-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
SE2Hdvi5GvNrj5bp6z4He6xpekfuU1UZWpNlsxjJ0oHXznNVg62qcXcyTzfm/grW
aK3e5+uVyagGF5W+fHVUJw==
<SEC-DOCUMENT>0000070530-04-000029.txt : 20040811
<SEC-HEADER>0000070530-04-000029.hdr.sgml : 20040811
<ACCEPTANCE-DATETIME>20040811170630
ACCESSION NUMBER: 0000070530-04-000029
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 13
CONFORMED PERIOD OF REPORT: 20040530
FILED AS OF DATE: 20040811
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: 04967711
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>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>form10k_81004.txt
<DESCRIPTION>NATIONAL SEMICONDUCTOR YR ENDED 5/30/04
<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 30, 2004
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. [ ]
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 21, 2003, was approximately $4,821,810,753 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 for purposes of this
calculation 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 25, 2004, was 356,718,621.
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
October 1, 2004. Part III
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
TABLE OF CONTENTS
<TABLE>
Page No
-------
PART I
<S> <C> <C>
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, Related Stockholder Matters and Issuer Purchases of
Equity Securities 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19
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 69
Item 9A. Controls and Procedures 70
PART III
Item 10. Directors and Executive Officers of the Registrant 71
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 72
Item 13. Certain Relationships and Related Transactions 74
Item 14. Principal Accountant Fees and Services 74
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 75
Signatures 77
</TABLE>
<PAGE>
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains 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, R&D efforts and
acquisitions and investments in other companies and are indicated by words or
phrases such as "anticipate," "expect," "outlook," "foresee," "believe,"
"could," "intend," and similar words or phrases. These statements are based on
our current plans and expectations and involve 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 in various markets such as wireless, PC, displays and
networks; 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 our forward-looking
statements, see the discussion on "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 and our other
reports and filings with the Securities and Exchange Commission. We undertake no
obligation to update forward-looking statements to reflect developments or
information obtained after the date hereof and disclaim any obligation to do so.
GENERAL
We design, develop, manufacture and market a wide range of semiconductor
products, most of which are analog and mixed-signal integrated circuits. Our
focus is on creating analog-intensive solutions that provide more energy
efficiency, portability, better audio and sharper images in electronics systems.
We target key markets such as:
o wireless handsets;
o displays;
o PCs;
o networks; and
o a broad range of portable applications.
Our strategy is to be the premier analog company driving the information
age. Combining analog and digital technology, we focus on analog-based
semiconductor products, which include stand-alone devices and subsystems, in the
areas of power management, display drivers, audio, amplifiers and data
conversion. Approximately 84 percent of our revenue in fiscal 2004 was generated
from analog-based products and we believe this percentage can potentially grow
in the future as a result of our increasing focus on developing new analog
products for a variety of 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
of our filings are on our website and are available free of charge. We also
maintain certain corporate governance documents on our website, including our
Code of Conduct and Ethics, Director Affairs Committee Charter, Compensation
Committee Charter, Audit Committee Charter and Other Governance Policies. We
will provide a printed copy of any of these documents to any shareholder who
requests it. We do not intend for information found on our website to be part of
this document.
RECENT HIGHLIGHTS
We began fiscal 2004 as a stronger company focused on achieving greater
profitability and better return on invested capital through increased sales of
our higher-margin analog products. During fiscal 2004, we continued to follow
through on profit-improvement actions that were first announced in February
2003. For example, in late August 2003, we completed the exit and sale of our
information appliance business, consisting primarily of the GeodeTM family of
integrated processor products (See Note 3 to the Consolidated Financial
Statements included in Item 8). During the year, we also completed other cost
reduction activities that resulted in lower R&D spending for the company as a
whole. At the same time, we were able to increase our research and development
investments in analog capabilities. As a result of our actions, combined with
better overall market conditions, our financial results in fiscal 2004 were
substantially improved compared to fiscal 2003.
<PAGE>
During September and October 2003, we repurchased a total of 25.4 million
shares (post-split basis) of our common stock for $400 million in connection
with a stock repurchase program announced in July 2003. This program was
followed by the announcement of another $400 million stock repurchase program in
March 2004. Under this second program, we repurchased an additional 7.0 million
shares (post-split basis) of our common stock for $142.5 million through the end
of fiscal 2004. These stock repurchase programs are one element of an overall
effort to increase our return on invested capital, which we believe improves
shareholder value. We also completed a two-for-one stock split in May 2004,
which was paid in the form of a stock dividend. We did the stock split to make
our stock more affordable to the individual investor while keeping the price per
share and the number of shares outstanding comparable to other leading companies
in our industry.
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 and mixed-signal
integrated products, which are used in numerous applications. While no precise
industry definition exists for analog and mixed-signal devices, we consider
products which process or condition 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, communications, computing, consumer
and automotive markets, and more narrowly defined markets such as wireless
handsets, LCD monitors, personal computers and HDTVs. Our analog and
mixed-signal devices include:
<TABLE>
<S> <C>
o operational and audio amplifiers; o communication interface circuits;
o power monitors, converters and regulators; o radio frequency integrated circuits;
o analog to digital converters; o flat panel display drivers and signal
processors.
</TABLE>
Other products with significant analog content 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.
Other product offerings that are not analog or mixed-signal include
microcontrollers, advanced I/O, connectivity processors and embedded BluetoothTM
solutions that serve a wide variety of applications in the personal computer,
industrial, automotive, consumer and communication markets.
CORPORATE ORGANIZATION; PRODUCT LINE BUSINESS UNITS
We are comprised of various product line business units which are combined to
form groups. During fiscal 2004, our operations were organized in the following
six groups: the Analog Group, the Displays and Wireless Group, the PC and
Networking Group, the Custom Solutions Group, the Imaging Group, and the
Information Appliance Group (which was ultimately disbanded in early fiscal
2004).
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 continue to maintain a leadership position in 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.
<PAGE>
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 innovative analog packaging and process technology,
we are focused on high growth markets that depend upon portability and
efficiency, such as cellular telephones and notebook computers. We are
continuing to increase our penetration into top tier original equipment
manufacturers in the wireless, display and personal computer segments. In fiscal
2004, nearly 43 percent of the Analog Group's revenues were derived from
original equipment manufacturers, while the remaining 57 percent came from our
worldwide authorized distributors.
We also use our analog expertise to develop high performance analog
products serving targeted applications in the broad consumer, industrial,
medical, automotive and information infrastructure markets. Our growing
portfolio of high performance analog building blocks includes high voltage
regulators, high speed op-amps, and high speed, low power analog to digital
converters. Recent product introductions address high voltage power management
applications of up to 100V and high speed amplifiers of up to 2 GHz. These
building block products can serve as the starting point for the development of
highly integrated application-specific standard products such as our current 3D
audio subsystems.
The Enhanced Solutions business unit 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 and Wireless Group: The Displays and Wireless Group consists of
two separate business groups: Displays and Wireless.
The Displays Group consists of our Flat Panel Displays, CRT, and Small Form
Factor Display 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 panels, CRT monitors, notebook computer displays, LCD
TV displays and personal client device displays.
The Flat Panel Displays business unit provides a variety of innovative
products for notebook thin film transistor (TFT) displays, flat panel monitors,
and LCD TV displays. These include a variety of timing controllers, low voltage
differential signal (LVDS) data receivers, LVDS transmitters and column drivers.
We have a significant market share in integrated LVDS receiver and timing
controllers that serve the notebook TFT displays market. We also continue to
expand our position in the discrete LVDS market. We recently introduced two new
display architecture standards: Advanced Bus Systems Interface (ABSI) and Point
to Point Differential Signal (PPDS). ABSI driver technology supports
chip-on-glass notebook and monitor panels. PPDS enables cinema quality display
performance and small bezels for LCD TV applications.
The CRT 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
capabilities, including our high voltage processes, are 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.
The Small Form Factor Displays business unit develops differentiated
display controllers for handset applications.
The Wireless Group delivers solutions that perform the radio and other
functions for handsets and base stations in the cellular and cordless telephone
markets. The Wireless Group leverages a number of technologies and standards:
o Code Division Multiple Access (CDMA);
o Personal Digital Cellular (PDC);
o Global Systems for Mobile Communications (GSM); and
o Digital Cordless Telephone technology (DCT)
There are two business units in the Wireless Group: RF Component and
Digital Cordless. The RF Component business unit offers radio frequency
components that mainly address the synthesizer block of the radios in CDMA, PDC
and GSM cellular handsets. The Digital Cordless business unit offers DECT and
DCT based solutions which allow us to offer some of the most flexible system
solutions available today for digital cordless voice and data applications. With
a unique baseband platform, one single baseband chip supports combined
voice/data, repeaters, base stations and handsets.
<PAGE>
PC and Networking Group: The PC and Networking Group consists of the
Advanced PC business unit and the Networking business unit. The Advanced PC
business unit provides innovative mixed-signal I/O products for servers,
desktops, mobile and storage computing and is focused on improving solutions for
connectivity, security and manageability.
The Networking business unit is made up of three divisions that address
opportunities in the enterprise, communications infrastructure and embedded
markets. The Enterprise division provides mixed signal solutions for switches
and routers. The Communications Infrastructure division provides high speed
physical interconnect products for wireless, telecom, data networking and
professional video applications. The Embedded division provides products used in
networked peripherals in certain enterprise and consumer markets.
Custom Solutions Group: The Custom Solutions Group consists of the
following three business units: Device Connectivity, Custom Silicon Systems and
Legacy Products.
The Device Connectivity business unit supplies connectivity processors,
embedded Bluetooth solutions, general-purpose microcontrollers and DVD player
solutions. Our connectivity processors are marketed under the CP3000 family and
are based on our CR16 core integrated with advanced connectivity peripherals,
and combined with optimized application software to address applications needing
device connectivity. Applications include Bluetooth accessories, telematics
(automotive) and industrial applications. Our general-purpose 8 and 16 bit
microcontrollers address a wide variety of applications in the industrial,
automotive, consumer and communication markets.
The Custom Silicon Systems business unit explores and initially develops
certain select new product opportunities for emerging markets such as wireless
sensors. It also supports custom products for select strategic partners.
The Legacy Products business unit supplies user-designed application
specific products in the form of standard cells and gate arrays, key
telecommunications components for analog and digital line cards, as well as
AC97-compliant audio codecs for consumer and automotive applications. This
business unit also supplies to Advanced Micro Devices foundry materials and
services for the information appliance product portfolio under separate
arrangements made with AMD at the time it purchased the information appliance
business.
Imaging Products Group: The Imaging Products Group 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.
Information Appliance Group: The GeodeTM family of integrated processor
products, the primary component of the Information Appliance Group, was sold to
AMD in late August 2003 as part of our disposition of the information appliance
business. See Note 3 to the Consolidated Financial Statements for more
information about the disposition of the information appliance business. The
remainder of the information appliance operation was closed by the end of the
first quarter of fiscal 2004.
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, 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 consists of research and process development necessary
for many of our core production processes, packaging technology and research.
CTMG provides a range of process libraries, product cores and software that are
shared among our product lines. 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, Analog is our only
reportable segment for fiscal 2004. The remaining business units that are not
included in the Analog reportable segment are grouped as "All Other."
<PAGE>
For further financial information on this segment, as well as geographic
information, refer to the information contained in Note 14, "Segment and
Geographic Information," in the Notes to the Consolidated Financial Statements
included in Item 8.
MARKETING AND SALES
We market our products globally to original equipment manufacturers and original
design manufacturers through a direct sales force. Major OEMs and ODMs include:
o Bosch; o LG Electronics; o Quanta;
o Dell; o L.M. Ericsson; o Samsung;
o Hewlett Packard; o Matsushita; o Siemens;
o IBM; o Motorola; o Sony; and
o Kyocera; o Nokia; o Sony - Ericsson Mobile
Communication.
There has been an increasing trend in the technology industry where OEMs
use contract manufacturers to build their products and 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 third party manufacturer. In addition to our direct sales force, we use
distributors in our four business regions, and approximately 51 percent of our
fiscal 2004 net sales were 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. In general, distributors do not have the
right to return product.
Our regional facilities in the United States, Europe, Japan and Asia
Pacific handle local 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.
We also provide web-based, online tools that allow customers and potential
customers to select our devices, create a design using our parts, and simulate
performance of that design.
CUSTOMERS
The distributor Arrow accounted for 10 percent of our net sales in fiscal 2004
and fiscal 2003. In addition, the distributor Avnet accounted for 11 percent of
our net sales in fiscal 2004, and approximately 10 percent of our net sales in
fiscal 2003 and fiscal 2002. Although we do not have any other customers with
sales greater than 10 percent, we do have several large customers that
manufacture and market wireless handsets, among other electronic products. These
customers typically purchase a variety of different products from us. If any one
of these customers were to cease all purchases from us within a very short
timeframe, such as within one quarter, it could have a negative impact on our
financial results for that period. However, we have not had any such experience
to date.
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 in 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. Sales in
fiscal 2004 were basically consistent with these trends, except that sales for
our third fiscal quarter were higher than the second fiscal quarter. Although
the third fiscal quarter in fiscal 2004 included 14 calendar weeks rather than
the normal 13 weeks, sales in our third fiscal quarter measured on a normalized
basis still grew slightly over sales in the second fiscal quarter.
<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.
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. An additional assembly and test
facility in China that began construction in fiscal 2003 as part of our effort
to increase assembly and test capacity was nearly completed by the end of fiscal
2004 and will be operational in fiscal 2005. We use subcontractors to perform
certain manufacturing functions in the United States, Europe, Israel, Southeast
Asia and Japan to address capacity and other economic issues.
Our wafer manufacturing processes span Bipolar, Metal Oxide Silicon,
Complementary Metal Oxide Silicon and Bipolar Complementary Metal Oxide Silicon
technologies, including Silicon Germanium. Our efforts are heavily focused on
processes that support our analog portfolio of products, which address wireless
handsets, displays, computers and a broad variety of other electronic
applications. 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 and development of most process and packaging
technologies are done by CTMG's process technology group. Specific product
design and development is generally done in our business units. Total R&D
expenses were $352.8 million for fiscal 2004, or 18 percent of net sales,
compared to $435.6 million for fiscal 2003, or 26 percent of net sales, and
$441.0 million for fiscal 2002, or 30 percent of net sales. These amounts
exclude in-process R&D charges of $0.7 million related to the acquisition of
DigitalQuake in fiscal 2003 and $1.3 million related to the acquisitions of
Fincitec, ARSmikro and Wireless Solutions Sweden in fiscal 2002. These
in-process R&D charges are included in our consolidated statements of operations
as a component of special items.
<PAGE>
Total company spending through fiscal 2004 for new product development was
down 16 percent, and for process and support technology was down 33 percent from
fiscal 2003 primarily because of expenses we eliminated in the business areas we
have exited. Although research and development spending was down as a whole and
as a percentage of sales, research and development spending for our Analog
segment increased as we continue to invest in the development of our analog
capabilities to address a variety of markets. A significant portion of our
research and development is directed at power management technology.
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 a broad
license 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 30, 2004, we employed approximately 9,700 people of whom approximately
4,000 were employed in the United States, 1,200 in Europe, 4,100 in Southeast
Asia and 400 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. With our focus on analog,
our major competitors include Analog Devices, Linear Technology, Maxim, ST
Microelectronics and Texas Instruments that sell competing products into some of
the same markets that we target. In some cases, we may also compete with our
customers. 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.
ENVIRONMENTAL REGULATIONS
To date, our compliance with foreign, 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 13, "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 during
fiscal 2004 was 93 percent, based on wafer starts, compared to 71 percent for
fiscal 2003 when production activity was lower under weaker business conditions.
We expect our captive manufacturing capacity together with 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. The
construction of an assembly and test facility in Suzhou, China that was begun in
fiscal 2003 as part of our effort to increase assembly and test capacity will be
operational in fiscal 2005.
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:
<TABLE>
<S> <C> <C>
Arlington, Texas; Indianapolis, Indiana; Salem, New Hampshire;
Calabasas, California; Kirkland, Washington; San Diego, California;
Federal Way, Washington; Norcross, Georgia; Santa Clara, California;
Fort Collins, Colorado; Phoenix, Arizona; South Portland, Maine;
Grass Valley, California; Rochester, New York; Tucson, Arizona;
</TABLE>
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 design facilities and our sales and administrative offices.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
We currently are a party to various legal proceedings, including those noted
below. While we believe that the ultimate outcome of these various 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
always 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, and future periods.
TAX MATTERS
The IRS has completed its examination of our tax returns for fiscal years 1997
through 2000 and on July 29, 2003 issued a notice of proposed adjustment seeking
additional taxes of approximately $19.1 million (exclusive of interest) for
those years. The issues giving rise to most of the proposed adjustments relate
to R&D credits, inventory and depreciation deductions. We are contesting the
adjustments through the administrative process. We are undergoing tax audits in
several international locations 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 the amounts sought by the
IRS, as well as any other deficiencies that 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, and we are conducting remediation and cleanup
efforts at the site. In addition to the Santa Clara site, we have been
designated from time to time as a potentially responsible party by
international, 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 retained
liability for environmental matters arising from our former operations of
Dynacraft, Inc. and the Fairchild business, but we are not currently involved in
any legal proceedings relating to those liabilities. We accrue costs associated
with environmental matters when they become probable and 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 each of 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 consolidated
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 our 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 $14.1 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 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 petition to the U.S. Supreme Court for a writ of certiorari was denied
in October 2003. The case is now proceeding in the District Court where
discovery has been completed, and we intend to contest it 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. The court has required the Scottish employees to seek
their remedies in Scottish courts. The court has also denied plaintiffs' motion
for certification of a medical monitoring class. Discovery in the case is
proceeding and we intend to defend this action vigorously.
3. In April 2002, ZF Micro Solutions, Inc. brought suit against us in the
California Superior Court alleging a number of contract and tort claims related
to an agreement we entered into in 1999 to design and manufacture a custom
integrated circuit device for ZF Micro Devices. ZF Micro Devices ceased business
operations in February 2002 and the case was brought by ZF Micro Solutions as
successor to ZF Micro Devices. The case began trial in May 2004 and on June 14,
2004, the jury in the case found for ZF Micro Solutions on a claim on
intentional misrepresentation, awarding damages of $28.0 million and on a claim
of breach of the implied covenant of good faith and fair dealing, awarding
damages of $2.0 million. On seven other claims brought by the plaintiff, the
jury found for us. The jury also found for us on our breach of contract
cross-claim, awarding damages of $1.1 million. We are challenging the verdicts
in favor of ZF Micro Solutions in post-trial motions and intend to vigorously
pursue the appeal of any judgment that may be entered against us in this matter.
<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 66
Technology and Manufacturing Group
Lewis Chew (2) Senior Vice President, Finance and Chief 41
Financial Officer
John M. Clark III (3) Senior Vice President, General Counsel 54
and Secretary
Brian L. Halla (4) Chairman of the Board, President and 57
Chief Executive Officer
Detlev J. Kunz (5) Senior Vice President and General Manager, 53
Worldwide Marketing and Sales
Donald Macleod (6) Executive Vice President and Chief 55
Operating Officer
Suneil V. Parulekar (7) Senior Vice President, Analog Group 56
Ulrich Seif (8) Senior Vice President and Chief 46
Information Officer
Edward J. Sweeney (9) Senior Vice President, Human Resources 47
* all information as of May 30, 2004, the last day of the 2004 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 held positions at LSI Logic as Vice
President, Worldwide Logistics and Customer Service and Vice
President, Assembly and Test.
(2) Mr. Chew joined National in May 1997 as Director of Internal Audit,
and was made Vice President and Controller in December 1998, Acting
Chief Financial Officer in April 2001 and Senior Vice President,
Finance and Chief Financial Officer in June 2001. Prior to joining
National, Mr. Chew was a partner at KPMG LLP.
(3) 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.
(4) 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.
(5) 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 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.
<PAGE>
(6) Mr. Macleod joined National in February 1978 and was named Executive
Vice President and Chief Operating Officer in April 2001. Prior to
April 2001, he had been Executive Vice President, Finance and Chief
Financial Officer since June 1995 and 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.
(7) 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.
(8) 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.
(9) 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 AND
ISSUER PURCHASES OF EQUITY SECURITIES
See information appearing in Note 8, Debt; Note 10, Shareholders' Equity; and
Note 16, 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 9, 2004 was $19.62. At July 9, 2004, the number
of record holders of our common stock was 7,415. For information on our equity
compensation plans, see Item 12 of this Form 10-K.
During the past three fiscal years, we have not sold any unregistered
securities.
PURCHASES OF EQUITY SECURITIES
The following table summarizes purchases we made of our common stock during the
fourth quarter of fiscal 2004:
<TABLE>
Maximum Dollar Value
Total Number of Shares of Shares that may
Purchased as Part of yet be purchased
Total Number of Shares Average Price Paid Per Publicly Announced under the Plans or
Period Purchased Share Plans Or Programs Programs(1)
- -------------------------- ------------------------ ------------------------ ------------------------ ----------------------
<S> <C> <C> <C> <C>
Month # 1 5,496,000 $20.19 5,496,000 $400 million
March 1, 2004 -
March 31, 2004
Month # 2
April 1, 2004 -
April 30, 2004
800,000 $20.24 800,000 $400 million
Month # 3
May 1, 2004 -
May 30, 2004 730,988 $20.52 730,988 $400 million
------------------------ ------------------------
7,026,988 $20.27 7,026,988 $400 million
Total ======================== ========================
</TABLE>
(1) Purchases during the fourth quarter were made under a program announced
March 11, 2004. Of the total shares purchased, 730,988 shares were purchased
through a privately negotiated transaction with a major financial institution.
The remainder of the shares was purchased in the open market. The total dollar
amount approved for the repurchase program is $400 million. There is no
expiration date for the program. Other repurchase programs announced in fiscal
2004 were completed prior to the beginning of the fourth quarter. We do not have
any plans to terminate the current plan prior to its completion.
<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.
FIVE-YEAR SELECTED FINANCIAL DATA
<TABLE>
Years Ended
In Millions, Except Per Share Amounts and May 30, May 25, May 26, May 27, May 28,
Employee Figures 2004 2003 2002 2001 2000
----------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $1,983.1 $1,672.5 $1,494.8 $2,112.6 $2,139.9
Operating costs and expenses 1,652.9 1,690.9 1,641.7 1,881.5 1,783.6
----------- ----------- ------------ ------------- -----------
Operating income (loss) 330.2 (18.4) (146.9) 231.1 356.3
Interest income, net 10.4 14.8 22.0 52.5 15.3
Other income (expense), net (6.9) (19.7) 1.5 23.5 263.7
----------- ----------- ------------ ------------- -----------
Income (loss) before income taxes and cumulative effect of a
change in accounting principle 333.7 (23.3) (123.4) 307.1 635.3
Income tax expense (benefit) 49.0 10.0 (1.5) 61.4 14.5
----------- ----------- ------------ ------------- -----------
Income (loss) from continuing operations before cumulative
effect of a change in accounting principle $ 284.7 $ (33.3) $ (121.9) $ 245.7 $ 620.8
=========== =========== ============ ============= ===========
Net income (loss) $ 282.8 $ (33.3) $ (121.9) $ 245.7 $ 620.8
=========== =========== ============ ============= ===========
Earnings (loss) per share:
From continuing operations before cumulative effect of a
change in accounting principle:
Basic $ 0.79 $(0.09) $(0.34) $ 0.70 $ 1.79
=========== =========== ============ ============= ===========
Diluted $ 0.73 $(0.09) $(0.34) $ 0.65 $ 1.62
=========== =========== ============ ============= ===========
Net income (loss):
Basic $ 0.78 $(0.09) $(0.34) $ 0.70 $ 1.79
=========== =========== ============ ============= ===========
Diluted $ 0.73 $(0.09) $(0.34) $ 0.65 $ 1.62
=========== =========== ============ ============= ===========
Weighted-average common and potential common
shares outstanding:
Basic 361.0 363.6 355.0 351.8 347.2
=========== =========== ============ ============= ===========
Diluted 388.5 363.6 355.0 376.8 383.4
=========== =========== ============ ============= ===========
FINANCIAL POSITION AT YEAR-END
Working capital $ 784.5 $ 872.0 $ 804.3 $ 803.2 $ 791.1
Total assets $2,280.4 $2,248.4 $2,290.7 $2,362.6 $2,382.2
Long-term debt $ - $ 19.9 $ 20.4 $ 26.2 $ 48.6
Total debt $ 22.1 $ 22.2 $ 25.9 $ 55.6 $ 80.0
Shareholders' equity $1,680.5 $1,706.0 $1,781.1 $1,767.9 $1,643.3
- -------------------------------------------------------------- ----------- ----------- ------------ ------------ -----------
OTHER DATA
Research and development $ 352.8 $ 435.6 $ 441.0 $ 435.6 $ 386.1
Capital additions $ 215.3 $ 154.9 $ 138.0 $ 239.5 $ 168.7
Number of employees (in thousands) 9.7 9.8 10.1 10.3 10.5
- -------------------------------------------------------------- ----------- ----------- ------------ ------------ -----------
</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
This Annual Report contains 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, R&D efforts and
acquisitions and investments in other companies and are indicated by words or
phrases such as "anticipate," "expect," "outlook," "foresee," "believe,"
"could," "intend," and similar words or phrases. These statements are based on
our current plans and expectations and involve 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 in various markets such as wireless, PC, displays and
networks; 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 our forward-looking
statements, see the discussion on "Risk Factors" that appears below and other
risks and uncertainties detailed in this and our other reports and filings with
the Securities and Exchange Commission. We undertake no obligation to update
forward-looking statements to reflect developments or information obtained after
the date hereof and disclaim any obligation to do so.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto:
o Critical Accounting Policies and Estimates
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.
We record a provision for estimated future returns at the time of shipment.
Approximately 51 percent of our semiconductor product sales were made
through distributors in fiscal 2004. 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. Actual distributor
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.
Service revenues, which are included in net sales, 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 sales. This income
is classified as a component of special items in the consolidated statement
of operations 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) Valuation of 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 inventory
down below the current carrying value. While our estimates require us to
make significant judgments and assumptions about 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. 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
Our impairment evaluation of long-lived assets 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.
Our impairment evaluation of goodwill is based on comparing the fair
value to the carrying value of our 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 and device connectivity business
units, which are included in "All Others." 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 sustain improvement, 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.
<PAGE>
d) Deferred Income Taxes
We determine deferred tax liabilities and assets 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. 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 those 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 international jurisdictions may cause us to change our
judgments 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 currently have recorded.
o Overview
We began fiscal 2004 as a stronger company focused on achieving greater
profitability and better return on invested capital through increased sales of
our higher-margin analog products. During fiscal 2004, we continued to follow
through on profit-improvement actions that were first announced in February
2003. For example, in late August 2003, we completed the exit and sale of our
information appliance business, consisting primarily of the GeodeTM family of
integrated processor products (See Note 3 to the Consolidated Financial
Statements). During the year, we also completed other cost reduction activities
that resulted in lower R&D spending for the company as a whole. At the same
time, we were able to increase our research and development investments in
analog capabilities. As a result of our actions, combined with better overall
market conditions, our financial results in fiscal 2004 were substantially
improved compared to fiscal 2003.
In reviewing our performance we consider several key financial measures.
When reviewing our net sales performance, we look at sales growth rates, new
order rates (including turns orders), average selling prices, revenue from new
products and market share in the Standard Linear category as defined by World
Semiconductor Trade Statistics. We generally define new products as those
introduced within the last three years. We gauge our operating income
performance by gross margin trends, product mix, average selling prices, factory
utilization rates and operating expenses relative to sales. We are focused on
generating a return on invested capital that consistently exceeds our cost of
capital and is higher than what we have typically generated historically. To
improve our return on invested capital we concentrate on operating income,
working capital management, capital expenditures and cash management. Operating
income improvements are being driven by gross margin growth and more efficient
operating expense ratios.
During September and October 2003, we repurchased a total of 25.4 million
shares of our common stock for $400 million in connection with a stock
repurchase program announced in July 2003. This program was followed by the
announcement of another $400 million stock repurchase program in March 2004.
Under this second program, we repurchased an additional 7.0 million shares of
our common stock for $142.5 million through the end of fiscal 2004. These stock
repurchase programs are one element of an overall effort to increase our return
on invested capital, which we believe improve shareholder value. We also
completed a two-for-one stock split in May 2004, which was paid in the form of a
stock dividend. We did the stock split to make our stock more affordable to the
individual investor while keeping the price per share and the number of shares
outstanding comparable to other leading companies in our industry and to allow
for less dilution of our shareholder base as a result of our various stock
plans.
The following table and discussion provides an overview of our operating
results for fiscal years 2004, 2003 and 2002:
<TABLE>
--------------- ------------ -------------- ------------ --------------
Years Ended: May 30, 2004 May 25, 2003 May 26, 2002
(In Millions) % Change % Change
--------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Sales $1,983.1 19% $1,672.5 12% $1,494.8
Operating income (loss) $ 330.2 $ (18.4) $ (146.9)
As a % of sales 17% (1%) (10%)
Net income (loss) $ 282.8 $ (33.3) $ (121.9)
As a % of sales 14% (2%) (8%)
</TABLE>
<PAGE>
Net sales were greater in fiscal 2004 than in fiscal 2003. The sales
increases are attributable to both higher industry demand and our market share
gains in key standard linear markets, particularly for power management
products. Unit shipments for the company were up 22 percent in fiscal 2004 from
unit shipments in fiscal 2003, while average selling prices were flat. The
improvement in net income was driven by higher gross margin on higher sales, as
well as lower operating expenses.
Net income for fiscal 2004 included special items of $41.6 million, which
include charges of $30.0 million arising from a lawsuit brought against us by ZF
Micro Solutions, Inc. (See Note 17 to the Consolidated Financial Statements) and
$3.1 million for the settlement of certain patent infringement claims. Special
items also included a net charge of $19.6 million for cost reduction actions and
the exit and sale of the information appliance business completed in August 2003
(See Note 3 to the Consolidated Financial Statements). In addition, special
items included $11.1 million of net intellectual property income. Prior to
fiscal 2004, net intellectual property income was classified as non-operating
income. Net intellectual property income reported in prior years has been
reclassified to conform to this presentation. Fiscal 2004 net income also
included a $1.9 million charge (including a tax effect of $0.2 million) for the
cumulative effect of a change in accounting principle as a result of the
adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations" (See
Note 7 to the Consolidated Financial Statements).
The increase in net sales for fiscal 2003 over fiscal 2002 came from higher
demand, particularly from customers in our wireless handset market, as business
conditions for the semiconductor industry slowly improved from those in fiscal
2002, although general market and worldwide economic conditions were essentially
flat. Unit shipments were up 29 percent from unit shipments in fiscal 2002, but
average selling prices in fiscal 2003 were down 13 percent from fiscal 2002.
Notwithstanding the net loss in fiscal 2003, the improvement in net results
compared to fiscal 2002 was primarily driven by the increase in sales in fiscal
2003 over that of fiscal 2002.
Net loss for fiscal 2003 included $38.2 million of special items. These
special items included $0.7 million for in-process R&D charges related to the
acquisition 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), which were taken as part
of our strategic profit improvement actions. Special items also included $6.1
million of net intellectual property income. The fiscal 2003 net loss also had
$13.8 million of charges included in R&D expenses for the write-down of
technology licenses (See the Research and Development section below).
o Sales
<TABLE>
-------------- ------------ ------------- ------------ --------------
Years Ended: May 30, 2004 May 25, May 26, 2002
(In Millions) % Change 2003 % Change
-------------- ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$1,664.7 23% $1,350.0 14% $ 1,182.5
Analog segment
As a % of sales 84% 81% 79%
All others 318.4 (1%) 322.5 3% 312.3
As a % of sales 16% 19% 21%
-------------- ------------- --------------
Total sales $1,983.1 $1,672.5 $1,494.8
============== ============= ==============
100% 100% 100%
</TABLE>
The chart above and the following discussion are based on our reportable
segments described in Note 14 to the Consolidated Financial Statements.
Our sales growth in fiscal 2004 was essentially all due to the Analog
segment. Growth in Analog segment sales was driven by higher consumer demand for
products such as wireless phones and notebook computers, and also because of a
general trend towards increased analog semiconductor content in a variety of
electronic products. Unit volume was up 22 percent over the prior year and
average selling prices for fiscal 2004 as a whole grew just slightly at 1
percent over fiscal 2003. Average selling prices were higher in the second half
of fiscal 2004, reflecting both a richer mix of products as well as actual price
improvements, as we have been actively striving to increase our sales of high
value, high performance analog products. Within the Analog segment, sales of
power management products led the growth in sales with an increase of 35 percent
from sales in fiscal 2003 where we continued to grow at a faster rate than the
overall market. The increased activity in wireless handsets largely drove the
sales growth in power management products. Sales of audio, data conversion and
application-specific wireless (including radio frequency building blocks)
products also contributed to the growth with increases of 30 percent, 28 percent
and 26 percent in fiscal 2004, respectively, over sales in fiscal 2003.
<PAGE>
For fiscal 2004, sales increased in all geographic regions compared to
fiscal 2003. The increases were 35 percent in Japan, 21 percent in the Asia
Pacific region, 16 percent in Europe and 8 percent in the Americas. Sales in
fiscal 2004 as a percentage of total sales remained flat at 46 percent for the
Asia Pacific region and 20 percent in Europe. Japan increased to 13 percent of
total sales while the Americas decreased to 21 percent. Foreign
currency-denominated sales in fiscal 2004 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 2004 sales
was minimal since only a quarter of our total sales was denominated in foreign
currency.
The growth in Analog segment sales for fiscal 2003 over fiscal 2002 came
from higher volume as unit shipments increased 30 percent from fiscal 2002.
However, average selling prices declined 11 percent from fiscal 2002, due to a
shift in product mix and some modest price declines. The mix was impacted by
increased sales of certain higher performing analog products offered in very
small form factors. Although these products were relatively lower in price,
within our portfolio of products, their gross margins were relatively higher.
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. Sales of application-specific wireless
products, primarily radio frequency building blocks, were flat year on year.
For fiscal 2003, sales increased in all geographic regions compared to
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. Many of our customers have manufacturing
operations in the Asia Pacific region that make their purchases in that region
and as a result, sales increased in the Asia Pacific region and declined in
Europe and the Americas. 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 fiscal 2003 total sales was denominated in foreign currency.
o Gross Margin
<TABLE>
-------------- ------------- -------------- ------------ ---------------
Years Ended: May 30, 2004 May 25, 2003 May 26, 2002
(In Millions) % Change % Change
-------------- ------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Sales $1,983.1 19% $1,672.5 12% $1,494.8
Cost of sales 970.8 3% 946.8 1% 941.4
-------------- -------------- ---------------
Gross margin $1,012.3 $725.7 $ 553.4
============== ============== ===============
As a % of sales 51% 43% 37%
</TABLE>
The increase in gross margin for fiscal 2004 over fiscal 2003 was driven by a
combination of higher factory utilization and improvement in product mix. Wafer
fabrication capacity utilization during fiscal 2004 was 93 percent, based on
wafer starts, compared to 71 percent for fiscal 2003. As discussed in the Sales
section above, our product mix has improved through active efforts to increase
the portion of our business that comes from high value, higher performance
analog products, which are more proprietary in nature and can generate higher
margins than products that are less proprietary or are multi-sourced. Analog
segment sales grew to 84 percent of total sales in fiscal 2004 from 81 percent
of total sales in fiscal 2003, which also positively impacts our gross margins
because our analog products generally have higher margins than non-analog
products.
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 coming from actual price
declines on selected products.
<PAGE>
o Research and Development
<TABLE>
-------------- ------------- -------------- ------------ ---------------
Years Ended: May 30, 2004 May 25, 2003 May 26, 2002
(In Millions) % Change % Change
-------------- ------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Research and
development $352.8 (19%) $435.6 (1%) $441.0
As a % of sales 18% 26% 30%
</TABLE>
Research and development expenses shown in the table above exclude in-process
R&D charges of $0.7 million in fiscal 2003 and $1.3 million in fiscal 2002.
Lower research and development expenses in fiscal 2004 from fiscal 2003
reflect the impact of actions we initially launched in February 2003 to reduce
our research and development expenses as a percentage of sales. These actions
included exits of businesses, headcount reductions and restructuring of a
licensing agreement with Taiwan Semiconductor Manufacturing Company. Ongoing
research and development spending is heavily focused on our analog products and
our underlying analog capabilities. Total company spending through fiscal 2004
for new product development was down 16 percent, and for process and support
technology was down 33 percent from fiscal 2003 primarily because of the
business areas we exited. Although research and development spending is down as
a whole and as a percentage of sales, research and development spending for our
Analog segment increased as we continue to invest in the development of new
analog and mixed-signal technology-based products for wireless handsets,
displays, notebook PCs, other portable devices, as well as applications for the
broader markets requiring analog technology. A significant portion of our
research and development is directed at power management technology.
R&D expenses for fiscal 2003 included $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 in fiscal 2003 were lower by 4
percent from expenses in fiscal 2002. The lower R&D expenses reflected our
effort to control the level of expenditures, in light of weak business
conditions.
o Selling, General and Administrative
<TABLE>
-------------- ------------- -------------- ------------ ---------------
Years Ended: May 30, 2004 May 25, 2003 May 26, 2002
(In Millions) % Change % Change
-------------- ------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Selling, general and
administrative $287.7 6% $270.3 4% $260.9
As a % of sales 15% 16% 17%
</TABLE>
The increases in selling, general and administrative expenses for fiscal 2004
over fiscal 2003 were consistent with increased business levels and were mainly
due to higher costs in fiscal 2004 related to employee compensation and
benefits, as well as incremental costs for outside services. Although sales
levels increased substantially in the last three quarters of fiscal 2004, we are
continuing to focus on controlling our cost structure in a way that allows sales
to rise faster than expenses. As a result, SG&A expenses as a percent of sales
declined from 16 percent in fiscal 2003 to 15 percent in fiscal 2004 and were
down to 13 percent in the fourth quarter of fiscal 2004.
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.
o Cost Reduction Programs and Restructuring of Operations
During fiscal 2004, we substantially completed the cost reduction activities
related to our strategic profit-improvement actions that were initially launched
in February 2003. These actions included the exit and sale of our information
appliance business, consisting primarily of the GeodeTM family of integrated
processor products, and other cost reduction activities that were also aimed at
improving profitability. As a result, we recorded a net charge of $19.6 million
in fiscal 2004. 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 2004 related to previously announced
actions.
<PAGE>
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. 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.
o Interest Income and Interest Expense
------------- -------------- -------------
Years Ended: May 30, May 25, 2003 May 26,
(In Millions) 2004 2002
------------- -------------- -------------
Interest income $ 11.6 $ 16.3 $25.9
Interest expense (1.2) (1.5) (3.9)
------------- -------------- -------------
Interest income, net $ 10.4 $ 14.8 $22.0
============= ============== =============
The decrease in interest income, net for fiscal 2004 compared to fiscal 2003 was
due to lower average interest rates on lower average cash balances in fiscal
2004. Although we generated positive cash flow from operations, our cash
balances in fiscal 2004 are lower mainly as a result of the repurchase of 32.4
million shares of our common stock for $542.5 million. Offsetting interest
expense was lower during fiscal 2004 compared to fiscal 2003 as we continued to
reduce our outstanding debt.
The decrease in net interest income for fiscal 2003 was due to lower
average interest rates on slightly higher average cash balances during fiscal
2003 compared to fiscal 2002. Offsetting interest expense was lower for fiscal
2003 as we continued to reduce our outstanding debt balances.
o Other Income (Expense), Net
------------- -------------- -------------
Years Ended: May 30, May 25, May 26,
(In Millions) 2004 2003 2002
------------- -------------- -------------
Share in net losses of
equity-method investments $(14.1) $(15.9) $ (7.3)
Net gain (loss) on marketable
and other investments, net 6.6 (3.9) 9.4
Other 0.6 0.1 (0.6)
------------- -------------- -------------
Total other income (expense), net $ (6.9) $(19.7) $ 1.5
============= ============== =============
The components of our other income (expense), net are primarily derived from
activities related to our investments. Net gain on investments for fiscal 2004
was primarily from the sale of shares in two nonpublicly traded companies upon
their acquisitions by third parties. Net loss on investments in fiscal 2003 was
the result of impairment losses for other than temporary declines in fair value
of nonmarketable investments that more than offset gains from the sale of
marketable investments. Net gain on investments in fiscal 2002 was primarily
from the sale of marketable investments. Our share in net losses of
equity-method investments was lower in fiscal 2004 as we had fewer equity-method
investments in nonpublic companies than in fiscal 2003.
<PAGE>
o Income Tax Expense
We recorded income tax expense of $49.0 million in fiscal 2004 on income before
taxes and cumulative effect of a change in accounting principle. This compares
to income tax expense of $10.0 million in fiscal 2003 and an income tax benefit
of $1.5 million in fiscal 2002 when in both years our income before taxes was
much lower than in fiscal 2004. The annual effective tax rate for fiscal 2004
was approximately 15 percent. Fiscal 2004 tax expense consisted primarily of
U.S. income tax, net of net operating losses and tax credits, and non-U.S.
income taxes. The fiscal 2003 tax expense primarily represented non-U.S. income
taxes on international income. The fiscal 2002 tax benefit consisted of $11.5
million for the expected refund of U.S. taxes as a result of a change in the
federal tax law, which was mostly offset by $10.0 million of tax expenses on
international income. Our ability to realize net deferred tax assets ($85.6
million at May 30, 2004) is primarily dependent on our ability to generate
future U.S. taxable income. We believe that it is more likely than not that we
will generate sufficient taxable income 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.
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 during fiscal 2004
was concentrated in U.K. pound sterling, Singapore dollar and Malaysian ringgit.
Bringing our assembly and test facility in China into operation during fiscal
2005 may add some risk from Chinese RMB exchange rate fluctuations in the
future. 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 some of our international locations, we maintain defined benefit pension
plans that are operated in accordance with local statutes and practices. As
required by the pension accounting standards, we record an adjustment for
minimum pension liability to adjust the liability related to one of these plans
to equal the amount of the unfunded accumulated benefit obligation. For fiscal
2004, the adjustment was $24.3 million and a corresponding amount is reflected
in the consolidated financial statements as a component of accumulated other
comprehensive loss. This adjustment decreased the unfunded benefit obligation
from $118.1 million in fiscal 2003 to $86.4 million in fiscal 2004. The
improvement in the funding status of this plan was mainly due to the increase in
the value of the plan's assets, since the value of the plan's accumulated
benefit obligation increased slightly with an additional year's accrual for
pension liabilities and an increase in the average age of plan participants. 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 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 30, 2004.
<PAGE>
o Liquidity and Capital Resources
------------ ----------- -----------
Years Ended: May 30, May 25, May 26,
(In Millions) 2004 2003 2002
------------ ----------- -----------
Net cash provided by
operating activities $ 477.7 $ 221.6 $ 122.0
Net cash used by
investing activities (252.2) (123.4) (330.6)
Net cash (used by) provided
by financing activities (384.8) 22.7 72.1
------------ ----------- -----------
($ 159.3) $ 120.9 ($ 136.5)
============ =========== ===========
The primary factors contributing to the changes in cash and cash equivalents in
fiscal 2004, 2003 and 2002 are described below:
In fiscal 2004, cash was generated from operating activities primarily from
net income, adjusted for noncash items (primarily depreciation and
amortization), net of the negative impact that came from changes in working
capital components. These changes in working capital components were mainly
driven by the overall higher levels of business activity in fiscal 2004. We also
generated cash from operating activities in fiscal 2003 because the positive
impact from the net loss, when adjusted for noncash items (primarily
depreciation and amortization), was greater than the negative impact from
changes in working capital components. In fiscal 2002, we generated operating
cash 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.
Major uses of cash for investing activities during fiscal 2004 included
investment in property, plant and equipment of $215.3 million, primarily for
machinery and equipment, net purchases of available-for-sale securities of $27.7
million and payments for security deposits on leased equipment of $20.1 million.
Major uses of cash for investing activities for fiscal 2003 included investment
in property, plant and equipment of $154.9 million, primarily for machinery and
equipment, the acquisition of DigitalQuake for $11.0 million, net of cash
acquired (See Note 4 to the Consolidated Financial Statements) and investment in
nonpublicly traded companies of $21.8 million. These uses of cash were partially
offset by proceeds from the net sale and maturity of marketable 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).
The primary use of cash from our financing activities in fiscal 2004 came
from our repurchase of a total 32.4 million shares of our common stock for
$542.5 million, net advances of $29.4 million to acquire our common stock and
payments of $22.7 million on software license obligations. A portion (15.7
million shares) of the stock repurchase was transacted directly with a major
financial institution and the remainder in the open market. These uses of cash
were partially offset by proceeds of $211.9 million from the issuance of common
stock under employee benefit plans. The primary source of cash from financing
activities during fiscal 2003 came from the issuance of common stock under
employee benefit plans of $42.7 million, which was partially offset by payments
of $14.6 million on software license obligations and a $5.4 million repayment of
our outstanding debt balances. The primary source of cash in fiscal 2002 came
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 and payments of $14.4 million on software license
obligations.
In March 2004, we announced that the Board of Directors approved another
$400 million stock repurchase program similar to the $400 million stock
repurchase program completed in September and October 2003. The new stock
repurchase program is consistent with our current business model which focuses
on higher value analog products and, therefore, is less capital intensive than
it has been historically. This stock repurchase program is one element of an
overall effort to increase our return on invested capital, which we believe
improves shareholder value. As of the end of fiscal 2004, the approved
repurchase program in place allows for $257.5 million of future common stock
repurchases.
<PAGE>
We foresee continuing cash outlays for plant and equipment in fiscal 2005,
with our primary focus on extending our analog capacity and capabilities at our
existing sites. The construction of an assembly and test facility in China that
was begun in fiscal 2003 as part of our effort to increase assembly and test
capacity is close to completion and will be operational in fiscal 2005. We
currently expect our fiscal 2005 capital expenditure amount to be in a similar
range as the fiscal 2004 amount. However, we continue to manage capital
expenditures within our targeted goals for return on invested capital and 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 2005, as well as the stock repurchase program.
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 30, 2004:
<TABLE>
Fiscal Year: 2010 and
(In Millions) 2005 2006 2007 2008 2009 thereafter Total
--------------- --------- --------- -------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Contractual obligations:
Debt obligations $ 22.1 $ - $ - $ - $ - $ - $ 22.1
Accrued software license
obligations 21.7 10.0 8.2 - - - 39.9
Noncancelable
operating leases 27.4 22.8 19.1 9.6 6.8 5.8 91.5
Purchase obligations under:
Fairchild manufacturing
agreement 2.6 - - - - - 2.6
Other 2.8 2.2 0.7 0.3 0.2 - 6.2
--------------- --------- --------- -------- ---------- -------------- -----------
Total $76.6 $35.0 $28.0 $ 9.9 $ 7.0 $ 5.8 $162.3
=============== ========= ========= ======== ========== ============== ===========
Commercial Commitments:
Standby letters of credit
under bank multicurrency
agreement $ 8.8 - - - - - $ 8.8
=============== ========= ========= ======== ========== ============== ===========
</TABLE>
In addition, as of May 30, 2004, capital purchase commitments were $62.1
million.
o Outlook
Although overall economic conditions continue to be somewhat difficult to
predict, demand levels throughout fiscal 2004 strengthened as we saw market
conditions in the semiconductor industry improve from a year ago. New orders
received during fiscal 2004 were stronger than originally expected and higher
than in the preceding year. New orders also increased at a faster rate than
sales, as a result of stronger order patterns in our distribution channels,
which tend to serve broader markets beyond wireless handset and PCs. New orders
from our top OEM customers, which include several major wireless handset
manufacturers, strengthened significantly in the second half of the fiscal year.
Our opening 13-week backlog entering the first quarter of fiscal 2005 was higher
than it was when we began the fourth quarter of fiscal 2004. However, we
anticipate turns orders, which are orders received with delivery requested in
the same quarter, to be seasonally lower in the first quarter of fiscal 2005
compared to the level in the fourth quarter. This is consistent with what we
have typically experienced in our August quarter in previous years. Our
experience has been that orders usually start slow at the beginning of summer
and pick up later in the quarter in preparation for increased manufacturing
activity that usually occurs in the latter part of the calendar year.
Considering all factors, including those discussed above, we expect sales for
the first quarter of fiscal 2005 to decline 4 percent to 5 percent from the
level achieved in our fiscal 2004 fourth quarter. This is down from the original
range we expected at the time we announced our fourth quarter earnings on June
10, 2004 since we have seen a more significant decrease in turns orders to date
than originally anticipated. However, if backlog orders are cancelled or if the
currently anticipated level of turns orders is not received, actual revenues may
be lower. We anticipate our gross margin percentage in the first quarter of
fiscal 2005 to be comparable to our fiscal 2004 fourth quarter.
<PAGE>
Our operating expenses, consisting of research and development and selling,
general and administrative, have benefited from the significant actions we have
taken since fiscal 2003 when we initially launched a strategic
profit-improvement plan. This is partially offset by incremental programs aimed
at analog growth markets. For the first quarter of fiscal 2005, we anticipate
operating expenses to be comparable to fiscal 2004 fourth quarter levels. We
expect our investment in property, plant and equipment in total for fiscal 2005
to be slightly higher than fiscal 2004. See "Liquidity and Capital Resources."
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 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. 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. Our major
competitors include Analog Devices, Linear Technology, Maxim, ST
Microelectronics and Texas Instruments 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, markets and customers.
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 some of our customers in certain markets, such as displays and wireless
handsets.
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 continue
to be successful in this targeted market. Although the worldwide handset market
is large, near-term growth trends are uncertain and difficult to predict with
accuracy.
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 applications such as
wireless handsets, displays, notebook PCs, other portable devices and other
applications that require analog.
Investments and Acquisitions. We have made and will continue to consider making
strategic business investments and alliances and acquisitions we consider
necessary to gain access to key technologies that we believe augment our
existing technical capability, and support our business model objectives (which
includes gross margin, operating margin, and return on invested capital
objectives). 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 Asian markets. As noted in our discussion of
planned capital expenditures, as part of our efforts to expand our business
presence in the Asian markets, we began construction during fiscal 2003 of an
assembly and test facility in China's Suzhou Industrial Park in the Jiangsu
Province of China. Construction of the facility is close to completion and it is
expected to be operational in fiscal 2005. We expect the facility to provide
analog products quickly and cost effectively to our customers in Asia, as well
as other regions as necessary. The facility will also increase our overall
assembly and test capacity to support increasing product volume. Product volume
increases are dependent upon customer demand. If our product volume does not
increase, lower 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 expected future gross margin.
<PAGE>
We face risks from our international operations. 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 try 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. 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 many parts of the world including the
continuing hostilities 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. Although the SARS illness appears to have been contained, if it or
other pandemic illness emerges in Asia, our business could be adversely
affected. The spread of such illnesses beyond Asia could also negatively impact
other aspects of our operations.
<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 the information appearing 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
<TABLE>
Page
----
Financial Statements:
<S> <C>
Consolidated Balance Sheets at May 30, 2004 and May 25, 2003 33
Consolidated Statements of Operations for each of the years in the
three-year period ended May 30, 2004 34
Consolidated Statements of Comprehensive Income (Loss) for each of the years
in the three-year period ended May 30, 2004 35
Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended May 30, 2004 36
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended May 30, 2004 37
Notes to Consolidated Financial Statements 38
Report of Independent Registered Public Accounting Firm 68
Financial Statement Schedule:
- -----------------------------
For the three years ended May 30, 2004
Schedule II -- Valuation and Qualifying Accounts 76
</TABLE>
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
May 30, May 25,
In Millions, Except Share Amounts 2004 2003
------------- --------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 642.9 $ 802.2
Short-term marketable investments 139.3 113.2
Receivables, less allowances of $46.7 in 2004 and $38.2 in 2003 198.9 140.9
Inventories 200.1 142.2
Other current assets 64.6 28.5
------------- --------------
Total current assets 1,245.8 1,227.0
Property, plant and equipment, net 699.6 680.7
Goodwill 173.3 173.3
Deferred tax assets 73.3 74.4
Other assets 88.4 93.0
------------- --------------
Total assets $2,280.4 $2,248.4
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 22.1 $ 2.3
Accounts payable 141.0 107.0
Accrued expenses 234.8 196.1
Income taxes payable 63.4 49.6
------------- --------------
Total current liabilities 461.3 355.0
Long-term debt - 19.9
Other noncurrent liabilities 138.6 167.5
------------- --------------
Total liabilities $599.9 $542.4
Commitments and contingencies
Shareholders' equity:
Common stock of $0.50 par value. Authorized 850,000,000 shares.
Issued and outstanding 357,611,988 in 2004 and 367,144,776 in 2003 $ 178.8 $ 183.6
Additional paid-in capital 1,038.9 1,369.5
Retained earnings 560.0 277.2
Unearned compensation (8.8) (10.0)
Accumulated other comprehensive loss (88.4) (114.3)
------------- --------------
Total shareholders' equity 1,680.5 1,706.0
------------- --------------
Total liabilities and shareholders' equity $2,280.4 $2,248.4
============= ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Years Ended May 30, May 25, May 26,
In Millions, Except Per Share Amounts 2004 2003 2002
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $1,983.1 $1,672.5 $1,494.8
Operating costs and expenses:
Cost of sales 970.8 946.8 941.4
Research and development 352.8 435.6 441.0
Selling, general and administrative 287.7 270.3 260.9
Special items 41.6 38.2 (1.6)
------------ ------------ ------------
Total operating costs and expenses 1,652.9 1,690.9 1,641.7
------------ ------------ ------------
Operating income (loss) 330.2 (18.4) (146.9)
Interest income, net 10.4 14.8 22.0
Other income (expense), net (6.9) (19.7) 1.5
------------ ------------ ------------
Income (loss) before taxes and cumulative effect of
a change in accounting principle 333.7 (23.3) (123.4)
Income tax expense (benefit) 49.0 10.0 (1.5)
------------ ------------ ------------
Income (loss) before cumulative effect of a change
in accounting principle 284.7 (33.3) (121.9)
Cumulative effect of a change in accounting principle
including tax effect of $0.2 (1.9) - -
------------ ------------ ------------
Net income (loss) $ 282.8 $ (33.3) $ (121.9)
============ ============ ============
Earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle:
Basic $ 0.79 $(0.09) $(0.34)
Diluted $ 0.73 $(0.09) $(0.34)
Cumulative effect of a change in accounting principle
including tax effect of $0.2:
Basic $(0.01) $ - $ -
Diluted $(0.01) $ - $ -
Net income (loss):
Basic $ 0.78 $(0.09) $(0.34)
Diluted $ 0.73 $(0.09) $(0.34)
Weighted-average common and potential common
shares outstanding:
Basic 361.0 363.6 355.0
Diluted 388.5 363.6 355.0
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
Years Ended May 30, May 25, May 26,
In millions 2004 2003 2002
------------- ------------- --------------
<S> <C> <C> <C>
Net income (loss) $ 282.8 $ (33.3) $(121.9)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities (3.4) (24.8) 32.6
Reclassification adjustment for net realized (gain) on
available- - (10.1) (9.4)
for-sale securities included in net income (loss)
Minimum pension liability 29.1 (57.5) (12.7)
Derivative instruments:
Unrealized gain (loss) on cash flow hedges 0.2 0.2 (0.4)
------------- ------------- --------------
Other comprehensive income (loss) 25.9 (92.2) 10.1
------------- ------------- --------------
Comprehensive income (loss) $ 308.7 $(125.5) $(111.8)
============= ============= ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
Accumulated
Additional Other
Common Stock Paid-In Retained Unearned Comprehensive
------------------
In Millions Shares Par Value Capital Earnings Compensation Loss Total
-------- --------- ----------- --------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at May 27, 2001 347.6 $173.8 1,207.8 $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 11.8 5.9 105.7 - - - 111.6
Unearned compensation relating to issuance of
restricted stock 0.2 0.1 3.0 - (3.1) - -
Cancellation of restricted stock (0.1) - (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 1.2 0.6 9.4 - - - 10.0
Other comprehensive income - - - - - 10.1 10.1
- --------------------------------------------------- -------- -------- ----------- ---------- ------------- ---------- ----------
Balances at May 26, 2002 360.7 180.4 1,325.1 310.5 (12.8) (22.1) 1,781.1
Net loss - - - (33.3) - - (33.3)
Issuance of common stock under option, purchase,
and profit sharing plans 6.5 3.2 40.6 - - - 43.8
Unearned compensation relating to issuance of
restricted stock - - 0.5 - (0.5) - -
Cancellation of restricted stock (0.1) - (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 367.1 183.6 1,369.5 277.2 (10.0) (114.3) 1,706.0
Net income - - - 282.8 - - 282.8
Issuance of common stock under option, purchase,
profit sharing plans 22.9 11.4 202.4 - - - 213.8
Unearned compensation relating to issuance of
restricted stock 0.2 0.1 3.0 - (3.1) - -
Cancellation of restricted stock (0.2) (0.1) (2.5) - 1.2 - (1.4)
Amortization of unearned compensation - - - - 3.1 - 3.1
Tax benefit associated with stock options - - 22.2 - - - 22.2
Purchase and retirement of treasury stock (32.4) (16.2) (526.3) - - - (542.5)
Net advances to acquire treasury stock - - (29.4) - - - (29.4)
Other comprehensive income - - - - - 25.9 25.9
- --------------------------------------------------- -------- ---------- ----------- --------- ------------- ---------- ----------
Balances at May 30, 2004 357.6 $178.8 $1,038.9 $ 560.0 $ (8.8) $ (88.4) $1,680.5
=================================================== ======== ========== =========== ========= ============= ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Years Ended May 30, May 25, May 26,
In Millions 2004 2003 2002
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 282.8 $ (33.3) $(121.9)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cumulative effect of a change in accounting principle 1.9 - -
Depreciation, amortization, and accretion 209.9 228.5 230.4
Net (gain) loss on investments (7.0) 3.9 (9.4)
Share in net losses of equity-method investments 14.1 15.9 7.3
Impairment of technology licenses - 13.8 -
Loss on disposal of equipment 6.2 2.9 4.4
Tax benefit associated with stock options 22.2 - -
Deferred tax provision - 3.6 18.0
Noncash special items 1.2 12.8 (2.3)
Other, net 3.6 0.8 0.2
Changes in certain assets and liabilities, net:
Receivables (50.4) (7.2) (8.0)
Inventories (62.5) 2.8 51.0
Other current assets (31.6) 3.4 -
Accounts payable and accrued expenses 78.7 (33.4) (25.8)
Income taxes payable 13.6 1.7 (5.2)
Other noncurrent liabilities (5.0) 5.4 (16.7)
------------ ------------ ------------
Net cash provided by operating activities 477.7 221.6 122.0
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (215.3) (154.9) (138.0)
Sale of equipment - 2.3 -
Sale and maturity of available-for-sale securities 359.0 892.6 88.6
Purchase of available-for-sale securities (386.7) (843.4) (200.1)
Sale of investments 12.1 18.0 11.2
Investment in nonpublicly traded companies (1.8) (21.8) (28.8)
Business acquisitions, net of cash acquired - (11.0) (42.1)
Funding of benefit plan (4.6) (3.6) (14.9)
Security deposits on leased equipment (20.1) - -
Other, net 5.2 (1.6) (6.5)
------------ ------------ ------------
Net cash used by investing activities (252.2) (123.4) (330.6)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt (2.1) (5.4) (20.6)
Payment on software license obligations (22.7) (14.6) (14.4)
Issuance of common stock 211.9 42.7 107.1
Net advances to acquire treasury stock (29.4) - -
Purchase and retirement of treasury stock (542.5) - -
------------ ------------ ------------
Net cash (used by) provided by financing activities (384.8) 22.7 72.1
Net change in cash and cash equivalents (159.3) 120.9 (136.5)
Cash and cash equivalents at beginning of year 802.2 681.3 817.8
------------ ------------ ------------
Cash and cash equivalents at end of year $ 642.9 $ 802.2 $ 681.3
============ ============ ============
</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 range of semiconductor
products, most of which are analog and mixed-signal integrated circuits. Our
focus is on creating analog-intensive solutions that provide more energy
efficiency, portability, better audio and sharper images in electronics systems.
We target key markets such as wireless handsets, displays, PCs, networks and a
broad range of portable applications.
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. For the fiscal year ended
May 30, 2004 we had a 53-week year. Operating results for this additional week
are considered immaterial to our consolidated results of operations for fiscal
2004. Fiscal years ended May 25, 2003 and May 26, 2002 were 52-week years.
On May 13, 2004, we completed a two-for-one stock split of our common stock
that was paid in the form of a stock dividend (See Note 10 to the Consolidated
Financial Statements). All information about capital stock accounts, share and
per share amounts included in the accompanying consolidated financial statements
and related notes for all years presented have been adjusted to retroactively
reflect this stock split.
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 51
percent of our semiconductor product sales were made through distributors in
fiscal 2004. 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. Service revenues, which are included in
net sales, 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 sales. This income is
classified as a component of special items in the consolidated statement of
operations 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 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.
<PAGE>
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. Goodwill is assigned to reporting units and as of May 30, 2004, we
have six 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.
Impairment of Long-Lived Assets
We evaluate goodwill for impairment on an annual basis and whenever events or
changes in circumstance indicate 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 2004 we tested each
reporting unit that contains goodwill as part of our annual goodwill impairment
evaluation. We also performed additional tests of our wireless and device
connectivity reporting units when the wireless business unit was reorganized
into two separate business units beginning in fiscal 2004. Our tests found no
impairment of goodwill.
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 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. 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 (loss) per share. A reconciliation of
the shares used in the computation follows:
<TABLE>
(In Millions) 2004 2003 2002
--------------- ---------------- ---------------
<S> <C> <C> <C>
Weighted-average common shares outstanding used
for basic earnings (loss) per share 361.0 363.6 355.0
Effect of dilutive securities:
Stock options 27.5 - -
--------------- ---------------- ---------------
Weighted-average common and potential common shares
outstanding used for diluted earnings (loss) per share 388.5 363.6 355.0
=============== ================ ===============
</TABLE>
<PAGE>
For the fiscal year ended May 30, 2004, we did not include options
outstanding to purchase 14.7 million shares of common stock with a
weighted-average exercise price of $28.33 in diluted earnings per share since
their effect was antidilutive because the exercise price of these options
exceeded the average market price during the year. However, these shares could
potentially dilute basic earnings per share in the future. For the fiscal year
ended May 25, 2003, we did not include options outstanding to purchase 88.9
million shares of common stock with a weighted-average exercise price of $14.00
in diluted loss per share since their effect was antidilutive due to the
reported loss. For the fiscal year ended May 26, 2002, we did not include
options outstanding to purchase 73.8 million shares of common stock with a
weighted-average exercise price of $14.12 in diluted loss per share since their
effect was also antidilutive due to the reported loss.
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 selling, general and
administrative expenses. 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.
Deferred Compensation Plan Assets. Employee contributions under the deferred
compensation plan (See Note 12 to the Consolidated Financial Statements) are
maintained in a rabbi trust. Participants can direct the investment of their
deferred compensation plan accounts in the same investments funds offered by the
401(k) plan (with the exception of the company stock fund, which is not
available for the nonqualified plan). Although participants direct the
investment of these funds, they are classified as trading securities and are
included in other assets because they remain assets of the company until they
are actually paid out to the participants.
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
use the equity method of accounting for 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 a hypothetical liquidation at book
value method. As of May 30, 2004, we had nonmarketable investments of $12.6
million included in other assets, which represented strategic business
investments in three small nonpublicly traded companies. Summarized unaudited
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>
(In Millions) 2004 2003
------------- -------------
<S> <C> <C>
COMBINED FINANCIAL POSITION (Unaudited)
Current assets $ 38.8 $ 67.4
Noncurrent assets 4.9 8.5
------------- -------------
Total assets $ 43.7 $ 75.9
============= =============
Current liabilities 8.5 21.6
Noncurrent liabilities 5.0 1.9
Shareholders' equity 30.2 52.4
------------- -------------
Total liabilities and shareholders' equity $ 43.7 $ 75.9
============= =============
</TABLE>
<PAGE>
<TABLE>
(In Millions) 2004 2003 2002
------------- ------------- --------------
<S> <C> <C> <C>
COMBINED OPERATING RESULTS (Unaudited)
Sales $ 20.8 $ 4.8 $ 0.6
Costs and expenses 49.3 41.3 20.0
------------- ------------- --------------
Operating loss $(28.5) $(36.5) $(19.4)
============= ============= ==============
Net loss $(35.2) $(45.6) $(24.4)
============= ============= ==============
</TABLE>
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 and accounts payable 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 30, 2004 and May
25, 2003. The estimated fair value of debt was $22.0 million at May 30, 2004 and
$20.8 million at May 25, 2003. 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 11 to the Consolidated
Financial Statements for more complete 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 2004, 2003
and 2002 was $8.45, $4.76 and $10.41 per share, respectively. The
weighted-average fair value of rights granted under the stock purchase plans was
$3.90, $2.59 and $3.48 per share for fiscal 2004, 2003 and 2002, 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 2004, 2003 and 2002:
2004 2003 2002
----------------- ----------------- ---------------
STOCK OPTION PLANS
Expected life (in years) 4.9 5.0 5.1
Expected volatility 75% 77% 75%
Risk-free interest rate 3.3% 2.7% 4.5%
STOCK PURCHASE PLANS
Expected life (in years) 0.4 0.3 0.3
Expected volatility 46% 54% 57%
Risk-free interest rate 1.3% 1.1% 1.7%
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:
<TABLE>
(In Millions, Except Per Share Amounts) 2004 2003 2002
-------------- -------------- ---------------
<S> <C> <C> <C>
Net income (loss) - as reported $282.8 $( 33.3) $(121.9)
Add back: Stock compensation charge included in
net income (loss) determined under the intrinsic
value method, net of tax 2.2 1.9 3.4
Deduct: Total stock-based employee compensation
expense determined under the fair value method,
net of tax 187.0 180.9 161.9
-------------- -------------- ---------------
Net income (loss) - pro forma $ 98.0 $(212.3) $(280.4)
============== ============== ===============
Basic earnings (loss) per share - as reported $ 0.78 $ (0.09) $ (0.34)
Basic earnings (loss) per share - pro forma $ 0.27 $ (0.58) $ (0.79)
Diluted earnings (loss) per share - as reported $ 0.73 $ (0.09) $ (0.34)
Diluted earnings (loss) per share - pro forma $ 0.25 $ (0.58) $ (0.79)
</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 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 was effective in fiscal 2004 for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of SFAS No. 149 did not have a
material impact on our consolidated financial position or results of
operations.
o 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 was effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise was effective at
the beginning of our second quarter for fiscal 2004. The adoption of this
statement did not have a material impact on our consolidated financial
position or results of operations.
<PAGE>
o In November 2003, the Emerging Issues Task Force reached a consensus on
Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." EITF No. 03-01 establishes additional
disclosure requirements for each category of SFAS No. 115 investments in a
loss position. Companies must disclose the aggregate amount of unrealized
losses and the aggregate related fair value of their investments with
unrealized losses. Those investments are required to be segregated by those
in a loss position for less than twelve months and those in a loss position
for greater than twelve months. Additionally, certain qualitative
disclosures should be made to clarify a circumstance whereby an
investment's fair value that is below cost is not considered
other-than-temporary. The provisions of this consensus are effective for
our fiscal year ended May 30, 2004. Since we had no SFAS No. 115
investments in a loss position in fiscal 2004, the provisions of this
consensus did not have any impact on our consolidated financial position or
results of operations.
o In December 2003, the Financial Accounting Standards Board issued SFAS No.
132 (Revised 2003), "Employers' Disclosures about Pensions and Other
Postretirement Benefits," relating to financial statement disclosures for
defined benefit plans. The new Statement does not change the measurement or
recognition of those plans that is required by SFAS No. 87, "Employers'
Accounting for Pensions," SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The Statement retains the
disclosure requirements contained in SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which it replaces and
also requires additional disclosures about the assets, obligations, cash
flows and net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans. The required information needs
to be provided separately for pension plans and for other postretirement
benefit plans. SFAS No. 132 was effective for our fiscal year ended May 30,
2004. The interim-period disclosures are effective for our fiscal 2005
first quarter ending August 29, 2004. Disclosure of certain information
about foreign plans is not effective until our fiscal 2005 year ending May
29, 2005. Since SFAS No. 132 only provides for additional disclosures and
does not impact the accounting for our pension plans, the adoption of this
statement did not have any impact on our consolidated financial position or
results of operations.
o In December 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (Revised December 2003), "Consolidation of Variable
Interest Entities," originally issued in January 2003. FIN 46 requires an
investor with a majority of the variable interests (primary beneficiary) in
a variable interest entity (VIE) to consolidate the entity and also
requires majority and significant variable interest investors to provide
certain disclosures. A VIE is an entity in which the voting equity
investors do not have a controlling interest, or the equity investment at
risk is insufficient to finance the entity's activities without receiving
additional subordinated financial support from other parties. We currently
do not have any financial interest in variable interest entities that would
require consolidation or any significant exposure to VIEs that would
require disclosure. Therefore, the provisions of this Interpretation did
not have any impact on our financial position or results of operations.
o At the beginning of fiscal 2004, we adopted 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. The impact
from the adoption of this statement is discussed in Note 7 to the
Consolidated Financial Statements.
Reclassifications
Certain amounts in prior years' consolidated financial statements and notes to
consolidated financial statements have been reclassified to conform to the
fiscal 2004 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 the exposure of
our principal to credit, geographic and investment sector risk. At May 30, 2004,
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.
<PAGE>
Our cash equivalents consisted of the following as of May 30, 2004 and May
25, 2003:
(In Millions) 2004 2003
-------------- ---------------
CASH EQUIVALENTS
Institutional money market funds $501.9 $733.8
Bank time deposits 30.5 16.5
Commercial paper 2.0 4.7
-------------- ---------------
Total cash equivalents $534.4 $755.0
============== ===============
Marketable investments at fiscal year-end comprised:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Estimated
(In Millions) Cost Gains Losses Fair Value
------------- ------------- ------------- -------------
2004
SHORT-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
<S> <C> <C> <C> <C>
Callable agencies $140.7 - $ (1.4) $139.3
------------- ------------- ------------- -------------
Total short-term marketable investments $140.7 - $ (1.4) $139.3
============= ============= ============= =============
LONG-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Equity securities $ 0.8 $ 1.3 - $ 2.1
------------- ------------- ------------- -------------
Total long-term marketable investments $ 0.8 $ 1.3 - $ 2.1
============= ============= ============= =============
2003
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
============= ============= ============= =============
</TABLE>
Net unrealized losses on available-for-sale securities of $0.1 million at
May 30, 2004 and net unrealized gains of $3.3 million at May 25, 2003 are
included in accumulated other comprehensive loss. The related tax effects are
not significant. Long-term marketable investments of $2.1 million at May 30,
2004 and $3.7 million at May 25, 2003 are included in other assets.
Scheduled maturities of investments in debt securities are:
(In Millions)
----------------
2006 $ 19.8
2007 119.5
----------------
Total $139.3
================
Gross realized gains on available-for-sale securities were $0.5 million in
fiscal 2004, $11.6 million in fiscal 2003 and $8.1 million in 2002. There were
no impairment losses recognized in fiscal 2004, but we recognized impairment
losses for other than temporary declines in fair value of $1.6 million in fiscal
2003 and $0.2 million in fiscal 2002.
<PAGE>
For nonmarketable investments, we recognized impairment losses of $0.3
million in fiscal 2004 and $11.6 million in fiscal 2003. No such losses were
recognized in fiscal 2002. We recognized gross realized gains of $6.4 million in
fiscal 2004 and $1.5 million in fiscal 2002. No such gains were recognized in
fiscal 2003. These gains came primarily from the sale of shares and acquisitions
by third parties.
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 2004 or 2003. No cash flow hedges
were terminated as a result of forecasted transactions that did not occur.
At May 30, 2004, 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 $0.6 million net realized loss from cash flow
hedges and a $1.6 million net realized gain from fair value hedges in fiscal
2004. For fiscal 2003, 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. 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 Financial Instruments
The table below shows the fair value and notional principal of derivative
financial instruments as of May 30, 2004 and May 25, 2003. 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 30, 2004 and May 25, 2003. 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 counter
parties 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>
<TABLE>
Carrying Notional Estimated Credit
(In Millions) Amount Principal Fair Value Risk
-------------- ----------- ------------- -------------
2004
<S> <C> <C> <C> <C>
INTEREST RATE INSTRUMENTS
Swaps:
Variable to fixed $ - $21.9 $ - $ -
============== =========== ============= =============
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts:
To sell dollars:
Pound sterling $(0.1) $ 6.3 $(0.1) $ -
Singapore dollar - 4.7 - -
-------------- ----------- ------------- -------------
Total $(0.1) $11.0 $(0.1) $ -
============== =========== ============= =============
Purchased options:
Japanese yen $ 0.1 $ 9.0 $ 0.1 $ -
============== =========== ============= =============
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
============== =========== ============= =============
</TABLE>
Concentrations of Credit Risk
Financial instruments that may subject us to concentrations of credit risk are
primarily investments and trade receivables. Our investment policy requires cash
investments to be placed with high credit quality counter parties and limits the
amount of investments with any one financial institution or direct issuer. We
sell our products to distributors and 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 45 percent of total accounts
receivable at May 30, 2004, and approximately 40 percent at May 25, 2003. In
fiscal 2004 we had one distributor who accounted for approximately 11 percent of
total net sales and another distributor who accounted for approximately 10
percent of total net sales. In fiscal 2003, we had two distributors who each
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.
<PAGE>
Note 3. Cost Reduction Programs and Restructuring of Operations
Fiscal 2004
Included as a component of special items in the consolidated statement of
operations for fiscal 2004, we reported a net charge of $19.6 million related to
the actions described below:
During fiscal 2004, we substantially completed all cost reduction
activities related to our strategic profit-improvement actions that were
initially launched in February 2003. Consistent with the objectives of those
actions, we also continued to take supplemental actions during fiscal 2004,
primarily for workforce reductions in various manufacturing, product development
and support areas. As a result of these supplemental actions, we recorded a
charge of $19.5 million, which includes severance costs, as well as asset
write-offs and lease obligations we incurred upon vacating certain manufacturing
and design center facilities during the year upon closure of those operations.
The charge includes severance of $11.4 million, $6.5 million for other exit
related costs and $1.6 million for the write-off of equipment.
In addition to these supplemental actions, we also completed the exit and
sale of our information appliance business in late August 2003. This included
the sale to AMD of certain intellectual property and assets of the information
appliance business. As part of the transaction, AMD hired 125 former National
employees who were mostly located in Longmont, Colorado. However, certain
information appliance assets were not included in the sale and certain employees
that were directly supporting the information appliance business were not hired
by AMD. The corresponding severance and asset impairments that were incurred
resulted in a charge of $5.3 million. This charge was reduced by proceeds of
$10.1 million from the sale of assets that had a carrying value of $7.5 million
less transaction costs of $1.3 million. A total of 238 employees were terminated
in fiscal 2004 as a combined result of the exit from the information appliance
business and the other supplemental actions.
The charges for the supplemental actions and the exit of our information
appliance business described above were partially offset by a $3.9 million
credit for the release of severance and other exit-related cost accruals no
longer required. A large portion of the accruals for severance costs was for
employees in the information appliance business and the cellular baseband
business (closed at the end of fiscal 2003), but the actual severance costs were
lower than originally expected because of some voluntary terminations and more
employees eventually hired by AMD in the information appliance disposition than
originally expected.
Total net charges related to cost reduction actions in fiscal 2004,
excluding the sale to AMD of the assets of the information appliance business,
is presented in the following table:
Analog
(In Millions) Segment All Others Total
------------- ------------- --------------
Severance $ 5.2 $4.0 $9.2
Exit related costs 2.6 3.4 6.0
Asset write-off 1.2 4.5 5.7
------------- ------------- --------------
$9.0 $11.9 $20.9
============= ============= ==============
Noncash charges included in the table above relate to the write-off of
assets, primarily equipment and a technology license that were dedicated to the
information appliance and cellular baseband businesses. The cellular baseband
business was closed at the end of fiscal 2003 as part of our profit-improvement
plan. In connection with the information appliance disposition to AMD discussed
above, we also entered into a separate supply agreement where we manufacture
product for AMD at prices specified by the terms of the agreement, which we
believe approximate market prices. This agreement is effective for three years
unless terminated earlier as permitted under the terms of the agreement.
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:
In May 2003, we announced that we were continuing to implement a series of
strategic profit-improvement actions that were launched in February 2003. Those
actions were designed to streamline our cost structure and enhance shareholder
value by prioritizing R&D spending on higher-margin analog businesses. 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.
<PAGE>
Noncash charges in fiscal 2003 related to the write-offs of certain assets,
primarily equipment and technology licenses. Other exit costs primarily
represented 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. 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.
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
a plan to reposition our resources and reduce costs. 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.
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 30, 2004 and May 25, 2003:
<TABLE>
Profit-Improvement Other Prior Cost Reduction
Actions Actions
-------------------------- ----------------------------
Other Exit Other Exit
(In Millions) Severance Costs Severance Costs Total
------------ ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 26, 2002 $ - $ - $ 8.6 $ 7.8 $ 16.4
Cost reduction program charges 31.2 2.4 - - 33.6
Cash payments (13.8) - (8.5) (2.4) (24.7)
------------ ------------- ------------- -------------- -------------
Balance at May 25, 2003 17.4 2.4 0.1 5.4 25.3
Cost reduction program charges 12.4 6.4 0.1 0.2 19.1
Cash payments (23.2) (3.7) (0.1) (2.6) (29.6)
Release of residual reserves (3.3) (0.3) - (0.3) (3.9)
------------ ------------- ------------- -------------- -------------
Balance at May 30, 2004 $ 3.3 $ 4.8 $ 0.1 $ 2.7 $ 10.9
============ ============= ============= ============== =============
</TABLE>
Other exit costs included in the balance at May 30, 2004, primarily relate
to lease obligations, which are expected to be paid through lease expiration
dates that range from August 2004 through January 2009.
During fiscal 2004 we paid severance to 406 employees in connection with
workforce reductions announced in fiscal 2003 and fiscal 2004. Amounts paid for
other exit-related costs during fiscal 2004 were primarily for payments under
lease obligations associated with previous restructuring and cost reduction
actions.
<PAGE>
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. DigitalQuake 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, were intended to enhance our offerings of
system solutions for flat panel display applications.
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 were to receive
additional contingent consideration of up to $9.9 million if certain revenue
targets were achieved over the 24 months following the acquisition. The
contingent consideration was to be recognized when it was probable that the
revenue targets would be achieved. Of the total contingent consideration, $5.7
million was also contingent on future employment and was to be treated as
compensation expense. The remainder was to be treated as an additional part of
the purchase price. Since the revenue targets have not yet been achieved and we
do not expect them to be achieved by August 2004, no such amounts have been
recognized.
Fiscal 2002
In April 2002, we acquired the Finnish company Fincitec Oy and its related
company, ARSmikro OU, based in Estonia. These companies developed 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.
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
Consolidated Balance Sheets
<TABLE>
(In Millions) 2004 2003
-------------- ---------------
<S> <C> <C>
RECEIVABLE ALLOWANCES
Doubtful accounts $ 2.1 $ 6.7
Returns and allowances 44.6 31.5
-------------- ---------------
Total receivable allowances $ 46.7 $ 38.2
============== ===============
INVENTORIES
Raw materials $ 13.9 $ 8.1
Work in process 122.6 89.2
Finished goods 63.6 44.9
-------------- ---------------
Total inventories $ 200.1 $ 142.2
============== ===============
PROPERTY, PLANT AND EQUIPMENT
Land $ 28.8 $ 23.3
Buildings and improvements 517.2 520.6
Machinery and equipment 1,950.5 1,847.5
Internal-use software 119.9 141.6
Construction in progress 57.5 30.6
-------------- ---------------
Total property, plant and equipment 2,673.9 2,563.6
Less accumulated depreciation and amortization 1,974.3 1,882.9
-------------- ---------------
Property, plant and equipment, net $ 699.6 $ 680.7
============== ===============
ACCRUED EXPENSES
Payroll and employee related $ 124.6 $ 93.0
Cost reduction charges and restructuring of operations 10.9 25.3
Litigation accruals 30.0 -
Other 69.3 77.8
-------------- ---------------
Total accrued expenses $ 234.8 $ 196.1
============== ===============
ACCUMULATED OTHER COMPREHENSIVE LOSS
Unrealized gain on available-for-sale securities $ (0.1) $ 3.3
Minimum pension liability (88.3) (117.4)
Unrealized loss on cash flow hedges - (0.2)
-------------- ---------------
Accumulated other comprehensive loss $ (88.4) $ (114.3)
============== ===============
</TABLE>
<PAGE>
Consolidated Statements of Operations
<TABLE>
(In Millions) 2004 2003 2002
------------- ------------- --------------
SPECIAL ITEMS - Expense (Income)
<S> <C> <C> <C>
Cost reduction charges and restructuring of operations $ 19.6 $ 43.6 $ 8.0
Litigation accruals 30.0 - -
Net intellectual property income (11.1) (6.1) (10.9)
Net intellectual property settlements 3.1 - -
In-process research and development charges - 0.7 1.3
------------- ------------- --------------
Total special items, net $ 41.6 $ 38.2 $ (1.6)
============= ============= ==============
INTEREST INCOME, NET
Interest income $ 11.6 $ 16.3 $ 25.9
Interest expense (1.2) (1.5) (3.9)
------------- ------------- --------------
Interest income, net $ 10.4 $ 14.8 $ 22.0
============= ============= ==============
OTHER INCOME (EXPENSE), NET
Share in net losses of equity-method investments $ (14.1) $ (15.9) $ (7.3)
Net gain (loss) on marketable and other investments, net 6.6 (3.9) 9.4
Other 0.6 0.1 (0.6)
------------- ------------- --------------
Total other income (expense), net $ (6.9) $ (19.7) $ 1.5
============= ============= ==============
</TABLE>
Note 6. Goodwill and Intangible Assets
There have been no changes to the carrying value of goodwill during the years
ended May 30, 2004 and May 25, 2003. The following table presents goodwill by
reportable segments:
(In Millions) Analog Segment All Others Total
--------------- -------------- -----------
Balances at May 30, 2004 $150.6 $ 22.7 $173.3
=============== ============== ===========
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>
Weighted-Average Weighted-Average
Amortization Period Amortization Period
(Years) (Years)
(In Millions) 2004 2003
------------- --------------------- --------------- ---------------------
<S> <C> <C> <C> <C>
Patents $ 4.9 5.0 $ 4.9 5.0
Unpatented technology 18.6 5.8 18.6 5.8
------------- ---------------
23.5 23.5
Less accumulated amortization 9.6 5.3
---------------
$13.9 5.7 $18.2 5.7
============= ===============
</TABLE>
Amortization expense was:
(In Millions) 2004 2003 2002
------------ ----------- -----------
Patent amortization $ 1.0 $ 1.0 $ 0.9
Technology amortization 3.3 2.6 -
------------ ----------- -----------
Total amortization $ 4.3 $ 3.6 $ 0.9
============ =========== ===========
<PAGE>
We expect amortization expense in the following fiscal years to be:
(In Millions)
----------------
2005 $ 4.0
2006 3.2
2007 3.0
2008 3.0
2009 0.7
----------------
$13.9
================
Note 7. Asset Retirement Obligations
We adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," at the
beginning of fiscal 2004. This statement requires that the fair value of a legal
liability for an asset retirement obligation be recorded in the period in which
it is incurred if a reasonable estimate of fair value can be made. Upon
recognition of a liability, the asset retirement cost is recorded as an increase
in the carrying value of the related long-lived asset and then depreciated over
the life of the asset. Our asset retirement obligations arise primarily from
contractual commitments to decontaminate machinery and equipment used at our
manufacturing facilities at the time we dispose of or replace them. We also have
leased facilities where we have asset retirement obligations from contractual
commitments to remove leasehold improvements and return the property to a
specified condition when the lease terminates. As a result of our evaluation of
our asset retirement obligations, we recorded a $2.1 million noncurrent
liability for asset retirement obligations and a $0.4 million increase in the
carrying value of the related assets, net of $1.0 million of accumulated
depreciation at the beginning of fiscal 2004. The cumulative effect that was
recorded in the first quarter of fiscal 2004 upon the adoption of this
accounting standard resulted in a charge of $1.9 million, including a tax effect
of $0.2 million.
We did not recognize any asset retirement obligations associated with the
closure or abandonment of the manufacturing facilities we own. We currently
intend to operate these facilities indefinitely and are therefore unable to
reasonably estimate the fair value of any legal obligations we may have because
of the indeterminate closure dates.
The following table presents the activity for the asset retirement
obligations for the year ended May 30, 2004:
(In Millions)
Balance at beginning of fiscal 2004 $ 2.1
Liability incurred for assets acquired 0.2
Accretion expense 0.2
-------------------
Ending balance $ 2.5
===================
The following table presents net income (loss) and earnings (loss) per
share for fiscal 2004, 2003 and 2002 as if the provisions of SFAS No. 143 had
been applied at the beginning of fiscal 2002:
<TABLE>
(In Millions, Except Per Share Amounts) 2004 2003 2002
------------- ------------- --------------
<S> <C> <C> <C>
Net income (loss), as reported $ 282.8 $ (33.3) $ (121.9)
Add back:
Cumulative effect of a change in accounting
principle including tax effect of $0.2 million 1.9 - -
Deduct:
Accretion and depreciation in fiscal 2003 and
2002, net of tax - 0.2 0.2
------------- ------------- --------------
Net income (loss), as adjusted $ 284.7 $ (33.5) $ (122.1)
============= ============= ==============
Net income (loss) per share, as adjusted:
Basic $ 0.79 $ (0.09) $ (0.34)
Diluted $ 0.73 $ (0.09) $ (0.34)
</TABLE>
<PAGE>
Note 8. Debt
Debt at fiscal year-end consisted of the following:
(In Millions) 2004 2003
------------- ------------
Unsecured promissory note at 1.2% $21.9 $19.9
Note secured by equipment at 7.0% - 2.1
Other 0.2 0.2
------------- ------------
Total debt 22.1 22.2
Less current portion of long-term debt 22.1 2.3
------------- ------------
Long-term debt $ - $19.9
============= ============
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. The note secured by equipment was fully repaid in fiscal 2004.
All our outstanding debt obligations mature in fiscal 2005.
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 2004, and we expect to renew or replace it prior to expiration. At May
30, 2004, we had committed $8.8 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 30, 2004, under the most restrictive of these covenants, $413.9 million of
tangible net worth was unrestricted and available for payment of dividends on
common stock.
Note 9. Income Taxes
Worldwide pretax income (loss) from operations and income taxes consist of the
following:
<TABLE>
(In Millions) 2004 2003 2002
-------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE
<S> <C> <C> <C>
U.S. $ 267.3 $(75.3) $(168.6)
Non-U.S. 66.4 52.0 45.2
-------------- ------------- -------------
$ 333.7 $(23.3) $(123.4)
============== ============= =============
INCOME TAX EXPENSE (BENEFIT)
Current:
U.S. federal, state and local $ 33.8 $ - $ (26.5)
Non-U.S. 15.2 6.4 7.0
-------------- ------------- -------------
49.0 6.4 (19.5)
Deferred:
U.S. federal and state (1.7) - 15.0
Non-U.S. 1.7 3.6 3.0
-------------- ------------- -------------
- 3.6 18.0
-------------- ------------- -------------
Income tax expense (benefit) $ 49.0 $ 10.0 $ (1.5)
============== ============= =============
</TABLE>
<PAGE>
The tax effects of temporary differences that constitute significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
(In Millions) 2004 2003
-------------- --------------
DEFERRED TAX ASSETS
<S> <C> <C>
Reserves and accruals $196.3 $152.8
Non-U.S. loss carryovers and other allowances 7.0 27.6
Federal and state credit carryovers 242.8 221.6
Other 25.9 80.5
-------------- --------------
Total deferred tax assets 472.0 482.5
Valuation allowance (373.9) (395.9)
-------------- --------------
Net deferred tax assets 98.1 86.6
-------------- --------------
DEFERRED TAX LIABILITIES
Other liabilities (12.5) (5.8)
-------------- --------------
Total deferred tax liabilities (12.5) (5.8)
-------------- --------------
Net deferred tax assets $ 85.6 $ 80.8
============== ==============
</TABLE>
We record a valuation allowance to reflect the estimated amount of deferred
tax assets that may not be realized. This occurs primarily when net operating
losses and tax credit carryovers expire. The valuation allowance for deferred
tax assets decreased by $22.0 million in fiscal 2004 compared to a decrease of
$51.4 million in fiscal 2003. The valuation allowance for deferred tax assets
includes $172.1 million and $134.0 million for stock option deductions at May
30, 2004, and May 25, 2003, respectively. The benefit of these deductions will
be credited to equity if realized. Included in the consolidated balance sheet at
May 30, 2004 are deferred tax assets of $12.3 million in other current assets.
Included in the consolidated balance sheet at May 25, 2003 are deferred tax
assets of $8.0 million in other current assets and deferred tax liabilities of
$1.6 million in other noncurrent liabilities.
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. As of May 30, 2004, 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>
2004 2003 2002
--------------- -------------- --------------
<S> <C> <C> <C>
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
Non-U.S. income taxed at different rates 2.1 (10.5) (21.1)
U.S. state and local taxes net of federal benefits 0.1 (0.7) (0.1)
Current year loss not benefited - (66.7) (20.6)
Changes in beginning of year valuation allowances (18.9) - 9.3
Export sales benefit (3.5) - -
Tax credits (0.9) - -
Other 0.8 - (1.3)
--------------- -------------- --------------
Effective tax rate 14.7% (42.9)% 1.2%
=============== ============== ==============
</TABLE>
We have not provided U.S. deferred taxes on cumulative earnings from
ongoing operations of non-U.S. affiliates and associated companies that have
been reinvested indefinitely. As of May 30, 2004 these earnings were
approximately $517.5 million. Because of the availability of U.S. foreign tax
credits, it is not practicable to determine the U.S. federal income tax
liability that would be payable if such earnings were not reinvested
indefinitely. Deferred taxes are provided for earnings of non-U.S. affiliates
and associated companies when we plan to remit those earnings.
At May 30, 2004, we had $22.1 million of U.S. net operating loss carryovers
and $215.9 million of state net operating loss carryovers for tax return
purposes, which expire between 2005 and 2024. California has temporarily
suspended the ability to utilize California net operating loss carryovers for
the fiscal 2004 and 2003 tax years. We also had $176.8 million of U.S. credit
carryovers and $98.9 million of state credit carryovers for tax return purposes,
which primarily expire between 2005 and 2024. Included in the state tax credits
is a California R&D credit of $76.6 million, which can be carried forward
indefinitely. In addition, we had net operating loss and other tax allowance
carryovers of $365.6 million from certain non-U.S. jurisdictions.
<PAGE>
The IRS has completed the field examinations of our tax returns for fiscal
years 1997 through 2000 and on July 29, 2003 issued a notice of proposed
adjustment seeking additional taxes of approximately $19.1 million (exclusive of
interest) for those years. We have contested the adjustments through applicable
IRS procedures. Our tax returns are audited in the U.S. by state agencies and at
international locations by local tax authorities from time to time. We believe
we have made adequate tax payments and/or accrued adequate amounts in our
financial statements to cover the amounts sought by the IRS, as well as any
other deficiencies that other governmental agencies may find in the audits.
Note 10. Shareholders' Equity
Stock Split
On May 13, 2004, we completed a two-for-one stock split of our common stock. The
stock split was payable in the form of a 100 percent stock dividend and entitled
each shareholder of record on April 29, 2004, to receive one share of common
stock for each outstanding share of common stock held on that date. All
information about capital stock accounts, share and per share amounts included
in the accompanying consolidated financial statements for all years presented
have been adjusted to retroactively reflect this stock split.
Stock Purchase Rights
Each outstanding share of common stock carries with it a stock purchase right.
If and when the rights become exercisable, each right entitles the registered
holder to purchase one two-thousandth of a share of series A junior
participating preferred stock at a price of $60.00 per one 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 our 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 our 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, our common stock in an
amount having a market value equal to twice the exercise price. In addition, 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 $0.005 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 1,853,280 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. Since we subsequently issued 1,729,728 shares to these
individuals as final payment on the notes in fiscal 2002 and 2000, the reserve
for the remaining 123,552 shares was cancelled.
Stock Repurchase Program
During September and October 2003, we repurchased a total of 25.4 million shares
of our common stock for $400 million in connection with a stock repurchase
program announced in July 2003. A portion (15.0 million shares) of the share
repurchase was completed through a privately negotiated transaction with a major
financial institution and the remainder was purchased in the open market. In
March 2004, we announced that our Board of Directors had approved another $400
million stock repurchase program similar to the program implemented in September
and October 2003. As of May 2004, we had repurchased an additional 7.0 million
shares of our common stock for $142.5 million, of which 730,988 shares were
purchased through a privately negotiated transaction with a major financial
institution. The remainder of the shares were purchased in the open market. The
approved repurchase program in place allows for $257.5 million of future stock
repurchases.
<PAGE>
As of May 30, 2004, we had an outstanding advance of $30.0 million with a
financial institution under a contract to repurchase our shares of common stock
at a fixed price. In June 2004, we repurchased 1.5 million shares of our common
stock upon the settlement of this contract.
All stock repurchased has been cancelled and is not held as treasury stock.
Dividends
We have not paid cash dividends on our common stock and we currently have no
plans in place to pay dividends.
Note 11. Stock-Based Compensation Plans
Stock Option Plans
As of May 30, 2004, under all stock options plans there were 145.8 million
shares reserved for issuance, including 53.8 million shares available for future
option grants. More information on our stock option plans follows:
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 78,709,858 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 2004, only 77,762 shares remained available
for option grants under this plan. Another plan, which has been in effect since
1997, authorizes the grant of up to 140,000,000 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 12,000,000 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 six months after grant. Until the beginning of fiscal 2004,
most options granted began vesting in four equal annual installments beginning
one year after grant and expired ten years and one day after grant. All options
granted during fiscal 2004 expire six years and one day after grant and begin
vesting with one fourth of the total grant after one year and the rest in equal
monthly installments over the next three years.
When we merged with Cyrix in fiscal 1998, we assumed Cyrix's outstanding
obligations under its 1988 incentive stock plan. As of May 30, 2004, there were
no more options outstanding to purchase 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 options plans and stock option agreements for
their employees and consultants. As of May 30, 2004, there were no more options
outstanding to purchase shares under the Mediamatics option plan. The ComCore
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
this stock option plan and as of May 30, 2004, options to purchase only a total
of 564 shares remained outstanding and were exercisable with a weighted-average
exercise price of $0.50 and a remaining contractual life of 3.0 years.
We have a director stock option plan that was first approved by
shareholders in fiscal 1998 which authorizes the grant of up to 2,000,000 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
680,000 shares of common stock with a weighted-average exercise price of $14.32
and weighted-average remaining contractual life of 6.8 years were outstanding
and exercisable as of May 30, 2004.
Upon his retirement in May 1995, we granted the former chairman of the
company an option to purchase 600,000 shares of common stock at $13.94 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 30, 2004,
options to purchase 165,000 shares of common stock were outstanding and
exercisable under this grant.
<PAGE>
In connection with the DigitalQuake acquisition in fiscal 2003, we granted
options to purchase an aggregate of 261,396 shares of common stock at $7.93 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. During fiscal 2004, a total of 89,210 shares
were issued upon exercise of these DigitalQuake options and options to purchase
a total of 172,186 shares of common stock remained outstanding at the end of
fiscal 2004.
Changes in shares of common stock outstanding under the option plans during
fiscal 2004, 2003 and 2002 (but excluding the DigitalQuake, director and former
chairman options), were as follows:
<TABLE>
Number of Shares Weighted-Average
(In Millions) Exercise Price
--------------------------- ------------------------------
<S> <C> <C>
Outstanding at May 27, 2001 77.2 $13.68
Granted 19.5 $16.17
Exercised (8.9) $ 9.07
Cancelled (4.7) $17.46
---------------------------
Outstanding at May 26, 2002 83.1 $14.54
Granted 14.2 $ 7.51
Exercised (2.1) $ 7.02
Cancelled (3.5) $15.98
---------------------------
Outstanding at May 25, 2003 91.7 $13.57
Granted 15.0 $13.50
Exercised (19.7) $ 9.14
Cancelled (5.3) $16.01
---------------------------
Outstanding at May 30, 2004 81.7 $14.47
===========================
</TABLE>
Expiration dates for options outstanding at May 30, 2004 range from
September 29, 2004 to May 23, 2013.
The following tables summarize information about options outstanding under
these plans (excluding the DigitalQuake, director and former chairman options)
at May 30, 2004:
<TABLE>
Outstanding Options
---------------------------------------------------------------------------
Weighted-Average Remaining
Contractual Life
Number of Shares (In Years) Weighted-Average
(In Millions) Exercise Price
--------------------- ---------------------------- ------------------------
RANGE OF EXERCISE PRICES
<C> <C> <C> <C>
$ 4.72-$ 6.50 12.2 5.6 $ 6.36
$ 6.53-$ 8.38 12.3 6.7 $ 7.53
$ 8.45-$11.63 12.1 5.3 $11.46
$11.68-$13.88 13.0 6.9 $12.97
$13.93-$17.00 3.5 5.0 $15.18
$17.02-$17.10 12.3 7.8 $17.10
$17.15-$39.03 16.3 5.8 $27.09
---------------------
Total 81.7 6.3 $14.47
=====================
</TABLE>
<PAGE>
<TABLE>
Options Exercisable
--------------------------------------------------
Number of Shares Weighted-Average Exercise
(In Millions) Price
--------------------- ----------------------------
RANGE OF EXERCISE PRICES
<C> <C> <C>
$ 4.72-$ 6.50 9.6 $ 6.39
$ 6.53-$ 8.38 6.1 $ 7.35
$ 8.45-$11.63 0.7 $10.79
$11.68-$13.88 8.6 $12.98
$13.93-$17.00 2.5 $15.12
$17.02-$17.10 5.9 $17.10
$17.15-$39.03 12.5 $29.39
---------------------
Total 45.9 $15.93
=====================
</TABLE>
In summary, as of May 30, 2004, there were 145.8 million shares reserved
for issuance under all option plans, including 53.8 million shares available for
future option grants.
Stock Purchase Plans
During fiscal 2004, we implemented a new employee stock purchase plan that
authorizes the issuance of up to 16,000,000 shares in quarterly offerings to
eligible employees worldwide at a price that is equal to 85 percent of the lower
of the common stock's fair market value at the beginning of a one year offering
period or at the end of the applicable quarter in the offering period. Once
implemented, we terminated our employee stock purchase plan that had been in
effect in the U.S. since 1977 that authorized the issuance of up to 49,900,000
shares of stock in quarterly offerings to eligible employees at a price that was
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 had an employee stock
purchase plan available to employees at international locations that had been in
effect since 1994. That plan authorized the issuance of up to 10,000,000 shares
of stock in quarterly offerings to eligible employees, also 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 our new and prior purchase plans use a captive broker
and we deposit shares purchased by the employee with the captive broker. In
addition, for international participants, the National subsidiary that the
participant is employed by is responsible for paying to National the difference
between the purchase price set by the terms of the plan and the fair market
value at the time of the purchase. All purchase plans have been approved by
shareholders.
Under the terms of all purchase plans, we issued 2.7 million shares in
fiscal 2004, 4.3 million shares in fiscal 2003 and 2.5 million shares in fiscal
2002 to employees for $30.0 million, $28.1 million and $26.7 million,
respectively. As of May 30, 2004, there were 15.6 million shares reserved for
issuance under the new stock purchase plan. Prior to the end of fiscal 2004, the
prior purchase plans were terminated and the reserves maintained for them were
cancelled.
Other Stock Plans
We have a director stock plan, which has been approved by shareholders, that
authorizes the issuance of up to 400,000 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 30, 2004, we
have issued 230,804 shares under the director stock plan and have reserved
169,196 shares for future issuances.
We have a restricted stock plan, which authorizes the issuance of up to
4,000,000 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 194,000, 60,000 and 224,000
shares under the restricted stock plan during fiscal 2004, 2003 and 2002,
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 $3.1
million, $0.5 million and $3.1 million of unearned compensation during fiscal
2004, 2003 and 2002, 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 30, 2004, we have 2,014,168 shares reserved for future issuances under the
restricted stock plan. Compensation expense for fiscal 2004, 2003 and 2002
related to shares of restricted stock was $3.1 million, $3.0 million and $3.4
million, respectively. At May 30, 2004, the weighted-average grant date fair
value for all outstanding shares of restricted stock was $14.84.
<PAGE>
Note 12. Retirement and Pension Plans
Our retirement and savings program for U.S. employees consists of a salary
deferral 401(k) plan and a profit sharing plan. More information of each of
these plans follows.
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. The matching company contribution was significantly
increased in fiscal 2004 to encourage employee participation. 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 10,000,000 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.
Until fiscal 2004, the profit sharing plan required contributions of the
greater of 5 percent of consolidated net earnings before income taxes (subject
to a limit of 5 percent of payroll) or 1 percent of payroll. Contributions were
made 25 percent in National stock and 75 percent in cash. During fiscal 2004,
the profit sharing plan was amended and ultimately terminated beginning fiscal
2005. The final profit sharing contribution was made in cash and consisted of
the profit sharing contribution that would have been made for fiscal 2004 less
the amount for increased 401(k) matching contributions made during fiscal 2004.
Total shares contributed under the profit sharing plan during fiscal 2004, 2003
and 2002 were 76,884 shares, 74,286 shares and 257,838 shares, respectively.
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:
<TABLE>
(In Millions) 2004 2003 2002
------------- ------------ ------------
<S> <C> <C> <C>
Profit sharing plan $14.5 $ 3.8 $ 3.6
Salary deferral 401(k) plan $14.6 $12.3 $11.0
Non-U.S. pension and retirement plans $19.9 $13.5 $10.6
</TABLE>
Defined benefit pension plans maintained in the U.K., Germany, Japan and
Taiwan 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>
(In Millions) 2004 2003 2002
----------------- ----------------- -----------------
<S> <C> <C> <C>
Service cost of benefits earned during the year $5.8 $4.9 $4.6
Plan participant contributions (0.9) (0.8) (0.9)
Interest cost on projected benefit obligation 11.5 9.6 7.6
Expected return on plan assets (6.3) (6.1) (5.3)
Net amortization and deferral 5.8 1.8 1.3
----------------- ----------------- -----------------
Net periodic pension cost $15.9 $9.4 $7.3
================= ================= =================
</TABLE>
<PAGE>
<TABLE>
(In Millions) 2004 2003
----------------- -----------------
BENEFIT OBLIGATION
<S> <C> <C>
Beginning balance $196.4 $138.5
Service cost 5.8 4.9
Interest cost 11.5 9.6
Benefits paid (2.9) (2.1)
Actuarial loss (8.4) 33.1
Exchange rate adjustment 15.3 12.4
----------------- -----------------
Ending balance $217.7 $196.4
================= =================
PLAN ASSETS AT FAIR VALUE
Beginning balance $ 78.4 $84.1
Actual return on plan assets 17.5 (18.4)
Company contributions 22.1 7.1
Plan participant contributions 0.9 0.8
Benefits paid (2.7) (1.9)
Exchange rate adjustment 9.7 6.7
----------------- -----------------
Ending balance $125.9 $78.4
================= =================
RECONCILIATION OF FUNDED STATUS
Fund status - Benefit obligation in excess of
plan assets $ 91.8 $118.0
Unrecognized net loss (100.6) (119.6)
Unrecognized net transition obligation 2.1 2.3
Adjustment to recognize minimum liability 93.1 117.4
----------------- -----------------
Accrued pension cost $ 86.4 $118.1
================= =================
</TABLE>
The projected benefit obligations and net periodic pension cost were
determined using the following assumptions:
<TABLE>
2004 2003 2002
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 1.8%-5.7% 2.3%-6.3% 2.8%-6.5%
Rate of increase in compensation levels 1.0%-4.1% 2.5%-3.8% 2.8%-3.8%
Expected long-term return on assets 2.8%-7.5% 3.3%-7.5% 3.8%-7.5%
</TABLE>
As required by the pension accounting standards, in each of the fiscal
years presented, we recorded adjustments for minimum pension liability to equal
the amount of the unfunded accumulated benefit obligation in one of our plans.
The adjustment in fiscal 2004 decreased the accrued benefit obligation of this
plan. The improvement in funding status was mainly due to increase in the value
of the plan's assets. The minimum liability adjustment is recorded in the
consolidated financial statements as a component of accumulated other
comprehensive loss.
Note 13. Commitments and Contingencies
Commitments
We lease certain facilities and equipment under operating lease arrangements.
Rental expenses under operating leases were $25.4 million, $24.1 million and
$25.3 million in fiscal 2004, 2003 and 2002, respectively.
<PAGE>
Future minimum commitments under noncancelable operating leases are as
follows:
(In Millions)
--------------------------
2005 $27.4
2006 22.8
2007 19.1
2008 9.6
2009 6.8
Thereafter 5.8
--------------------------
Total $91.5
==========================
We have a manufacturing agreement with Fairchild Semiconductor Corporation
where we are committed to purchase a minimum level of goods and services based
on specified wafer prices, which are intended to approximate market prices. The
agreement had an original term of three years through December 2003, but was
extended in fiscal 2004 through December 2004 under similar terms. We now have a
remaining commitment to purchase a minimum of $2.6 million of product from
Fairchild in fiscal 2005. Total purchases from Fairchild were $16.7 million in
fiscal 2004, $24.2 million in fiscal 2003 and $32.3 million in fiscal 2002.
During fiscal 2004 we entered into a master operating lease agreement for
capital equipment under which individual operating lease agreements are executed
as the delivery and acceptance of scheduled equipment occurs. The required
future minimum lease payments under these operating leases are included in the
table above. These individual operating lease agreements under the master lease
provide for guarantees of the equipment's residual value at the end of their
lease terms for up to a maximum of $10.5 million. The fair value of the lease
guarantees, which is immaterial, has been recorded as a liability.
Contingencies -- Legal Proceedings
Environmental Matters. We have been named to the National Priorities List for
our Santa Clara, California, site and we have completed a remedial
investigation/feasibility study with the Regional Water Quality Control Board
(RWQCB), acting as an agent for the Federal Environmental Protection Agency. We
have agreed in principle with the RWQCB to a site remediation plan and we are
conducting remediation and cleanup efforts at the site. In addition to the Santa
Clara site, from time to time we have been designated as a Potentially
Responsible Party (PRP) by international, 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 2004, 2003 and 2002.
As part of the disposition 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, we also agreed to retain liability for current
remediation projects and environmental matters arising from our prior operation
of certain Fairchild plants 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, the costs associated
with the liabilities we have retained in these dispositions have not been
material and there have been no related legal proceedings.
Other Matters. 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' efforts to certify
a medical monitoring class were denied by the court. Discovery in the case is
proceeding.
<PAGE>
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 petition to the U.S. Supreme Court for a writ of certiorari was
denied in October 2003. We have completed discovery in the case in the district
court and intend to contest the case through all available means.
In April 2002, ZF Micro Solutions, Inc. brought suit against us alleging a
number of contract and tort claims related to an agreement we had entered into
in 1999 to design and manufacture a custom integrated circuit device for ZF
Micro Devices. ZF Micro Devices ceased business operations in February 2002 and
the case was brought by ZF Micro Solutions as successor to ZF Micro Devices.
Trial began in May 2004 and a verdict, which is discussed in Note 17, Subsequent
Events, was rendered in June 2004 after the end of our fiscal year.
The IRS has completed field examinations of our tax returns for fiscal
years 1997 through 2000 and has issued a notice of proposed adjustment seeking
additional taxes of approximately $19.1 million (exclusive of interest) for
those years (See Note 9 to the Consolidated Financial Statements). We are
contesting through the administrative process the IRS claims regarding our
1997-2000 tax returns.
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 our past divestitures, 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 liabilities in our consolidated financial
statements.
Note 14. Segment and Geographic Information
We design, develop, manufacture and market a wide range of semiconductor
products, most of which are analog and mixed-signal integrated circuits. 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. For fiscal 2004, our Analog
segment, which accounted for 84 percent of net sales, is the only operating
segment that meets the criteria of a reportable segment under SFAS No. 131.
Operating segments that do not meet the criteria in SFAS 131 of a reportable
segment are combined under "All Others." Segment information for fiscal 2003 and
2002 has been reclassified to conform to the fiscal 2004 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 applicants. Current offerings
include power management circuits, radio frequency circuits, audio subsystems,
display drivers, integrated receivers and timing controllers.
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.
<PAGE>
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 operating 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.
The following table presents specified amounts included in the measure of
segment results or the determination of segment assets:
<TABLE>
Analog
(In Millions) Segment All Others Total
------------- -------------- ---------------
2004
<S> <C> <C> <C>
Sales to unaffiliated customers $ 1,664.7 $ 318.4 $ 1,983.1
============= ============== ===============
Segment income (loss) before income taxes: $ 395.1 $ (61.4) $ 333.7
============= ============== ===============
Depreciation and amortization $ 16.4 $ 193.5 $ 209.9
Interest income - $ 11.6 $ 11.6
Interest expense - $ 1.2 $ 1.2
Share in net losses of equity-method
investments $ 6.6 $ 7.5 $ 14.1
Segment assets $ 304.4 $ 1,974.3 $ 2,278.7
============= ============== ===============
2003
Sales to unaffiliated customers $ 1,350.0 $ 322.5 $ 1,672.5
============= ============== ===============
Segment income (loss) before income taxes: $ 60.1 $ (83.4) $ (23.3)
============= ============== ===============
Depreciation and amortization $ 14.9 $ 213.6 $ 228.5
Interest income - $ 16.3 $ 16.3
Interest expense - $ 1.5 $ 1.5
Share in net losses of equity-method
Investments $ 10.3 $ 5.6 $ 15.9
Segment assets $ 277.3 $ 1,971.1 $ 2,248.4
============= ============== ===============
2002
Sales to unaffiliated customers $ 1,182.5 $ 312.3 $ 1,494.8
============= ============== ===============
Segment loss before income taxes: $ (10.6) $ (112.8) $ (123.4)
============= ============== ===============
Depreciation and amortization $ 10.5 $ 219.9 $ 230.4
Interest income - $ 25.9 $ 25.9
Interest expense - $ 3.9 $ 3.9
Share in net losses of equity-method
investments $ 1.0 $ 6.3 $ 7.3
Segment assets $ 294.8 $ 1,995.9 $ 2,290.7
============= ============== ===============
</TABLE>
Segment assets include those assets that are specifically dedicated to an
operating segment and include inventories, equipment, equity investments,
goodwill and amortizable intangibles assets. 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 the
standard cost of product for each segment.
<PAGE>
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>
People's
United United Republic of Rest of Total
(In Millions) States Kingdom China Singapore World Eliminations Consolidated
----------- ------------ ----------- ------------ ------------- ------------- ----------------
2004
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 421.2 $ 170.9 $ 544.0 $ 377.8 $ 469.2 $1,983.1
Transfers between geographic areas 526.8 160.8 0.1 693.6 3.4 $(1,384.7) -
----------- ------------ ----------- ------------ ------------- ------------- ----------------
Net sales $ 948.0 $ 331.7 $ 544.1 $ 1,071.4 $ 472.6 $(1,384.7) $1,983.1
=========== ============ =========== ============ ============= ============= ================
Long-lived assets $ 694.4 $ 38.8 $ 30.0 $ 65.3 $ 159.7 $ 988.2
======== ============ =========== ============ ============= ============= ================
2003
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 $ 4.3 $ 71.9 $ 114.0 $ 959.8
=========== ============ =========== ============ ============= ============= ================
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 $ 1.3 $ 68.8 $ 123.0 $1,024.3
=========== ============ =========== ============ ============= ============= ================
</TABLE>
<PAGE>
Note 15. Supplemental Disclosure of Cash Flow Information and Noncash Investing
and Financing Activities
<TABLE>
(In Millions) 2004 2003 2002
------------ ------------ --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for:
<S> <C> <C> <C>
Interest expense $ 1.3 $ 1.5 $ 4.0
Income taxes $15.4 $17.6 $16.2
(In Millions) 2004 2003 2002
------------ ------------ --------------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of stock for employee benefit plans $ 0.9 $ 0.8 $ 4.3
Issuance of common stock to directors $ 0.4 $ 0.3 $ 0.2
Unearned compensation relating to restricted stock issuance $ 3.1 $ 0.5 $ 3.1
Restricted stock cancellation $ 1.4 $ 1.1 $ 0.1
Issuance of common stock upon conversion of convertible
subordinated promissory note - - $ 10.0
Change in unrealized gain on cash flow hedges $ 0.2 $ 0.2 $ (0.4)
Change in unrealized gain on available-for-sale securities $ (3.4) $ (34.9) $ 23.2
Minimum pension liability $ (24.3) $ 57.5 $ 12.7
Effect of investee equity transactions - $ 4.7 -
Purchase of software under license obligations, net $ 19.7 $ 16.4 -
</TABLE>
<PAGE>
Note 16. Financial Information by Quarter (Unaudited)
The following table presents the quarterly information for fiscal 2004 and 2003:
<TABLE>
Fourth Third Second First
(In Millions, Except Per Share Amounts) Quarter Quarter Quarter Quarter
-------------- --------------- --------------- ---------------
2004
<S> <C> <C> <C> <C>
Net sales $ 571.2 $ 513.6 $ 473.5 $ 424.8
Gross margin $ 310.8 $ 264.1 $ 237.0 $ 200.4
Net income $ 94.2 $ 93.1 $ 65.8 $ 29.7
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Earnings per share:
Net income:
Basic $ 0.26 $ 0.26 $ 0.18 $ 0.08
Diluted $ 0.24 $ 0.24 $ 0.17 $ 0.08
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Weighted-average common and potential
common shares outstanding:
Basic 357.3 357.4 360.2 369.0
Diluted 389.6 389.4 391.0 383.8
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Common stock price - high $ 24.35 $ 22.63 $ 22.30 $ 14.80
Common stock price - low $ 18.83 $ 17.95 $ 13.05 $ 9.19
- --------------------------------------------------- -------------- --------------- --------------- ---------------
2003
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 $ (0.01) $ (0.10) $ 0.02 $ 0.00
Diluted $ (0.01) $ (0.10) $ 0.02 $ 0.00
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Weighted-average common and potential
common shares outstanding:
Basic 366.0 364.2 362.6 361.4
Diluted 366.0 364.2 364.0 374.2
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Common stock price - high $ 12.40 $ 10.76 $ 9.67 $ 16.87
Common stock price - low $ 7.73 $ 6.27 $ 4.98 $ 7.72
- --------------------------------------------------- -------------- --------------- --------------- ---------------
</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 30, 2004, there were approximately 7,469 holders
of common stock.
<PAGE>
Note 17. Subsequent Events
In June 2004, the jury in the case brought against us by ZF Micro Solutions,
Inc. rendered its verdict. The background of this case is discussed in the Legal
Proceedings section of Note 13, Commitments and Contingencies. The jury found
for ZF Micro Solutions, Inc. on a claim of intentional misrepresentation,
awarding damages of $28.0 million, and on a claim of breach of the implied
covenant of good faith and fair dealing, awarding damages of $2.0 million. The
jury found for us on seven other of the plaintiff's claims and also found for us
on our cross-claim for breach of contract, awarding us damages of $1.1 million.
We are challenging the verdicts against us in post-trial motions and intend to
vigorously pursue the appeal of any judgment that may be entered against us in
this case. We have accrued a charge of $30.0 million to cover the total amount
of damages the jury awarded to ZF Micro Solutions. Although the loss we may
ultimately sustain may be higher or lower than the amount we have recorded, we
believe this is our best estimate at this time of any loss we could incur. This
amount is included in special items in the consolidated statement of operations
for the fourth quarter of fiscal 2004. We have not recognized the $1.1 million
for damages awarded to us, since we have no assurance of its recoverability.
In June 2004, we settled for $2.2 million a patent infringement case that
was originally brought against us in June 2002. This settlement amount is
included in net intellectual property settlements as a component of special
items for the fourth quarter of fiscal 2004 and has since been paid.
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
National Semiconductor Corporation:
We have audited the accompanying consolidated balance sheets of National
Semiconductor Corporation and subsidiaries (the Company) as of May 30, 2004 and
May 25, 2003, 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 30, 2004. In connection with our
audits of the consolidated financial statements, we have also audited the
related financial statement Schedule II, "Valuation and Qualifying Accounts."
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 30, 2004 and May 25, 2003,
and the results of their operations and their cash flows for each of the years
in the three-year period ended May 30, 2004 in conformity with U.S. generally
accepted accounting principles. 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.
As described in notes 1 and 7 to the consolidated financial statements, the
Company recorded the cumulative effect of a change in accounting principle in
connection with its adoption of Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations," as of the beginning of
fiscal 2004.
KPMG LLP
Mountain View, California
June 9, 2004 (except as to Note 17, which is as of July 7, 2004)
<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. 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.
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. As required by SEC Rule 13a-15(b), 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,
under the supervision of and 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 2004. 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 at the reasonable assurance level.
(b) Changes in internal controls.
There has been no change in our internal controls over financial reporting
during fiscal 2004 that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
<PAGE>
PART III
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information appearing in our Proxy Statement for the 2004 annual
meeting of shareholders to be held on or about October 1, 2004 and which will be
filed in definitive form pursuant to Regulation 14A on or about August 25, 2004
(hereinafter "2004 Proxy Statement"), is incorporated herein by reference:
o information concerning our directors appearing in the section on the
proposal relating to election of directors;
o information appearing under the subcaptions "Audit Committee," "Section
16(a) Beneficial Ownership Reporting Compliance, and "Code of Business
Conduct and Ethics" appearing in the section titled "Corporate Governance,
Board Meetings and Committees."
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 in the section titled "Executive Compensation"
(including all related subcaptions thereof), under the subcaptions "Director
Compensation" and "Compensation Committee Interlocks and Insider Participation"
in the section titled "Corporate Governance, Board Meetings and Committees," the
section titled "Compensation Committee Report on Executive Compensation," and
the section titled "Company Stock Price Performance" in the 2004 Proxy Statement
is incorporated herein by reference.
<PAGE>
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 in the section titled "Security Ownership
of Certain Beneficial Owners" in the 2004 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 2004 Proxy
Statement is incorporated herein by reference.
EQUITY COMPENSATION PLANS
The following table summarizes share and exercise price information about our
equity compensation plans as of May 30, 2004.
<TABLE>
Plan Category Number of Securities Weighted Average Number of Securities
Remaining Available For
To Be Issued Upon Exercise Price of Future Issuance Under Equity
Exercise of Outstanding Compensation Plans
Outstanding Options, Options, Warrants (excluding securities
Warrants, and Rights and Rights reflected in column (a))
(a) (b) (c)
------------------------ --------------------- ------------------------------
Equity Compensation plans approved by
Shareholders:
<S> <C> <C> <C>
Option Plans (1) 23,631,486 $13.99 3,057,762
Employee Stock Purchase Plan - - 15,574,734
Director Stock Plan - - 169,196
Equity Compensation plans not
approved by Shareholders:
Option Plans (2) 59,160,858 $14.63 50,747,346
Restricted Stock Plan - - 2,014,168
--- -------------- ----- --------------------- ------------- ----------------
Total 82,792,344 71,563,206
=== ============== ===== ===================== ============= ================
</TABLE>
(1) Includes options to be issued under the Stock Option Plan, Executive Officer
Stock Option Plan and Director Stock Option Plan.
(2) Includes options to be issued under the 1997 Employees Stock Option Plan,
options assumed in the ComCore acquisition, 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. All options granted in fiscal 2004 expire
six years and one day after date of grant. Options can vest after six months;
all options granted in fiscal 2004 begin to vest after one year, with vesting
completed ratably over four years. At the end of fiscal 2004, options to
purchase 58,823,108 shares with a weighted-average exercise price of $14.66 were
outstanding under this plan.
OPTIONS ASSUMED IN ACQUISITIONS: We assumed ComCore's outstanding obligations
under its stock option plan and stock option agreements with its employees and
consultants when we acquired ComCore in fiscal 1998. Each optionee received an
option for equivalent shares of our common stock based on the exchange rate used
in the ComCore acquisition agreement. 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
this plan. At the end of fiscal 2004, options to purchase 564 shares of common
stock 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 $13.94 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 2004, there were options to purchase
165,000 shares outstanding under this grant.
In connection with the DigitalQuake acquisition in fiscal 2003, we granted
options to purchase an aggregate of 261,396 shares of common stock at $7.93 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 shares of common stock, subject to remaining employed by National. At the end
of fiscal 2004, options to purchase 172,186 shares remained outstanding under
this grant.
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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information appearing in the section of the 2004 Proxy Statement relating to
the proposal on the Ratification of the Appointment of KPMG LLP as the
Independent Auditors of the Company 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 30, 2004- 32-67
refer to Index in Item 8
(a) 2. Financial Statement Schedules
- -------------------------------------
Schedule II - Valuation and Qualifying Accounts 76
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 79 to 81 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 30, 2004, we filed two reports on Form 8-K as
follows:
1. A report on Form 8-K was filed on March 11, 2004 furnishing under item 12
to the Securities and Exchange Commission our press release issued on March
11, 2004 announcing our earnings for the quarter ended February 29, 2004.
The news release contained Financial Statements consisting of Condensed
Consolidated Statements of Operations, Balance Sheets and Statements of
Cash Flows prepared in accordance with GAAP. Certain operating results
information that was not prepared in accordance with GAAP was also included
in the press release. The Form 8-K also furnished to the Commission under
item 5 a press release issued on March 11, 2004 announcing the approval by
our board of directors of a program to repurchase up to $400 million of our
common stock.
2. A report on Form 8-K was filed on April 20, 2004 furnishing under Item 5 to
the Commission a press release issued on April 19, 2004 announcing the
approval of a two-for-one stock split payable in the form of a stock
dividend on May 13, 2004 to stockholders of record on April 29, 2004.
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In Millions)
Deducted from Receivables
in the Consolidated Balance Sheets
Doubtful Returns and
Description Accounts Allowances Total
- ----------- -------- ---------- -----
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
Additions charged against revenue - 207.6 207.6
Additions charged against
costs and expenses (0.3) - (0.3)
Deductions (4.3) (1) (194.5) (198.8)
----- ------- -------
Balances at May 30, 2004 $ 2.1 $ 44.6 $ 46.7
________________________________________________
(1) Doubtful accounts written off, less recoveries.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONAL SEMICONDUCTOR CORPORATION
Date: August 10, 2004
/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 10th day of August 2004.
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>
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
National Semiconductor Corporation:
We consent to incorporation by reference in the Registration Statements No.
33-48943, 33-54931, 33-61381, 333-09957, 333-23477, 333-36733, 333-53801,
333-63614, 333-48424, 333-100662, and 333-109348 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 of our report dated June 9, 2004 (except
as to Note 17, which is as of July 7, 2004), with respect to the consolidated
balance sheets of National Semiconductor Corporation and subsidiaries as of May
30, 2004 and May 25, 2003, 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 30, 2004 and the
related financial statement schedule, which report appears in the 2004 Annual
Report on Form 10-K of National Semiconductor Corporation.
Our report refers to the cumulative effect of a change in accounting principle
and the Company's adoption of Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations."
KPMG LLP
Mountain View, California
August 10, 2004
<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).
Certificate of Adjusted Purchase Price on Number of Shares dated April
23, 2004 filed by National Semiconductor Corporation with the Rights
Agent (incorporated by reference from the Exhibits to our Amendment
No. 3 to Registration Statement on Form 8-A filed April 26, 2004).
10.1 Management Contract or Compensatory Plan or Arrangement: Executive
Officer Incentive Plan as amended effective May 28, 2001.
(incorporated by reference from the Exhibits to our Form 10-K for the
fiscal year ended May 25, 2003 filed July 22, 2003). Fiscal Year 2004
Executive Officer Incentive Plan Agreement (incorporated by reference
from the Exhibits to our Form 10-Q for the quarter ended August 24,
2003 filed October 2, 2003).
10.2 Management Contract or Compensatory Plan or Arrangement: Executive
Officer Incentive Plan as amended effective July 14, 2005. Fiscal Year
2005 Executive Officer Incentive Plan Agreement.
10.3 Management Contract or Compensatory Plan or Agreement: Stock Option
Plan, as amended effective April 15, 2003. (incorporated by reference
from the Exhibits to our Form 10-K for the fiscal year ended May 25,
2003 filed July 22, 2003).
10.4 Management Contract or Compensatory Plan or Agreement: Executive
Officer Stock Option Plan, as amended effective April 15, 2003.
(incorporated by reference from the Exhibits to our Form 10-K for the
fiscal year ended May 25, 2003 filed July 22, 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).
<PAGE>
10.6 Management Contract or Compensatory Plan or Arrangement: Director
Stock Plan as amended through June 26, 1997. (incorporated by
reference from the Exhibits to our Form 10-K for the fiscal year ended
May 25, 2003 filed July 22, 2003).
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.
10.15Management Contract or Compensatory Plan or Agreement: National
Semiconductor 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). Amendment One to Deferred Compensation
Plan.
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, as amended effective July 14, 2004.
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).
10.22Equity Compensation Plan not approved by Stockholders: Retirement and
Savings Program. (incorporated by reference from the Exhibits to our
Form 10-K for the year ended May 26, 2002 filed August 16, 2002.)
Amendments One to Seven to Retirement and Savings Program.
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: Fiscal year
2004 Key Employee Incentive Plan. (incorporated by reference from the
Exhibits to our Form 10-Q for the quarter ended August 24, 2003 filed
October 2, 2003).
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.
(incorporated by reference from the Exhibits to our Form 10-K for the
fiscal year ended May 25, 2003 filed July 22, 2003).
10.27Management Contract or Compensatory Plan or Arrangement: 2005
Executive Officer Equity Plan (subject to stockholder approval).
14.1 Code of Ethics.
21.1 List of Subsidiaries.
23.1 Consent of Independent Registered Public Accounting Firm (included in
Part IV).
24.1 Power of Attorney.
31.1 Rule 13a-14 (a) /15d-14 (a) Certifications.
32.1 Section 1350 certifications.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<FILENAME>form10k_ex102a.txt
<DESCRIPTION>EXHIBIT 10.2 EFFECTIVE 7/14/04 INCENTIVE PLAN
<TEXT>
Exhibit 10.2
NATIONAL SEMICONDUCTOR CORPORATION
2005 EXECUTIVE OFFICER INCENTIVE PLAN AGREEMENT
ARTICLE 1
Definitions
-----------
Whenever used in the Agreement, unless otherwise indicated, the following
terms shall have the respective meanings set forth below:
<TABLE>
<S> <C>
Agreement: This Executive Officer Incentive Plan Agreement.
Award: The amount to be paid to a Plan Participant.
Award Date: The date set by the Committee for payment of Awards.
Annual Incentive
Base Salary: Generally, the annualized base remuneration received by a Participant from
the Company at the end of the fiscal year as reflected in the Company's
human resources information systems. Extraordinary items, including but not
limited to prior awards, relocation expenses, car allowances, international
assignment allowances and tax adjustments, sales incentives, amounts
recognized as income from stock, stock options or other stock based
compensation, disability benefits (whether paid by the Company or a third
party) and other similar kinds of extra or additional remuneration are
excluded from the computation of Annual Incentive Base Salary.
Company: National Semiconductor Corporation ("NSC"), a Delaware corporation, and any
other corporation in which NSC controls directly or indirectly fifty percent
(50%) or more of the combined voting power of voting securities, and which
has adopted this Plan.
Disability: Inability to perform any services for the Company and eligible to receive
disability benefits under the standards used by the Company's disability
benefit plan or any successor plan thereto.
Executive Officer: Any officer of the Company identified by the Company in its annual report on
Form 10-K filed with the Securities and Exchange Commission as an executive
officer of the Company.
Participant: An Executive Officer designated as a Participant in accordance with the
provisions of Article 3.
Performance
Goal: Factors considered and scored to determine the amount of a Participant's
Award, which shall be based on one or more of the business criteria listed
in Section 5(b) of the Plan.
Retirement: Permanent termination of employment with the Company, and (a) the
Participant's age is either sixty-five (65) or age is at least fifty-five
(55) and age plus years of service in the employ of the Company is
sixty-five (65) or more, and (b) the retiring Participant has confirmed to
the Chief Financial Officer of the Company that he or she does not intend to
engage in a full-time vocation.
Target Award: The Award, expressed as a percentage of Annual Incentive Base Salary that
may be earned by a Participant for achievement of the target level of
performance.
</TABLE>
All capitalized terms used in this Agreement and not otherwise defined
herein have the meanings assigned to them in the Executive Officer Incentive
Plan.
ARTICLE 2
Effective Date
--------------
The Agreement will become effective as of May 31, 2004, to be effective for
the Company's fiscal year 2005.
<PAGE>
ARTICLE 3
Eligibility for Plan Participation
----------------------------------
A. Within ninety (90) days after the commencement of the Company's fiscal year,
the Committee shall designate those Executive Officers who shall be Plan
Participants for the fiscal year.
B. Participants will be notified once the Committee has designated Participants
for the fiscal year. Continued participation will be re-evaluated by the
Committee annually pursuant to Article 3A supra at the beginning of the fiscal
year.
C. Newly hired Executive Officers and persons who are promoted to Executive
Officers may be added as Participants to the Plan by the Committee during the
fiscal year. Such Participants will receive a prorated Award based on time of
participation in the Plan.
D. Participants may be removed from the Plan during the fiscal year at the
discretion of the Committee. Participants so removed will receive a prorated
Award based on length of participation in the Plan.
ARTICLE 4
Target Awards/Incentive Levels
------------------------------
A. Each Participant will be assigned an incentive level which shall be expressed
as a percentage of the Participant's Annual Incentive Base Salary. Target Awards
will also be identified for each Participant, which shall constitute the Award
which can be earned for the target level of performance, taking into account the
assigned incentive level.
B. In the event that a Participant changes positions during the Plan Period and
the change results in a change in incentive level, whether due to promotion or
demotion, the incentive level will be prorated to reflect the time spent in each
position.
ARTICLE 5
Plan Performance Goals
----------------------
A. Performance Goals and associated weights will be established by the Committee
within ninety (90) days after the start of the fiscal year. Each Performance
Goal will define the source for scoring and the measurement metric. Performance
Goals and their associated weights may change from one fiscal year to another
fiscal year to reflect the Company's financial, operational and strategic goals,
but must be based on one or more of the business criteria listed in Section 5(b)
of the Plan.
<PAGE>
B. Actual Award amounts may vary from the Target Award, depending on actual
achievement on Performance Goals.
ARTICLE 6
Calculation and Payment of Awards
---------------------------------
A. A Participant's Award will be calculated as a percentage of Annual Incentive
Base Salary at the end of the fiscal year as follows:
1) The Participant's Target Award is determined prior to the beginning of
the fiscal year.
2) The performance of each Participant on their assigned Performance
Goals is scored at the end of the fiscal year to determine a
performance level.
3) The total performance level shall be multiplied by the Participant's
assigned incentive level. No one individual Award may exceed the
lesser of 600% of the Participant's Annual Incentive Base Salary at
the end of fiscal 2005 or $6 million (six million dollars).
4) The Committee may adjust Awards to reflect discretion it deems
appropriate. As a result, some or all Award amounts may be adjusted to
reflect the exercise of the Committee's discretion.
B. The Committee will score the performance of the Plan Participants. Awards
will be paid only after the Committee certifies in writing that the ratings on
the Performance Goals have been attained and that the Committee has approved the
Awards.
C. Awards will be paid in cash on or about the Award Date.
D. Awards will reflect the Participant's Annual Incentive Base Salary in effect
at the end of the fiscal year. Participants who take a leave of absence during
the fiscal year for good cause shown to the satisfaction of the Committee will
have their Awards prorated to reflect actual pay earned during the fiscal year.
<PAGE>
E. Any Awards that are prorated for any reason under the terms of the Plan or
this Agreement will be prorated based on the effective date of the change that
resulted in the proration.
ARTICLE 7
Termination of Employment
-------------------------
A. To be eligible to receive an Award, the Participant must be employed by the
Company on the last working day of the fiscal year. A Participant whose
employment has terminated prior to that date will forfeit the Award, except as
otherwise provided in this Article 7.
B. If a Participant's employment is terminated during the fiscal year by
Disability, Retirement, or death, the Participant will receive an Award
reflecting the Participant's performance and actual period of full-time
employment during the fiscal year.
C. Unless local law or regulation provides otherwise, payments of Awards made
upon termination of employment by death shall be made on the Award Date to: (a)
beneficiaries 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.
D. Participants whose employment is terminated by reduction in force during the
fiscal year will receive no Award. If a Participant's employment is terminated
by reduction in force after the fiscal year but before the Award Date, the
Participant will receive the Award on the Award Date.
E. The Committee reserves the right to reduce an Award to reflect a
Participant's absence from work during a fiscal year.
F. Notwithstanding any other provisions of this Agreement to the contrary, the
right of a Participant to receive an Award, including Awards deferred pursuant
to the provisions of Article 8, shall be forfeited if the Participant's
employment is terminated for good cause shown such as acts of moral turpitude, a
reckless disregard of the rights of other employees or because of or the
Participant is discovered to have engaged in fraud, embezzlement, dishonesty
against the Company, obtaining funds or property under false pretenses,
assisting a competitor without permission, or interfering with the relationship
of the Company with a customer. An Award may also be forfeited if a Participant
terminates employment by reason of Retirement and subsequently engages in
full-time employment or any activity in competition with the business of the
Company. A Participant's Award will be forfeited for any of the above reasons
regardless of whether such act is discovered prior to or subsequent to the
Participant's termination of employment or payment of an Award. If an Award has
been paid, such payment shall be repaid to the Company by the Participant. The
determination of whether an Award is forfeited or must be repaid under the
provisions of this Article 7 shall be made by the Committee in its sole
discretion.
<PAGE>
ARTICLE 8
Deferral of Awards
------------------
Participants eligible to participate in the Company's 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.
ARTICLE 9
Interpretations and Rule-Making
-------------------------------
The Committee shall have the sole right and power to: (i) interpret the
provisions of the Agreement, and resolve questions thereunder, which
interpretations and resolutions shall be final and conclusive; (ii) adopt such
rules and regulations with regard to the administration of the Plan as are
consistent with the terms of the Plan and the Agreement, and (iii) generally
take all action to equitably administer the operation of the Plan and this
Agreement.
ARTICLE 10
Declaration of Incentives, Amendment, or Discontinuance
-------------------------------------------------------
The Committee may on or before the Award Date: (i) determine not to make
any Awards to any or all Participants for any fiscal year; (ii) make any
modification or amendment to this Agreement for any or all Participants provided
such modification or amendment is in accordance with the terms of the Plan; or
(iii) discontinue this Agreement for any or all Participants provided such
modification or amendment is otherwise in accordance with the Plan.
<PAGE>
ARTICLE 11
Miscellaneous
-------------
A. Except as provided in the Deferred Compensation Plan, no right or interest in
the Plan is transferable or assignable except by will or the laws of descent and
distribution.
B. Participation in the Plan does not guarantee any right to continued
employment and the Committee and management reserve the right to dismiss
Participants for any reason whatsoever. Participation in one fiscal year does
not guarantee a Participant the right to participation in any subsequent fiscal
year.
C. The Company reserves the right to deduct from all Awards under this Plan any
sums due the Company as well as any taxes or other amounts required by law to be
withheld with respect to Award payments.
D. Maintenance of financial information relevant to measuring performance during
the fiscal year will be the responsibility of the Chief Financial Officer of the
Company.
E. The provisions of the Plan shall not limit, or restrict, the right or power
of the Committee to continue to adopt such other plans or programs, or to make
salary, bonus, incentive, or other payments, with respect to compensation of
Executive Officers, as in its sole judgment it may deem proper.
F. Except to the extent superseded by federal law, this Agreement shall be
construed in accordance with the laws of the State of California.
G. No member of the Company's board of directors or any officer, employee, or
agent of the Company shall have any liability to any person, firm or corporation
based on or arising out of this Agreement or the Plan.
H. Any dispute relating to or arising from this Agreement shall be determined by
binding arbitration by a three member panel chosen under the auspices of the
American Arbitration Association and acting pursuant to its Commercial Rules,
sitting in San Jose, California. The panel may assess all fees, costs and other
expenses, including reasonable counsel fees, as the panel sees fit.
Notwithstanding the parties' election to use arbitration to resolve disputes
under this Agreement, nothing contained in that election shall preclude either
party, if the circumstances warrant, from seeking extraordinary relief, such as
injunction and attachment, from any court of competent jurisdiction in
California.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>form10k_ex102b.txt
<DESCRIPTION>EXHIBIT 10.2 EXEC. OFFICER INCENTIVE PLAN
<TEXT>
Exhibit 10.2
NATIONAL SEMICONDUCTOR CORPORATION
Executive Officer Incentive Plan
(as amended effective July 14, 2004)
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.
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 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 comprised solely of directors who are both "outside
directors" under Section 162(m) of the Code, and "non-employee directors" under
Rule 16b-3 under the Securities Exchange Act of 1934.
(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 identified by the
Company in its annual report on Form 10-K filed with the Securities and Exchange
Commission as an executive officer of the Company.
(h) Target Award - The Award expressed as a percentage of annualized base
remuneration that may be earned by a participant for achievement of the target
level of performance.
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. Within no
later than ninety (90) days after the start of each fiscal year, the Committee
shall: (i) determine which Executive Officers are in positions in which they are
likely to make substantial contributions to the Company's success and therefore
participate in the Plan for the fiscal year; (ii) set Target Awards for each
participant; (iii) establish performance goals and performance goal measures as
provided by Section 5; and (iv) establish the terms and conditions of the Award
Agreement in effect for the applicable fiscal year.
5. Performance Goals.
(a) The Committee shall establish performance goals applicable to a
particular fiscal year within no later than ninety (90) days after the start of
the fiscal year while the outcome of the performance goal is substantially
uncertain.
(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:
Financial Business Criteria:
Net income Earnings per share
Debt reduction Cash flow
Stockholder return Revenue
Return on investment Revenue growth
Return on invested capital Return on net assets
Return on equity Profit before tax
Gross operating profit Profit after tax
Return on research and Market capitalization
development investment Total stockholder return
Margin
Performance goals based on financial business criteria may be set on a pre tax
or after tax basis, may be defined by absolute or relative measures, and may be
valued on a growth or fixed basis.
<PAGE>
Strategic and Operational Business Criteria:
Quality improvements Market share
Cycle time reductions Reduction in product returns
Manufacturing improvements Customer satisfaction
and/or efficiencies improvements
Strategic positioning Compensation/review
programs program improvements
Business/information Expense management
systems improvements Customer request date
Infrastructure support performance
programs New product revenue
Human resource programs Customer programs
New product releases Technology development
Operational and strategic programs
programs
(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. In establishing
the target level, the Committee will specify the measures to be used to evaluate
performance goal achievement and the weighting of each performance goal. The
Committee may also establish minimum threshold and maximum performance criteria.
(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.
(e) At the time the Committee sets performance goals, the Committee will
establish the Target Award for each participant.
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) Depending on performance, actual Awards may vary from the Target Award,
reflecting the minimum threshold to the maximum performance level of goal
achievement. The maximum Award payable under this Plan to any participant for
any fiscal year shall be the lesser of $6 million (six million dollars) or 600%
of the participant's annualized base remuneration at the end of the fiscal year.
<PAGE>
(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 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 shall grant all or such portion of an Award for the year as has been
earned based on performance achievement to any participant who is appointed or
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.
7. Payment of Awards.
(a) Each participant shall be paid the Award in cash as soon as practicable
after the Committee has determined that Awards have been earned and are payable.
(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.
<PAGE>
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 it is 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. The exercise of the Committee's discretion as permitted by
Section 6(c) shall not be deemed to constitute an amendment or modification
subject to the provisions of this Section 9.
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 Committee in its discretion determines otherwise.
(a) Retirement - When a participant's employment terminates as a result of
retirement, the participant will receive an Award reflecting performance and
actual period of employment during the fiscal year.
(b) Death or Disability of a Participant.
(i) In the event of a participant's death, the participant's estate or
beneficiaries shall have the right to receive an Award reflecting
performance and actual period of employment during the fiscal year. 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, the participant will
receive an Award reflecting performance and actual period of employment
during the fiscal year. In the event the participant is incapacitated, the
Award will be paid to the participant's authorized legal representative.
<PAGE>
(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 Awards; 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 for payment under the Plan, 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 became 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_ex1014.txt
<DESCRIPTION>EXHIBIT 10.14 CHANGE OF CONTROL EMP. AGREEMENT
<TEXT>
Exhibit 10.14
CHANGE OF CONTROL
EMPLOYMENT AGREEMENT
AGREEMENT by and between National Semiconductor Corporation, a Delaware
corporation (the "Company") and ___________________ (the "Executive"), dated as
of the xxxx day of xcxxx, xxxx.
The Board of Directors of the Company (the "Board") has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the first date
during the Change of Control Period (as defined in Section l(b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
<PAGE>
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13 (d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (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 (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (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 Company'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) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company or
the acquisition of assets of another corporation (a "Business Combination"), in
each case, unless, following such Business Combination, (i) all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and Outstanding Company
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 which as a result of
such transaction owns the Company or all or substantially all of the Company'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 Company Common Stock and Outstanding Company
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 Company 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 Company of a complete liquidation
or dissolution of the Company.
<PAGE>
3. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties. (i) During the Employment
Period, (A) the Executive's position (including status, offices, titles and
reporting requirements), authority, duties and responsibilities shall be at
least commensurate in all material respects with the most significant of those
held, exercised and assigned to the Executive at any time during the 120-day
period immediately preceding the Effective Date and (B) the Executive's services
shall be performed at the location where the Executive was employed immediately
preceding the Effective Date or any office or location less than 35 miles from
such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive
agrees to devote reasonable attention and time during normal business hours
to the business and affairs of the Company and, to the extent necessary to
discharge the.responsibilities assigned to the Executive hereunder, to use
the Executive's reasonable best efforts to perform faithfully and
efficiently such responsibilities. During the Employment Period it shall
not be a violation of this Agreement for the Executive to (A) serve on
corporate, civic or charitable boards or committees, (B) deliver lectures,
fulfill speaking engagements or teach at educational institutions and (C)
manage personal investments, so long as such activities do not
significantly interfere with the performance of the Executive's
responsibilities as an employee of the Company in accordance with this
Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the
Effective Date, the continued conduct of such activities (or the conduct of
activities similar in nature and scope thereto) subsequent to the Effective
Date shall not thereafter be deemed to interfere with the performance of
the Executive's responsibilities to the Company.
<PAGE>
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive
shall be awarded, for each fiscal year ending during the Employment Period,
an annual bonus (the "Annual Bonus") in cash at least equal to the
Executive's highest bonus under the Company's Executive Office Incentive
Plan or any.comparable bonus under any predecessor or successor plan, for
the last three full fiscal years prior to the Effective Date (annualized in
the event that the Executive was not employed by the Company for the whole
of such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus
shall be paid no later than the end of the third month of the fiscal year
next following the fiscal year for which the Annual Bonus is awarded,
unless the Executive shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive,
stock option, savings and retirement plans, practices, policies and
programs applicable generally to other peer executives of the Company and
its affiliated companies, but in no event shall such plans, practices,
policies and programs provide the Executive with incentive opportunities
(measured with respect to both regular and special incentive opportunities,
to the extent, if any, that such distinction is applicable), savings
opportunities and retirement benefit opportunities, in each case, less
favorable, in the aggregate, than the most favorable of those provided by
the Company and its affiliated companies for the Executive under such
plans, practices, policies and programs as in effect at any time during the
120-day period immediately preceding the Effective Date or if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be
eligible for participation in and shall receive all benefits under welfare
benefit plans, practices, policies and programs provided by the Company and
its affiliated companies (including, without limitation, medical,
prescription, dental, disability, salary continuance, employee life, group
life, accidental death and travel accident insurance plans and programs) to
the extent applicable generally to other peer executives of the Company and
its affiliated companies, but in no event shall such plans, practices,
policies and programs provide the Executive with benefits which are less
favorable, in the aggregate, than the most favorable of such plans,
practices, policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if
more favorable to the Executive, those provided generally at any time after
the Effective Date to other peer executives of the Company and its
affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses
incurred by the Executive in accordance with the most favorable policies,
practices and procedures of the Company and its affiliated companies in
effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
<PAGE>
(vi) Fringe Benefits. During the Employment Period, the Executive
shall be entitled to fringe benefits, including, without limitation, tax
and financial planning services and, if applicable, use of an automobile
and payment of related expenses, in accordance with the most favorable
plans, practices, programs and policies of the Company and its affiliated
companies in effect for the Executive at any time during the 120-day period
immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to
other peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial
and other assistance, at least equal to the most favorable of the foregoing
provided to the Executive by the Company and its affiliated companies at
any time during the 120-day period immediately preceding the Effective Date
or, if more favorable to the Executive, as provided generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacations in accordance with the most favorable plans,
policies, programs and practices of the Company and its affiliated
companies as in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to
the Executive, as in effect generally at any time thereafter with respect
to other peer executives of the Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that Disability of
the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
reasonably acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during the
Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically identifies the manner
in which the Board or Chief Executive Officer believes that the Executive
has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
<PAGE>
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
<PAGE>
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by Section 4(a) of this Agreement, or any other action by the
Company which results in a diminution in such position, authority, duties
or responsibilities, excluding for this purpose an isolated, insubstantial
and inadvertent action not taken in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions
of Section 4(b) of this Agreement, other than an isolated, insubstantial
and inadvertent failure not occurring in bad faith and which is remedied by
the Company promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be based at any office
or location other than as provided in Section 4(a)(i)(B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section
11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive. Anything in this Agreement to the
contrary notwithstanding, a termination by the Executive for any reason during
the 30-day period immediately following the first anniversary of the Effective
Date shall be deemed to be a termination for Good Reason for all purposes of
this Agreement.
(d) Notice of Termination. Any termination by the Company for cause, or by
the Executive for Good Reason, shall be communicated by Notice of Termination to
the other party hereto given in accordance with Section 12(b) of this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice). The failure by the Executive or the Company to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the Executive's
employment is terminated by the Company for Cause, or by the Executive for Good
Reason, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the date on which
the Company notifies the Executive of such termination and (iii) if the
Executive's employment is terminated by reason of death or Disability, the date
of death of the Executive or the Disability Effective Date, as the case may be.
<PAGE>
6. Obligations of the Company upon Termination. (a) Good Reason; Other Than
for Cause, Death or Disability. If, during the Employment Period, the Company
shall terminate the Executive's employment other than for Cause, Death or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through the
Date of Termination to the extent not theretofore paid, (2) the
product of (x) the higher of (I) the Recent Annual Bonus and (II) the
Annual Bonus paid or payable, including any bonus or portion thereof
which has been earned but deferred (and annualized for any fiscal year
consisting of less than twelve full months or during which the
Executive was employed for less than twelve full months), for the most
recently completed fiscal year during the Employment Period, if any
(such higher amount being referred to as the "Highest Annual Bonus")
and (y) a fraction, the numerator of which is the number of days in
the current fiscal year through the Date of Termination, and the
denominator of which is 365 and (3) any compensation previously
deferred by the Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay, ,in each case to the
extent not theretofore paid (the sum of the amounts described in
clauses (1), (2), and (3) shall be hereinafter referred to as the
"Accrued Obligations"); and
B. the amount equal to the product of (1) two and ninety-nine
one-hundredths (2.99) and (2) the sum of (x) the Executive's Annual
Base Salary and (y) the Highest Annual Bonus; and
C. an amount equal to the difference between (a) the aggregate
benefit under the Company's qualified defined benefit retirement plans
(collectively, the "Retirement Plan") and any excess or supplemental
defined benefit retirement plans in which the Executive participates
(collectively, the "SERP") which the Executive would have accrued
(whether or not vested) if the Executive's employment had continued
for three years after the Date of Termination and (b) the actual
vested benefit, if any, of the Executive under the Retirement Plan and
the SERP, determined as of the Date of Termination (with the foregoing
amounts to be computed on an actuarial present value basis, based on
the assumption that the Executive's compensation in each of the three
years following such termination would have been that required by
Section 4(b) (i) and Section 4(b) (ii), and using actuarial
assumptions no less favorable to the Executive than the most favorable
of those in effect for purposes of computing benefit entitlements
under the Retirement Plan and the SERP at any time from the day before
the Effective Date) through the Date of Termination;
(ii) for three years after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which would
have been provided to them in accordance with the plans, programs,
practices and policies described in Section 4(b) (iv) of this Agreement if
the Executive's employment had not been terminated or, if more favorable to
the Executive, as in effect generally at any time thereafter with respect
to other peer executives of the Company and its affiliated companies and
their families, provided, however, that if the Executive becomes reemployed
with another employer and is eligible to receive medical or other welfare
benefits under another employer-provided plan, the medical and other
welfare benefits described herein shall be secondary to those provided
under such other plan during such applicable period of eligibility, and for
purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until three years after the Date of Termination and to
have retired on the last day of such period;
<PAGE>
(iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services, the scope and provider of which shall
be selected by the Executive in the Executive's sole discretion; and
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or contract or
agreement of the Company and its affiliated companies (such other amounts
and benefits shall be hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligation to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligation to the Executive, other than for payment of
Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter generally with respect to other peer executives of the Company
and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's employment shall
be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligation to the Executive other than the obligation
to pay to the Executive (x) the Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall terminate
without further obligation to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
<PAGE>
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice (other than any severance pay plan) provided by the Company
or any of its affiliated companies and for which the Executive may qualify, nor,
subject to Section 12(f), shall anything herein limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company or any of its affiliated companies. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company or any of
its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
8. Full Settlement; Legal Fees. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and except as
specifically provided in Section 6(a) (ii), such amounts shall not be reduced
whether or not the Executive obtains other employment. The Company agrees to pay
as incurred, to the full extent permitted by law, all legal fees and expense
which the Executive may reasonably incur as a result of any contest (regardless
of the outcome thereof) by the Company, the Executive or others of the validity
or enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (whether such contest is between the Company
and the Executive or between either of them and any third party, and including
as a result of any contest by the Executive about the amount of any payment
pursuant to this Agreement), plus in each case interest on any delayed payment
at the applicable Federal rate provided for in Section 7872(f) (2) (A) of the
Internal Revenue Code of 1986, as amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. Notwithstanding the foregoing provisions of this
Section 9(a), if it shall be determined that the Executive is entitled to a
Gross-Up Payment, but that the present value as of the date of the Change of
Control, determined in accordance with Sections 280G(b)(2)(ii) and 280G(d)(4) of
the Code (the "Present Value"), of the Payments does not exceed 110% of the
greatest Present Value of Payments (the "Safe Harbor Cap") that could be paid to
the Executive such that the receipt thereof would not give rise to any Excise
Tax, then no Gross-Up Payment shall be made to the Executive and the amounts
payable to Executive under this Agreement shall be reduced to the maximum amount
that could be paid to the Executive such that the Present Value of the Payments
does not exceed the Safe Harbor Cap. The reduction of the amounts payable
hereunder, if applicable, shall be made by reducing the payments as elected by
the Executive. For purposes of reducing the Payments to the Safe Harbor Cap,
only amounts payable under this Agreement (and no other Payments) shall be
reduced. If the reduction of the amounts payable hereunder would not result in a
reduction of the Present Value of the Payments to the Safe Harbor Cap, no
amounts payable under this Agreement shall be reduced pursuant to this
provision.
<PAGE>
(b) Subject to the provisions of Section 9(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by a nationally
recognized certified public accounting firm designated by the Executive (the
"Accounting Firm"), which shall provide detailed supporting calculations both to
the Company and the Executive within 15 business days of the receipt of notice
from the Executive that there has been a Payment, or such earlier time as is
requested by the Company. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting the Change
of Control, the Executive shall appoint another nationally recognized accounting
firm to make the determinations required hereunder (which accounting firm shall
then be referred to as the Accounting Firm hereunder). All fees and expenses of
the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment,
as determined pursuant to this Section 9, shall be paid by the Company to the
Executive within five days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding upon
the Company and the Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpayment"), consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 9(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance,
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
<PAGE>
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and without
the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
<PAGE>
12. Miscellaneous. (a) This Agreement shall be governed by and construed in
accordance with the laws of the State of California without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
_________________________________________
_________________________________________
If to the Company: National Semiconductor Corporation
2900 Semiconductor Drive, M/S: 16-135
Santa Clara, California 95052
Attn: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to Section 5(c) (i)-(v) of this Agreement,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may otherwise
be provided under any other written agreement between the Executive and the
Company, the employment of the Executive by the Company is "at will" and, prior
to the Effective Date, the Executive's employment may be terminated by either
the Executive or the Company at any time prior to the Effective Date, in which
case the Executive shall have no further rights under this Agreement. From and
after the Effective Date this Agreement shall supersede any other agreement
between the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.
____________________________________________
(Executive)
NATIONAL SEMICONDUCTOR CORPORATION
By:
Its:
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<FILENAME>form10k_ex1015.txt
<DESCRIPTION>EXHIBIT 10.15 DEFFERED COMP PLAN
<TEXT>
AMENDMENT ONE
TO THE
NATIONAL SEMICONDUCTOR CORPORATION
DEFERRED COMPENSATION PLAN
WHEREAS National Semiconductor Corporation (the "Employer") has adopted the
National Semiconductor Corporation Deferred Compensation Plan, amended and
restated effective November 1, 2001 (the "Plan"); and
WHEREAS the Employer wishes to discontinue Annual Profit Sharing Contributions
under the National Semiconductor Corporation Retirement and Savings Program (the
"RASP") after Fiscal Year 2004; and
WHEREAS the Employer wishes to clarify that no Employee shall be eligible to
receive an Annual Profit Sharing Restoration Amount under the Plan once Annual
Profit Sharing Contributions are discontinued under the RASP; and
WHEREAS Section 5.02 of the Plan provides that the Employer reserves the right
to amend the Plan at any time;
NOW, THEREFORE, the Employer hereby adopts this Amendment One as provided below,
effective for the Plan Years beginning after May 30, 2004:
1. Section 2.01A is amended by adding the following new sentence at the end
thereof:
Notwithstanding the foregoing, no Employee shall be eligible to receive an
Annual Profit Sharing Restoration Amount in any Plan Year beginning after
May 30, 2004.
2. Section 3.02 is amended by adding the following new sentence at the end
thereof:
No amounts shall be credited under this Section 3.02 for any Plan Year
beginning after May 30, 2004.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>6
<FILENAME>form10k_ex1020.txt
<DESCRIPTION>EXHIBIT 10.20 EMPLOYEE STOCK OPTION PLAN -7/14/04
<TEXT>
Exhibit 10.20
NATIONAL SEMICONDUCTOR CORPORATION
1997 EMPLOYEES STOCK OPTION PLAN
(as amended effective July 14, 2004)
1. TITLE OF PLAN
The title of this Plan is the National Semiconductor Corporation 1997
Employees Stock Option Plan, hereinafter referred to as the "Plan".
2. PURPOSE
The Plan is intended to align the interests of eligible 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 eligible 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 personnel 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 140,000,000 shares of the Corporation's $0.50 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 Rule 16b-3 promulgated under the Securities Exchange Act of 1934 ("Exchange
Act") and any successor rule.
<PAGE>
(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 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. Once granted, the exercise price of
any options granted under this Plan may not be revised or repriced at any time,
except as provided in Section 8.
(d) During any one fiscal year of the Corporation, the aggregate number of
options that may be granted under this Plan may not exceed two percent (2%) of
the greatest number of total shares of the Corporation's $0.50 par value Common
Stock outstanding during the applicable fiscal year.
5. ELIGIBILITY
Options may be granted only to regular salaried employees of the
Corporation and its subsidiaries who are not 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 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 employee to purchase stock pursuant to any other 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 stock option shall be six years and one day
from the date it was granted.
(c) 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.
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.
<PAGE>
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 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, the rules of any stock exchange on which the
Corporation's stock is listed, or other applicable law or regulation.
<PAGE>
(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 April 18, 1997.
<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 35% 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>7
<FILENAME>form10k_ex1022.txt
<DESCRIPTION>EXHIBIT 10.22 RETIREMENT AND SAVINGS PROGRAM
<TEXT>
EXHIBIT 10.22
AMENDMENT ONE
TO THE
NATIONAL SEMICONDUCTOR CORPORATION
RETIREMENT AND SAVINGS PROGRAM
WHEREAS National Semiconductor Corporation (the "Employer") has adopted the
National Semiconductor Corporation Retirement and Savings Program, restated
effective September 1, 1996 (the "Plan"); and
WHEREAS the Employer wishes to amend the Plan to comply with the
requirements of the Economic Growth and Tax Relief Reconciliation Act of 2001
("EGTRRA"); and;
WHEREAS Sections 16.03H and 21.02 of the Plan provides that the Plan may be
amended by the Employer, by action of its Board of Directors, or with respect to
administrative provisions, by action of the Committee;
NOW, THEREFORE, the Employer hereby adopts this Amendment as provided
below:
I. The Plan is hereby amended to comply with the requirements of EGTRRA as
provided in Sections 2.11B, 5.02A, 5.02 B, 5.05, 5.06, 12.01B1, 12.08C.,
13.01A, 13.01B.2, 13.01C, 13.02A, 14.01D, 14.01I, 14.01J, and 14.03 of the
draft document submitted to the Internal Revenue Service on May 28, 2002,
effective as of the dates provided therein.
<PAGE>
SECOND AMENDMENT TO THE
NATIONAL SEMICONDUCTOR CORPORATION
RETIREMENT AND SAVINGS PROGRAM
WHEREAS National Semiconductor Corporation (the "Employer") has adopted the
National Semiconductor Corporation Retirement and Savings Program, restated
effective June 1, 1997 (the "Plan"); and
WHEREAS the Employer has decided to sell the Information Appliance ("IA")
Business Unit of Employer to AMD, Inc.; and WHEREAS the Employer wishes to amend
the Plan to provide that any Participant employed by IA Business Unit who
becomes employed by AMD, Inc., in connection with the sale of the IA Business
Unit to AMD, Inc., shall be 100% vested in his Profit Sharing Account; and
WHEREAS Section 21.02 of the Plan provides that the Plan may be amended by
action of the Committee in the case of provisions affecting employees involved
in a corporate acquisition, disposition or similar transaction; and
NOW, THEREFORE, the Employer hereby adopts this Amendment as provided
below.
I. Section 8.01 of the Plan is hereby amended by the addition of the new
subsection which shall be added at the end thereof:
Any Participant employed by IA Business Unit who becomes employed by
AMD, Inc., in connection with the sale of the IA Business Unit to AMD,
Inc., shall be 100% vested in his Profit Sharing Account.
II. This Amendment shall be effective August 18, 2003.
<PAGE>
AMENDMENT THREE
TO THE
NATIONAL SEMICONDUCTOR CORPORATION
RETIREMENT AND SAVINGS PROGRAM
WHEREAS National Semiconductor Corporation (the "Employer") has adopted the
National Semiconductor Corporation Retirement and Savings Program, amended and
restated effective June 1, 1997 (the "Plan"); and;
WHEREAS the Employer wishes to amend the Plan relating to distributions
that may be made without the consent of a Participant; and
WHEREAS Sections 16.03H and 21.02 of the Plan provides that the Plan may be
amended by the Employer, by action of its Board of Directors, or with respect to
administrative provisions, by action of the Committee;
NOW, THEREFORE, the Employer hereby adopts this Amendment as provided
below:
I. Section 12.01.B.3 is hereby amended in its entirety as follows:
If a Participant does not consent to receive payment of his or her benefit,
payment shall be made not later than the earlier of the dates described in
a. and b. below:
a. Unless the Participant elects otherwise, sixty (60) days after the
close of the Plan Year in which the later of the following events
occurs:
(i) the Participant attains age sixty-five (65); or
(ii) the termination of the Participant's service with the Employer.
b. The date provided under Section 12.02 below.
Notwithstanding the provisions of Subsection 12.01.B.3.a above, the
failure of a Participant to consent to a distribution shall be deemed
to be an election to defer commencement of payment as provided in
Subsection 12.01.B.3.a above. Payment shall be in accordance with
Section 12.01B.1 above.
II. This amendment shall be effective on and after October 6, 2003.
<PAGE>
AMENDMENT FOUR
TO THE
NATIONAL SEMICONDUCTOR CORPORATION
RETIREMENT AND SAVINGS PROGRAM
WHEREAS National Semiconductor Corporation (the "Employer") has adopted the
National Semiconductor Corporation Retirement and Savings Program, amended and
restated effective June 1, 1997 (the "Plan"); and;
WHEREAS the Employer wishes to increase the rate of the Employer Match
under the Plan; and
WHEREAS the Employer wishes to discontinue Annual Profit Sharing
Contributions under the Plan after Fiscal Year 2004; and WHEREAS the Employer
wishes to change the Plan Year from the Employer's Fiscal Year to the calendar
year; and
WHEREAS Section 21.01 of the Plan provides that the Plan may be amended by
the Employer, by action of its Board of Directors;
NOW, THEREFORE, the Employer hereby adopts this Amendment as provided
below, effective December 1, 2003 (except as otherwise specified):
1. Section 2.04 is hereby amended by the addition of the following two new
sentences at the end thereof:
Solely for purposes of the allocation of the Annual Profit Sharing
Contribution with respect to Fiscal Year 2004, the Allocation Date
shall be the last day of such Fiscal Year. Because Fiscal Year 2004
ends after the short Plan Year ending December 31, 2003, there shall
be no allocation of, nor Allocation Date for, Annual Profit Sharing
Contributions for such short Plan Year.
2. Section 2.05 is hereby amended in its entirety as follows:
Annual Profit Sharing Contribution means the contribution made in
respect of any Plan Year by the Employer in accordance with Section
5.01, except that no contribution shall be made in respect of the Plan
Year ending December 31, 2003, and the final Annual Profit Sharing
Contribution under this Plan shall be made in respect to Fiscal Year
2004 during the Plan Year commencing January 1, 2004.
3. Section 2.37 is hereby amended by the addition of the following two new
sentences at the end thereof:
The Plan Year commencing May 26, 2003 shall end on December 31, 2003.
Effective January 1, 2004, Plan Year means the calendar year period
beginning on January 1 ending on December 31.
4. Section 5.01A is hereby amended in its entirety as follows:
For each Fiscal Year beginning before January 1, 2004, the Employer
intends, as a part of a regular plan and program (but, except as
otherwise provided herein, does not hereby bind itself), to contribute
from its current or accumulated net profit an amount computed in the
manner set forth in paragraph B below. No further Annual Profit
Sharing Contributions shall be made under the Plan with respect to
Fiscal Years that begin after December 31, 2003.
<PAGE>
5. Section 5.01B is hereby amended by the addition of the following new
paragraph 7 at the end thereof:
7. Solely for purposes of the Annual Profit Sharing Contribution for
Fiscal Year 2004 (to be made during the Plan Year beginning
January 1, 2004), the amount of the Employer's Annual Profit
Sharing Contribution otherwise required under this Section shall
be reduced by the difference between (a) the aggregate Employer
Match for all Participants required under Section 5.03 for the
period beginning January 1, 2004 and ending May 30, 2004, and (b)
the aggregate Employer Match for all Participants that would have
been required for such period under the formula in effect under
Section 5.03 immediately prior to January 1, 2004. The Committee
shall have the authority to determine the amount of the Annual
Profit Sharing Contribution for Fiscal Year 2004.
6. Section 5.03 is hereby amended by the addition of the following new
paragraph after the second paragraph thereof:
Effective January 1, 2004, on behalf of each Participant who elects to
defer compensation pursuant to Section 5.02 of the Plan, the Employer
shall contribute an amount equal to one-hundred-fifty percent (150%),
or any other percentage as the Board may determine for any given Plan
Year or Years, of the Participants' Elected Contribution made as of
any given pay date that are not in excess of four percent (4%) of such
Participant's Compensation for such pay date. As of the last day of
each Plan Year, the Employer shall contribute an additional amount, if
necessary, so that each Participant who is employed on the last day of
the Plan Year (or who retires, dies, is Laid Off, becomes Disabled or
becomes an Inactive Participant during the Plan Year) receives an
Employer Match for the Plan Year equal to one-hundred-fifty percent
(150%), or such other percentage as the Board may determine for any
given Plan Year or Years, of the Participant's Elected Contributions
made during the Plan Year that are not in excess of four percent (4%)
of the Participant's Compensation for all such pay dates within the
Plan Year.
7. Section 6.02 is hereby amended by the addition of the following new
sentence at the end thereof:
<PAGE>
Notwithstanding the preceding sentence, in the case of the Annual
Profit Sharing Contribution with regard to Fiscal Year 2004 (to be
made during the Plan Year beginning January 1, 2004), there shall be
no Annual Profit Sharing Contribution allocated to any Participant who
is not in the actual employ of the Employer at the close of Fiscal
Year 2004, except that a Participant who retires, dies, is Laid Off,
becomes Disabled, or becomes an Inactive Participant during the Fiscal
Year shall share in the contributions and forfeitures for such Fiscal
Year.
8. Section 6.03A is hereby amended by the addition of the following new
paragraph immediately before the final paragraph thereof :
Solely for purposes of the applying the preceding sentence with regard
to the Annual Profit Sharing Contribution for Fiscal Year 2004 (to be
made during the Plan Year beginning January 1, 2004), "C" shall equal
the amount of the Participant's Compensation for Fiscal Year 2004 and
"D" shall equal the total amount of Compensation of all Participants
for such Fiscal Year.
9. The second sentence of Section 6.04 is hereby amended by deleting the
period at the end thereof and inserting the following:
(or would have been allocated under Section 6.03A, disregarding the
method for allocating the Annual Profit Sharing Contribution for
Fiscal Year 2004 and the discontinuation of Annual Profit Sharing
Contributions thereafter).
<PAGE>
AMENDMENT FIVE
TO THE
NATIONAL SEMICONDUCTOR CORPORATION
RETIREMENT AND SAVINGS PROGRAM
WHEREAS National Semiconductor Corporation (the "Employer") has adopted the
National Semiconductor Corporation Retirement and Savings Program, amended and
restated effective June 1, 1997 (the "Plan"); and;
WHEREAS the Employer wishes to amend the Plan relating to minimum required
distributions in order to comply with the requirements of the final Treasury
regulations under section 401(a)(9) of the Internal Revenue Code; and
WHEREAS the Internal Revenue Service has issued a model amendment for this
purpose; and
WHEREAS Sections 16.03H and 21.02 of the Plan provides that the Plan may be
amended by the Employer, by action of its Board of Directors, or with respect to
administrative provisions, by action of the Committee;
NOW, THEREFORE, the Employer hereby adopts this Amendment Five as provided
below:
Minimum Distribution Requirements
- ---------------------------------
Section 1. General Rules.
1.1 Effective Date. The provisions of this amendment will apply for purposes of
determining required minimum distributions for calendar years beginning
with the 2003 calendar year.
1.2 Precedence. The requirements of this amendment will take precedence over
any inconsistent provisions of the Plan.
1.3 Requirements of Treasury Regulations Incorporated. All distributions
required under this amendment will be determined and made in accordance
with the Treasury regulations under section 401(a)(9) of the Internal
Revenue Code. -
1.4 TEFRA Section 242(b)(2) Elections. Notwithstanding the other provisions of
this amendment, distributions may be made under a designation made before
January 1, 1984, in accordance with section 242(b)(2) of the Tax Equity and
Fiscal Responsibility Act (TEFRA) and the provisions of the Plan that
relate to section 242(b)(2) of TEFRA.
<PAGE>
Section 2. Time and Manner of Distribution.
2.1 Required Beginning Date. The participant's entire interest will be
distributed, or begin to be distributed, to the participant no later than
the participant's required beginning date.
2.2 Death of Participant Before Distributions Begin. If the participant dies
before distributions begin, the participant's entire interest will be
distributed, or begin to be distributed, no later than as follows:
(a) If the participant's surviving spouse is the participant's sole
designated beneficiary, then distributions to the surviving spouse
will begin by December 31 of the calendar year immediately following
the calendar year in which the participant died, or by December 31 of
the calendar year in which the participant would have attained age 70
1/2, if later.
(b) If the participant's surviving spouse is not the participant's sole
designated beneficiary, then distributions to the designated
beneficiary will begin by December 31 of the calendar year immediately
following the calendar year in which the participant died.
(c) If there is no designated beneficiary as of September 30 of the year
following the year of the participant's death, the participant's
entire interest will be distributed by December 31 of the calendar
year containing the fifth anniversary of the participant's death.
(d) If the participant's surviving spouse is the participant's sole
designated beneficiary and the surviving spouse dies after the
participant but before distributions to the surviving spouse begin,
this Section 2.2, other than Section 2.2(a), will apply as if the
surviving spouse were the participant.
For purposes of this Section 2.2 and Section 4, unless Section 2.2(d)
applies, distributions are considered to begin on the participant's
required beginning date. If Section 2.2(d) applies, distributions are
considered to begin on the date distributions are required to begin to the
surviving spouse under Section 2.2(a). If distributions under an annuity
purchased from an insurance company irrevocably commence to the participant
before the participant's required beginning date (or to the participant's
surviving spouse before the date distributions are required to begin to the
surviving spouse under Section 2.2(a)), the date distributions are
considered to begin is the date distributions actually commence.
<PAGE>
2.3 Forms of Distribution. Unless the participant's interest is distributed in
the form of an annuity purchased from an insurance company or in a single
sum on or before the required beginning date, as of the first distribution
calendar year distributions will be made in accordance with Sections 3 and
4 of this article. If the participant's interest is distributed in the form
of an annuity purchased from an insurance company, distributions thereunder
will be made in accordance with the requirements of section 401(a)(9) of
the Code and the Treasury regulations.
Section 3. Required Minimum Distributions During Participant's Lifetime.
3.1 Amount of Required Minimum Distribution For Each Distribution Calendar
Year. During the participant's lifetime, the minimum amount that will be
distributed for each distribution calendar year is the lesser of:
(a) the quotient obtained by dividing the participant's account balance by
the distribution period in the Uniform Lifetime Table set forth in
section 1.401(a)(9)-9 of the Treasury regulations, using the
participant's age as of the participant's birthday in the distribution
calendar year; or
(b) if the participant's sole designated beneficiary for the distribution
calendar year is the participant's spouse, the quotient obtained by
dividing the participant's account balance by the number in the Joint
and Last Survivor Table set forth in section 1.401(a)(9)-9 of the
Treasury regulations, using the participant's and spouse's attained
ages as of the participant's and spouse's birthdays in the
distribution calendar year.
3.2 Lifetime Required Minimum Distributions Continue Through Year of
Participant's Death. Required minimum distributions will be determined
under this Section 3 beginning with the first distribution calendar year
and up to and including the distribution calendar year that includes the
participant's date of death
Section 4. Required Minimum Distributions After Participant's Death.
4.1 Death On or After Date Distributions Begin.
(a) Participant Survived by Designated Beneficiary. If the participant
dies on or after the date distributions begin and there is a
designated beneficiary, the minimum amount that will be distributed
for each distribution calendar year after the year of the
participant's death is the quotient obtained by dividing the
participant's account balance by the longer of the remaining life
expectancy of the participant or the remaining life expectancy of the
participant's designated beneficiary, determined as follows:
(1) The participant's remaining life expectancy is calculated using
the age of the participant in the year of death, reduced by one
for each subsequent year.
(2) If the participant's surviving spouse is the participant's sole
designated beneficiary, the remaining life expectancy of the
surviving spouse is calculated for each distribution calendar
year after the year of the participant's death using the
surviving spouse's age as of the spouse's birthday in that year.
For distribution calendar years after the year of the surviving
spouse's death, the remaining life expectancy of the surviving
spouse is calculated using the age of the surviving spouse as of
the spouse's birthday in the calendar year of the spouse's death,
reduced by one for each subsequent calendar year.
<PAGE>
(3) If the participant's surviving spouse is not the participant's
sole designated beneficiary, the designated beneficiary's
remaining life expectancy is calculated using the age of the
beneficiary in the year following the year of the participant's
death, reduced by one for each subsequent year.
(b) No Designated Beneficiary. If the participant dies on or after the
date distributions begin and there is no designated beneficiary as of
September 30 of the year after the year of the participant's death,
the minimum amount that will be distributed for each distribution
calendar year after the year of the participant's death is the
quotient obtained by dividing the participant's account balance by the
participant's remaining life expectancy calculated using the age of
the participant in the year of death, reduced by one for each
subsequent year.
4.2 Death Before Date Distributions Begin.
(a) Participant Survived by Designated Beneficiary. If the participant
dies before the date distributions begin and there is a designated
beneficiary, the minimum amount that will be distributed for each
distribution calendar year after the year of the participant's death
is the quotient obtained by dividing the participant's account balance
by the remaining life expectancy of the participant's designated
beneficiary, determined as provided in Section 4.1.
(b) No Designated Beneficiary. If the participant dies before the date
distributions begin and there is no designated beneficiary as of
September 30 of the year following the year of the participant's
death, distribution of the participant's entire interest will be
completed by December 31 of the calendar year containing the fifth
anniversary of the participant's death.
(c) Death of Surviving Spouse Before Distributions to Surviving Spouse Are
Required to Begin. If the participant dies before the date
distributions begin, the participant's surviving spouse is the
participant's sole designated beneficiary, and the surviving spouse
dies before distributions are required to begin to the surviving
spouse under Section 2.2(a), this Section 4.2 will apply as if the
surviving spouse were the participant.
Section 5. Definitions.
5.1 Designated beneficiary. The individual who is designated as the beneficiary
under Section 1.05 of the Plan and is the designated beneficiary under
section 401(a)(9) of the Internal Revenue Code and section 1.401(a)(9)-1,
Q&A-4, of the Treasury regulations.
<PAGE>
5.2 Distribution calendar year. A calendar year for which a minimum
distribution is required. For distributions beginning before the
participant's death, the first distribution calendar year is the calendar
year immediately preceding the calendar year which contains the
participant's required beginning date. For distributions beginning after
the participant's death, the first distribution calendar year is the
calendar year in which distributions are required to begin under Section
2.2. The required minimum distribution for the participant's first
distribution calendar year will be made on or before the participant's
required beginning date. The required minimum distribution for other
distribution calendar years, including the required minimum distribution
for the distribution calendar year in which the participant's required
beginning date occurs, will be made on or before December 31 of that
distribution calendar year.
5.3 Life expectancy. Life expectancy as computed by use of the Single Life
Table in section 1.401(a)(9)-9 of the Treasury regulations.
5.4 Participant's account balance. The account balance as of the last valuation
date in the calendar year immediately preceding the distribution calendar
year (valuation calendar year) increased by the amount of any contributions
made and allocated or forfeitures allocated to the account balance as of
dates in the valuation calendar year after the valuation date and decreased
by distributions made in the valuation calendar year after the valuation
date. The account balance for the valuation calendar year includes any
amounts rolled over or transferred to the Plan either in the valuation
calendar year or in the distribution calendar year if distributed or
transferred in the valuation calendar year.
5.5 Required beginning date. The date specified in Section 12.02.
<PAGE>
AMENDMENT SIX
TO THE
NATIONAL SEMICONDUCTOR CORPORATION
RETIREMENT AND SAVINGS PROGRAM
WHEREAS National Semiconductor Corporation (the "Employer") has adopted the
National Semiconductor Corporation Retirement and Savings Program, amended and
restated effective June 1, 1997 (the "Plan"); and;
WHEREAS the Employer wishes to amend the Plan in order to adopt the safe
harbor method for satisfying the section 401(k) and 401(m) nondiscrimination
tests; and
WHEREAS Sections 16.03H and 21.02 of the Plan provides that the Plan may be
amended by the Employer, by action of its Board of Directors, or with respect to
administrative provisions, by action of the Committee;
NOW, THEREFORE, the Employer hereby adopts this Amendment Six as provided
below:
1. Section 2.11A is hereby amended by the addition of the following new
paragraph at the end thereof:
Effective January 1, 2004, Compensation means wages within the meaning
of Section 3401(a) of the Code and all other payments of compensation
to an Employee of the Employer for which the Employer is required to
furnish the Employee a written statement under Sections 6041(d),
6051(a)(3), and 6052 of the Code. Compensation must be determined
without regard to rules under Section 3401(a) of the Code that limit
the remuneration included in wages based on the nature or location of
the employment or the services performed (such as the exception for
agricultural labor in Section 3401(a)(2) of the Code). Compensation
shall also include amounts paid or made available during such year and
shall include any elective deferral (as defined in Section 402(g)(3)
of the Code), and any amount which is contributed or deferred by the
Employer at the election of the Employee and which is not includable
in the gross income of the Employee by reason of Section 125 or
132(f)(4) of the Code. Notwithstanding the foregoing, Compensation
shall exclude all irregular or additional compensation (except for any
type of additional compensation for Employees working outside their
regularly scheduled tour of duty, such as overtime, pay premiums for
shift differential and call-in premiums).
2. Article 13 is hereby amended by adding the following new Section 13.04 at
the end thereof:
13.04 ADP and ACP Test Safe Harbor.
A. Rules of Application.
Effective January 1, 2004, the Employer has elected to use the
ADP and ACP Test Safe Harbor. The provisions of this Section
shall apply for the Plan Year and any provisions relating to the
actual deferral percentage test described in Section 401(k)(3) of
the Code or the actual contribution percentage test described in
Section 401(m)(2) of the Code do not apply. To the extent that
any other provision of the Plan is inconsistent with the
provisions of this Section, the provisions of this Section
govern.
B. ADP and ACP Test Safe Harbor Contribution.
1. The Employer will contribute to the Plan for each Plan Year on
behalf of each Eligible Employee the Employer Match amount
described under Section 5.03, which amount shall constitute both
an ADP and ACP Test Safe Harbor Contribution.
2. The Participant's accrued benefit derived from ADP and ACP Test
Safe Harbor Contributions is nonforfeitable and may not be
distributed earlier than separation from service, death,
disability, an event described in Section 401(k)(10) of the Code,
or the attainment of age 59-1/2. In addition, such contributions
shall satisfy the ADP Test Safe Harbor without regard to
permitted disparity under Section 401(l) of the Code.
C. Definitions for purposes of this subsection,
1. "ACP Test Safe Harbor" is the method described in subsection B
for satisfying the ACP test of Section 401(m)(2) of the Code.
2. "ACP Test Safe Harbor Matching Contribution" is the Employer
Match described in Section 5.03.
3. "ADP Test Safe Harbor" is the method described in subsection B
for satisfying the ADP test of Section 401(k)(3) of the Code.
4. "ADP Test Safe Harbor Contribution" is the Employer Match
described in Section 5.03.
5. "Eligible Employee" means an Employee eligible to make
Participant Elected Contributions under the Plan for any part of
the Plan Year or who would be eligible to make Participant
Elected Contributions but for a suspension due to a hardship
distribution or to statutory limitations, such as Sections 402(g)
and 415 of the Code.
<PAGE>
D. Notice Requirement.
At least 30 days, but not more than 90 days, before the beginning
of the Plan Year, the Employer will provide each Eligible
Employee a comprehensive notice of the Employee's rights and
obligations under the Plan, written in a manner calculated to be
understood by the average Eligible Employee. If an Employee
becomes eligible after the 90th day before the beginning of the
Plan Year and does not receive the notice for that reason, the
notice must be provided no more than 90 days before the Employee
becomes eligible but not later than the date the Employee becomes
eligible.
E. Election Periods.
In addition to any other election periods provided under the
plan, each Eligible Employee may make or modify a deferral
election during the 30-day period immediately following receipt
of the notice described in subsection D above.
<PAGE>
AMENDMENT SEVEN
TO THE
NATIONAL SEMICONDUCTOR CORPORATION
RETIREMENT AND SAVINGS PROGRAM
WHEREAS National Semiconductor Corporation (the "Employer") has adopted the
National Semiconductor Corporation Retirement and Savings Program, amended and
restated effective June 1, 1997 (the "Plan"); and;
WHEREAS the Employer wishes to amend the Plan in order to give Participants
the opportunity to self direct the investment of all of their Accounts under the
Plan; and
WHEREAS Sections 16.03H and 21.02 of the Plan provide that the Plan may be
amended by the Employer, by action of its Board of Directors, or with respect to
administrative provisions, by action of the Committee;
NOW, THEREFORE, the Employer hereby adopts this Amendment Seven as provided
below, effective on the date the final Annual Profit Sharing Contribution is
made for Fiscal Year 2004:
1. Section 2.31 is hereby amended in its entirety as follows:
NSC Stock Fund means the fund consisting of shares of NSC Stock and
short-term liquid investments, which is maintained by the Trustee for
the investment of Participants' Accounts which are directed to be
invested in NSC Stock. Each Participant's interest in the NSC Stock
Fund shall be measured in units of participation, rather than shares
of NSC Stock. Such units shall represent a proportionate interest in
all of the assets of the NSC Stock Fund in accordance with the Trust
Agreement.
2. Section 7.02 is hereby amended in its entirety as follows:
All amounts in each Participant's Accounts shall be invested in one or
a combination of the available Investment Funds selected by the
Committee, in accordance with the election of such Participant (or
Beneficiary, if applicable), made pursuant to this Article VII and
pursuant to Section 404(c) of ERISA. This Plan permits Participants
and Beneficiaries to exercise control over the assets in their
accounts in a manner that is intended to bring the Plan within the
rules of Section 404(c) of ERISA. Fiduciaries of the Plan shall be
relieved of liability for any losses or by reason of any breach which
results from the Participant's or Beneficiary's exercise of control
under this Section.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>8
<FILENAME>form10k_ex1027.txt
<DESCRIPTION>EXHIBIT 10.27 EXECUTIVE OFFICER EQUITY PLAN
<TEXT>
18
Exhibit 10.27
NATIONAL SEMICONDUCTOR EXECUTIVE
2005 EXECUTIVE OFFICER EQUITY PLAN
1. PURPOSE AND OBJECTIVES
The National Semiconductor 2005 Executive Officer Equity Plan (the "Plan")
is designed to align the interests of Executive Officers of National
Semiconductor Corporation with the interests of the Company's stockholders
and to provide incentives for such Executive Officers to exert maximum
efforts for the success of the Company. By extending to Executive Officers
the opportunity to acquire proprietary interests in the Company and to
participate in its success, the Plan may be expected to benefit the Company
and its stockholders by making it possible for the Company to attract and
retain the best available executive talent and by rewarding them for their
part in increasing the value of the Company's shares.
2. DEFINITIONS
Whenever used in this Plan, the following terms shall have the meaning set
forth below:
AWARD: The grant of any form of stock, stock option, stock appreciation
right, or performance share units whether granted singly, in combination or
in tandem, to a Participant pursuant to such terms, conditions, performance
requirements, limitations and restrictions as the Committee may establish
in order to fulfill the objectives of the Plan.
AWARD AGREEMENT: An agreement between the Company and a Participant that
sets forth the terms, conditions, performance requirements, limitations and
restrictions applicable to an Award.
BOARD: The board of directors of the Company.
CODE: The Internal Revenue Code of 1986, as amended.
COMMITTEE: The committee appointed by the Board to administer the Plan.
COMMON STOCK: The Company's common stock, par value $0.50 per share.
COMPANY: National Semiconductor Corporation ("NSC") a Delaware corporation,
and any corporation in which NSC controls directly or indirectly more than
fifty percent (50%) of the combined voting power of voting securities.
<PAGE>
DISABILITY: Inability to perform any services for the Company and eligible
to receive disability benefits under the standards used by the Company's
disability benefit plans or any successor plan thereto.
Effective Date: The date this Plan is approved by the Company's
stockholders.
EOIP: The Company's Executive Officer Incentive Plan.
EXCHANGE ACT: Securities Exchange Act of 1934, as amended.
EXECUTIVE OFFICER: Employees of the Company identified as the Company's
executive officers in the Company's annual report on Form 10-K filed with
the Securities and Exchange Commission.
EXERCISE PRICE: Price at which a share of Common Stock may be purchased by
a Participant pursuant to the exercise of an Option.
FAIR MARKET VALUE: Opening price per share of the Common Stock on the New
York Stock Exchange on the relevant date or if the Common Stock is not
traded on such date, then on the immediately preceding trading day on the
New York Stock Exchange. Notwithstanding the foregoing, for federal, state
and local income tax reporting purposes, the Fair Market Value may be
determined by the Committee in accordance with uniform and
non-discriminatory standards adopted by it from time to time.
FISCAL YEAR: The fiscal year of the Company.
GRANT DATE: With respect to an Award, the date that the Award was granted.
IMMEDIATE FAMILY: Parents (including step-parents), spouses, children
(including step-children and adopted children) and siblings (including
step-siblings.)
NON-QUALIFIED STOCK OPTION: Option to purchase shares of Common Stock that
is not intended to be an incentive stock option, as that term is defined in
the Code.
OPTION: Non-Qualified Stock Option.
PARTICIPANT: An Executive Officer to whom an Award has been made under the
Plan.
PERFORMANCE GOALS: The goal(s) (or combined goals) determined by the
Committee (in its discretion) to be applicable to a Participant with
respect to an Award. As determined by the Committee, the Performance Goals
applicable to an Award may provide for a targeted level or levels of
achievement using one or more of the business criteria specified in Section
6. The Performance Goals may differ from Participant to Participant and
from Award to Award.
<PAGE>
PERFORMANCE SHARE UNITS: Awards to be made under the conditions specified
in Section 8.
RETIREMENT: Permanent termination of employment with the Company and (a)
age is either sixty-five (65) or age is at least fifty-five (55) and years
of service in the employ of the Company is ten (10) or more, and (b) the
terminating employee has certified to the Chief Financial Officer of the
Company that he or she does not intend to engage in a full-time vocation;
provided however, that the Committee may in its discretion waive the
obligation to deliver a certification that the terminating employee does
not intend to engage in a full-time vocation.
SECRETARY: The Secretary of the Company.
Stock Appreciation Right: Awards granted to a Participant pursuant to
Section 9.
3. ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the Committee. The
Committee shall consist of not less than two (2) directors who shall be
appointed from time to time by, and shall serve at the pleasure of, the
Board. The Committee shall be comprised solely of directors who both are
(a) "non-employee directors" under Rule 16b-3 under the Exchange Act, (b)
"outside directors" under Section 162(m) of the Code; and (c) "independent
directors" as required by the listing standards of the New York Stock
Exchange.
3.2 Authority of the Committee. It shall be the duty of the Committee to
administer the Plan in accordance with the Plan's provisions. The Committee
shall have all powers and discretion necessary or appropriate to administer
the Plan and to control its operation, including, but not limited to, the
power to (a) approve which Executive Officers shall be granted Awards, (b)
prescribe the terms and conditions of the Awards, (c) interpret the Plan
and the Awards, (d) adopt such procedures and subplans as are necessary or
appropriate to permit participation in the Plan by Executive Officers who
are foreign nationals or employed outside of the United States, (e) adopt
rules for the administration, interpretation and application of the Plan as
are consistent therewith and (f) interpret, amend or revoke any such rules.
<PAGE>
3.3 Decisions Binding. All determinations and decisions made by the
Committee and the Board pursuant to the provisions of the Plan shall be
final, conclusive, and binding on all persons, and shall be given the
maximum deference permitted by law.
4. SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in Section 4.3, the
total number of shares available for issuance under the Plan shall not
exceed 3,000,000 which may be unissued shares, or shares acquired by the
Company, either on the market or otherwise. The total number of shares of
Common Stock that may be delivered upon exercise of Options that may be
granted under this Plan shall not exceed 1,000,000 and the total number of
shares of Common Stock that can be delivered under the Plan in connection
with Performance Share Units and upon settlement of Stock Appreciation
Rights shall not exceed 2,000,000.
4.2 Expired Awards. If an Award is forfeited, cancelled, terminates,
expires, or lapses for any reason, any shares of Common Stock subject to
such Award shall again be available to be the subject of an Award, except
as determined by the Committee. Any shares of Common Stock withheld for tax
purposes upon payment of an Award shall not again be available to be
subject to an Award.
4.3 Adjustments in Awards and Authorized Shares. In the event that there is
any change in the shares of the Company through any dividend or other
distribution (whether in the form of cash, shares of Common Stock, other
securities, or other property), recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of shares of Common Stock or other
securities of the Company, then the number of shares of Common Stock that
may be delivered under the Plan, the number, class, and price of shares of
Common Stock subject to outstanding Awards, and the numerical limits of
Section 4.1 shall be appropriately adjusted by the Committee.
Notwithstanding the preceding, the number of shares of Common Stock subject
to any Award shall always be a whole number.
5. ELIGIBILITY
Awards may be granted under the Plan only to Executive Officers of the
Company. No Executive Officer shall have the automatic right to receive an
Award under this Plan. Once having been selected to receive an Award, an
Executive Officer has no right to be selected to receive a future Award.
<PAGE>
6. PERFORMANCE GOALS
Performance Goals shall identify one or more business criteria, which may
include any of the following:
Financial Business Criteria:
Net income Earnings per share
Debt reduction Cash flow
Stockholder return Revenue
Return on investment Revenue growth
Return on invested capital Return on net assets
Return on equity Profit before tax
Gross operating profit Profit after tax
Return on research and Market capitalization
development investment Total stockholder return
Margin
Performance Goals based on financial business criteria may be set on a pre
tax or after tax basis, may be defined by absolute or relative measures,
and may be valued on a growth or fixed basis.
Strategic and Operational Business Criteria:
Quality improvements Market Share
Cycle time reductions Reduction in product returns
Manufacturing improvements Customer satisfaction
and/or efficiencies improvements
Strategic positioning Compensation/review
programs program improvements
Business/information Expense management
systems improvements Customer request date
Infrastructure support performance
programs New product revenue
Human resource programs Customer programs
New product releases Technology development
Operational and strategic programs
programs
7. STOCK OPTIONS
7.1 Grant of Options. Subject to the terms and provisions of the Plan,
Options may be granted to Executive Officers at any time and from time to
time as determined by the Committee in its sole discretion. The Committee
shall determine the number of shares of Common Stock subject to each
Option, provided, however that no one individual may receive a grant of
more than 250,000 Options in any one Fiscal Year.
<PAGE>
7.2 Award Agreement. Each Option shall be evidenced by an Award Agreement
that shall specify the Exercise Price, the expiration date of the Option,
the number of shares of Common Stock to which the Option pertains, and such
other terms and conditions as the Committee, in its discretion, shall
determine. The Committee may provide that Options become exercisable in
installments. The terms of the Award Agreement need not be identical for
all Participants or for each Option granted.
7.3 Exercise Price. The Exercise Price for each Option shall be not less
than one hundred percent (100%) of the Fair Market Value on the Grant Date.
7.4 Term. The maximum term of any Option shall be six years and one day
from the Grant Date. Subject to these limits, the Committee shall provide
in each Award Agreement when each Option expires and becomes unexercisable.
7.5 Performance Requirements. The Committee may establish performance
requirements for exercisability of Options. Performance requirements may be
set based upon the achievement of Performance Goals or other specific
performance objectives (Company-wide, divisional, or individual.)
7.6 Exercisability of Options.
7.6.1Except as provided in Section 10.1.1, an Option may not be
exercised to any extent, either by the person to whom it was
granted, the grantee's transferee, the grantee's guardian or
legal representative 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 Company 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. Subject to
the foregoing, Options shall be exercisable only after the time
vesting requirements specified in the Option grant have been
satisfied and, if applicable, the Committee has certified in
writing that all applicable performance conditions have been met.
7.6.2The Committee has the discretion to determine whether Options
granted shall be transferable without consideration to the
Participant's Immediate Family members or family trusts for the
benefit of the Participant's Immediate Family members.
<PAGE>
7.7 Payment of Purchase Price.
7.7.1Options shall be exercised by the Participant's delivery of a
notice of exercise to the Company's Stock Administration
department (or such other designee as the Company may identify),
setting forth the number of shares with respect to which the
Option is to be exercised, accompanied by full payment for the
shares. The notice shall be given in the form and manner
specified by the Company from time to time.
7.7.2Upon the exercise of any Option, the Exercise Price shall be
payable to the Company in full in cash or its equivalent. The
Committee, in its sole discretion, may also permit exercise by
tendering previously acquired shares that have been held by the
Participant for at least six months that have an aggregate Fair
Market Value at the time of exercise equal to the total Exercise
Price. As soon as practicable after receipt of a notification of
exercise and full payment for the shares of Common Stock
purchased, the Company shall deliver to the Participant (or to
one of the Company's preferred brokers that is designated by the
Participant), share certificates (which may be in book entry
form) representing such shares.
7.8 Termination of Employment.An Option shall terminate and may not be
exercised if the Participant to whom it is granted ceases to be
continuously employed by the Company, except (subject nevertheless to the
last sentence of this Section 7.8): (a) if the Participant's continuous
employment is terminated for any reason other than (i) Retirement, (ii)
Disability, or (iii) death, the Participant or the Participant's transferee
may exercise the Option to the extent that the Participant 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 Participant 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
Participant's death by the Participant's transferee or the person or
persons to whom the Participant's rights under the Option otherwise pass by
will or by the laws of descent or distribution but only to the extent
exercisable at the date of such termination; (b) if the Participant's
continuous employment is terminated by (i) Retirement, (ii) 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 Participant or the Participant's transferee, or
in the event of the Participant's death, by the persons to whom the
Participant's rights under the Option shall pass by will or by the laws of
descent or distribution; (c) if the Participant's continuous employment is
terminated and within a period of ninety (90) days thereafter the
Participant returns to the active payroll as an employee of the Company,
the Committee may reinstate any portion of the Option previously granted
but not exercised. Nothing contained in this Section 7.8 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>
8. PERFORMANCE SHARE UNITS
8.1 Establishment of Performance Share Unit Targets. Subject to the terms
and provisions of the Plan, the Committee, at any time and from time to
time, may establish for the Executive Officers target awards of Performance
Share Units in such amounts as the Committee, in its sole discretion, shall
determine. The Committee shall determine the number of Performance Share
Unit targets to be established for each Participant, provided, however,
that no one individual may have a target of more than 250,000 Performance
Share Units established in any one Fiscal Year.
8.2 Performance Share Unit Agreement. Performance Share Units shall be
evidenced by an agreement that shall specify the target number of
Performance Share Units established for the Participant, applicable
performance conditions, the performance period which at a minimum shall be
two years, a vesting period which may or may not run concurrently to the
performance period, and such other terms and conditions as the Committee,
in its sole discretion, shall determine.
8.3 Performance Conditions. The Committee shall set performance conditions
for Performance Share Units in accordance with this Section 8.3.
8.3.1General Performance Conditions. The Committee may set
performance conditions based upon the achievement of specific
performance objectives (Company-wide, divisional, or individual).
8.3.2Section 162(m) Performance Conditions. For purposes of
qualifying Performance Share Units as "performance-based
compensation" under Section 162(m) of the Code, the Committee may
set performance conditions based upon the achievement of
Performance Goals. The Performance Goals shall be set by the
Committee on or before the latest date permissible to enable the
Performance Share Units to qualify as "performance-based
compensation" under Section 162(m) of the Code. In qualifying
Performance Share Units under Section 162(m) of the Code, the
Committee shall follow any procedures determined by it from time
to time to be necessary or appropriate to ensure qualification of
the Performance Share Units under Section 162(m) of the Code
(e.g., in determining the Performance Goals and measuring
performance achievement).
<PAGE>
8.4 Award Determination and Calculation. Awards will be determined at the
end of the performance period if a threshold performance level on the
performance conditions of 50% has been achieved. At the time of Award
determination, the actual number of Performance Share Units earned will be
determined, based on achievement of applicable performance goals. The
Committee must determine the performance level achieved and certify in
writing that the performance ratings and other applicable conditions have
been satisfied before Awards can be paid. The actual number of Performance
Share Units that may be earned may range from 50% to 150% of the
established target and may not exceed 375,000 for any one performance
period. Awards will be paid in shares of Common Stock equal to the number
of Performance Share Units that has been earned after the Committee has
approved the Award and any applicable vesting period thereafter has been
satisfied.
8.5 Transferability. Prior to actual payment of Awards, Participants shall
not have the right to sell, transfer, pledge, assign, or otherwise alienate
or hypothecate any rights to Awards. Any attempted disposition thereof
shall be null and void and of no effect.
8.6 Other Conditions. The Committee may impose such other conditions as it
may deem advisable or appropriate in accordance with this Section 8.6.
8.6.1General Conditions. The Committee may set conditions based on
applicable federal or state securities laws or any other basis
determined by the Committee.
8.6.2Termination of Employment. Each Performance Share Unit Agreement
shall provide that any rights to receive shares of Common Stock
upon achievement of performance conditions shall terminate
immediately upon termination of employment for any reason during
the applicable performance and vesting periods; provided,
however, that the Committee may provide that no such termination
shall occur in the event of a termination of employment because
of the Participant's Retirement, Disability or death, in which
event the Committee shall have the discretion to determine
whether and in what amount an Award is payable. Awards determined
by the Committee to be payable upon the Participant's termination
of employment by reason of death shall be paid to the person or
persons to whom the Participant's rights pass by will or by the
laws of descent or distribution. The Committee shall have the
discretion to determine the effect of all matters and questions
relating to termination of employment, including but not by way
of limitation, the question of whether a termination of
employment resulted from a discharge for cause, and all questions
of whether particular leaves of absence constitute termination of
employment.
<PAGE>
9. STOCK APPRECIATION RIGHTS
9.1 Grant of Stock Appreciation Rights. Subject to the terms and provisions
of the Plan, the Committee, at any time and from time to time, may grant
Stock Appreciation Rights to Executive Officers in such amounts as the
Committee, in its sole discretion, shall determine. The Committee shall
determine the number of Stock Appreciation Rights to be granted to each
Participant, provided, however that no one individual may receive a grant
of more than 100,000 Stock Appreciation Rights in any one fiscal year.
9.2 Stock Appreciation Right Award Agreement. Each Award of Stock
Appreciation Rights shall be evidenced by an Award Agreement that shall
specify the number of Stock Appreciation Rights granted, the term, strike
price, exercisability, performance conditions, and such other terms and
conditions as the Committee, in its sole discretion, shall determine.
9.3 Term. The Committee shall determine the stated term of each Stock
Appreciation Right granted under the Plan but no Stock Appreciation Right
shall be exercisable more than six years and one day after the Grant Date.
9.4 Strike Price. Unless provided otherwise by the Committee, the strike
price per share of Common Stock subject to a Stock Appreciation Right shall
be determined by the Committee and set forth in the Award Agreement;
provided however, the strike price shall not be less than the Fair Market
Value of the Common Stock on the Grant Date.
9.5 Exercisability. Stock Appreciation Rights shall be exercisable at such
time or times and subject to such terms and conditions as shall be
determined by the Committee; provided however, that except as provided in
Section 10.1.1, no Stock Appreciation Right shall be exercisable until one
year after the Grant Date, and the Committee may provide that Stock
Appreciation Rights become exercisable in installments.
<PAGE>
9.6 Performance Requirements. The Committee shall establish performance
requirements for exercisability of Stock Appreciation Rights. Performance
requirements may be set based upon achievement of specific performance
objectives (Company-wide, divisional or individual.) For purposes of
qualifying Stock Appreciation Rights as "performance-based compensation"
under Section 162(m) of the Code, the Committee may set performance
requirements based on achievement of Performance Goals. In such case, the
Performance Goals shall be set by the Committee on or before the latest
date permissible to enable the Stock Appreciation Rights to qualify as
"performance-based" compensation under Section 162(m) of the Code and the
Committee shall follow any procedures determined by it from time to time to
be necessary or appropriate to ensure qualification of the Stock
Appreciation Rights under Section 162(m) of the Code. Stock Appreciation
Rights will not be exercisable until the Committee has certified in writing
that the performance requirements have been met and vesting requirements
have been satisfied.
9.7 Settlement. Stock Appreciation Rights may be exercised once the
Committee has certified in writing that the applicable performance
requirements have been met and the applicable vesting requirements have
been satisfied. If otherwise exercisable, Stock Appreciation Rights shall
be automatically exercised on the last day of the term of the Stock
Appreciation Right, provided the Fair Market Value of the Common Stock on
the last day of the term exceeds the applicable strike price of the Stock
Appreciation Right. Upon exercise of a Stock Appreciation Right, a
Participant shall be entitled to receive an amount in shares of Common
Stock equal to (a) the excess of the Fair Market Value on the date of
exercise of one share of Common Stock over the applicable strike price
multiplied by (b) the number of shares of Common Stock in respect of which
the Stock Appreciation Right shall have been exercised. Any amounts that
may be due for fractional shares shall be paid in cash. As soon as possible
after exercise, the Company shall deliver to the Participant (or to one of
the Company's preferred brokers that is designated by the Participant)
share certificates (which may be in book entry form) representing the
shares attributable to the amount due.
9.8 Transferability. No Stock Appreciation Right shall be transferable by a
Participant other than by (a) will or by laws of descent and distribution
or (b) if permitted by the Committee, pursuant to a transfer to the
Participant's Immediate Family member or a trust for the benefit of
Participant's Immediate Family members. All Stock Appreciation Rights shall
be exercisable, subject to the terms of this Plan, only by the Participant,
the guardian or legal representative of the Participant, any person to whom
such Stock Appreciation Right is transferred pursuant to this Section 9.8,
or after the Participant's death, the person to whom the rights to the
Stock Appreciation Right pass by will or by the laws of descent or
distribution.
<PAGE>
9.9 Termination of Employment.A Stock Appreciation Right shall terminate
and may not be exercised if the Participant to whom it is granted ceases to
be continuously employed by the Company, except (subject nevertheless to
the last sentence of this Section 9.9): (a) if the Participant's continuous
employment is terminated for any reason other than (i) Retirement, (ii)
Disability, or (iii) death, the Participant or the Participant's transferee
may exercise the Stock Appreciation Right to the extent that the
Participant was entitled to exercise such Stock Appreciation Right 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 Participant shall die
within the period of three (3) months following the date of such
termination without having exercised such Stock Appreciation Right, the
Stock Appreciation Right may be exercised within a period of one year
following the Participant's death by the Participant's transferee or the
person or persons to whom the Participant's rights under the Stock
Appreciation Right otherwise pass by will or by the laws of descent or
distribution but only to the extent exercisable at the date of such
termination; (b) if the Participant's continuous employment is terminated
by (i) Retirement, (ii) Disability, or (iii) death, the Stock Appreciation
Right 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 Participant or the Participant's transferee, or in the
event of the Participant's death, by the persons to whom the Participant's
rights under the Stock Appreciation Right shall pass by will or by the laws
of descent or distribution; (c) if the Participant's continuous employment
is terminated and within a period of ninety (90) days thereafter the
Participant returns to the active payroll as an employee of the Company,
the Committee may reinstate any portion of the Stock Appreciation Right
previously granted but not exercised. Nothing contained in this Section 9.9
is intended to extend the stated term of the Stock Appreciation Right and
in no event may a Stock Appreciation Right be exercised by anyone after the
expiration of its stated term.
<PAGE>
10. CHANGE-OF-CONTROL PROVISIONS
10.1 Impact. Notwithstanding any other provision of the Plan to the
contrary, unless otherwise provided in an Award Agreement, in the event of
a Change-of-Control:
10.1.1 any Options and Stock Appreciation Rights outstanding as of the
date such Change-of-Control occurs, and which are not then
exercisable and vested, shall become fully exercisable and
vested;
10.1.2 the performance conditions imposed under each Performance Share
Unit Agreement shall lapse, and each Participant shall be
entitled to receive shares of Common Stock equivalent to the
target number of Performance Share Units specified in the
Performance Share Unit Award Agreement.
10.2 Definition of Change-of-Control. For purposes of the Plan, a
"Change-of-Control" shall mean the happening of any of the following
events:
10.2.1 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 35% or more of
either (x) the then outstanding shares of the Company's Common
Stock (the "Outstanding Company Common Stock") or (y) the
combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this Section 10.2.1, the
following acquisitions shall not be deemed to result in a
Change-of-Control: (i) any acquisition directly from the Company,
(ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained
by the Company or any corporation controlled by the Company or
(iv) any acquisition by any corporation pursuant to a transaction
that complies with clauses (i), (ii) and (iii) of Section 10.2.3
below; or
10.2.2 individuals who, as of the date hereof, constitute the Board
(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 Company's
stockholders, 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>
10.2.3 the approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of the
Company 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
stockholders, 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
Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 60%, respectively, of 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 Company or all or substantially all of
the Company'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 Company Common Stock and Outstanding Company 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 Company 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
10.2.4 approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
<PAGE>
10.3 Change-of-Control Price. For purposes of the Plan, "Change-of-Control
Price" means the higher of (a) the highest reported sales price of a share
of Common Stock in any transaction reported on the New York Stock Exchange
during the sixty (60) day period prior to and including the date of the
Change-of-Control; or (b) if the Change-of-Control is the result of a
tender or exchange offer or a Business Combination, the highest price per
share of Common Stock paid in such tender or exchange offer or Business
Combination. To the extent that the consideration paid in any transaction
described above consists all or in part of securities or other noncash
consideration, the value of such securities or other noncash consideration
shall be determined by the Board in its sole discretion.
11. FORFEITURE OF AWARDS
Notwithstanding anything in the Plan to the contrary, the Committee may, in
its sole discretion, in the event of serious misconduct by a Participant
(including, without limitation, any misconduct prejudicial to or in
conflict with the Company) or any termination of employment for cause or in
the event that a Participant terminates Employment for Retirement and
subsequently engages in full-time employment, or any activity of a
Participant in competition with the business of the Company, (a) cancel any
outstanding Award granted to such Participant, in whole or in part, whether
or not vested or deferred, or (b) following the exercise or payment of an
Award within a period specified by the Committee, require such Participant
to repay to the Company any gain realized or payment received upon the
exercise or payment of such Award (with such gain or payment valued as of
the date of exercise or payment). Such cancellation or repayment obligation
shall be effective as of the date specified by the Committee. Any repayment
obligation may be satisfied in Common Stock or cash or a combination
thereof (based upon the Fair Market Value of Common Stock on the date of
payment), and the Committee may provide for an offset to any future
payments owed by the Company to the Participant if necessary to satisfy the
repayment obligation. The determination of whether a Participant has
engaged in a serious breach of conduct or any activity in competition with
the business of the Company shall be determined by the Committee in good
faith and in its sole discretion. This Section 11 shall have no application
following a Change-of-Control.
12. TERM; AMENDMENT AND TERMINATION
12.1 Term of the Plan. The Plan shall be effective as of the Effective Date
and shall remain in effect thereafter until terminated by the Company.
Awards outstanding on the Plan's termination date shall not be affected or
impaired by the termination of the Plan.
<PAGE>
12.2 Amendment. The Board may amend, alter, suspend, discontinue or
terminate the Plan or any portion thereof at any time; provided, however,
that no such amendment, alteration, suspension, discontinuation or
termination (a) shall be made without stockholder approval if such approval
is required by applicable law, regulatory requirement or stock exchange or
accounting rules, or if the Board deems it necessary or desirable to
qualify for or comply with any tax, applicable law, stock exchange,
accounting or regulatory requirement, (b) except as required by applicable
law or stock exchange or accounting rules, shall be made without the
consent of the affected Participant, if such action would impair the rights
of such Participant under any outstanding Award or (c) shall cause an Award
qualified as performance-based compensation under Section 162(m) of the
Code to cease to qualify as such. Notwithstanding anything to the contrary
herein, the Committee or Board may amend or alter the Plan in such manner
as may be necessary so as to have the Plan conform to local rules and
regulations in any jurisdiction outside the United States.
13. GENERAL PROVISIONS
13.1 Representation. The Committee may require each person purchasing or
receiving shares of Common Stock pursuant to an Award to represent to and
agree with the Company in writing that such person is acquiring the shares
without a view to the distribution thereof. The certificates for such
shares may include any legend which the Committee deems appropriate to
reflect any restrictions on transfer.
13.2 Conditions to Company's Obligation to Issue Stock. Notwithstanding any
other provision of the Plan or agreements made pursuant thereto, the
Company shall not be required to issue or deliver any certificate or
certificates for shares of Common Stock under the Plan prior to fulfillment
of all of the following conditions:
13.2.1 Listing or approval for listing upon notice of issuance, of
such shares on the New York Stock Exchange, Inc., or such other
securities exchange as may at the time be the principal market
for the Common Stock;
13.2.2 Any registration or other qualification of such shares of the
Company under any state or federal law or regulation, or the
maintaining in effect of any such registration or other
qualification which the Committee shall, in its absolute
discretion upon the advice of counsel, deem necessary or
advisable; and
13.2.3 Obtaining any other consent, approval, or permit from any state
or federal governmental agency which the Committee shall, in its
absolute discretion after receiving the advice of counsel,
determine to be necessary or advisable.
<PAGE>
13.3 No Limit on Other Arrangements. Nothing contained in the Plan shall
prevent the Company from adopting other or additional compensation
arrangements for its Executive Officers.
13.4 No Repricings/Regrants/Exchanges/Modifications. The Committee may not
grant new Options, Performance Share Units, or Stock Appreciation Rights in
exchange for the cancellation of any other Award made under this Plan or
any other plan of the Company. Other than in connection with a change in
the Company's capitalization as provided in Section 4.3, neither the
Exercise Price of an Option nor the strike price of a Stock Appreciation
Right may be reduced without approval of the Company's stockholders. No
material amendments may be made to the Plan without the approval of the
Company's stockholders.
13.5 No Contract of Employment.The Plan shall not constitute a contract of
employment, and adoption of the Plan shall not confer upon any Participant
or Executive Officer any right to continued employment, nor shall it
interfere in any way with the right of the Company to terminate the
employment of any Participant or Executive Officer at any time.
13.6 Tax Withholding. No later than the date as which an amount first
becomes includible in the gross income of the Participant for federal
income tax purposes with respect to any Award under the