2002 2001
-------------- --------------
<S> <C> <C>
DEFERRED TAX ASSETS
Allowances and accruals $136.6 $170.9
Non-U.S. loss carryovers and other allowances 19.4 24.9
Federal and state credit carryovers 302.4 249.2
Other 79.6 10.6
-------------- --------------
Total gross deferred assets 538.0 455.6
Valuation allowance (447.3) (342.9)
-------------- --------------
Net deferred assets 90.7 112.7
-------------- --------------
DEFERRED TAX LIABILITIES
Other liabilities (6.3) (10.3)
-------------- --------------
Total gross deferred liabilities (6.3) (10.3)
-------------- --------------
Net deferred tax assets $ 84.4 $102.4
============== ==============
</TABLE>
We record a valuation allowance to reflect the estimated amount of deferred
tax assets that may not be realized. This occurs primarily when net operating
losses and tax credit carryovers expire. The valuation allowance increased by
$104.4 million in fiscal 2002 compared to decreases of $108.3 million in fiscal
2001 and $85.5 million in fiscal 2000. The valuation allowance for deferred tax
assets includes $125.7 million and $100.2 million for stock option deductions at
May 26, 2002 and May 27, 2001, respectively. The benefit of these deductions
will be credited to equity if realized.
The ultimate realization of deferred tax assets depends upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. We consider projected future taxable income and tax planning
strategies in making this assessment. Based on the historical taxable income and
projections for future taxable income over the periods that the deferred tax
assets are deductible, we believe it is more likely than not that we will
realize the benefits of these deductible differences, net of valuation
allowances as of May 26, 2002.
The reconciliation between the income tax rate computed by applying the
U.S. federal statutory rate and the reported worldwide tax rate follows:
<TABLE>
<CAPTION>
2002 2001 2000
--------------- -------------- --------------
<S> <C> <C> <C>
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
Non-U.S. losses and tax differential
related to non-U.S. income 5.2 (5.6) (1.3)
Dividend and Subpart F income (26.3) 1.2 0.3
U.S. state and local taxes net of federal benefits (0.1) 0.1 -
Current year loss and credits not benefited (20.6) (6.5) (19.3)
Changes in beginning of year valuation allowances 9.3 (7.8) (12.7)
Other (1.3) 3.6 0.3
--------------- -------------- --------------
Effective tax rate 1.2% 20.0% 2.3%
=============== ============== ==============
</TABLE>
U.S. income taxes were provided on repatriated earnings of non-U.S.
subsidiaries. U.S. income taxes were also provided for deferred taxes on
undistributed earnings of non-U.S. subsidiaries that are not expected to be
permanently reinvested in the subsidiaries. There has been no provision for U.S.
income taxes for the remaining undistributed earnings of approximately $433.2
million at May 26, 2002, because we intend to reinvest these earnings
indefinitely in operations outside the United States. If these earnings were
distributed, additional U.S. taxes of approximately $91.3 million would accrue
after utilization of U.S. tax credits.
At May 26, 2002, we had U.S. and state credit carryovers of approximately
$198.9 million and $103.6 million, respectively, for tax return purposes, which
primarily expire between 2003 and 2022. Included in the state credits, we had
California R&D credits of approximately $84.0 million at May 26, 2002, which can
be carried forward indefinitely. We also had capital and investment allowance
carryovers of approximately $56.9 million from certain non-U.S. jurisdictions.
National and the IRS have settled all issues and finalized the federal
income tax computations connected with the IRS's examination of tax returns for
fiscal years 1986 through 1996. After giving effect to loss and credit
carryovers, the tax deficiency for these years was approximately $3.4 million,
all of which has been paid. The interest amount on the final deficiency has been
finalized. The IRS has begun examination of our tax returns for fiscal 1997
through 2000. We believe that we have made adequate tax payments and/or accrued
adequate amounts in our financial statements to cover all years in question.
Note 9. Shareholders' Equity
Stock Purchase Rights
Each outstanding share of common stock carries with it a stock purchase right.
The rights are issued pursuant to a dividend distribution that was initially
declared on August 5, 1988. If and when the rights become exercisable, each
right entitles the registered holder to purchase one one-thousandth of a share
of series A junior participating preferred stock at a price of $60.00 per
one-thousandth share, subject to adjustment. The rights are attached to all
outstanding shares of common stock and no separate rights certificates have been
distributed.
If any individual or group acquires 20 percent or more of common stock or
announces a tender or exchange offer which, if completed, would result in that
person or group owning at least 20 percent of the common stock, the rights
become exercisable and will detach from the common stock. If the person or group
actually acquires 20 percent or more of the common stock (except in certain cash
tender offers for all of the common stock), each right will entitle the holder
to purchase, at the right's then-current exercise price, the common stock in an
amount having a market value equal to twice the exercise price. Similarly, if,
after the rights become exercisable, National merges or consolidates with or
sells 50 percent or more of its assets or earning power to another person or
entity, each right will then entitle the holder to purchase, at the right's
then-current exercise price, the stock of the acquiring company in an amount
having a market value equal to twice the exercise price. National may redeem the
rights at $0.01 per right at any time prior to the acquisition by a person or
group of 20 percent or more of the outstanding common stock. Unless they are
redeemed earlier, the rights will expire on August 8, 2006.
Stock reserves
During fiscal 1998, we reserved 926,640 shares of common stock for issuance upon
conversion of convertible subordinated promissory notes issued to three
individuals as partial consideration for the acquisition of ComCore
Semiconductor. During fiscal 2000, 247,104 shares were issued to one of these
individuals (See Note 7), leaving a balance in the reserve of 679,536 shares. In
fiscal 2002, 617,760 shares were issued to the remaining two individuals as
final payment on the notes. The reserve for the remaining 61,776 shares was
cancelled.
When we merged with Cyrix in November 1997, 16.4 million shares of common
stock were issued to the holders of Cyrix common stock. In addition, we reserved
up to 2.7 million shares of common stock for issuance upon exercise of Cyrix
employee or director stock options or pursuant to Cyrix employee benefit plans
and up to 2.6 million shares of common stock for issuance upon conversion of
Cyrix 5.5 percent convertible subordinated notes due June 1, 2001. We
repurchased substantially all of the outstanding Cyrix convertible subordinated
notes in fiscal 1998. The last remaining notes were paid off in June 2001 and
the reserve held for the conversion of the notes was cancelled.
We have paid no cash dividends on our common stock and we intend to
continue our practice of reinvesting all earnings.
Note 10. Stock-Based Compensation Plans
Stock Option Plans
We have three stock option plans under which employees and officers may be
granted stock options to purchase shares of common stock. One plan, which has
been in effect since 1977, authorizes the grant of up to 39,354,929 shares of
common stock for nonqualified or incentive stock options (as defined in the U.S.
tax code) to officers and key employees. Another plan authorizes the grant of up
to 70,000,000 shares of common stock for nonqualified stock options to employees
who are not executive officers. There is also an executive officer stock option
plan, which authorizes the grant of up to 6,000,000 shares of common stock for
nonqualified options only to the company's executive officers. These plans
generally provide that options are granted at the market price on the date of
grant and expire up to a maximum of ten years and one day after grant or three
months after termination of employment (up to five years after termination due
to death, disability or retirement), whichever occurs first. We have
historically used options as a major component of employee compensation
packages, consistent with practices throughout the semiconductor and high
technology industry. Options can vest after a six-month period, but most vest
ratably over a four-year period.
When we merged with Cyrix in fiscal 1998, we assumed Cyrix's outstanding
obligations under its 1988 incentive stock plan. Each option under the Cyrix
plan converted into the right or option to purchase 0.825 share of National
common stock. The purchase price of the option was also adjusted accordingly.
Options under the Cyrix 1988 incentive stock plan expire up to a maximum of ten
years after grant, subject to earlier expiration upon termination of employment.
No more options will be granted under the Cyrix 1988 incentive stock plan.
As part of the acquisitions of ComCore Semiconductor in fiscal 1998 and
Mediamatics in fiscal 1997, we assumed ComCore's and Mediamatics' outstanding
obligations under their stock option plans and stock option agreements for their
employees and consultants. ComCore and Mediamatics optionees received an option
for equivalent shares of National common stock based on an exchange rate
determined under the applicable acquisition agreements. The options expire up to
a maximum of ten years after grant, subject to earlier expiration upon
termination of employment. No more options will be granted under either of these
stock option plans. The Mediamatics transaction resulted in a new measurement
date for these options and we recorded related unearned compensation in the
amount of $9.2 million. Amortization of this unearned compensation, which was
recorded ratably over the vesting period of these options, was fully expensed by
February 2001. The compensation expense for these Mediamatics options was $1.2
million in fiscal 2001 and $2.8 million in fiscal 2000.
The following table summarizes information about options outstanding under these
plans at May 26, 2002:
<TABLE>
<CAPTION>
Outstanding Options
------------------------------------------------------------------------------------------
Weighted-Average
Remaining
Range of Exercise Number of Shares Contractual Life Weighted-Average
Prices (In Thousands) (In Years) Exercise Price
--------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C>
ComCore option plan $0.50-$0.77 3.2 5.4 $0.69
Mediamatics option plan $2.85 2.9 4.8 $2.85
</TABLE>
We have a director stock option plan that was first approved by
shareholders in fiscal 1998 which authorizes the grant of up to 1,000,000 shares
of common stock to eligible directors who are not employees of the company.
Options were granted automatically upon approval of the plan by stockholders and
are granted automatically to eligible directors upon their appointment to the
board and subsequent election to the board by stockholders. Director stock
options vest in full after six months. Under this plan, options to purchase
280,000 shares of common stock with a weighted-average exercise price of $30.75
and weighted-average remaining contractual life of 7.3 years were outstanding as
of May 26, 2002.
Upon his retirement in May 1995, we granted the former chairman of the
company an option to purchase 300,000 shares of common stock at $27.875 per
share. The option was granted outside the company's stock option plans at the
market price on the date of grant. It expires ten years and one day after grant
and became exercisable ratably over a four-year period. As of May 26, 2002,
options to purchase 140,000 shares of common stock were outstanding under this
option grant.
In connection with the acquisition of innoComm Wireless, we granted options
to purchase 799,339 shares of common stock at $27.44 to three founding
shareholders of innoComm. The options were granted outside the stock option
plans at the market price on the date of grant and become exercisable two years
after grant. The option gives the innoComm Wireless founding shareholders the
right to receive all or a portion of their third installment of the purchase
price in cash or shares of common stock.
Changes in shares of common stock outstanding under the option plans during
fiscal 2002, 2001 and 2000 or otherwise (but excluding the ComCore, Mediamatics,
innoComm Wireless, director and former chairman options), were as follows:
<TABLE>
<CAPTION>
Weighted-Average
(In Millions) Number of Shares Exercise Price
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Outstanding May 30, 1999 35.4 $14.80
Granted 9.4 $56.96
Exercised (6.6) $15.74
Cancelled (5.2) $14.81
------------------------------ ------------------------------
Outstanding at May 28, 2000 33.0 $26.55
Granted 11.5 $27.15
Exercised (3.0) $13.29
Cancelled (3.0) $31.69
------------------------------ ------------------------------
Outstanding May 27, 2001 38.5 $27.35
Granted 9.8 $32.33
Exercised (4.5) $18.15
Cancelled (2.3) $34.92
------------------------------ ------------------------------
Outstanding May 26, 2002 41.5 $29.08
============================== ==============================
</TABLE>
Expiration dates for options outstanding at May 26, 2002 range from July 13,
2002 to May 6, 2012.
The following tables summarize information about options outstanding under
these plans (excluding the ComCore, Mediamatics, innoComm Wireless, director and
former chairman options) at May 26, 2002:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------------------------------------------------------
Weighted-Average
Remaining Contractual
Number of Shares Life Weighted-Average
Range of Exercise Prices (In Millions) (In Years) Exercise Price
------------------------ ------------------------ -----------------------
<C> <C> <C> <C> <C>
$8.38-$13.00 8.5 6.5 $12.74
$13.06-$23.00 6.6 5.5 $15.70
$23.05-$25.95 7.6 8.8 $25.76
$26.00-$31.37 3.7 7.6 $28.29
$31.44-$34.20 7.7 9.7 $34.16
$34.49-$59.75 1.0 8.0 $46.67
$59.88-$79.62 6.4 7.9 $60.11
------------------------ ------------------------ -----------------------
Total 41.5 7.7 $29.08
======================== ======================== =======================
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
-----------------------------------------------
Number of Shares (In Weighted-Average
Range of Exercise Prices Millions) Exercise Price
---------------------- ------------------------
<C> <C> <C> <C>
$8.38-$13.00 5.8 $12.73
$13.06-$23.00 4.9 $15.44
$23.05-$25.95 1.9 $25.71
$26.00-$31.37 1.4 $29.38
$31.44-$34.20 0.2 $33.73
$34.49-$59.75 0.4 $48.17
$59.88-$79.62 3.2 $60.04
---------------------- ------------------------
Total 17.8 $25.62
====================== ========================
</TABLE>
On October 24, 2000, an option grant was made to employees who had received
options in the prior calendar year. Excluded from this grant were the president
and chief executive officer and executive staff members. This special grant was
made because of the significant decline in the stock's market price during the
first half of fiscal 2001. Shares under the option grant vested 100 percent one
year from the date of grant and expired 15 months from the date of grant.
Options to purchase a total 1.9 million shares at $24.125 per share were granted
in the special option grant.
As of May 26, 2002, approximately 83.9 million shares were reserved for
issuance under all option plans, including shares available for future option
grants.
Stock Purchase Plans
We have an employee stock purchase plan that has been in effect since 1977 that
authorizes the issuance of up to 24,950,000 shares of stock in quarterly
offerings to eligible employees at a price that is equal to 85 percent of the
lower of the common stock's fair market value at the beginning or the end of a
quarterly period. We also have an employee stock purchase plan available to
employees at international locations that has been in effect since 1994. This
plan authorizes the issuance of up to 5,000,000 shares of stock in quarterly
offerings to eligible employees at a price equal to 85 percent of the lower of
its fair market value at the beginning or the end of a quarterly period. Both
purchase plans use a captive broker and we deposit shares purchased by the
employee with the captive broker. In addition, for the international purchase
plan, the participant's local employer is responsible for paying the difference
between the purchase price set by the terms of the plan and the fair market
value at the time of the purchase. Both purchase plans have been approved by
stockholders.
Under the terms of the stock purchase plan and the global stock purchase
plan, we issued 1.2 million shares in fiscal 2002, 1.1 million shares in fiscal
2001 and 1.3 million shares in fiscal 2000 to employees for $26.7 million, $27.3
million and $26.3 million, respectively. As of May 26, 2002, approximately 7.3
million shares were reserved for issuance under the two stock purchase plans.
Other Stock Plans
We have a director stock plan that authorizes the issuance of up to 200,000
shares of common stock to eligible directors who are not employees of the
company. The common stock is issued automatically to eligible new directors upon
their appointment to the board and to all eligible directors on their subsequent
election to the board by shareholders. Directors may also elect to take their
annual retainer fees for board and committee membership in stock under the plan.
As of May 26, 2002, 85,624 shares had been issued under the director stock plan
and 114,376 shares were reserved for future issuances.
We have a restricted stock plan, which authorizes the issuance of up to
2,000,000 shares of common stock to employees who are not officers of the
company. The plan has been made available to a limited group of employees with
technical expertise we consider important. During fiscal 2002, 2001 and 2000,
112,000, 240,000 and 166,500 shares, respectively, were issued under the
restricted stock plan. Restrictions expire over time, ranging from two to six
years after issuance. Based upon the market value on the dates of issuance, we
recorded $3.1 million, $7.5 million and $8.3 million of unearned compensation
during fiscal 2002, 2001 and 2000, respectively. This unearned compensation is
included as a separate component of shareholders' equity in the financial
statements and is amortized to operations ratably over the applicable
restriction.
In May 1996, we issued 200,000 shares of restricted stock to Brian L.
Halla, then newly hired president and chief executive officer. These shares were
not issued under the restricted stock plan and had restrictions that expired
annually over a four-year period. The shares were recorded at the market value
on the date of issuance as unearned compensation included as a separate
component of shareholders' equity in the consolidated financial statements and
were amortized to operations over the four-year vesting period. These restricted
shares were granted to Mr. Halla specifically as part of his compensation
package when he joined the company.
Compensation expense for fiscal 2002, 2001 and 2000 related to all shares
of restricted stock, including the shares granted to Mr. Halla, was $3.4
million, $3.0 million and $2.0 million, respectively. At May 26, 2002, the
weighted-average grant date fair value for all outstanding shares of restricted
stock was $28.78.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. This information is required to be determined as if we
had accounted for stock-based awards to employees under the fair value method
specified by SFAS No. 123. The weighted-average fair value of stock options
granted during fiscal 2002, 2001 and 2000 was $17.49, $15.88 and $36.36 per
share, respectively. The weighted-average fair value of rights granted under the
stock purchase plans was $6.47, $9.73 and $7.38 for fiscal 2002, 2001 and 2000.
The fair value of the stock-based awards to employees was estimated using a
Black-Scholes option pricing model that assumes no expected dividends and the
following weighted-average assumptions for fiscal 2002, 2001 and 2000:
<TABLE>
<CAPTION>
2002 2001 2000
------------------ ----------------- ------------------
<S> <C> <C> <C>
Stock Option Plans
Expected life (in years) 5.1 5.7 5.8
Expected volatility 75% 73% 64%
Risk-free interest rate 4.5% 5.0% 6.6%
Stock Purchase Plans
Expected life (in years) 0.3 0.3 0.3
Expected volatility 57% 95% 100%
Risk-free interest rate 1.7% 3.7% 5.8%
</TABLE>
For pro forma purposes, the estimated fair value of stock-based awards to
employees is amortized over the options' vesting period (for options) and the
three-month purchase period (for stock purchases) under the stock purchase
plans. The pro forma information follows:
<TABLE>
<CAPTION>
(In Millions, Except Per Share Amounts)
2002 2001 2000
-------------- -------------- ----------------
<S> <C> <C> <C>
Net income (loss) - as reported $(121.9) $245.7 $620.8
Net income (loss) - pro forma $(280.5) $132.9 $550.3
Basic earnings (loss) per share - as reported $ (0.69) $ 1.40 $ 3.58
Basic earnings (loss) per share - pro forma $ (1.58) $ 0.76 $ 3.17
Diluted earnings (loss) per share - as reported $ (0.69) $ 1.30 $ 3.24
Diluted earnings (loss) per share - pro forma $ (1.58) $ 0.71 $ 2.87
</TABLE>
Note 11. Retirement and Pension Plans
Our retirement and savings program for U.S. employees consists of two plans, as
follows:
The profit sharing plan requires contributions of the greater of 5 percent
of consolidated net earnings before income taxes (subject to a limit of 5% of
payroll) or 1 percent of payroll. Contributions are made 25 percent in National
stock and 75 percent in cash and contributions made in National stock must
remain in National stock until the employee leaves the company and terminates
participation in the plan. Total shares contributed under the profit sharing
plan during fiscal 2002, 2001 and 2000 were 128,919 shares, 104,151 shares and
34,025 shares, respectively. As of May 26, 2002, 1.1 million shares of common
stock were reserved for future contributions.
The salary deferral 401(k) plan allows employees to defer up to 15 percent
of their salaries, subject to certain limitations, with partially matching
company contributions. Contributions are invested in one or more of thirteen
investment funds at the discretion of the employee. One of the investment funds
is a stock fund in which contributions are invested in National common stock at
the discretion of the employee. 401(K) investments made by the employee in
National stock may be sold at any time upon direction of the employee. Although
5.0 million shares of common stock are reserved for issuance to the stock fund,
shares purchased to date with contributions have been purchased on the open
market and we have not issued any stock directly to the stock fund.
We also have a deferred compensation plan, which allows highly compensated
employees (as defined by IRS regulations) to receive a higher profit sharing
plan allocation than would otherwise be permitted under IRS regulations and to
defer greater percentages of compensation than would otherwise be permitted
under the salary deferral 401(k) plan and IRS regulations. The deferred
compensation plan is a nonqualified plan of deferred compensation maintained in
a rabbi trust. Participants can direct the investment of their deferred
compensation plan accounts in the same investment funds offered by the 401(k)
plan (with the exception of the company stock fund, which is not available for
the nonqualified plan).
Certain of our subsidiaries that are not located in the U.S. have varying
types of defined benefit pension and retirement plans that are consistent with
local statutes and practices.
The annual expense for all plans was as follows:
<TABLE>
<CAPTION>
(In Millions) 2002 2001 2000
------------- ------------ ------------
<S> <C> <C> <C>
Profit sharing plan $ 3.6 $19.9 $15.5
Salary deferral 401(k) plan $ 11.0 $10.6 $10.8
Non-U.S. pension and retirement plans $ 10.6 $ 8.3 $10.7
</TABLE>
Defined benefit pension plans maintained in the U.K., Germany and Japan
cover all eligible employees within each respective country. Pension plan
benefits are based primarily on participants' compensation and years of service
credited as specified under the terms of each country's plan. The funding policy
is consistent with the local requirements of each country. The plans' assets
consist primarily of U.S. and foreign equity securities, bonds, property and
cash.
Net annual periodic pension cost of these non U.S. defined benefit pension plans
is presented in the following table:
<TABLE>
<CAPTION>
(In Millions) 2002 2001 2000
----------------- ----------------- -----------------
<S> <C> <C> <C>
Service cost of benefits earned during the year $4.3 $4.1 $5.5
Plan participant contributions (0.9) (0.7) (1.3)
Interest cost on projected benefit obligation 7.5 7.0 6.5
Expected return on plan assets (5.3) (5.6) (5.2)
Net amortization and deferral 1.3 0.2 0.9
----------------- ----------------- -----------------
Net periodic pension cost $6.9 $5.0 $6.4
================= ================= =================
</TABLE>
Benefit obligation and asset data of these plans at fiscal year-end and
details of their changes during the year are presented in the following tables:
<TABLE>
<CAPTION>
(In Millions) 2002 2001
----------------- -----------------
<S> <C> <C>
BENEFIT OBILGATION
Beginning balance $122.9 $120.0
Service cost 4.3 4.1
Interest cost 7.5 7.0
Benefits paid (1.9) (2.6)
Actuarial loss 2.2 6.6
Exchange rate adjustment 1.9 (12.2)
----------------- -----------------
Ending balance $136.9 $122.9
================= =================
PLAN ASSETS AT FAIR VALUE
Beginning balance $ 75.7 $ 82.3
Actual return on plan assets (5.3) (7.9)
Company contributions 11.9 12.2
Plan participant contributions 0.9 0.7
Benefits paid (1.8) (2.5)
Exchange rate adjustment 1.7 (9.1)
----------------- -----------------
Ending balance $ 83.1 $ 75.7
================= =================
RECONCILIATION OF FUNDED STATUS
Fund status - Benefit obligation in excess of plan
assets $ 53.8 $ 47.2
Unrecognized net loss (59.7) (47.1)
Unrecognized net transition obligation 2.1 2.1
Adjustment to recognize minimum liability 59.9 47.2
----------------- -----------------
Accrued pension cost $ 56.1 $ 49.4
================= =================
</TABLE>
The projected benefit obligations and net periodic pension cost were determined
using the following assumptions:
<TABLE>
<CAPTION>
2002 2001 2000
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 2.8%-6.5% 3.0%-6.5% 3.0%-6.5%
Rate of increase in compensation levels 2.8%-3.8% 3.0%-4.3% 3.0%-4.5%
Expected long-term return on assets 3.8%-7.5% 4.0%-7.5% 4.0%-8.0%
</TABLE>
In each of fiscal years presented, we recorded adjustments for minimum
liability to adjust the liability related to one of our plans to equal the
amount of the unfunded accumulated benefit obligation as required by the pension
accounting standard. The corresponding offset is recorded in the financial
statements as a component of accumulated other comprehensive loss.
Note 12. Commitments and Contingencies
Commitments
We lease certain facilities and equipment under operating lease arrangements.
Rental expenses under operating leases were $25.3 million, $26.3 million and
$28.1 million in fiscal 2002, 2001 and 2000, respectively.
Future minimum commitments under noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
(In Millions)
------------------------------
<S> <C> <C>
2003 $16.5
2004 14.1
2005 11.7
2006 7.9
2007 6.0
Thereafter 9.9
------------------------------
Total $66.1
==============================
</TABLE>
As part of the Fairchild transaction in fiscal 1997, we entered into a
manufacturing agreement with Fairchild where we committed to purchase a minimum
of $330.0 million in goods and services during the first 39 months after the
transaction, based on specified wafer prices, which are intended to approximate
market prices. The agreement expired in June 2000. During fiscal 2000, our total
purchases under the agreement were $87.5 million. In June 2000, we extended the
manufacturing arrangement for one year with similar terms. Total purchases from
Fairchild in fiscal 2001 were $55.4 million, most of which were made under the
one-year extension. Prior to the end of fiscal 2001, we entered into a two-year
extension under similar terms where we have committed to purchase a minimum of
$30.0 million and $20.0 million of product from Fairchild in fiscal 2002 and
2003, respectively. Under this extension, our purchases from Fairchild during
fiscal 2002 totaled $32.3 million.
In June 2000, we entered into a ten-year licensing agreement with Taiwan
Semiconductor Manufacturing Company to gain access to a variety of TSMC's
advanced sub-micron processes for use in our wafer fabrication facility in Maine
as desired, if and when those processes are developed by TSMC. Prior to this
agreement, we were only utilizing our own process technology in Maine. Total
license fees of $187.0 million are to be paid quarterly through April 2006. We
paid license fees of $37.0 million in fiscal 2002 and $35.0 million in fiscal
2001. In connection with this agreement, we are also required to pay a royalty
of 5 percent on wafers we manufacture utilizing the TSMC process technology that
are in excess of a pre-determined minimum level in any calendar quarter. No
royalties have been paid during either fiscal 2002 or 2001 under this agreement.
Contingencies -- Legal Proceedings
In April 1988, we received a notice from the of U.S. Customs Service in San
Francisco alleging that we had underpaid duties of approximately $19.5 million
on goods that we had imported from our foreign subsidiaries from June 1, 1979 to
March 1, 1985. We had been contesting the notice in various proceedings since
1988. In March 1998, the Assistant Commissioner of Customs reduced the amount of
the alleged underpayment to approximately $3.6 million. The underpayment was
subject to penalties computed as a multiple of the underpayment. In July 2001,
the Customs Service accepted our offer to settle the matter for $2.5 million. We
had already paid this amount to the Customs Service. The matter is now
concluded.
We have been named to the National Priorities List for our Santa Clara,
California, site and have completed a remedial investigation/feasibility study
with the Regional Water Quality Control Board, acting as an agent for the
Federal Environmental Protection Agency. We have agreed in principle with the
RWQCB to a site remediation plan. We were sued by AMD, which sought recovery of
cleanup costs AMD incurred in the Santa Clara area under the RWQCB orders for
contamination that AMD alleged were originally caused by us. The settlement of
this case was completed in fiscal 2002 and the AMD suit is now concluded.
In addition to the Santa Clara site, from time to time we have been
designated as a potentially responsible party by federal and state agencies for
certain environmental sites with which we may have had direct or indirect
involvement. These designations are made regardless of the extent of our
involvement. These claims are in various stages of administrative or judicial
proceedings and include demands for recovery of past governmental costs and for
future investigations and remedial actions. In many cases, the dollar amounts of
the claims have not been specified, and with respect to a number of the PRP
claims, have been asserted against a number of other entities for the same cost
recovery or other relief as was sought from us. We accrue costs associated with
environmental matters when they become probable and reasonably estimable. The
amount of all environmental charges to earnings, including charges for the Santa
Clara site remediation, (excluding potential reimbursements from insurance
coverage), were not material during fiscal 2002, 2001 and 2000.
As part of the disposition in fiscal 1996 of the Dynacraft assets and
business, we retained responsibility for environmental claims connected with
Dynacraft's Santa Clara, California, operations and for other environmental
claims arising from our conduct of the Dynacraft business prior to the
disposition. As part of the Fairchild disposition in fiscal 1997, we also agreed
to retain liability for current remediation projects and environmental matters
arising from our prior operation of Fairchild's plants in South Portland, Maine;
West Jordan, Utah; Cebu, Philippines; and Penang, Malaysia; and Fairchild agreed
to arrange for and perform the remediation and cleanup. We prepaid to Fairchild
the estimated costs of the remediation and cleanup and remain responsible for
costs and expenses incurred by Fairchild in excess of the prepaid amounts.
In January 1999, a class action suit was filed against us and our chemical
suppliers by former and present employees claiming damages for personal
injuries. The complaint alleges that cancer and reproductive harm were caused to
employees exposed to chemicals in the workplace. Plaintiffs presently seek a
certification of a medical monitoring class, which we oppose. Discovery in the
case is proceeding.
In November, 2000, a derivative action was brought against us and other
defendants by a shareholder of Fairchild Semiconductor International, Inc.
Plaintiff seeks recovery of alleged 'short-swing' profits under section 16(b) of
the Securities Exchange Act of 1934 from the sale by the defendants in January
2000 of Fairchild common stock. The complaint alleges that Fairchild's
conversion of preferred stock held by the defendants at the time of Fairchild's
initial public offering in August 1999 constitutes a 'purchase' that must be
matched with the January 2000 sale for purposes of computing the 'short-swing'
profits. Plaintiff seeks from National alleged recoverable profits of
approximately $14.1 million. In February, 2002, the judge in the case granted
the motion to dismiss filed by us and our co-defendants and dismissed the case,
ruling that the conversion was done pursuant to a reclassification which is
exempt from the scope of Section 16(b). Plaintiff appealed the dismissal of the
case in March 2002.
Our tax returns for certain years are under examination in the U.S. by the
IRS (See Note 8). In addition to the foregoing, we are a party to other suits
and claims that arise in the normal course of business.
Based on current information, we do not believe that it is probable that
losses associated with the proceedings discussed above that exceed amounts
already recognized will be incurred in amounts that would be material to our
financial position or results of operations.
Note 13. Segment and Geographic Information
We design, develop, manufacture and market a wide array of semiconductor
products for applications in a variety of markets. We are organized by various
product line business units. For segment reporting purposes, each of our product
line business units represents an operating segment as defined under SFAS No.
131, 'Disclosures about Segments of an Enterprise and Related Information,' and
our chief executive officer is considered the chief operating decision-maker.
Business units that have similarities, including economic characteristics,
underlying technology, markets and customers, are aggregated into segments.
Under the criteria in SFAS No. 131, only the Analog segment and the Information
Appliance segment are considered reportable segments. All other segments are
included in the caption 'All Others.' Prior to fiscal 2000, the former Cyrix
business unit was also considered a separate reportable operating segment.
The Analog segment includes a wide range of building block products such as
high-performance operational amplifiers, power management circuits, data
acquisition circuits, interface circuits and circuits targeted towards
leading-edge monitor applications such as ultra-thin flat panel displays. The
Analog segment's wireless circuits perform the radio, baseband controller, power
management and other related functions primarily for handsets and base stations
in the cellular and cordless telephones. The segment is heavily focused on using
our analog expertise as the initial point to integrate systems on a chip aimed
at the cellular, personal systems and information appliance markets. Current
offerings include a complete GSM chipset solution, audio subsystems and flat
panel display column drivers, integrated receivers and timing controllers.
The Information Appliance segment contains all business units focused on
providing component and system solutions to the emerging information appliance
market, which we are strategically focusing on to provide next-generation
solutions. These products include application-specific integrated
microprocessors based on our GeodeTM technology and diverse advanced
input/output controllers. The Information Appliance segment is focused on three
key market segments that include enterprise thin clients (computers that have
minimal memory and access software from a centralized server network),
interactive TV set-top boxes (equipped with digital video) and personal
information access devices, such as those currently being designed for the
Microsoft Mira project.
The former Cyrix business unit primarily offered a line of Cyrix M II
microprocessors, which were stand-alone central processing units that were
targeted toward the sub-$1,000 PC market. In this market, which is currently
dominated by two major competitors, we experienced highly competitive pricing
trends and constant pressure to rapidly release new microprocessors with higher
operating speeds. As a result, we decided to exit the Cyrix PC microprocessor
business in May 1999 and completed the sale of the assets of this business to
VIA Technologies in September 1999 (See Note 3).
Aside from these operating segments, our corporate structure also includes
the centralized Worldwide Marketing and Sales Group, the Central Technology and
Manufacturing Group, and the Corporate Group. Certain expenses of these groups
are allocated to the operating segments and are included in their segment
operating results.
With the exception of the allocation of certain expenses, the significant
accounting policies and practices used to prepare the consolidated financial
statements as described in Note 1 are generally followed in measuring the sales,
segment income or loss and determination of assets for each reportable segment.
We allocate certain expenses associated with centralized manufacturing, selling,
marketing and general administration to reporting segments based on either the
percentage of net trade sales for each operating segment to total net trade
sales or headcount, as appropriate. Certain R&D expenses primarily associated
with centralized activities such as process development are allocated to
operating segments based on the percentage of dedicated R&D expenses for each
operating segment to total dedicated R&D expenses. A portion of interest income
and interest expense is indirectly allocated to operating segments and is
included in segment operating results.
The following table presents specified amounts included in the measure of
segment results or the determination of segment assets:
<TABLE>
<CAPTION>
Information Cyrix
(In Millions) Analog Appliance Business All Eliminations Total
Segment Segment Unit Others Consolidated
----------- --------------- ----------- ------------- --------------- ---------------
2002
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 1,126.8 $ 198.7 $ - $ 169.3 $ - $ 1,494.8
=========== =============== =========== ============= =============== ===============
Segment loss before income taxes
$ (12.2) $ (88.4) $ - $ (22.8) $ - $ (123.4)
=========== =============== =========== ============= =============== ===============
Depreciation and amortization $ 14.0 $ 7.1 $ - $ 209.3 $ 230.4
Interest income $ - $ - $ - $ 25.2 $ 25.2
Interest expense $ - $ - $ - $ 3.9 $ 3.9
Segment assets $ 286.9 $ 18.6 $ - $ 1,983.3 $ 2,288.8
2001
Sales to unaffiliated customers $ 1,516.8 $ 227.0 $ - $ 368.8 $ - $ 2,112.6
Inter-segment sales - 0.1 - - (0.1) -
----------- --------------- ----------- ------------- --------------- ---------------
Net sales $ 1,516.8 $ 227.1 $ - $ 368.8 $ (0.1) $ 2,112.6
=========== =============== =========== ============= =============== ===============
Segment income (loss) before
income taxes $ 364.1 $ (106.5) $ - $ 49.5 $ - $ 307.1
=========== =============== =========== ============= =============== ===============
Depreciation and amortization $ 24.9 $ 9.7 $ - $ 208.7 $ 243.3
Interest income $ - $ - $ - $ 57.3 $ 57.3
Interest expense $ - $ - $ - $ 5.3 $ 5.3
Segment assets $ 145.7 $ 28.1 $ - $ 2,188.5 $ 2,362.3
2000
Sales to unaffiliated customers $ 1,514.1 $ 239.1 $ 18.6 $ 368.1 $ - $2,139.9
Inter-segment sales - 0.3 - - (0.3) -
----------- --------------- ----------- ------------- --------------- ---------------
Net sales $ 1,514.1 $ 239.4 $ 18.6 $ 368.1 $ (0.3) $2,139.9
=========== =============== =========== ============= =============== ===============
Segment income (loss) before
income taxes and extraordinary item
$ 454.1 $ (99.8) $ (22.6) $ 310.8 $ - $ 642.5
=========== =============== =========== ============= =============== ===============
Depreciation and amortization $ 13.8 $ 13.9 $ 3.3 $ 232.8 $ 263.8
Interest income $ - $ - $ - $ 33.2 $ 33.2
Interest expense $ - $ - $ - $ 17.9 $ 17.9
Segment assets $ 133.0 $ 30.8 $ - $ 2,218.4 $2,382.2
</TABLE>
Depreciation and amortization presented for each segment include only such
charges on dedicated segment assets. The measurement of segment profit and loss
includes an allocation of depreciation expense for shared manufacturing
facilities contained in each segment's product standard cost.
We operate in three main geographic areas that include the Americas, Europe
and the Asia Pacific region including Japan. In the information that follows,
sales include local sales and exports made by operations within each area. Total
sales by geographic area include sales to unaffiliated customers and
inter-geographic transfers, which are based on standard cost. To control costs,
a substantial portion of our products are transported between the Americas,
Europe and the Asia Pacific region in the process of being manufactured and
sold. Sales to unaffiliated customers have little correlation with the location
of manufacture.
The following tables provides geographic sales and asset information by major
countries within the main geographic areas (Japan is included with the rest of
the world):
<TABLE>
<CAPTION>
(In Millions)
United United Hong Singapore Rest of Eliminations Total
States Kingdom Kong World Consolidated
------------ ----------- ---------- ------------ ------------- --------------- --------------
2002
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 377.7 $ 169.7 $ 423.0 $ 229.4 $ 295.0 $ 1,494.8
Transfers between geographic areas 364.1 126.0 0.2 619.1 0.3 $(1,109.7) -
------------ ----------- ---------- ------------ ------------- --------------- --------------
Net sales $ 741.8 $ 295.7 $ 423.2 $ 848.5 $ 295.3 $(1,109.7) $ 1,494.8
============ =========== ========== ============ ============= =============== ==============
Long-lived assets $ 788.9 $ 42.3 $ 0.7 $ 68.8 $ 123.6 $ - $ 1,024.3
============ =========== ========== ============ ============= =============== ==============
2001
Sales to unaffiliated customers $ 702.3 $ 313.5 $ 445.8 $ 221.5 $ 429.5 $ 2,112.6
Transfers between geographic areas 470.2 181.1 0.7 747.4 1.0 $(1,400.4) -
------------ ---------- ---------- ------------ ------------- --------------- --------------
Net sales $ 1,172.5 $ 494.6 $ 446.5 $ 968.9 $ 430.5 $(1,400.4) $ 2,112.6
============ =========== ========== ============ ============= =============== ==============
Long-lived assets $ 742.4 $ 49.1 $ 0.9 $ 87.9 $ 141.9 $ - $ 1,022.2
============ =========== ========== ============ ============= =============== ==============
2000
Sales to unaffiliated customers $ 761.7 $ 348.8 $ 439.1 $ 214.6 $ 375.7 $ 2,139.9
Transfers between geographic areas 544.2 192.1 0.1 875.8 0.7 $(1,612.9) -
------------ ----------- ---------- ------------ ------------- --------------- --------------
Net sales $ 1,305.9 $ 540.9 $ 439.2 $ 1,090.4 $ 376.4 $(1,612.9) $ 2,139.9
============ =========== ========== ============ ============= =============== ==============
Long-lived assets $ 632.7 $ 37.1 $ 1.2 $ 93.6 $ 137.3 $ - $ 901.9
============ =========== ========== ============ ============= =============== ==============
</TABLE>
Note 14. Supplemental Disclosure of Cash Flow Information and Noncash Investing
and Financing Activities
<TABLE>
<CAPTION>
(In Millions) 2002 2001 2000
--------------- -------------- --------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for:
Interest expense $ 4.0 $ 5.6 $ 21.5
Income taxes $ 16.2 $ 80.1 $ 21.6
</TABLE>
<TABLE>
<CAPTION>
(In Millions) 2002 2001 2000
--------------- -------------- --------------
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of stock for employee benefit plans $ 4.3 $ 4.1 $ 0.9
Issuance of stock for director stock plan $ 0.2 $ 0.3 $ 0.4
Change in unrealized gain on available-for-sale securities $ 23.2 $ 11.3 $ (18.6)
Change in unrealized loss on cash flow hedges $ 0.4 $ - $ -
Unearned compensation relating to restricted stock issuance $ 3.1 $ 7.5 $ 8.3
Issuance of common stock upon conversion of convertible
subordinated promissory notes $ 10.0 $ - $ 7.1
Restricted stock cancellation $ 0.9 $ 2.8 $ 6.0
Minimum pension liability $ 12.7 $ 16.0 $ 6.2
</TABLE>
Note 15. Financial Information by Quarter (Unaudited)
The following table presents the quarterly information for fiscal 2002 and 2001:
<TABLE>
<CAPTION>
Fourth Third Second First
(In Millions, Except Per Share Amounts) Quarter Quarter Quarter Quarter
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
2002
Net sales $ 419.5 $ 369.5 $ 366.5 $ 339.3
Gross margin $ 180.5 $ 133.3 $ 129.5 $ 110.1
Net income (loss) $ 17.1 $ (37.8) $ (46.6) $ (54.6)
Earnings (loss) per share:
Net income (loss):
Basic $ 0.10 $ (0.21) $ (0.26) $ (0.31)
Diluted $ 0.09 $ (0.21) $ (0.26) $ (0.31)
Weighted-average common and potential
common shares outstanding:
Basic 179.8 178.4 176.8 174.9
Diluted 190.6 178.4 176.8 174.9
Common stock price - high $ 37.30 $ 34.91 $ 35.10 $ 34.97
Common stock price - low $ 24.93 $ 25.03 $ 19.70 $ 24.86
- --------------------------------------------------- -------------- --------------- --------------- ---------------
2001
Net sales $ 401.2 $ 475.6 $ 595.0 $ 640.8
Gross margin $ 164.4 $ 233.0 $ 300.7 $ 339.4
Net income (loss) $ (44.4) $ 39.2 $ 106.7 $ 144.2
Earnings (loss) per share:
Net income (loss):
Basic $ (0.26) $ 0.23 $ 0.60 $ 0.81
Diluted $ (0.26) $ 0.21 $ 0.56 $ 0.74
Weighted-average common and potential
common shares outstanding:
Basic 173.6 174.0 178.1 178.1
Diluted 173.6 183.0 191.9 195.8
Common stock price - high $ 30.97 $ 29.41 $ 47.94 $ 73.88
Common stock price - low $ 19.71 $ 17.13 $ 19.69 $ 31.25
- --------------------------------------------------- -------------- --------------- --------------- ---------------
</TABLE>
Our common stock is traded on the New York Stock Exchange and the Pacific
Exchange. The quoted market prices are as reported on the New York Stock
Exchange Composite Tape. At May 26, 2002, there were approximately 8,194 holders
of common stock.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
National Semiconductor Corporation:
We have audited the accompanying consolidated balance sheets of National
Semiconductor Corporation and subsidiaries as of May 26, 2002 and May 27, 2001,
and the related consolidated statements of operations, comprehensive income
(loss), shareholders' equity and cash flows for each of the years in the
three-year period ended May 26, 2002. In connection with our audits of the
consolidated financial statements, we have also audited the related financial
statement Schedule II, 'Valuation and Qualifying Accounts.' These consolidated
financial statements and financial statement schedule are the responsibility of
the company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Semiconductor Corporation and subsidiaries as of May 26, 2002 and May 27, 2001,
and the results of their operations and their cash flows for each of the years
in the three-year period ended May 26, 2002 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Mountain View, California
June 5, 2002
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers appearing under the
caption 'Election of Directors' (including subcaptions thereof) and 'Section
16(a) Beneficial Ownership Reporting Compliance' in our Proxy Statement for the
2002 annual meeting of shareholders to be held on or about October 18, 2002 and
which will be filed in definitive form pursuant to Regulation 14A on or about
September 1, 2002 (hereinafter '2002 Proxy Statement'), is incorporated herein
by reference. Information concerning our executive officers is set forth in Part
I of the Form 10-K under the caption 'Executive Officers of the Registrant.'
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the captions 'Director Compensation',
'Compensation Committee Interlocks and Insider Participation' and 'Executive
Compensation' (including all related sub captions thereof) in the 2002 Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the only known ownership of more than 5 percent of
our outstanding common stock 'Outstanding Capital Stock, Quorum and Votin' in
the 2002 Proxy Statement, is incorporated herein by reference. The information
concerning the ownership of our equity securities by directors, certain
executive officers and directors and officers as a group, appearing under the
caption 'Security Ownership of Management' in the 2002 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Pages in
(a) 1. Financial Statements this document
For the three years ended May 26, 2002- 31
refer to Index in Item 8
(a) 2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts 69
All other schedules are omitted since the required information is
inapplicable or the information is presented in the consolidated financial
statements or notes thereto.
Separate financial statements of National are omitted because we are
primarily an operating company and all subsidiaries included in the consolidated
financial statements being filed, in the aggregate, do not have minority equity
interest or indebtedness to any person other than us in an amount which exceeds
five percent of the total assets as shown by the most recent year end
consolidated balance sheet filed herein.
(a) 3. Exhibits
The exhibits listed in the accompanying Index to Exhibits on pages 72 to 74 of
this report are filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K
During the quarter ended May 26, 2002, we did not file any reports on Form 8-K.
NATIONAL SEMICONDUCTOR CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In Millions)
Deducted from receivables
in the consolidated balance sheets
<TABLE>
<CAPTION>
Doubtful Returns and
Description Accounts Allowances Total
<S> <C> <C> <C> <C> <C>
Balances at May 30, 1999 $ 9.1 $ 58.9 $ 68.0
Additions charged against revenue - 223.9 223.9
Additions charged against
costs and expenses 0.3 - 0.3
Deductions (2.0) (1) (231.6) (233.6)
------------ --------- ----------
Balances at May 28, 2000 7.4 51.2 58.6
Additions charged against revenue - 243.9 243.9
Additions charged against
costs and expenses 2.0 - 2.0
Deductions (2.1) (1) (257.3) (259.4)
------------ --------- ----------
Balances at May 27, 2001 7.3 37.8 45.1
Additions charged against revenue - 151.3 151.3
Additions charged against
costs and expenses 0.2 - 0.2
Deductions - (158.8) (158.8)
------------ --------- ----------
Balances at May 26, 2002 $ 7.5 $ 30.3 $ 37.8
============= ========= ==========
</TABLE>
________________________________________________
(1) Doubtful accounts written off, less recoveries.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: August 16, 2002 /S/ BRIAN L. HALLA*
Brian L. Halla
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities stated and on the 16th day of August 2002.
Signature Title
/S/ BRIAN L. HALLA* Chairman of the Board, President
Brian L. Halla and Chief Executive Officer
(Principal Executive Officer)
/S/ LEWIS CHEW* Senior Vice President, Finance
Lewis Chew and Chief Financial Officer
(Principal Financial Officer)
/S/ ROBERT E. DEBARR * Controller
Robert E. DeBarr. (Principal Accounting Officer)
/S/ STEVEN R. APPLETON * Director
Steven R. Appleton
/S/ GARY P. ARNOLD * Director
Gary P. Arnold
/S/ RICHARD J. DANZIG * Director
Richard J. Danzig
/S/ ROBERT J. FRANKENBERG * Director
Robert J. Frankenberg
/S/ E. FLOYD KVAMME* Director
E. Floyd Kvamme
/S/ MODESTO A. MAIDIQUE * Director
Modesto A. Maidique
/S/ EDWARD R. McCRACKEN * Director
Edward R. McCracken
* By /S/ LEWIS CHEW
Lewis Chew, Attorney-in-fact
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
National Semiconductor Corporation:
We consent to incorporation by reference in the Registration Statements No.
33-48943, 33-54931, 33-55703, 33-61381, 333-09957, 333-23477, 333-36733,
333-53801, 333-63614, 333-88269, 333-48424 and 333-70040 on Form S-8, and Post
Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement No.
333-38033-01 of National Semiconductor Corporation and subsidiaries of our
report dated June 5, 2002, relating to the consolidated balance sheets of
National Semiconductor Corporation and subsidiaries as of May 26, 2002 and May
27, 2001, and the related consolidated statements of operations, comprehensive
income (loss), shareholders' equity, and cash flows for each of the years in the
three-year period ended May 26, 2002 and the related financial statement
schedule, which report appears on page 69 of the 2002 Annual Report on Form 10-K
of National Semiconductor Corporation.
KPMG LLP
Mountain View, California
August 16, 2002
<PAGE>
INDEX TO EXHIBITS
Item 14(a) (3)
The following documents are filed as part of this report:
1. Financial Statements: reference is made to the Financial Statements
described under Part IV, Item 14(a) (1).
2. Other Exhibits:
3.1 Second Restated Certificate of Incorporation of the Company, as amended
(incorporated by reference from the Exhibits to our 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 our
Registration Statement on Form S-8 Registration No. 333-09957 which became
effective August 12, 1996); Certificate of Amendment of Certificate of
Incorporation dated September 22, 2000 (incorporated by reference from the
Exhibits to our Registration Statement on Form S-8 Registration No.
333-48424, which became effective October 23, 2000).
3.2 By-Laws of the Company.
4.1 Form of Common Stock Certificate (incorporated by reference from the
Exhibits to our Registration Statement on Form S-3 Registration No.
33-48935, which became effective October 5, 1992).
4.2 Rights Agreement (incorporated by reference from the Exhibits to our
Registration Statement on Form 8-A filed August 10, 1988). First Amendment
to the Rights Agreement dated as of October 31, 1995 (incorporated by
reference from the Exhibits to our Amendment No. 1 to the 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 our Amendment No. 2 to the Registration Statement on
Form 8-A filed January 17, 1997).
4.3 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).
4.4 Registration Rights Agreement 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 Arrangement: Executive Officer
Incentive Plan (incorporated by reference from the Exhibits to our Form
10-K for the fiscal year ended May 30, 1999 filed July 29, 1999). Fiscal
Year 2002 Executive Officer Incentive Plan Agreement (incorporated by
reference from the Exhibits to our Form 10-Q for the quarter ended August
26, 2001 filed October 4, 2001).
10.2 Management Contract or Compensatory Plan or Agreement: Stock Option Plan,
as amended through April 26, 1998 (incorporated by reference from the
Exhibits to our Registration Statement on Form S-8 Registration No.
333-57029, which became effective June 17, 1998).
10.3 Management Contract or Compensatory Plan or Agreement: Executive Officer
Stock Option Plan (incorporated by reference from the Exhibits to our
Registration Statement on Form S-8 Registration No. 333-48424, which became
effective October 23, 2000).
10.4 Management Contract or Compensatory Plan or Arrangement; Equity
Compensation Plan not approved by Stockholders: Agreement with Peter J.
Sprague dated May 17, 1995 (incorporated by reference from the Exhibits to
our Form 10-K for fiscal year ended May 27, 2000 filed August 3, 2000). Non
Qualified Stock Option Agreement with Peter J. Sprague dated May 18, 1995
(incorporated by reference from the Exhibits to our Registration Statement
on Form S-8 Registration No. 33-61381 which became effective July 28,
1995).
10.5 Management Contract or Compensatory Plan or Arrangement: Director Stock
Plan as amended through June 26, 1997 (incorporated by reference from the
Exhibits to our definitive Proxy Statement for the Annual Meeting of
Stockholders held September 26, 1997 filed August 12, 1997).
10.6 Management Contract or Compensatory Plan or Arrangement: Director Stock
Option Plan (incorporated by reference from the Exhibits to our Form 10-Q
for the quarter ended August 29, 1999 filed October 12, 1999).
10.7 Management Contract or Compensatory Plan or Arrangement: Director Deferral
Plan (incorporated by reference from the Exhibits to our Form 10-Q for the
quarter ended August 29, 1999 filed October 12, 1999).
10.8 Management Contract or Compensatory Plan or Arrangement: Board Retirement
Policy (incorporated by reference from the Exhibits to our Form 10-K for
the fiscal year ended May 30, 1999 filed July 29, 1999).
10.9 Management Contract or Compensatory Plan or Arrangement: Preferred Life
Insurance Program (incorporated by reference from the Exhibits to our Form
10-K for the fiscal year ended May 30, 1999 filed July 29, 1999).
10.10Management Contract or Compensatory Plan or Arrangement: Retired Officers
and Directors Health Plan (incorporated by reference from the Exhibits to
our Form 10-K for the fiscal year ended May 28, 2000 filed August 3, 2000).
10.11Management Contract or Compensatory Plan or Agreement: National
Semiconductor Corporation Long Term Disability Coverage Plan Summary,
National Semiconductor Corporate Executive Staff as amended January 1, 2000
(incorporated by reference from the Exhibits to our Form 10-Q for the
quarter ended February 27, 2000 filed April 11, 2000).
10.12Management Contract or Compensatory Plan or Agreement: Long Term
Disability Plan Summary, National Semiconductor Executive Employees
(incorporated by reference from the Exhibits to our Form 10-Q for the
quarter ended February 27, 2000 filed April 11, 2000).
10.13Management Contract or Compensatory Plan or Agreement: Form of Change of
Control Employment Agreement entered into with Executive Officers of the
Company (incorporated by reference from our Form 10-K for fiscal year ended
May 31, 1998 filed August 3, 1998).
10.14Management Contract or Compensatory Plan or Agreement: National
Semiconductor Corporation Deferred Compensation Plan (incorporated by
reference from the Exhibits to our Form 10-Q for the quarter ended February
24, 2002 filed April 10, 2002).
10.15Equity Compensation Plan not approved by Stockholders: Cyrix Corporation
1998 Incentive Stock Plan (incorporated by reference from the Exhibits to
our Post-Effective Amendment No. 1 on Form S-8 to Form S-4 Registration
Statement Registration No. 333-38033-01 filed November 18, 1997).
10.16Equity Compensation Plan not approved by Stockholders: ComCore
Semiconductor, Inc. 1997 Stock Option Plan (incorporated by reference from
the Exhibits to our Registration Statement on Form S-8 Registration No.
333-53801 filed May 28, 1998).
10.17Equity Compensation Plan not approved by Stockholders: 1995 Stock Option
Plan for officers and Key Employees of Mediamatics, Inc. and 1997 Stock
Option Plan of Mediamatics, Inc. (incorporated by reference from the
Exhibits to our Registration Statement on Form S-8 Registration No.
333-23477 filed March 17, 1997).
10.18Equity Compensation Plan not approved by Stockholders: Restricted Stock
Plan (incorporated by reference from the Exhibits to our Registration
Statement on Form S-8 Registration No. 333-09957 filed August 12, 1996).
10.19Equity Compensation Plan not approved by Stockholders: 1997 Employees
Stock Option Plan (incorporated by reference from the Exhibits to our
Registration Statement on Form S-8 Registration No. 333-63614 filed June
22, 2001).
10.20Equity Compensation Plan not approved by Stockholders: Agreement and Plan
of Merger by and among National Semiconductor Corporation, Nesshin
Acquisition Sub, Inc., innoComm Wireless, Inc., and Bernard Xavier, Daniel
Meacham and Ibrahim Yayla dated as of February 2, 2001; Letter Agreement
with Daniel Meacham; Letter Agreement with Bernard Xavier; Letter Agreement
with Ibrahim Yayla (incorporated by reference from the Exhibits to our
Registration Statement on Form S-8 Registration No. 333-70040 filed
September 24, 2001).
10.21Equity Compensation Plan not approved by Stockholders: Retirement and
Savings Program.
10.22Management Contract or Compensatory Plan or Arrangement: 2002 Key Employee
Incentive Plan.
10.23Management Contract or Compensatory Plan or Arrangement: Relocation Package
made available to Detlev Kunz.
21.0 List of Subsidiaries.
23.0 Consent of Independent Auditors (included in Part IV).
24.1 Power of Attorney.
<PAGE>
Exhibit 21.0
NATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
The following table shows certain information with respect to the active
subsidiaries as of May 26, 2002, all of which are included in consolidated
financial statements:
State or Other Country Percent of
Other In Which Voting
Jurisdiction Subsidiary Securities
Name of Incorporation is Registered by National Owned
- --------------------- ------------- ----------- ----------
Algorex Inc. California 100%
ComCore Semiconductor, Inc. California 100%
innoComm WIRELESS California 100%
Mediamatics, Inc. California 100%
National Semiconductor
International, Inc. Delaware 100%
National Semiconductor
Netsales, Inc. Delaware 100%
National Semiconductor
(Maine), Inc. Delaware 100%
ASIC II Limited Hawaii 100%
National Semiconductor
B.V. Corporation Delaware 100%
National Semiconductor
France S.A.R.L. France 100%
National Semiconductor
GmbH Germany Belgium 100%
National Semiconductor
(I.C.) Ltd. Israel 100%
National Semiconductor
S.r.l. Italy 100%
National Semiconductor
Aktiebolog (A.B). Sweden 100%
National Semiconductor
Sweden Aktiebolog. Sweden 100%
National Semiconductor
(U.K.) Ltd. Great Britain Denmark/Ireland 100%
Finland/Norway/Spain
National Semiconductor
(U.K.)Pension Trust
Company Ltd. Great Britain 100%
National Semiconductor
Benelux B.V. Netherlands 100%
National Semiconductor B.V. Netherlands 100%
National Semiconductor
International B.V. Netherlands 100%
National Semiconductor
International Finance S.A. Switzerland 100%
Arsmikro oui. Estonia 100%
National Semiconductor
Finland Oy Finland 100%
Natsem India Designs
Pvt. Ltd. India 100%
National Semiconductor
(Australia)Pty.Ltd. Australia 100%
National Semiconductor
(Hong Kong) Limited Hong Kong 100%
National Semiconductor
(Far East) Limited Hong Kong Taiwan 100%
National Semiconductor
Hong Kong Sales Limited Hong Kong 100%
National Semiconductor Services
Limited Hong Kong 100%
National Semiconductor
Japan Ltd. Japan 100%
N.S. Microelectronics
Co., LTD. Japan 19%
National Semiconductor
Korea Limited. Korea 100%
National Semiconductor
SDN. BHD. Malaysia 100%
National Semiconductor
Technology SDN.BHD. Malaysia 100%
National Semiconductor
Services Malaysia SDN.BHD. Malaysia 100%
National Semiconductor Pte. Ltd. Singapore 100%
National Semiconductor Asia Pacific
Pte. Ltd. Singapore 100%
National Semiconductor Manufacturer
Singapore Pte. Ltd. Singapore 100%
Shanghai National Semiconductor
Technology Limited People's Republic of China 95%
National Semiconductor Shanghai
Ltd. People's Republic of China 100%
National Semiconductor Canada Inc. Canada 100%
National Semiconductores
do Brazil Ltda. Brazil 100%
Electronica NSC de Mexico, S.A. Mexico 100%
National Semiconductor (Barbados) 100%
Limited Barbados 100%
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3
<SEQUENCE>3
<FILENAME>form10k_exh3-2.txt
<DESCRIPTION>EXHIBIT 3.2
<TEXT>
NLL\SecMtrs\bylaw1001
10/20/01
Exhibit 3.2
BY-LAWS
OF
NATIONAL SEMICONDUCTOR CORPORATION
AMENDED AS OF OCTOBER 30, 2001
ARTICLE I.
OFFICES
Section 1. Registered Office. The registered office shall be in the City of
Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The corporation may also have offices at such
other places both within and without the State of Delaware as the board of
directors may from time to time determine or the business of the corporation may
require.
<PAGE>
ARTICLE II.
STOCKHOLDERS
Section 1. Place of Meetings. Meetings of stockholders shall be held at
such place either within or without the State of Delaware as may be designated
by the board of directors.
Section 2. Annual Meeting. An annual meeting of stockholders shall be held
on the fourth Friday in September of each year, at 10:30 A.M., or at such other
date and time as shall be designated by the board of directors. At the annual
meeting the stockholders shall elect a board of directors and transact such
other business as may be properly brought before the meeting.
Section 3. Special Meetings. Subject to the rights of the holders of any
series of stock having a preference over the Common Stock of the corporation as
to dividends or upon liquidation ("Preferred Stock") with respect to such series
of Preferred Stock, special meetings of the stockholders may be called only by
the chairman of the board or by the board of directors pursuant to a resolution
adopted by a majority of the total number of directors which the corporation
would have if there were no vacancies (the "Whole Board").
Section 4. Notice of Meetings. The secretary or such other officer of the
corporation as is designated by the board of directors shall serve personally or
send through the mails or by telegraph a written notice of annual or special
meetings of stockholders, addressed to each stockholder of record entitled to
vote at his address as it appears on the stock transfer books of the
corporation, stating the time and place of the meeting and the purpose or
purposes for which the meeting is called, not less than ten nor more than sixty
days before the date of the meeting. If mailed, notice shall be deemed to have
been given when deposited in the United States mail, postage prepaid, directed
to the stockholder at his address as it appears on the records of the
corporation. Notice given by telegraph shall be deemed to have been given upon
delivery of the message to the telegraph company. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the corporation's notice of meeting. Any previously
scheduled meeting of the stockholders may be postponed, and (unless the
Certificate of Incorporation otherwise provides) any special meeting of the
stockholders may be cancelled, by resolution of the board of directors upon
public notice given prior to the date previously scheduled for such meeting of
stockholders.
Section 5. Waiver of Notice. Notice of a meeting need not be given to any
stockholder who signs a waiver of notice, in person or by proxy, whether before
or after a meeting. The attendance of any stockholder at a meeting, in person or
by proxy, without protesting either prior thereto or at its commencement the
lack of notice of such meeting, shall constitute a waiver of notice by him.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the stockholders need be specified in any written waiver of
notice.
Section 6. Stockholder's List. The officer who has charge of the stock
transfer book of the corporation shall prepare and make, at least ten days
before every meeting of the stockholders at which directors are to be elected, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
examination by any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 7. Quorum and Adjournment. Except as otherwise provided by law or
by the Certificate of Incorporation, the holders of a majority of the
outstanding shares of the corporation entitled to vote generally in the election
of directors (the "Voting Stock"), present in person or represented by proxy,
shall constitute a quorum at all meetings of stockholders for the transaction of
business, except that when specified business is to be voted on by a class or
series of stock voting as a class, the holders of a majority of the shares of
such class or series shall constitute a quorum of such class or series for the
transaction of such business. The chairman of the meeting or a majority of the
shares so represented may adjourn the meeting from time to time, whether or not
there is such a quorum. The stockholders present at a duly called meeting at
which a quorum is present may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
days, or after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote.
Section 8. Proxies. At all meetings of stockholders, each stockholder
entitled to vote shall have one vote, to be exercised in person or by proxy, for
each share of capital stock having voting power, held by such stockholder. All
proxies shall be in writing, shall relate only to a specific meeting (including
continuations and adjournments of the same), and shall be filed with the
secretary at or before the time of the meeting. Each proxy must be signed by the
shareholder or his attorney-in-fact. The person or persons named in a proxy for
a specific meeting may vote at any adjournment of the meeting for which the
proxy was given. If more than one person is named as proxy, a majority of such
persons so named present at the meeting, or if only one shall be present, then
that one, shall have and exercise all the powers conferred upon all of the
persons unless the proxy shall provide otherwise. A proxy purporting to be
executed by or on behalf of a stockholder shall be deemed valid unless
challenged prior to or at its exercise and the burden of proving invalidity
shall rest on the challenger.
Section 9. Notice of Stockholder Business and Nominations.
a. Annual Meetings of Stockholders.
(1) Nominations of persons for election to the board of
directors of the corporation and the proposal of business to be
considered by the stockholders may be made at an annual meeting
of stockholders (a) pursuant to the corporation's notice of
meeting, (b) by or at the direction of the board of directors or
(c) by any stockholder of the corporation who was a stockholder
of record at the time of giving of notice provided for in this
By-Law, who is entitled to vote at the meeting and who complies
with the notice procedures set forth in this By-Law.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c)
of paragraph (a)(1) of this By-Law, the stockholder must have
given timely notice thereof in writing to the secretary of the
corporation and such other business must otherwise be a proper
matter for stockholder action. To be timely, a stockholder's
notice shall be delivered to the secretary at the principal
executive offices of the corporation not later than the close of
business on the 120th day nor earlier than the close of business
on the 150th day prior to the first anniversary of the preceding
year's annual meeting; provided, however, that in the event that
the date of the annual meeting is more than 30 days before or
more than 120 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than
the close of business on the 150th day prior to such annual
meeting and not later than the close of business on the later of
the 120th day prior to such annual meeting or the 10th day
following the day on which public announcement of the date of
such meeting is first made by the corporation. In no event shall
the public announcement of an adjournment of an annual meeting
commence a new time period for the giving of a stockholder's
notice as described above. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and Rule 14a-11 thereunder
(including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if
elected); (b) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons
for conducting such business at the meeting and any material
interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as
to the stockholder giving the notice and the beneficial owner, if
any, on whose behalf the nomination or proposal is made (i) the
name and address of such stockholder, as they appear on the
corporation's books, and of such beneficial owner and (ii) the
class and number of shares of the corporation which are owned
beneficially and of record by such stockholder and such
beneficial owner.
(3) Notwithstanding anything in the second sentence of
paragraph (a)(2) of this By-Law to the contrary, in the event
that the number of directors to be elected to the board of
directors of the corporation is increased and there is no public
announcement by the corporation naming all of the nominees for
director or specifying the size of the increased board of
directors at least 130 days prior to the first anniversary of the
preceding year's annual meeting, a stockholder's notice required
by this By-Law shall also be considered timely, but only with
respect to nominees for any new positions created by such
increase, if it shall be delivered to the secretary at the
principal executive offices of the corporation not later than the
close of business on the 10th day following the day on which such
public announcement is first made by the corporation.
b. Special Meetings of Stockholders.
Only such business shall be conducted at a special meeting
of stockholders as shall have been brought before the meeting
pursuant to the corporation's notice of meeting. Nominations of
persons for election to the board of directors may be made at a
special meeting of stockholders at which directors are to be
elected pursuant to the corporation's notice of meeting (a) by or
at the direction of the board of directors or (b) provided that
the board of directors has determined that directors shall be
elected at such meeting, by any stockholder of the corporation
who is a stockholder of record at the time of giving of notice
provided for in this By-Law, who shall be entitled to vote at the
meeting and who complies with the notice procedures set forth in
this By-Law. In the event the corporation calls a special meeting
of stockholders for the purpose of electing one or more directors
to the board of directors, any such stockholder may nominate a
person or persons (as the case may be), for election to such
position(s) as specified in the corporation's notice of meeting,
if the stockholder's notice required by paragraph (a)(2) of this
By-Law shall be delivered to the secretary at the principal
executive offices of the corporation not earlier than the close
of business on the 90th day prior to such special meeting and not
later than the close of business on the later of the 60th day
prior to such special meeting or the 10th day following the day
on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the board of
directors to be elected at such meeting. In no event shall the
public announcement of an adjournment of a special meeting
commence a new time period for the giving of a stockholder's
notice as described above.
c. General.
(1) Only such persons who are nominated in accordance with
the procedures set forth in this By-Law shall be eligible to
serve as directors and only such business shall be conducted at a
meeting of stockholders as shall have been brought before the
meeting in accordance with the procedures set forth in this
By-Law. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the chairman of the meeting shall
have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures
set forth in this By-Law and, if any proposed nomination or
business is not in compliance with this By-Law, to declare that
such defective proposal or nomination shall be disregarded.
(2) For purposes of this By-Law, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or
in a document publicly filed by the corporation with the
Securities and Exchange Commission pursuant to Section 13, 14 or
15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-Law,
a stockholder shall also comply with all applicable requirements
of the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth in this By-Law. Nothing in this
By-Law shall be deemed to affect any rights (i) of stockholders
to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (ii)
of the holders of any series of Preferred Stock to elect
directors under specified circumstances.
Section 10. Voting. When a quorum is present at any meeting, the
affirmative vote of the holders of a majority of the capital stock having voting
power present in person or represented by proxy and entitled to vote on the
matter shall decide any question brought before such meeting, except (i) in
respect of elections of directors which shall be decided, subject to the rights
of the holders of any series of Preferred Stock, by a plurality of the votes
cast, and (ii) when the question is one which by express provision of statute or
Certificate of Incorporation a different vote is required, in which case such
express provision shall govern and control the decision of such question. No
vote need be taken by ballot unless required by statute.
Section 11. Inspectors of Elections; Opening and Closing the Polls. The
board of directors by resolution shall appoint one or more inspectors, which
inspector or inspectors may include individuals who serve the corporation in
other capacities, including, without limitation, as officers, employees, agents
or representatives, to act at the meetings of stockholders and make a written
report thereof. One or more persons may be designated as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate has been
appointed to act or is able to act at a meeting of stockholders, the chairman of
the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before discharging his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. The inspectors shall have the
duties prescribed by law.
The chairman of the meeting shall fix and announce at the meeting the date
and time of the opening and the closing of the polls for each matter upon which
the stockholders will vote at a meeting.
Section 12. Record Date for Action by Written Consent. In order that the
corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the board of directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the board of directors, and which date
shall not be more than ten (10) days after the date upon which the resolution
fixing the record date is adopted by the board of directors. Any stockholder of
record seeking to have the stockholders authorize or take corporate action by
written consent shall, by written notice to the secretary, request the board of
directors to fix a record date. The board of directors shall promptly, but in
all events within ten (10) days after the date on which such a request is
received, adopt a resolution fixing the record date (unless a record date has
previously been fixed by the board of directors pursuant to the first sentence
of this Section). If no record date has been fixed by the board of directors
pursuant to the first sentence of this Section or otherwise within ten (10) days
of the date on which such a request is received, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the board of directors is required by
applicable law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
corporation by delivery to its registered office in Delaware, its principal
place of business, or to any officer or agent of the corporation having custody
of the book in which proceedings of meetings of stockholders are recorded.
Delivery shall be by hand or by certified or registered mail, return receipt
requested. If no record date has been fixed by the board of directors and prior
action by the board of directors is required by applicable law, the record date
for determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the date on which the
board of directors adopts the resolution taking such prior action.
Section 13. Inspectors of Written Consent. In the event of the delivery, in
the manner provided by Section 12 of this Article to the corporation of the
requisite written consent or consents to take corporate action and/or any
related revocation or revocations, the corporation shall engage independent
inspectors of elections for the purpose of promptly performing a ministerial
review of the validity of the consents and revocations. For the purpose of
permitting the inspectors to perform such review, no action by written consent
without a meeting shall be effective until such date as the independent
inspectors certify to the corporation that the consents delivered to the
corporation in accordance with Section 12 of this Article represent at least the
minimum number of votes that would be necessary to take the corporate action.
Nothing contained in this Section shall in any way be construed to suggest or
imply that the board of directors or any stockholder shall not be entitled to
contest the validity of any consent or revocation thereof, whether before or
after such certification by the independent inspectors, or to take any other
action (including, without limitation, the commencement, prosecution, or defense
of any litigation with respect thereto, and the seeking of injunctive relief in
such litigation).
Section 14. Effectiveness of Written Consent. Every written consent shall
bear the date of signature of each stockholder who signs the consent and no
written consent shall be effective to take the corporate action referred to
therein unless, within sixty (60) days of the earliest dated written consent
received in accordance with Section 12 of this Article, a written consent or
consents signed by a sufficient number of holders to take such action are
delivered to the corporation in the manner prescribed in Section 12 of this
Article.
<PAGE>
ARTICLE III.
THE BOARD OF DIRECTORS
Section 1. Composition. The board of directors shall consist of eight
directors subject to such automatic increase as may be required by the
corporation's Restated Articles of Incorporation. The board may enlarge or
reduce the size of the board in a vote of the majority of the directors in
office. No director need be a stockholder.
Section 2. Election and Term. Except as provided in Section 3 of this
Article, the directors shall be elected by a plurality vote at the annual
meeting of the stockholders. Each director shall hold office until his successor
is elected and qualified or until his earlier resignation or removal.
Section 3. Vacancies and Newly Created Directorships. Any vacancy on the
board of directors, or any newly created directorships, however occurring, may
be filled by a majority of the directors then in office, though less than a
quorum or by a sole remaining director. Any vacancy in the board of directors
may also be filled by a plurality vote of the stockholders unless such vacancy
shall have been previously filled by the board of directors.
Section 4. Powers. The business of the corporation shall be managed by its
board of directors which shall have and may exercise all such powers of the
corporation, including the power to make, alter or repeal the bylaws of the
corporation, and do all such lawful acts and things as are not by statute
directed or required to be exercised or done by the stockholders.
Section 5. Place of Meetings. The board of directors of the corporation may
hold meetings both regular and special, either within or without the State of
Delaware. Members of the board of directors or any committee designated by the
board, may participate in a meeting of such board or committee by means of a
conference telephone by means of which all persons participating in the meeting
can hear each other, and participation shall constitute presence in person at
such meeting.
Section 6. Regular Meetings. Regular meetings of the board of directors may
be held without call or notice immediately following the annual meeting of the
stockholders and at such time and at such place as shall from time to time be
selected by the board of directors, provided that in respect of any director who
is absent when such selection is made, the notice, waiver and attendance
provisions of Section 7 of this Article shall apply to such regular meetings.
Section 7. Special Meetings and Notice. Special meetings of the board of
directors may be called by the chairman of the board of directors, a majority of
the directors or the president on notice given to each director, either
personally (including by telephone) or by hand delivery, first-class mail,
overnight mail, courier service, telegram or facsimile transmission sent to his
business or home address, stating the place, date and hour of the meeting. If
mailed by first-class mail, such notice shall be deemed to have been adequately
given when deposited in the United States mail, postage prepaid, directed to the
director at his business or home address, at least five (5) days before such
meeting. Notice given by telegraph, overnight mail or courier service shall be
deemed adequately given upon delivery of the message to the telegraph company or
to the overnight mail or courier service company at least two days before such
meeting. Notice given by facsimile transmission shall be deemed adequately given
upon transmission of the message at least twelve (12) hours before such meeting.
Notice given by hand delivery or personally shall be deemed adequately given
when delivered at least twelve (12) hours before such meeting. Notice of a
meeting need not be given to any director who signs a waiver of notice, whether
before or after the meeting. The attendance of any director at a meeting,
without protesting either prior thereto or at its commencement the lack of
notice of such meeting, shall constitute a waiver of notice by him. Any notice
or waiver of notice of a meeting of the board of directors need not specify the
purposes of the meeting.
Section 8. Quorum and Voting. At all meetings of the board of directors a
majority less one of the total number of directors then in office shall
constitute a quorum for the transaction of business, except that in no case
shall less than two directors be deemed to constitute a quorum, and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the board of directors. If a quorum shall not be present at
any meeting of the board of directors, a majority of less than a quorum may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
Section 9. Action by Consent. Any action required or permitted to be taken
at any meeting of the board of directors may be taken without a meeting, if all
members of the board of directors, then in office, consent thereto in writing,
and the writing or writings are filed with the minutes of proceedings of the
board of directors.
Section 10. Resignation. Any director may resign at any time upon written
notice delivered to the corporation at its principal office. The resignation
shall take effect at the time specified therein, and if no time be specified, at
the time of its dispatch to the corporation.
Section 11. Removal. A director may be removed for cause by the vote of a
majority of the stockholders at a special or annual meeting after the director
has been given reasonable notice and opportunity to be heard before the
stockholders.
Section 12. Committees. The board of directors may, by resolution passed by
a majority of the whole board of directors, designate one or more committees,
each committee to consist of one or more of the directors of the corporation,
which committee, to the extent provided in the resolution, shall have and may
exercise the powers of the board of directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it. Such committee or committees
shall have such name or names as may be determined from time to time by
resolution adopted by the board of directors. Each committee shall keep regular
minutes of its meetings and report the same to the board of directors when
required.
<PAGE>
ARTICLE IV.
OFFICERS
Section 1. Designation. The officers of the corporation shall consist of a
president, a treasurer, a secretary, and such other officers including a
chairman of the board of directors, one or more group presidents, vice
presidents (including group executive vice presidents, corporate vice presidents
and senior vice presidents), assistant treasurers and assistant secretaries, as
the board of directors or the stockholders may deem warranted. With the
exception of the chairman of the board of directors who must be a director, no
officer need be a director or a stockholder. Any number of offices may be held
by the same person.
Section 2. Election and Term. Except for officers to fill vacancies and
newly created offices provided for in Section 6 of this Article, the officers
shall be elected by the board of directors at the first meeting of the board of
directors after the annual meeting of the stockholders. All officers shall hold
office at the pleasure of the board of directors.
Section 3. Duties of Officers. In addition to those duties that may from
time to time be delegated to them by the board of directors, the officers of the
corporation shall have the following duties:
(a) Chairman of the Board. The chairman of the board shall preside at
all meetings of the stockholders and of the board of directors at which he
is present, shall be ex-officio a member of all committees formed by the
board of directors and shall have such other duties and powers as the board
of directors may prescribe.
(b) President. The president shall be the chief executive officer of
the corporation, shall have general and active management of the business
of the corporation, shall see that all orders and resolutions of the board
of directors are carried into effect, and, in the absence or nonelection of
the chairman of the board of directors, shall preside at all meetings of
the stockholders and the board of directors at which he is present if he is
also a director. The president also shall execute bonds, mortgages, and
other contracts requiring a seal under the seal of the corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be delegated expressly
by the board of directors to some other officer or agent of the corporation
and shall have such other powers and duties as the board of directors may
prescribe.
(c) Group President. The group president or group presidents, if any,
shall have general and active management of the group for which they are
designated as president by the board of directors and shall have such other
duties and powers as vice-presidents or as the board of directors or the
president may prescribe.
(d) Vice-President. The vice-president or vice-presidents, if any,
shall have such duties and powers as the board of directors or the
president may prescribe. In the absence of the president or in the event of
his inability or refusal to act, the group president or vice president, if
any, or if there be more than one, the group presidents or vice-presidents,
in the order designated by the board of directors, or, in the absence of
such designation, then in the order of their election, shall perform the
duties and exercise the powers of the president.
(e) Secretaries and Assistant Secretaries. The secretary shall record
the proceedings of all meetings of the stockholders and all meetings of the
board of directors in books to be kept for that purpose, shall perform like
duties for the standing committees when required, and shall give, or cause
to be given, call and/or notices of all meetings of the stockholders and
meetings of the board of directors in accordance with these by-laws. The
secretary also shall have custody of the corporate seal of the corporation,
affix the seal to any instrument requiring it and attest thereto when
authorized by the board of directors or the president, and shall have such
other duties and powers as the board of directors may prescribe.
The assistant secretary, if any, or if there be more than one, the
assistant secretaries, in the order designated by the board of directors,
or, if there be no such designation, then in order of their election,
shall, in the absence of the secretary or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the secretary
and shall have such other duties and powers as the board of directors may
prescribe.
In the absence of the secretary or an assistant secretary at a meeting
of the stockholders or the board of directors, an acting secretary shall be
chosen by the stockholders or directors, as the case may be, to exercise
the duties of the secretary at such meeting.
In the absence of the secretary or an assistant secretary or in the
event of the inability or refusal of the secretary or an assistant
secretary to give, or cause to be given, any call and/or notice required by
law or these by-laws, any such call and/or notice may be given by any
person so directed by the board of directors, the president or
stockholders, upon whose requisition the meeting is called in accordance
with these by-laws.
(f) Treasurer and Assistant Treasurer. The treasurer shall have the
custody of the corporate funds and securities, shall keep full and accurate
accounts of receipts and disbursements in books belonging to the
corporation and shall deposit all moneys and other valuable effects in the
name and to the credit of the corporation in such depositories as may be
designated by the board of directors. The treasurer shall also disburse the
funds of the corporation as may be ordered by the board of directors,
taking proper vouchers for such disbursements, shall render to the board of
directors, when the board of directors so requires, an account of all his
transactions as treasurer and of the financial condition of the
corporation, and shall have such other duties and powers as the board of
directors may prescribe. If required by the board of directors, the
treasurer shall give the corporation a bond, which shall be renewed every
six years, in such sum and with such surety or sureties as shall be
satisfactory to the board of directors for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his
possession or under his control belonging to the corporation.
The assistant treasurer, if any, or if there be more than one, the
assistant treasurers in the order designated by the board of directors, or,
in the absence of such designation, then in the order of their election,
shall, in the absence of the treasurer or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the treasurer
and shall have such other duties and powers as the board of directors may
prescribe.
(g) Other Officers. Any other officer shall have such powers and
duties as the board of directors may prescribe.
Section 4. Resignation. Any officer may resign at any time upon written
notice delivered to the corporation at its principal office. The resignation
shall take effect at the time specified therein, and if no time be specified, at
the time of its dispatch to the corporation.
Section 5. Removal. Any officer elected or appointed by the board of
directors may be removed at any time by the affirmative vote of a majority of
the board of directors.
Section 6. Vacancies and Newly Created Offices. A vacancy in office,
however occurring, and newly created offices, shall be filled by the board of
directors.
<PAGE>
ARTICLE V.
CAPITAL STOCK
Section 1. Stock Certificates. Each holder of stock in the corporation
shall be entitled to have a certificate signed in an officer's official capacity
or in the name of the corporation by the chairman of the board of directors, or
the president or a vice-president and the treasurer or an assistant treasurer,
or the secretary or an assistant secretary of the corporation, certifying the
number of shares owned by him in the corporation. Where a certificate is
countersigned (a) by a transfer agent other than the corporation or its
employee, or, (b) by a registrar other than the corporation or its employee, any
other signature on the certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
Section 2. Lost, Stolen or Destroyed Certificates. The board of directors,
or at their direction any officer of the company, may direct a new certificate
or certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the board of
directors, or at their direction any officer of the company, may, in its (his)
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 3. Transfer. Upon surrender to the secretary or the transfer agent
of the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, and upon
compliance with any provisions respecting restrictions on transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 4. Issue of Stock. From time to time, the board of directors may,
by vote of a majority of the directors, issue any of the authorized capital
stock of the corporation for cash, property, services rendered or expenses, or
as a stock dividend and on any terms permitted by law.
Section 5. Fixing Record Date. In order that the corporation may determine
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or to express consent to corporate action in writing
without a meeting or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
Section 6. Registered Stockholders. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
<PAGE>
ARTICLE VI.
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the corporation
may be declared by the board of directors in any regular or special meeting,
pursuant to law. Dividends may be paid in cash, in property, or in shares of
capital stock. Before payment of any dividend, there may be set aside out of any
funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
Section 2. Checks. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the corporation shall be fixed
by a resolution of the board of directors.
Section 4. Seal. The corporate seal shall have inscribed thereon the name
of the corporation, the year of its organization and the words "Corporate Seal
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
<PAGE>
ARTICLE VII.
AMENDMENTS
Section 1. Amendments. These by-laws may be amended at any proper meeting
of the stockholders or of the board of directors.
<PAGE>
ARTICLE VIII.
INDEMNIFICATION
Section 1. Non-Derivative Proceedings. The corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contenders or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceedings, had
reasonable cause to believe that his conduct was unlawful.
Section 2. Derivative Proceedings. The corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 3. Amount of Indemnification. To the extent that a director,
officer, employee or agent of the corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
Sections 1 or 2, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
Section 4. Determination to Indemnify. Any indemnification under Sections 1
or 2 (unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in Sections 1 and 2. Such
determination shall be made (1) by the board of directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in
written opinion, or (3) by the stockholders.
Section 5. Advance Payment. Expenses incurred in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of a director, officer, employee or agent to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in this section or otherwise
pursuant to the law of Delaware.
Section 6. Non-Exclusiveness of By-Law. The indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of this
Article VIII shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
statute, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in an official capacity and as to action in another
capacity while holding such office.
Section 7. Continuation of Indemnification. The indemnification and
advancement of expenses provided by, or granted pursuant to this Article VIII,
or permitted by statute or otherwise, shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 8. Indemnification Insurance. The corporation shall have power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of this section.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>form10k_exhibit.txt
<DESCRIPTION>EXHIBIT 10.21 SAVINGS AND RETIREMENT
<TEXT>
NATIONAL SEMICONDUCTOR CORPORATION
RETIREMENT AND SAVINGS PROGRAM
Originally Effective June 1, 1975
Amended and Restated Effective June 1, 1997
<PAGE>
- 1 -
7/23/02 11:00 AM Doc. #83279 v.1
TABLE OF CONTENTS
ARTICLE I.....................................................................1
1.01 Name..............................................................1
1.02 Effective Date....................................................1
ARTICLE II....................................................................2
2.01 Accounts..........................................................2
2.02 Accrued Benefit...................................................2
2.03 Actual Deferral Percentage........................................2
2.04 Allocation Date...................................................2
2.05 Annual Profit Sharing Contributions...............................2
2.06 Beneficiary.......................................................3
2.07 Board.............................................................3
2.08 Code..............................................................3
2.09 Comlinear 401(k) Plan.............................................3
2.10 Committee.........................................................3
2.11 Compensation......................................................3
2.12 Consolidated Group................................................3
2.13 Disability........................................................4
2.14 Disability Benefit Plan...........................................4
2.15 Electronic Access System..........................................4
2.16 Employee..........................................................5
2.17 Employer..........................................................5
2.18 Employer Match....................................................5
2.19 Employment Date...................................................5
2.20 ERISA.............................................................5
2.21 Fairchild 1988 Rollover Account...................................6
2.22 Fiscal Year.......................................................6
2.23 401(k) Account....................................................6
2.24 Highly Compensated Employee.......................................6
2.25 Hour of Service...................................................7
2.26 Inactive Participant..............................................7
2.27 Investment Fund...................................................7
2.28 Layoff or Laid Off................................................7
2.29 Non-Highly Compensated Employee...................................7
2.30 NSC Stock.........................................................7
2.31 NSC Stock Fund....................................................7
2.32 One-Year Break-in-Service.........................................8
2.33 Participant.......................................................8
2.34 Participant Elected Contribution..................................8
2.35 Plan..............................................................8
2.36 Plan Quarter......................................................8
2.37 Plan Year.........................................................8
2.38 Profit Sharing Account............................................8
2.39 Rollover Account..................................................8
2.40 Rollover Contribution.............................................9
2.41 Spouse and Surviving Spouse.......................................9
2.42 Stock Bonus Account...............................................9
2.43 Termination Date..................................................9
2.44 Trust or Trust Agreement..........................................10
2.45 Trust Fund or Fund................................................10
2.46 Trustee...........................................................10
2.47 Valuation Date....................................................10
2.48 Voluntary Contributions...........................................10
2.49 Voluntary After-Tax Account.......................................10
2.50 Years of Service..................................................10
ARTICLE III...................................................................13
3.01 Eligibility Requirements..........................................13
3.02 Ineligible Employees..............................................13
3.03 Credit for Predecessor Employment.................................14
3.04 Credit for Consolidated Group Employment..........................15
ARTICLE IV....................................................................16
4.01 Participation on Re-employment....................................16
4.02 Inactive Participants.............................................16
ARTICLE V.....................................................................17
5.01 Employer's Annual Profit Sharing Contributions....................17
5.02 Participant Elected Contributions.................................18
5.03 Employer Match....................................................20
5.04 Discontinued Contributions........................................21
5.05 Limitation on Contributions.......................................21
5.06 Rollover Contributions............................................21
ARTICLE VI....................................................................23
6.01 Accounts..........................................................23
6.02 Employment Required at End of Plan Year...........................23
6.03 Allocation and Crediting of Contributions.........................23
6.04 Disposition of Forfeitures from Former Participant's
Profit Sharing Accounts...........................................24
6.05 Adjustment of the Participant's Accounts..........................25
6.06 Title to Assets in Trustee........................................25
6.07 Participant's NSC Stock Voting Rights.............................25
6.09 Limits with Respect to Transactions in NSC Stock..................26
ARTICLE VII...................................................................27
7.01 Investment Funds in General.......................................27
7.02 Investment of Accounts............................................27
7.03 Election of Investment Funds......................................28
7.04 Expenses..........................................................29
ARTICLE VIII..................................................................30
8.01 Vested Amounts....................................................30
8.02 Forfeiture of Nonvested Accounts..................................32
8.03 Vesting on Re-Employment..........................................32
8.04 Lost Participant or Beneficiary...................................33
ARTICLE IX....................................................................34
9.01 Retirement........................................................34
ARTICLE X.....................................................................35
10.01 Death of Participant..............................................35
10.02 Payments Upon Failure to Designate Beneficiary....................35
ARTICLE XI....................................................................36
ARTICLE XII...................................................................37
12.01 Distribution of Benefits..........................................37
12.02 Required Distributions............................................41
12.03 Distribution to Minors and Incompetents...........................42
12.04 Qualified Domestic Relations Order................................42
12.05 Hardship Withdrawals..............................................44
12.06 In-Service Withdrawals............................................45
12.07 Participant Loans.................................................46
12.08 Direct Rollovers..................................................47
ARTICLE XIII..................................................................50
13.01 Actual Deferral Percentage and Actual Contribution
Percentage Testing................................................50
13.02 Limitations on Allocations........................................53
13.03 Controlled Groups.................................................55
ARTICLE XIV...................................................................56
14.01 Applicability.....................................................56
14.02 Definitions.......................................................56
14.03 Top Heavy Requirements............................................60
14.04 Limitations on Contributions......................................61
14.05 Benefits Under Different Plans....................................61
<PAGE>
ARTICLE XV....................................................................63
ARTICLE XVI...................................................................64
16.01 Appointment of Committee..........................................64
16.02 Committee Action..................................................64
16.03 Rights and Duties of Committee....................................64
16.04 Investments.......................................................65
16.05 Information, Reporting and Disclosure.............................66
16.06 Independent Qualified Accountant..................................66
16.07 Standard of Care Imposed Upon the Committee.......................66
16.08 Allocation and Delegation of Responsibility.......................66
16.09 Bonding...........................................................67
16.10 Claims Procedure..................................................67
16.11 Indemnification...................................................68
ARTICLE XVII..................................................................69
17.01 Authority for Appointment.........................................69
17.02 Investment Manager Discretion.....................................69
ARTICLE XVIII.................................................................70
ARTICLE XIX...................................................................71
ARTICLE XX....................................................................72
ARTICLE XXI...................................................................73
21.01 Right to Amend and Terminate......................................73
21.02 Administrative Amendments.........................................73
21.03 Protection of Accrued Benefits....................................73
21.04 No Re-vesting.....................................................74
21.05 Exclusive Benefit of Participants.................................74
21.06 Termination and Discontinuance of Contributions...................74
ARTICLE XXII..................................................................75
22.01 Subsidiaries......................................................75
22.02 Termination of Participation......................................75
22.03 Contributions and Allocations.....................................75
22.04 Committee.........................................................76
22.05 Accounts..........................................................76
ARTICLE XXIII.................................................................77
ARTICLE XXIV..................................................................78
24.01 Internal Revenue Service Approval.................................78
24.02 Mistake of Fact...................................................78
24.03 Disallowance of Deductibility.....................................78
ARTICLE XXV...................................................................79
25.01 Governing Law.....................................................79
25.02 Severability of Provisions........................................79
25.03 Counterparts......................................................79
25.04 Captions..........................................................79
25.05 Interchangeable Word Usage........................................79
25.06 USERRA Provisions.................................................79
<PAGE>
ARTICLE I
NAME AND EFFECTIVE DATE
1.01 Name.
This Plan shall be known as the National Semiconductor Corporation
Retirement and Savings Program ("Plan").
1.02 Effective Date.
The original effective date of the Plan was June 1, 1975. This
Restatement reflects the consolidation of all amendments adopted since
the date of the latest restatement, as well as amendments adopted to
conform with the requirements of GUST (changes made by "GATT" (the
Uruguay Round Agreements Act, PL 103-465); "USERRA" (provisions in the
Uniformed Services Employment and Reemployment Rights Act of 1994, PL
103-353); "SBJPA" (the Small Business Job Protection Act of '96, PL
104-188); "TRA '97" (the Taxpayer Relief Act of '97, PL 105-34); "RRA
'98" (the Internal Revenue Service Restructuring and Reform Act of
'98, PL 105-206) and "CRA" (the Community Renewal Tax Relief Act of
2000, PL 106-554)). Finally, this Restatement reflects the adoption of
amendments to reflect certain provisions of the Economic Growth and
Tax Relief Reconciliation Act of 2001 ("EGTRRA").
Unless otherwise stated, the effective date of the amendments made by
this restated Plan is June 1, 1997. This restated Plan shall only
apply to Participants who perform one or more Hours of Service on or
after June 1, 1997.
<PAGE>
ARTICLE II
DEFINITIONS
Whenever used herein, unless the context clearly indicates otherwise,
the following words and phrases have the meanings indicated:
2.01 Accounts.
Accounts means the separate accounts and sub-accounts established by
the Committee in the name of each Participant, in accordance with
Section 6.01.
2.02 Accrued Benefit.
Accrued Benefit means the balance of a Participant's Accounts
including investment experience as of the most recent Valuation Date,
plus accumulated contributions since such date and less any
distributions since such date.
2.03 Actual Deferral Percentage.
Actual Deferral Percentage means, with respect to the group of Highly
Compensated Participants and Non-Highly Compensated Participants, the
average of the ratios (calculated separately for each Employee in each
such group) of the sum of Employee elective contributions and any
other contributions (which the Plan Administrator may under Treasury
regulations elect to include in the calculation), to the Employee's
compensation, as defined under Internal Revenue Code Section 414(s),
received during the Plan Year.
2.04 Allocation Date.
Allocation Date means the last day of each Plan Year for the purpose
of allocating Annual Profit Sharing Contributions made under Section
5.01 hereof, each pay date of the Employer (or, prior to December 1,
1999, the last day of each Plan Quarter) for which an Employee has
made a Participant Elected Contribution for the purpose of allocating
the Employer Match made pursuant to Section 5.03 hereof and such other
dates as the Committee may determine pursuant to Article VI hereof.
The term Allocation Date refers to the date on which a Participant is
determined to be entitled to receive a contribution, and not to the
date on which such contribution is credited to the Participant's
Accounts.
2.05 Annual Profit Sharing Contributions.
Annual Profit Sharing Contributions means the contribution made in
respect of any Plan Year by the Employer in accordance with Section
5.01.
<PAGE>
2.06 Beneficiary.
Beneficiary means the person or persons designated as such by a
Participant in accordance with Article X.
2.07 Board.
Board means the Board of Directors of National Semiconductor
Corporation.
2.08 Code.
Code means the Internal Revenue Code of 1986, as amended.
2.09 Comlinear 401(k) Plan.
Comlinear 401(k) Plan means the 401(k) plan formerly maintained by
Comlinear, Inc., the assets of which were merged into the Plan
effective 12/31/95.
2.10 Committee.
Committee means the Administrative Committee appointed by the Board in
accordance with Article XVI.
2.11 Compensation.
A. Compensation means the sum of:
1. the Employee's basic or regular rate of compensation for each pay
date during that portion of the Plan Year in which the Employee
is a Participant in the Plan; plus
2. all overtime, lead time, sales commissions and shift differential
income received for pay dates during the Plan Year.
B. For Plan Years beginning after December 31, 1993 and before
December 31, 2001, no more than $150,000 (or such other amount as
adjusted for costs of living under Section 401(a)(17)(B) of the
Code) of annual Compensation shall be taken into consideration
for any Employee for any reason under this Plan. For Plan Years
beginning after December 31, 2001, no more than $200,000 (or such
other amount as adjusted for costs of living under Section
401(a)(17)(B) of the Code) of annual Compensation shall be taken
into consideration for any Employee for any reason under this
Plan.
2.12 Consolidated Group.
Consolidated Group means those corporations whose earnings are taken
into account for purposes of preparing a consolidated annual report to
shareholders of the Employer.
2.13 Disability.
Disability means:
A. Any medically determinable physical or mental impairment that
causes a Participant to be qualified for disability benefits (or
that would have qualified the Participant for disability benefits
if the Participant had elected disability coverage) under the
Employer's Disability Benefit Plan, so long as the Employer has a
Disability Benefit Plan in effect; or
B. If there is no Disability Benefit Plan in effect, any medically
determinable physical or mental impairment that causes a
Participant to be unable:
1. During the first twelve (12) months following determination
of such impairment, to substantially perform the regular
material duties of the same occupation or occupations for
which the Participant has been employed by the Employer; and
2. Subsequent to the first twelve (12) months following
determination of such impairment, to substantially perform
the material duties of any occupation for which the
Participant is or becomes qualified by reason of education,
training, or experience.
Disability shall be established by the certification of a physician,
selected by the Participant and approved by the Committee, that the
Participant has suffered a permanent disability, or, if the physician
selected by the Participant shall not be approved by the Committee, by
a majority of three physicians, one selected by the Participant (or
his or her spouse, child, parent or legal representative in the event
of the Participant's inability to select a physician), one by the
Committee, and the third by the two physicians selected by the
Participant and the Committee. The decisions of the majority of such
three physicians shall be final and conclusive.
2.14 Disability Benefit Plan.
Disability Benefit Plan means the long term disability benefit
provisions of the income benefit plan created by the Employer and
executed by and between the Employer and the trustees of the trust
created for such plan on July 13, 1981, which were incorporated into a
separate Long Term Disability Plan in 1992, as such Disability Benefit
Plan may hereafter be amended.
2.15 Electronic Access System.
Electronic Access System means the Retirement Connection or any other
interactive telephone, computer or electronic system adopted by the
Committee or its delegate for use in receiving communications from
and/or providing information to Participants and/or Beneficiaries.
2.16 Employee.
"Employee" shall mean any person who renders services to the Employer
in the status of an employee as that term is defined in Code Section
3121(d) and specifically excludes any independent contractor. An
individual shall only be treated as an Employee if he or she is
reported on the payroll records of the Employer as a common law
employee. This term does not include any other common law employee. In
particular, it is expressly intended that individuals not treated as
common law employees on the payroll records of the Employer are to be
excluded from Plan participation even if a determination is
subsequently made by the Internal Revenue Service, another
governmental agency, a court or other tribunal that such individuals
are common law employees of the Employer for purposes of pertinent
Code sections or for any other purpose. An individual who performs
services for the Employer as a leased employee within the meaning of
Code Section 414(n) shall not be considered an Employee hereunder for
a Plan Year provided the Plan satisfies the coverage requirements of
Code Section 410(b) on one day during each quarter of such Plan Year,
after counting all such leased employees as nonparticipating employees
for purposes of testing whether such requirements are satisfied. If
the Plan fails to satisfy such requirements in any Plan Year, all such
leased employees shall be treated as Employees for such Plan Year in
the manner and to the extent provided for in Code Section 414(n),
except as provided in Code Section 414(n)(1)(B) or Code Section
414(n)(5). For purposes of this Subsection, effective for Plan Years
commencing after December 31, 1996, "leased employee" means any person
(other than an Employee) who pursuant to an agreement between the
Employer and any other person ("leasing organization") has performed
services for the Employer (or for the Employer and related persons
determined in accordance with Section 414(n)(6) of the Code) on a
substantially full-time basis for a period of at least one year, and
such services are performed under the primary direction or control of
the Employer.
2.17 Employer.
Employer means National Semiconductor Corporation; any subsidiary or
affiliate which, with the consent of National Semiconductor
Corporation adopts this Plan; and any corporation which acquires the
Employer's business and adopts this Plan.
2.18 Employer Match.
Employer Match means the contribution made by the Employer in respect
of Participants' Elected Contributions for any Plan Year in accordance
with Section 5.03.
2.19 Employment Date.
Employment Date means the first day on which Employee completes an
Hour of Service.
2.20 ERISA.
ERISA means the Employee Retirement Income Security Act of 1974, as
amended.
2.21 Fairchild 1988 Rollover Account.
The Account of a Participant who was employed at Fairchild
Semiconductor Corporation prior to October 8, 1987 to which were
credited contributions under its Profit Sharing Plan, which Account
was rolled over into this Plan as of January 1, 1988.
2.22 Fiscal Year.
Fiscal Year means the Employer's fiscal year for federal income tax
purposes.
2.23 401(k) Account.
401(k) Account means the separately allocated Account of a Participant
arising from Participant Elected Contributions made in accordance with
Section 5.02 and the Employer Match made in accordance with Section
5.03.
2.24 Highly Compensated Employee.
The term Highly Compensated Employee includes highly compensated
active employees and highly compensated former employees, determined
pursuant to the following rules:
A. A highly compensated active employee is any Employee who:
1. at any time during the Plan Year or the preceding Plan Year was a
Five Percent Owner; or
2. received compensation from the Employer or any affiliated
Employer during the preceding Plan Year in excess of $80,000 (as
adjusted pursuant to Section 414(q)(1) of the Code).
B. A highly compensated former employee is determined based on the
rules applicable to determining highly compensated employee
status as in effect for the Plan Year (determination year), in
accordance with section 1.414(q)-1T, A-4 of the temporary Income
Tax Regulations and Notice 97-45.
C. In determining whether an Employee is a Highly Compensated
Employee for years beginning in 1997, the amendments to Code
section 414(q) stated above are treated as having been in effect
for years beginning in 1996.
D. For purposes of this Section 2.24, "compensation" has the meaning
given to it under Code section 415(c)(3), as that Code section
has been amended by GUST to reflect the inclusion of any elective
deferrals (as defined in Code section 402(g)(3)), and any amount
which is contributed or deferred by the Employer at the election
of the Employee and which is not includible in the gross income
of the Employee by reasons of Code sections 125, 132(f)(4) or
457.
<PAGE>
2.25 Hour of Service.
Hour of Service means each hour for which an Employee is paid, or
entitled to payment, for the performance of duties for the Employer.
2.26 Inactive Participant.
Inactive Participant means a Participant who is ineligible to
participate in the allocation of Employer contributions and
forfeitures pursuant to Section 4.02, but remains employed by the
Employer or within the Consolidated Group and continues to have
Accounts under this Plan.
2.27 Investment Fund.
Investment Fund means any investment option authorized by the
Committee for the investment of Participants' Accounts pursuant to
Article VII hereof.
2.28 Layoff or Laid Off.
Layoff or Laid Off means the involuntary cessation of an Employee's
employment with the Employer for business reasons administered in
accordance with the Employer's standard personnel practices.
2.29 Non-Highly Compensated Employee.
Non-Highly Compensated Employee means an Employee who is not a Highly
Compensated Employee.
2.30 NSC Stock.
NSC Stock means the common stock of National Semiconductor
Corporation.
2.31 NSC Stock Fund.
NSC Stock Fund means the fund consisting of shares of NSC Stock and
short-term liquid investments, which is maintained by the Trustee to
hold Employer Profit Sharing Contributions made in the form of NSC
Stock, and for the investment of Stock Bonus Accounts and
Participants' Accounts which are directed to be invested in NSC Stock.
Each Participant's interest in the NSC Stock Fund shall be measured in
units of participation, rather than shares of NSC Stock. Such units
shall represent a proportionate interest in all of the assets of the
NSC Stock Fund in accordance with the Trust Agreement.
<PAGE>
2.32 One-Year Break-in-Service.
One-Year Break-in-Service means a twelve-consecutive-month period
commencing on an Employee's Termination Date (except in the case of a
Laid Off Employee, commencing on the first anniversary of the
Termination Date) during which an Employee fails to complete an Hour
of Service.
2.33 Participant.
Participant means an Employee who has satisfied the requirements for
eligibility under Section 3.01 or 4.01.
2.34 Participant Elected Contribution.
Participant Elected Contribution means the contribution made by the
Employer from salary deferrals elected by the Participant in
accordance with Section 5.02.
2.35 Plan.
Plan means this Retirement and Savings Program and each part thereof.
2.36 Plan Quarter.
Plan Quarter means the three-consecutive-month period corresponding to
quarters of the Employer's Fiscal Year during each Plan Year.
2.37 Plan Year.
Plan Year means the twelve-consecutive-month period ending on the last
day of the Employer's Fiscal Year and in which period the records of
this Plan are kept and which period is also the limitation year for
purposes of applying the limits of Section 415 of the Code.
2.38 Profit Sharing Account.
Profit Sharing Account means the Account of a Participant which arises
from Annual Profit Sharing Contributions made by the Employer pursuant
to Section 5.01.
2.39 Rollover Account.
Rollover Account means the Account of a Participant which arises from
any rollover Contribution made by such Participant.
<PAGE>
2.40 Rollover Contribution.
Rollover Contribution means a contribution made by an Employee to the
Trust from the proceeds of a distribution to such Employee from
another qualified retirement Plan. Rollover Contributions shall be
accepted by the Trustee in accordance with the provisions of Section
5.06.
2.41 Spouse and Surviving Spouse.
Spouse means the lawful husband or wife of the Participant and
Surviving Spouse means the Participant's Spouse surviving at the date
of the Participant's death, or a former Spouse of the Participant if a
qualified domestic relations order, as defined under Section 414(p) of
the Code, requires that such former Spouse be treated as a Surviving
Spouse for purposes of determining survivor benefits upon the
Participant's death.
2.42 Stock Bonus Account.
Stock Bonus Account means the separately allocated Account of a
Participant arising from stock bonus contributions made by the
Employer prior to May 31, 1987 pursuant to Section 5.04.
2.43 Termination Date.
Termination Date means the earliest of:
A. The date on which the Employee quits, is discharged, dies, or
retires from employment with the Consolidated Group;
B. The second anniversary of the Employee's absence on account of:
1. the individual's pregnancy;
2. the birth of a child of the individual;
3. the placement of a child with the individual in connection
with the adoption of such child by the individual;
4. caring for such a child for a period immediately following
such birth or placement; or
5. approved medical or industrial leave.
C. The date on which the Employee is Laid Off, as that term is
defined under Section 2.28 above; or
<PAGE>
D. The first anniversary of the date the Employee is not performing
duties for any corporation in the Consolidated Group for any
other reason. Provided, however, that in the case of an absence
due to service in the Armed Forces of the United States which
gives rise to re-employment rights under federal law, Termination
Date shall be the date provided pursuant to such law,
notwithstanding the one-year limitation, provided that the
Employee complies with the relevant provisions of federal law
establishing such re-employment rights and, in fact, returns to
employment with the Company within the period provided by law.
2.44 Trust or Trust Agreement.
Trust or Trust Agreement means the National Semiconductor Corporation
Retirement and Savings Program Trust made and executed by and between
the Employer and the Trustee, effective September 1, 1996 as amended.
2.45 Trust Fund or Fund.
Trust Fund or Fund means all contributions received by the Trustee for
purposes of the Plan, the investment thereof, and the earnings, losses
and appreciation or depreciation thereon, less payments made to carry
out the Plan.
2.46 Trustee.
Trustee means Fidelity Management Trust Company, or any successor
Trustee or Trustees hereunder.
2.47 Valuation Date.
Valuation Date means any business day on which the stock market is
open.
2.48 Voluntary Contributions.
Voluntary Contributions means the voluntary after-tax contributions of
a Participant made on or before May 31, 1984.
2.49 Voluntary After-Tax Account.
Voluntary After-Tax Account means the separately allocated Account of
a Participant arising from Voluntary Contributions made by such
Participant on or before May 31, 1984. No additional contributions are
expected to be made to this account.
2.50 Years of Service.
A. Years of Service to determine a Participant's vested interest
under Article VIII means the whole number (disregarding any
fraction) derived by dividing 365 into the sum of:
1. The period of time beginning on the Employee's Employment
Date and ending on his or her Termination Date, provided,
that in applying the rule of this paragraph 1 to a Laid Off
Employee, the period of time shall end on the first
anniversary of the Employee's Termination Date;
2. The period of time beginning on the Employee's re-employment
date and ending on his or her Termination Date, provided,
that in applying the rule to this paragraph 2 to a Laid Off
Employee, the period of time shall end on the first
anniversary of the Employee's Termination Date;
3. The period of time commencing on the Employee's Termination
Date and ending on the Employee's resumption of employment
with the Employer providing the Employee resumes such
employment prior to incurring a One-Year Break-in-Service,
as defined in Section 2.32, provided, that in applying the
rule of this paragraph 3 to a Laid Off Employee, the period
of time shall commence on the first anniversary of the
Employee's Termination Date;
4. The purpose of these Years of Service rules regarding
vesting is to grant an employee credit for all Years of
Service as long as the Employee is in the employ of the
Employer. Under paragraphs 1 and 2, an Employee who is Laid
Off is granted one additional year for vesting. Under
paragraph 3, the time between the Termination Date and
re-employment date also take into account the additional
year of vesting. The effect of 1, 2 and 3 together, is to
give an Employee who has been Laid-Off only one, not two,
extra Years of Service for vesting.
5. In addition to Years of Service credited pursuant to
paragraphs 1 through 4 above, Employees shall be given
credit for Years of Service credited under the following
predecessor plans, effective as of the date of acquisition
by the Employer of the plan sponsors, as follows:
- ------------------------------------------------- -----------------------------
Predecessor Plan Acquisition Date
- ------------------------------------------------- -----------------------------
- ------------------------------------------------- -----------------------------
Mediamatics, Inc. 401(k) Plan March 17, 1997
- ------------------------------------------------- -----------------------------
- ------------------------------------------------- -----------------------------
- ------------------------------------------------- -----------------------------
- ------------------------------------------------- -----------------------------
Future Integrated System 401(k) Profit October 20, 1997
Sharing Plan
------------------------------------------------ -----------------------------
------------------------------------------------ -----------------------------
------------------------------------------------ -----------------------------
------------------------------------------------ -----------------------------
Cyrix 401(k) Retirement Plan November 17, 1997
- ------------------------------------------------- -----------------------------
Provided, however, that for the year of acquisition, Employees shall
receive credit for the greater of the number of Years of Service that would
have been credited pursuant to the provisions of the applicable predecessor
plan, or the Years of Service that would be credited hereunder for such
period.
6. In addition to Years of Service credited pursuant to
paragraphs 1 through 5 above, Employees shall be given
credit for Years of Service with the following predecessor
employers, effective as of the date of hire of the Employees
by the employer, as follows:
------------------------------------------------- -----------------------------
Predecessor Employer Date of Hire
------------------------------------------------- -----------------------------
------------------------------------------------- -----------------------------
Hughes Aircraft Company August 7, 1995
------------------------------------------------- -----------------------------
------------------------------------------------- -----------------------------
------------------------------------------------- -----------------------------
------------------------------------------------- -----------------------------
Comlinear, Inc. January 1, 1996
------------------------------------------------- -----------------------------
------------------------------------------------- -----------------------------
------------------------------------------------- -----------------------------
------------------------------------------------- -----------------------------
East Coast Labs October 1, 1996
------------------------------------------------- -----------------------------
------------------------------------------------- -----------------------------
------------------------------------------------- -----------------------------
------------------------------------------------- -----------------------------
Gulbransen, Inc. January 22, 1998
------------------------------------------------- -----------------------------
------------------------------------------------- -----------------------------
------------------------------------------------- -----------------------------
------------------------------------------------- -----------------------------
ComCore Semiconductor, Inc. May 27, 1998
- -------------------------------------------------- -----------------------------
- -------------------------------------------------- -----------------------------
- -------------------------------------------------- -----------------------------
- -------------------------------------------------- -----------------------------
Algorex, Inc. January 1, 2000
- -------------------------------------------------- -----------------------------
- -------------------------------------------------- -----------------------------
- -------------------------------------------------- -----------------------------
- -------------------------------------------------- -----------------------------
Vivid Semiconductor, Inc. August 14, 2000
- -------------------------------------------------- -----------------------------
- -------------------------------------------------- -----------------------------
- -------------------------------------------------- -----------------------------
- -------------------------------------------------- -----------------------------
innoCOMM Wireless, Inc. February 24, 2001
- -------------------------------------------------- -----------------------------
B. If a Participant has had any One-Year Break-in-Service, the
Participant's Years of Service before the One-Year Break-in-Service
shall be included in computing Years of Service as soon as the
Participant completes one Hour of Service after his or her
re-employment date.
C. For purposes of calculating benefits upon re-employment, the following
rule shall be applied: Years of Services completed by a Participant
after five (5) consecutive One-Year Breaks-in-Service shall not be
taken into account in determining the Participant's nonforfeitable
interest in his or her Accounts which accrued before the five (5) year
period of Breaks-in-Service.
D. Years of Service completed with Fairchild Semiconductor Corporation
("FSC"), or an affiliate of FSC, by an Employee who was in the service
of FSC, or one of its affiliates, on January 1, 1988, or was
transferred from FSC, or one of its affiliates, to NSC and was in
NSC's service on January 1, 1988, shall be counted to determine the
Participant's vested interest under Article VIII. Notwithstanding the
first sentence of this paragraph D, an Employee described in this
paragraph D shall be fully vested under the Plan upon attainment of
age 55 while in the service of the Employer.
<PAGE>
ARTICLE III
ELIGIBLE EMPLOYEES
3.01 Eligibility Requirements.
A. General Eligibility.
Unless ineligible under Section 3.02, an Employee shall be
eligible to participate in the Plan on the date on which the
Employee commences employment with the Employer. Any election to
defer Compensation pursuant to Section 5.02 hereof shall be
effective as soon as administratively feasible following the
Employee's election in accordance with Section 5.02.
B. Eligibility Under Prior Plan.
Employees who were eligible to participate in this Plan on August
31, 1996 shall continue to participate in the Plan subject to the
provisions of this restated Plan.
C. Expatriate Status.
Foreign nationals employed by the Employer, on "expatriate
status" from the United States, in locations outside of the
United States or its territories shall, provided they meet the
eligibility requirements above, be eligible to participate in
this Plan.
3.02 Ineligible Employees.
A. Collective Bargaining Agreement.
An Employee shall not participate in this Plan if the Employee is
included in a unit covered by an agreement which the Secretary of
Labor finds to be a collective bargaining agreement between
employee representatives and one or more employers if retirement
benefits were the subject of good faith bargaining and the
agreement does not require participation in this Plan. For
purposes of the preceding sentence, an agreement shall not be
considered a collective bargaining agreement if it has been
bargained for by an employee representative which is an
organization in which more than one-half of the members are
owners, officers or executives of the Employer.
<PAGE>
B. Foreign Nationals.
1. Temporary Duty in United States.
Foreign nationals employed in the United States or its
territories on temporary duty assignment as defined under
administrative policies of the Employer shall not be
eligible to participate in this Plan.
2. Non-resident Aliens.
Foreign nationals employed by the Employer at locations
outside of the United States or its territories shall not be
eligible to participate in this Plan, except as provided in
Section 3.01.C.
3. Participation in Foreign Plan.
Foreign nationals temporarily employed by the Employer in
the United States or its territories who continue to be
covered under a foreign retirement plan sponsored by a
company included in the Consolidated Group during such
employment shall not be eligible to participate in this
Plan.
C. Interim Contract Employees.
Employees who are hired or rehired, by the Employer after
May 31, 1988 and designated by the Employer as interim
contract employees or co-op employees (hereinafter referred
to as "Interim Contract Employees or CO-OP Employees") shall
not be eligible to participate in this Plan. If an Employee
who formerly participated in this Plan is rehired as an
Interim Contract Employee or CO-OP Employee after May 31,
1988 and an earlier forfeiture of such Employee's Accrued
Benefit is restored under the provisions of Sections 8.04
and 8.05, such restoration shall be made, but the Employee
shall not be entitled to make further Participant Elected
Contributions under the Plan nor be entitled to further
Employer contributions while the Employee is employed as an
Interim Contract Employee or CO-OP Employee.
3.03 Credit for Predecessor Employment.
In the event the Employer acquires all or a part of the assets of an
unrelated entity, and, as a result of such acquisition employs some or
all of the unrelated entity's employees, the Committee may provide
that such employees be treated as having been employed by the Employer
for purposes of vesting and/or participation for the period they were
continuously employed by the predecessor employer from whom the assets
were acquired. While the Committee may provide vesting and/or
participation credit on an acquisition-by-acquisition basis, the
Committee shall treat all employees of each acquisition in a
nondiscriminatory manner.
3.04 Credit for Consolidated Group Employment.
In the event an Employee of a corporation in the Consolidated Group
becomes an Employee of the Employer under this Plan, he or she shall
receive credit for vesting and participation for his or her employment
within the Consolidated Group.
<PAGE>
ARTICLE IV
RE-EMPLOYMENT AND INACTIVE PARTICIPANTS
4.01 Participation on Re-employment.
A former Participant shall become a Participant immediately upon the
Employee's return to the employ of the Employer in an eligible class
of Employees.
4.02 Inactive Participants.
A. In the event a Participant becomes ineligible to participate
because he or she is no longer a member of an eligible class of
Employees, such Employee shall participate immediately upon his
or her return to an eligible class of Employees.
B. Such Employee shall participate in any contribution for the year
that the Employee left the eligible class, to the extent provided
herein, on the basis of the amount of his or her Compensation
during that portion of the year that he or she is eligible.
C. For each succeeding year that such individual remains in the
employment of the Employer or a Consolidated Group corporation,
no part of the Employer's contribution and no forfeitures shall
be allocated to his or her Accounts, but such Accounts shall
share proportionately in investment earnings, gains and losses in
accordance with Section 6.05 of this Plan.
D. Benefits shall be paid to such individual upon termination of his
or her employment, in accordance with Article XII.
<PAGE>
ARTICLE V
CONTRIBUTIONS
5.01 Employer's Annual Profit Sharing Contributions.
A. Annual Profit Sharing Contributions.
For each Fiscal Year, the Employer intends, as a part of a
regular plan and program (but, except as otherwise provided
herein, does not hereby bind itself), to contribute from its
current or accumulated net profit an amount computed in the
manner set forth in paragraph B below.
B. Computation of Profit Sharing Contributions.
1. For purposes of computing the Employer's Annual Profit
Sharing Contribution, the term "net pre-tax profits" for any
Fiscal Year means:
a. The earnings for such year of the Consolidated Group as
reported for purposes of its consolidated financial
statements and the annual report to stockholders of the
Employer before the deduction of the Employer's Annual
Profit Sharing Contribution and any taxes based upon or
measured by net income; but
b. After excluding all extraordinary items of income or
gain, charges or credits to income; and
c. After excluding such other items of income or gain or
charges to income not classified as extraordinary, but
which have been designated for exclusion by the Board.
2. The Employer's Annual Profit Sharing Contribution for each
Plan Year (beginning with the June 1, 1992 Plan Year) shall
be seventy-five percent (75%) in cash and twenty-five
percent (25%) in the form of NSC Stock, except as otherwise
determined by the Committee in its sole discretion. In
making the NSC Stock contribution, the Employer may
contribute NSC Stock or cash to be used to purchase NSC
Stock as it deems appropriate during the Plan Year and the
portion of the Employer's Annual Profit Sharing Contribution
required to be made in NSC Stock shall be determined using
the closing price of NSC Stock on any national securities
exchange on the date of contribution, or if the Employer
made a cash contribution, the amount of such cash without
regard to the market price of NSC Stock purchased with such
cash.
3. Except as otherwise provided below, the amount of the
Employer's Annual Profit Sharing Contribution for any Fiscal
Year (beginning with the June 1, 1992 Fiscal Year) shall be
the greater of:
a. Five percent (5%) of net pre-tax profits for such year;
b. One percent (1%) of the Compensation paid during the
Plan Year to Participants who, in accordance with
Section 6.02, are entitled to an allocation of an
Annual Profit Sharing Contribution; or
c. Such other amount as is determined for that Fiscal Year
by the Board, in its sole discretion, by a resolution
adopted no later than the date permitted by law for a
tax deduction with respect to such contribution for
that Fiscal Year.
4. In the case of the merger or disposition of a corporate
entity or division by the Employer, the Committee shall have
discretion to determine the amount of the Annual Profit
Sharing Contribution to be made by the Employer for affected
Employees with respect to the portion of any Plan Year
during which the affected Employees are Employees of the
Employer.
5. The Employer's determination of its Annual Profit Sharing
Contribution shall be binding on all Participants, the
Committee and the Employer.
6. Effective for Plan Years beginning after May 28, 2000, in no
event shall the amount of the Employer's Annual Profit
Sharing Contribution for any Plan Year exceed five percent
(5%) of the Compensation paid during the Plan Year to
Participants who, in accordance with Section 6.02, are
entitled to an allocation of an Annual Profit Sharing
Contribution.
C. Date of Payment.
The Employer shall pay its Annual Profit Sharing
Contribution to the Trustee not later than the due date
(including extensions thereof) for the filing of its federal
income tax return for the close of the Fiscal Year for which
such contribution is made.
5.02 Participant Elected Contributions.
A. Election to Defer Compensation.
<PAGE>
Each Participant may elect to defer any whole percentage of the
Participant's Compensation up to the maximum percentage deferral
determined by the Committee. Prior to January 1, 2002, the amount
of deferral shall not exceed $9,500 (or such amount as adjusted
under Section 402(g)(5) of the Code) during any calendar year.
After December 31, 2001, the amount of deferral shall not exceed
the dollar limitation contained in Section 402(g) of the Code in
effect for such taxable year, except to the extent permitted
under Paragraph B of this Section and Section 414(v) of the Code,
if applicable. Such deferred amounts shall be contributed by the
Employer to the Participant's 401(k) Account. Except as
authorized by the Committee, contributions shall be made from
payroll deductions as authorized by the Participant through use
of the Electronic Access System or by written notification made
in accordance with uniform procedures established by the
Committee. Each Participant may, through use of the Electronic
Access System or by written notification made in accordance with
uniform procedures established by the Committee, specify the
percentage of Compensation to be deferred and contributed to the
Trust, and thereafter the Participant may increase or decrease
said contribution in accordance with uniform procedures
established by the Committee. A Participant's elections hereunder
shall be effective as soon as administratively feasible following
the Participant's election.
B. Catch-Up Contributions.
This paragraph B shall apply to contributions after December 31,
2001. All Participants who make elective deferrals under this
Plan and who will attain age 50 before the close of the calendar
year, shall be eligible to make catch-up contributions in
accordance with, and subject to the limitations of,
Section 414(v) of the Code. Such catch-up contributions shall not
be taken into account for purposes of the provisions of the Plan
implementing the required limitations of sections 402(g) and 415
of the Code. The Plan shall not be treated as failing to satisfy
the provisions of the Plan implementing the requirements of
Sections 401(k)(3), 401(k)(11), 401(k)(12), 410(b), or 416 of the
Code, as applicable, by reason of the making of such catch-up
contributions.
C. Payment to Trustee.
The Employer shall transmit to the Trustee the amounts withheld
by it, pursuant to Paragraph A above, as soon as practicable, but
in no event later than fifteenth (15th) business day of the month
following the month in which the amount is withheld. However, the
Employer shall not transmit to the Trustee any deferred amounts
withheld by it for a Highly Compensated Employee, which in the
Committee's opinion, as communicated to the Employer, would cause
the Plan to fail to meet the requirements of Section 401(k) of
the Internal Revenue Code for that Plan Year.
<PAGE>
D. Suspension of Deferrals.
A Participant may, through use of the Electronic Access System or
upon written notice made in accordance with uniform procedures
established by the Committee, suspend his or her election under
this Section 5.02 to have a portion of his or her Compensation
deferred. In the event of such a suspension, a Participant shall
not be entitled to make Participant Elected Contributions to this
Plan for such period as established by the Committee under
uniform procedures. The Participant shall, nevertheless, be
considered a Participant hereunder for all other purposes during
such period of time if his or her employment continues during
that time. At any time after the expiration of such period, such
Participant may, upon application, again elect to have
contributions made under this Section 5.02.
5.03 Employer Match.
Prior to October 1, 2000, on behalf of each Participant who elects to
defer Compensation pursuant to Section 5.02 of the Plan (and, prior to
December 1, 1999, who is employed as of the last day of the Plan
Quarter during which such Compensation is deferred, or who retires,
dies, is Laid Off, becomes Disabled, or becomes an Inactive
Participant during the Plan Quarter), the Employer shall contribute an
amount equal to fifty percent (50%), or any other percentage as the
Board may determine for any given Plan Year or Years, of the
Participant's Elected Contributions made as of any given pay date (or,
prior to December 1, 1999, during the Plan Quarter) that are not in
excess of six percent (6%) of such Participant's Compensation during
such pay date (or, prior to December 1, 1999, such Plan Quarter). As
of the last day of each Plan Year, the Employer shall contribute an
additional amount, if necessary, so that each Participant who is
employed on the last day of the Plan Year (or who retires, dies, is
Laid Off, becomes Disabled or becomes an Inactive Participant during
the Plan Year) receives an Employer Match for the Plan Year equal to
fifty percent (50%), or such other percentage as the Board may
determine for any given Plan Year or Years, of the Participant's
Elected Contributions made during the Plan Year that are not in excess
of six percent (6%) of the Participant's Compensation for such Plan
Year.
Effective October 1, 2000, on behalf of each Participant who elects to
defer Compensation pursuant to Section 5.02 of the Plan, the Employer
shall contribute an amount equal to one-hundred percent (100%), or any
other percentage as the Board may determine for any given Plan Year or
Years, of the Participant's Elected Contributions made as of any given
pay date that are not in excess of four percent (4%) of such
Participant's Compensation for such pay date. As of the last day of
each Plan Year, the Employer shall contribute an additional amount, if
necessary, so that each Participant who is employed on the last day of
the Plan Year (or who retires, dies, is Laid Off, becomes Disabled or
becomes an Inactive Participant during the Plan Year) receives an
Employer Match for the Plan Year equal to one-hundred percent (100%),
or such other percentage as the Board may determine for any given Plan
Year or Years, of the Participant's Elected Contributions made during
the Plan Year that are not in excess of four percent (4%) of the
Participant's Compensation for all such pay dates within the Plan
Year.
Such Employer Match shall be remitted to the Trustee by the Employer
no later than the due date (including extensions thereof) for the
filing of its federal income tax return for the close of the Fiscal
Year for which such contributions are made.
5.04 Discontinued Contributions.
All contributions to Stock Bonus Accounts hereunder were suspended
after May 31, 1987, due to changes in the Internal Revenue Code
affecting credits for stock bonus plans. All Participants were 100%
vested in their Stock Bonus Accounts at that time. No further
contributions to Voluntary After-Tax Accounts were made after May 31,
1984. No further contributions were made to Fairchild 1988 Rollover
Accounts after December 31, 1987.
5.05 Limitation on Contributions.
Prior to January 1, 2002, in no event shall the sum of the deductible
contributions made by the Employer, in respect of any Plan Year,
pursuant to this Article V, be greater than:
A. Fifteen percent (15%) of the total Compensation paid to or
accrued for all Participants; plus
B. The maximum amount allowed as a deduction for federal income
taxes in accordance with Section 404 of the Code relating to the
"carrying over" of contributions allowed for Plan Years prior to
January 1, 1987 in which less than the maximum amount was
contributed to the Plan.
5.06 Rollover Contributions.
An Employee of the Employer who has received an eligible rollover
distribution, within the meaning of Section 402 of the Code, from the
qualified retirement plan of a predecessor employer, may, in
accordance with uniform procedures established by the Committee,
contribute a part or the entire amount of such distribution to the
Trust Fund. Such contribution may be made either as a direct rollover
from the qualified retirement plan, as a rollover contribution made by
the Employee within 60 days of the receipt of the distribution by such
Employee, or as a rollover contribution from an individual retirement
account or annuity into which such eligible rollover distribution was
rolled over (a "conduit IRA"), in accordance with Section 408(d)(3) of
the Code.
Such contributions must be in cash arising from contributions made by
one or more predecessor employers to one or more qualified retirement
plans in which the contributing Employee was a participant and
investment earnings on such contribution and/or investment earnings on
contributions made by the contributing Employee under the provisions
of such plans. An Employee wishing to make a Rollover Contribution
shall provide written representation that the contribution satisfies
these requirements.
Upon receipt of a Rollover Contribution and election, the Committee
shall establish a Rollover Account or Accounts in the name of the
contributing Employee. Except in the case of a direct rollover, such
contributions must be made by the contributing Employee on or before
sixty (60) days following the receipt of the distribution from the
qualified retirement plan or conduit IRA.
Each Rollover Account will be separately accounted for by the
Committee and invested together with the 401(k) Accounts of
Participants in accordance with the contributing Employee's election,
made through use of the Electronic Access System or in writing under
procedures established by the Committee.
Neither the Committee nor the Trustee shall have any responsibility
for determining the taxability of such contributions or earnings
arising therefrom upon the ultimate distribution of such funds from
this Plan. Administration of required tax withholding on such monies
in accordance with provisions of the Code or regulations pertaining
thereto shall not be construed by any person to constitute a
determination of the taxability of such funds.
The Plan will accept participant rollover contributions and/or direct
rollovers of distributions made after December 31, 2001, from:
A. a qualified plan described in Sections 401(a) or 403(a) of the
Code;
B. an annuity contract described in Section 403(b) of the Code;
C. an eligible plan under Section 457(b) of the Code which is
maintained by a state, political subdivision of a state, or any
agency or instrumentality of a state or political subdivision of
a state; or
D. an individual retirement account or annuity described in Sections
408(a) or 408(b) of the Code that is eligible to be rolled over
and would otherwise be includible in gross income.
<PAGE>
ARTICLE VI
PARTICIPANT ACCOUNTS AND CREDITING
OF CONTRIBUTIONS
6.01 Accounts.
The Committee shall establish, in the name of each Participant, a
Profit Sharing Account, a 401(k) Account, and if applicable, a Stock
Bonus Account, a Voluntary After-Tax Account, a Fairchild 1988
Rollover Account and a Rollover Account.
In addition, the Committee shall establish, in the name of each
Participant, subaccounts within each Participant's Accounts. These
subaccounts shall correspond to the various Investment Funds in which
the Participant's Accounts are invested in accordance with Article
VII. Amounts credited to the foregoing Accounts and Subaccounts shall
be accounted for in accordance with Article VII.
6.02 Employment Required at End of Plan Year.
There shall be no Annual Profit Sharing Contribution allocated to any
Participant who is not in the actual employ of the Employer at the
close of the Plan Year for which the contribution is made, except that
a Participant who retires, dies, is Laid Off, becomes Disabled, or
becomes an Inactive Participant during a Plan Year shall share in the
contributions and forfeitures for such year.
6.03 Allocation and Crediting of Contributions.
A. Allocation of the Employer's Annual Profit Sharing Contribution.
Beginning with the June 1, 1992 Plan Year, each Participant will
receive an allocation pursuant to the following formula: A =
B*(C/D) where:
A = a Participant's allocated share for the Plan Year;
B = the total amount of the Employer's Annual Profit-Sharing
Contribution;
C = the amount of the Participant's Compensation for the Plan
Year; and
D = the total amount of Compensation of all Participants for
such Plan Year.
The Employer's Annual Profit Sharing Contribution shall be
allocated to each Participant's Profit Sharing Account as of the
Allocation Date for Profit Sharing Contributions, and shall be
credited to such Account on the day such contribution is deemed
to be received by the Trustee.
B. Crediting of Participant Elected Contributions.
<PAGE>
Employer Contributions arising from a Participant's election to
defer Compensation shall be credited to such Participant's 401(k)
Account as soon as they are received by the Trustee, and shall be
allocated among the Participant's 401(k) Subaccounts in such
proportions as the Participant has elected pursuant to Article
VII.
C. Crediting of the Employer Match.
The Employer Match shall be credited to a Participant's 401(k)
Account on the date such contributions are deemed to be received
by the Trustee, and shall be allocated among the Participant's
401(k) Subaccounts in the same proportions as his or her
Participant Elected Contributions.
6.04 Disposition of Forfeitures from Former Participant's Profit Sharing
Accounts.
Beginning with the June 1, 1992 Plan Year, Profit Sharing Account
balances forfeited by former Participants whose employment has
terminated prior to becoming fully vested, in accordance with Article
VIII of the Plan, shall first be used to restore the accounts of any
reemployed Participant, in accordance with Section 8.04. Any remaining
amounts forfeited during the Plan Year shall be re-allocated, as of
the last day of each Plan Year, to the Profit Sharing Accounts of all
remaining Participants in the same manner as the Employer's Annual
Profit Sharing Contribution is allocated under Section 6.03 A. In the
event the amount available to be re-allocated for a Plan Year but for
the preceding sentence is insufficient to be re-allocated for such
Plan Year, such unallocated amount shall be carried over until there
are sufficient amounts to be re-allocated during a Plan Year.
Notwithstanding the foregoing, if it is determined that a Participant
has been credited in any Plan Year with less than the amount of
Employer contributions or forfeitures to which the Participant was
entitled under this Plan for such year, then any forfeitures shall be
allocated to such Participant, to the extent necessary to correct any
deficiencies in his or her Accounts (including foregone earnings, if
any), before such forfeitures are allocated in the manner prescribed
above. In the event that more than one Participant has been credited
with less than the amount of Employer contributions and forfeitures to
which he or she is entitled, and the forfeitures are insufficient in
amount to correct the deficiencies in the Accounts of each such
Participant, then such forfeitures shall be allocated to such
Participants in accordance with rules established by the Committee.
Notwithstanding the foregoing, effective November 17, 1997, the
forfeitures of former Cyrix employees shall be used to reduce the
Employer Match due on behalf of Employees who were former Cyrix
employees for the third Plan Quarter of the Plan Year in which the
Cyrix acquisition date occurred. Any remaining forfeitures of former
Cyrix employees shall be used to reduce the Employer Match due on
behalf of Employees who were former Cyrix employees for the fourth
Plan Quarter of the Plan Year in which the Cyrix acquisition occurred.
If there are additional forfeitures of former Cyrix employees after
such allocation, they shall reduce the Employer's Annual Profit
Sharing Contribution for the Fiscal Year end following such
acquisition.
6.05 Adjustment of the Participant's Accounts.
The Trustee shall, on each Valuation Date, value all assets of the
Trust Fund, allocate net gains or losses, and process additions to and
withdrawals from Participants' Accounts in the following manner:
A. The Trustee shall first compute the fair market value of
securities and/or the other assets comprising each Investment
Fund. Each Participant Account balance invested in each
Investment Fund shall be adjusted each business day by applying
the closing market price of the Investment Fund on the current
business day to the share-unit balance of Participant's Account
invested in the Investment Fund as of the close of business on
the current business day;
B. The Trustee shall then account for any requests for withdrawals
made by any Participant, and for allocations of contributions to
Participants' Accounts. In completing the valuation procedure
described above, such adjustments in the amounts credited to such
Participants' Accounts shall be made on the business day to which
the investment activity relates.
6.06 Title to Assets in Trustee.
Title to all assets under this Plan shall be vested in the Trustee,
who shall hold the Trust Fund and the income as a part thereof and
make payments therefrom as provided in this Plan.
6.07 Participant's NSC Stock Voting Rights.
A Participant or Beneficiary shall be entitled to direct the Trustee
how to exercise the voting rights on NSC Stock allocated to his or her
Accounts, and the Trustee shall vote NSC Stock allocated to a
Participant or Beneficiary's Accounts as directed by such Participant
or Beneficiary. In the case of combined fractional shares of NSC Stock
allocated to the Accounts of all Participants and Beneficiaries, NSC
Stock credited to Participants' and Beneficiaries' Accounts as to
which the Trustee does not receive voting directions, and all
unallocated NSC Stock held by the Trustee, such NSC Stock shall be
voted by the Trustee proportionately in the same manner as it votes
NSC Stock on which it receives voting directions, provided, however,
that the Trustee shall not exercise the voting rights for any NSC
Stock allocated to a Stock Bonus Account for which the Participant or
Beneficiary fails to give a direction.
The Employer shall provide the Trustee and each Participant with such
notices and information statements relating to the time and manner in
which voting rights are to be exercised as is required by applicable
law and the Employer's charter and bylaws and as provided to
shareholders other than Participants.
The provisions of this Section 6.07 shall not prevent the Board, or
one or more designees of the Board, from soliciting and exercising a
Participant's voting rights under a proxy provision applicable to all
shareholders of NSC Stock.
In the case of one or more tender offers for NSC Stock, a Participant
shall be entitled to direct the Trustee on the acceptance or rejection
of such offer in regard to the NSC Stock allocated to such
Participant's Accounts. Each Participant's direction to the Trustee
shall be treated as confidential.
6.09 Limits with Respect to Transactions in NSC Stock.
Each Participant subject to Section 16(b) of the Securities Exchange
Act of 1934 (the "Exchange Act"), as amended, relating to employee
benefit plans, shall be subject to such limitations as the Committee,
in its sole discretion, deems necessary to comply with the rules of
the Exchange Act.
<PAGE>
ARTICLE VII
INVESTMENT FUNDS
7.01 Investment Funds in General.
The Investment Funds available hereunder shall be selected by the
Committee, and shall include at least three (3) investment
alternatives:
A. each of which is diversified;
B. each of which has materially different risk and return
characteristics;
C. which in the aggregate enable the Participant or Beneficiary by
choosing among them to achieve a portfolio with aggregate risk
and return characteristics at any point within the range normally
appropriate for the Participant or Beneficiary; and
D. each of which when combined with investments in the other
alternatives tend to minimize through diversification the overall
risk of a Participant's or Beneficiary's portfolio.
7.02 Investment of Accounts.
A. Profit Sharing Accounts and Fairchild 1988 Rollover Accounts.
All amounts in the Profit Sharing Accounts and Fairchild 1988
Rollover Accounts of Participants shall be invested by the
Trustee acting under the direction of the Committee in accordance
with Section 16.04 hereof and pursuant to the terms of the Trust
Agreement.
B. Stock Bonus Accounts.
All amounts in the Stock Bonus Accounts shall be invested by the
Trustee at the direction of the Committee in the NSC Stock Fund.
C. 401(k) Accounts, Voluntary After-Tax Accounts and Rollover
Accounts.
All amounts in each Participant's 401(k), Voluntary After-Tax and
Rollover Contributions Accounts shall be invested in one or a
combination of the available Investment Funds selected by the
Committee, in accordance with the election of such Participant
(or Beneficiary, if applicable), made pursuant to this Article
VII and pursuant to Section 404(c) of ERISA. This Plan permits
Participants and Beneficiaries to exercise control over the
assets in their accounts in a manner that is intended to bring
the Plan within the rules of Section 404(c) of ERISA. Fiduciaries
of the Plan shall be relieved of liability for any losses or by
reason of any breach which results from the Participant's or
Beneficiary's exercise of control under this Section.
<PAGE>
7.03 Election of Investment Funds.
The following procedures shall govern the making of elections
regarding Investment Funds.
A. Initial Elections.
When an Employee first becomes a Participant hereunder, an
Investment Fund or Funds shall be specified for the investment of
all amounts to be allocated to his Accounts subject to
Participant direction pursuant to Section 7.02.C. The elected
Investment Fund or Funds shall be effective with respect to
Participant Elected Contributions and the Employer Match made on
and after the date upon which the election is made. A separate
election of the Investment Fund or Funds shall be made with
respect to the investment of any Rollover Contribution made by a
Participant. Each Participant must specify the Investment Funds
for 100% of such Participant's Participant Elected Contributions,
Employer Match and Rollover Contributions, if any.
B. Subsequent Elections.
A Participant (or Beneficiary) may elect a new Investment Fund
for future contributions and may change the allocation of his
existing Accounts among the Investment Funds at any time, in
accordance with procedures established by the Committee. Each
Participant must specify the Investment Funds for 100% of such
Participant's current contributions subject to Participant
direction and for 100% of the value of such Participant's 401(k)
Account, Voluntary After-Tax Account and Rollover Account.
C. Elections Regarding Investments.
A Participant's election to change the allocation of his existing
Accounts must specify either the percent of such Accounts to be
reallocated, the specific dollar amount to be transferred, or the
specific number of shares to be purchased and/or sold. A
Participant's election to change the allocation of his current
contributions must specify the percent of such contributions to
be allocated to each elected Investment Fund. In addition, a
Participant's election of a new Investment Fund for future or
existing amounts may be subject to restriction pursuant to the
terms of the contract(s) comprising the Investment Funds. Unless
the Participant's election otherwise specifies, the pattern of
allocations elected as to past Participant Elected Contributions
and Employer Match shall apply to all current and future
contributions unless or until the Participant (or Beneficiary)
otherwise elects pursuant to B. above.
<PAGE>
D. Elections Involving NSC Stock Fund.
Any election by a Participant or Beneficiary regarding investment
in or transfers from the NSC Stock Fund shall be made in
accordance with DOL Reg. Section 2550.404c-1(d)(2)(ii)(E)(4). The
Committee shall ensure that procedures are designed to safeguard
the confidentiality of all information relating to the purchase,
holding and sale of NSC Stock and the exercise of voting, tender
and similar rights with respect to NSC Stock by Participants and
Beneficiaries, and that such procedures are followed. An
independent fiduciary shall be appointed to carry out activities
relating to any situations which the Committee determines involve
a potential for undue Employer influence upon Participants and
Beneficiaries with regard to the direct or indirect exercise of
shareholder rights.
E. Additional Election Procedures.
The Committee shall comply with the Participant's (or
Beneficiary's) instructions except as otherwise provided in DOL
Reg. Section 2550.404c-1(b)(2)(ii)(B) or (d)(2)(ii). Upon
request, a Participant or Beneficiary may obtain a written
confirmation of his election instructions.
F. Fees.
The fees of each Investment Fund shall be charged to the Accounts
of the Participants invested in such Investment Fund, unless such
expenses are paid by the Employer in accordance with Section 7.04
below. In accordance with Section 404(c) of ERISA, the Committee
shall inform Participants and Beneficiaries of any fees charged
to their individual Accounts.
7.04 Expenses.
Unless otherwise provided herein, the expenses of Plan administration
shall be paid out of Trust assets, unless paid by the Employer. The
Employer may pay directly any expenses of administering the Plan,
including the compensation, if any, of the Trustee. The Employer may
advance such expenses subject to reimbursement out of Trust assets,
without obligating itself to pay such expenses. In addition, except as
otherwise provided, Investment Fund fees shall be paid by Participants
in accordance with Section 7.03.
<PAGE>
ARTICLE VIII
VESTED PERCENTAGE AND TERMINATION BENEFIT
8.01 Vested Amounts.
Upon death, retirement or Disability, the full amount credited to the
Participant's Accounts shall become fully vested. In the event of
termination of the employment of a Participant for any reason other
than death, Disability, or retirement, the Participant will receive a
percentage of the balance of his or her Accounts, according to said
Participant's Years of Service as follows:
A. Profit Sharing Accounts.
Years of Service Vested Percent
Less than 3 years 0%
3 years, but less than 4 20%
4 years, but less than 5 40%
5 years, but less than 6 60%
6 years, but less than 7 80%
7 years or more 100%
B. 401(k) Accounts.
1. The portion of a Participant's 401(k) Account attributable
to his or her Participant Elected Contributions is 100%
vested at all times.
2. The portion of a Participant's 401(k) Account attributable
to Employer Match for Plan Years beginning before June 1,
1990 shall be vested as follows:
Years of Service Vested Percent
----------------------------------------------------------
Less than 3 years 0%
3 years or more 100%
3. The portion of a Participant's 401(k) Account attributable
to the Employer Match for Plan Years beginning after May 31,
1990 shall be 100% vested at all times.
C. Stock Bonus Accounts.
The total balance of each Participant's Stock Bonus Account is
100% vested at all times.
<PAGE>
D. Voluntary After-Tax Accounts.
The total balance of each Participant's Voluntary After-Tax
Account is 100% vested at all times.
E. Profit Sharing Accounts of Former Cyrix Employees.
The Profit Sharing account of any Employee who was an employee of
Cyrix as of November 16, 1997, and who transferred to the service
of the Employer as of November 17, 1997 (including contributions
made pursuant to this Plan as well as to the Cyrix Plan) shall
vest at the rate of 25% per Year of Service, as provided under
the Cyrix Plan.
F. Matching Contribution Accounts of Former Cyrix Employees.
Any Employee who was a participant in the Cyrix 401(k) Plan as of
November 16, 1997, and who transferred to the service of the
Employer as of November 17, 1997 shall be fully vested in the
value of his employer matching contribution account under the
Cyrix Plan as of November 17, 1997, as well as in the portion of
his 401(k) Accounts attributable to any Employer Match allocated
to his Accounts thereafter, regardless of the number of his Years
of Service. Any former employee of Cyrix who was not an employee
as of November 16, 1997 and who had not taken a distribution from
the Cyrix Plan shall be 100% vested in his accounts there under
attributable to employer matching contributions. Any such former
employee of Cyrix who had previously obtained a distribution from
the Cyrix Plan shall forfeit the nonvested portion of his
accounts under the Cyrix Plan; provided, however, that such
nonvested portion shall be reinstated to the credit of the former
participant if such former participant is rehired by National and
becomes an Employee hereunder before incurring five consecutive
One-Year Breaks in Service, determined beginning on the date of
his or her termination from Cyrix.
G. Vesting for FSC Employees.
1. Special Vesting Schedule.
An Employee of FSC, or an affiliate of FSC, on January 1, 1988,
or an Employee of NSC on January 1, 1988 who transferred to NSC
from FSC, or an FSC affiliate, who completed 5 or more years of
Service (whether or not consecutive and without regard to Breaks
in Service) with FSC (or an FSC affiliate) on or before January
1, 1988, shall have the Employee's vested interest under this
Article VIII determined under the vesting schedule of the FSC
Profit Sharing Plan as such schedule existed immediately prior to
January 1, 1988. In the case of an FSC employee whose vested
interest is not calculated under the vesting schedule of the FSC
Profit Sharing Plan by reason of the first sentence of this
paragraph B, such Employee's vested interest shall be determined
under the vesting schedule of Section 8.01, provided, that such
an Employee's vested interest shall not be less than the
Employee's vested interest under the vesting schedule of the FSC
Profit Sharing Plan immediately prior to January 1, 1988.
2. Rehired FSC Employees.
If an Employee terminated from the service of FSC, or an FSC
affiliate, prior to September 30, 1987, and is rehired by the
Employer after January 1, 1988, and before the Employee incurs
five (5) consecutive One-Year Breaks in Service, the Employee
shall be entitled to a restoration of the Employee's forfeited
Accrued Benefit, if any, under the rules of the FSC Profit
Sharing Plan as it existed immediately prior to January 1, 1988.
8.02 Forfeiture of Nonvested Accounts.
The forfeitable portion of the Accounts of a Participant whose service
with the Consolidated Group terminates as defined under Section 2.43
shall be forfeited in accordance with the following rules.
A. The forfeitable amounts of an affected Participant shall be
forfeited and transferred to the forfeiture suspense account as
of the earlier of the date on which the Participant receives a
distribution of his entire nonforfeitable interest in the Plan,
or the date on which the Participant incurs five (5) consecutive
One-Year Breaks-in-Service. Provided, however, that the amounts
forfeited on behalf of a Participant shall be restored to such
Participant's Accounts if the Participant returns to the service
of the Consolidated Group before incurring five (5) consecutive
One-Year Breaks-in-Service. The forfeited amount shall be
restored to the Participant in accordance with paragraph B below.
B. Forfeited amounts, unadjusted by any investment increases or
decreases, of an Employee who returns to the Employer's service
before incurring five (5) consecutive One-Year Breaks-in-Service
shall be restored to the Participant's Account. If the
forfeitable amount is reallocated by reason of a One-Year
Break-in-Service which occurs in a Plan Year beginning before
January 1, 1985, no restoration of the forfeitable amount shall
be made.
8.03 Vesting on Re-Employment.
A separate account shall be maintained for a Participant's interest
remaining in the Plan at the time of distribution if the Participant
separates from the Employer's service, is paid his or her
nonforfeitable interest under the Plan and returns to the Employer's
service before incurring five (5) consecutive One-Year
Breaks-in-Service. At any relevant time, the Participant's vested
portion of the separate account shall not be less than an amount "X"
determined by the formula:
<PAGE>
X = P(AB + (R x D))-(R x D)
For purposes of applying the formula:
-------------------------------------
P is the vested percentage at the relevant time;
AB is the account balance at the relevant time;
D is the amount of the distribution; and
R is the ratio of the account balance at the relevant time
to the account balance after distribution.
8.04 Lost Participant or Beneficiary.
In the event a benefit is payable to a Participant or a Beneficiary,
but the payee cannot be located, then at the close of the
twelve-consecutive-month period following the Employee's Termination
Date or the date on which the amount becomes payable to the
Beneficiary, the benefit payable to the person shall be treated as a
forfeiture subject to Section 6.04. The benefit forfeited under this
Section 8.04 shall nevertheless be reinstated if the Participant, or
Beneficiary if applicable, makes a claim for the forfeited benefit.
<PAGE>
ARTICLE IX
RETIREMENT
9.01 Retirement.
A Participant shall be eligible for normal retirement on attainment of
age sixty-five (65), or, if a Participant is Laid Off by the Employer
and has attained the age of sixty-four (64), at the time of such
lay-off. A Participant may continue in the service of the Employer as
a Participant in this Plan beyond normal retirement age. In the event
such Participant continues in the service of the Employer, the
Participant shall continue to be treated in all respects as a
Participant until actual retirement. No benefits shall become payable
to such a Participant until actual retirement and separation from
employment, except as provided for in Section 12.02. When a
Participant retires, such Participant shall be entitled to receive the
entire amount credited to his or her Accounts under Article VI as of
the Plan Year-end following the Participant's actual date of
retirement. In addition, any Participant who terminates from
employment after attaining at least age fifty-five (55), provided that
the sum of such Participant's age plus Years of Service equals or
exceeds sixty-five (65), will be considered to have retired, and shall
be 100% vested and entitled to share in contributions for the Plan
Year of termination pursuant to Sections 5.01 and 5.02.
<PAGE>
ARTICLE X
DEATH BENEFIT
10.01 Death of Participant.
A Participant who dies while in the service of the Employer shall be
100 percent (100%) vested in the Participant's Accounts upon the
Participant's death. Upon the Participant's death, the nonforfeitable
portion of the Participant's Accounts (reduced by any security
interest held by the Plan by reason of a loan outstanding to the
deceased Participant) shall be payable to the Participant's Surviving
Spouse, or the Participant's designated Beneficiary if the Participant
has no Surviving Spouse at the time of death, or if the Spouse has
consented to the designation of a Beneficiary other than the Surviving
Spouse. The designation of a Beneficiary to whom the Spouse has
consented shall not be changed without the Spouse's consent to such
change. A Spouse's consent must be in writing, it must acknowledge the
effect of the Beneficiary designation, and it must be witnessed by a
notary public. A spouse's consent to a Beneficiary designation as
provided for under this Section is effective only with respect to the
Spouse. Payment of the death benefit shall be made in accordance with
the provisions of Article XII, provided that, the Surviving Spouse may
request that the payment be made within a reasonable time following
the Participant's death. Provided, however, nothing in this Section
10.01 shall override the provisions of a Qualified Domestic Relations
Order as set forth in Section 12.04.
10.02 Payments Upon Failure to Designate Beneficiary.
Any portion of the amount payable which is undisposed of because of
the failure to designate a Beneficiary or the failure of the
Beneficiary to survive the Participant shall be paid in order of
survivorship to:
A. The Participant's Spouse;
B. The Participant's children, in equal shares;
C. The Participant's brothers and/or sisters, in equal shares;
D. The Surviving heirs of the Participant's estate, their respective
identities and shares determined by the laws of interstate
succession in California at the time of the Participant's death;
or
E. If none of the individuals in A through D survive the death of
the Participant, then such remaining benefit shall be forfeited
in accordance with Section 8.06.
Notwithstanding the above, if the Committee is unable to locate any of
the persons listed above within twelve (12) months, the Committee
shall forfeit the remaining benefit in accordance with Section 8.06.
ARTICLE XI
DISABILITY BENEFIT
Upon incurring a Disability, a Participant shall be fully vested and entitled to
receive the entire value of his or her Accounts. Disability benefits shall be
payable two (2) years after the date of the commencement of the Participant's
leave of absence attributable to such Disability, provided that the Participant
remains Disabled. Effective September 15, 1997, payment of benefits may commence
prior to such date, in the case of a Disabled Participant whose life expectancy
at the time of payment is certified by a medical professional to be less than 6
months, provided that the Participant (or his representative) and his spouse, if
applicable, consents to such distribution. The Trustee shall pay, at the
direction of the Committee, to said Participant his or her Disability benefit
from the Plan in accordance with Section 12.01.
<PAGE>
ARTICLE XII
DISTRIBUTIONS, WITHDRAWALS AND LOANS
12.01 Distribution of Benefits.
A. Forms of Distribution.
Except as otherwise provided below, the entire vested balance of
a Participant's Accounts shall be paid either:
1. in equal monthly, quarterly or annual installments over a
period certain not to exceed the life expectancy of the
Participant (or Beneficiary in the case of a Participant who
dies prior to the time his benefits commenced) or the joint
and last survivor life expectancy of the Participant and his
Beneficiary, or
2. as a single-sum distribution consisting of a distribution:
a. in kind of the number of whole shares of NSC Stock
representing the vested balance of his or her Accounts
invested in the NSC Stock Fund; and b. cash,
representing the remaining fair market value of his or
her vested interest in all Accounts, or
3. as a single sum representing the fair market value of his or
her entire vested interest in the Accounts. In paying a
Participant or Beneficiary in accordance with this Section
12.01 A.3, the value of his or her units in the NSC Stock
Fund shall be added to the cash representing the remaining
fair market value of his or her Accounts and the vested
portion of such total cash amounts shall be the single sum
payment made to the Participant or Beneficiary.
4. Benefits of Former Comlinear Participants.
a. In the case of a Participant who was participating in
the Comlinear 401(k) Plan, the portion of the
Participant's Accrued Benefit equal to the
Participant's initial Account balance as of December
31, 1995, which was transferred into the Plan shall be
payable in the forms of benefit available under the
Comlinear 401(k) Plan. Unless the Participant otherwise
elects, subject to the consent of his spouse, if
applicable, such benefits shall be paid in the form of
a Qualified Joint and Survivor Annuity. The Qualified
Joint and Survivor Annuity is, for a Participant who is
not married, a single life annuity, and, for a
Participant who is married, an annuity for the life of
the Participant with a benefit continued after the
death of the Participant for the life of the surviving
spouse in an amount equal to 50% of the amount payable
to the Participant.
b. A Participant may, with the consent of his spouse,
elect to waive the Qualified Joint and Survivor
Annuity. An election by the Participant to waive the
joint and survivor annuity must be made in writing
during the 90-day election period ending on the annuity
starting date and must include the consent of the
Participant's spouse. The spouse's consent must
specifically acknowledge the designated Beneficiary, if
any, and the effect of such election and must be
witnessed by a Plan representative or a notary public.
The consent shall not be required if it is established
to the satisfaction of the Committee that it cannot be
obtained because there is no spouse, the spouse cannot
be located, or under such other circumstances as may be
prescribed by Treasury regulations. The Participant's
election to waive the joint and survivor annuity may be
revoked in writing without the consent of the spouse at
any time during the election period. A change in
designated Beneficiary made subsequent to a spousal
consent shall be deemed to be a revocation of the
Participant's election to waive the joint and survivor
annuity unless the spousal consent expressly permits
designations by the Participant without any requirement
for further consent by the spouse. Any subsequent
election to waive the joint and survivor annuity must
comply with the requirements of this paragraph.
The annuity starting date means the first day of the first
period for which an amount is payable as an annuity, or, for
a benefit not payable as an annuity, the first day on which
all events have occurred that entitle the Participant to
such benefit.
c. The Committee shall provide the Participant no less
than thirty (30) days (unless Regulations or
administrative pronouncements permit a shorter period)
and no more than ninety (90) days before the annuity
starting date, a written explanation of:
(i) the terms and conditions of the joint and survivor
annuity;
(ii) the Participant's right to make, and the effect of, an
election to waive the joint and survivor annuity;
(iii)the requirement that the Participant's spouse consent
to the waiver of the joint and survivor annuity; and
(iv) the Participant's right to revoke the waiver, and the
effect thereof.
Notwithstanding the foregoing, the written explanation may be provided
after the annuity starting date, provided that the election period
shall not end before the thirtieth (30th) day after the date on which
the explanation is provided. A Participant may elect (with spousal
consent) to waive the thirty (30) day period if the distribution
commences more than seven (7) days after such explanation is provided.
d. If the Participant has waived the Qualified Joint and
Survivor Annuity pursuant to Section 12.01 A.4.b, above, his
benefit shall be paid to him under one of the following
options selected by the Participant with the consent of his
spouse:
(i) Lump sum distribution in cash;
(ii) Single life annuity for the Participant's life only;
(iii)Life annuity with a guaranteed period of 5, 10 or 15
years;
(iv) Life annuity with an installment refund;
(v) Life annuity with 50%, 66-2/3% or 100% continued after
the Participant's death to his Beneficiary; or
(vi) Installments over months not exceeding the life
expectancies of the Participant and his or her spouse
with any amounts remaining upon the death of the
Participant payable to his or her Beneficiary.
The Participant shall make his selection on an application for
benefits filed with the Committee in accordance with Section 16.10
hereof. Upon the Participant's written request, the Committee shall
furnish an explanation of the effect of any other methods of
distribution the Participant may select from the available options.
e. The accrued benefit of any Participant electing a
distribution under this Section 12.01 A.4 shall be debited
to the extent necessary to pay the expenses relating to the
provision of the optional forms of benefit hereunder.
<PAGE>
B. Time of Distribution.
1. Termination Benefits.
Payment to a terminated Participant shall be made within a
reasonable time following the Participant's Termination
Date. Provided, however, if the value of a Participant's
nonforfeitable Account balance exceeds (or, for
distributions prior to March 23, 1999 has ever, at the time
of any previous distribution, exceeded) $3,500 ($5,000
effective for Plan Years commencing on or after August 6,
1997), payment shall not be made unless the Participant and
the Participant's Spouse, if applicable, consent in writing
to the payment. For purposes of the preceding sentence,
after December 31, 2001, the value of a Participant's
nonforfeitable Account balance shall be determined without
regard to that portion of the Account balance that is
attributable to rollover contributions (and earnings
allocable thereto) within the meaning of sections 402(c),
403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16) of
the Code. If the Participant and the Participant's spouse,
if applicable, fail to consent to the distribution, such
failure shall be deemed to be an election to defer
distribution. Distribution may commence as of any subsequent
date as of which the Participant and spouse, if applicable,
elect to receive such distribution, subject to section 12.01
B.3 below.
In the case of a Participant who is Laid Off, the Committee
may authorize a payment to such Participant of his or her
nonforfeitable interest as of any date after the end of the
Plan Year following the Participant's Termination Date. In
the event the Committee authorizes an earlier payment to a
Laid Off Participant, the Committee may make the payment
based on the nonforfeitable percentage the Participant will
have as of the first anniversary of his or her Termination
Date.
2. Retirement, Death and Disability Benefits.
Benefits due to a Participant or Beneficiary as a result of
retirement, death, or Disability shall be paid within a
reasonable time after the end of the Plan Year of such
retirement, death or Disability, or at such earlier time as
the Committee, in its sole discretion, may determine.
Provided that, in the case of payment to a Participant or
his surviving Spouse, the payment shall be made in
accordance with Section 12.01 B.1 above. The Committee may,
acting in its sole discretion, authorize an early
distribution to a Participant or Beneficiary of the balance
of such Participant's Accounts valued as of any Valuation
Date following death or retirement. Such distribution shall
be a total distribution of the entire amount available to
such Participant. Such Participant or Beneficiary shall
still be entitled to receive a share of the Employer's
Annual Profit Sharing and Employer Match as of the next
applicable Allocation Date. 3. Consent to Distribution.
If a Participant does not consent to receive payment of his
or her benefit, payment shall be made not later than sixty
(60) days after the close of the Plan Year in which the
later of the following events occurs:
a. The Participant attains age sixty-five (65); or
b. The termination of the Participant's service with the
Employer.
Payment shall be in accordance with Section 12.01 B.1 above.
12.02 Required Distributions.
Notwithstanding any other provisions of this Plan to the contrary, the
minimum distribution requirements of Section 401(a)(9) of the Code and
the regulations there under are hereby incorporated by reference and
the following shall apply to active Participants.
A. For Plan Years beginning after December 31, 1988, the interest of
an active Participant who attains age seventy and one-half (70
1/2) while employed shall be distributed in periodic installments
designed to satisfy the minimum distribution requirements of
Section 401(a)(9) of the Code and regulations there under,
commencing not later than the April 1st following the calendar
year in which the Participant attains age seventy and one-half
(70 1/2). Provided, however, that the distribution of a
Participant's benefit need not commence earlier than the April
1st following the calendar year in which the Participant retires
if the Participant attained age seventy and one-half (70 1/2)
before January 1, 1988 and such Participant is not a five percent
(5%) owner (as defined under Section 416(i) of the Code) at any
time during the Plan Year ending with or within the calendar year
in which the Participant attained age sixty-six and one-half (66
1/2) and during any subsequent Plan Year. For those Participants
who attained age seventy and one-half (70 1/2) in the calendar
year 1988, their deemed retirement date shall be January 1, 1989
for purposes of this paragraph A, and such Participant's
distribution must commence by April 1, 1990. Payment to a
Participant who terminates employment on or after attainment of
age seventy and one-half (70 1/2) shall be made in accordance
with Section 12.01 B.2 above.
Notwithstanding the foregoing, effective January 1, 1997, for a
Participant who attains age seventy and one-half on or after
January 1, 1997 and who has not yet retired, distribution of
benefits from the Plan shall not commence prior to retirement
unless elected by the Participant; provided, however, that in no
event shall commencement of benefit distributions from the Plan
be delayed beyond April 1 of the calendar year following the
later of the calendar year in which the Participant attains age
seventy and one-half (70 1/2) or retires.
<PAGE>
B. If a Participant dies before distribution of the Participant's
interest has commenced, the Participant's entire interest shall
be distributed within a reasonable time, not to exceed five (5)
years, following the Valuation Date next following the
Participant's death. In the event the Participant's designated
Beneficiary is the Participant's Spouse, payment to the Spouse
shall be made in accordance with Section 12.01 B.1 above, and
shall in any event commence no later than the date on which the
Participant would have reached age seventy and one-half (70-1/2).
If a deceased Participant's designated Beneficiary is the
Participant's Spouse and the Spouse dies before payments
commence, the Participant's entire interest shall be distributed
by applying the rules of this paragraph as though the deceased
spouse were the Participant.
12.03 Distribution to Minors and Incompetents.
Distributions to minors or incompetents may be made to the legal
guardian of said person, or to the parent of said minor. The trustee
shall not be required to see to the application of any such
distribution so made to any of said persons, but said person's receipt
shall be a full discharge of the Trustee's duties.
12.04 Qualified Domestic Relations Order.
A. Distributions.
In the event a person (hereafter called the "alternate payee") is
designated by a qualified domestic relations order, as defined
under Section 414(p) of the Code, as having a right to receive
all or a portion of the benefits payable under the Plan to a
Participant, payment to the alternate payee may begin on the date
on which Participant is entitled to a distribution under the
Plan, or such earlier date as the alternate payee may elect,
consistent with the terms of the QDRO.
B. The Committee shall abide by the terms of any qualified domestic
relations order A "qualified domestic relations order" means any
judgment, decree, or order (including approval of a property
settlement agreement) which creates or recognizes the existence
of an alternate payee's right to receive all or a portion of the
benefits payable to a Participant hereunder pursuant to a State's
domestic relations law relating to the provision of child
support, alimony payments, or marital property rights to a
spouse, former spouse, child, or other dependent of the
Participant; provided, however, that such order specifically
states:
1. The name and last known mailing address of the Participant
and of each alternate payee covered by such order;
2. The amount or percentage of the Participant's benefits to be
paid by the Plan to each alternate payee or the manner in
which such amount or percentage is to be determined;
3. The number of payments or the period to which such order
applies; and
4. The name of each plan to which such order applies.
C. The Committee shall establish reasonable written procedures to
determine the qualified status of domestic relations orders and
to administer distributions made there under in a manner
consistent with the following:
1. The Committee shall promptly notify the Participant and any
named alternate payee of the receipt of a domestic relations
order and the Plan procedures used for determining whether
such order is a qualified domestic relations order;
2. The Committee shall, within a reasonable period following
receipt, determine whether such order is qualified and
notify the Participant and each alternate payee of such
determination;
3. The Committee shall separately account for any amounts
affected by the Order (except for any amounts that would not
be distributable in any event during the period in which the
qualified status of the Order is being determined), and
shall make no distribution, withdrawal or loan from such
amounts until the earlier of the date of determination of
the qualified status of the order or the expiration of 18
months from the date on which the first payment would be
required to be made under the order;
4. If, within the 18-month period referred to in 3. above, the
order is determined to be qualified, the Committee shall
segregate the amounts payable to the alternate payee into
separate Accounts in the name of such alternate payee, and
shall administer such Accounts in all ways as if such
alternate payee were a Participant hereunder. The Committee
shall pay the segregated amounts to the alternative payee(s)
pursuant to the terms of such order. If, within such 18
month period, the order is determined not to be qualified,
or the order's status is unresolved, the Committee shall pay
the segregated amounts to the person or persons, if any, who
would be entitled to such amounts if no order had been
received; and
5. A determination that a domestic relations order is qualified
which is made later than 18 months after the receipt of such
order shall operate prospectively only.
D. Distributions made pursuant to this Section 12.04 shall
completely discharge the Plan of its obligations with respect to
the Participant, his Beneficiary and each alternate payee to the
extent of any distributions made.
<PAGE>
12.05 Hardship Withdrawals.
A distribution from a Participant's vested Profit Sharing Account,
401(k) Account (provided that income on Participant Elected
Contributions after May 30, 1989 shall not be available for
distribution upon hardship), Fairchild 1988 Rollover Account or Stock
Bonus Account may be made to a Participant, upon the Participant's
request, if it is established that the Participant has an immediate
and heavy financial need and the distribution is necessary to satisfy
such need. The Committee shall establish the existence of the
Participant's immediate and heavy financial need and the Participant's
need for a distribution to satisfy such need by applying the following
standards:
A. Immediate and Heavy Financial Need.
The existence of an immediate and heavy financial need shall be
established by determining one of more of the following:
1. Expenses incurred or necessary for medical care, described
in Section 213(d) of the Code, of the Participant, the
Participant's Spouse, or any dependent of the Participant (a
dependent shall be determined under Section 152 of the
Code);
2. Costs directly related to the purchase (excluding mortgage
payments) of a principal residence for the Participant;
3. Payment of tuition and related educational fees (and room
and board expenses) for the next twelve (12) months of
post-secondary education for the Participant, or a member of
the Participant's immediate family;
4. The need to prevent eviction of the Participant from the
Participant's principal residence or foreclosure on the
mortgage of the Participant's principal residence;
5. The need to pay the funeral expenses of a family member; or
6. Any other reason recognized to constitute an immediate and
heavy financial need by the Commissioner of Internal Revenue
Service in a revenue ruling, notice or other document of
general applicability.
B. Distribution Necessary to Satisfy the Financial Need.
The Participant's need for a distribution to satisfy a financial
need as established under paragraph A shall be
determined as follows:
1. The Committee shall consider all relevant facts and
circumstances of the Participant to determine whether the
need may be satisfied from other resources that are
available to the Participant;
2. The Participant represents, and swears under penalty of
perjury, that the financial need cannot be satisfied without
causing further undue hardship:
a. Through reimbursement or compensation by insurance or
otherwise;
b. By reasonable liquidation of savings or assets, to the
extent such liquidation would not itself cause an
immediate and heavy financial need;
c. By the Participant ceasing elective contributions under
this Plan; and
d. By other distributions or nontaxable loans from plans
maintained by the Employer or by any other employer, or
by borrowing from commercial sources on reasonable
commercial terms.
3. The Committee may impose such conditions on hardship
distributions, as it deems necessary, so long as such
conditions are applied equally to all Participants who
request hardship distributions.
C. Additional Rules.
The following rules shall apply to each request for a hardship
distribution by a Participant:
1. The Participant's request for a hardship distribution shall
be made on such forms as are provided by the Trustee from
time to time and the Participant shall furnish the Trustee
with such information as the Committee requests in its
evaluation of the Participant's request; and
2. The amount distributed, if any, shall in no event exceed the
amount required to satisfy the immediate and heavy financial
need of the Participant and to pay any federal, state, or
local taxes or penalties reasonably anticipated to result
from the distribution. Immediate and heavy financial need
may include any taxes or penalties paid by such Participant
on such hardship distribution.
12.06 In-Service Withdrawals.
As of any Valuation Date, a Participant who has a Voluntary
Contributions or a Rollover Account may elect an in-service
withdrawal. Such withdrawal will be taken first from the Voluntary
After-Tax Account, if any, and then from the Rollover Account.
<PAGE>
12.07 Participant Loans.
Loans may be made to Participants under this Plan in accordance with
the following provisions:
A. At the request of a Participant, and under rules to be
established from time-to-time by the Committee, the Plan may make
a loan of money to such Participant from the Participant's
Accounts (excluding any Voluntary After-Tax Account), but not
exceeding fifty percent (50%) of the cumulative vested interest
of the Participant in all of his or her Plan Accounts. All loans
shall be made available to Participants on a reasonably
equivalent basis. A Participant shall request a loan by
submitting a completed loan application form or initiate a loan
by use of the Electronic Access System, together with such
application fee as the Committee may require on a uniform basis
from Participants applying for loans, and in the case of a
residential loan application, also submitting copies of the
Purchase and Sales Agreement or Contractor's bid, whichever the
case may be. A Participant may have no more than two (2) loans
outstanding at the same time, which may be residential and/or
nonresidential loans.
B. Notwithstanding the preceding, no loan may be made to the extent
that such loan (when added to the outstanding balance of any
other loan to such Participant) exceeds the lesser of:
1. $50,000, reduced by the excess (if any) of the highest
outstanding balance of loans from the Plan during the
one-year period ending on the day before the date on which
such loan was made, over the outstanding balance of loans
from the Plan on the date on which such loan was made; or
2. one-half (1/2) of the vested balance of all accounts of the
Participant in the Plan, determined as of the origination
date of the loan. In no event will a loan be made which
would be taxed under Code section 72(p) as a distribution
from the Plan.
A nonresidential loan shall, by its terms, be repaid within six (6) to
sixty (60) months, and a residential loan shall, by its terms, be
repaid within six (6) to one hundred twenty (120) months. Loan
payments may generally be made only by way of automatic payroll
deduction, and a Participant shall be entitled to an extension in loan
payments in the event that due to a shutdown or short work week the
payroll check for a Participant is insufficient to cover the loan
payment due, but not beyond the time period required for loan
repayment under Section 72(p) of the Code, or pursuant to Regulations
there under. In the event that Participant is Laid Off, on an
authorized leave of absence, is for any other reason not receiving a
paycheck, or is separated from service, such Participant shall make
direct monthly payments on any loan outstanding. In the event that
payment is not received by ninety (90) days after the due date, the
loan will be in default pursuant to subparagraph G. hereunder.
C. The outstanding balance of any such loans, including interest at
a reasonable rate based on the prime rate as published in the
Wall Street Journal, shall constitute a lien against the Accounts
of a Participant and shall be deductible therefrom in the event
of a distribution to the Participant for any reason whatsoever.
The interest rate to be charged on loans shall be established on
the first business day of each month for loans initiated during
such month.
D. Loans shall be secured by the Participant's Retirement and
Savings Program Accounts.
E. Effective October 12, 1998, no assignment of a Comlinear
Participant's vested Accrued Benefit shall be made to secure a
loan unless the Comlinear Participant's Spouse consents in
writing to the assignment, the consent acknowledges that the
Comlinear Participant's vested Retirement and Savings Program
Account Balance may be used to pay the loan if the Comlinear
Participant's service with the Employer terminates and the loan
is delinquent, and the Spouse's consent is witnessed by a notary
public or a Plan representative. To be effective, the Spouse's
consent to the assignment must be signed during the 30-day period
ending on the date on which the loan is to be assigned. Such
consent shall thereafter be binding with respect to the
consenting Spouse or any subsequent Spouse with respect to that
loan. A new consent shall be required of the Spouse if there is a
renegotiation, extension, renewal, or other revision of the loan.
F. Any loan shall require substantially level amortization of the
loan (with payments not less frequently than quarterly) over the
term of the loan.
G. In the event of default, foreclosure on the note and attachment
of the security will not occur until a distributable event occurs
in the Plan. Events that constitute a default include, but are
not limited to: 1) a missed monthly payment due on or before the
15th day of the month in the case of a Participant who is
terminated, Laid Off, who is on an authorized leave of absence,
or who is not receiving a paycheck for any other reason. Default
will occur as of the end of the Plan Quarter following the Plan
Quarter in which the failure to remit a monthly payment occurs.
12.08 Direct Rollovers.
A. This Section 12.08 applies to distributions made on or after
January 1, 1993.
Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election under this Article XII, a
distributee may elect, at the time and in the manner prescribed by the
Committee, to have any portion of an eligible rollover distribution
paid directly to an eligible retirement plan specified by the
distributee in a direct rollover. For purposes of this Section, the
following terms shall be defined as follows:
1. Eligible rollover distribution: An eligible rollover distribution
is any distribution of all or any portion of the balance to the
credit of the distributee, except that an eligible rollover
distribution does not include: any distribution that is one of a
series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy)
of the distributee or the joint lives (or joint life
expectancies) of the distributee and the distributee's designated
beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under
Section 401(a)(9) of the Code; the portion of any distribution
that is not includible in gross income (determined without regard
to the exclusion for net unrealized appreciation with respect to
employer securities), and, effective January 1, 1999, any
hardship distribution described in Code section
401(k)(2)(B)(i)(IV).
2. Eligible retirement plan: An eligible retirement plan is an
individual retirement account described in Section 408(a) of the
Code, an individual retirement annuity described in Section
408(b) of the Code, an annuity plan described in Section 403(a)
of the Code, or a qualified trust described in Section 401(a) of
the Code, that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover
distribution to the surviving spouse, an eligible retirement plan
is an individual retirement account or individual retirement
annuity.
3. Distributee: A distributee includes an Employee or former
Employee. In addition, the Employee's or former Employee's
Surviving Spouse and the Employee's or former Employee's Spouse
or former Spouse who is the alternate payee under a qualified
domestic relations order, as defined in Section 414(p) of the
Code, are distributees with regard to the interest of the Spouse
or former Spouse.
4. Direct rollover: A direct rollover is a payment by the plan to
the eligible retirement plan specified by the distributee.
B. The Committee shall prescribe reasonable procedures for the election
of direct rollovers under this Section, including, but not limited to:
1. Requirements that adequate information be provided by the
distributee, including the name of the eligible retirement plan
to which the rollover is to be made, representation from the
eligible retirement plan as to the type of eligible retirement
plan it is, and that it will accept the direct rollover, and
other information necessary to make the direct rollover, such as
the name and address of the trustee of the eligible retirement
plan;
2. Requirements that direct rollover elections be made within the
time periods permitted for electing optional forms of payment
pursuant to this Article XII; and
3. Limitations on the amount of a direct rollover, providing that
direct rollover may not be elected by a distributee whose
eligible rollover distributions during a year are reasonably
expected to be less than $200, and providing that, in the case of
a distributee who elects to receive part of his distribution in
cash and to have the remainder paid to an eligible retirement
plan, the portion to be directly rolled over must be equal to at
least $500.
C. This paragraph C shall apply to distributions made after December 31,
2001:
1. For purposes of the direct rollover provisions of this Section
12.08 of the Plan, an eligible retirement plan shall also mean an
annuity contract described in Section 403(b) of the Code and an
eligible plan under Section 457(b) of the Code which is
maintained by a state, political subdivision of a state, or any
agency or instrumentality of a state of political subdivision of
a state and which agrees to separately account for amounts
transferred into such plan from this Plan. The definition of
eligible retirement plan shall also apply in the case of a
distribution to a surviving spouse, or to a spouse or former
spouse who is the alternate payee under a qualified domestic
relation order, as defined in Section 414(p) of the Code.
2. In addition, any amount that is distributed on account of
hardship shall not be an eligible rollover distribution and the
distributee may not elect to have any portion of such a
distribution paid directly to an eligible retirement plan.
3. Moreover, a portion of a distribution shall not fail to be an
eligible rollover distribution merely because the portion
consists of after-tax employee contributions which are not
includible in gross income. However, such portion may be
transferred only to be an individual retirement account or
annuity described in Section 408(a) of the Code, or to a
qualified defined contribution plan described in Section 401(a)
or 403(a) of the Code that agrees to separately account for
amounts so transferred, including separately accounting for the
portion of such distribution which is includible in gross income
and the portion of such distribution which is not so includible.
<PAGE>
ARTICLE XIII
NONDISCRIMINATION TESTING AND LIMITATIONS ON ALLOCATIONS
13.01 Actual Deferral Percentage and Actual Contribution Percentage Testing.
A. Limitation on Deferral of Compensation.
The Committee shall establish uniform rules and procedures for
administering Participant Elected Contributions. Such rules and
procedures must satisfy one of the following tests or be
nondiscriminatory in operation within the meaning of the Code: 1)
the Actual Deferral Percentage of the eligible Highly Compensated
Employees may not be greater than the Actual Deferral Percentage
of the eligible Non-Highly Compensated for the current Plan Year
multiplied by 1.25; or 2) the lesser of (i) the Actual Deferral
Percentage for the Non-Highly Compensated Employees for the
current Plan Year multiplied by two (2) and (ii) the Actual
Deferral Percentage for the Non-Highly Compensated Employees for
the current Plan Year, plus two (2) percentage points.
The above tests shall be performed in accordance with Section
401(k) of the Code, as amended, and any applicable regulation
there under; and Section 401(k) of the Code and its regulations
are hereby incorporated in this Document by reference as provided
under Regulation section 1.401(k)-1(b)(2)(iii). In order to
satisfy the above requirements, the Committee may, in its sole
discretion, require the Employer to reduce the future percentage
deferrals elected by the Highly Compensated Employees and/or the
Committee shall direct the return of a portion of the amounts
deferred by the Highly Compensated Employees, in accordance with
paragraph B below.
Except as provided in Section 5.02B, if an amount is returned to
an Employee because the Employee's elective deferral for the
calendar year exceeds $9,500 ($11,000 for Plan Years commencing
on or after January 1, 2002) (or such amount as adjusted under
Section 402(g)(5) of the Code), such excess deferral shall be
counted in determining the Employee's Actual Deferral Percentage
for the Plan Year in which such excess deferral was made. If two
or more cash or deferred arrangements (as determined under
Section 401(k) of the Code) are treated as a single Plan for
purposes of Section 401(a)(4) or 410(b) of the Code, such
arrangements shall be treated as a single Plan for purposes of
the limitations of this Section. If a Highly Compensated Employee
participates in two or more cash or deferred arrangements (as
determined under Section 401(k) of the Code) maintained by the
Employer, all of such cash or deferred arrangements shall be
treated as a single plan for purposes of determining the Actual
Deferral Percentage of each Employee.
<PAGE>
B. Return of Excess Deferrals Withheld.
1. Nondiscrimination Test.
If it is determined after the end of a Plan Year that any
amounts deferred by Highly Compensated Employees would cause
the Plan to fail to meet the requirements of Section 5.02 C,
excess contributions and income thereon shall be returned as
soon as possible following the Plan Year, but in any event
no later than the end of the Plan Year following the Plan
Year for which they were made. In determining the amount of
excess contributions to be returned to Highly Compensated
Employees, the Committee shall direct the Employer to
distribute to the Highly Compensated Participant with the
largest amount of deferrals (and so forth) his or her excess
portions in accordance with Code section 401(k)(8)(C), the
regulations there under, and any subsequent Internal Revenue
Service guidance issued there under such that any amounts
remaining satisfy this Section and Code section 401(k).
The income or loss allocable to excess contributions shall
be income or loss attributable to such excess contributions
for the Plan Year determined pursuant to Section 6.05.
Income or loss between the end of the Plan Year and the date
of distribution shall be disregarded. Any Employer Match
attributable to excess contributions which are returned to a
Highly Compensated Employee shall be forfeited.
2. Deferral Limit.
Except as provided in Section 5.02B, if a Participant's
elective deferral under Section 401(k) of the Code exceeds
$9,500 ($11,000 commencing on or after January 1, 2002) (or
such amount as adjusted under Section 402(g)(5) of the Code)
for a calendar year, an excess deferral occurs. A
Participant may assign to this Plan any excess deferral made
during a taxable year by notifying the Committee on or
before March 15 following the end of such year. In the event
the excess deferral arises solely by taking into account
qualified plans of the Employer, the Participant will be
deemed to have notified the Committee. The excess amount
shall be returned not later than the April 15th immediately
following the year of the excess deferral and shall include
earnings for the calendar year attributable to such excess
deferral, determined pursuant to Section 6.05. Income or
loss attributable to the period from the end of the calendar
year to the date of distribution shall be disregarded. The
amount returned shall reduce the Participant's elective
deferrals for the year to not more than the allowable amount
for such year. The excess amount shall be determined from
all plans under which the Participant made elective
deferrals for the year.
C. Limitation on Contribution Percentages.
Employer Matches shall satisfy one of the following tests:
1) The contribution percentage of the eligible Highly
Compensated Employees shall be not greater than the
contribution percentage of the eligible Non-Highly
Compensated Employees for the current Plan Year multiplied
by 1.25; or 2) the lesser of (i) the contribution percentage
for the Non-Highly Compensated Employees for the current
Plan Year multiplied by two (2) and (ii) the contribution
percentage for the Non-Highly Compensated Employees for the
current Plan Year, plus two (2) percentage points.
For Plan Years beginning before January 1, 2002, if a Highly
Compensated Employee participates in a Plan or Plans
maintained by the Employer under which the Highly
Compensated Employee is eligible to make elective
contributions subject to the requirements of Section 401(k)
of the Code and one or more of such Plans is also subject to
Section 401(m) of the Code, the tests applied to the
contributions for the Highly Compensated Employee shall be
performed in accordance with Section 401(m) of the Code and
the regulations there under to prevent the multiple use of
the alternative limitations as provided in Section 401(m) of
the Code.
If two or more plans are aggregated for purposes of Section
410(b) of the Code or a Highly Compensated Employee
participates in two or more plans of the Employer to which
matching contributions or Employee voluntary contributions
are made, all such contributions shall be aggregated to
apply the tests above.
The contribution percentage for a specified group of
Employees for a Plan Year shall be the average of the ratios
(calculated separately for each Employee in such group), of
the sum of the Employer Match and Employee nondeductible
contributions (and such other contributions as permitted to
be included in the calculation under U.S. Treasury
regulations) to the Employee's compensation during the Plan
Year as defined under Section 414(s) of the Code.
D. Return of Contributions.
Any Employer Match which causes the contribution percentage
of the eligible Highly Compensated Employees to exceed the
limits of this Section shall be returned, or forfeited if
forfeitable, (together with income attributable to such
contributions through the end of the Plan Year, determined
in accordance with Section 6.05) before the close of the
following Plan Year. Amounts returned (or forfeited if
applicable) shall be the amounts for the Highly Compensated
Employees who have the highest contribution amounts, and
successive amounts shall be returned or forfeited in
accordance with Code section 401(m)(6), regulations there
under, and any subsequent Internal Revenue Service guidance
issued there under, until the amounts remaining satisfy the
requirements of this Section and Section 401(m) of the Code.
Forfeited amounts may not be allocated to a Highly
Compensated Employee whose contributions for such Plan Year
are reduced by reason of this Section.
13.02 Limitations on Allocations.
A. Notwithstanding any other provisions of the Plan, the total
annual addition credited to a Participant's Accounts for any
Plan Year shall not exceed an amount equal to the smaller
of: 1) $30,000 for Plan Years commencing prior to January 1,
2002 ($40,000 for Plan Years commencing on or after January
1, 2002), as adjusted for increases in the cost-of-living