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<ACCEPTANCE-DATETIME>20030721205707
ACCESSION NUMBER: 0000070530-03-000017
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 20030525
FILED AS OF DATE: 20030722
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: 03795245
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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<DESCRIPTION>PERIOD ENDING MAY 25, 2003
<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 25, 2003
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)
<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. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X . No .
The aggregate market value of voting stock held by non-affiliates of National as
of November 22, 2002, was approximately $2,635,415,828 based on the last
reported sale price on that date. 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 20, 2003, was 183,806,274.
DOCUMENTS INCORPORATED BY REFERENCE
Document Location in Form 10-K
-------- ---------------------
Portions of the Proxy Statement for the Annual
Meeting of Stockholders to be held on or
about September 25, 2003. Part III
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
TABLE OF CONTENTS
Page No
PART I
Item 1. Business 4
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 14
Executive Officers of the Registrant 15
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 17
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 31
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 68
Item 9A. Controls and Procedures 69
PART III
Item 10. Directors and Executive Officers of the Registrant 70
Item 11. Executive Compensation 70
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 70
Item 13. Certain Relationships and Related Transactions 70
Item 14. Principal Accountant Fees and Services 70
PART IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 71
Signatures 73
<PAGE>
ITEM 1. BUSINESS
The statements in this Annual Report on Form 10-K contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements relate to,
among other things, sales, gross margins, operating expenses, capital
expenditures and acquisitions and investments in other companies and are
indicated by words or phrases such as 'expect," "outlook," "foresee," "we
believe," "we intend" and similar words or phrases. These statements are based
on our current plans and expectations and involve numerous risks and
uncertainties that could cause actual results to differ materially from
expectations. These forward-looking statements should not be relied upon as
predictions of future events as we cannot assure you that the events or
circumstances reflected in these statements will be achieved or will occur. The
following are among the principal factors that could cause actual results to
differ materially from the forward-looking statements: general business and
economic conditions in the semiconductor industry and the growth rate in the
wireless, PC and information infrastructure industries; pricing pressures and
competitive factors; delays in the introduction of new products or lack of
market acceptance for new products; our success in integrating acquisitions and
achieving operating improvements with acquisitions; risks of international
operations; legislative and regulatory changes; the outcome of legal,
administrative and other proceedings that we are involved in; the results of our
programs to control or reduce costs; and the general worldwide geopolitical
situation. For a discussion of some of the factors that could cause actual
results to differ materially from the forward-looking statements, see the "Risk
Factors" section set forth in Item 7, Management's Discussion and Analysis of
Financial Conditions and Results of Operations and other risks and uncertainties
detailed in this or our other reports and filings with the Securities and
Exchange Commission. We undertake no obligation to update forward-looking
statements to reflect further developments or information obtained after the
date hereof and disclaim any obligation to do so.
General
- -------
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 amplifiers; o personal computers;
o power management; o local and wide area networks; and
o flat panel and CRT displays; o imaging.
o wireless communications;
Our strategy is to provide systems-on-a-chip for our key trendsetting
partners, using our analog expertise as a starting point for forward
integration. Approximately 75 percent of our revenue is generated from
analog-based products and this percentage is likely to grow in the future due to
our increasing focus on developing analog solutions for high growth markets and
applications.
National was originally incorporated in the state of Delaware in 1959 and
our headquarters have been in Santa Clara, California since 1967. On our
"Investor Information" website, located at www.national.com, we post the
following filings as soon as reasonably practicable after they are
electronically filed or furnished to the Securities and Exchange Commission: our
annual report on Form 10-K, our quarterly reports on Form 10-Q, our current
reports on Form 8-K and any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All
our filings on our website are available free of charge.
Recent Highlights/Acquisitions
- ------------------------------
In February 2003, we launched a series of strategic profit-improvement actions
designed to streamline our cost structure and enhance shareholder value by
prioritizing R&D spending on higher-margin analog businesses. As part of that
plan, we indicated we would seek to sell the information appliance business,
primarily consisting of the GeodeTM family of products, and our cellular
baseband business. At that time, we expected to complete the sales within the
following 3 to 6 months. Since February, we have conferred with several
prospective buyers for the information appliance business and in May we
announced that we were actively pursuing a sale of that business. At the same
time we also announced the immediate closure of the cellular baseband business.
In August 2002, we completed the acquisition of DigitalQuake, Inc., a
development stage enterprise engaged in the development of digital display
products located in Campbell, California. We believe the addition of
DigitalQuake's display capabilities and products, which include a
fourth-generation scaling solution, a triple analog-to-digital converter and an
advanced digital video interface with encryption/decryption technologies, will
help us provide a broad range of system solutions for flat panel monitors.
<PAGE>
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 markets, and more
narrowly defined markets such as wireless handsets, displays, imaging and human
interface and information infrastructure. Our analog and mixed-signal devices
include:
o amplifiers and regulators; o image sensors;
o power monitors and line drivers; o radio frequency integrated circuits;
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 for notebook and desktop computers, as well as servers.
Corporate Organization; Product Line Business Units
- ---------------------------------------------------
We are comprised of various product line business units which are combined to
form groups. During fiscal 2003, our operations were organized in the following
five groups: the Analog Group, the Displays Group, the Information Appliance and
Wireless Group, the Wired Communications Group and the Custom Solutions Group.
ANALOG GROUP: Analog products are the 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 analog
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 depend upon portability
and efficiency, such as cellular telephones and notebook computers. We are using
our analog expertise to develop high performance products aimed at wireless
handsets, displays, notebook computers, other portable devices and information
infrastructure applications. Current offerings include audio subsystems and a
complete power management unit for the Global Systems for Mobile Communications
(GSM) wireless product applications. We are increasing our penetration into the
top tier original equipment manufacturer customer base in the wireless, display
and personal computer market segments. Nearly 42 percent of the Analog Group's
revenues are derived from original equipment manufacturers, while the remaining
58 percent come from our worldwide authorized distributors.
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,
Column Driver and CRT/Digital TV 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, brighter color
and/or better power efficiency for flat panel monitors, CRT monitors and
notebook computer displays.
The Flat Panel Displays business unit provides a variety of innovative
products for notebook thin film transistor (TFT) displays and flat panel
monitors. Our products include a variety of timing controllers, low voltage
differential signal (LVDS) data receivers and LVDS transmitters. We recently
introduced response time compensation (RTC) for LCD TV applications. RTC is a
display technology that speeds up the response time of LCDs for improved picture
quality. In the notebook TFT displays segment, we have significant market share
in the integrated LVDS receiver and timing controllers. We also continue to
expand our position in the discrete LVDS market. The Flat Panel Displays
business unit is also developing scaler products targeted at flat panel
monitors.
The Column Driver business unit recently introduced a new family of column
drivers that use the industry standard reduced swing differential signaling
(RSDS) digital interface technology. We are also developing new product
offerings for the mobile handset market.
The CRT and Digital TV business unit offers a variety of video drivers and
pre-amplifiers that go into CRT monitors and digital TVs. While the overall
market unit volume of CRT monitors is expected to decline over time due to the
increasing penetration of flat panel displays, the business unit's leading edge
technology, including our new high-voltage processes, is being channeled toward
opportunities in the fast growing digital TV market. Our product offerings
include the integrated family of pre-amplifiers with on-screen display, clamp
and video drivers for a wide variety of CRT display types.
INFORMATION APPLIANCE AND WIRELESS GROUP: The Information Appliance and
Wireless Group consist of our Information Appliance and Wireless business units.
The Information Appliance business unit has been focused on providing easier
access to the Internet with our GeodeTM product family of silicon and system
solutions. The GeodeTM technology merges complex functionality, such as
processing, system logic, graphics, audio and video decompression on to one
highly integrated device. As part of our program to streamline our cost
structure and enhance shareholder value through prioritizing R&D spending on
higher margin analog businesses, we announced in February 2003 that we are
seeking to sell the GeodeTM business. You can find further discussion on this
topic in Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and Note 3 to the Consolidated Financial Statements.
The Wireless business unit delivers solutions that perform the radio and
other functions for handsets and base stations in the cellular, cordless
telephone and wireless data markets. The Wireless business unit leverages a
number of technologies and standards:
o Code Division Multiple Access (CDMA);
o Personal Digital Cellular (PDC); and
o Global Systems for Mobile Communications (GSM).
o Digital Cordless Telephone technology; and
o BluetoothTM.
Our Wireless business unit offers radio frequency components that focus on
addressing the synthesizer block of the radios in CDMA, PDC and GSM cellular
standards as well as Wireless-LAN and cordless 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. 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 GSM chipset solution, which combined the radio transceiver,
digital baseband, analog baseband and power management into one solution, was a
part of the cellular baseband business that we closed at the end of fiscal 2003.
WIRED COMMUNICATIONS GROUP: The Wired Communications Group consists of the
Advanced PC business unit, which was formally a part of the Information
Appliance and Wireless Group, and the Networking business unit. The Advanced PC
business unit provides innovative mixed-signal I/O products for servers,
desktops, mobile and storage computing. The business unit is focused on
improving and creating standards for networking, security and manageability.
During fiscal 2003 the Advanced PC business unit introduced the EthernetMAX
product family. Developed with iReady Corporation, a leader in iSCSI, these
products are the first to integrate gigabit MAC/PHY, TOE, Ipsec and iSCSI
technologies onto a single chip, which addresses an emerging market opportunity-
The Networking business unit focuses on the enterprise, communications
infrastructure and embedded markets. The Enterprise business unit provides
complete mixed signal solutions for switches and routers. The Communications
Infrastructure business unit is focused on the development of high-speed
physical interconnect products for wireless, telecom, data networking and
professional video applications. The Embedded business unit focuses on products
used in networked peripherals in the enterprise and consumer markets.
<PAGE>
CUSTOM SOLUTIONS GROUP: The Custom Solutions Group consists of the
following four business units: Device Connectivity, Legacy Products, Custom
Silicon Systems and Imaging Products.
The Device Connectivity business unit offers a wide range of processors and
microcontrollers. Our processors are based on either our CR16 core or the ARM7
core and are combined with dedicated application software to address
applications involving device connectivity. Applications include BluetoothTM
accessories, telematics (automotive), wireless access points, security systems
and advanced meter reading. Our general-purpose 8 and 16 bit microcontrollers
address a wide variety of applications in the communication, consumer,
industrial, and automotive segments.
The Legacy Products business unit supplies user-designed application
specific products in the form of standard cells and gate arrays as well as key
components for analog and digital line cards for telecommunication systems.
The Custom Silicon Systems business unit acts as the portal to our
technologies, manufacturing and logistics infrastructure to produce systems-on-a
chip solutions for key strategic partners.
The Imaging Products business unit develops complete imaging solutions
including CMOS image sensors and image processors. These solutions are aimed at
applications for the mobile phone, automotive and various consumer products.
FISCAL 2004 ORGANIZATION STRUCTURE: After the end of fiscal 2003, we
reorganized our business operations into the following groups: the Analog Group,
the Displays and Wireless Group, the PC and Networking Group, the Imaging Group,
and the Custom Solutions Group. This reorganization was done to reflect our
decisions to exit the cellular baseband business and the GeodeTM product line
within the Information Appliance business. We do not expect this change to
materially affect the way we define and report our operating segments under SFAS
131.
WORLDWIDE MARKETING AND SALES AND CENTRAL TECHNOLOGY AND MANUFACTURING
GROUP: Separate from our business operating groups, our corporate structure
includes a centralized Worldwide Marketing and Sales Group and a Central
Technology and Manufacturing Group (CTMG).
Worldwide Marketing and Sales is structured around the four major regions
of the world where we operate -- the Americas (North and South), 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 are shared among our product lines to develop system level
solutions. This group 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 larger segments. Under the criteria in SFAS No. 131, we have four
reportable segments for fiscal 2003:
o Analog Segment;
o Information Appliance Segment;
o Enterprise Networking Segment;
o Enhanced Solutions Segment.
Prior to fiscal 2003, the Enterprise Networking and Enhanced Solutions
segments were previously included with all other segments 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.
<PAGE>
Marketing and Sales
- -------------------
We market our products globally to original equipment manufacturers and original
design manufacturers through a direct sales force. Major OEMs and ODMs include:
o Bosch; o LG Electronics; o Samsung;
o Dell; o L.M. Ericsson; o Siemens;
o Hewlett Packard; o Motorola; o Sony; and
o IBM; o Nokia; o Sony - Ericsson Mobile Communication.
o Kyocera; o Quanta;
There has been an increasing trend in the technology industry where OEMs
use contract manufacturers to build their products and ODMs 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 50 percent of our
total worldwide sales are generated 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, Japan
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 Arrow accounted for 10
percent of total net sales in fiscal 2003 as a result of its acquisition of
Pioneer in February, 2003. In addition, the distributor Avnet accounted for
approximately 10 percent of total net sales in fiscal 2003 and 2002. No one
customer or distributor accounted for 10 percent or more of total net sales in
fiscal 2001.
Backlog
- -------
In accordance with industry practice, we frequently revise semiconductor backlog
quantities and shipment schedules under outstanding purchase orders to reflect
changes in customer needs. We rarely formally enforce binding agreements for the
sale of specific quantities at specific prices that are contractually subject to
price or quantity revisions, consistent with industry practice. For these
reasons, we do not believe it is meaningful to disclose the amount of backlog at
any particular date.
Seasonality
- -----------
We are affected by the seasonal trends of the semiconductor and related
industries. We typically experience sequentially lower sales in our first and
third fiscal quarters, primarily due to customer vacation and holiday schedules.
Sales usually reach a seasonal peak in our fourth fiscal quarter. Fiscal 2003
was consistent with these trends, although market conditions for the
semiconductor industry were improved over fiscal 2002.
<PAGE>
Manufacturing
- -------------
The design of semiconductor and integrated circuit products is shaped by general
market needs and customer requirements. Following product design and
development, we 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 two facilities in Southeast Asia. During the second quarter of
fiscal 2003, we began construction of an assembly and test facility in China to
expand our business presence in the Asia markets. 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 the development of new analog and mixed-signal
technology-based products for applications aimed at wireless handsets, displays,
imaging and human interface and information infrastructure. 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, our 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.
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 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 $435.6 million for fiscal 2003, or 26 percent of sales, compared to $441.0
million for fiscal 2002, or 30 percent of sales, and $435.6 million for fiscal
2001, or 21 percent of sales. These amounts exclude in-process R&D charges of
$0.7 million related to the acquisition of DigitalQuake in fiscal 2003, $1.3
million related to the acquisitions of Fincitec, ARSmikro and Wireless Solutions
Sweden in fiscal 2002 and $16.2 million related to the acquisitions of innoComm
Wireless and Vivid Semiconductor in fiscal 2001. These in-process R&D charges
are included in our consolidated statements of operations as a component of
special items.
<PAGE>
During fiscal 2003, we devoted approximately 79 percent of our R&D effort
towards new product development and 21 percent towards the development of
process and support technology. Compared to fiscal 2002, this represents a 1
percent increase in spending for new product development and an 11 percent
decrease towards the development of process and support technology. A
significant and increasing portion of our R&D efforts will be aimed in the
future at developing new analog products.
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 similar
corresponding license from the other party and 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 no single license agreement is
material to us, either in terms of royalty payments due or payable or
intellectual property rights granted or received.
Employees
- ---------
At May 25, 2003, we employed approximately 9,800 people of whom approximately
4,400 were employed in the United States, 1,200 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
- -----------
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 Koninklijke (Royal) Philips Electronics,
Matsushita, Motorola, NEC, Samsung and Toshiba. We also compete with a large
number of corporations such as Texas Instruments, ST Microelectronics, Maxim,
Analog Devices and Linear Technology that sell competing products into some of
the same markets that we target. 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 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.
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" to 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 statutes and regulations governing the use, storage, handling,
discharge or disposal of toxic, volatile or otherwise hazardous chemicals used
in our manufacturing processes.
<PAGE>
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. Wafer fabrication capacity utilization for fiscal
2003, based on wafer starts, was 71 percent, as production activity increased in
response to improved business conditions in the semiconductor industry. This
compares with wafer fabrication capacity utilization for fiscal 2002 of 55
percent when production activity was much lower due to weaker business
conditions in the semiconductor industry. 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.
During the second quarter of fiscal 2003, we began construction of an assembly
and test facility in Suzhou, China to expand our business presence in the Asia
markets. The facility is expected to be completed and operational in fiscal
2004.
Our principal administrative and research facilities are located in Santa
Clara, California. Our regional headquarters for Worldwide Marketing and Sales
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; Irvine, California; Rochester, New York;
Calabasas, California; Kirkland, Washington; Salem, New Hampshire;
Federal Way, Washington; Longmont, Colorado; San Diego, California;
Fort Collins, Colorado; Nashua, New Hampshire; Santa Clara, California;
Grass Valley, California; Norcross, Georgia; South Portland, Maine;
Indianapolis, Indiana; Phoenix, Arizona; Tucson, Arizona;
and at overseas locations including China, Estonia, Finland, Germany, India,
Israel, Japan, the Netherlands, Sweden, Taiwan and the United Kingdom. We own
our manufacturing facilities and our corporate headquarters. In general, we
lease most of our sales and administrative offices.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
We currently are a party to various legal proceedings, including those noted
below. While management currently believes that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a material adverse
effect on our financial position or overall trends in results of operations,
litigation is subject to inherent uncertainties, and unfavorable rulings could
occur. An unfavorable ruling could include money damages or an injunction
prohibiting us from selling one or more products. Were an unfavorable ruling to
occur, there exists the possibility of a material adverse impact on the net
income of the period in which the ruling occurs, or future periods.
Tax Matters
- -----------
The IRS is in the process of examining our tax returns for fiscal years 1997
through 2000. At the end of fiscal 2003, there were no outstanding unresolved
issues with the IRS from prior audits and examinations. We are in the process of
undergoing a tax audit in the Netherlands and from time to time our tax returns
are audited in the U.S. by state agencies and at international locations by
local tax authorities. We believe we have made adequate tax payments and/or
accrued adequate amounts in our financial statements to cover any deficiencies
the IRS or other government agencies may find in these audits.
Environmental Matters
- ---------------------
We have 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. In addition to the Santa Clara site, we have been
designated from time to time 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 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 have also assumed 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 can be reasonably estimated. The amount of all
environmental charges to earnings, including charges relating to the Santa Clara
site remediation, excluding 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.
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
seeks 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 appealed the
dismissal of the case and upon appeal, the U.S. Court of Appeals for the third
circuit reversed the District Court's dismissal. Our petition for a panel
rehearing and/or rehearing en banc was denied by the Appeals Court in April
2003. Our motion to stay the issuance of the Appeals Court mandate to the
District Court pending our petition to the U.S. Supreme Court was denied in May
2003. We intend to continue to contest the case through all available means.
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 our 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 are presently
seeking to certify a medical monitoring class, which we are opposing. Discovery
in the case is proceeding and we intend to defend this action vigorously.
<PAGE>
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.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT *
Name Current Title Age
- ---- ------------- ---
Kamal K. Aggarwal (1) Executive Vice President, Central 65
Technology and Manufacturing Group
Jean-Louis Bories (2) Executive Vice President and General Manager, 48
Information Appliance Group
Lewis Chew (3) Senior Vice President, Finance and Chief 40
Financial Officer
John M. Clark III (4) Senior Vice President, General Counsel 53
and Secretary
Brian L. Halla (5) Chairman of the Board, President and 56
Chief Executive Officer
Detlev J. Kunz (6) Senior Vice President and General Manager, 52
Worldwide Marketing and Sales
Donald Macleod (7) Executive Vice President and Chief 54
Operating Officer
Suneil V. Parulekar (8) Senior Vice President, Analog Group 55
Ulrich Seif (9) Senior Vice President and Chief 45
Information Officer
Edward J. Sweeney (10) Senior Vice President, Human Resources 46
* all information as of May 25, 2003, the last day of the 2003 fiscal year.
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. Effective with the beginning of fiscal 2004, Mr. Bories was named
Senior Vice President, Displays and Wireless.
(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.
<PAGE>
(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.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
See information appearing in 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 11, 2003 was $22.52. At July 11, 2003, the number of
record holders of our common stock was 7,831.
During the past three fiscal years, we have not sold any unregistered
securities.
The following table summarizes share and exercise price information about
our equity compensation plans as of May 25, 2003.
<TABLE>
<CAPTION>
Number of Securities
Number of Securities Weighted Average Remaining Available For
To Be Issued Upon Exercise Price of Future Issuance Under Equity
Plan Category Exercise of Outstanding Compensation Plans
Outstanding Options, Options, Warrants (excluding securities
Warrants, and Rights and Rights reflected in column (a))
(a) (b) (c)
------------------------ --------------------- ------------------------------
<S> <C> <C> <C>
Equity Compensation plans approved by
Shareholders:
Option Plans (1) 12,967,271 $26.07 3,141,343
Employee Stock Purchase Plans - - 5,206,961
Director Stock Plan - - 95,824
Equity Compensation plans not
approved by Shareholders:
Option Plans (2) 33,541,463 $27.51 26,668,095
Restricted Stock Plan - - 1,049,917
--- -------------- ----- --------------------- ------------- ----------------
Total 46,508,734 38,162,140
=== ============== ===== ===================== ============= ================
</TABLE>
(1) Includes options issued under the Stock Option Plan, Executive Officer
Stock Option Plan and Director Stock Option Plan.
(2) Includes options issued under the 1997 Employees Stock Option Plan,
options assumed in the Mediamatics, Cyrix and ComCore acquisitions, options
granted to our former chairman upon his retirement, and options issued as part
of the consideration paid for DigitalQuake.
The 1997 Employees Stock Option Plan provides for the grant of nonqualified
stock options to employees who are not executive officers of the company.
Options are granted at market price on the date of grant and can 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. Options can vest after six months but most
granted through the end of fiscal 2003 begin vesting after one year and ratably
thereafter. At the end of fiscal 2003, there were 33,108,247 shares outstanding
under this plan with a weighted-average exercise price of $27.58.
Options assumed in acquisitions:
We assumed Cyrix's outstanding obligations under its 1988 incentive stock
plan in our acquisition of Cyrix in 1997. Each option under the Cyrix plan
converted into the right or option to purchase 0.825 shares of our common stock,
and the exercise price was adjusted accordingly. These options expire up to a
maximum of ten years after grant, subject to earlier expiration upon termination
of employment. No more options have been or will be granted under this Cyrix
plan. At the end of fiscal 2003, there were Cyrix options to purchase 158,638
shares remaining outstanding with a weighted-average exercise price of $22.90.
<PAGE>
We assumed Mediamatics' and ComCore's outstanding obligations under their
stock option plans and stock option agreements with their employees and
consultants when we acquired Mediamatics in fiscal 1997 and ComCore in fiscal
1998. Each optionee under these plans received an option for equivalent shares
of our common stock based on the exchange rate used in the applicable
acquisition agreements. These options expire up to a maximum of ten years after
the date of grant, subject to earlier expiration upon termination of employment.
No more options have been or will be granted under these plans. At the end of
fiscal 2003, options to purchase 2,883 shares with a weighted-average exercise
price of $2.85 were outstanding under the Mediamatics plans and options to
purchase 997 shares with a weighted average exercise price of $0.50 were
outstanding under the ComCore plan.
OTHER EQUITY COMPENSATION PLANS: The option granted to our former chairman was
granted in 1995 upon his retirement after more than twenty years of service. The
option was granted at $27.875 per share, the market price on the date of grant,
expires ten years and one day after grant, and became exercisable ratably over a
four-year period. At the end of fiscal 2003, there were options to purchase
140,000 shares outstanding under this grant.
In connection with the DigitalQuake acquisition in fiscal 2003, we granted
options for 130,698 shares to five founding shareholders of DigitalQuake. These
options were granted at the market price on the date of grant and become
exercisable in two equal installments, one and two years after the date of
grant. The option gives the DigitalQuake founding shareholders the right to
receive all or a portion of their installment payments of the purchase price
paid for DigitalQuake in cash or stock, subject to remaining employed by
National.
Our Restricted Stock Plan authorizes issuance of restricted 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 considered important to
the company. The restrictions expire over time, ranging from two to six years
after issuance.
<PAGE>
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
In Millions, Except Per Share Amounts and May 25, May 26, May 27, May 28, May 30,
Employee Figures 2003 2002 2001 2000 1999
----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $1,672.5 $1,494.8 $2,112.6 $2,139.9 $1,956.8
Operating costs and expenses 1,697.0 1,652.6 1,887.3 1,795.1 3,040.6
----------- ----------- ------------ ----------- ------------
Operating income (loss) (24.5) (157.8) 225.3 344.8 (1,083.8)
Interest income (expense), net 14.1 21.3 52.0 15.3 (2.2)
Other income (expense), net (12.9) 13.1 29.8 275.2 0.6
----------- ----------- ------------ ----------- ------------
Income (loss) before income taxes (23.3) (123.4) 307.1 635.3 (1,085.4)
Income tax expense (benefit) 10.0 (1.5) 61.4 14.5 (75.5)
=========== =========== ============ =========== ============
Net income (loss) $ (33.3) $ (121.9) $245.7 $620.8 $(1,009.9)
=========== =========== ============ =========== ============
Earnings (loss) per share:
Basic $(0.18) $(0.69) $1.40 $3.58 $(6.04)
=========== =========== ============ =========== ============
Diluted $(0.18) $(0.69) $1.30 $3.24 $(6.04)
=========== =========== ============ =========== ============
Weighted-average common and potential common
shares outstanding:
Basic 181.8 177.5 175.9 173.6 167.1
=========== =========== ============ =========== ============
Diluted 181.8 177.5 188.4 191.7 167.1
=========== =========== ============ =========== ============
FINANCIAL POSITION AT YEAR-END
Working capital $ 913.8 $ 804.3 $ 803.2 $ 791.1 $ 324.2
Total assets $2,244.6 $2,288.8 $2,362.3 $2,382.2 $2,044.3
Long-term debt $ 19.9 $ 20.4 $ 26.2 $ 48.6 $ 416.3
Total debt $ 22.2 $ 25.9 $ 55.6 $ 80.0 $ 465.6
Shareholders' equity $1,706.0 $1,781.1 $1,767.9 $1,643.3 $ 900.8
- -------------------------------------------------------- ----------- ------------ ------------ ------------ -----------
OTHER DATA
Research and development $ 435.6 $ 441.0 $ 435.6 $ 386.1 $ 471.3
Capital additions $ 171.3 $ 138.0 $ 239.5 $ 168.7 $ 317.5
Number of employees (in thousands) 9.8 10.1 10.3 10.5 11.6
- -------------------------------------------------------- ----------- ------------ ------------ ------------ -----------
</TABLE>
We did not pay cash dividends on our common stock in any of the years presented
above.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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:
a) 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 amount 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 a provision for estimated future returns at the time of shipment.
Approximately 50 percent of our semiconductor product sales are made
through distributors. We have agreements with our distributors that cover
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 returns
activity has been materially consistent with the provisions we have 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, the fee is fixed or determinable, collection of the fee is
reasonably assured and no further obligations to the other party exist.
b) 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 with the ability to
make reliable estimates. To date the actual amount of obsolete or
unmarketable inventory has been materially consistent with previously
estimated write-downs we have recorded. We also evaluate the carrying value
of inventory for lower-of-cost-or-market on an individual product basis,
and these evaluations are intended to identify any difference between net
realizable value and standard cost. Net realizable value is determined as
the selling price of the product less the estimated cost of disposal. When
necessary, we reduce the carrying value of inventory to 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.
<PAGE>
c) 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 and amortizable intangible assets. 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 the carrying value may not be fully
recoverable. Other intangible assets subject to this evaluation include
developed technology we have acquired, patents and technology licenses. We
are required to make judgments and assumptions in identifying those events
or changes in circumstances that may trigger impairment. Some of the
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 changes 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 generally weak current economic climate, we are
periodically evaluating whether an impairment of our amortizable 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 amortizable 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. 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 our annual review for goodwill impairment in the fourth
quarter of fiscal 2003 and tested for goodwill impairment in each reporting
unit that contains goodwill. We also performed additional tests of our
wireless reporting unit in February 2003 when we announced our intention to
sell our cellular baseband business unit and in May 2003 when we
subsequently announced the immediate closure of that business unit. The
cellular baseband business unit was a part of the wireless reporting unit.
Our tests found that no impairment existed. 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.
Reporting units with goodwill include our wireless, displays, power
management and data conversion business units, which are operating segments
within our Analog reportable segment, and our Enterprise Networking
reporting unit, which is a reportable segment. Our estimates 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, or
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 net equity and results of operations.
d) Deferred 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. 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.
<PAGE>
We consider past performance, expected future taxable income and prudent
and feasible tax planning strategies in assessing the amount of the
valuation allowance. Our forecast of expected future taxable income is
based over such future periods that we believe can be reasonably estimated.
Changes in market conditions that differ materially from our current
expectations and changes in future tax laws in the U.S. and in
international jurisdictions may cause us to change our judgements of future
taxable income. These changes, if any, may require us to adjust our
existing tax valuation allowance higher or lower than the amount we have
recorded.
o Overview
- -------------
During fiscal 2003, we began a series of strategic profit-improvement actions
designed to increase our return on investments and streamline our cost
structure. Our main focus is on analog products and leveraging our analog
strengths and R&D spending on key growth markets utilizing analog products. The
main actions taken during the year were the closure of the cellular baseband
business within our Wireless business unit and the decision to sell our
Information Appliance business unit, consisting primarily of the GeodeTM family
of processor products. The discussion below includes historical information
which does not completely reflect our current strategic positioning and focus.
We recorded net sales of $1.7 billion in fiscal 2003. This compares to $1.5
billion in fiscal 2002 and $2.1 billion in fiscal 2001. The increase in sales
for fiscal 2003 over sales for fiscal 2002 came from higher demand, particularly
from customers in our wireless handset market, one of our target markets, as
business conditions for the semiconductor industry have slowly improved from a
year ago, although general market and worldwide economic conditions have been
essentially flat.
The decline in sales for fiscal 2002 from sales for fiscal 2001 came from
lower demand seen broadly across semiconductor markets, as business conditions
in the semiconductor industry remained weak throughout fiscal 2002. In contrast,
market conditions were very strong in the first half of fiscal 2001, but as we
entered into the second half of fiscal 2001, market conditions for the
semiconductor industry quickly weakened.
In fiscal 2003, we recorded a net loss of $33.3 million. This compares to a
net loss of $121.9 million in fiscal 2002 and net income of $245.7 million in
fiscal 2001. The improvement in our operating results for fiscal 2003 compared
to fiscal 2002 was primarily driven by increased sales as business conditions
for the semiconductor industry have slowly improved since last year. Our
operating results for fiscal 2002 were primarily affected by lower sales caused
by the overall economic slowdown experienced in fiscal 2002.
The net loss for fiscal 2003 includes $44.3 million of special items. The
special items include $0.7 million for in-process R&D charges related to the
acquisition in the second quarter of DigitalQuake (See Note 4 to the
Consolidated Financial Statements) and a net charge of $43.6 million related to
cost reduction actions (See Note 3 to the Consolidated Financial Statements).
The cost reduction actions were taken as part of our strategic profit
improvement actions. The fiscal 2003 net loss also has $13.8 million of charges
included in R&D expenses for the writedown of technology licenses (See the
Research and Development section below).
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 to the Consolidated Financial Statements). Special items also included a
net charge of $8.0 million related to cost reduction actions (See Note 3 to the
Consolidated Financial Statements). Net income for fiscal 2001 included special
items of $51.9 million, which included $16.2 million for in-process R&D charges
related to acquisitions during the year (See Note 4 to the Consolidated
Financial Statements) and a $35.7 million net charge for cost reduction actions
(See Note 3 to the Consolidated Financial Statements).
o Sales
- --------------
The following discussion includes comments pertaining to our reportable
segments, which are described in Note 13 to the Consolidated Financial
Statements.
The increase in sales for fiscal 2003 over sales for fiscal 2002 came from
higher unit volume throughout the year, up 29 percent from the previous year.
This unit volume increase was partially offset by lower average selling prices
that were down 13 percent from the previous year, as we saw a shift in product
mix toward lower priced products, combined with some price declines. We are
encouraged by the sales increase which occurred during an environment of overall
flat economic conditions and the SARS outbreak.
<PAGE>
The Analog segment, which represents 77 percent of our total sales,
experienced an increase in sales of 15 percent for fiscal 2003 over sales for
fiscal 2002. The increase came primarily from higher volume as unit shipments
increased 30 percent from last year. However, average selling prices declined 11
percent from last year, due to a shift in unit mix toward lower priced products
and some modest price declines. A significant portion of these lower priced
products were a variety of high performance analog products offered in very
small form factors, made possible by our advanced chip-packaging technologies.
Although these products may be relatively lower in price, their gross margins
are relatively higher within our portfolio of products. Within the Analog
segment, sales of audio, power management and amplifier products increased in
fiscal 2003 by 41 percent, 45 percent and 23 percent, respectively, from sales
in fiscal 2002. Products for wireless handsets largely drove the sales growth in
power management products. Sales of application-specific wireless products,
primarily radio frequency building blocks, were flat year on year.
Sales for fiscal 2003 for the Information Appliance segment increased 6
percent from sales for fiscal 2002. The increase came from a higher volume of
GeodeTM integrated processor products and integrated DVD products that rose 57
percent from the previous year. Average selling prices declined 19 percent from
last year for both GeodeTM and integrated DVD products. The GeodeTM product
family is the primary component of the Information Appliance business we are
seeking to sell (See Note 3 to the Consolidated Financial Statements).
For fiscal 2003, sales increased in all geographic regions compared to
sales for fiscal 2002. The increases were 28 percent in Japan, 17 percent in the
Asia Pacific region, 5 percent in Europe and 3 percent in the Americas. Sales
for fiscal 2003 as a percentage of total sales increased to 46 percent for the
Asia Pacific region and 11 percent in Japan, while decreasing to 23 percent in
the Americas and 20 percent in Europe. We have found that many of our customers
have manufacturing operations in the Asia Pacific region that make their
purchases in the Asia Pacific region, leading to sales increases in the Asia
Pacific region with decreases in the Americas and Europe. Foreign
currency-denominated sales in fiscal 2003 were favorably affected by foreign
currency exchange rate fluctuations as the Japanese yen, pound sterling and euro
all strengthened against the dollar, but the impact on overall fiscal 2003 sales
was minimal since less than a quarter of our total sales was denominated in
foreign currency.
Our sales for fiscal 2002 declined significantly from sales for fiscal
2001, 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 the
decreased shipment volume. 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 to gain increased market share in target areas.
The Analog segment, which represented 75 percent of our total sales for
fiscal 2002, experienced a decline in sales of 26 percent 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. The year-to-year
slowdown in demand for personal computers and PC-related products was a
significant cause of the decline in sales for the Information Appliance segment
in fiscal 2002 since many of our information appliance products are used in the
PC marketplace. In addition, the market adoption of emerging information
appliances that are not PCs was 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 once again the impact from this
was minimal since less than a quarter of our total sales for fiscal 2002 was
denominated in foreign currency.
o Gross Margin
- -----------------
Gross margin as a percentage of sales was 43 percent in fiscal 2003 compared to
37 percent in fiscal 2002 and 49 percent in fiscal 2001. The increase in gross
margin for fiscal 2003 over fiscal 2002 was primarily driven by higher factory
utilization. Wafer fabrication capacity utilization during fiscal 2003 was 71
percent, compared to 55 percent in fiscal 2002 when production activity was much
lower due to weaker business conditions. Improvement in overall product mix and
lower manufacturing costs in fiscal 2003 also offset an unfavorable impact on
gross margin of actual price declines on selected products.
<PAGE>
The decline in gross margin for fiscal 2002 from fiscal 2001 was primarily
driven by lower factory utilization. Wafer fabrication capacity utilization
during fiscal 2002 was 55 percent, as production activity was reduced
considerably by weakened business conditions. 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 also saw lower margins from some products in fiscal 2002, caused mostly
by a shift in product sales mix and to a lesser extent by pricing pressure.
o Research and Development
- -----------------------------
Our research and development expenses in fiscal 2003 were $435.6 million, or 26
percent of sales, compared to $441.0 million in fiscal 2002, or 30 percent of
sales, and $435.6 million in fiscal 2001, or 21 percent of sales. These amounts
exclude in-process R&D charges of $0.7 million in fiscal 2003, $1.3 million in
fiscal 2002 and $16.2 million in fiscal 2001 related to acquisitions (see Note 4
to the Consolidated Financial Statements). The in-process R&D charges are
separately included as a component of special items in the consolidated
statements of operations. R&D expenses for fiscal 2003 also include $13.8
million of charges for the writedown of technology licenses. Of this total, $5.0
million came from the technology license with TSMC that was impaired when we
restructured the agreement and entered into a new agreement to use TSMC as our
supplier of wafers for products with feature sizes of 0.15-micron and below. In
addition, we reached alternative arrangements with two other R&D partners that
led to the impairment of additional technology licenses for the remaining $8.8
million charge. Excluding these charges, R&D expenses for fiscal 2003 were lower
by 4 percent from R&D expenses for fiscal 2002. The lower R&D expenses reflect
our effort to control the level of expenditures and prioritize spending toward
more critical projects, as we focus our R&D spending on analog products. During
fiscal 2003, we devoted 79 percent of our R&D effort towards new product
development and 21 percent towards the development of process and support
technology. Compared to fiscal 2002, this represents a one percent increase in
spending for new product development and an 11 percent decrease in spending for
process and support technology. We continue to invest in the development of new
analog and mixed-signal technology-based products for applications in the
wireless handsets, displays, other portable devices and information
infrastructure markets.
Higher R&D expenses in fiscal 2002 over fiscal 2001 resulted mainly from
higher fees paid under the license agreement with TSMC that was subsequently
restructured in fiscal 2003. The agreement, which began in fiscal 2001, allowed
us to gain access to a variety of TSMC's subsequently advanced sub-micron
processes if and when those processes were developed by TSMC, for use in our
Maine facility as we desired.
o Selling, General and Administrative
- ----------------------------------------
Our selling, general and administrative expenses in fiscal 2003 were $270.3
million, or 16 percent of sales, compared to $260.9 million in fiscal 2002, or
18 percent of sales, and $324.7 million in fiscal 2001, or 15 percent of sales.
The overall increase in SG&A expenses for fiscal 2003 over expenses for fiscal
2002 was mainly due to higher payroll and employee benefit expenses. The
expenses for fiscal 2003 also reflect higher expenses from foreign currency
remeasurement losses of $3.5 million compared to a $0.2 million net gain in
fiscal 2002.
The decline in SG&A expenses for fiscal 2002 from the fiscal 2001 level
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. In
addition, the fiscal 2001 SG&A expenses included a $20.5 million expense
associated with a charitable donation of equity securities given 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 SFAS No. 142, "Goodwill and Other Intangible
Assets," at the beginning of fiscal 2002.
o Cost-Reduction Programs and Restructuring of Operations
- ------------------------------------------------------------
For fiscal 2003, we recorded charges of $45.7 million related to the series of
strategic profit-improvement actions that we announced in February 2003. These
actions, which were targeted at saving approximately $30 million per quarter,
are designed to streamline our cost structure and enhance shareholder value by
prioritizing R&D spending on higher-margin analog businesses. We also completed
certain activities by the end of the fiscal year that reduced our estimate for
an environmental liability for costs related to a prior exit action, which
resulted in a credit of $2.1 million. The credit partially offset the charges
for the fiscal 2003 cost reduction actions. See Note 3 to the Consolidated
Financial Statements for a more complete discussion of these actions and related
charges, as well as a discussion of activity during fiscal 2003 related to
previously announced actions.
o Charge for Acquired In-Process Research and Development
- ------------------------------------------------------------
In connection with our acquisition during fiscal 2003 of DigitalQuake, Inc., we
allocated $0.7 million of the total purchase price to the value of in-process
R&D. 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.
These amounts were expensed upon acquisition because technological feasibility
had not been established and no alternative uses existed for the technologies.
For more specific information on each acquisition, see Note 4 to the
Consolidated Financial Statements.
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 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 the estimated total 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.
<PAGE>
o Interest Income and Interest Expense
- -----------------------------------------
For fiscal 2003, we earned net interest income of $14.1 million compared to
$21.3 million in fiscal 2002 and $52.0 million in fiscal 2001. The decrease in
net interest income for fiscal 2003 was due to lower average interest rates on
higher average cash balances during fiscal 2003 compared to fiscal 2002.
Offsetting interest expense was slightly lower for fiscal 2003 as we continued
to reduce our outstanding debt balances. The decrease in net interest income for
fiscal 2002 compared to fiscal 2001 was 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 reduced our
outstanding debt balances.
o Other Income (Expense), Net
- --------------------------------
We recorded other expense, net of $12.9 million for fiscal 2003 and other
income, net of $13.1 million for fiscal 2002 and $29.8 million for fiscal 2001.
The components of other expense, net for fiscal 2003 included $6.8 million of
net intellectual property income, which was offset by a $15.9 million charge for
our share in net losses of equity-method investments, a $1.6 million net loss
from other investments, and $2.2 million from other miscellaneous losses. Net
intellectual property income for fiscal 2003 included $3.9 million from a single
significant licensing agreement with a North American company and the remainder
from a number of individually small agreements. The components of other income,
net for fiscal 2002 included $11.6 million of net intellectual property income,
a $9.4 million net gain from investments, a $7.3 million charge for our share in
net losses of equity-method 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. Other income, net for fiscal 2001 included a $30.6 million net gain
from investments, $6.3 million of net intellectual property income, a $3.6
million charge for our share in net losses of equity-method investment and $3.5
million from other miscellaneous losses. The net gain from 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.
o Income Tax Expense
- -----------------------
We recorded an income tax expense of $10.0 million in fiscal 2003, compared to
an income tax benefit of $1.5 million in fiscal 2002 and income tax expense of
$61.4 million in fiscal 2001. The fiscal 2003 tax expense represents non-U.S.
income taxes on international income. We did not incur U.S. income taxes. The
fiscal 2002 tax benefit consisted of $11.5 million expected refund of U.S. taxes
as a result of the new federal tax act, which was mostly offset by $10.0 million
of tax expenses on international income. Our ability to realize net deferred tax
assets ($80.8 million at May 25, 2003) is primarily dependent on our ability to
generate future U.S. taxable income. We believe that it is more likely than not
we should be able to generate sufficient taxable income in the U.S. to utilize
these tax assets, but it is possible that we will be unable to do so and
therefore unable to realize the benefits of recognized tax assets. This could
result in future charges to increase the deferred tax asset valuation allowance.
<PAGE>
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
currency denominated 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.
At certain of our international locations, we maintain defined benefit
pension plans that are operated in accordance with local statutes and practices.
We record an adjustment for minimum pension 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 standards. For fiscal
2003, the adjustment we recorded was $57.5 million. A corresponding amount is
recorded in the consolidated financial statements as a component of accumulated
other comprehensive loss. This increased the unfunded benefit obligation from
$56.1 million in fiscal 2002 to $117.1 million in fiscal 2003. The major cause
of this growth was an increase in the accumulated benefit obligation due to a
reduction in the assumed discount rate and the effect of some fixed rate
increases in benefits in excess of current inflation rates as determined under
the terms of the plan. Concurrently, lower than expected rate of return on plan
assets due to a decline in interest rates and investment returns in the past few
years also reduced plan assets. As we have done in the past, we will continue to
fund the plan in the future to adequately meet the minimum funding requirements
under local statutes.
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 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 immediately
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 25, 2003.
<PAGE>
o Liquidity and Capital Resources
- ------------------------------------
As of May 25, 2003, cash, cash equivalents and short-term marketable investments
were $915.4 million, up from $834.4 million at May 26, 2002. Cash and cash
equivalents increased $120.9 million in fiscal 2003 compared to a decrease of
$136.5 million in fiscal 2002 and an increase of $39.0 million in fiscal 2001.
The primary factors contributing to these changes are described below:
We generated cash from operating activities of $221.1 million during fiscal
2003 compared to $107.6 million in fiscal 2002 and $491.8 million in fiscal
2001. For fiscal 2003, cash was generated from operating activities because the
positive impact from the net loss, after adjusting for noncash items (primarily
depreciation and amortization), more than offset the negative impact that came
from changes in working capital components. The negative changes from working
capital components for fiscal 2003 came primarily from decreases in accounts
payable and accrued expenses. For fiscal 2002, operating cash was generated
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. For fiscal 2001, operating cash was
generated primarily from net income adjusted for noncash expenses, which was
partially offset by the negative impact from changes in working capital
components.
Our investing activities used cash of $137.5 million in fiscal 2003,
compared to $330.6 million used in fiscal 2002 and $302.2 million used in fiscal
2001. Major uses of cash in fiscal 2003 included the acquisition of DigitalQuake
for $11.0 million, net of cash received (See Note 4 to the Consolidated
Financial Statements) and investment in property, plant and equipment of $171.3
million, primarily for machinery and equipment, and CAD software licenses, which
were offset by the net sale and maturity of available-for-sale securities of
$49.2 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 to the Consolidated Financial Statements).
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 to the Consolidated
Financial Statements).
Our financing activities generated cash of $37.3 million for fiscal 2003
and $86.5 million in fiscal 2002, while they used cash of $150.6 million in
fiscal 2001. The primary source of cash in fiscal 2003 came from the issuance of
common stock under employee benefit plans in the amount of $42.7 million, which
was partially offset by the repayment of $5.4 million of our outstanding debt
balances. The primary source of cash in fiscal 2002 was from the issuance of
common stock under employee benefit plans in the amount of $107.1 million, 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.
We foresee continuing cash outlays for plant and equipment going into the
first half of fiscal 2004, with our primary focus on new capabilities that
support our target growth markets, as well as improvements to provide more
capacity in selected areas and improved manufacturing efficiency and
productivity. During fiscal 2003, we began construction of an assembly and test
facility in China to expand our business presence in the Asia markets. We
currently expect our fiscal 2004 capital expenditure amount to be similar to the
fiscal 2003 amount. However, we will continue to manage capital expenditures in
light of business conditions. We expect existing cash and investment balances,
together with existing lines of credit, to be sufficient to finance planned
capital investments in fiscal 2004.
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, significant declines
in overall economic conditions could lead to deterioration in the quality of
customer receivables. In addition, major declines in financial markets would
likely 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 25, 2003:
<TABLE>
<CAPTION>
(In Millions) Fiscal Year: 2009 and
2004 2005 2006 2007 2008 thereafter Total
--------------- ---------- --------- --------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Contractual obligations:
Debt obligations $ 2.3 $19.9 $ - $ - $ - $ - $ 22.2
Noncancellable
operating leases 22.1 17.9 12.4 9.3 6.1 5.3 73.1
Purchase obligations under:
CAD software licensing
agreements 20.1 20.1 1.3 - - - 41.5
Fairchild manufacturing
agreement 2.8 - - - - - 2.8
Other 1.5 1.5 0.8 - - - 3.8
--------------- ---------- --------- --------- -------- ------------- ----------
Total $48.8 $59.4 $14.5 $9.3 $6.1 $5.3 $143.4
=============== ========== ========= ========= ======== ============= ==========
Commercial Commitments:
Standby letters of credit
under bank multicurrency
agreement $ 11.9 - - - - - $ 11.9
=============== ========= ========= ======== ========== ============== ===========
</TABLE>
In addition, as of May 25, 2003, capital purchase commitments were $56.4
million.
<PAGE>
o Recently Issued Accounting Pronouncements
- ----------------------------------------------
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." 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. This
statement will be effective for our fiscal year 2004. We are currently analyzing
this statement and have not yet determined its impact on our consolidated
financial statements.
In April 2003, the Financial Accounting Standards Board issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
will be effective in fiscal 2004 for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. We
do not expect the adoption of this statement to have a material impact on our
consolidated financial position or results of operations.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 changes the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new statement requires that those instruments be classified as
liabilities in statements of financial position. Most of the guidance in SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of our second
quarter for fiscal 2004. We do not expect the adoption of this statement to have
a material impact on our consolidated financial position or results of
operations.
o Outlook
- ------------
Although overall economic conditions remain flat and uncertain, demand levels in
fiscal 2003 were better as business conditions in the semiconductor industry
slowly improved from a year ago. We experienced sequential quarterly growth in
new orders during the second half of fiscal 2003, especially for our Analog
segment where orders for power management, amplifier and audio products
experienced the greatest increases. While new orders grew overall in the just
completed fourth quarter, we saw delivery dates for orders placed by customers
begin to extend further out in time. As we finished the fiscal year, we also saw
a drop in the weekly run rate of total orders and turns orders, which are orders
received with delivery requested in the same quarter. As a result, our opening
13-week backlog entering the first quarter of fiscal 2004 was slightly lower
than it was at the beginning of the fiscal 2003 fourth quarter. Historically,
sales in our first quarter have been down from the preceding fourth quarter due
to the summer vacation season. Turns orders are typically lower during a portion
of the summer season when our customers have lower production activities. Based
on these seasonal factors, we anticipate that sales for the first quarter of
fiscal 2004 will be flat to down by 4 percent from the fiscal 2003 fourth
quarter. If the level of turns orders is not achieved or the rate of new orders
declines, we may not be able to achieve the level of sales expected for the
first quarter of fiscal 2004. We also expect gross margin percentage to be flat
to slightly down from gross margin achieved in the recent fourth quarter,
depending on the sales level. We believe we have the ability to quickly adjust
the level of production activity in our manufacturing facilities to align with
changes in order levels and economic conditions during the quarter, if
necessary. However, the mix of available product may not exactly match the mix
of product requested on a short-term basis.
Since we first launched the series of profit-improvement actions back in
February 2003 designed to improve our return on investments and streamline our
cost structure, we have achieved some significant savings in our future
operating expenses. To date, we have restructured our technology licensing
agreement with TSMC, essentially eliminating the quarterly fees we were paying
to have access to TSMC's advanced sub-micron processes for use in our Maine
facility. We also announced the closure of the cellular baseband business in May
2003 and reduced our worldwide workforce by 760 positions by the end of the
fiscal year. So far, these actions are expected to result in a savings of
approximately $25 million per quarter, most of which will be reflected in
reduction in our R&D expenses. Accordingly, we expect R&D expenses in the first
quarter of fiscal 2004 to be in the range of $91-$94 million, with SG&A expenses
in the range of $64-$66 million. As a part of the plan, we announced we would
seek to sell the Information Appliance business, primarily consisting of the
GeodeTM family of products, and we are actively pursuing a sale of that
business, which we expect to complete by the end of the first quarter of fiscal
2004. If we are unable to sell the business, we will close the business unit.
Sale or closure of the business unit is expected to provide additional savings.
In the meantime we will continue to incur expenses associated with supporting
the business and its customers.
<PAGE>
o Risk Factors
- -----------------
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 cycles, 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 expect to 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.
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 Koninklijke (Royal) Philips
Electronics, Matsushita, Motorola, NEC, Samsung and Toshiba. We also compete
with a large number of corporations such as Texas Instruments, ST
Microelectronics, Maxim, Analog Devices and Linear Technology that sell
competing products into some of the same markets that we target. 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 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.
The wireless handset market continues to be important to our future growth
plans. New products are being developed to address new features and
functionality in handsets, such as color displays, advanced audio, lighting
features 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 worldwide handset
market is large, 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.
IF DEVELOPMENT OF NEW PRODUCTS IS DELAYED OR MARKET ACCEPTANCE IS BELOW
EXPECTATIONS, FUTURE OPERATING RESULTS MAY BE UNFAVORABLY AFFECTED. We believe
that continued focused investment in research and development, especially the
timely development and market acceptance of new analog products, is a key factor
to our successful growth and our ability to achieve strong financial
performance. 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 more highly integrated solutions
and building block products, both primarily based on our analog capabilities.
These products will continue to be targeted towards application in the wireless
handsets, displays, other portable devices and information infrastructure
markets.
ACQUISITIONS. We have made and will continue to consider making strategic
business investments and alliances and acquisitions, if necessary, to gain
access to key technologies that we believe augment our existing technical
capability or enable us to achieve faster time to market. Acquisitions and
investments involve risks and uncertainties that may unfavorably impact our
future financial performance. We may not be able to integrate and develop the
technologies we acquire as expected. If the technology is not developed in a
timely manner, we may be unsuccessful in penetrating target markets. In
addition, with any acquisition there are risks that future operating results may
be unfavorably affected by acquisition related costs, including in-process R&D
charges and incremental R&D spending.
EXPANSION OF OUR BUSINESS IN THE ASIA MARKETS. As noted in our discussion of
planned capital expenditures, as part of our efforts to expand our business
presence in the Asia markets, we began construction of an assembly and test
facility in China's Suzhou Industrial Park in the Jiangsu Province of China
during the second quarter of fiscal 2003. The facility is expected to provide
analog products quickly and cost effectively to our customers in China, as well
as other regions as necessary. The facility also will increase our overall
assembly and test capacity to support increasing product volume. Increases in
product volume are dependent upon demand from our customers. If we do not
increase product volume, lower than expected factory utilization, which results
in higher manufacturing cost per unit, will unfavorably impact operating
results. In addition, unexpected start-up expenses, inefficiencies and delays in
the start of production in the facility may reduce our expected future gross
margin.
<PAGE>
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:
- - fluctuations in foreign currency rates;
- - instability of foreign economies;
- - emerging infrastructures in foreign markets;
- - support required abroad for demanding manufacturing requirements;
- - foreign government instability and changes; and
- - U.S. and foreign laws and policies affecting trade and investment.
Although we did not experience 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 adverse effect on us in the past and they could
adversely affect us 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 and euro.
TAXES. From time to time, we have received notices of tax assessments from
certain governments of countries in which we operate. The IRS is in the process
of examining our tax returns for fiscal 1997 through 2000. We are also
undergoing a tax audit in the Netherlands. These governments or other government
entities may serve future notices of assessments on us and the amounts of these
assessments or our failure to favorably resolve such assessments may have a
material adverse effect on our financial condition or results of operations.
CURRENT WORLD EVENTS. Recent unrest in the many parts of the world including the
war in Iraq and terrorist activities worldwide have resulted in additional
uncertainty on the overall state of the world economy. There is no assurance
that the consequences from these events will not disrupt our operations either
in the U.S. or other regions of the world where we have operations. The outbreak
of the SARS illness could also adversely affect our business in Asia if it does
not continue to be contained. If there is a significant spread of SARS beyond
Asia, other aspects of our operations could be negatively impacted.
<PAGE>
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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements: Page
- --------------------- ----
Consolidated Balance Sheets at May 25, 2003 and May 26, 2002 33
Consolidated Statements of Operations for each of the years in the
three-year period ended May 25, 2003 34
Consolidated Statements of Comprehensive Income (Loss) for each of
the years in the three-year period ended May 25, 2003 35
Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended May 25, 2003 36
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended May 25, 2003 37
Notes to Consolidated Financial Statements 38
Independent Auditors' Report 67
Financial Statement Schedule:
For the three years ended May 25, 2003
Schedule II -- Valuation and Qualifying Accounts 73
Pursuant to Item 3-09 of Regulation S-X, we are required to file the separate
financial statements of iReady Corporation for the current fiscal year as part
of this Form 10-K because our share in the net losses of iReady in the amount of
$8.5 million exceeded 20 percent of our reported loss before income taxes of
$23.3 million for fiscal 2003. The current fiscal year of iReady does not end
until September 30, 2003. At such time as audited financial statements of iReady
become available, we will file an amendment to this Form 10-K to include the
financial statements of iReady. Neither iReady's losses nor its financial
condition or cash flows are expected to have a material effect on our results of
operations, financial condition or cash flows.
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 25, May 26,
In Millions, Except Share Amounts 2003 2002
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 802.2 $ 681.3
Short-term marketable investments 113.2 153.1
Receivables, less allowances of $38.2 in 2003 and $37.8 in 2002 137.1 131.7
Inventories 142.2 145.0
Deferred tax assets 66.0 58.7
Other current assets 20.5 38.3
------------- --------------
Total current assets 1,281.2 1,208.1
Property, plant and equipment, net 680.7 737.1
Goodwill 173.3 173.3
Other assets 109.4 170.3
------------- --------------
Total assets $2,244.6 $2,288.8
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2.3 $ 5.5
Accounts payable 107.0 123.7
Accrued expenses 208.5 226.7
Income taxes payable 49.6 47.9
------------- --------------
Total current liabilities 367.4 403.8
Long-term debt 19.9 20.4
Other noncurrent liabilities 151.3 83.5
------------- --------------
Total liabilities $538.6 $507.7
Commitments and contingencies
Shareholders' equity:
Common stock of $0.50 par value. Authorized 850,000,000 shares.
Issued and outstanding 183,572,388 in 2003 and 180,361,609 in 2002 $ 91.8 $ 90.2
Additional paid-in capital 1,461.3 1,415.3
Retained earnings 277.2 310.5
Unearned compensation (10.0) (12.8)
Accumulated other comprehensive loss (114.3) (22.1)
------------- --------------
Total shareholders' equity 1,706.0 1,781.1
------------- --------------
Total liabilities and shareholders' equity $2,244.6 $2,288.8
============= ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended May 25, May 26, May 27,
In Millions, Except Per Share Amounts 2003 2002 2001
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $1,672.5 $1,494.8 $2,112.6
Operating costs and expenses:
Cost of sales 946.8 941.4 1,075.1
Research and development 435.6 441.0 435.6
Selling, general and administrative 270.3 260.9 324.7
Special items 44.3 9.3 51.9
------------ ------------ ------------
Total operating costs and expenses 1,697.0 1,652.6 1,887.3
------------ ------------ ------------
Operating income (loss) (24.5) (157.8) 225.3
Interest income, net 14.1 21.3 52.0
Other income (expense), net (12.9) 13.1 29.8
------------ ------------ ------------
Income (loss) before income taxes (23.3) (123.4) 307.1
Income tax expense (benefit) 10.0 (1.5) 61.4
------------ ------------ ------------
Net income (loss) $ (33.3) $ (121.9) $ 245.7
============ ============ ============
Earnings (loss) per share:
Basic $(0.18) $(0.69) $1.40
Diluted $(0.18) $(0.69) $1.30
Weighted-average common and potential common
shares outstanding:
Basic 181.8 177.5 175.9
Diluted 181.8 177.5 188.4
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Years Ended May 25, May 26, May 27,
In millions 2003 2002 2001
------------- ------------- --------------
<S> <C> <C> <C>
Net income (loss) $ (33.3) $(121.9) $245.7
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities (24.8) 32.6 32.6
Reclassification adjustment for net realized (gain) on
available- (10.1) (9.4) (21.3)
for-sale securities included in net income (loss)
Minimum pension liability (57.5) (12.7) (16.0)
Derivative instruments:
Unrealized gain (loss) on cash flow hedges 0.2 (0.4) -
------------- ------------- --------------
Other comprehensive income (loss) (92.2) 10.1 (4.7)
------------- ------------- --------------
Comprehensive income (loss) $(125.5) $(111.8) $241.0
============= ============= ==============
</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>
Accumulated
Additional Other
Common Paid-In Retained Unearned Comprehensive
In Millions Stock Capital Earnings Compensation Loss Total
-------- ---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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, purchase,
and profit sharing plans 2.2 70.0 - - - 72.2
Unearned compensation relating to issuance of restricted stock 0.1 7.4 - (7.5) - -
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, purchase,
and profit sharing plans 3.0 108.6 - - - 111.6
Unearned compensation relating to issuance of restricted stock - 3.1 - (3.1) - -
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 convertible
subordinated promissory notes 0.3 9.7 - - - 10.0
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
Net loss - - (33.3) - - (33.3)
Issuance of common stock under option, purchase,
and profit sharing plans 1.6 42.2 - - - 43.8
Unearned compensation relating to issuance of restricted stock - 0.5 - (0.5) - -
Cancellation of restricted stock - (1.4) - 0.3 - (1.1)
Amortization of unearned compensation - - - 3.0 - 3.0
Effect of investee equity transactions - 4.7 - - - 4.7
Other comprehensive loss - - - - (92.2) (92.2)
- --------------------------------------------------------------- -------- ---------- ---------- ------------ ------------ ----------
Balances at May 25, 2003 $91.8 $1,461.3 $ 277.2 $(10.0) $(114.3) $1,706.0
=============================================================== ======== ========== ========== ============ ============ ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended May 25, May 26, May 27,
In Millions 2003 2002 2001
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (33.3) $(121.9) $245.7
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, amortization, and accretion 228.5 230.4 243.3
Net (gain) loss on investments 1.6 (9.4) (30.6)
Share in net losses of equity-method investments 15.9 7.3 3.6
Impairment of technology licenses 13.8 - -
Loss on disposal of equipment 2.9 4.4 3.1
Donation of equity securities - - 20.5
Deferred tax provision 3.6 18.0 27.6
Noncash special items 12.8 (2.3) 21.9
Other, net 0.8 0.2 0.3
Changes in certain assets and liabilities, net:
Receivables (5.3) (6.4) 135.2
Inventories 2.8 51.0 (2.6)
Other current assets 3.4 - 0.8
Accounts payable and accrued expenses (34.9) (32.9) (138.9)
Income taxes payable 1.7 (5.2) (33.7)
Other noncurrent liabilities 6.8 (25.6) (4.4)
------------ ------------ ------------
Net cash provided by operating activities 221.1 107.6 491.8
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (171.3) (138.0) (239.5)
Sale of equipment 2.3 - -
Sale and maturity of available-for-sale securities 892.6 88.6 48.2
Purchase of available-for-sale securities (843.4) (200.1) (28.0)
Sale of investments 18.0 11.2 34.8
Investment in nonpublicly traded companies (21.8) (28.8) (14.9)
Business acquisitions, net of cash acquired (11.0) (42.1) (99.1)
Funding of benefit plan (3.6) (14.9) (2.4)
Other, net 0.7 (6.5) (1.3)
------------ ------------ ------------
Net cash used by investing activities (137.5) (330.6) (302.2)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt (5.4) (20.6) (24.4)
Issuance of common stock 42.7 107.1 68.2
Purchase and retirement of treasury stock - - (194.4)
------------ ------------ ------------
Net cash provided by (used by) financing activities 37.3 86.5 (150.6)
Net change in cash and cash equivalents 120.9 (136.5) 39.0
Cash and cash equivalents at beginning of year 681.3 817.8 778.8
------------ ------------ ------------
Cash and cash equivalents at end of year $802.2 $681.3 $817.8
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
- ---------------------------------------------------
OPERATIONS
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 amplifiers, power management, flat panel and CRT displays, wireless
communications, personal computers, local and wide area networks, and imaging.
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
25, 2003, May 26, 2002 and May 27, 2001 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 amount is fixed
or determinable and collection of the revenue is reasonably assured. At the time
of shipment we record a provision for estimated future returns. Approximately 50
percent of our semiconductor product sales are sold through distributors. We
have agreements with our distributors that cover 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, the fee is fixed and determinable, collection of the fee 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). Internal-use software is included in
the property, plant and equipment balance.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair value of
identifiable net tangible and intangible assets acquired in a business
combination. Since we adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," at the beginning of fiscal 2002, we no longer amortize goodwill.
Instead, we evaluate goodwill for impairment annually and whenever events or
changes in circumstances indicate that it is more likely than not that an
impairment loss has been incurred. Goodwill is assigned to reporting units,
which are operating segments as defined by our current segment reporting
structure. As of May 25, 2003, we have five reporting units that contain
goodwill. Acquisition-related intangible assets other than goodwill include
developed technology and patents, which are amortized on a straight-line basis
over their estimated useful life (2-6 years). Intangible assets other than
goodwill are included within other assets on the consolidated balance sheet.
<PAGE>
Prior to fiscal 2002, we amortized goodwill on a straight-line basis over
3-7 years and we evaluated goodwill for impairment in accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, 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. We evaluate goodwill impairment annually in
our fourth fiscal quarter, which has been selected as the period for our
recurring evaluation for all reporting units. In fiscal 2003 we tested each
reporting unit that contains goodwill as part of our annual goodwill impairment
evaluation. We also performed additional tests of our wireless reporting unit in
February 2003 when we announced our intent to sell our cellular baseband
business unit and in May when we subsequently announced the immediate closure of
that business unit. The cellular baseband business unit was a part of the
wireless reporting unit.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of 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 and amortizable intangible assets. 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. If assets are determined to be recoverable, but the useful lives
are shorter than we originally estimated, we depreciate or amortize the net book
value of the asset over the newly determined remaining useful lives.
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 PER SHARE
We compute basic earnings per share using the weighted-average number of common
shares outstanding. Diluted earnings 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.
For all years presented, the reported net income (loss) was used in our
computation of basic and diluted earnings per share. A reconciliation of the
shares used in the computation follows:
<TABLE>
<CAPTION>
(In Millions) 2003 2002 2001
--------------- ---------------- ---------------
<S> <C> <C> <C>
Weighted-average common shares outstanding used
for basic earnings per share 181.8 177.5 175.9
Effect of dilutive securities:
Stock options - - 12.5
--------------- ---------------- ---------------
Weighted-average common and potential common shares
outstanding used for diluted earnings per share 181.8 177.5 188.4
=============== ================ ===============
</TABLE>
<PAGE>
As of May 25, 2003, we did not include options outstanding to purchase 44.4
million shares of common stock with a weighted-average exercise price of $27.99
in diluted earnings per share since their effect was antidilutive due to the
reported loss. These shares could, however, potentially dilute basic earnings
per share in the future. As of May 26, 2002, we did not include options
outstanding to purchase 36.9 million shares of common stock with a
weighted-average exercise price of $28.24 in diluted earnings per share since
their effect was antidilutive due to the reported loss. As of May 27, 2001, we
did not include options outstanding to purchase 10.0 million shares of common
stock with a weighted-average exercise price of $53.58 in diluted earnings per
share since their effect was antidilutive because their exercise price exceeded
the average market price during the year.
CURRENCIES
The functional currency for all operations worldwide is the U.S. dollar. We
include gains and losses arising from remeasurement 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
selling, general and administrative expenses.
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 equivalents 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. We
record at cost nonmarketable investments where we do not have the ability to
exercise significant influence or control and periodically review them for
impairment. We record using the equity method nonmarketable investments in which
we do have the ability to exercise significant influence, but do not hold a
controlling interest. Under the equity method, we record our share of net losses
of the investees in nonoperating income using the hypothetical liquidation at
book value method. Increases in the carrying value of investments attributable
to sales of stock by investees are credited to shareholders' equity.
Summarized financial information of our equity-method investments as of and
for periods ended closely corresponding to our fiscal years is presented in the
following table:
<TABLE>
<CAPTION>
(In Millions) 2003 2002
-------------- --------------
<S> <C> <C>
Combined financial position:
Current assets $ 67.4 $ 70.1
Noncurrent assets 8.5 1.7
-------------- --------------
Total assets $ 75.9 $ 71.8
============== ==============
Current liabilities 21.6 4.9
Noncurrent liabilities 1.9 0.1
Shareholders' equity 52.4 66.8
-------------- --------------
Total liabilities and shareholders' equity $ 75.9 $ 71.8
============== ==============
</TABLE>
<TABLE>
<CAPTION>
2003 2002 2001
-------------- -------------- ----------------
<S> <C> <C> <C>
Combined operating results:
Sales $ 4.8 $ 0.6 $ -
Costs and expenses 41.3 20.0 1.5
-------------- -------------- ----------------
Operating loss $(36.5) $(19.4) $(1.5)
============== ============== ================
Net loss $(45.6) $(24.4) $(3.0)
============== ============== ================
</TABLE>
<PAGE>
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.
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. 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 25, 2003
and May 26, 2002. The estimated fair value of debt was $20.8 million at May 25,
2003 and $26.8 million at May 26, 2002. 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 employee stock option and stock purchase plans in accordance
with the intrinsic method of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." See Note 10 to the Consolidated
Financial Statements for more information on our stock-based compensation plans.
Pro forma information regarding net income(loss) and earnings(loss) per
share is required by SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure." This information illustrates the effect on net income(loss) and
earnings(loss) per share 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 2003, 2002
and 2001 was $16.62, $17.49 and $15.88 per share, respectively. The
weighted-average fair value of rights granted under the stock purchase plans was
$3.83, $6.43 and $9.73 per share for fiscal 2003, 2002 and 2001, respectively.
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 2003, 2002 and 2001:
2003 2002 2001
------ ------ ------
Stock Option Plans
Expected life (in years) ........... 5.0 5.1 5.7
Expected volatility ................ 77% 75% 73%
Risk-free interest rate ............ 2.7% 4.5% 5.0%
Stock Purchase Plans
Expected life (in years) ........... 0.3 0.3 0.3
Expected volatility ................ 54% 57% 95%
Risk-free interest rate ............ 1.1% 1.7% 3.7%
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.
<PAGE>
The pro forma information follows:
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
2003 2002 2001
-------------- -------------- ----------------
<S> <C> <C> <C>
Net income (loss) - as reported $( 33.3) $(121.9) $245.7
Add back: Stock compensation charge included in the
net income(loss) determined under the intrinsic
value method, net of tax 1.9 3.4 5.4
Deduct: Total stock-based employee compensation
expense determined under the fair value method,
net of tax 180.9 161.9 116.2
-------------- -------------- ----------------
Net income (loss) - pro forma $(212.3) $(280.4) $134.9
============== ============== ================
Basic earnings (loss) per share - as reported $(0.18) $(0.69) $1.40
Basic earnings (loss) per share - pro forma $(1.17) $(1.58) $0.77
Diluted earnings (loss) per share - as reported $(0.18) $(0.69) $1.30
Diluted earnings (loss) per share - pro forma $(1.17) $(1.58) $0.72
</TABLE>
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.
New Accounting Pronouncements:
o In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which supersedes 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. This statement was effective for
our fiscal year 2003. The adoption of this statement did not have a
material impact on our financial position or results of operations.
o 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 was effective for our fiscal year 2003. The
adoption of this statement did not have a material impact on our financial
position or results of operations.
<PAGE>
o In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 establishes standards of accounting and reporting for costs
associated with exit or disposal activities. It supersedes EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." One of the principal differences between SFAS No. 146 and
EITF Issue No. 94-3 concerns the recognition of a liability for costs
associated with an exit or disposal activity. SFAS No. 146 requires that a
liability be recognized for those costs only when the liability is
incurred. Under EITF Issue No. 94-3, a liability for such costs was
recognized as of the date of the commitment to an exit plan. SFAS No. 146
also requires that an exit or disposal liability be initially measured at
fair value. This statement was effective in fiscal 2003 for exit or
disposal activities that were initiated after December 31, 2002. As a
result, we recorded a net charge of $43.6 million in connection with the
cost reduction actions announced in the second half of fiscal 2003. See
Note 3 to the Consolidated Financial Statements for more information on the
cost reduction actions.
o In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others."
This interpretation requires a guarantor to include disclosure of certain
guarantees that it has issued and if applicable, at inception of the
guarantee, to recognize a liability for the fair value of the obligation
undertaken in issuing a guarantee. The recognition and measurement
requirements of this interpretation are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. As of May 25,
2003, we had not issued or modified any agreements that included guarantees
subject to the recognition and measurement provisions of this
interpretation. The disclosure requirements are effective for fiscal 2003
and are included in Note 12 to the Consolidated Financial Statements.
o In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities." This
interpretation requires that if a business enterprise has a controlling
financial interest in a variable interest entity, the assets, liabilities
and results of the activities of the variable interest entity should be
included in consolidated financial statements of the business enterprise.
This interpretation applies immediately to variable interest entities
created after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of this interpretation
were effective beginning in our third quarter of fiscal 2003. We currently
do not have any financial interest in variable interest entities.
Therefore, the adoption of this Interpretation did not have a material
impact on our financial position or results of operations.
o In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure an
amendment of FASB Statement No. 123." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions under this
statement are effective for fiscal 2003. The adoption of the disclosure
requirements of SFAS No. 148 did not have a material impact on our
financial position and results of operations.
RECLASSIFICATIONS
Certain amounts in prior years' consolidated financial statements and notes to
consolidated financial statements have been reclassified to conform to the
fiscal 2003 presentation. Net operating results have not been affected by these
reclassifications.
Note 2. Financial Instruments
- ------------------------------
CASH EQUIVALENTS
Our policy is to diversify our investment portfolio to minimize our exposure to
principal that could arise from credit, geographic and investment sector risk.
At May 25, 2003, investments were placed with a variety of different financial
institutions and other issuers. Investments with maturity of less than one year
have a rating of A1/P1 or better. Investments with maturity of more than one
year have a minimum rating of AA/Aa2.
At May 25, 2003, our cash equivalents consisted of the following (in
millions): bank time deposits ($16.5), institutional money market funds ($733.8)
and commercial paper ($4.7). At May 26, 2002, our cash equivalents consisted of
the following (in millions): bank time deposits ($178.0), institutional money
market funds ($167.0) and commercial paper ($278.2).
<PAGE>
Marketable investments at fiscal year-end comprised:
(In Millions)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- ------------- ------------- -------------
2003
<S> <C> <C> <C> <C>
SHORT-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Callable agencies $112.8 $ 0.4 - $113.2
------------- ------------- ------------- -------------
Total short-term marketable investments $112.8 $ 0.4 - $113.2
============= ============= ============= =============
LONG-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Equity securities $ 0.8 $ 2.9 - $ 3.7
------------- ------------- ------------- -------------
Total long-term marketable investments $ 0.8 $ 2.9 - $ 3.7
============= ============= ============= =============
2002
SHORT-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Callable agencies $134.5 $ 0.5 - $135.0
Corporate bonds 18.0 0.1 - 18.1
------------- ------------- ------------- -------------
Total short-term marketable investments $152.5 $ 0.6 - $153.1
============= ============= ============= =============
LONG-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Debt securities:
Government debt securities $ 10.0 $ - - $ 10.0
------------- ------------- ------------- -------------
Equity securities 8.8 38.9 $(1.3) 46.4
------------- ------------- ------------- -------------
Total long-term marketable investments $ 18.8 $38.9 $(1.3) $ 56.4
============= ============= ============= =============
</TABLE>
Net unrealized gains on available-for-sale securities of $3.3 million at
May 25, 2003 and $38.2 million at May 26, 2002, are included in accumulated
other comprehensive loss. The related tax effects are not significant. Long-term
marketable investments of $3.6 million at May 25, 2003 and $56.4 million at May
26, 2002 are included in other assets.
Since fiscal 2001, our debt securities portfolio has included various
government agency callable bonds with call dates of three months. In fiscal
2003, we began classifying these callable bonds as short-term marketable
investments, since the agencies have typically repaid the face value of the
bonds on the call dates. Prior year information has been reclassified to conform
to the fiscal 2003 presentation.
Scheduled maturities of investments in debt securities were:
(In Millions)
----------------
2005 $ 10.1
2006 103.1
----------------
Total $113.2
================
Gross realized gains on available-for-sale securities were $11.6 million in
fiscal 2003, $8.1 million in 2002 and $25.5 million in 2001. We realized
impairment losses for other than temporary declines in the fair value of
available-for-sale securities of $1.6 million in fiscal 2003, $0.2 million in
fiscal 2002 and $4.2 million in fiscal 2001. For nonmarketable investments, we
recognized impairment losses of $11.6 million in fiscal 2003 and $12.7 million
in fiscal 2001. No such losses were recognized in fiscal 2002. While there were
no gross realized gains from nonmarketable investments in fiscal 2003, we
recognized gross realized gains of $1.5 million in fiscal 2002 and $22.4 million
in 2001. These gains came primarily from the sale of shares in connection with
initial public offerings and acquisitions by third parties.
<PAGE>
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. For cash flow hedges the maximum length of
time we hedge our exposure is 3 to 6 months. 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. The effective portion of all
changes in these derivative instruments is reported in the same financial
statement line item as the changes in the hedged item.
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 2003 or 2002. No cash flow hedges
were terminated as a result of forecasted transactions that did not occur.
At May 25, 2003, the estimated net amount of existing gains or losses from
cash flow hedges expected to be reclassified into earnings within the next year
was $0.2 million. We recognized a $0.5 million net realized loss from cash flow
hedges and a $1.3 million net realized gain from fair value hedges in fiscal
2003. For fiscal 2002, we recognized net realized losses of $0.2 million from
cash flow hedges and $0.5 million from fair value hedges.
FAIR VALUE AND NOTIONAL PRINCIPAL OF DERIVATIVE SHEET FINANCIAL INSTRUMENTS
The table below shows the fair value and notional principal of derivative
financial instruments as of May 25, 2003 and May 26, 2002. 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 25, 2003 and May 26, 2002. 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.
<PAGE>
Carrying Notional Estimated Credit
(In Millions) Amount Principal Fair Value Risk
----------- ----------- ------------- --------
2003
INTEREST RATE INSTRUMENTS
Swaps:
Variable to fixed $(0.1) $19.9 $(0.1) $ -
=========== =========== ============= ========
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts:
To sell dollars:
Pound sterling $ - $ 6.3 $ - $ -
Singapore dollar - 4.5 - -
-------------- ----------- ------------- -------
Total $ - $10.8 $ - $ -
============== =========== ============= =======
Purchased options:
Japanese yen $0.2 $23.0 $0.2 $0.2
============ =========== ============= =========
2002
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 $ - $ -
============== =========== ============= =======
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 40 percent
of total accounts receivable at May 25, 2003, and approximately 38 percent at
May 26, 2002. In fiscal 2003, we had two distributors who each accounted for
approximately 10 percent of total net sales. In fiscal 2002, one of our
distributors accounted for approximately 10 percent of total net sales. Sales to
these distributors are mostly for our Analog Segment products, but also include
some sales for our other operating segment products. 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 2003
Included as a component of special items in the consolidated statement of
operations for fiscal 2003, we reported net charges of $43.6 million related to
the actions described below:
<PAGE>
In May 2003, we announced that we were on schedule in implementing a series
of strategic profit-improvement actions that were launched in February 2003.
These actions are designed to streamline our cost structure and enhance
shareholder value by prioritizing R&D spending on higher-margin analog
businesses. As part of that plan, we indicated we would seek to sell the
information appliance business, primarily consisting of the GeodeTM family of
products, and our cellular baseband business. We indicated that we expected to
complete the sales within the following 3 to 6 months. Since February, we have
conferred with several prospective buyers of the information appliance business
and in May we indicated that we were actively pursuing a sale of that business.
At the same time we also announced the immediate closure of the cellular
baseband business. In connection with these activities, we reduced our worldwide
workforce by 336 positions for the business units affected and related support
functions, as well as for various infrastructure reductions consistent with our
overall profit-improvement objectives. This was in addition to a reduction of
424 employees from our worldwide workforce action announced in February 2003 due
to a realignment of personnel resources for various manufacturing, product
development and support areas. These workforce reductions should be
substantially completed by the end of the first quarter of fiscal 2004. In
connection with these actions, we recorded a charge of $45.7 million as
described in the following table:
<TABLE>
<CAPTION>
(In Millions) Information Enterprise Enhanced
Analog Appliance Networking Solutions
Segment Segment Segment Segment All Others Total
------------- ------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Severance $ 8.5 $ 1.8 $ 1.3 $ 0.4 $19.2 $31.2
Exit related costs 2.1 - - - 0.3 2.4
Asset write-off 8.6 - - - 3.5 12.1
------------- ------------- -------------- ------------- -------------- -------------
$19.2 $ 1.8 $ 1.3 $ 0.4 $23.0 $45.7
============= ============= ============== ============= ============== =============
</TABLE>
Noncash charges related to the write-offs of certain assets, primarily equipment
and technology licenses that were dedicated to the cellular baseband business.
Other exit costs primarily represent facility lease obligations related to
closure of sales offices and design centers that occurred prior to the end of
the fiscal year. We also completed certain activities by the end of the fiscal
year that reduced our estimate for an environmental liability for costs related
to a prior exit action, which resulted in a credit of $2.1 million. This credit
partially offset the charges for the fiscal 2003 actions.
In February 2003, we also restructured our existing technology licensing
agreement, and entered into a new long-term technology and manufacturing
agreement, with Taiwan Semiconductor Manufacturing Corporation. The new
arrangement establishes TSMC as our supplier of wafers for products with feature
sizes at and below 0.15-micron. Under the new arrangement, we no longer are
required to pay TSMC any further licensing fees for access to its process
technologies. We recorded a $5.0 million charge included in R&D expenses for
impairment of licensed technology associated with the TSMC technology licensing
agreement that was revised. Because of the revision and the new supply
arrangement with TSMC, we no longer intend to transfer any further processes
from TSMC to our Maine manufacturing facility.
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 scaled back efforts in some wireless networking technologies,
such as the IEEE 802.11 technology standard, and narrowed investment in the
set-top box portion of the information appliance business. We reallocated
investment to support what we saw as growing opportunities in the wireless
handset and flat-panel display markets, and our broadening capability in the
analog power management area. We also shifted more sales and marketing resources
to the Asia Pacific region to support the sales growth we are seeing in that
region. The plan resulted in a net reduction of approximately 150 positions from
our global workforce, which was completed in fiscal 2003. In connection with
these actions, we recorded a charge of $12.5 million. The charge included $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 represented 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.
<PAGE>
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 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 our wafer manufacturing operations in Greenock,
Scotland. This charge represented additional severance costs associated with the
termination of certain 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 at the same site were
substantially completed by the end of September 2000.
SUMMARY OF ACTIVITIES
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 25, 2003 and May 26, 2002:
Other Exit
(In Millions) Severance Costs Total
-------------- --------------- --------------
Balance at May 28, 2000 $ 3.1 $16.0 $ 19.1
Cash payments (11.6) (6.1) (17.7)
Cost reduction program charges 25.8 4.2 30.0
Credit for residual reserves - (1.1) (1.1)
-------------- --------------- --------------
Balance at May 27, 2001 17.3 13.0 30.3
Cash payments (14.6) (6.2) (20.8)
Cost reduction program charges 8.5 3.2 11.7
Credit for residual reserves (2.6) (2.2) (4.8)
-------------- --------------- --------------
Balance at May 26, 2002 8.6 7.8 16.4
Cash payments (22.3) (2.4) (24.7)
Cost reduction program charges 31.2 2.4 33.6
-------------- --------------- --------------
Balance at May 25, 2003 $17.5 7.8 $ 25.3
============== =============== ==============
During fiscal 2003, we paid severance to 537 employees in connection with
the cost reduction actions announced in February and May of fiscal 2003. Amounts
paid for other exit-related costs during fiscal 2003 were primarily for payments
under lease obligations and facility clean-up costs associated with previous
restructuring actions.
Note 4. Acquisitions
- ---------------------
FISCAL 2003
In late August 2002, we completed the acquisition of DigitalQuake, Inc., a
development stage enterprise engaged in the development of flat panel display
products located in Campbell, California. The addition of DigitalQuake's
capabilities and products, which include a fourth-generation scaling solution, a
triple analog-to-digital converter and an advanced digital video interface with
encryption/decryption technologies, should help us provide a broad range of
system solutions for flat panel display applications.
<PAGE>
The purchase was completed through a step-acquisition where during the six
months prior to the closing we acquired approximately a 30 percent equity
interest through investments totaling $6.4 million. In August 2002, the
remaining equity interest was acquired for additional consideration of $14.8
million. Of this amount, we paid $12.7 million upon the closing of the
transaction and recorded the remaining liability of $2.1 million to be paid in 2
installments over the next two years. We allocated $18.6 million of the total
purchase price to developed technology, $1.9 million to net tangible assets, and
$0.7 million to in-process research and development. The in-process research and
development was expensed upon completion of the acquisition and is included as a
component of special items in the consolidated statement of operations for
fiscal 2003. No amounts were allocated to goodwill since this development stage
enterprise was not considered a business. The developed technology is an
intangible asset that is being amortized over its estimated useful life of six
years.
Employees and former shareholders of DigitalQuake will also receive
additional contingent consideration of up to $9.9 million if certain revenue
targets are achieved over the 24 months following the acquisition. The
contingent consideration will be recognized when it is probable that the revenue
targets will be achieved. Of the total contingent consideration, $5.7 million is
also contingent on future employment and will be treated as compensation
expense. The remainder will be treated as an additional part of the purchase
price.
FISCAL 2002
In April 2002, we acquired the Finnish company Fincitec Oy and its related
company, ARSmikro OU, based in Estonia. These companies develop low-voltage,
low-power application specific integrated circuits for battery-powered devices.
This acquisition was done to strengthen our development capabilities for power
management circuits and help us expand our suite of integrated and discrete
silicon solutions for portable devices, including cell phones, personal digital
assistants, digital cameras and other such 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 developer of
wireless solutions ranging from telemetry to mobile phones to wireless
networking, including Bluetooth. We made this acquisition 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 solutions for
wireless connectivity based in San Diego, California. The acquisition was
intended to complement our existing base of design and product expertise in
wireless networking applications. 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 paid a total of
$18.3 million to innoComm employees upon the completion of their first and
second year service anniversaries. These amounts were 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 has technologies and
analog engineering resources which increase our strengths in creating silicon
solutions for flat-panel display applications. 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.
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.
<PAGE>
Note 5. Consolidated Financial Statement Details
- -------------------------------------------------
<TABLE>
<CAPTION>
(In Millions) 2003 2002
-------------- ---------------
<S> <C> <C>
RECEIVABLE ALLOWANCES
Doubtful accounts $ 6.7 $ 7.5
Returns and allowances 31.5 30.3
-------------- ---------------
Total receivable allowances $ 38.2 $ 37.8
============== ===============
INVENTORIES
Raw materials $ 8.1 $ 6.4
Work in process 89.2 86.9
Finished goods 44.9 51.7
-------------- ---------------
Total inventories $ 142.2 $ 145.0
============== ===============
PROPERTY, PLANT AND EQUIPMENT
Land $ 23.3 $ 23.3
Buildings and improvements 520.6 524.2
Machinery and equipment 1,847.5 1,774.1
Internal-use software 141.6 87.5
Construction in progress 30.6 47.8
-------------- ---------------
Total property, plant and equipment 2,563.6 2,456.9
Less accumulated depreciation and amortization 1,882.9 1,719.8
-------------- ---------------
Property, plant and equipment, net $ 680.7 $ 737.1
============== ===============
ACCRUED EXPENSES
Payroll and employee related $ 91.3 $ 115.6
Cost reduction charges and restructuring of operations 25.3 16.4
Software license obligations 31.1 -
Other 60.8 94.7
-------------- ---------------
Total accrued expenses $ 208.5 $ 226.7
============== ===============
ACCUMULATED OTHER COMPREHENSIVE LOSS
Unrealized gain on available-for-sale securities $ 3.3 $ 38.2
Minimum pension liability (117.4) (59.9)
Unrealized loss on cash flow hedges (0.2) (0.4)
-------------- ---------------
$(114.3) $ (22.1)
============== ===============
</TABLE>
<TABLE>
<CAPTION>
(In Millions) 2003 2002 2001
------------- ------------- --------------
<S> <C> <C> <C>
SPECIAL ITEMS - Income (expense)
Cost reduction charges and restructuring of operations $(43.6) $ (8.0) $ (35.7)
In-process research and development charges (0.7) (1.3) (16.2)
------------- ------------- --------------
$(44.3) $ (9.3) $ (51.9)
============= ============= ==============
(In Millions) 2003 2002 2001
------------- ------------- --------------
INTEREST INCOME, NET
Interest income $ 15.6 $ 25.2 $ 57.3
Interest expense (1.5) (3.9) (5.3)
------------- ------------- --------------
Interest income, net $ 14.1 $ 21.3 $ 52.0
============= ============= ==============
(In Millions) 2003 2002 2001
------------- ------------- --------------
OTHER INCOME (EXPENSE), NET
Net intellectual property income $ 6.8 $ 11.6 $ 6.3
Net gain (loss) on investments, net (1.6) 9.4 30.6
Share in net losses of equity-method investments (15.9) (7.3) (3.6)
Other (2.2) (0.6) (3.5)
------------- ------------- --------------
Total other income(expense), net $ (12.9) $ 13.1 $ 29.8
============= ============= ==============
</TABLE>
Beginning in fiscal 2003, our share in net losses of investments accounted
for under the equity method is included in other income (expense), net. Other
income (expense), net for fiscal 2002 and 2001 has been conformed to reflect
this change.
Note 6. Goodwill and Intangible Assets
- ---------------------------------------
The following table provides changes in goodwill by reportable segment:
<TABLE>
<CAPTION>
(In Millions) Enterprise
Analog Segment Networking
Segment Total
--------------- -------------- --------------
<S> <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
No goodwill was acquired during fiscal 2003 - - -
- ---------------------------------------------------- --------------- -------------- --------------
Balances at May 25, 2003 $171.6 $1.7 $173.3
=============== ============== ==============
</TABLE>
Other intangible assets, which are included in other assets in the accompanying
consolidated balance sheet and will continue to be amortized, consisted of the
following:
<TABLE>
<CAPTION>
Weighted-Average Weighted-Average
Amortization Amortization
Period Period
(In Millions) (Years) (Years)
2003 2002
---------------- --------------- ------------ ----------------
<S> <C> <C> <C> <C>
Patents $ 4.9 5.0 $4.9 5.0
Unpatented technology 18.6 5.8 0.8 2.4
---------------- ------------
23.5 5.7
Less accumulated amortization 5.3 1.7
---------------- ------------
$18.2 5.7 $4.0 4.6
================ ============
</TABLE>
We expect amortization expense in the following fiscal years to be:
(In Millions)
----------------
2004 $ 4.3
2005 4.0
2006 3.2
2007 3.0
2008 3.0
Thereafter 0.7
----------------
$18.2
================
<PAGE>
Amortization expense was:
(In Millions) 2003 2002 2001
------------ ----------- -----------
Goodwill amortization $ - $ - $ 13.0
Patent and technology amortization 3.6 0.9 0.8
------------ ----------- -----------
Total amortization $ 3.6 $ 0.9 $ 13.8
============ =========== ===========
Adjusted net income (loss) and net income (loss) per share exclusive of
amortization expense related to goodwill was:
<TABLE>
<CAPTION>
(In Millions) 2003 2002 2001
------------ ----------- -----------
<S> <C> <C> <C>
Net income (loss), as reported $(33.3) $(121.9) $245.7
Add back:
Goodwill amortization - - 13.0
------------ ----------- -----------
Net income (loss) - adjusted $(33.3) $(121.9) $258.7
============ =========== ===========
Basic earnings (loss) per share, as reported $ (0.18) $ (0.69) $ 1.40
Add back:
Goodwill amortization - - 0.07
------------ ----------- -----------
Basic earnings (loss) per share - adjusted $ (0.18) $ (0.69) $ 1.47
============ =========== ===========
Diluted earnings (loss) per share, as reported $ (0.18) $ (0.69) $ 1.30
Add back:
Goodwill amortization - - 0.07
------------ ----------- -----------
Diluted earnings (loss) per share - adjusted $ (0.18) $ (0.69) $ 1.37
============ =========== ===========
</TABLE>
Note 7. Debt
- -------------
Debt at fiscal year-end consisted of the following:
(In Millions) 2003 2002
------------- ------------
Unsecured promissory note at 1.2% $19.9 $18.2
Notes secured by equipment at 7.0% - 8.0% 2.1 6.8
Other 0.2 0.9
------------- ------------
Total debt 22.2 25.9
Less current portion of long-term debt 2.3 5.5
------------- ------------
Long-term debt $19.9 $20.4
============= ============
The unsecured promissory note, 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
original maturity periods that range from four to five years. One of the notes
was fully repaid in fiscal 2003. The remaining note is due November 2003. The
financing agreement relating to the remaining note contains 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. At May 25, 2003 we were in compliance with all covenants
under the agreement.
<PAGE>
Our outstanding debt obligations mature in future fiscal years as follows:
(In Millions) Total Debt
-------------------
-------------------
2004 $ 2.3
2005 19.9
-------------------
Total $22.2
===================
We have a multicurrency credit agreement with a bank that provides for
multicurrency loans, letters of credit and standby letters of credit. The total
amount of credit under the agreement is $20 million. The agreement expires in
October 2003, and we expect to renew or replace it prior to expiration. At May
25, 2003, we had utilized $12.0 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 25, 2003, under the most restrictive of these covenants, $204.3 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:
(In Millions) 2003 2002 2001
------------ ------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES
U.S. $(75.3) $(168.6) $231.0
Non-U.S. 52.0 45.2 76.1
------------ ------------- ------------
$(23.3) $(123.4) $307.1
============ ============= ============
INCOME TAX EXPENSE (BENEFIT)
Current:
U.S. federal, state and local $ - $ (26.5) $ 20.6
Non-U.S. 6.4 7.0 13.2
------------ ------------- ------------
6.4 (19.5) 33.8
Deferred:
U.S. federal and state 8.2 15.0 22.3
Non-U.S. (4.6) 3.0 5.3
------------ ------------- ------------
3.6 18.0 27.6
------------ ------------- ------------
Income tax expense (benefit) $ 10.0 $ (1.5) $ 61.4
============ ============= ============
<PAGE>
The tax effects of temporary differences that constitute significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
(In Millions) 2003 2002
-------------- --------------
DEFERRED TAX ASSETS
Reserves and accruals $152.8 $136.6
Non-U.S. loss carryovers and other allowances 27.6 19.4
Federal and state credit carryovers 221.6 302.4
Other 80.5 79.6
-------------- --------------
Total gross deferred assets 482.5 538.0
Valuation allowance (395.9) (447.3)
-------------- --------------
Net deferred assets 86.6 90.7
-------------- --------------
DEFERRED TAX LIABILITIES
Other liabilities (5.8) (6.3)
-------------- --------------
Total deferred liabilities (5.8) (6.3)
-------------- --------------
Net deferred tax assets $ 80.8 $ 84.4
============== ==============
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 for deferred
tax assets decreased by $51.4 million in fiscal 2003 compared to an increase of
$104.4 million in fiscal 2002 and a decrease of $108.3 million in fiscal 2001.
The valuation allowance for deferred tax assets includes $134.0 million and
$125.7 million for stock option deductions at May 25, 2003, and May 26, 2002,
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. As of May 25, 2003, 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.
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>
2003 2002 2001
--------------- -------------- --------------
<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 11.7 5.2 (5.6)
Tax on non-U.S. income (22.2) (26.3) 1.2
U.S. state and local taxes net of federal benefits (0.7) (0.1) 0.1
Current year loss not benefited (66.7) (20.6) (6.5)
Changes in beginning of year valuation allowances - 9.3 (7.8)
Other - (1.3) 3.6
--------------- -------------- --------------
Effective tax rate (42.9)% 1.2% 20.0%
=============== ============== ==============
</TABLE>
U.S. income taxes were 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 $479.9 million at May 25,
2003, because we intend to reinvest these earnings indefinitely in operations
outside the United States. If these earnings were distributed, additional U.S.
taxes of $111.2 million would accrue after utilization of U.S. tax credits.
At May 25, 2003, we had $165.6 million of U.S. net operating loss
carryovers and $268.0 million of state net operating loss carryovers for tax
return purposes, which expire between 2004 and 2023. California has temporarily
suspended the ability to utilize California net operating loss carryovers for
the fiscal 2004 and 2003 tax years. We also had $149.9 million of U.S. credit
carryovers and $71.7 million of state credit carryovers for tax return purposes,
which primarily expire between 2004 and 2023. Included in the state tax credits
is a California R&D credit of $49.9 million, which can be carried forward
indefinitely. In addition, we had net operating loss and other tax allowance
carryovers of $112.2 million from certain non-U.S. jurisdictions.
The IRS is in the process of examining our tax returns for fiscal 1997
through 2000. We are also undergoing a tax audit in the Netherlands and from
time to time our tax returns are audited in the U.S. by state agencies and at
international locations by local tax authorities.
<PAGE>
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, we merge or consolidate with or sell 50
percent or more of our 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. We 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, we issued 247,104 shares to one of these
individuals, leaving a balance in the reserve of 679,536 shares. In fiscal 2002,
we issued 617,760 shares 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 not paid cash dividends on our common stock and we currently have
no plans in place to pay dividends.
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 when it was first approved by shareholders, 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. As of the end of fiscal 2003, only 16,343 shares remained available
for option grants under this plan. Another plan, which has been in effect since
1997, 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 was approved by shareholders
in 2000 and which authorizes the grant of up to 6,000,000 shares of common stock
for nonqualified options only to executive officers. All plans provide that
options are granted at the market price on the date of grant and can 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. The plans provide that
options can vest after a six-month period, but most begin vesting after one year
and ratably thereafter.
<PAGE>
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 our 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, and at
the end of fiscal 2003, there were options outstanding to purchase only 158,638
shares under the Cyrix 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 our common stock based on the 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 these stock option plans, and
at the end of fiscal 2003, options to purchase only a total of 3,880 shares
remained outstanding under these 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.
The following table summarizes information about options outstanding under these
plans at May 25, 2003:
<TABLE>
Outstanding Options
<CAPTION>
------------------------------------------------------------------------------------------
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>
ComCore option plan $0.50-$0.77 1.0 3.8 $0.50
Mediamatics option plan $2.85 2.9 3.8 $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 shareholders and
are granted automatically to eligible directors upon their appointment to the
board and subsequent election to the board by shareholders. Director stock
options vest in full after six months. Under this plan, options to purchase
345,000 shares of common stock with a weighted-average exercise price of $27.36
and weighted-average remaining contractual life of 7.1 years were outstanding as
of May 25, 2003.
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 25, 2003,
options to purchase 140,000 shares of common stock were outstanding under this
grant.
In connection with the acquisition of innoComm Wireless in fiscal 2001, we
granted options to purchase an aggregate of 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
became exercisable two years after grant. The option gave 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, as long as
they remained employed by us. These options expired in fiscal 2003 without being
exercised.
In connection with the DigitalQuake acquisition in fiscal 2003, we granted
options to purchase an aggregate of 130,698 shares of common stock at $15.85 to
five founding shareholders of DigitalQuake. These options were granted outside
of the stock option plans at the market price on the date of grant and become
exercisable in two equal installments, one and two years after the date of
grant. The option gives the DigitalQuake founding shareholders the right to
receive all or a portion of their installment payments of the purchase price
paid for DigitalQuake in cash or shares of common stock, subject to the founders
remaining employed by National.
<PAGE>
Changes in shares of common stock outstanding under the option plans during
fiscal 2003, 2002 and 2001 (but excluding the ComCore, Mediamatics, innoComm
Wireless, DigitalQuake, director and former chairman options), were as follows:
<TABLE>
<CAPTION>
Weighted-Average
(In Millions) Number of Shares Exercise Price
------------------------------ ------------------------------
<S> <C> <C>
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 at May 27, 2001 38.5 $27.35
Granted 9.8 $32.33
Exercised (4.5) $18.15
Cancelled (2.3) $34.92
------------------------------ ------------------------------
Outstanding at May 26, 2002 41.5 $29.08
Granted 7.1 $15.01
Exercised (1.0) $14.04
Cancelled (1.8) $31.96
------------------------------ ------------------------------
Outstanding at May 25, 2003 45.8 $27.13
============================== ==============================
</TABLE>
Expiration dates for options outstanding at May 25, 2003 range from July 13,
2003 to May 19, 2013.
The following tables summarize information about options outstanding under
these plans (excluding the ComCore, Mediamatics, innoComm Wireless,
DigitalQuake, director and former chairman options) at May 25, 2003:
<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 9.7 6.3 $12.73
$13.05-$16.05 7.8 6.6 $14.60
$16.13-$25.50 3.8 7.1 $19.01
$25.60-$25.95 6.6 7.9 $25.95
$26.00-$33.56 3.8 6.7 $28.69
$33.63-$34.20 7.1 8.8 $34.19
$34.40-$78.06 7.0 6.9 $58.34
------------------------ ------------------------ -----------------------
Total 45.8 7.2 $27.13
======================== ======================== =======================
</TABLE>
Options Exerciseable
-----------------------------------------------
Number of Shares (In Weighted-Average
Range of Exercise Prices Millions) Exercise Price
---------------------- ------------------------
$8.38-$13.00 7.7 $12.77
$13.05-$16.05 4.5 $14.40
$16.13-$25.50 1.6 $19.55
$25.60-$25.95 3.3 $25.95
$26.00-$33.56 2.0 $29.25
$33.63-$34.20 1.9 $34.19
$34.40-$78.06 5.2 $58.66
---------------------- ------------------------
Total 26.2 $26.97
====================== ========================
<PAGE>
As of May 25, 2003, there were 82.9 million shares reserved for issuance
under all option plans, including 31.8 million 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
shareholders.
Under the terms of both purchase plans, we issued 2.1 million shares in
fiscal 2003, 1.2 million shares in fiscal 2002 and 1.1 million shares in fiscal
2001 to employees for $28.1 million, $26.7 million and $27.3 million,
respectively. As of May 25, 2003, there were 5.2 million shares reserved for
issuance under the two stock purchase plans.
OTHER STOCK PLANS
We have a director stock plan, which has been approved by shareholders, that
authorizes the issuance of up to 200,000 shares of common stock to eligible
directors who are not employees of the company. The 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 25, 2003, we
have issued 104,176 shares under the director stock plan and have reserved
95,824 shares 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. We issued 30,000, 112,000 and 240,000
shares under the restricted stock plan during fiscal 2003, 2002 and 2001,
respectively. Restrictions expire over time, ranging from two to six years after
issuance. Based upon the market value on the dates of issuance, we recorded $0.5
million, $3.1 million and $7.5 million of unearned compensation during fiscal
2003, 2002 and 2001, 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 periods. As of
May 25, 2003, we have reserved 1,049,917 shares for future issuances under the
restricted stock plan. Compensation expense for fiscal 2003, 2002 and 2001
related to shares of restricted stock, was $3.0 million, $3.4 million and $3.0
million, respectively. At May 25, 2003, the weighted-average grant date fair
value for all outstanding shares of restricted stock was $30.94.
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 2003, 2002 and 2001 were 37,143 shares, 128,919 shares and
104,151 shares, respectively. As of May 25, 2003, 1.1 million shares of common
stock were reserved for future contributions.
<PAGE>
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 fifteen
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 at the employee's direction. Although
5,000,000 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 international subsidiaries have varying types of defined benefit
pension and retirement plans that comply with local statutes and practices.
The annual expense for all plans was as follows:
(In Millions) 2003 2002 2001
------------- ------------ ------------
Profit sharing plan $ 3.8 $ 3.6 $19.9
Salary deferral 401(k) plan $12.3 $11.0 $10.6
Non-U.S. pension and retirement plans $13.5 $10.6 $ 8.3
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) 2003 2002 2001
----------------- ----------------- -----------------
<S> <C> <C> <C>
Service cost of benefits earned during the year $4.6 $4.3 $4.1
Plan participant contributions (0.8) (0.9) (0.7)
Interest cost on projected benefit obligation 9.5 7.5 7.0
Expected return on plan assets (6.1) (5.3) (5.6)
Net amortization and deferral 1.8 1.3 0.2
----------------- ----------------- -----------------
Net periodic pension cost $9.0 $6.9 $5.0
================= ================= =================
</TABLE>
Benefit obligation and asset data for these plans at fiscal year-end and
details of their changes during the year are presented in the following tables:
(In Millions) 2003 2002
----------------- -----------------
BENEFIT OBLIGATION
Beginning balance 136.9 $122.9
Service cost 4.6 4.3
Interest cost 9.5 7.5
Benefits paid (2.0) (1.9)
Actuarial loss 32.5 2.2
Exchange rate adjustment 12.6 1.9
----------------- -----------------
Ending balance $194.1 $136.9
================= =================
PLAN ASSETS AT FAIR VALUE
Beginning balance $83.1 $75.7
Actual return on plan assets (18.4) (5.3)
Company contributions 7.1 11.9
Plan participant contributions 0.8 0.9
Benefits paid (1.9) (1.8)
Exchange rate adjustment 6.8 1.7
----------------- -----------------
Ending balance $77.5 $83.1
================= =================
<PAGE>
RECONCILIATION OF FUNDED STATUS
Fund status - Benefit obligation in
excess of plan assets $116.6 $53.8
Unrecognized net loss (119.2) (59.7)
Unrecognized net transition obligation 2.3 2.1
Adjustment to recognize minimum liability 117.4 59.9
------------- -----------------
Accrued pension cost $117.1 $56.1
============= =================
The projected benefit obligations and net periodic pension cost were
determined using the following assumptions:
<TABLE>
<CAPTION>
2003 2002 2001
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 2.3%-6.3% 2.8%-6.5% 3.0%-6.5%
Rate of increase in compensation levels 2.5%-3.8% 2.8%-3.8% 3.0%-4.3%
Expected long-term return on assets 3.3%-7.5% 3.8%-7.5% 4.0%-7.5%
</TABLE>
In each of the fiscal years presented, we recorded adjustments for minimum
pension 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 increase in the unfunded accumulated benefit
obligation was due to a reduction in the assumed discount rate and the effect of
some fixed rate increases in benefits in excess of current inflation rates as
determined under the terms of the plan. Concurrently, lower than expected rate
of return on plan assets due to a decline in interest rates and investment
returns in the past few years also reduced plan assets. A corresponding amount
is recorded in the consolidated 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 $24.1 million, $25.3 million and
$26.3 million in fiscal 2003, 2002 and 2001, respectively.
Future minimum commitments under noncancellable operating leases are as
follows:
(In Millions)
------------------------------
2004 $22.1
2005 17.9
2006 12.4
2007 9.3
2008 6.1
Thereafter 5.3
------------------------------
Total $73.1
==============================
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 has been extended through December 2003 under
similar terms and we have a remaining commitment to purchase a minimum of $2.8
million of product from Fairchild in fiscal 2004. Total purchases from Fairchild
were $24.2 million in fiscal 2003, $32.3 million in fiscal 2002 and $55.4
million in fiscal 2001.
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. The agreement provided that total license fees of $187.0 million were to
be paid quarterly through April 2006. We paid license fees of $22.0 million in
fiscal 2003, $37.0 million in fiscal 2002 and $35.0 million in fiscal 2001. In
February 2003, we restructured the agreement with TSMC and entered into a new
long-term technology and manufacturing agreement which establishes TSMC as our
supplier of wafers for products with feature sizes at or below 0.15 micron.
Under this new arrangement, we are no longer required to pay TSMC any further
licensing fees for access to its process technologies.
<PAGE>
CONTINGENCIES -- LEGAL PROCEEDINGS
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. 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 in the case of the PRP
cases, claims have been asserted against a number of other entities for the same
cost recovery or other relief as is sought from us. We accrue costs associated
with environmental matters when they become probable and can be reasonably
estimated. 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 2003,
2002 and 2001.
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. To
date, our liability for these excess costs has not been material.
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 are presently
seeking to certify a medical monitoring class, which we are opposing. 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 $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 and upon
appeal, the appeals court reversed the lower court's dismissal. Our petition for
a panel rehearing and/or rehearing en banc was denied by the appeals court in
April 2003. Our motion to stay the issuance of the appeals court mandate to the
district court pending our petition to the U.S. Supreme Court was denied in May
2003. We intend to continue to contest the case through all available means.
Our tax returns for certain years are under examination in the U.S. by the
IRS and in other countries by local authorities (See Note 8 to the Consolidated
Financial Statements). 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
consolidated financial position or results of operations.
CONTINGENCIES -- OTHER
In connection with divestitures we have done in the past, we have routinely
provided indemnities to cover the indemnified party for matters such as
environmental, tax, product and employee liabilities. We also routinely include
intellectual property indemnification provisions in our terms of sale,
development agreements and technology licenses with third parties. Since maximum
obligations are not explicitly stated in these indemnification provisions, the
potential amount of future maximum payments cannot be reasonably estimated. To
date we have incurred minimal losses associated with these indemnification
obligations and as a result, we have not recorded any liability in our
consolidated financial statements.
<PAGE>
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 larger
segments. In addition to the Analog segment and the Information Appliance
segment, the Enterprise Networking segment and the Enhanced Solutions segment
are considered reportable segments under the criteria in SFAS No. 131. Business
units that do not meet the criteria in SFAS 131 of reportable segment are
combined under "Other" and prior to fiscal 2003, the Enterprise Networking and
the Enhanced Solutions segments were included in "Other." Segment information
for fiscal 2002 and 2001 has been reclassified to conform to the fiscal 2003
presentation.
The Analog segment includes a wide range of building block products such as
high-performance operational amplifiers, power management circuits, data
acquisition circuits and interface circuits. The Analog segment also includes a
variety of mixed-signal products which combine analog and digital circuitry onto
the same chip. The segment is heavily focused on using our analog expertise to
develop high performance building blocks, integrated solutions and mixed-signal
products aimed at wireless handsets, displays, notebook computers, other
portable devices and information infrastructure applications. Current offerings
include power management circuits, radio frequency circuits, audio subsystems,
display 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. Products include application-specific integrated microprocessors based
on our GeodeTM technology and diverse advanced input/output controllers. The
GeodeTM family of products represents the primary component of the information
appliance business we are seeking to sell (See Note 3 to the Consolidated
Financial Statements). The Information Appliance segment was focused on three
key market segments: enterprise thin clients (computers that have minimal memory
and access software from a centralized server network), personal information
access devices, such as WebPADTM, and interactive TV set-top boxes (equipped
with digital video).
The Enterprise Networking segment provides complete mixed-signal solutions
for switches, routers and products used in networked peripherals in the
enterprise and consumer markets.
The Enhanced Solutions segment supplies integrated circuits and contract
services to the high reliability market, which includes avionics, defense, space
and the federal government.
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.
<PAGE>
The following table presents specified amounts included in the measure of
segment results or the determination of segment assets:
<TABLE>
<CAPTION>
Information Enterprise Enhanced
(In Millions) Analog Appliance Networking Solutions
Segment Segment Segment Segment All Others Eliminations Total
---------- ------------ ----------- --------- ---------- ------------- -----------
2003
<S> <C> <C> <C> <C> <C> <C>
Sales to Unaffiliated Customers $1,295.0 $ 211.2 $ 30.4 $ 49.1 $ 86.8 - $1,672.5
Inter-segment Sales - - - - - - -
========== ============ =========== ========= ========== ============= ===========
Net sales $1,295.0 $ 211.2 $ 30.4 $ 49.1 $ 86.8 - $1,672.5
========== ============ =========== ========= ========== ============= ===========
Segment income (loss) before income taxes: $ 82.8 $ (51.9) $ (42.2) $ 15.3 $ (27.3) - $ (23.3)
========== ============ =========== ========= ========== ============= ===========
Depreciation and amortization $ 18.0 $ 5.2 $ 1.5 $ 0.2 $ 203.6 - $ 228.5
Interest income - - - - $ 15.6 - $ 15.6
Interest expense - - - - $ 1.5 - $ 1.5
Share in net losses of equity-method investments $ 1.8 - $ 8.5 - $ 5.6 - $ 15.9
Segment Assets $ 269.8 $ 31.6 $ 4.4 $ 1.1 $1,937.7 - $2,244.6
========== ============ =========== ========= ========== ============= ===========
2002
Sales to Unaffiliated Customers $1,126.8 $ 198.7 $ 25.8 $ 53.5 $ 90.0 - $1,494.8
Inter-segment Sales - - - - - - -
========== ============ =========== ========= ========== ============= ===========
Net sales $1,126.8 $ 198.7 $ 25.8 $ 53.5 $ 90.0 - $1,494.8
========== ============ =========== ========= ========== ============= ===========
Segment income (loss) before income taxes: $ (12.2) $ (83.5) $ (53.2) $ 13.5 $ 12.0 - $ (123.4)
========== ============ =========== ========= ========== ============= ===========
Depreciation and amortization $ 14.0 $ 7.1 $ 2.1 $ 0.2 $ 207.0 - $ 230.4
Interest income - - - - $ 25.2 - $ 25.2
Interest expense - - - - $ 3.9 - $ 3.9
Share in net losses of equity-method investments $ 0.4 - $ 0.6 - $ 6.3 - $ 7.3
Segment Assets $ 286.9 $ 18.6 $ 3.3 $ 2.3 $1,977.7 - $2,288.8
========== ============ =========== ========= ========== ============= ===========
2001
Sales to Unaffiliated Customers $1,516.8 $ 227.0 $ 77.0 $ 58.6 $ 233.2 - $2,112.6
Inter-segment Sales - 0.1 - - - (0.1) -
========== ============ =========== ========= ========== ============= ===========
Net sales $1,516.8 $ 227.1 $ 77.0 $ 58.6 $ 233.2 (0.1) $2,112.6
========== ============ =========== ========= ========== ============= ===========
Segment income (loss) before income taxes: $ 364.1 $ (106.5) $ (31.0) $ 17.8 $ 62.7 - $ 307.1
========== ============ =========== ========= ========== ============= ===========
Depreciation and amortization $ 24.9 $ 9.7 $ 5.6 $ 0.3 $ 202.8 - $ 243.3
Interest income - - - - $ 57.3 - $ 57.3
Interest expense - - - - $ 5.3 - $ 5.3
Share in net losses of equity-method investments - - - - $ 3.6 - $ 3.6
Segment Assets $ 145.7 $ 28.1 $ 10.6 $ 1.8 $2,176.1 - $2,362.3
========== ============ =========== ========= ========== ============= ===========
</TABLE>
<PAGE>
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 our marketing and sales activities in four main geographic areas
that include the Americas, Europe, Japan and the Asia Pacific region. In the
information presented below, 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 table 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 Rest of Total
United States Kingdom Hong Kong Singapore World Eliminations Consolidated
------------- ---------- ----------- ---------- ---------- --------------- ----------------
2003
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 388.9 $ 160.5 $ 500.0 $ 262.7 $ 360.4 $1,672.5
Transfers between geographic areas 465.7 145.3 - 691.7 3.0 $(1,305.7) -
------------- ---------- ----------- ---------- ---------- --------------- ----------------
Net sales $ 854.6 $ 305.8 $ 500.0 $ 954.4 $ 363.4 $(1,305.7) $1,672.5
============= ========== =========== ========== ========== =============== ================
Long-lived assets $ 730.7 $ 38.9 $ 0.7 $ 71.9 $ 117.6 $ 959.8
============= ========== =========== ========== ========== =============== ================
2002
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
============= ========== =========== ========== ========== =============== ================
</TABLE>
<PAGE>
NOTE 14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING
AND FINANCING ACTIVITIES
<TABLE>
(In Millions) 2003 2002 2001
--------------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
<S> <C> <C> <C>
Cash paid for:
Interest expense $ 1.5 $ 4.0 $ 5.6
Income taxes $17.6 $16.2 $80.1
(In Millions) 2003 2002 2001
--------------- -------------- --------------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of stock for employee benefit plans $ 0.8 $ 4.3 $ 4.1
Issuance of common stock to directors $ 0.3 $ 0.2 $ 0.3
Unearned compensation relating to restricted stock issuance $ 0.5 $ 3.1 $ 7.5
Restricted stock cancellation $ 1.1 $ 0.9 $ 2.8
Issuance of common stock upon conversion of convertible
subordinated promissory note - $ 10.0 -
Change in unrealized gain on cash flow hedges $ 0.2 $ (0.4) -
Change in unrealized gain on available-for-sale securities $ (34.9) $ 23.2 $ 11.3
Minimum pension liability $ 57.5 $ 12.7 $ 16.0
Effect of investee equity transactions $ 4.7 - -
</TABLE>
<PAGE>
Note 15. Financial Information by Quarter (Unaudited)
The following table presents the quarterly information for fiscal 2003 and 2002:
<TABLE>
<CAPTION>
Fourth Third Second First
(In Millions, Except Per Share Amounts) Quarter Quarter Quarter Quarter
-------------- --------------- --------------- ---------------
2003
<S> <C> <C> <C> <C>
Net sales $ 425.3 $ 404.3 $ 422.3 $ 420.6
Gross margin $ 189.8 $ 172.5 $ 181.1 $ 182.3
Net income (loss) $ (4.4) $ (36.4) $ 6.2 $ 1.3
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Earnings (loss) per share:
Net income (loss):
Basic $ (0.04) $ (0.20) $ 0.03 $ 0.01
Diluted $ (0.04) $ (0.20) $ 0.03 $ 0.01
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Weighted-average common and potential
common shares outstanding:
Basic 183.0 182.1 181.3 180.7
Diluted 183.0 182.1 182.0 187.1
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Common stock price - high $ 24.80 $ 21.52 $ 19.34 $ 33.74
Common stock price - low $ 15.45 $ 12.54 $ 9.95 $ 15.44
- --------------------------------------------------- -------------- --------------- --------------- ---------------
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 $ 24.85
- --------------------------------------------------- -------------- --------------- --------------- ---------------
</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 25, 2003, there were approximately 7,849 holders
of common stock.
<PAGE>
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 25, 2003 and May 26, 2002,
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 25, 2003. In connection with our audits of the
consolidated financial statements, we also have 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 and financial statement schedule 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 25, 2003 and May 26, 2002,
and the results of their operations and their cash flows for each of the years
in the three-year period ended May 25, 2003 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 4, 2003
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
We maintain disclosure controls and procedures that are intended to ensure
that the information required to be disclosed in our Exchange Act filings
is properly and timely recorded, processed, summarized and reported. We
have a disclosure controls committee comprised of key individuals from a
variety of disciplines in the company that are involved in the disclosure
and reporting process. The committee meets regularly to ensure the
timeliness, accuracy and completeness of the information required to be
disclosed in our filings. The committee reviewed this Form 10-K and also
met with the Chief Executive Officer and the Chief Financial Officer to
review this Form 10-K and the required disclosures and the effectiveness of
the design and operation of our disclosure controls and procedures. The
committee performed an evaluation, with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of fiscal 2003. Based on that evaluation and their
supervision of and participation in the process, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective for the fiscal year 2003 covered by
this Form 10-K.
In designing and evaluating our disclosure controls and procedures, our
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and that management necessarily is required
to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Since we have investments in certain
unconsolidated entities which we do not control or manage, our disclosure
controls and procedures with respect to such entities are necessarily
substantially more limited than those we maintain for our consolidated
subsidiaries. Nevertheless, management believes that the company's
disclosure controls and procedures are effective.
(b) Changes in internal controls.
There have been no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and
procedures subsequent to the date of the evaluation described above.
<PAGE>
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
2003 annual meeting of shareholders to be held on or about September 25, 2003
and which will be filed in definitive form pursuant to Regulation 14A on or
about August 15, 2003 (hereinafter "2003 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," "Executive
Compensation" (including all related subcaptions thereof), and Company Stock
Price Performance in the 2003 Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information concerning the only known ownership of more than 5 percent of
our outstanding common stock appearing under the caption "Outstanding Capital
Stock, Quorum and Voting" in the 2003 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 2003 Proxy
Statement is incorporated herein by reference. For information on securities
authorized for issuance under equity compensation plans, see item 5 of this Form
10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information appearing in the section of the 2003 Proxy Statement on the
proposal relating to the Ratification of Selection of Independent Auditors is
incorporated herein by reference.
<PAGE>
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Pages in
(a) 1. Financial Statements this document
- ----------------------------- -------------
For the three years ended May 25, 2003- 32-66
refer to Index in Item 8
(a) 2. Financial Statement Schedules
- -------------------------------------
Schedule II - Valuation and Qualifying Accounts 72
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 76 to 78 of
this report are filed as part of, or incorporated by reference into, this
report.
(b) Reports on Form 8-K
- ----------------------------
During the quarter ended May 25, 2003, we filed one report on Form 8-K as
follows:
A report on Form 8-K was filed May 21, 2003 furnishing to the Securities and
Exchange Commission as part of Regulation FD disclosure a press release we
issued on May 21, 2003. The press release updated our progress in implementing
the strategic profit improvement actions we initially announced in February
2003. No financial statements were included in the Form 8-K.
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In Millions)
Deducted from Receivables
in the Consolidated Balance Shets
Doubtful Returns and
Description Accounts Allowances Total
- ----------- -------- ---------- -----
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
Additions charged against revenue - 174.9 174.9
Additions charged against
costs and expenses 0.4 - 0.4
Deductions (1.2) (1) (173.7) (174.9)
--------- ------- -------
Balances at May 25, 2003 $ 6.7 $ 31.5 38.2
========= ======= =======
(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: July 21, 2003 /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 21st day of July 2003.
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
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
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 333-100662 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 4, 2003, relating to the consolidated balance sheets of
National Semiconductor Corporation and subsidiaries as of May 25, 2003 and May
26, 2002, 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 25, 2003 and the related financial statement
schedule, which report appears in the 2003 Annual Report on Form 10-K of
National Semiconductor Corporation.
KPMG LLP
Mountain View, California
July 21, 2003
<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, as amended effective October 30, 2001.
(incorporated by reference from the Exhibits to our Form 10-K for the year
ended May 26, 2002, which became effective August 16, 2002).
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).
10.1 Management Contract or Compensatory Plan or Arrangement: Executive Officer
Incentive Plan as amended effective May 28, 2001. Fiscal Year 2003
Executive Officer Incentive Plan Agreement (incorporated by reference from
the Exhibits to our Form 10-Q for the quarter ended August 25, 2002 filed
October 1, 2002).
10.2 Management Contract or Compensatory Plan or Arrangement: 2003 Key Employee
Incentive Plan (incorporated by reference from the Exhibits to our Form
10-Q for the quarter ended August 25, 2002 filed October 1, 2002).
10.3 Management Contract or Compensatory Plan or Agreement: Stock Option Plan,
as amended effective April 15, 2003.
10.4 Management Contract or Compensatory Plan or Agreement: Executive Officer
Stock Option Plan, as amended effective April 15, 2003.
10.5 Management Contract or Compensatory Plan or Arrangement; Equity
Compensation Plan not approved by Stockholders: 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).
10.6 Management Contract or Compensatory Plan or Arrangement: Director Stock
Plan as amended through June 26, 1997.
<PAGE>
10.7 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).
10.8 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).
10.9 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).
10.10Management 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).
10.11Management 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).
10.12Management Contract or Compensatory Plan or Agreement: Executive Long Term
Disability Plan as amended January 1, 2002 as restated July 2002
(incorporated by reference from the Exhibits to our Form 10-Q for the
quarter ended November 24, 2002 filed January 6, 2003).
10.13Management Contract or Compensatory Plan or Agreement: Executive Staff
Long Term Disability Plan as amended January 1, 2002 as restated July 2002.
(incorporated by reference from the Exhibits to our Form 10-Q for the
quarter ended November 24, 2002 filed January 6, 2003).
10.14Management 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).
10.15Management 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).
10.16Equity 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).
10.17Equity 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).
10.18Equity 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).
10.19Equity 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).
10.20Equity 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).
10.21Equity Compensation Plan not approved by stockholders: Option and
Agreement and Plan of Merger by and among National Semiconductor
Corporation, Nintai Acquisition Sub, Inc., DigitalQuake, Inc. and Paul A
Lessard and Michael G. Fung dated as of February 8, 2002; First Amendment
to Option and Agreement and Plan of Merger; Letter Agreement with Jackson
Tung; Letter Agreement with Michael Fung; Letter Agreement with Anil Kumar;
Letter Agreement with Paul Lessard; Letter Agreement with Duane Oto
(incorporated by reference from the Exhibits to our Registration Statement
on Form S-8 Registration No. 333-100662 filed October 22, 2002).
<PAGE>
10.22Equity Compensation Plan not approved by Stockholders: Retirement and
Savings Program. (incorporated by reference from the Exhibits to our
Form-10K for the fiscal year ended May 26, 2002 filed August 16, 2002).
10.23Management Contract or Compensatory Plan or Arrangement: Executive
Physical Exam Plan effective January 1, 2003 (incorporated by reference
from the Exhibits to our Form 10-Q for the quarter ended November 24, 2002
filed January 6, 2003).
10.24Management Contract or Compensatory Plan or Arrangement: Relocation
Package made available to Detlev Kunz. (incorporated by reference from the
Exhibits to our Form 10-K for the fiscal year ended May 26, 2002 filed
August 16, 2002).
10.25Management Contract or Compensatory Plan or Arrangement: Executive
Preventive Health Program, January 2003. (incorporated by reference from
the Exhibits to our Form 10-Q for the quarter ended February 23, 2003 filed
April 2, 2003).
10.26Management Contract or Compensatory Plan or Arrangement: Severance Benefit
Plan, as amended and restated as of January 1, 2003.
21.1 List of Subsidiaries.
23.1 Consent of Independent Auditors (included in Part IV).
24.1 Power of Attorney.
99.1 Additional Exhibit: Rule 13a-14 (a) /15d-14 (a) Certifications.
99.2 Additional Exhibit: Section 1350 certifications.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>form10k_101.txt
<DESCRIPTION>EXHIBIT 10.1 EXECUTIVE OFFICER INCENTIVE PLAN
<TEXT>
Exhibit 10.1
NATIONAL SEMICONDUCTOR CORPORATION
Executive Officer Incentive Plan
(as amended effective May 28, 2001)
1. Objectives.
The National Semiconductor Corporation Executive Officer Incentive Plan (the
"Plan") is designed to retain executives and reward them for making major
contributions to the success and profitability of the Company. These objectives
are accomplished by making incentive Awards under the Plan and providing
participants with a proprietary interest in the growth and performance of the
Company.
2. Definitions.
(a) Award - The Award to a Plan participant pursuant to terms and
conditions of the Plan.
(b) Award Agreement - An agreement between the Company and a participant
that sets forth the terms, conditions and limitations applicable to an Award.
(c) Board - The Board of Directors of National Semiconductor Corporation.
(d) Code - The Internal Revenue Code of 1986, as amended from time to time.
(e) Committee - The Stock Option and Compensation Committee of the Board,
or such other committee of the Board that is designated by the Board to
administer the Plan. The Committee shall be constituted to permit the Plan to
comply with the requirements of Section 162(m) of the Code and any regulations
issued thereunder and shall initially consist of not less than three members of
the Board.
(f) Company - National Semiconductor Corporation ("NSC") and any other
corporation in which NSC controls, directly or indirectly, fifty percent (50%)
or more of the combined voting power of all classes of voting securities.
(g) Executive Officer - Any officer of the Company subject to the reporting
requirements of Section 16 of the Securities and Exchange Act of 1934 ("Exchange
Act").
<PAGE>
3. Eligibility.
Only Executive Officers are eligible for participation in the Plan.
4. Administration.
The Plan shall be administered by the Committee which shall have full power and
authority to construe, interpret and administer the Plan. Each decision of the
Committee shall be final, conclusive and binding upon all persons. Prior to the
beginning of each fiscal year, the committee shall: (i) determine which
Executive Officers are in positions in which they are likely to make substantial
long term contributions to the Company's success and therefore participate in
the Plan for the fiscal year; and (ii) to which Award level each participant is
assigned.
5. Performance Goals.
(a) The Committee shall establish performance goals applicable to a
particular fiscal year prior to its start, provided, however, that such goals
may be established after the start of the fiscal year but while the outcome of
the performance goal is substantially uncertain if such a method of establishing
performance goals is permitted under proposed or final regulations issued under
Code Section 162 (m).
(b) Each performance goal applicable to a fiscal year shall identify one or
more business criteria that is to be monitored during the fiscal year. Such
business criteria include any of the following:
Net income Cash flow
Earnings per share Stockholder return
Debt reduction Revenue
Return on investment Revenue growth
Return on net assets Manufacturing improvements and/or
Operating ratio efficiencies
Quality improvements Return on equity
Market share Cycle time reductions
Profit before tax Customer satisfaction
Size of equity improvements
Reduction in product Return on research and
returns development investment
Reduction in product Customer request date
Strategic positioning performance
programs Human resource excellence
Compensation/review programs
program improvements New product releases
Business/information
systems improvements
<PAGE>
(c) The Committee shall determine the target level of performance that must
be achieved with respect to each criteria that is identified in a performance
goal in order for a performance goal to be treated as attained.
(d) The Committee may base performance goals on one or more of the
foregoing business criteria. In the event performance goals are based on more
than one business criteria, the Committee may determine to make Awards upon
attainment of the performance goal relating to any one or more of such criteria,
provided the performance goals, when established, are stated as alternatives to
one another.
6. Awards.
(a) The Committee shall make Awards only in the event the Committee
certifies in writing prior to payment of the Award that the performance goal or
goals under which the Award is to be paid has or have been attained.
(b) The maximum Award payable under this Plan to any participant for any
fiscal year shall be the lesser of $2 million (two million dollars) or 200% of
the participant's annualized base remuneration at the end of the fiscal year.
(c) The Committee in its sole and absolute discretion may reduce but not
increase the amount of an Award otherwise payable to a participant upon
attainment of the performance goal or goals established for a fiscal year.
(d) A participant's performance must be satisfactory, regardless of Company
performance, before he or she may be paid an incentive Award.
(e) To the extent permitted under regulations issued under Code Section
162(m), in the event the performance goals for a fiscal year are attained, the
Committee, in its discretion, may grant all or such portion of an incentive
Award for the year as it deems advisable to a participant (or his or her
beneficiary in the case of his death) who is employed or who is promoted to an
Executive Officer position covered by this Plan during the year, or whose
employment is terminated during the fiscal year, or who suffers a permanent
disability.
<PAGE>
7. Payment of Awards.
(a) Each participant shall be paid the Award solely in cash as soon as
practicable following grant of the Award by the Committee.
(b) Participants who are eligible under the National Semiconductor
Corporation Deferred Compensation Plan (the "Deferred Compensation Plan") may
elect to make an irrevocable election to defer receipt of all or any portion of
any Award pursuant to and in accordance with the terms of the Deferred
Compensation Plan.
(c) Effective after May 27, 2001, any previously deferred Awards will be
consolidated under the Deferred Compensation Plan and will be payable and
administered in accordance with the terms of the Deferred Compensation Plan and
no longer will be payable under the terms of this Plan. In no event will a
participant be entitled to the same amount under this Plan and the Deferred
Compensation Plan.
8. Tax Withholding.
The Company shall have the right to deduct applicable taxes from any Award
payment.
9. Amendment, Modification, Suspension
or Discontinuance of this Plan.
The Committee may amend, modify, suspend or terminate the Plan for the purpose
of meeting or addressing any changes in legal requirements or for any other
purpose permitted by law. The Committee will seek stockholder approval of an
amendment if determined to be required by or advisable under regulations of the
Securities and Exchange Commission or the Internal Revenue Service, the rules of
any stock exchange on which the Company's stock is listed or other applicable
law or regulation. No amendment, suspension, termination or discontinuance may
impair the right of a participant or his or her designated beneficiary to
receive any Award accrued prior to the later of the date of adoption or the
effective date of such amendment, suspension, termination or discontinuance.
<PAGE>
10. Termination of Employment.
If the employment of a participant terminates, other than pursuant to paragraphs
(a) and (b) of this Section 10, all unpaid Awards shall be cancelled
immediately, unless the Award Agreement provides otherwise.
(a) Retirement - When a participant's employment terminates as a result of
retirement, the Committee may permit Awards to continue in effect beyond the
date of retirement in accordance with the applicable Award Agreement and the
vesting of any Award may be accelerated.
(b) Death or Disability of a Participant.
(i) In the event of a participant's death, the participant's estate or
beneficiaries shall have a period up to the expiration date specified in
the Award Agreement within which to receive any outstanding Award held by
the participant under such terms as may be specified in the applicable
Award Agreement. Rights to any such outstanding Awards shall pass by will
or the laws of descent and distribution in the following order: (a) to
beneficiaries so designated by the participant; if none, then (b) to a
legal representative of the participant; if none, then (c) to the persons
entitled thereto as determined by a court of competent jurisdiction. Awards
so passing shall be made at such times and in such manner as if the
participant were living.
(ii) In the event a participant is disabled, Awards and rights to any
such Awards may be paid to the participant.
(iii) After the death or disability of a participant, the Committee
may in its sole discretion at any time (a) terminate restrictions in Award
Agreements; (b) accelerate any or all installments and rights; and (c)
instruct the Company to pay the total of any accelerated payments in a lump
sum to the participant, the participant's estate, beneficiaries or
representative.
(iv) In the event of uncertainty as to interpretation of or
controversies concerning this paragraph (b) of Section 10, the Committee's
determinations shall be binding and conclusive.
11. Cancellation and Rescission of Awards.
Unless the Award Agreement specifies otherwise, the Committee may cancel any
unpaid Awards at any time if the participant is not in compliance with all other
applicable provisions of the Award Agreement and the Plan. Awards may also be
cancelled if the Committee determines that the participant has at any time
engaged in activity harmful to the interest of or in competition with the
Company.
12. Nonassignability.
No Award or any other benefit under the Plan shall be assignable or transferable
by the participant during the participant's lifetime.
13. Unfunded Plan.
The Plan shall be unfunded. Although bookkeeping accounts may be established
with respect to participants, any such accounts shall be used merely as a
bookkeeping convenience. The Company shall not be required to segregate any
assets that may at any time be represented by cash, nor shall the Plan be
construed as providing for such segregation, nor shall the Company nor the Board
nor the Committee be deemed to be a trustee of any Award under the Plan. Any
liability of the Company to any participant with respect to an Award under the
Plan shall be based solely upon any contractual obligations that may be created
by the Plan and any Award Agreement; no such obligation of the Company shall be
deemed to be secured by any pledge or other encumbrance on any property of the
Company. Neither the Company nor the Board nor the Committee shall be required
to give any security or bond for the performance of any obligation that may be
created by the Plan.
14. No Right to Continued Employment.
Nothing in this Plan shall confer upon any employee any right to continue in the
employ of the Company or shall interfere with or restrict in any way the right
of the Company to discharge an employee at any time for any reason whatsoever,
with or without good cause.
15. Effective Date.
The Plan shall become effective on May 29, 1994. The Committee may terminate or
suspend the Plan at any time. No awards may be made while the Plan is suspended
or after it is terminated.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>form10k_1026.txt
<DESCRIPTION>EXHIBIT 10.26 SEVERANCE BENEFIT PLAN
<TEXT>
Exhibit 10.26
NATIONAL SEMICONDUCTOR CORPORATION
SEVERANCE BENEFIT PLAN
This document constitutes an amended and restated plan and summary plan
description of the National Semiconductor Corporation Severance Benefit Plan
(the "Plan") effective as of January 1, 2003 and supercedes any prior National
Semiconductor Corporation Severance Benefit Plan document. The Plan is an
"employee welfare benefit plan" within the meaning of section 3(l) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Your
ERISA rights are described at the end of this pamphlet. This pamphlet is
provided to you as required by ERISA. You should keep it for future reference.
The Plan provides guidelines for offering severance benefits to employees
who suffer an employment loss as the result of a reduction-in-force. In order to
accept the offer and receive severance benefits, employees must enter into a
separation agreement, releasing any and all claims against the Company. National
Semiconductor Corporation (the "Company") shall determine in its sole discretion
on a case-by-case basis whether or not a reduction-in-force has occurred,
whether or not to offer severance benefits in the event of a reduction-in-force,
whether or not a reduction-in-force will result in an employment loss that
qualifies for a severance benefits offer and whether or not an employee has
properly accepted a severance benefits offer. In addition, the schedule of
severance benefits actually offered to employees is discretionary with the
Company and may vary from the schedules shown herein as guidelines. The Company
reserves the right to amend or terminate the Plan at any time.
1 SELECTION CRITERIA AND ELIGIBILITY
1.1 Eligible employees are those employees of the Company who are selected
by the Company in its sole discretion to receive an offer of benefits
under this Plan in the event of a reduction-in-force. All decisions as
to whether a reduction-in-force has occurred and the employees
affected by the reduction shall be made in the sole discretion of the
Company in consultation with the affected business units/support
groups, in accordance with this section. Due consideration shall be
given to the work any affected employee was performing or qualified to
perform and to the employee's level of performance. An individual
shall only be treated as an employee if he or she is reported on the
payroll records of the National Semiconductor Corporation as a common
law employee. This term does not include any other common law
employee. In particular, it is intended that individuals not treated
as common law employees on the payroll records of National
Semiconductor Corporation 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 National Semiconductor
Corporation for purposes of pertinent Internal Revenue Code sections
or for any other purpose.
1.2 In the event the Company decides to totally eliminate a particular job
function, all incumbents in such a job function will be subject to
reduction-in-force.
1.3 Barring total elimination of jobs, special skills and job performance
are primary considerations in selecting employees for a
reduction-in-force. Employees in similar job functions may be
evaluated within a business unit/department or across organizations in
order to retain a core group of employees who possess skills necessary
to successfully continue company operations. Evaluation factors
include job performance and critical skills, including breadth of
skills, and transferable skills.
1.3.1If an employee's job is being eliminated and the employee has
special skills which can be utilized in another capacity, the
employee(s) may, in the sole discretion of the Company, be
offered reassignment to another position.
1.3.1.1 An employee who refuses an offer of a comparable position
will be considered to have resigned and will not be eligible
for severance benefits hereunder.
1.3.1.2 An employee who refuses an offer of a position at a
reduced salary and severs from employment will be eligible
for severance benefits hereunder.
<PAGE>
1.4 No employee shall be eligible for severance benefits under this Plan
unless the Company, in its sole discretion, determines that he/she
will suffer an employment loss. For purposes of this Plan, an
employment loss means a significant hiatus in an employee's ability to
work and earn compensation comparable to that which he/she earned
immediately before separating from Company employment.
1.5 Unless the Company decides otherwise, employees terminated from
Company employment as the result of sales or other transfers of
Company business units, divisions, subsidiaries or assets to a new
owner, not owned by or affiliated with the Company, shall not be
entitled to receive severance benefits under this Plan. The Company
may in its sole discretion decide otherwise by initiating a
reduction-in-force before the effective date of the sale or transfer
and selecting for an offer of Plan benefits those affected employees
it determines will experience an employment loss as a result of the
transaction..
1.6 An employee whose position has been selected for a reduction-in-force
at a time when the employee is on protected family leave or other
legally protected leave will be eligible for severance benefits. An
employee who is on leave that is not for protected family leave or
other legally-protected leave when a reduction-in-force eliminates
his/her job will not be eligible for severance benefits, regardless of
the length of the leave, and may not return to active status unless
there is an open requisition for which the employee is qualified .
2 SEVERANCE BENEFITS
The benefits provided under this Plan (Plan benefits or severance benefits)
include severance pay and extended medical and dental benefits.
2.1 Severance Pay
2.1.1Employees affected by a reduction-in-force and selected by the
Company to receive an offer of severance benefits under this Plan
will be eligible for severance pay in accordance with the
approved severance pay schedule in effect at the time of
separation, provided they accept the offer. The severance pay
schedule set forth in Section 2.1.2 is a guideline only, and, in
the discretion of the Company, may be modified, amended or
eliminated. Any such change shall be made by the Corporate Vice
President of Human Resources. Unless the Company, in its sole
discretion, decides otherwise, the amounts scheduled below will
apply in all other cases. Except as provided in Section 2.1.8,
severance pay shall be paid in one lump-sum as of the date of
separation unless the Company, in its sole discretion, decides
otherwise.
2.1.2Severance Pay Schedule. Employees who accept the Company's
severance benefits offer will receive severance pay based on
their years of Company service:
Years of service Weeks of severance pay
Up to 1 year 3 weeks
1 year + one day to 2 years 4 weeks
2 years + one day to 3 years 5 weeks
3 years + one day to 4 years 6 weeks
4 years + one day to 5 years 7 weeks
5 years + one day to 6 years 8 weeks
6 years + one day to 7 years 9 weeks
7 years + one day to 8 years 10 weeks
8 years + one day to 9 years 11 weeks
9 years + one day to 10 years 12.5 weeks
10 years + one day to 11 years 14 weeks
11 years + one day to 12 years 15.5 weeks
12 years + one day to 13 years 17 weeks
13 years + one day to 14 years 18.5 weeks
14 years + one day to 15 years 20 weeks
Additional 1.5 weeks for every yearly increment thereafter.
2.1.3Severance pay will be calculated according to base salary plus
applicable shift premium, unless the Company decides otherwise.
2.1.4Severance pay shall be net of amounts withheld by the Company to
fulfill any federal, state or local withholding requirement.
2.1.5All vacation accrued to date of separation will generally be
paid in addition to severance pay, as part of final pay.
2.1.6 Any borrowed vacation will be subtracted from severance pay.
2.1.6.1 However, no employee who is eligible to receive benefits
under this Plan will receive less than 40 hours severance
pay, except as noted in Section 2.1.1 or 2.1.6.2.
2.1.6.2 Severance pay may be reduced below 40 hours if: (1)
travel advances have not been accounted for with approved
Expense Reports, and/or (2) garnishments are normally
deducted from pay.
2.1.7Regular part-time employees will generally be paid one-half of
the otherwise applicable severance pay, according to their length
of service and based on their weekly rate of pay.
2.1.8Employees who have been selected to receive an offer of
severance benefits may irrevocably elect, no later than the
earlier of the day prior to their date of separation or 30 days
after their receipt of notice of separation, to defer receipt of
their severance pay. If the employee accepts the offer, payment
of deferred severance pay will be made within sixty (60) days of
the first of the calendar year following the year of his/her
separation from service. The election shall be made in accordance
with procedures established by the Company. Interest shall not
accrue on the severance pay from the date of deferral to the date
of payment.
<PAGE>
2.1.9Unless the Company, in its sole discretion, decides otherwise,
severance pay offered to employees who previously received
severance benefits will be based on their date of rehire
following the most recent receipt of severance benefits.
2.2 Extended medical and dental coverage
2.2.1Employees affected by a reduction-in-force and selected by the
Company to receive an offer of severance benefits under this Plan
will be eligible for extended medical and dental coverage at
Company expense, provided they accept the offer. Such extended
coverage will begin following the last day of the month in which
the employee separates from employment and shall continue for a
period set out in the approved extended coverage schedule in
effect at the time of separation, if any. The schedule set forth
in Section 2.2.2 is a guideline only, and, in the discretion of
the Company, may be modified, amended or eliminated. Any such
change shall be made by the Corporate Vice President of Human
Resources. Unless the Company, in its sole discretion, decides
otherwise, the extended coverage schedule below will apply in all
other cases.
2.2.2Extended coverage schedule. Employees who accept the Company's
severance benefits offer, will receive extended mental and dental
coverage for a period based on their years of Company service:
Years of service Coverage after separation
---------------- -------------------------
Up to 7 years 3 months
7 years + one day to 14 years 6 months
14 years + one day to 20 years 9 months
More than 20 years 12 months
2.2.3National will pay the entire cost of medical and dental benefits
for the applicable extended coverage period. Extended coverage
shall only be available to the extent the affected employee has
coverage in place at the time he or she is selected for
termination as part of a reduction-in-force and has rights to
continue such coverage under COBRA, the federal continuation
coverage law. Employees who opted out of coverage during the
previous open enrollment period may not enroll in order to obtain
extended coverage. Likewise, employees may not add dependents to
obtain extended coverage, except as permitted by COBRA.
<PAGE>
2.2.4Under COBRA, employees are eligible to purchase continuation
coverage after their employment terminates, typically for a
period of up to 18 months, by paying monthly premiums.
Information about COBRA continuation coverage under the National
Health Care Continuation (HCC) Option will be provided to
affected employees. After employees separate from employment, any
rights they may have to change coverage, add dependents or elect
other coverage options will be determined under the federal COBRA
law and regulations. Those individuals terminated from Company
employment who have COBRA rights may purchase continuation
coverage even if they do not receive or accept an offer of
severance benefits under this Plan. Employees who do receive and
accept a severance benefits offer will not have to pay COBRA
premiums during the extended coverage provided as a severance
benefit under this Plan. However, the Company-provided extended
coverage will count toward the maximum period of COBRA coverage.
After Company-paid extended coverage ends, employees will be able
to maintain coverage during the remainder of the COBRA
continuation period by paying the required monthly premiums.
2.2.5Employees may be eligible to convert their medical plan
participation to an individual policy within 31 days from the
date their COBRA coverage ends. There is no individual conversion
option under the dental plan.
2.2.6Unless the Company, in its sole discretion, decides otherwise,
extended medical and dental coverage for employees who previously
received severance benefits will be based on their date of rehire
following the most recent receipt of severance benefits.
2.3 Notice or payment in lieu of notice
2.3.1Generally, the Company intends to give employees affected by a
reduction-in-force 30 days notice before their employment
terminates.
2.3.2In the event that an affected employee is terminated for cause
during the notice period, no benefits shall be payable to him/her
under this Plan.
2.3.3If an employee affected by a reduction-in-force and offered Plan
benefits elects to terminate his/her employment before the end of
the notice period, his usual pay and benefits will end on the
termination date. The employee will receive severance benefits
under this Plan only if the Company determines in its sole
discretion that his/her early separation is in the Company's best
interests and only if he/she accepts the benefits offer, in
accordance with Section 2.4.
<PAGE>
2.3.4If the Company in its sole discretion determines it will no
longer require the services of some or all affected employees
before the end of the notice period, it may elect to continue
those employees' usual pay and benefits through the end of the
notice period, but relieve them of the obligation to provide
further services. After the notice period ends, the employees'
employment will terminate, their usual pay and benefits will
cease and they will receive any benefits offered under this Plan,
provided they have accepted the offer.
2.3.5If the reduction-in-force falls under the WARN Act and/or
California Labor Code sections 1400 et seq., or if the Company
otherwise decides in its sole discretion, the generally-provided
30-day notice period shall be changed to a 60-day notice period.
If the reduction in force falls under California Labor Code
sections 1400, et seq., but not under the WARN Act, severance pay
to California employees covered by those sections will be reduced
by the amount of pay they receive for the additional 30 days of
notice. Such reductions shall be made in the same manner and
subject to the same 40-hour minimum severance payment described
in Sections 2.1.6, 2.1.6.1 and 2.1.6.2.
2.3.6The Company reserves the right to terminate affected employees'
employment before the end of the applicable notice period and pay
such employees, in lieu of notice, an amount representing their
usual pay and benefits for any remaining part of the notice
period. In the event the Company takes such action, it shall pay
such amount-in-lieu-of-notice to each affected employee, whether
or not he/she accepts a severance benefits offer and becomes
entitled to severance benefits under this Plan.
2.3.7Any deviation from these provisions requires the approval of the
Corporate Vice President of Human Resources.
2.4 Accepting the Company's severance benefits offer
2.4.1An employee shall not be eligible to receive the severance
benefits offered by the Company under this Plan unless he/she
accepts the offer. An employee can accept the Company's offer
only by entering into a valid and enforceable separation
agreement that includes a release and waiver of any and all
claims against the Company.
2.4.2The Company may in its sole discretion impose different or
additional conditions for accepting an offer of, or otherwise
becoming entitled to, Plan benefits.
<PAGE>
2.5 Revocation or cessation of Plan benefits
2.5.1The Company shall revoke and/or cease severance benefits under
this Plan if it determines, in its sole discretion, that an
employee has breached any obligation owed to the Company; has
engaged in any activity injurious to the Company; or has been
incorrectly or mistakenly offered or awarded Plan benefits.
2.5.2The Company shall revoke severance benefits under this Plan in
the event it decides not to terminate an employee or recalls or
rehires an employee before he/she receives such benefits. The
Company shall cease Plan benefits in the event it recalls or
rehires an employee while he/she is still receiving such
benefits.
3 ELIGIBILITY FOR RECALL AND INCENTIVE PLAN AWARDS
3.1 Recall/Rehire
3.1.1Employees affected by a reduction-in-force will be eligible for
recall for six months following their separation dates, whether
or not they accept the Company's severance benefits offer.
Affected employees will be considered for positions for which
they are qualified based on critical skills and job performance.
Any affected employee who refuses an offer of suitable employment
from the Company or declines an interview for a reasonable recall
opportunity will no longer be eligible for recall.
3.1.2Except as otherwise provided herein, the Company's Bridging of
Service policy will apply to a separated employee who is rehired.
Length of service related to specific benefit plans will be
governed by the rules of those plans. If the specific benefit
plan does not address length of service, the terms of the
Company's Bridging of Service policy will apply.
3.1.2.1 Vacation accrual will begin at zero, with the accrual
rate determined according to the Company's Bridging of
Service policy taking into consideration employee's prior
years of service.
3.2 Incentive plan awards
3.2.1Employees selected for a reduction-in-force may or may not be
eligible for incentive plan awards, depending on when the
reduction-in-force takes place. Whether or not such employees
accept the Company's severance benefits offer will not be a
factor. Participants in the Key Employee Incentive Plan (KEIP)
whose employment is terminated by a reduction-in-force during the
plan period will not receive an award. Participants in the
Success Sharing Plan (SSP) whose employment is terminated by
reduction-in-force during the measurement period will not receive
an award. If a KEIP or SSP participant's employment is terminated
by a reduction-in-force after the plan period or measurement
period, but before the award payment date, he/she will receive
the full amount of any award on the award payment date.
<PAGE>
4 ADMINISTRATION
4.1 The Company is the Plan Administrator. The Company may delegate to the
Vice President of Human Resources or any other individual
responsibility for the administration of the Plan, and for making any
interpretation of or implementing any change in Plan provisions which
the Company is authorized to make hereunder. Benefits are provided
through direct payments by the Company from its general assets. The
Company has full discretion and authority to interpret the Plan and
make all determinations relating to eligibility for and the payment of
benefits under the Plan. The Company's interpretations and exercise of
discretion hereunder shall be final and binding on all persons
claiming benefits under the Plan.
5 AMENDMENT AND TERMINATION
5.1 The Company reserves the right to amend or terminate the Plan at any
time by action of its Board of Directors, or, in the case of
administrative provisions, by the Corporate Vice President of Human
Resources.
6 NO EMPLOYMENT RIGHTS
6.1 The adoption of the Plan is not a contract between the Company and any
employee, nor does it give any employee any right to continue
employment with the Company, or interfere with the right of the
Company to discharge any employee. Nothing contained in this Plan
shall give any employee or beneficiary any right, title or interest in
any property of the Company.
7 NO ASSIGNMENT
7.1 An employee's rights under this Plan cannot be assigned, alienated,
encumbered, or otherwise transferred.
8 CLAIMS PROCEDURE
8.1 Employees do not have to file a claim for severance benefits. However,
if an employee feels severance benefits have been incorrectly
determined, the employee may file a written notice with the Plan
Administrator, at the address listed in Section 9.9, to request a
review of the determination.
<PAGE>
8.2 The Plan Administrator will give written notice of its decision within
90 days after the filing of the request for review unless special
circumstances require an extension up to an additional 90 days. If the
Plan Administrator determines that an extension of time for processing
is required, written notice of the extension shall be furnished to the
claimant prior to the termination of the initial 90-day period. In no
event shall such extension exceed a period of 90 days from the end of
such initial period. The extension notice shall indicate the special
circumstances requiring an extension of time and the date by which the
Plan expects to render the benefit determination. If a claim is
denied, the notice will (1) specify the reason or reasons for denial,
(2) refer to the pertinent Plan provisions on which the denial is
based, (3) describe any additional material or information necessary
to perfect the claims, and an explanation of why such material or
information is necessary and (4) explain the Plan's review procedures
and the time limits applicable to such procedures, including a
statement of the claimant's right to bring a civil action under ERISA
Section 502(a) following an adverse benefit determination on review.
The claimant may then appeal the decision by filing a written notice
of appeal with the Plan Administrator within 60 days after receipt of
the notice of denial.
8.3 A claimant or any authorized representative may, before or after
filing a notice of appeal, review any documents pertinent to the claim
and submit documents, records, written comments and other information
relating to the claim. The claimant shall be provided, upon request
and free of charge, reasonable access to, and copies of all documents,
records, and other information relevant to the claimant's claim of
benefits. The Plan Administrator will make its decision on the appeal
within 60 days after receipt of the appeal (unless special
circumstances require an extension of time up to 120 days). If the
Plan Administrator determines that an extension of time for processing
is required, written notice of the extension shall be furnished to the
claimant prior to the termination of the initial 60-day period. In no
event shall such extension exceed a period of 60 days from the end of
such initial period. The extension notice shall indicate the special
circumstances requiring an extension of time and the date by which the
Plan expects to render the benefit determination. Such review will
take into account all comments, documents, records and other
information submitted by the claimant relating to the claim, without
regard to whether such information was submitted or considered in the
initial benefit determination.
8.4 Such decision shall be rendered in writing, and shall include (1)
specific reasons for the decision, (2) specific references to the
provisions of the Plan on which the decision is based, (3) a statement
that the claimant is entitled to receive, upon request and free of
charge, reasonable access to, and copies of, all documents, records,
and other information relevant to the claimant's claim for benefits,
and (4) a statement of the claimant's right to bring an action under
Section 502(a) of ERISA. Such decision shall be final.
9 OTHER INFORMATION
9.1 Legal Process
9.1.1Any legal process having to do with a denied claim or otherwise
should be directed by writing to:
National Semiconductor Corporation
Attention: General Counsel
2900 Semiconductor Drive
P.O. Box 58090
Santa Clara, California 95052-8090
<PAGE>
9.2 Rights and Protections
9.2.1ERISA provides for the following rights and protections with
respect to the Plan. As a participant in the Plan, you are
entitled to:
9.2.1.1 Examine, without charge, at the Plan Administrator's
office, all Plan documents and copies of all documents filed
by the Plan with the U.S. Department of Labor, such as
annual reports and Plan descriptions.
9.2.1.2 Obtain copies of Plan documents and other Plan
information upon written request to the Plan Administrator.
The Administrator may make a reasonable charge for the
copies.
9.2.2If a participant's claim for a benefit is denied, in whole or in
part, the participant must receive a written explanation of the
reason for the denial. The participant has the right to have the
Plan Administrator review and reconsider his or her claim. Under
ERISA there are steps that the participant can take to enforce
the above rights. For instance, if the participant requests
materials from the Plan Administrator and does not receive them
within 30 days, he or she may file suit in a federal court. In
such a case, the court may require the Plan Administrator to
provide the materials and to pay the participant up to $100 a day
until he or she receives the materials, unless the materials were
not sent because of reasons beyond the control of the Plan
Administrator.
9.2.3In addition to creating rights for plan participants, ERISA also
imposes duties upon the people who are responsible for the
operation of an employee benefit plan. The people who operate the
Plan, called "fiduciaries," have a duty to do so prudently and
solely in the interest of Plan participants and beneficiaries.
9.2.4If it should happen that the Plan fiduciaries misuse the Plan's
money or if a participant is discriminated against for asserting
his or her rights, he or she may seek assistance from the U.S.
Department of Labor, or may file suit in a federal court. The
court will decide who should pay court costs and legal fees. If
the participant is successful, the court may order the person
sued to pay these costs and fees. If the participant loses, the
court may order the participant to pay these costs and fees, if,
for example, it finds the claim or suit frivolous.
9.2.5Neither the Company nor any other person may terminate or
otherwise discriminate against an employee in any way to prevent
the employee from obtaining a benefit from this Plan or
exercising rights under ERISA.
9.2.6Questions about the information presented herein should be
directed to the employee's supervisor, the Human Resources
Department or the Plan Administrator. Questions about participant
rights under ERISA or if assistance is required in obtaining
documents from the Plan Administrator, participants should
contact the nearest office of the Pension and Welfare Benefits
Administration, U.S. Department of Labor, listed in the telephone
directory or the Division of Technical Assistance and Inquiries,
Pension and Welfare Benefits Administration, U.S. Department of
Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210.
Participants may also obtain certain publications about
participant rights and responsibilities under ERISA by calling
the publications hotline of the Pension and Welfare Benefits
Administration.
9.3 Plan Name -- The National Semiconductor Corporation Severance Benefit
Plan.
9.4 Plan Number -- 513
9.5 Plan Year -- The Plan year is the 12-month period corresponding with
the Company's fiscal year end.
9.6 Type of Plan -- The Plan is a severance benefits plan.
9.7 Plan Administration -- The Plan is administered by the Company.
<PAGE>
9.8 Plan Sponsor and Employers' Identification Number (EIN)
National Semiconductor Corporation
2900 Semiconductor Drive
P.O. Box 58090
Santa Clara, California 95052-8090
(408) 721-5000
EIN: 95-2095071
9.9 Name and Address of Plan Administrator
National Semiconductor Corporation
Attention: Corporate Benefits
2900 Semiconductor Drive M/S C1-195
P.O. Box 58090
Santa Clara, California 95052-8090
9.10 Name and Address of the Agent for Service of Legal Process
National Semiconductor Corporation
Attention: General Counsel
2900 Semiconductor Drive M/S G3-135
P.O. Box 58090
Santa Clara, California 95052-8090
9.11 Source of Financing of the Plan -- The Plan is unfunded and the cost
of benefits provided by the Plan is paid by the Company.
9.12 The Plan's Requirements Regarding Eligibility for Participation and
Benefits -- See Section 1, "Selection Criteria and Eligibility".
9.13 Description of Circumstances Which May Result in Disqualification,
Ineligibility or Denial or Loss of Benefits -- See Section 1,
"Selection and Eligibility Criteria" and Section 2 "Severance
Benefits".
9.14 Procedure to Be Followed in Presenting Claims for Benefits Under the
Plan --See Section 8, "Claims Procedure".
9.15 Governing Law - The provisions of the Plan shall be construed,
administered and enforced according to the laws of the State of
California, to the extent not preempted by federal law.
<PAGE>
IN WITNESS WHEREOF, National Semiconductor Corporation, by its duly authorized
representative, has caused this amended Plan to be executed in its name and on
its behalf as of this 6th day of January, 2003.
National Semiconductor Corporation
By _//S// EDWARD SWEENEY
Edward Sweeney
Senior Vice-President, Human Resources
<PAGE>
National Semiconductor Corporation
Severance Benefit Plan
Executive Addendum - January 1, 2003
Eligibility
All Executives in National's executive level classifications are eligible to
receive severance benefits that may be greater than the severance benefits
outlined in Section 2.1.1 of the Severance Benefit Plan.
This policy will not apply in cases where an executive is being terminated for
misconduct or unsatisfactory job performance which has been communicated and
documented.
Severance Benefits
Executives are eligible for severance benefits according to the following
schedule, or according to the schedule outlined in Section 2.1.1 of the
Severance Benefit Plan, whichever is greater.
xecutive Level 3 (4400 Job Codes) Six months severance pay
Executive Level 4 & 5 (4300 & 4200 Job Codes) Five months severance pay
Executive Level 6 (4100 Job Codes) Four months severance pay
All other provisions of the National Semiconductor Corporation Severance Benefit
Plan applies.
Approval:
//S// EDWARD SWEENEY 1/6/03
-------------------- ------
Edward Sweeney, Senior Vice-President, Human Resources Date
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<FILENAME>form10k_103.txt
<DESCRIPTION>EXHIBIT 10.3 STOCK OPTION PLAN
<TEXT>
Exhibit 10.3
NATIONAL SEMICONDUCTOR CORPORATION
STOCK OPTION PLAN
(as amended effective April 15, 2003)
1. TITLE OF PLAN
The title of this Plan is the National Semiconductor Corporation Stock
Option Plan, hereinafter referred to as the "Plan", and formerly known as the
National Semiconductor Corporation 1977 Stock Option Plan.
2. PURPOSE
The Plan is intended to align the interests of eligible key employees of
National Semiconductor Corporation (hereinafter called the "Corporation") and
its subsidiaries (as hereinafter defined) with the interests of the stockholders
of the Corporation and to provide incentives for such employees to exert maximum
efforts for the success of the Corporation. By extending to key employees the
opportunity to acquire proprietary interests in the Corporation and to
participate in its success, the Plan may be expected to benefit the Corporation
and its stockholders by making it possible for the Corporation to attract and
retain the best available talent and by rewarding key management and technical
personnel for their part in increasing the value of the Corporation's shares. It
is further intended that options granted pursuant to this Plan may be incentive
stock options under Section 422A of the Internal Revenue Code of 1986, as
amended (the "Code"), or may be options which are not incentive stock options
(hereinafter called "non-qualified stock options").
3. STOCK SUBJECT TO THE PLAN
There will be reserved for issue upon the exercise of options granted under
the Plan 39,354,929 shares of the Corporation's $.50 par value Common Stock,
subject to adjustment as provided in Paragraph 8, which may be unissued shares,
reacquired shares, or shares bought on the market. If any option which shall
have been granted shall expire or terminate for any reason without having been
exercised in full, the unpurchased shares shall again become available for the
purposes of the Plan (unless the Plan shall have been terminated).
4. ADMINISTRATION
(a) The Plan shall be administered by a committee of the Board of Directors
of the Corporation (the "Committee") which shall be appointed by a majority of
the whole Board. The Committee shall be constituted to permit the Plan to comply
with (i) Rule 16b-3 promulgated under the Securities Exchange Act of 1934
("Exchange Act") and any successor rule and (ii) IRS regulations issued under
Section 162(m) of the Code, and shall initially consist of not less than three
members of the Board, all of whom are ineligible for benefits under the Plan and
none of whom has been so eligible for at least one year prior to serving on such
Committee.
(b) The Committee shall have the plenary power, subject to and within the
limits of the express provisions of the Plan:
(i) To determine from time to time which of the eligible persons shall
be granted options under the Plan; the time or times (during the term of
the option) within which all or portions of each option may be exercised
and the number of shares for which an option or options shall be granted to
each of them. Notwithstanding the foregoing, no person may be granted more
than 500,000 options during any one fiscal year of the Corporation.
(ii) To construe and interpret the Plan and options granted under it,
and to establish, amend, and revoke rules and regulations for its
administration. The Committee, in the exercise of this power, shall
generally determine all questions of policy and expediency that may arise,
may correct any defect, or supply any omission or reconcile any
inconsistency in the Plan or in any option agreement in a manner and to the
extent it shall deem necessary or expedient to make the Plan fully
effective.
(iii) To prescribe the terms and provisions of each option granted
(which need not be identical).
(iv) To determine whether options granted shall be incentive stock
options or non-qualified stock options.
(v) To determine whether options granted shall be transferable without
consideration to immediate family members or family trusts for the benefit
of the optionee's immediate family members. As used herein, "immediate
family" means parents, spouses and children.
(c) The Committee shall not have the authority to grant new options in
exchange for the cancellation of stock options previously granted under the Plan
or under any other stock option plan of the Corporation.
<PAGE>
5. ELIGIBILITY
Options may be granted only to regular salaried officers and key employees
of the Corporation and its subsidiaries. The term "subsidiary" corporation shall
mean any corporation in which the Corporation controls, directly or indirectly,
fifty percent (50%) or more of the combined voting power of all classes of
stock. A director of the Corporation shall not be eligible for the benefits of
the Plan unless such person also is a regular salaried employee of the
Corporation and/or of any subsidiary.
6. TERMS OF OPTION AND OPTION AGREEMENTS
Each option shall be evidenced by a Stock Option Agreement which may
expressly identify the options as incentive stock options or as non-qualified
stock options, and be in such form and contain such provisions as the Committee
shall from time to time deem appropriate; provided, however, that the grant of a
non-qualified option pursuant to this Plan shall in no way be construed to be an
alternative to the right of an employee to purchase stock pursuant to any
incentive stock option heretofore or hereafter granted to an employee pursuant
to any stock option plans now in existence or hereafter adopted by the
Corporation. The terms of the option agreements need not be identical, but each
option agreement shall include, by appropriate language, or be subject to, the
substance of all of the applicable following provisions:
(a) The purchase price under each option granted shall be as determined by
the Committee but shall in no instance be less than 100% of fair market value on
the date of grant. The fair market value on the date of grant shall be the
opening price of the Common Stock on the New York Stock Exchange on such date
(or if there shall be no trading on such date, then on the first previous date
on which there is such trading).
(b) The maximum term of any incentive stock option shall be ten years from
the date it was granted.
(c) The maximum term of any non-qualified stock option shall be ten years
and one day from the date it was granted.
(d) An option may not be exercised to any extent, either by the person to
whom it was granted or by the grantee's transferee, or by any person after the
grantee's death, unless the person to whom the option was granted has remained
in the continuous employ of the Corporation, or of a subsidiary, for not less
than six months from the date when the option was granted. Otherwise, each
option shall be exercisable as determined by the Committee.
(e) The Corporation, during the terms of options granted under the Plan, at
all times will keep available the number of shares of stock required to satisfy
such options.
(f) The Corporation will seek to obtain from each regulatory commission or
agency having jurisdiction such authority as may be required to issue and sell
shares of stock to satisfy such options. Inability of the Corporation to obtain
from any such regulatory commission or agency authority which counsel for the
Corporation deems necessary for the lawful issuance and sale of its stock to
satisfy such options shall relieve the Corporation from any liability for
failure to issue and sell stock to satisfy such options pending the time when
such authority is obtained or is obtainable.
(g) Neither a person to whom an option is granted nor his or her
transferee, legal representative, heir, legatee, or distributee, shall be deemed
to be the holder of, or to have any of the rights of a holder with respect to,
any shares subject to such option unless and until he or she has exercised his
or her option pursuant to the terms thereof.
(h) In order to be exempt under Section 16 of the Exchange Act, the option
may not be transferable except by will or by the laws of descent or
distribution, and during the lifetime of the person to whom the option is
granted he or she alone may exercise it.
(i) An option shall terminate and may not be exercised if the person to
whom it is granted ceases to be continuously employed by the Corporation, or by
a subsidiary of the Corporation, except (subject nevertheless to the last
sentence of this subparagraph (h)): (1) if the grantee's continuous employment
is terminated for any reason other than (i) retirement, (ii) permanent
disability, or (iii) death, the grantee or the grantee's transferee may exercise
the option to the extent that the grantee was entitled to exercise such option
at the date of such termination at any time within a period of three (3) months
following the date of such termination, or if the grantee shall die within the
period of three (3) months following the date of such termination without having
exercised such option, the option may be exercised within a period of one year
following the grantee's death by the grantee's transferee or the person or
persons to whom the grantee's rights under the option pass by will or by the
laws of descent or distribution but only to the extent exercisable at the date
of such termination; (2) if the grantee's continuous employment is terminated by
(i) retirement, (ii) permanent disability, or (iii) death, the option may be
exercised in accordance with its terms and conditions at any time within a
period of five (5) years following the date of such termination by the grantee
or the grantee's transferee, or in the event of the grantee's death, by the
persons to whom the grantee's rights under the option shall pass by will or by
the laws of descent or distribution; (3) if the grantee's continuous employment
is terminated and within a period of ninety (90) days thereafter the grantee is
recalled to the active payroll, the Committee may reinstate any portion of the
option previously granted but not exercised. Nothing contained in this
subparagraph (h) is intended to extend the stated term of the option and in no
event may an option be exercised by anyone after the expiration of its stated
term.
<PAGE>
(j) Option agreements evidencing incentive stock options shall contain such
terms and provisions as may be necessary to render them incentive stock options
pursuant to Section 422A of the Code and the Income Tax Regulation thereunder,
as the same or any successor statute or regulations may at the time be in
effect.
(k) Nothing in this Plan or in any option granted hereunder shall confer on
any optionee any right to continue in the employ of the Corporation or any of
its subsidiaries, or to interfere in any way with the right of the Corporation
or any of its subsidiaries to terminate his or her employment at any time.
7. TIME OF GRANTING OPTION
The Committee shall determine the date on which options are granted under
the Plan. All options granted must be approved at a meeting of the Committee by
a majority of the members of the Committee.
8. ADJUSTMENT IN NUMBER OF SHARES AND IN OPTION PRICE
In the event there is any change in the shares of the Corporation through
the declaration of stock dividends or a stock split-up, or through
recapitalization resulting in share split-ups, or combinations or exchanges of
shares, or otherwise, the number of shares available for option, as well as the
shares subject to any option and the option price thereof, shall be
appropriately adjusted by the Committee.
9. PAYMENT OF PURCHASE PRICE AND WITHHOLDING TAXES
(a) The purchase price for all shares purchased pursuant to options
exercised must be either paid in full in cash, or paid in full, with the consent
of the Committee, in Common Stock of the Corporation that has been held by the
optionee at least six (6) months valued at fair market value on the date of
exercise or a combination of cash and Common Stock. Fair market value on the
date of exercise is the opening price of the Common Stock on the New York Stock
Exchange on such date, or if there shall be no trading on such date, then on the
first previous date on which there was such trading.
(b) The Committee may permit the payment of all or part of the applicable
required withholding taxes due upon exercise of an option by the withholding of
shares otherwise issuable upon exercise of the option. Option shares withheld in
payment of such taxes shall be valued at the fair market value of the
Corporation's Common Stock on the date of exercise as defined herein.
10. CHANGE IN CONTROL
In the event of a Change-of-Control (as defined in the attached Exhibit A)
of the Corporation, any options granted hereunder which are outstanding as of
the date such Change-of-Control is determined to have occurred, and which are
not then exercisable and vested, shall become fully exercisable and vested to
the full extent of the original grant.
11. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN
(a) The Board may amend, modify, suspend or terminate the Plan for the
purpose of meeting or addressing any changes in legal requirements or for any
other purpose permitted by law. The Board will seek stockholder approval of an
amendment if determined to be required by or advisable under regulations of the
Securities and Exchange Commission or the Internal Revenue Service, the rules of
any stock exchange on which the Corporation's stock is listed, or other
applicable law or regulation.
(b) The Plan shall continue in effect until all shares available for
issuance under the Plan have been issued. An option may not be granted while the
Plan is suspended or after it is terminated.
(c) The rights and obligations under any options granted while the Plan is
in effect shall not be altered or impaired by amendment, suspension or
termination of the Plan, except with the consent of the person to whom the
option was granted or the grantee's transferee or to whom rights under an option
shall have passed by will or by the laws of descent and distribution.
12. EFFECTIVE DATE
The Plan, as amended and restated, shall become effective on April 22,
1994, subject to approval by the stockholders of the Corporation within twelve
(12) months after said date.
<PAGE>
EXHIBIT A
A "change of control" means:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 20% or more of either (x) the then outstanding shares of common stock of the
Corporation (the "Outstanding Corporation Common Stock") or (y) the combined
voting power of the then outstanding voting securities of the Corporation
entitled to vote generally in the election of directors (the "Outstanding
Corporation Voting Securities"); provided, however, that for purposes of this
subsection (a), the following acquisitions shall not be deemed to result in a
change of control: (i)any acquisition directly from the Corporation, (ii) any
acquisition by the Corporation, (iii) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Corporation or any
corporation controlled by the Corporation or (iv) any acquisition by any
corporation pursuant to a transaction that complies with clauses (i), (ii) and
(iii) of subsection (c) below; or
(b) individuals who, as of the date hereof, constitute the Board of
Directors of the Corporation (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Corporation's shareholders, was approved by a
vote of at least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
(c) the approval by the shareholders of the Corporation of a
reorganization, merger or consolidation or sale or other disposition of all or
substantially all of the assets of the Corporation or the acquisition of assets
of another corporation ("Business Combination") or, if consummation of such
Business Combination is subject, at the time of such approval by shareholders,
to the consent of any government or governmental agency, the obtaining of such
consent (either explicitly or implicitly by consummation) unless, following such
Business Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding Corporation Common
Stock and Outstanding Corporation Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation that as a result of such transaction owns the Corporation or all or
substantially all of the Corporation's assets either directly or through one or
more subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting Securities, as the case may be,
(ii) no Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the Corporation
or any corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a majority of the members
of the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) approval by the shareholders of the Corporation of a complete
liquidation or dissolution of the Corporation.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>6
<FILENAME>form10k_104.txt
<DESCRIPTION>EXHIBIT 10.4 EXECUTIVE OFFICER STOCK OPTION PLAN
<TEXT>
Exhibit 10.4
NATIONAL SEMICONDUCTOR CORPORATION
EXECUTIVE OFFICER STOCK OPTION PLAN
(as amended effective April 15, 2003)
1. TITLE OF PLAN
The title of this Plan is the National Semiconductor Corporation Executive
Officer Stock Option Plan, hereinafter referred to as the "Plan".
2. PURPOSE
The Plan is intended to align the interests of executive officers of
National Semiconductor Corporation (hereinafter called the "Corporation") and
its subsidiaries (as hereinafter defined) with the interests of the stockholders
of the Corporation and to provide incentives for such executive officers to
exert maximum efforts for the success of the Corporation. By extending to
executive officers the opportunity to acquire proprietary interests in the
Corporation and to participate in its success, the Plan may be expected to
benefit the Corporation and its stockholders by making it possible for the
Corporation to attract and retain the best available executive talent and by
rewarding them for their part in increasing the value of the Corporation's
shares. It is further intended that options granted pursuant to this Plan shall
only be options which are not incentive stock options, as that term is defined
in Section 422A of the Internal Revenue Code of 1986, as amended (the "Code").
Such options which may be granted under this Plan shall be referred to herein as
non-qualified stock options.
3. STOCK SUBJECT TO THE PLAN
There will be reserved for issue upon the exercise of options granted under
the Plan 6,000,000 shares of the Corporation's $.50 par value Common Stock,
subject to adjustment as provided in Paragraph 8, which may be unissued shares,
reacquired shares, or shares bought on the market. If any option which shall
have been granted shall expire or terminate for any reason without having been
exercised in full, the unpurchased shares shall again become available for the
purposes of the Plan (unless the Plan shall have been terminated).
<PAGE>
4. ADMINISTRATION
(a) The Plan shall be administered by a committee of the Board of Directors
of the Corporation (the "Committee") which shall be appointed by a majority of
the whole Board. The Committee shall be constituted to permit the Plan to comply
with Rule 16b-3 promulgated under the Securities Exchange Act of 1934 ("Exchange
Act") and any successor rule.
(b) The Committee shall have the plenary power, subject to and within the
limits of the express provisions of the Plan:
(i) To determine from time to time which of the eligible persons shall
be granted options under the Plan; the time or times (during the term of
the option) within which all or portions of each option may be exercised
and the number of shares for which an option or options shall be granted to
each of them. Notwithstanding the foregoing, no person may be granted more
than 1,000,000 options during any one fiscal year of the Corporation.
(ii) To construe and interpret the Plan and options granted under it,
and to establish, amend, and revoke rules and regulations for its
administration. The Committee, in the exercise of this power, shall
generally determine all questions of policy and expediency that may arise,
may correct any defect, or supply any omission or reconcile any
inconsistency in the Plan or in any option agreement in a manner and to the
extent it shall deem necessary or expedient to make the Plan fully
effective.
(iii) To prescribe the terms and provisions of each option granted
(which need not be identical).
(iv) To determine whether options granted shall be transferable
without consideration to immediate family members or family trusts for the
benefit of optionee's immediate family members. As used herein, "immediate
family" means parents, spouses and children.
(c) The Committee may not grant new options in exchange for the
cancellation of stock options previously granted under the Plan or under any
other stock option plan of the Corporation.
5. ELIGIBILITY
Options may be granted only to regular salaried employees of the
Corporation and its subsidiaries who are executive officers of the Corporation.
The term "subsidiary" corporation shall mean any corporation in which the
Corporation controls, directly or indirectly, fifty percent (50%) or more of the
combined voting power of all classes of stock, and the term "executive officer"
means any officer of the corporation subject to the reporting requirements of
Section 16 of the Exchange Act. Directors of the Corporation who are not also
officers shall not be eligible to be granted options under the Plan.
<PAGE>
6. TERMS OF OPTION AND OPTION AGREEMENTS
Each option shall be evidenced by a Stock Option Agreement which shall be
in such form and contain such provisions as the Committee shall from time to
time deem appropriate; provided, however, that the grant of an option pursuant
to this Plan shall in no way be construed to be an alternative to the right of
an optionee to purchase stock pursuant to any other stock option heretofore or
hereafter granted to an optionee pursuant to any stock option plans now in
existence or hereafter adopted by the Corporation. The terms of the option
agreements need not be identical, but each option agreement shall include, by
appropriate language, or be subject to, the substance of all of the applicable
following provisions:
(a) The purchase price under each option granted shall be as determined by
the Committee but shall in no instance be less than 100% of fair market value on
the date of grant. The fair market value on the date of grant shall be the
opening price of the Common Stock on the New York Stock Exchange on such date
(or if there shall be no trading on such date, then on the first previous date
on which there is such trading).
(b) The maximum term of any stock option shall be ten years and one day
from the date it was granted.
(c) Except as provided in Paragraph 10 hereof, an option may not be
exercised to any extent, either by the person to whom it was granted or by the
grantee's transferee, or by any person after the grantee's death, unless the
person to whom the option was granted has remained in the continuous employ of
the Corporation, or of a subsidiary, for not less than six months from the date
when the option was granted. Otherwise, each option shall be exercisable as
determined by the Committee.
(d) The Corporation, during the terms of options granted under the Plan, at
all times will keep available the number of shares of stock required to satisfy
such options.
(e) The Corporation will seek to obtain from each regulatory commission or
agency having jurisdiction such authority as may be required to issue and sell
shares of stock to satisfy such options. Inability of the Corporation to obtain
from any such regulatory commission or agency authority which counsel for the
Corporation deems necessary for the lawful issuance and sale of its stock to
satisfy such options shall relieve the Corporation from any liability for
failure to issue and sell stock to satisfy such options pending the time when
such authority is obtained or is obtainable.
<PAGE>
(f) Neither a person to whom an option is granted nor his or her
transferee, legal representative, heir, legatee, or distributee, shall be deemed
to be the holder of, or to have any of the rights of a holder with respect to,
any shares subject to such option unless and until he or she has exercised his
or her option pursuant to the terms thereof.
(g) An option shall terminate and may not be exercised if the person to
whom it is granted ceases to be continuously employed by the Corporation, or by
a subsidiary of the Corporation, except (subject nevertheless to the last
sentence of this subparagraph (g)): (1) if the grantee's continuous employment
is terminated for any reason other than (i) retirement, (ii) permanent
disability, or (iii) death, the grantee or the grantee's transferee may exercise
the option to the extent that the grantee was entitled to exercise such option
at the date of such termination at any time within a period of three (3) months
following the date of such termination, or if the grantee shall die within the
period of three (3) months following the date of such termination without having
exercised such option, the option may be exercised within a period of one year
following the grantee's death by the grantee's transferee or the person or
persons to whom the grantee's rights under the option pass by will or by the
laws of descent or distribution but only to the extent exercisable at the date
of such termination; (2) if the grantee's continuous employment is terminated by
(i) retirement, (ii) permanent disability, or (iii) death, the option may be
exercised in accordance with its terms and conditions at any time within a
period of five (5) years following the date of such termination by the grantee
or the grantee's transferee, or in the event of the grantee's death, by the
persons to whom the grantee's rights under the option shall pass by will or by
the laws of descent or distribution; (3) if the grantee's continuous employment
is terminated and within a period of ninety (90) days thereafter the grantee is
recalled to the active payroll, the Committee may reinstate any portion of the
option previously granted but not exercised. Nothing contained in this
subparagraph (g) is intended to extend the stated term of the option and in no
event may an option be exercised by anyone after the expiration of its stated
term.
(h) Nothing in this Plan or in any option granted hereunder shall confer on
any optionee any right to continue in the employ of the Corporation or any of
its subsidiaries, or to interfere in any way with the right of the Corporation
or any of its subsidiaries to terminate his or her employment at any time.
<PAGE>
7. TIME OF GRANTING OPTION
The Committee shall determine the date on which options are granted under
the Plan. All options granted must be approved at a meeting of the Committee by
a majority of the members of the Committee.
8. ADJUSTMENT IN NUMBER OF SHARES AND IN OPTION PRICE
In the event there is any change in the shares of the Corporation through
the declaration of stock dividends or a stock split-up, or through
recapitalization resulting in share split-ups, or combinations or exchanges of
shares, or otherwise, the number of shares available for option, as well as the
shares subject to any option and the option price thereof, shall be
appropriately adjusted by the Committee.
9. PAYMENT OF PURCHASE PRICE AND WITHHOLDING TAXES
(a) The purchase price for all shares purchased pursuant to options
exercised must be either paid in full in cash, or paid in full, with the consent
of the Committee, in Common Stock of the Corporation that has been held by the
optionee for at least six (6) months valued at fair market value on the date of
exercise or a combination of cash and Common Stock. Fair market value on the
date of exercise for these purposes is the opening price of the Common Stock on
the New York Stock Exchange on such date, or if there shall be no trading on
such date, then on the first previous date on which there was such trading.
(b) The Committee may permit the payment of all or part of the applicable
required withholding taxes due upon exercise of an option by the withholding of
shares otherwise issuable upon exercise of the option. Option shares withheld in
payment of such taxes shall be valued at the fair market value of the
Corporation's Common Stock on the date of exercise as defined in Section 9(a)
hereinabove.
10. CHANGE IN CONTROL
In the event of a Change-of-Control (as defined in the attached Exhibit A)
of the Corporation, any options granted hereunder which are outstanding as of
the date such change-of-control is determined to have occurred, and which are
not then exercisable and vested, shall become fully exercisable and vested to
the full extent of the original grant.
<PAGE>
11. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN
(a) The Board may amend, modify, suspend or terminate the Plan for the
purpose of meeting or addressing any changes in legal requirements or for any
other purpose permitted by law. The Board will seek stockholder approval of an
amendment if determined to be required by or advisable under regulations of the
Securities and Exchange Commission, the rules of any stock exchange on which the
Corporation's stock is listed, or other applicable law or regulation.
(b) The Plan shall continue in effect until all shares available for
issuance under the Plan have been issued. An option may not be granted while the
Plan is suspended or after it is terminated.
(c) The rights and obligations under any options granted while the Plan is
in effect shall not be altered or impaired by amendment, suspension or
termination of the Plan, except with the consent of the person to whom the
option was granted or the grantee's transferee or to whom rights under an option
shall have passed by will or by the laws of descent and distribution.
12. EFFECTIVE DATE
The Plan shall become effective on June 22, 2000, subject to approval by
the stockholders within twelve (12) months thereafter.
<PAGE>
EXHIBIT A
A "change of control" means:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 20% or more of either (x) the then outstanding shares of common stock of the
Corporation (the "Outstanding Corporation Common Stock") or (y) the combined
voting power of the then outstanding voting securities of the Corporation
entitled to vote generally in the election of directors (the "Outstanding
Corporation Voting Securities"); provided, however, that for purposes of this
subsection (a), the following acquisitions shall not be deemed to result in a
change of control: (i)any acquisition directly from the Corporation, (ii) any
acquisition by the Corporation, (iii) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Corporation or any
corporation controlled by the Corporation or (iv) any acquisition by any
corporation pursuant to a transaction that complies with clauses (i), (ii) and
(iii) of subsection (c) below; or
(b) individuals who, as of the date hereof, constitute the Board of
Directors of the Corporation (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Corporation's shareholders, was approved by a
vote of at least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
<PAGE>
(c) the approval by the shareholders of the Corporation of a
reorganization, merger or consolidation or sale or other disposition of all or
substantially all of the assets of the Corporation or the acquisition of assets
of another corporation ("Business Combination") or, if consummation of such
Business Combination is subject, at the time of such approval by shareholders,
to the consent of any government or governmental agency, the obtaining of such
consent (either explicitly or implicitly by consummation) unless, following such
Business Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding Corporation Common
Stock and Outstanding Corporation Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation that as a result of such transaction owns the Corporation or all or
substantially all of the Corporation's assets either directly or through one or
more subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting Securities, as the case may be,
(ii) no Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the Corporation
or any corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a majority of the members
of the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) approval by the shareholders of the Corporation of a complete
liquidation or dissolution of the Corporation.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>7
<FILENAME>form10k_106.txt
<DESCRIPTION>EXHIBIT 10.6 DIRECTOR STOCK PLAN
<TEXT>
Exhibit 10.6
NATIONAL SEMICONDUCTOR CORPORATION
DIRECTOR STOCK PLAN
as amended through June 26, 1997
1. PURPOSE
The purposes of the Director Stock Plan (the "Plan") of National
Semiconductor Corporation (the "Corporation") are to promote the recruiting and
retention of highly qualified individuals to serve in the capacity of
non-employee directors of the Corporation and to strengthen the commonality of
interest between directors and stockholders.
2. STOCK SUBJECT TO THE PLAN
200,000 shares of the Corporation's $.50 par value Common Stock shall be
available for issuance under the Plan, subject to adjustment as provided in
Paragraph 6, which may be unissued shares, reacquired shares, or shares bought
on the market.
3. ADMINISTRATION
The Plan shall be administered by the Board of Directors of the
Corporation, whose construction and interpretation of the terms and provisions
of the Plan shall be final and conclusive. The amount of the Common Stock to be
issued under the Plan, the timing of the issuance of the Common Stock under the
Plan, and terms as to eligibility shall be in accordance with the terms of the
Plan.
4. ELIGIBILITY
Common Stock issued under this Plan may be issued only to directors of the
Corporation who are not employees of the Corporation or its subsidiaries or
affiliates and have not been such employees for at least one year prior to
becoming eligible to receive benefits under this Plan.
<PAGE>
5. TERMS OF STOCK AWARDS
(a) Common Stock shall be issued automatically to all eligible directors as
follows: (i) on the date of the approval of the Plan by the holders of a
majority of the shares represented at a meeting of the Corporation's
stockholders duly called and held in accordance with the Corporation's by-laws
and applicable law, each eligible director shall be issued 1,000 shares of
Common Stock; (ii) each person who becomes an eligible director after the date
of stockholder approval of the Plan shall be issued 1,000 shares of Common Stock
on the date of the appointment of such person to the Board of Directors; and
(iii) each eligible director shall be issued 1,000 shares of Common Stock on the
date of each subsequent election of such director to the Board of Directors by
the stockholders.
(b) Common Stock shall be issued to each eligible director who elects
within ten (10) days after the date of (i) initial appointment to the Board of
Directors, or (ii) each subsequent election to the Board of Directors by
stockholders, to receive the full value of the director's annual cash retainer
fees for Board membership and Committee chairmanship in Common Stock. The number
of shares to be issued shall be determined by dividing the retainer fee by the
opening price of the Common Stock on the New York Stock Exchange on the date of
initial appointment or the subsequent reelection by the stockholders, as
applicable. If there is no trading on such day, the opening price of the Common
Stock on the New York Stock Exchange on the first previous trading date shall be
used. Fractional shares shall not be issued and the value of any fractional
shares shall be paid in cash.
(c) Common Stock issued under the Plan, whether pursuant to Paragraph 5(a)
or 5(b), shall be restricted from sale, assignment or other transfer for a
period of six months from the date of issuance. In the event any recipient shall
cease to act as a Director prior to expiration of six months from the date of
issuance, all rights in and to the Common Stock so issued shall be forfeited and
shall revert to the Company. All Common Stock acquired by the Company in this
manner shall be retired and cancelled promptly after the acquisition thereof.
All such shares shall upon such cancellation become available for reissuance
under the Plan.
(d) While the Plan is in effect, the Corporation at all times will keep
available the number of shares of stock required to satisfy the terms of the
Plan.
(e) The Corporation will seek to obtain from each regulatory commission or
agency having jurisdiction such authority as may be required to issue shares of
stock under the Plan. Inability of the Corporation to obtain from any such
regulatory commission or agency authority which counsel for the Corporation
deems necessary for the lawful issuance of its stock under the Plan shall
relieve the Corporation from any liability for failure to issue such stock until
such time when such authority is obtained or is obtainable.
(f) Nothing in this Plan shall confer on any participant any right to
continue as a director of the Corporation.
<PAGE>
6. ADJUSTMENT IN NUMBER OF SHARES
In the event there is any change in the shares of the Corporation through
the declaration of stock dividends or a stock split-up, or through
recapitalization resulting in share split-ups, or combinations or exchanges of
shares, or otherwise, the number of shares available for issuance, as well as
the number of shares to be issued pursuant to the terms of Paragraph 5 (a),
shall be proportionately adjusted, provided that the number of shares issuable
at any one time to any one participant shall always be a whole number.
7. PAYMENT OF WITHHOLDING TAXES
The payment of all or part of any applicable withholding taxes due upon
issuance of stock under the Plan, up to the highest marginal rates then in
effect, shall be made by the withholding of shares otherwise issuable. Shares
withheld in payment of such taxes shall be valued at the fair market value of
the Corporation's Common Stock on the date of issuance of stock under the Plan.
8. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN
(a) The Board may amend, modify, suspend or terminate the Plan for the
purpose of meeting or addressing any changes in legal requirements or for any
other purpose permitted by law; provided, however, that the Plan may not be
amended more than once every six months, other than to comport with changes in
the Internal Revenue Code of 1986, as amended, the Employee Retirement Income
Security Act, or the rules thereunder. The Board will seek stockholder approval
of an amendment if determined to be required by or advisable under regulations
of the Securities and Exchange Commission or the Internal Revenue Service, the
rules of any stock exchange on which the Corporation's stock is listed or other
applicable law or regulation.
(b) The Plan, unless sooner terminated, shall terminate on June 26, 2007.
No stock may be issued under the Plan until the Plan is approved by stockholders
or while the Plan is suspended or after it is terminated.
9. EFFECTIVE DATE
The Plan shall become effective on August 20, 1992, subject to approval by
the stockholders of the Corporation within twelve months after such date.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>8
<FILENAME>form10k_211.txt
<DESCRIPTION>EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
<TEXT>
Exhibit 21.1
NATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
The following table shows certain information with respect to our active
subsidiaries as of May 25, 2003, all of which are included in our consolidated
financial statements:
<TABLE>
<CAPTION>
Percent of
State or Other Other Country In Voting
Jurisdiction of Which Subsidiary Securities Owned
Name Incorporation is Registered by National
- ---------------------------------------------- ----------------------- ------------------- ------------------
<S> <C>
Algorex California 100%
DigitalQuake, 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 Estonia ou 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%
</TABLE>
<TABLE>
<CAPTION>
Percent of
State or Other Other Country In Voting
Jurisdiction of Which Subsidiary Securities Owned
Name Incorporation is Registered by National
- -------------------------------------------- -------------------------- ------------------- ------------------
<S> <C> <C> <C>
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 95%
China
National Semiconductor Shanghai Ltd. People's Republic of 100%
China
National Semiconductor (Suzhou) Ltd. People's Republic of 100%
China
National Semiconductor Canada Inc. Canada 100%
National Semiconductores do Brasil Ltda. Brazil 100%
Electronica NSC de Mexico, S.A. Mexico 100%
National Semiconductor (Barbados) Limited Barbados 100%
National Semiconductor Investments, Ltd. British Virgin Islands 100%
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24
<SEQUENCE>9
<FILENAME>form10k_241.txt
<DESCRIPTION>EXHIBIT 24.1 POWER OF ATTORNEY
<TEXT>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned persons hereby
constitutes and appoints Brian L. Halla, Lewis Chew, and John M. Clark III, and
each of them singly, his true and lawful attorney-in-fact and in his name,
place, and stead, and in any and all of his offices and capacities with National
Semiconductor Corporation (the "Company"), to sign the Annual Report on Form
10-K for the Company's 2003 fiscal year, and any and all amendments to said
Annual Report on Form 10-K, and generally to do and perform all things and acts
necessary or advisable in connection therewith, and each of the undersigned
hereby ratifies and confirms all that each of said attorneys-in-fact may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto executed this
Power of Attorney as of the date set forth opposite his signature.
SIGNATURE DATE
//S//BRIAN L. HALLA July 17, 2003
Brian L. Halla
//S//STEVEN R. APPLETON July 16, 2003
Steven R. Appleton
//S//GARY P. ARNOLD July 16, 2003
Gary P. Arnold
//S//RICHARD J. DANZIG July 16, 2003
Richard J. Danzig
//S//ROBERT J. FRANKENBERG July 16, 2003
Robert J. Frankenberg
//S//E. FLOYD KVAMME July 16, 2003
E. Floyd Kvamme
//S//MODESTO A. MAIDIQUE July 16, 2003
Modesto A. Maidique
//S//EDWARD R. McCRACKEN July 16, 2003
Edward R. McCracken
//S//LEWIS CHEW July 16, 2003
Lewis Chew
//S//ROBERT E. DeBARR July 16, 2003
Robert E. DeBarr
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>10
<FILENAME>form10k_991.txt
<DESCRIPTION>EXHIBIT 99.1 CERTIFICATIONS RULE 13A-14(A)
<TEXT>
Exhibit 99.1
CERTIFICATION
I, Brian L. Halla, certify that:
1. I have reviewed this annual report on Form 10-K of National Semiconductor
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
control over financial reporting.
Date: July 21, 2003
\s\ Brian L. Halla
------------------
Brian L. Halla
President & CEO
<PAGE>
CERTIFICATION
I, Lewis Chew, certify that:
1. I have reviewed this annual report on Form 10-K of National Semiconductor
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: July 21, 2003
\s\ Lewis Chew
--------------
Lewis Chew
Senior Vice President, Finance
and Chief Financial Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>11
<FILENAME>form10k_992.txt
<DESCRIPTION>EXHIBIT 99.2 CERTIFICATIONS SECTION 1350
<TEXT>
Exhibit 99.2
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to 18 U.S.C Section 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned officer of National Semiconductor
Corporation, a Delaware corporation (the "Company") hereby certifies, to such
officer's knowledge, that:
(i) the accompanying Annual Report on Form 10-K of the Company for the
fiscal year ended May 25, 2003 (the "Report") fully complies with the
requirements of Section 13 (a) or Section 15 (d), as applicable, of the
Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: July 21, 2003
\s\ Brian L. Halla
------------------
Brian L. Halla
President and Chief Executive Officer
This certification is being furnished pursuant to Rule 13a-14(b) of the
Exchange Act of 1934, as amended (the "Exchange Act"), as the same shall be
applicable to a Form 10-K due on or after August 14, 2003. This certification
shall not be deemed "filed" for any purpose under the federal securities laws,
including Section 18 of the Exchange Act. This certification shall not be deemed
to be incorporated by reference into any filing under the Securities Act of
1933, as amended or the Exchange Act.
A signed original of this written statement required by section 906 has
been provided to National Semiconductor Corporation and will be retained by
National Semiconductor Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
<PAGE>
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C Section 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned officer of National Semiconductor
Corporation, a Delaware corporation (the "Company") hereby certifies, to such
officer's knowledge, that:
(i) the accompanying Annual Report on Form 10-K of the Company for the
fiscal year ended May 25, 2003 (the "Report") fully complies with the
requirements of Section 13 (a) or Section 15 (d), as applicable, of the
Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: July 21, 2003
\s\ Lewis Chew
--------------
Lewis Chew
Senior Vice President, Finance and
Chief Financial Officer
This certification is being furnished pursuant to Rule 13a-14(b) of the
Exchange Act of 1934, as amended (the "Exchange Act"), as the same shall be
applicable to a Form 10-K due on or after August 14, 2003. This certification
shall not be deemed "filed" for any purpose under the federal securities laws,
including Section 18 of the Exchange Act. This certification shall not be deemed
to be incorporated by reference into any filing under the Securities Act of
1933, as amended or the Exchange Act.
A signed original of this written statement required by section 906 has
been provided to National Semiconductor Corporation and will be retained by
National Semiconductor Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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