-----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, PqrzJxz3Lt1KRa44V3F4Mo8HXEVrAeeRPVwy8WfTy+EhjGzmTYOeUd5Ubk96rApP an4eJzK3NKu8vjv4ZDf3Zw== /in/edgar/work/20000803/0000070530-00-000010/0000070530-00-000010.txt : 20000921 0000070530-00-000010.hdr.sgml : 20000921 ACCESSION NUMBER: 0000070530-00-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000528 FILED AS OF DATE: 20000803 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL SEMICONDUCTOR CORP CENTRAL INDEX KEY: 0000070530 STANDARD INDUSTRIAL CLASSIFICATION: [3674 ] IRS NUMBER: 952095071 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06453 FILM NUMBER: 685007 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 10-K 1 0001.txt FORM 10K FOR NATIONAL SEMICONDUCTOR CORP 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 28, 2000 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number: 1-6453 NATIONAL SEMICONDUCTOR CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2095071 (State of incorporation) (I.R.S. Employer Identification Number) 2900 SEMICONDUCTOR DRIVE, P.O. BOX 58090 SANTA CLARA, CALIFORNIA 95052-8090 (Address of principal executive offices) Registrant's telephone number, including area code: (408) 721-5000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered Common stock, par value New York Stock Exchange $0.50 per share Pacific Exchange Preferred Stock Purchase Rights New York Stock Exchange Pacific Exchange Securities registered pursuant to Section 12(g)of the Act: None (Title of class) --Continued on next page-- 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 10K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of June 23, 2000, was approximately $12,132,060,350. 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 in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the registrant's common stock, $0.50 par value, as of June 23, 2000, was 178,045,632. DOCUMENTS INCORPORATED BY REFERENCE Document Location in Form 10-K -------- --------------------- Portions of the Proxy Statement for the Annual Part III Meeting of Stockholders to be held on or about September 22, 2000. Portions of the Company's Registration Statement on Part IV Form S-3, Registration No. 33-48935, which became effective October 5, 1992. Portions of the Company's Registration Statement on Part IV Form S-3, Registration No. 33-52775, which became effective March 22, 1994. Portions of the Company's Registration Statement on Part IV Form S-8, Registration No. 333-57029, which became effective June 17, 1998. Portions of the Company's Registration Statement on Part IV Form S-8, Registration No. 33-61381, which became effective July 28, 1995. Portions of the Company's Registration Statement on Part IV Form S-3, Registration No. 33-63649, which became effective November 6, 1995. Portions of the Company's Registration Statement on Part IV Form S-8, Registration No. 333-36733, which became effective September 30, 1997. Portions of the Company's Registration Statement on Part IV Form S-8, Registration No. 333-09957, which became effective August 12, 1996. Portions of Cyrix Corporation's Registration Statement Part IV on Form S-3, Registration No. 333-10669, which became effective August 22, 1996. Portions of the Proxy Statement for the Annual Meeting Part IV held September 26, 1997 Portions of the Company's Post Effective Amendment No. Part IV on Form S-8 to Form S-4 Registration No. 333-38033-01, which became effective November 18, 1997. The Index to Exhibits is located on pages 67-69. PART I ITEM 1. BUSINESS General National Semiconductor Corporation's goal is to be a leader in the emerging market for information appliances. National's strategy is to put systems on a chip for its key trendsetting data highway partners, using its analog expertise as a starting point for forward integration. Throughout this document, National Semiconductor Corporation and its majority-owned subsidiaries may be referred to as National or the company. The company designs, develops, manufactures and markets a wide array of semiconductor products, including a broad line of analog, mixed-signal and other integrated circuits. These products address a variety of markets and applications, including information appliances, personal systems, wireless communications, flat panel and CRT displays, power management, local and wide area networks, automotive, consumer and military aerospace. National was incorporated in the state of Delaware in 1959. In fiscal 1998, National completed a merger with Cyrix Corporation, which was accounted for as a pooling of interests. Cyrix designed, developed and marketed its own x86 software-compatible microprocessors for the personal computer marketplace. The merger provided access to Cyrix's x86 microprocessor cores and combined enabling technologies crucial to the system-on-a-chip strategy. National's focus then shifted toward the consumer segment of the PC market, specifically, the sub-$1,000 PC market with its line of Cyrix M II microprocessors. In this market, which is dominated by two major competitors, the company experienced predatory pricing trends and constant pressure to release new microprocessors with higher operating speeds. As a result, in May 1999 National announced its exit from the Cyrix PC microprocessor business. In September 1999, the company completed the sale of the assets of the Cyrix PC microprocessor business to VIA Technologies, Inc., a Taiwanese company. The sale included the M II x86 compatible microprocessor (including the registered trademark) and successor products. National retained the integrated Media GX microprocessor, which forms the core of the company's new GeodeTM family of solutions for the information appliance market. In December 1999, the company acquired Algorex Inc., a provider of high performance digital signal processing products, architecture and software technologies for the wireless communication market. These technologies are expected to enhance the company's capability in the future to provide complete chipset solutions for the cellular phone and wireless information appliance markets. The acquisition was accounted for using the purchase method of accounting. Products Semiconductors are integrated circuits (in which a number of transistors and other elements are combined to form a more complicated circuit) or discrete devices (such as individual transistors). In an integrated circuit, various components are fabricated in a small area or "chip" of silicon, which is then encapsulated in plastic, ceramic or other advanced forms of packaging and connected to a circuit board or substrate. National manufactures an extensive range of analog intensive, mixed-signal and digital products, which are used in numerous commercial sectors. While no precise industry standard exists for analog and mixed-signal devices, the company considers products which process analog information, convert analog to digital or digital to analog, as analog and mixed-signal devices. The company is a leading supplier of analog and mixed-signal products, serving both broad based markets such as the industrial and consumer market, and more narrowly defined markets such as wireless communications, data processing, ethernet local area networks and personal systems. Its analog and mixed-signal devices include amplifiers and regulators, power monitors and line drivers, audio, video, automotive, display and data acquisition products. Other company products with significant digital to analog or analog to digital capability include products for local area and wireless networking, wireless communications, plus products for personal systems and personal communications, such as input/output offerings. Super I/O is the brand name National uses to describe its integrated circuits that handle system peripheral and input/output functions on the personal computer motherboard. Corporate Structure and Organization. The company is organized by various product line business units that are grouped to form three organizational units: the Analog Group, the Information Appliance Group, and the Network Products Group. Each group is described in the following paragraphs. Beginning in fiscal 2000, certain product line business units that formerly made up the Communications and Consumer Group were reorganized within the three remaining organizational units. Analog Group: Analog products are used to maintain and control continuously variable electrical signals in the real world. They are used in equipment to provide a human interface, such as sound, vision and images, as well as to provide communications interfaces and power management. Analog technology is used to enrich the experience of humans when interacting with electronic applications. The Analog Group develops and manufactures numerous building block products such as high-performance operational amplifiers, power management circuits, data acquisition circuits, interface circuits and circuits targeted toward leading-edge monitor applications such as ultra-thin flat panel displays. The Analog Group's wireless circuits perform the radio, baseband controller, power management and related functions primarily for handsets and base stations in the cellular and cordless telephone markets. With National's leadership in small package technology, the Analog Group is succeeding in high growth markets that require portability, such as cellular telephones and wireless information appliances. It is focused on using its analog expertise as the initial point to integrate systems on a chip aimed at the cellular, personal systems and information appliance markets. Current offerings include scanners on a chip, systems health monitoring and integrated power management systems. The group also uses analog building blocks with its COP8 family of microcontrollers, targeted to communications, automotive and industrial applications. The Analog Group has a large and diverse global customer base, approaching 80,000 customers worldwide. The group is increasing its penetration into the top tier OEM customer base in the wireless and telecommunications sectors and now derives 30 percent of its revenues from this area. Approximately 50 percent of analog revenues are achieved through authorized distributors worldwide. Enhanced Solutions, a business unit that was previously a part of the Communications and Consumer Group, is now a part of the Analog Group for organizational reporting purposes. It has been a supplier of integrated circuits and contract services to the high reliability market, comprised of avionics, defense, space and the federal government, with a broad range of military and space grade products including analog, logic, interface and networking devices. Information Appliance Group: The Information Appliance Group combines the Information Appliance, Advanced I/O, MediamaticsTM and Custom Solutions business units. The group delivers component and system solutions targeted heavily towards the emerging information appliance market. It develops system level hardware and software solutions, based on National's GeodeTM technology. This technology merges complex functionality - processing, system logic, graphics, audio and video decompression - on to one highly integrated device. Built around National's series of x86 microprocessor cores, the GeodeTM Information Appliance system-on-a-chip family is the first commercially available integrated circuit to offer a complete Information Appliance system-on-a-chip. By leveraging the GeodeTM technology with its analog and mixed-signal communications capabilities, the company has developed a complete system solution that will allow users to get information and communicate (by accessing the Internet) in a simpler, more intuitive and user-friendly fashion than is typically experienced with PCs today. The Information Appliance business unit concentrates on three major market segments that include interactive TV set-top boxes (equipped with digital video), enterprise thin clients (computer systems with minimal memory that access software from a centralized server network) and personal information access devices (for the consumer Internet access market) such as WebPADTM. The Advanced I/O business unit provides I/O solutions to the PC motherboard and emerging information appliance markets. It is also directing the integration of analog and advanced technologies, such as security features, for future generations of customers. MediamaticsTM furnishes key video and audio processing technologies, including MPEG capability, required to execute National's information appliance strategy. Target applications include PCs, digital versatile disc players, set top boxes, video servers and convergence appliances. The PanteraTM DVD architecture is the building block for other video and audio decoder products. Custom Solutions, a business unit that was previously part of the Communications and Consumer Group, is now a part of the Information Appliance Group for organizational reporting purposes. It supplies a range of application-specific and standard integrated circuits for targeted customers in the telecommunications, automotive and consumer electronics markets. Network Products Group: The Network Products Group offers a line of Ethernet products that address a range of applications. The majority of network product sales for fiscal 2000 were derived from relatively mature 10/100 Mb products. Utilizing the digital signal processing technology that was initially obtained through the ComCore acquisition, the group has now developed new network products with higher bandwidth applications. These include MACPHYTERTM, a fast Ethernet 10/100Mb device, combined with a media access controller; a GIGPHYTERTM, offering expanded bandwidth (10/100/1000Mbps) that addresses transmission over copper networks; and a DSPHYTERTM, a single 10/100Mbps ethernet transceiver device. The group's current new product development efforts focus on both the wired and wireless home networking markets. Separately from these operating groups, National's corporate structure includes centralized Worldwide Sales and Marketing and a Central Technology and Manufacturing Group. Worldwide Sales and Marketing is structured around the four major regions of the world where the company operates -- the Americas (North and South Americas), Europe, Japan and Asia Pacific -- and unites the company's worldwide sales and marketing organization. CTMG manages all production, including outsourced manufacturing requirements, and technology operations. The technology operations include process technology, which provides pure research and process development necessary for many of the company's core production processes, and initial product prototyping for leading edge products. CTMG provides a range of process libraries, product cores and software that is shared among National's product lines to develop system level solutions. It is also responsible for the selection and usage of common support tools, including integrated computer-aided design for design, layout, simulation and initial test of the logical and physical representations for new products. Segment Financial Information For segment reporting purposes, each of the company's product line business units represent 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 similar economic characteristics have been combined to form three main operating segments that include the Analog segment, the Information Appliance segment and the Network Products segment. Based on the criteria under SFAS 131, only the Analog and the Information Appliance segments are considered reportable segments. The Network Products segment, as well as other business units that did not meet the aggregation criteria to be included in the three main operating segments, is included in "All Others." For further financial information on these segments, refer to the information contained in Note 12, "Segment and Geographic Information," in the Notes to the Consolidated Financial Statements included in Item 8. Marketing and Sales The company markets its products globally to original equipment manufacturers through a direct sales force. Major OEMs include Telefonaktiebolaget L.M. Ericsson, Samsung Group, Motorola, Inc., Siemens AG, Compaq Computer Corporation, as well as Robert Bosch GmbH, International Business Machines Corporation, Hewlett-Packard Company, Nokia Group and Nortel Networks Corporation. In addition to its direct sales force, National uses distributors in its four business regions, and approximately 44 percent of the company's worldwide revenues are channeled through distributors. Sales to distributors include an increasing portion of sales in which a distributor acts as the logistics partner for one or more of the company's OEM customers. In line with industry practices, National generally credits distributors for the effect of price reductions on their inventory of National products and, under specific conditions, repurchases products that have been discontinued by the company. Customer support is handled by comprehensive, central facilities in the United States, Europe and Singapore. These customer support centers respond to inquiries on product pricing and availability, customer technical support requests, order entry and scheduling. National augments its sales effort with application engineers based in the field. These engineers are specialists in National's product portfolio and work with customers to identify and design National integrated circuits into the customers' products and applications. These engineers also help identify emerging markets for new products and are supported by company design centers in the field or at manufacturing sites. Customers National is not dependent upon any single customer, the loss of which would have a material effect on the company. No one customer or distributor accounted for 10 percent or more of total net sales in fiscal 2000, 1999 and 1998. Backlog Semiconductor backlog quantities and shipment schedules under outstanding purchase orders are frequently revised to reflect changes in customer needs. Binding agreements for the sale of specific quantities at specific prices that are contractually subject to price or quantity revisions are, as a matter of industry practice, rarely formally enforced. For these reasons, National does not believe that the amount of backlog at any particular date is meaningful. Seasonality Generally, National is affected by the seasonal trends of the semiconductor and related industries. As a result of these trends, it typically experiences lower revenue in the third fiscal quarter, primarily due to customer holiday demand adjustments. Revenue usually reaches a seasonal peak in the company's fourth fiscal quarter. During fiscal 2000, this trend in order patterns was experienced, but the company nevertheless realized sequential quarterly revenue growth, as business conditions for the semiconductor industry continued to improve throughout the first half of calendar 2000. Manufacturing The design of semiconductor and integrated circuit products is shaped by general market needs and customer requirements. 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. Production of integrated circuits continues with wafer sort, where the wafers are tested and separated into individual circuit devices; assembly, where 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; and final test, where 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. 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. The company conducts product design and development work predominantly in the United States. Wafer fabrication is concentrated in two facilities in the United States and one in Scotland. Nearly all product assembly and final test operations are performed in facilities in Southeast Asia. For capacity utilization and other economic reasons, National employs subcontractors to perform certain manufacturing functions in the United States, Europe, Israel, Southeast Asia and Japan. National's wafer manufacturing processes span Bipolar, Metal Oxide Silicon, Complementary Metal Oxide Silicon and Bipolar Complementary Metal Oxide Silicon technologies. The company is converting its wafer fabrication processes to emphasize integration of analog and digital capabilities to support its strategy to develop system-on-a-chip products. Bipolar processes primarily support National's standard products. As products decrease in size and increase in functionality, National's and its subcontractors' 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 National's manufacturing processes use certain key raw materials critical to its products. These include silicon wafers, certain chemicals and gases, ceramic and plastic packaging materials and various precious metals. National also relies on subcontractors to supply finished or semi-finished products that it then markets through its sales channels. Both raw materials and semi-finished or finished products are obtained from various sources, although the number of sources for any particular material or product is relatively limited. Although National feels its current supply of essential materials is adequate, shortages from time to time have occurred and could occur again. Significant increases in demand, rapid product mix changes or natural disasters can all affect the company's ability to procure materials or goods. Research and Development National's research and development consists of pure research in metallurgical, electro-mechanical and solid state sciences, manufacturing process development and product design. Research functions and development of most process technologies are done by Central Technology and Manufacturing's process technology group. Total company R&D expenses were $386.1 million for fiscal 2000, or 18 percent of sales, compared to $471.3 million for fiscal 1999, or 24 percent of sales, and $482.0 million for fiscal 1998, or 19 percent of sales. These amounts exclude in-process R&D charges of $4.2 million related to the acquisition of Algorex Inc. in fiscal 2000 and $102.9 million related to the acquisitions of ComCore Semiconductor, Inc. ($95.2 million), Future Integrated Systems, Inc. ($2.5 million) and the digital audio technology business of Gulbransen ($5.2 million) in fiscal 1998. The in-process R&D charges are included as a component of special items in the consolidated statements of operations. For fiscal 2000, National expended 21 percent of its R&D spending toward the development of process technology and 79 percent for new product development, a decline in spending of 47 percent and 3 percent, respectively, from 1999, when it spent 33 percent toward process technology and 67 percent for new product development. This shift reflects the company's exit from the Cyrix PC microprocessor business, a concurrent spending reduction in related product and CMOS process development, and management's decision to realign its strategic research and development programs to focus on its analog and information appliance businesses. Patents National owns numerous United States and non-U.S. patents and has many patent applications pending. It considers the development of patents and the maintenance of an active patent program advantageous to the conduct of its business but believes that continued success will depend more on engineering, production, marketing, financial and managerial skills than on its patent program. The company licenses certain of its patents to other manufacturers and participates 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 the agreements are cross-licenses where the company grants broad licenses to its intellectual property in exchange for receiving a license; none are exclusive. The amount of income from licensing agreements has varied in the past and the amount and timing of future income from licensing agreements cannot be precisely forecast. On an overall basis, National believes that none of the license agreements is material to the company in terms of either the royalty payments due or payable or the intellectual property rights granted or received under any such agreement. Employees At May 28, 2000, National employed approximately 10,500 people of whom approximately 4,800 were employed in the United States, 1,300 in Europe, 4,300 in Southeast Asia and 100 in other areas. The company believes that its future success depends fundamentally on its ability to recruit and retain skilled technical and professional personnel. National's employees in the United States are not covered by collective bargaining agreements. The company considers its employee relations worldwide to be favorable. Competition and Risks The Semiconductor Industry The semiconductor industry is characterized by rapid technological change and frequent introduction of new technology leading to more complex and powerful products. The result is a cyclical economic environment generally characterized by short product life cycles, rapid selling price erosion and high sensitivity to the overall business cycle. In addition, both substantial capital and R&D investment are required for development and manufacture of products and processes. The company may experience periodic fluctuations in its operating results because of industry-wide conditions. Fluctuations in Financial Results National's financial results are affected by the business cycles and seasonal trends of the semiconductor and related industries. Shifts in product mix toward, or away from, higher margin products can also have a significant impact on its operating results. As a result of these and other factors, National's financial results can fluctuate significantly from period to period. As an example, the company generated net income in fiscal 2000, but experienced substantial losses in fiscal 1999 and 1998. It also generated net income in fiscal 1993 through 1997, while it incurred losses in fiscal 1989 through 1992. Competition Competition in the semiconductor industry is intense. National competes with a number of major corporations in the high-volume segment of the industry. These include several multinational companies whose semiconductor business may be only part of their overall operations, such as IBM, Motorola, Inc., Koninklijke (Royal) Philips Electronics N.V., NEC Corporation and Toshiba Corporation. National also competes with a large number of corporations that target particular markets such as Linear Technology Corporation, Analog Devices, Inc., Advanced Micro Devices, Inc., LSI Logic Corporation, STMicroelectronics N.V., Intel Corporation and Texas Instruments Incorporated. Competition is based on design and quality of products, product performance, price and service, with the relative importance of such factors varying among products and markets. National currently faces escalating competition in the networking market from both large companies such as Intel and Lucent Technologies Inc., as well as newer companies including Broadcom Corporation and Marvell Technology Group Ltd. With the Cyrix 6x86 and M II products, the company was faced with competition in the personal computer market for socket-seven compatible microprocessor products where companies such as Intel and AMD significantly influence the price and availability of products. There can be no assurance that National will be able to compete successfully in the future against existing or new competitors or that its operating results will not be adversely affected by increased price competition. The company may also compete with several of its customers, particularly customers in the networking and personal systems markets. International Operations National conducts a substantial portion of its operations outside the United States and its business is subject to risks associated with many factors beyond its 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, government changes and U.S. and foreign laws and policies affecting trade and investment. Although it has not experienced any materially adverse effects from its foreign operations as a result of these factors, National has been impacted in the past by one or more of these factors and can be impacted in the future by these. In addition, although the company seeks to hedge its exposure to currency exchange rate fluctuations, its competitive position relative to non-U.S. suppliers can be affected by the exchange rate of the U.S. dollar against other currencies, particularly the Japanese yen. Environmental Regulations National believes that compliance with federal, state and local laws or regulations which have been enacted to regulate the environment has not had, nor will have, a material effect upon the company's capital expenditures, earnings, competitive or financial position. (See Item 3, Legal Proceedings.) In addition to the risks discussed above, further discussion of other risks and uncertainties that may affect the company's business is included in the Outlook section of "Management's Discussion and Analysis" (See Item 7). Geographic Information For information on the geographic areas in which the company operates, refer to the information contained in Note 12, "Segment and Geographic Information," in the Notes to the Consolidated Financial Statements (See Item 8). ITEM 2. PROPERTIES National's principal administrative and research facilities are located in Santa Clara, California. Its principal wafer fabrication and process research and product development and development capabilities are located at the company's plants in South Portland, Maine; Arlington, Texas; and Greenock, Scotland. The company also operates small design facilities in various locations in the U.S. including Calabasas, California; Draper, Utah; Federal Way, Washington; Fort Collins, Colorado; Fremont, California; Grass Valley, California; Iselin, New Jersey; Longmont, Colorado; Nashua, New Hampshire; Newport Beach, California; Norcross, Georgia; Salem, New Hampshire; San Diego, California; San Francisco, California; and Tucson, Arizona and overseas locations including China, Germany, India, Israel, Japan, the Netherlands and the United Kingdom. The company conducts manufacturing in its wafer fabrication facilities located in Arlington, Texas; South Portland, Maine; and Greenock, Scotland. In connection with the company's decision in fiscal 1999 to consolidate its wafer manufacturing operations in Greenock, Scotland, the manufacturing from its 4-inch wafer fabrication facility was consolidated into its 6-inch wafer fabrication facility at the same site. It also moved some of the Greenock production to its manufacturing facility in Arlington, Texas. The closure of the Greenock 4-inch wafer fabrication facility is now expected to be completed by the end of September 2000. As previously announced, National will retain full ownership of the manufacturing facility in Greenock and has ceased its efforts to seek an investor to acquire and operate that facility as an independent foundry business. The company's remaining captive manufacturing capacity and its third-party subcontract manufacturing arrangements are expected to be adequate to supply the company's needs in the foreseeable future. Assembly and test functions are performed primarily in Southeast Asia. These facilities are located in Melaka, Malaysia and Toa Payoh, Singapore. The regional headquarters for National's Worldwide Sales and Marketing are located in Santa Clara, California; Munich, Germany; Tokyo, Japan; and Kowloon, Hong Kong. National maintains local sales offices, sales service centers and design centers in various locations and countries throughout its four business regions. In general, the company owns its manufacturing facilities and leases most of its sales and administrative offices. Notes secured by real estate include two notes assumed as part of the repurchase of the equity interest in the company's Arlington, Texas, facility, which was sold and leased back prior to 1990. Interest on these notes is due semi-annually, principal payments vary and maturities range from March 2001 to March 2002. These notes total $8.8 million of the company's long-term debt as of May 28, 2000. Wafer fabrication capacity utilization for fiscal 2000 was 75 percent compared to 57 percent for fiscal 1999, as demand for analog products improved throughout the year, especially in the cellular and wireless markets. Capacity utilization also reflects lower activity in Maine, particularly during the first half of fiscal 2000 due to the decision to exit the Cyrix PC microprocessor business. The company finished the fourth quarter of fiscal 2000 with 90 percent capacity utilization. ITEM 3. LEGAL PROCEEDINGS In November 1999, the company and the IRS filed a stipulation of settled issue with the United States Tax Court. The stipulation confirms the settlement between the company and the IRS of all outstanding issues relating to a deficiency notice previously issued by the IRS seeking additional taxes for fiscal 1989. The issues giving rise to the additional taxes primarily related to the company's former Israeli operation and the purchase price paid in fiscal 1988 for Fairchild Semiconductor Corporation. The computations of the deficiency for 1989 and any related deficiency liabilities, or refunds, if any, for subsequent years have not been finalized. The IRS is also examining the company's tax returns for fiscal 1994 through 1996. The company believes that adequate tax payments have been made or accrued for all years. On April 22, 1988, the district director of the United States Customs Service, San Francisco, issued a notice of proposed action and a pre-penalty notice to the company alleging underpayment of duties of approximately $19.5 million on merchandise imported from the company's foreign subsidiaries during the period from June 1, 1979 to March 1, 1985. The company filed an administrative appeal in September 1988. On May 23, 1991, the district director revised the Customs action and issued a notice of penalty claim and demand for restoration of duties, reducing the alleged underpayment of duties for the same period to approximately $6.9 million. The company filed an administrative petition for relief in October 1991 and the alleged underpayment was subsequently reduced on April 22, 1994 to approximately $3.6 million. The revised alleged underpayment could be subject to penalties that may be computed as a multiple of the underpayment. The company filed a supplemental petition for relief in October 1994. In March 1998, the assistant commissioner of customs for the office of regulations and rulings issued a decision on the petition, which provided insignificant reductions to the duty amount being sought. In June 1998, the company filed an offer of $1.0 million in compromise of all claims, which was rejected by U.S. Customs. Settlement negotiations are continuing. The company intends to continue to contest the assessments through available avenues for relief if it is not able to resolve the issues with U.S. Customs. On July 1, 1988, the Customs Service liquidated various duty drawback claims previously filed by the company, denying the payment of drawback previously paid to the company and issued bills in the amount of $2.5 million seeking repayment of the accelerated drawback. Timely protests of these liquidations were filed in September 1988. These protests were denied in March 1996. The company is pursuing judicial review of the denial in the Court of International Trade and has paid the denied duties and associated interest totaling $5.2 million, which is a prerequisite to filing a summons with the Court. Settlement negotiations are underway. The company believes that resolution of these Customs matters will not have a material impact on the company's financial position and results of operations. The company has been named to the National Priorities List (Superfund) for its Santa Clara, California site and has completed a remedial investigation/feasibility study with the Regional Water Quality Control Board, acting as agent for the EPA. The company has agreed in principle with the RWQCB to a site remediation plan. The company has also been sued by AMD, which seeks recovery of cleanup costs incurred by AMD in the Santa Clara, California area under the RWQCB remediation orders. AMD alleges that certain contamination for which the RWQCB has found AMD responsible was originally caused by the company. As part of the litigation, the company is seeking to recover from AMD expenses relating to commingled groundwater in an area offsite and downgradient to National's and AMD's superfund sites. In addition to the Santa Clara site, the company has been designated as a potentially responsible party by federal and state agencies with respect to certain sites with which the company may have had direct or indirect involvement. These designations are made regardless of the extent of the company's 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 have been asserted against a number of other entities for the same cost recovery or other relief as was asserted against the company. The company has also retained liability for environmental matters arising from its former operations of Dynacraft, Inc. and the Fairchild business but is not currently involved in any legal proceedings relating to those liabilities. The company accrues costs associated with such matters when they become probable and reasonably estimable. The amount of all environmental charges to earnings, including charges relating to the Santa Clara site remediation, which did not include potential reimbursements from insurance coverage, have not been material during the last three fiscal years. The company believes that the potential liability, if any, in excess of amounts already accrued will not have a material effect on the company's financial position and results of operations. In November 1997, a federal securities class action suit was filed in the California Superior Court, Santa Clara County, by Goodman Epstein on behalf of himself and other Cyrix shareholders. Trial in that case began in June 2000 and on July 11, 2000 a jury returned a verdict in favor of the company and its board of directors. The case arose out of the 1997 merger between Cyrix and the company. The plaintiffs represented a class of approximately 25,000 former Cyrix shareholders who exchanged their Cyrix stock for the company's stock in connection with the merger. Plaintiffs claimed that the company's proxy and prospectus misrepresented material information about the company's ability to manufacture Cyrix microprocessors. Plaintiffs brought their claims under Sections 11 and 12 of the Securities Act of 1933. Another state law claim for breach of fiduciary duty against Cyrix and its directors was dismissed on summary judgment prior to trial. The company does not know at this time if plaintiffs intend to appeal. In January 1999, a class action suit was filed against the company in the California Superior Court, Santa Clara County, by James Harris and other former and present employees claiming damages for personal injury. The complaint alleged that cancer and/or reproductive harm were caused to employees as a result of alleged exposure to toxic chemicals while working at the company. Plaintiffs claim to have worked at the Company's facility in Santa Clara County and/or in Greenock, Scotland. In addition, one plaintiff purports 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. 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. No specific amount of monetary damages is claimed. The company filed demurrers to the initial complaints and has now answered the fifth amended complaint. Only limited discovery has taken place to date. The company intends to defend this action vigorously. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE REGISTRANT * Name Current Title Age Kamal K. Aggarwal (1) Executive Vice President, Central 62 Technology and Manufacturing Group Roland Andersson (2) Senior Vice President and General Manager, 48 Worldwide Marketing and Sales Jean-Louis Bories (3) Executive Vice President and General Manager, 45 Information Appliance Group Patrick J. Brockett (4) Executive Vice President and General Manager, 52 Analog Group John M. Clark III (5) Senior Vice President, General Counsel 50 and Secretary Brian L. Halla (6) Chairman of the Board, President and 53 Chief Executive Officer Donald Macleod (7) Executive Vice President, Finance and 51 Chief Financial Officer Gobi R. Padmanabhan (8) Senior Vice President and General Manager, 54 Network Products Group Richard A. Wilson (9) Vice President, Human Resources 57 * all information as of May 28, 2000 Business Experience During Last Five Years (1) Mr. Aggarwal joined the company in November 1996 as Executive Vice President, Central Technology and Manufacturing Group. Prior to joining the company, Mr. Aggarwal held positions as Vice President, Worldwide Logistics and Customer Service and Vice President, Assembly and Test at LSI Logic Corporation. (2) Mr. Andersson joined the company in October 1983. Prior to becoming Senior Vice President and General Manager, Worldwide Marketing and Sales in January 2000, Mr. Andersson held positions at the company as Vice President and General Manager, Europe, Director of Business Development, Europe, and Director of Sales, Europe. (3) Mr. Bories joined the company in October 1997. Prior to becoming Executive Vice President and General Manager, of the Cyrix Group in January 1999 and of the Information Appliance Group in September 1999, he held the position of Senior Vice President, Core Technology Group. Prior to joining the company, he had held positions at LSI Logic Corporation as Vice President and General Manager, ASIC Division; Vice President, Engineering/CAD; Director, Advanced Methodology; and Director, 500K Program. (4) Mr. Brockett joined the company in September 1979. Prior to becoming Executive Vice President and General Manager, Analog Group in October 1997, he held positions at the company as Executive Vice President, Worldwide Sales and Marketing; President, International Business Group; Corporate Vice President, International Business Group; Vice President, North America Business Center; Vice President and Managing Director, European Operations; and Vice President and Director of European Sales. (5) Mr. Clark joined the company 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. (6) Mr. Halla joined the company in May 1996 as Chairman of the Board, President and Chief Executive Officer. Prior to joining the company, Mr. Halla held positions at LSI Logic Corporation 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. (7) Mr. Macleod joined the company in February 1978. Prior to becoming Executive Vice President, Finance and Chief Financial Officer in June 1995, he held positions as Senior Vice President, Finance and Chief Financial Officer; Vice President, Finance and Chief Financial Officer; Vice President, Financial Projects; Vice President and General Manager, Volume Products - Europe; and Director of Finance and Management Services - Europe. (8) Mr. Padmanabhan joined the company in June 1996. Prior to becoming Senior Vice President and General Manager, Network Products Group in April 1999, he held the position of Senior Vice President, Technology, Research and Development. Prior to joining the company, he had held positions at LSI Logic Corporation as Senior Director, Research and Development; and Director, Research and Development. (9) Mr. Wilson joined the company in February 1996 as Vice President, Human Resources. Prior to joining the company, he held the position of Vice President, Human Resources at MCI Network Services for 5 1/2 years. Executive officers serve at the pleasure of the company's Board of Directors. There is no family relationship among any of the company's directors and executive officers. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS During the past three fiscal years, the company has issued unregistered securities as follows: In connection with a retention arrangement related to the acquisition of ComCore Semiconductor, Inc. in fiscal 1998, the company issued convertible subordinated promissory notes to each of the founding shareholders of ComCore for a total of $15.0 million. As a result of the termination of one of the ComCore founding shareholders, during fiscal 2000 the company issued approximately 247,000 shares of common stock upon conversion of one of the promissory notes. The remaining notes for a total $10 million are noninterest-bearing and are due the earlier of either the date of termination of the employee or May 2001. Each note is convertible, in whole or in part, into shares of the company's common stock on the maturity date or within 30 days thereafter, based on an initial conversion price of $16.1875. The notes (and underlying shares issued upon conversion of the notes to the shareholder) were issued under the private placement exemption of section 4(2) of the Securities Act. The underwriters were involved in the ComCore acquisition. See information appearing in Notes 6, Debt; Note 8, Shareholders' Equity; and Note 14, Financial Information by Quarter (Unaudited) in the Notes to the Consolidated Financial Statements included in Item 8. The Company's 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 21, 2000 was $42.25. At July 21, 2000, the number of record holders of the Company's common stock was 8,845. 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
Years Ended May 28, May 30, May 31, May 25, May 26, In Millions, Except Per Share Amounts 2000 1999 1998 1997 1996 ----------- ------------ ----------- ---------- ----------- OPERATING RESULTS Net sales $2,139.9 $1,956.8 $2,536.7 $2,684.4 $2,833.4 Operating costs and expenses 1,798.0 3,043.1 2,683.6 2,692.1 2,619.3 ----------- ------------ ----------- ---------- ----------- Operating income (loss) 341.9 (1,086.3) (146.9) (7.7) 214.1 Interest income (expense), net 15.3 (2.2) 22.3 6.1 9.4 Other income, net 285.3 3.1 24.9 18.7 47.5 ----------- ------------ ----------- ---------- ----------- Income (loss) before income taxes and extraordinary item 642.5 (1,085.4) (99.7) 17.1 271.0 Income tax expense (benefit) 14.9 (75.5) (1.1) 15.5 70.0 ----------- ------------ ----------- ---------- ----------- Income (loss) before extraordinary item $627.6 $(1,009.9) $(98.6) $1.6 $201.0 =========== ============ =========== ========== =========== Net income (loss) $620.8 $(1,009.9) $(98.6) $1.6 $201.0 =========== ============ =========== ========== =========== Net income (loss) used in basic earnings per share calculation (reflecting preferred dividends, if applicable): Income (loss) before extraordinary item $627.6 $(1,009.9) $(98.6) $1.6 $195.4 =========== ============ =========== ========== =========== Net income (loss) $620.8 $(1,009.9) $(98.6) $1.6 $195.4 =========== ============ =========== ========== =========== Netincome (loss) used in diluted earnings per share calculation (reflecting adjustment for interest on convertible notes when dilutive, if applicable): Income (loss) before extraordinary item $627.6 $(1,009.9) $(98.6) $1.6 $201.0 =========== ============ =========== ========== =========== Net income (loss) $620.8 $(1,009.9) $(98.6) $1.6 $201.0 =========== ============ =========== ========== =========== Earnings (loss) per share: Income (loss) before extraordinary item: Basic $3.62 $(6.04) $(0.60) $0.01 $1.35 =========== ============ =========== ========== =========== Diluted $3.27 $(6.04) $(0.60) $0.01 $1.30 =========== ============ =========== ========== =========== Net income (loss): Basic $3.58 $(6.04) $(0.60) $0.01 $1.35 =========== ============ =========== ========== =========== Diluted $3.24 $(6.04) $(0.60) $0.01 $1.30 =========== ============ =========== ========== =========== Weighted-average common and potential common shares outstanding: Basic 173.6 167.1 163.9 156.1 145.0 =========== ============ =========== ========== =========== Diluted 191.7 167.1 163.9 159.1 154.3 =========== ============ =========== ========== ===========
Years Ended May 28, May 30, May 31, May 25, May 26, In Millions, Except Per Share Amounts 2000 1999 1998 1997 1996 ----------- ------------ ----------- ---------- ----------- - ---------------------------------------------------------- ----------- ----------- ----------- ---------- ----------- FINANCIAL POSITION AT YEAR-END Working capital $839.9 $324.2 $514.6 $911.6 $647.7 Total assets $2,382.2 $2,044.3 $3,100.7 $3,210.8 $2,911.3 Long-term debt $48.6 $416.3 $390.7 $460.5 $412.8 Total debt $80.0 $465.6 $444.6 $475.9 $454.4 Shareholders' equity $1,643.3 $900.8 $1,858.9 $1,871.7 $1,723.2 - ---------------------------------------------------------- ----------- ----------- ----------- ---------- ----------- OTHER DATA Research and development $386.1 $471.3 $482.0 $404.5 $379.0 Capital additions $169.9 $303.3 $622.0 $605.6 $707.7 Number of employees (in thousands) 10.5 11.6 13.0 12.8 20.7 - ---------------------------------------------------------- ----------- ----------- ----------- ---------- -----------
National has paid no cash dividends on its common stock in any of the years presented above. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and notes thereto: Results of Operations The company recorded net sales of $2.1 billion in fiscal 2000 compared to $2.0 billion in fiscal 1999 and $2.5 billion in fiscal 1998. The growth in sales for fiscal 2000 over fiscal 1999 was primarily attributable to improvement in market conditions for the semiconductor industry. As a result, the company continued to experience better than expected growth in new orders in all regions. The decline in sales for fiscal 1999 from sales in fiscal 1998 was caused by significant price reductions in the Cyrix PC microprocessor line of products combined with the lack of successful new product introductions from the Network Products Group. Lower sales were also heavily driven by a general slowdown in new orders the company experienced, particularly in the first half of fiscal 1999. The company recorded net income of $620.8 million compared to net losses of $1.0 billion in fiscal 1999 and $98.6 million in fiscal 1998. The increase in net income was driven by improved operating results, reflecting the effects of the company's decision to exit the Cyrix PC microprocessor business, the growth in sales of non-PC microprocessor products and the benefits of cost reduction actions that were announced in May of fiscal 1999. Special items and certain other net gains also contributed to the improvement in fiscal 2000 net income. For fiscal 2000, net income included special items of $55.3 million. The special items included a $26.8 million gain from the sale of assets of the Cyrix PC microprocessor business (See Note 3), a $4.2 million in-process research and development charge related to the acquisition of Algorex Inc. (See Note 4), a credit of $14.7 million related to restructuring of operations (See Note 3) and an $18.0 million credit related to an indemnity agreement with Fairchild Semiconductor that expired in March 2000 (See Note 5). In addition to these special items, net income included a $270.7 million gain from the sale of shares of Fairchild stock held by the company and an extraordinary loss of $6.8 million (net of taxes of $0.4 million). The shares of Fairchild stock were sold as part of an initial public offering and a secondary offering that Fairchild completed in August 1999 and February 2000, respectively. The extraordinary loss was recorded in connection with the redemption of the company's 6.5 percent convertible subordinated notes due 2002 (See Note 6). The loss in fiscal 1999 included $700.9 million attributable to special charges for restructuring of operations. The remaining loss was primarily driven by lower sales and margin erosion mainly due to lower factory utilization and price reductions, particularly in the Cyrix PC microprocessor products. The restructuring charges in fiscal 1999 included $689.6 million related to the company's decision in May 1999 to exit the Cyrix PC microprocessor business and $23.0 million related to the consolidation of the wafer manufacturing operations in Greenock, Scotland (See Note 3). These amounts were partially offset by a credit of $11.7 million from reserves that were no longer required related to prior restructure actions completed during the year. In addition to the restructure charges, fiscal 1999 operating results included $55.1 million in charges related to the exit of the Cyrix PC microprocessor business. The charges included $9.0 million against sales for product returns, $43.6 million included in cost of sales for the write down of Cyrix microprocessor inventory and $2.5 million included in selling, general and administrative expenses for accounts receivable allowances. A $48.6 million charge for costs associated with the termination of a wafer manufacturing and marketing agreement between Cyrix and IBM (See Note 11) was also included in cost of sales for fiscal 1999. Sales The increase in overall sales for the year was a result of significantly higher volumes, which more than offset lower average selling prices experienced across the company's product offerings. Sales growth, excluding the Cyrix PC microprocessor products, was 20 percent over sales for fiscal 1999. The following discussion is based on the company's operating segments described in Note 12 of the consolidated financial statements. The Analog segment, whose sales now represent 71 percent of the company's total sales, drove the growth in sales. In fiscal 2000, analog product sales grew 30 percent over sales for fiscal 1999. This growth was driven by significantly higher unit volume, but was partially offset by lower average selling prices from ongoing price erosion and a changing mix of products. Sales were particularly strong in the wireless cellular markets, led by application-specific wireless communications products, amplifiers and power management products, which all grew more than 62 percent over sales for fiscal 1999. Sales in fiscal 2000 for the Information Appliance segment, excluding the Cyrix PC microprocessor unit, grew by 18 percent over sales for fiscal 1999 due to higher volume, offset partially by lower average selling prices. Selling prices were impacted by strong competition and efforts to gain market share, as the group focused on information appliance partners in the set-top box, webpad and thin client markets. This represents a shift from fiscal 1999, when PC-related markets were the primary focus for information appliances. Network product sales declined in fiscal 2000 by 22 percent from sales for fiscal 1999. Although the company introduced new products employing new digital signal processing technology in the second half of the fiscal year, minimal shipments of these new products and decreasing demand for mature ethernet products contributed to the sales decline. The decrease in unit shipments more than offset marginal increases in average selling prices for network products. Fiscal 2000 sales increased in all geographic regions compared to sales in fiscal 1999, which included Cyrix PC microprocessor product sales. The increases were 40 percent for Japan, 12 percent for Europe, 8 percent for the Asia Pacific region and 3 percent for the Americas. Foreign currency exchange rate fluctuation had minimal impact on sales since the favorable effect from the Japanese yen was offset by the unfavorable effect experienced as the dollar strengthened against most European currencies. Sales for fiscal 2000 as a percentage of total sales increased to 25 percent and 9 percent for Europe and Japan, respectively, while it declined to 36 percent for the Americas and 30 percent for the Asia Pacific region. The overall decline in sales for fiscal 1999 from sales for fiscal 1998 was primarily caused by price erosion that affected average selling prices in most of the company's product areas. Sales in fiscal 1999 for analog products declined by 13 percent from fiscal 1998 sales. General weakness experienced by the company in the PC and communications related markets contributed to the decline in sales for the company's analog products, particularly sales in the first half of the year. Industry-wide excess capacity forced average analog selling prices to decline over the year, which more than offset increased unit shipments. Despite the overall decline in sales for analog products, sales within Analog for application-specific wireless communications products grew by 8 percent over fiscal 1998 sales. This growth was driven by higher unit volume with some modest price declines. Sales for network products in fiscal 1999 declined 59 percent from fiscal 1998 sales, as the company continued to experience declining shipments in its existing mature portfolio of ethernet products. The company's failure to introduce successful new network products since the second half of fiscal 1998 was the primary cause of the sharp drop in fiscal 1999 sales for network products. Cyrix PC microprocessor sales also declined by 21 percent from fiscal 1998 sales. Significant price reductions in the Cyrix PC microprocessor products caused the decline in Cyrix sales, despite a unit volume increase. Highly competitive pricing trends and higher-speed microprocessor offerings by competitors negatively impacted average selling prices of Cyrix microprocessors. The decline in sales for information appliance products was also driven by the general weakness experienced during the year in the PC and communications related markets. Sales of integrated microprocessors and certain other PC-related peripheral products declined 40 percent in fiscal 1999 from fiscal 1998 as a result of a decrease in both units and prices. Although integrated microprocessors are now targeted at a variety of information appliance applications, historically, the vast majority of sales of integrated microprocessors through the end of fiscal 1999 has been achieved through PC products, such as sub-$1,000 desktop PCs and lower-cost notebook PCs. Compared to sales in fiscal 1998, fiscal 1999 sales decreased in all geographic regions. The decreases were 33 percent for the Americas, 25 percent for Japan, 21 percent for Europe and 7 percent for the Asia Pacific region. As the dollar strengthened against the Japanese yen, the dollar value of foreign currency denominated sales had an unfavorable effect on sales in Japan. This was offset by a generally favorable effect experienced in Europe. As a result, foreign currency exchange rate fluctuation had minimal effect on the overall decrease in sales. For fiscal 1999, sales as a percentage of total sales increased to 31 percent for the Asia Pacific region and declined to 38 percent for the Americas, while it remained constant at 24 percent for Europe and 7 percent for Japan. Gross Margin Gross margin as a percentage of sales increased to 46 percent in fiscal 2000 from 21 percent in fiscal 1999 and 35 percent in fiscal 1998. Excluding the effect of charges in fiscal 1999 related to the IBM contract termination of $48.6 million and the write down of Cyrix microprocessor inventory of $43.6 million related to the exit of the Cyrix PC microprocessor business, gross margin for fiscal 1999 was 26 percent. The increase in gross margin for fiscal 2000 was driven primarily by improved product mix, as Cyrix PC microprocessor sales were replaced by higher-margin analog product sales, and by increased factory utilization, particularly at the Arlington and Greenock manufacturing facilities. Wafer fabrication capacity utilization for fiscal 2000 was 75 percent compared to 57 percent for fiscal 1999. This reflects lower activity in Maine, particularly during the first half of the fiscal year due to the decision to exit the Cyrix PC microprocessor business. Excluding the effect of Maine, wafer fabrication capacity utilization for fiscal 2000 was 85 percent. As production activity in Maine began to ramp back up in the second half of fiscal 2000, factory utilization reached 94 percent by the end of the fiscal year. The reduction in depreciation expense associated with the impairment losses recorded in May 1999 on capital assets in Maine also contributed to the overall improvement in gross margin. For fiscal 1999, the primary factors contributing to the decline in gross margin from fiscal 1998 were lower factory utilization combined with price erosion, particularly in the Cyrix PC microprocessor products. Lower wafer fabrication capacity utilization for fiscal 1999 of 57 percent compared to 76 percent for fiscal 1998, was primarily caused by running manufacturing facilities (except those located in Maine) at reduced capacity utilization rates during most of the year in order to manage inventory levels and control costs. Capacity utilization in Maine reached 92 percent in the third quarter of fiscal 1999, as the IBM action enabled the company to ramp up its own microprocessor manufacturing and more fully utilize the capacity available in its Maine wafer fabrication facility. However, capacity utilization in Maine significantly declined in the fourth quarter of fiscal 1999, falling to 34 percent by the end of the fiscal year, as a result of the decision to exit the Cyrix PC microprocessor business. Additional expenses of approximately $35.6 million associated with consolidating the Greenock capacity and transferring related processes to the company's other manufacturing facilities also unfavorably affected gross margin. Research and Development Research and development expenses in fiscal 2000 were $386.1 million, or 18 percent of sales, compared to $471.3 million in fiscal 1999, or 24 percent of sales, and $482.0 million in fiscal 1998, or 19 percent of sales. The fiscal 2000 and 1998 amounts exclude $4.2 million and $102.9 million, respectively, for in-process R&D charges related to acquisitions. The in-process R&D charges are included as a component of special items in the consolidated statements of operations. Exiting from the Cyrix PC microprocessor business allowed the company to reduce fiscal 2000 R&D spending for product development, as well as the underlying advanced CMOS process development spending. The company continues to invest resources to develop new cores and integrate those cores with its other technological capabilities to create system-on-a-chip products aimed at the emerging information appliance market. It also continues to invest in the development of new analog and mixed-signal technology-based products for applications in the wireless communications, personal systems and consumer markets, as well as in the process technologies needed to support those products. For fiscal 2000, the company devoted approximately 79 percent of its R&D effort towards new product development and 21 percent towards the development of process technology. This represents a decrease from fiscal 1999 of 3 percent and 47 percent in spending for new product development and process technology, respectively. The decline in R&D expenses in fiscal 1999 from fiscal 1998 resulted from the company's ability to manage expenses to more closely align spending with business conditions at the time. A significant portion of R&D expenses had been directed towards developing Cyrix microprocessor-based products and advanced sub-micron processes necessary for manufacturing high-performance PC microprocessors. Selling, General and Administrative Selling, general and administrative expenses in fiscal 2000 were $312.3 million, or 15 percent of sales, compared to $317.4 million in fiscal 1999, or 16 percent of sales, and $353.2 million in fiscal 1998, or 14 percent of sales. The reduction in fiscal 2000 expenses reflects the benefits achieved from the cost reduction actions announced in May 1999. These cost savings were partially offset by an increase in fiscal 2000 of payroll and employee benefit expenses. The comparable fiscal 1999 expenses also included recoveries derived from service fees paid by Fairchild Semiconductor under a transition services agreement entered into when the company completed its disposition of Fairchild. There is no such recovery reflected in expenses for fiscal 2000, since that agreement terminated during fiscal 1999. The decrease in fiscal 1999 expenses from fiscal 1998 reflects the effect of certain actions taken by the company in late fiscal 1998 to reduce its overall cost structure in response to weakened business conditions experienced at that time. Restructuring of Operations During fiscal 2000, the company recorded credits of $14.7 million related to the reduction of certain restructure reserves that were no longer required and the final disposition of equipment from the closure of the Santa Clara wafer fabrication facility. Other activity during fiscal 2000 related to the restructuring actions that were undertaken during fiscal 1999 and 1998 is described in Note 3 of the Notes to Consolidated Financial Statements. Charge for Acquired In-Process Research and Development In connection with the acquisition of Algorex Inc. in fiscal 2000, $4.2 million of the total purchase price was allocated to the value of in-process R&D. In connection with the acquisitions during fiscal 1998 of ComCore Semiconductor, Inc., Future Integrated Systems, Inc. and the digital audio technology business of Gulbransen, Inc., $95.2 million, $2.5 million and $5.2 million, respectively, of each total purchase price was allocated to the value of in-process R&D. These amounts were determined through established valuation techniques used in the high-technology industry and were expensed upon acquisition because technological feasibility had not been established and no alternative uses existed for the technologies. Algorex was a provider of high performance digital signal processing products, architecture and software technologies for the wireless communication markets. National expects these technologies to enhance its capability in the future to provide complete chipset solutions for the cellular phone and wireless information appliance markets. ComCore was a designer of integrated circuits for computer networking and broadband communications that used mathematical techniques combined with advanced digital signal processing and customized design methodologies to create high-performance communications integrated circuits. ComCore was acquired in order to add advanced design and technology capabilities to the company's existing analog, mixed-signal and digital expertise. FIS supplied graphics hardware and software products for the PC market. FIS was acquired for its design expertise to enhance the company's ability to integrate advanced graphics capabilities into system-on-a-chip solutions for the personal computer market. The Gulbransen audio compressor technology was acquired to provide digital audio building blocks for system-on-a-chip solutions. In each acquisition, the fair value of the in-process R&D was based on discounted projected net cash flows expected to be derived after successful completion of the R&D projects underway. Estimates of future cash flows from revenues were based primarily on market growth assumptions, lives of underlying technologies and the company's expected share of market. Gross profit projections were based on the company's experience with products that were similar in nature or products sold into markets with similar characteristics. Estimated operating expenses, income taxes and capital charges were deducted from gross profit to determine net operating income for the in-process R&D projects. Operating expenses were estimated as a percentage of revenue and included sales and marketing expenses and development costs to maintain the technology once it has achieved technological feasibility. The company discounted the net cash flows of the in-process R&D projects using probability adjusted discount rates that approximated the overall rate of return for each acquisition as a whole and reflected the inherent uncertainties surrounding the development of in-process R&D projects. Interest Income and Interest Expense For fiscal 2000, the company earned net interest income of $15.3 million, compared to net interest expense of $2.2 million for fiscal 1999 and net interest income of $22.3 for fiscal 1998. Net interest income in fiscal 2000 was the result of both higher cash balances and higher interest rates, combined with a decrease in interest expense. The decrease in interest expense was mainly due to the redemption of the $258.8 million 6.5 percent convertible subordinated notes, which were repaid in November 1999. Net interest expense in fiscal 1999 compared to net interest income in fiscal 1998 was primarily attributable to less interest earned from slightly lower rates on lower average cash balances while interest expense was relatively consistent, as average debt balances remained unchanged. In addition, the company capitalized $0.4 million of interest associated with capital expansion projects in fiscal 1999 compared to $4.9 million in fiscal 1998. There was no interest capitalized in fiscal 2000. Other Income, Net Other income, net was $285.3 million for fiscal 2000, compared to $3.1 million for fiscal 1999 and $24.9 million for fiscal 1998. For fiscal 2000, this included a net gain of $272.5 million from equity investments, $11.5 million of net intellectual property income and other miscellaneous income of $1.3 million. Net intellectual property income for fiscal 2000 related primarily to two significant licensing agreements. This compares to fiscal 1999, which included $11.3 million of net intellectual property income related primarily to a single significant licensing agreement and a $0.1 million net loss from equity investments. These amounts were offset by a $7.0 million settlement of disputes involving intellectual property rights and other miscellaneous expenses of $1.1 million. For fiscal 1998, other income, net included $15.7 million of net intellectual property income related to a single significant licensing agreement, as well as smaller ongoing royalty receipts, a $10.3 million net gain from equity investments and other miscellaneous expenses of $1.1 million. Income Tax Provision/Benefit The company recorded income tax expense of $14.9 million in fiscal 2000, compared to income tax benefits in fiscal 1999 and 1998 of $75.5 million and $1.1 million, respectively. The effective tax rate for fiscal 2000 was 2 percent compared to effective tax rates of approximately 7 percent and 1 percent for fiscal 1999 and 1998, respectively. The tax rate in fiscal 2000 is less than the federal statutory rate due primarily to the reduction in U.S. taxable income from the utilization of net operating loss carryovers. Realization of net deferred tax assets ($130.0 million at May 28, 2000) is primarily dependent on the company's ability to generate future U.S. taxable income. Management believes that it is more likely than not that forecasted U.S. taxable income will be sufficient to utilize these tax assets. However, there can be no assurance that the company will meet its expectations of future U.S. taxable income. Foreign Operations The company's 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 the company to risk from exchange rate fluctuations. The company's exposure from expenses at foreign manufacturing facilities is concentrated in pound sterling, Singapore dollar and Malaysian ringgit. Where practical, net non-U.S. dollar denominated asset and liability positions are hedged using forward exchange and purchased option contracts. The company's exposure from foreign revenue is limited to the Japanese yen and the euro. The company hedges 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. Financial Market Risks The company is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks, the company uses derivative financial instruments. The company does not use derivative financial instruments for speculative or trading purposes. Due mainly to the short-term nature of the major portion of the company's investment portfolio, the fair value of the company's investment portfolio or related income would not be significantly impacted by either a 100 basis point increase or decrease in interest rates. An increase in interest rates would benefit the company due to the large net cash position. An increase in interest rates also would not increase interest expense due to the fixed rates of the company's debt obligations. A substantial majority of the company's revenue and capital spending is transacted in U.S. dollars. However, the company enters into these 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, the company has established revenue and balance sheet hedging programs. The company's hedging programs reduce, but do not always eliminate, the impact of foreign currency exchange rate movements. Adverse change (defined as 15 percent in all currencies) in exchange rates would result in a decline in income before taxes of less than $10 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, such changes typically affect the volume of sales or the foreign currency sales price as competitors' products become more or less attractive. The company's 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 the company's balances as of May 28, 2000. Financial Condition As of May 28, 2000, cash and short-term investments increased to a total $849.9 million from a total $525.9 million at May 30, 1999. Cash generated from operating activities was $399.7 million, an increase over $226.1 million in fiscal 1999 and $280.8 million in fiscal 1998. Net income primarily contributed to this increase. Although operating cash was positively affected by net income earned in fiscal 2000, it was negatively impacted by changes in working capital. The negative effect from changes in working capital was attributable to increases primarily in receivables and in inventories due to higher sales and increased demand. Investing activities generated cash of $207.5 million in fiscal 2000 compared to cash used of $317.2 million in fiscal 1999 and $753.6 million in fiscal 1998. Proceeds of $286.0 million from the sale of Fairchild stock was the primary source of cash from investing activities. Proceeds of $75.0 million from the sale of the Cyrix PC microprocessor business also contributed to cash from investing activities. These proceeds were partially offset by the company's investment in property, plant and equipment of $169.9 million. This compares to cash used in investing activities in fiscal 1999 and fiscal 1998, which was primarily for capital expenditures of $303.3 million and $622.0 million, respectively. Lower capital expenditures in fiscal 1999 from fiscal 1998 were driven by significantly reduced spending for the Maine wafer fabrication facility, which was essentially completed by the end of calendar 1998, and management's effort to control the overall level of capital expenditures in response to then weakened business conditions. Financing activities used cash of $247.1 million in fiscal 2000, compared to providing cash of $49.0 million in fiscal 1999 and $18.2 million in fiscal 1998. A total of $380.5 million was used to repay debt in fiscal 2000. This included payment of $265.8 million to redeem the company's 6.5 percent convertible subordinated notes. Debt repayment was partially offset by the receipt of $133.4 million from the issuance of common stock under employee benefit plans. In fiscal 1999, the primary contributors to cash generated by financing activities included the proceeds of a $67.5 million drawdown on new equipment loans and $28.0 million from the issuance of common stock under employee benefit plans. Those amounts were partially offset by $56.5 million of general debt repayment. In fiscal 1998, cash provided by financing activities included proceeds of a $100.4 million drawdown on new and existing equipment loans and $63.2 million from the issuance of common stock under employee benefit plans. Those amounts were offset by the $126.4 million redemption of substantially all of the Cyrix 5.5 percent convertible subordinated notes and $19.0 million of other general debt repayment. Management foresees substantial cash outlays for plant and equipment throughout fiscal 2001, with primary focus on capacity expansion in its wafer manufacturing and assembly and test facilities, based on expected future unit volume increases. As a result, the fiscal 2001 capital expenditure level is expected to be significantly higher than the fiscal 2000 level. Existing cash and investment balances, together with existing lines of credit, are expected to be sufficient to finance planned fiscal 2001 capital investments. Recently Issued Financial Accounting Standards In June 1999, the Financial Accounting Standards Board deferred the effective date for adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. The company is presently analyzing this statement and has not yet determined its impact on the company's consolidated financial statements. The company is required to adopt this statement by the first quarter of fiscal 2002. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. The staff accounting bulletin summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The staff accounting bulletin is effective beginning in the fourth quarter of fiscal 2001 and is not expected to have any material impact on the company's consolidated financial statements. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25. Interpretation No. 44 clarifies the application of Opinion 25 for the definition of an employee for purposes of applying Opinion 25, the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. The interpretation is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The company believes that this interpretation will not have a material impact on the company's consolidated financial statements. Year 2000 Readiness Program The company completed its transition from calendar year 1999 to 2000 with no reported significant impact to operations. The company terminated its formal year 2000 program after its systems, facilities and products successfully transitioned the February 29 leap year date. Year 2000 project costs and resource consumption incurred through fiscal 2000 totaled approximately $19 million. Approximately 40 percent of those costs were related to internal staff costs, with the remaining 60 percent for hardware and software upgrade costs that were incremental to ongoing operating expenses. Internal staff that were dedicated to the year 2000 project, either full time or part time, have been redeployed to other areas of focus, such as e-commerce. Outlook The statements contained in this outlook section and within certain sections of management's discussion and analysis are forward-looking based on current expectations and management's estimates. Actual results may differ materially from those set forth in these forward-looking statements. The semiconductor industry is characterized by rapid technological change and frequent introduction of new technology leading to more complex and more integrated products. The result is a cyclical environment with short product life, price erosion and high sensitivity to the overall business cycle. In addition, substantial capital and R&D investment are required to support products and manufacturing processes. As a result of these industry conditions, the company has experienced in the past and may experience in the future periodic fluctuations in its operating results. The company's strategy is to put systems on a chip for its key trendsetting data highway partners, using its analog expertise as a starting point for forward integration. As a result of this focus, the company expects to grow at or above market rates of growth in particular segments of the analog, mixed-signal and information appliance markets. Market conditions for the semiconductor industry improved throughout the fiscal year. The company experienced better than expected sequential quarterly sales growth as new orders continued to strengthen. The analog business was especially healthy, particularly in the cellular markets where sales of amplifier, power management and application-specific wireless products were strong. The company believes its business in these areas will continue to grow and anticipates this improvement to continue into fiscal 2001. However, the company faces the risk that the current improvement in the semiconductor industry may be short-lived. Unless there is continued improvement in new orders, the company may be unable to attain the level of revenue growth expected for fiscal 2001 and operating results will be unfavorably affected. The company derives a significant portion of its revenue from products for the wireless handset market. A decline in the rate of growth for this specific market may also have an unfavorable impact on the company's future revenue and results of operations. The overall rate of orders and product pricing may also be affected by continued and increasing competition and by market growth rates in the personal computer, communication and networking areas. The company also continues to devote efforts to develop new network products in order to regain its market position. Although new products employing new digital signal processing technology were introduced in the second half of fiscal 2000, there have been minimal shipments of these products to date. The company anticipates that these new products will begin generating sales in the first half of fiscal 2001. Lack of customer acceptance of products and unforeseen obstacles or schedule delays with additional product development may affect the company's sales and results of operations. While business conditions and overall market pricing have a major influence on gross margin, the company's planned expansion of manufacturing capacity, improvements in manufacturing efficiency and the introduction of new products are expected to result in future gross margin improvement. Future gross margin improvement is also predicated on increased new order rates of higher-margin multi-market analog products. Future gross margin is also affected by wafer fabrication capacity utilization. Although management expects to more fully utilize its existing wafer capacity, this expectation is based on continued improvement in new orders, as well as increasing sales volumes. Future gross margin will also be affected by the successful completion of the closure of the 4-inch wafer fabrication facility in Greenock, Scotland and transfer of that manufacturing into the 6-inch wafer fabrication facility on the same site, as well as to other National facilities. The company currently expects wafer manufacturing activity in the 4-inch wafer fabrication facility to cease by the end of September 2000 and all other actions associated with the closure to be completed shortly thereafter. Until the closure is completed, the company may be unable to benefit fully from the impact of the related manufacturing cost reductions. Future gross margin will also be affected by the company's ability to fill the available capacity in its 8-inch wafer fabrication facility in Maine, where wafer starts were significantly reduced due to the company's decision in May 1999 to exit the Cyrix PC microprocessor business. Although the company had been seeking a third party to partner with National in owning and operating the Maine facility, it is no longer pursuing such an arrangement. Subsequent to the end of fiscal 2000, the company entered into a licensing agreement with Taiwan Semiconductor Manufacturing Company to gain access to a variety of its advanced sub-micron processes for use in the Maine facility, if and when those processes are fully developed. National is currently utilizing its own process technology in Maine and this arrangement will enable National to ultimately gain access down to TSMC's 0.10-micron process technology. These advanced process technologies are expected to accelerate the development of high performance digital and mixed-signal products for the information appliance, wireless and networking markets. There can be no assurance that TSMC will successfully develop all of the processes provided for in the agreement. Lack of adequate process technology would have an adverse impact on the long-term capability of the Maine facility. The company is currently pursuing a number of actions to increase the capacity utilization in the Maine wafer fabrication facility. The increase is expected to come from both internal need as well as third-party foundry opportunities. Although revenue from third-party foundry arrangements was not significant during fiscal 2000, the company expects total revenue from this source to grow in fiscal 2001. Total foundry revenue achieved will depend upon the amount of unutilized capacity available and the level of external demand for foundry production. There can be no assurance that external demand for foundry production would not be adversely affected by other outside foundry operations including TSMC in the event they experience available capacity. The company expects to use this foundry business to balance the level of manufacturing activity in Maine, while also considering the service needs of its foundry customers. Management believes that it will be able to successfully increase the manufacturing level in Maine. However, under-utilization of capacity in Maine will have an unfavorable impact on future gross margin. The company's focus is to continue to introduce new products, particularly more highly integrated system-on-a-chip products and higher-margin analog products that are targeted towards wireless communication and information appliances. So far, the market for information appliances has grown slower than expected. Despite the fact that the company's information appliance products have received acceptance for design into numerous customer product development projects, volume demand for these products has not yet materialized to contribute any significant level of revenue. If the development of new products is delayed or market acceptance is below expectations, future gross margin may be unfavorably affected. The company believes that continued focused investment in research and development, especially the timely development and market acceptance of new products, is a key factor to the company's successful growth and its ability to achieve strong financial performance. National's product portfolio, particularly products in the personal systems and communications area, have short product life cycles. Successful development and introduction of new products are critical to the company's ability to maintain a competitive position in the marketplace. The company will continue to invest resources to develop new cores and integrate those cores with its other technological capabilities to create system-on-a-chip products aimed at the emerging information appliance market. It will also continue to invest in the development of new analog and mixed-signal technology-based products for applications in the communications, personal systems and consumer markets, as well as in process technologies needed to support those products. As a result, the company anticipates R&D spending for fiscal 2001 to be higher than the fiscal 2000 level, but lower as a percentage of sales, at approximately 16 percent. The company also expects overall SG&A expenses to be slightly higher than in fiscal 1999, but to decline to approximately 14 percent of sales as the company continues to manage its cost structure and control spending. Certain aspects of the company's logistics operation are outsourced to a third-party provider. During the first quarter of 2001, the company plans to transfer those outsourced operations to another third-party provider. In the event that the company experiences difficulties or encounters unforeseen obstacles during the transition or the third party is unable to provide an acceptable level of services, this change may have an unfavorable impact on the company's future revenue and results of operations. Because of significant international sales, the company benefits overall from a weaker dollar and is adversely affected by a stronger dollar relative to major currencies worldwide. As such, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may unfavorably affect the company's consolidated sales and net income. The company attempts to manage the short-term exposures to foreign currency fluctuations, but there can be no assurance that the company's risk management activities will fully offset the adverse financial impact resulting from unfavorable movements in foreign exchange rates. From time to time, the company has received notices of tax assessments from certain governments of countries in which the company operates. There can be no assurance that these governments or other government entities will not serve future notices of assessments on the company, or that the amounts of such assessments and the failure of the company to favorably resolve such assessments would not have a material adverse effect on the company's financial condition or results of operations. In addition, the company's tax returns for certain years are under examination in the U.S. While the company believes it has sufficiently provided for all tax obligations, there can be no assurance that the ultimate outcome of the tax examinations will not have a material adverse effect on the company's future financial condition or results of operations. The forward-looking statements discussed or incorporated by reference in this outlook section involve a number of risks and uncertainties. Other risks and uncertainties include, but are not limited to, the general economy, regulatory and international economic conditions, the changing environment of the semiconductor industry, competitive products and pricing, growth in the PC and communications industries, the effects of legal and administrative cases and proceedings, and such other risks and uncertainties as may be detailed from time to time in the company's reports and filings with the SEC. Appendix to MD&A Graphs (3 yrs)
2000 1999 1998 ------------- ------------- ------------- Net Sales per Employee $198.0 $164.1 $197.1 Net Operating Margin as a Percent of Sales 16.0% (55.5%) (5.8%) Operating Costs and Expenses (As a Percent of Sales): Selling, General, and ` Administrative 14.6% 16.2% 13.9% Research and Development 18.0% 24.1% 19.0% Cost of Sales 54.0% 79.4% 65.1% Net Property, Plant, and Equipment $803.7 $916.0 $1,655.8 Stock Price Ending $49.63 $19.38 $16.25
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 Operation in Item 7 and in Note 1, "Summary of Significant Accounting Policies," and Note 2, "Financial Instruments," in the Notes to the Consolidated Financial Statements included in Item 8. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Financial Statements: Consolidated Balance Sheets at May 28, 2000 and May 30, 1999 28 Consolidated Statements of Operations for each of the years in the three-year period ended May 28, 2000 29 Consolidated Statements of Comprehensive Income (Loss) for each of the years in the three-year period ended May 28, 2000 30 Consolidated Statements of Shareholders' Equity for each of the year sin the three-year period ended May 28, 2000 31 Consolidated Statements of Cash Flows for each of the years in the three-year period ended May 28, 2000 32 Notes to Consolidated Financial Statements 33-59 Independent Auditors' Report 60 Financial Statement Schedule: - ----------------------------- For the three years ended May 28, 2000 Schedule II -- Valuation and Qualifying Accounts 64 NATIONAL SEMICONDUCTOR CORPORATION CONSOLIDATED BALANCE SHEETS
May 28, May 30, In Millions, Except Share Amounts 2000 1999 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 778.8 $ 418.7 Short-term marketable investments 71.1 107.2 Receivables, less allowances of $58.6 in 2000 and $68.0 in 1999 258.6 171.9 Inventories 192.9 141.3 Deferred tax assets 125.7 117.9 Other current assets 40.5 32.2 ------------- ------------- Total current assets 1,467.6 989.2 Property, plant and equipment, net 803.7 916.0 Other assets 110.9 139.1 ------------- ------------- Total assets $2,382.2 $2,044.3 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 31.4 $ 49.3 Accounts payable 194.5 189.8 Accrued expenses 315.1 348.1 Income taxes payable 86.7 77.8 ------------- ------------- Total current liabilities 627.7 665.0 Long-term debt 48.6 416.3 Other noncurrent liabilities 62.6 62.2 ------------- ------------- Total liabilities $ 738.9 $1,143.5 Commitments and contingencies Shareholders' equity: Common stock of $0.50 par value. Authorized 300,000,000 shares. Issued and outstanding 177,561,617 in 2000; 169,053,112 in 1999 $ 88.8 $ 84.5 Additional paid-in capital 1,407.9 1,268.1 Retained earnings (deficit) 186.7 (434.1) Unearned compensation (12.6) (15.0) Accumulated other comprehensive loss (27.5) (2.7) ------------- ------------- Total shareholders' equity $1,643.3 $ 900.8 ------------- ------------- Total liabilities and shareholders' equity $2,382.2 $2,044.3 ============= =============
See accompanying Notes to Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended May 28, May 30, May 31, In Millions, Except Per Share Amounts 2000 1999 1998 ----------- -------------- ------------- Net sales $2,139.9 $1,956.8 $2,536.7 Operating costs and expenses: Cost of sales 1,154.9 1,553.5 1,651.7 Research and development 386.1 471.3 482.0 Selling, general and administrative 312.3 317.4 353.2 Special items (55.3) 700.9 196.7 ----------- -------------- ------------- Total operating costs and expenses 1,798.0 3,043.1 2,683.6 ----------- -------------- ------------- Operating income (loss) 341.9 (1,086.3) (146.9) Interest income (expense), net 15.3 (2.2) 22.3 Other income, net 285.3 3.1 24.9 ----------- -------------- ------------- Income (loss) before income taxes and extraordinary item 642.5 (1,085.4) (99.7) Income tax expense (benefit) 14.9 (75.5) (1.1) ----------- -------------- ------------- Income (loss) before extraordinary item 627.6 (1,009.9) (98.6) Extraordinary loss on early extinguishment of debt, net of taxes of $0.4 million 6.8 - - ----------- -------------- ------------- Net income (loss) $ 620.8 $(1,009.9) $ (98.6) =========== ============== ============= Earnings (loss) per share: Income (loss) before extraordinary item: Basic $3.62 $(6.04) $(0.60) Diluted $3.27 $(6.04) $(0.60) Net income (loss): Basic $3.58 $(6.04) $(0.60) Diluted $3.24 $(6.04) $(0.60) Weighted-average common and potential common shares outstanding: Basic 173.6 167.1 163.9 Diluted 191.7 167.1 163.9
See accompanying Notes to Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended May 28, May 30, May 31, In millions 2000 1999 1998 ------------- ------------ ------------- Net income (loss) $620.8 $(1,009.9) $ (98.6) Other comprehensive income (loss), net of tax: Unrealized gain on available-for-sale securities 177.0 22.2 2.1 Reclassification adjustment for realized gain included in net income (loss) (195.6) - (6.3) Minimum pension liability (6.2) (12.5) (12.5) ------------- ------------ ------------- Other comprehensive income (loss) (24.8) 9.7 (16.7) ------------- ------------ ------------- Comprehensive income (loss) $596.0 $(1,000.2) $(115.3) ============= ============ =============
The tax effects of other comprehensive income (loss) components included in each of the years presented above were not significant. See accompanying Notes to Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Additional Retained Other Common Paid-In Earnings Unearned Comprehensive In Millions Stock Capital (Deficit) Compensation Income (Loss) Total ----------- ------------ ------------ ---------------- --------------- ------------- Balances at May 25, 1997 $80.6 $1,153.8 $675.0 $(42.0) $ 4.3 $1,871.7 Adjustment to conform pooling of interests for shareholders' equity - 1.3 (0.6) - - 0.7 Net loss - - (98.6) - - (98.6) Issuance of common stock under option, purchase, and profit sharing plans and tax benefit of $17.5 2.1 80.9 - - - 83.0 Fair value of stock options assumed in ComCore acquisition - 4.3 - - - 4.3 Unearned compensation charge relating to issuance of restricted stock - 0.7 - (0.7) - - Cancellation of restricted stock - (0.9) - 0.9 - - Amortization of unearned compensation - - - 14.5 - 14.5 Other comprehensive loss - - - - (16.7) (16.7) - --------------------------------------------- ----------- ------------- ----------- ----------------- ---------------- ----------- Balances at May 31, 1998 82.7 1,240.1 575.8 (27.3) (12.4) 1,858.9 Net loss - - (1,009.9) - - (1,009.9) Issuance of common stock under option, purchase, and profit sharing plans 1.8 26.5 - - - 28.3 Unearned compensation charge relating to issuance of restricted stock - 3.5 - (3.5) - - Cancellation of restricted stock - (2.0) - 2.0 - - Amortization of unearned compensation - - - 13.8 - 13.8 Other comprehensive income - - - - 9.7 9.7 - --------------------------------------------- ----------- ------------- ----------- ----------------- ---------------- ----------- Balances at May 30, 1999 84.5 1,268.1 (434.1) (15.0) (2.7) 900.8 Net income - - 620.8 - - 620.8 Issuance of common stock under option, purchase, and profit sharing plans 4.1 130.6 - - - 134.7 Unearned compensation charge relating to issuance of restricted stock 0.1 8.2 - (8.3) - - Cancellation of restricted stock - (6.0) - 2.7 - (3.3) Amortization of unearned compensation - - - 8.0 - 8.0 Issuance of common stock upon conversion of a convertible subordinated promissory note 0.1 7.0 - - - 7.1 Other comprehensive loss - - - - (24.8) (24.8) - --------------------------------------------- ----------- ------------- ----------- ----------------- ---------------- ----------- Balances at May 28, 2000 $88.8 $1,407.9 $186.7 $(12.6) $(27.5) $1,643.3 =========== ============= =========== ================= ================ ===========
See accompanying Notes to Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended May 28, May 30, May 31, In Millions 2000 1999 1998 ------------ ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $620.8 $(1,009.9) $ (98.6) Adjustments to reconcile net income (loss) with net cash provided by operations: Depreciation and amortization 263.8 405.6 306.7 Loss (gain) on investments (272.5) 0.1 (10.3) Loss on disposal of equipment 11.9 50.5 9.7 Deferred tax provision (12.1) 52.8 4.9 Tax benefit associated with stock options - - 17.5 Non-cash special items (55.3) 700.9 196.7 Other, net 1.6 0.7 (0.5) Changes in certain assets and liabilities, net: Receivables (86.7) 36.6 55.7 Inventories (57.0) 142.6 (60.6) Other current assets (8.3) 44.2 (2.9) Accounts payable and accrued expenses (9.7) (80.6) (102.8) Income taxes 9.0 (114.0) (47.0) Other liabilities (5.8) (3.4) 12.3 ------------ ------------ ----------- Net cash provided by operating activities 399.7 226.1 280.8 ------------ ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (169.9) (303.3) (622.0) Sale of equipment 8.6 - - Maturity of held-to-maturity securities - - 14.5 Sale and maturity of available-for-sale securities 151.2 167.1 1,005.8 Purchase of available-for-sale securities (115.1) (162.0) (1,051.5) Disposition of Cyrix PC microprocessor business 75.0 - - Sale of investments 286.0 0.1 16.2 Business acquisitions, net of cash acquired (22.2) - (96.4) Purchase of investments and other, net (6.1) (19.1) (20.2) ------------ ------------ ----------- Net cash provided by (used by) investing activities 207.5 (317.2) (753.6) ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Redemption of convertible subordinated notes (265.8) - (126.4) Issuance of debt - 77.5 100.4 Repayment of debt (114.7) (56.5) (19.0) Issuance of common stock, net 133.4 28.0 63.2 ------------ ------------ ----------- Net cash provided by (used by) financing activities (247.1) 49.0 18.2 ------------ ------------ ----------- Net change in cash and cash equivalents 360.1 (42.1) (454.6) Adjustment to conform pooling of interests for cash and cash equivalents at beginning of year - - 17.6 Cash and cash equivalents at beginning of year 418.7 460.8 897.8 ------------ ------------ ----------- Cash and cash equivalents at end of year $778.8 $ 418.7 $460.8 ============ ============ ===========
See accompanying Notes to Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include National Semiconductor Corporation and its majority-owned subsidiaries. Throughout the notes to the consolidated financial statements, National Semiconductor Corporation and its majority-owned subsidiaries may be referred to as National or the company. All significant intercompany transactions are eliminated in consolidation. Nonmarketable investments in which National has less than 20 percent ownership and in which it does not have the ability to exercise significant influence over the investee are initially recorded at cost and periodically reviewed for impairment. The company's fiscal year ends on the last Sunday of May. The fiscal years ended May 28, 2000 and May 30, 1999 had 52-week years. The fiscal year ended May 31, 1998 had a 53-week year. Operating results for the additional week in fiscal 1998 were considered immaterial to the consolidated results of operations. In November 1997, the company acquired all outstanding shares of Cyrix Corporation common stock (See Note 4). The merger was accounted for as a pooling of interests. Accordingly, the consolidated financial statements include Cyrix. Since the fiscal years for National and Cyrix differed, Cyrix changed its fiscal year-end to coincide with National's beginning in fiscal 1998. The results of operations for the period January 1, 1997 through May 25, 1997 for Cyrix, which included net sales of $84.6 million, total operating costs and expenses of $84.4 million, other expense of $1.1 million, income tax benefit of $0.3 million, net loss of $0.6 million and an increase in capital from the issuance of common stock of $1.3 million, have been recorded as an adjustment to shareholders' equity. Revenue Recognition Revenue from the sale of semiconductor products is recognized when shipped, with a provision for estimated returns and allowances recorded at the time of shipment. Other revenues are generally recognized ratably over the contractual period or as the services are performed according to the terms of the arrangement. Inventories Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market. Property, Plant and Equipment Property, plant and equipment are recorded at cost. The company uses 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. The company capitalizes interest on borrowings during the construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful life of the assets. In connection with various capital expansion projects, the company capitalized $0.4 million and $4.9 million of interest in fiscal 1999 and 1998, respectively. No interest was capitalized in fiscal 2000. The company reviews the carrying value of property, plant and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. In connection with certain restructuring actions during fiscal 1999 and 1998, the company recorded impairment losses of $633.9 million and $20.3 million, respectively (See Note 3). The fair value of the related assets was determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved. Income Taxes Deferred tax liabilities and assets at the end of each period are determined based on the future tax consequences attributable to 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 measurement of deferred tax assets is reduced, if necessary, by a valuation allowance. Earnings per Share Basic earnings per share are computed 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, plus other potentially dilutive securities outstanding, such as convertible subordinated notes. For all years presented, the reported net income (loss) was used in the computation of basic and diluted earnings per share. A reconciliation of the shares used in the computation follows:
Years Ended May 28, May 30, May 31, (In Millions) 2000 1999 1998 --------------- ---------------- --------------- Weighted-average common shares outstanding used for basic earnings per share 173.6 167.1 163.9 Effect of dilutive securities: Stock options 18.1 - - --------------- ---------------- --------------- Weighted-average common and potential common shares outstanding used for diluted earnings per share 191.7 167.1 163.9 =============== ================ ===============
As of May 28, 2000, there were options outstanding to purchase 8.4 million shares of common stock with a weighted-average exercise price of $59.49, which could potentially dilute basic earnings per share in the future, but which were not included in diluted earnings per share as their effect was antidilutive. The effect of potential common stock from stock options was antidilutive for fiscal 1999 and 1998. Therefore, stock options to purchase 36.2 million shares of common stock with a weighted-average exercise price of $14.70 and 22.8 million shares of common stock with a weighted-average exercise price of $22.49 were not included in diluted earnings per share at May 30, 1999 and May 31, 1998, respectively. The company also had outstanding the $258.8 million convertible subordinated notes, which were convertible into approximately 6.0 million shares of common stock at May 30, 1999 and May 31, 1998. For all years presented, the effect of the assumed conversion of the convertible subordinated notes was antidilutive. Currencies The functional currency for all operations worldwide is the U.S. dollar. Accordingly, gains and losses arising from translation of foreign currency financial statement balances into U.S. dollars are included in income. Gains and losses resulting from foreign currency transactions are also included in income. Financial Instruments Cash and Cash Equivalents. Cash equivalents are highly liquid instruments with a maturity of three months or less at the time of purchase. National maintains its cash balances in various currencies and in a variety of financial instruments. The company has not experienced any material losses related to any short-term financial instruments. Marketable Investments. The company classifies its debt and marketable equity securities into held-to-maturity or available-for-sale categories. Debt securities are classified as held-to-maturity when the company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded as either short-term or long-term on the balance sheet based upon contractual maturity date and are stated at amortized cost. 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. Off-Balance Sheet Financial Instruments. Gains and losses on currency forward and option contracts that are intended to hedge an identifiable firm commitment are deferred and included in the measurement of the underlying transaction. Gains and losses on hedges of anticipated revenue transactions are deferred until such time as the underlying transactions are recognized or are recognized immediately if the transaction is terminated earlier than initially anticipated. Gains and losses on contracts to hedge certain non-U.S. dollar denominated assets and liabilities are recognized in income and generally offset by the corresponding effect of currency movements on these financial positions. Gains and losses on any instruments not meeting the aforementioned criteria are recognized in income in the current period. Subsequent gains or losses on the related financial instrument are recognized in income in each period until the instrument matures, is terminated or is sold. Income or expense on swaps is accrued as an adjustment to the yield of the related investments or debt hedged by the instrument. Cash flows associated with derivative transactions are reported as arising from operating activities in the consolidated statements of cash flows. Fair Values of Financial Instruments The carrying amounts for cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses approximate their fair values due to their short period of time until 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 28, 2000. Employee Stock Plans The company accounts for its stock option plans and its employee stock purchase plans in accordance with the intrinsic method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Use of Estimates in Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts in prior years' consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the fiscal 2000 presentation. Net operating results have not been affected by these reclassifications. Note 2. Financial Instruments Marketable Investments The company's policy is to diversify its investment portfolio to reduce risk to principal that could arise from credit, geographic and investment sector risk. At May 28, 2000, investments were placed with a variety of different financial institutions or other issuers. Investments with a maturity of less than one year have a rating of A1/P1 or better. Investments with a maturity of more than one year have a minimum rating of AA/Aa2. The company's investment portfolio generally matures within one year or less. Gross realized gains on available-for-sale securities approximated $273.0 million and $10.6 million for fiscal 2000 and 1998, respectively. No gross realized gains were recognized in fiscal 1999. Gross realized losses were not material for fiscal 2000, 1999 or 1998. Investments at fiscal year-end comprised:
Gross Unrealized Estimated (In Millions) Amortized Cost Gains/(Losses) Fair Value 2000 SHORT-TERM INVESTMENTS Available-for-sale securities: Certificates of deposit $ 15.0 $ - $ 15.0 Corporate bonds 34.9 (0.1) 34.8 U.S. government and federal agency debt securities 21.3 - 21.3 ------------------- ---------------- --------------- Total short-term investments $ 71.2 $ (0.1) $ 71.1 =================== ================ =============== LONG-TERM INVESTMENTS Available-for-sale securities: Equity securities $ 8.9 $ 3.8 $ 12.7 ------------------- ---------------- --------------- Total long-term investments $ 8.9 $ 3.8 $ 12.7 =================== ================ =============== 1999 SHORT-TERM INVESTMENTS Available-for-sale securities: Certificates of deposit $ 9.0 $ - $ 9.0 Corporate bonds 74.8 (0.1) 74.7 Auction rate preferred stock 11.0 - 11.0 U.S. government and federal agency debt securities 12.5 - 12.5 ------------------- ---------------- --------------- Total short-term investments $107.3 $ (0.1) $107.2 =================== ================ =============== LONG-TERM INVESTMENTS Available-for-sale securities: Equity securities $ 2.0 $22.3 $ 24.3 ------------------- ---------------- --------------- Total long-term investments $ 2.0 $22.3 $ 24.3 =================== ================ ===============
Long-term investments of $12.7 million and $24.3 million were included in other assets at May 28, 2000 and May 30, 1999, respectively. At May 28, 2000, the company held $31.8 million and $694.7 million of available-for-sale and held-to-maturity securities, respectively, which are classified as cash equivalents on the consolidated balance sheet. These cash equivalents consist of the following (in millions): bank time deposits ($226.5), institutional money market funds ($16.2), commercial paper ($459.1) and auction rate preferred stock ($24.7). At May 30, 1999, the company held $0.3 million and $389.4 million of available-for-sale and held-to-maturity securities, respectively, which are classified as cash equivalents on the consolidated balance sheet. These cash equivalents consist of the following (in millions): bank time deposits ($142.1), institutional money market funds ($8.6) and commercial paper ($239.0). Net unrealized gains on available-for-sale securities of $3.2 million at May 28, 2000 and $22.2 million at May 30, 1999 are included in accumulated other comprehensive loss. The related tax effects are not significant. Off-Balance Sheet Financial Instruments The company utilizes various off-balance sheet financial instruments to manage market risks associated with fluctuations in certain interest rates and foreign currency exchange rates. Company policy allows the use of derivative financial instruments to protect against market risks arising in the normal course of business. Company policy prohibits the use of derivative instruments for the sole purpose of trading for profit on price fluctuations or to enter into contracts that intentionally increase the underlying exposure. The criteria used 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. Foreign Currency Instruments The objective of the foreign exchange risk management policy is to preserve the U.S. dollar value of after-tax cash flow in relation to non-U.S. dollar currency movements. The company uses forward and option contracts to hedge firm commitments and anticipatory exposures. These exposures primarily consist of product sales in currencies other than the U.S. dollar, a majority of which are made through the company's subsidiaries in Europe and Japan. In addition, the company uses forward and option contracts to hedge certain non-U.S. dollar denominated asset and liability positions. Gains and losses from foreign currency transactions were not significant for fiscal 2000, 1999 and 1998. Interest Rate Derivatives The company uses swap agreements to convert the variable interest rate of certain long-term Japanese yen debt to a fixed Japanese yen interest rate (1.63 percent at May 28, 2000). Fair Value and Notional Principal of Off-Balance Sheet Financial Instruments The table below shows the fair value and notional principal of off-balance sheet instruments as of May 28, 2000 and May 30, 1999. The notional principal amounts for off-balance sheet 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 28, 2000 and May 30, 1999. The credit risk amount shown in the table represents the gross exposure to potential accounting loss on these transactions if all counterparties failed to perform according to the terms of the contract, based on the then-current currency exchange rate or interest rate at each respective date. Although the following table reflects the notional principal, fair value and credit risk amounts of the off-balance sheet instruments, it does not reflect the gains or losses associated with the exposures and transactions that the off-balance sheet 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. Transactions Qualifying for Hedge Accounting:
Carrying Notional Estimated Credit (In Millions) Amount Principal Fair Value Risk -------------- ----------- ------------- ------------- 2000 INTEREST RATE INSTRUMENTS Swaps: Variable to fixed $ - $22.5 $ (0.2) $ - FOREIGN EXCHANGE INSTRUMENTS Forward contracts: To buy dollars: Japanese yen $ - $ 7.4 $ 0.1 $ - To sell dollars: Pound sterling $ - $25.4 $ (1.5) $ - Singapore dollar - 10.1 (0.2) - -------------- ----------- ------------- ------------- Total $ - $35.5 $ (1.7) $ - ============== =========== ============= ============= Purchased options: Pound sterling $ - $14.2 $ - $ - Japanese yen - 3.0 - - Other (0.1) 2.8 - - -------------- ----------- ------------- ------------- Total $ (0.1) $20.0 $ - $ - ============== =========== ============= ============= INTEREST RATE INSTRUMENTS Swaps: Variable to fixed $ - $20.1 $ (0.3) $ - FOREIGN EXCHANGE INSTRUMENTS Forward contracts: To sell dollars: Pound sterling $ (0.2) $17.9 $ (0.2) $ - Singapore dollar (0.1) 10.1 (0.2) - -------------- ----------- ------------- ------------- Total $ (0.3) $28.0 $ (0.4) $ - ============== =========== ============= ============= Purchased options: Pound sterling $ - $ 8.0 $ - $ - Japanese yen (0.1) 7.0 0.1 0.1 Other - 5.0 - - -------------- ----------- ------------- ------------- Total $ (0.1) $20.0 $ 0.1 $ 0.1 ============== =========== ============= =============
All foreign exchange forward contracts expire within one year. Unrealized gains and losses on foreign exchange forward contracts are deferred and recognized in income in the same period as the hedged transactions. Unrealized gains and losses on such agreements at May 28, 2000 and May 30, 1999 are immaterial. All foreign currency option contracts expire within one year. Premiums on purchased foreign exchange option contracts are amortized over the life of the option. Unrealized gains and losses on these option contracts are deferred until the occurrence of the hedged transaction and recognized as a component of the hedged transaction. Unrealized gains on such agreements at May 28, 2000 and May 30, 1999 were immaterial. Fair Value of Financial Instruments At May 28, 2000, the estimated fair value of long-term debt was $100.6 million and the carrying values of receivables and accounts payable approximate their estimated fair values. Concentrations of Credit Risk Financial instruments that potentially subject the company to concentrations of credit risk are primarily investments and trade receivables. The company's investment policy requires cash investments to be placed with high-credit quality counterparties and limits the amount of credit from any one financial institution or direct issuer. The company sells its products to distributors and original equipment manufacturers involved in a variety of industries including computers and peripherals, wireless communications, automotive and networking. The company performs continuing credit evaluations of its customers whenever necessary and generally does not require collateral. Historically, it has not experienced significant losses related to receivables from individual customers or groups of customers in any particular industry or geographic area. Note 3. Restructuring of Operations In fiscal 2000 the company reported a $14.7 million credit from restructuring of operations related to the actions described below: In connection with the restructuring actions announced in May 1999, the company paid $22.5 million in severance to terminated employees during fiscal 2000. Payment was made to 167 employees terminated in the worldwide workforce reduction action, 278 employees terminated in connection with the closure of the 8-inch development wafer fabrication facility located in Santa Clara, California and 418 employees terminated in connection with the decision to exit the Cyrix PC microprocessor business. In connection with the sale of the Cyrix PC microprocessor business in September 1999 (discussed in the following paragraph), 104 of these terminated employees were hired by VIA Technologies, Inc., a Taiwanese company. Since all activities that were related to these restructuring actions were substantially completed during fiscal 2000, the company recorded a credit of $9.0 million for severance and other exit-related cost reserves no longer required. In connection with the closure of the Santa Clara wafer fabrication facility, the company also recorded a credit of $2.6 million from the final disposition of related equipment. The company paid $11.8 million for other exit-related costs during fiscal 2000, primarily related to activities connected with the closure of the Santa Clara 8-inch development wafer fabrication facility. In September 1999, the company completed the sale of the assets of the Cyrix PC microprocessor business to VIA Technologies, Inc. The sale included the M II x86 compatible microprocessor and successor products. National retained the integrated Media GX microprocessor, which forms the core of the new GeodeTM family of solutions for the information appliance market. Assets sold included inventories, land, buildings and equipment, primarily located in Richardson, Texas; Arlington, Texas; Mesa, Arizona; and Santa Clara, California. Some PC microprocessor-related manufacturing assets in Toa Payoh, Singapore were also included. Proceeds from this transaction were $75.0 million, of which $8.2 million represented reimbursement to National for certain employee retention costs incurred solely as a result of completing the sale. The remaining $66.8 million represented payment for the assets sold. The company recorded a gain on the sale of $26.8 million. In September 1999, the company also announced it would retain full ownership of its semiconductor manufacturing facility in Greenock, Scotland and ceased its efforts to seek an investor to acquire and operate that facility as an independent foundry business. As a result, the company recorded a credit of $3.1 million from the reduction of its restructure reserve related to a penalty that the company will no longer incur. The company will continue to consolidate its manufacturing lines in Greenock as previously announced in October 1998 by closing the 4-inch wafer fabrication facility and transferring products and processes to the 6-inch wafer fabrication facility on the same site, as well as to other National facilities. In connection with the closure of the 4-inch wafer fabrication facility, the company paid $9.3 million in severance to 407 terminated employees during fiscal 2000. The company currently expects the remainder of employee terminations resulting from the facility closure to be completed during the first quarter of fiscal 2001. Wafer manufacturing activity in the 4-inch wafer fabrication facility is expected to cease by the end of September 2000 and all other actions associated with the closure of the 4-inch wafer fabrication facility will be completed shortly thereafter. In fiscal 1999, the company reported a net restructure charge of $700.9 million related to the actions described below: In May 1999, the company announced its decision to exit the Cyrix PC microprocessor business and related support activities in order to sharpen its focus on the emerging information appliance market and on its traditional analog business. The related actions, which were substantially completed during fiscal 2000, included the elimination in total of approximately 1,126 positions worldwide and closure of the 8-inch development wafer fabrication facility in Santa Clara, California. In connection with these actions, operating results for fiscal 1999 included a restructure charge of $689.6 million. The decision to exit the Cyrix PC microprocessor business resulted in significant impairment of capital assets in South Portland, Maine; Richardson, Texas; and Toa Payoh, Singapore, which were substantially devoted to supporting the Cyrix PC microprocessor business. The company also announced its intention to seek a third-party to partner with National in owning and operating its wafer fabrication facility in Maine. As a result, the restructure charge included impairment losses of $494.3 million relating to these assets. The Maine assets have been treated as assets to be held and used, since they relate to a wafer fabrication facility that cannot be removed immediately from operations and are being depreciated over the new expected life. The planned exit from the 8-inch development wafer fabrication facility in Santa Clara resulted in an additional $139.6 million impairment loss included in the restructure charge. The other components of the restructure charge included $37.0 million for severance and $18.7 million for other exit-related costs. Of the total charge, noncash charges included the impairment losses and $3.2 million of other exit-related costs. During fiscal 1999, the company paid $5.4 million for severance to 263 terminated employees associated with these actions. In October 1998, the company announced plans to consolidate its wafer manufacturing operations in Greenock, Scotland and to seek investors to acquire and operate the facility in Greenock as an independent foundry business. This action was prompted by a continued weakness in the semiconductor market, which resulted in overall lower capacity utilization of the company's manufacturing facilities. The company is in the process of closing its 4-inch wafer fabrication facility in Greenock and consolidating the related manufacturing into its 6-inch wafer fabrication facility on the same site. The company is also moving some of the Greenock capacity and related processes to its manufacturing facility in Arlington, Texas. This action was originally expected to reduce the Greenock workforce by approximately 600 employees. The Greenock assets have been treated as assets to be held and used since they cannot be removed immediately from operations and are being depreciated over the new expected life. In connection with the closure of the 4-inch wafer fabrication facility, the company recorded a restructuring charge of $23.0 million in fiscal 1999. The charge included $12.6 million for severance, $3.9 million for costs associated with the dismantling of the 4-inch wafer fabrication facility and approximately $6.5 million for other exit-related costs. Other than $5.5 million of other exit-related costs for noncash items, the charge included primarily cash items. The fiscal 1999 restructure charges were partially offset by a credit of $11.7 million related to certain prior restructure actions. The credit included $3.0 million for severance, $4.1 million from the disposition of assets and $4.6 million for other exit costs. The credit was prompted by the completion during fiscal 1999 of remaining actions primarily associated with the closure of the 5-inch and 6-inch wafer fabrication facilities in Santa Clara, California and a worldwide workforce reduction plan. The timing of these actions was consistent with the timetable previously announced in fiscal 1998. In fiscal 1998 the company reported a net restructure charge of $63.8 million related to the actions described below: Due to weakened business conditions experienced in the second half of fiscal 1998, the company implemented an overall cost reduction plan in April 1998, including a worldwide workforce reduction. This action, which was completed during fiscal 1999, resulted in a total reduction of 815 people. During fiscal 1999, the company paid $10.8 million of severance to 458 remaining employees associated with this action. In addition, the plan included modification of certain previously announced actions related to the closure of the Santa Clara 5-inch and 6-inch wafer manufacturing facilities, as well as additional impairment loss related to the write down of certain assets in the 0.65-micron wafer manufacturing facility in Arlington, Texas. As a result, the company recorded a $73.6 million restructuring charge in fiscal 1998. The restructuring charge included approximately $32.5 million for severance and lease termination costs, $10.6 million for the write-off of assets related to discontinued product development programs and $10.2 million for the write-off of assets related to discontinued process technology development. It also included an additional $20.3 million impairment loss on certain assets in the Arlington wafer manufacturing facility. The additional impairment loss was caused by weakened business conditions that significantly reduced the demand for wafers from the 0.65-micron wafer manufacturing facility. These charges were partially offset by a credit of $9.8 million for severance reserves no longer required, related to actions that were completed during fiscal 1998 from the fiscal 1997 reorganization of the company's operating structure and realignment of its manufacturing facilities. Included in accrued liabilities at May 28, 2000, is $19.1 million related to severance and other exit costs for restructuring actions, as discussed above, that were not yet completed as of the end of fiscal 2000. These restructuring costs primarily represent facility clean-up costs and lease obligations, as well as approximately $2.6 million of remaining severance related to the closure of the Greenock 4-inch wafer fabrication facility. The timing of actual departure of employees and payment of severance may occur in different accounting periods due to minimum termination notification periods. Severance is usually paid on the effective date of termination. Note 4. Acquisitions In December 1999, the company acquired Algorex Inc., a provider of high performance digital signal processing products, architecture and software technologies for the wireless communication markets. These technologies are expected to enhance the company's future capability to provide complete chipset solutions for the cellular phone and wireless information appliance markets. The acquisition was accounted for using the purchase method with a purchase price of $21.5 million. In connection with the acquisition, the company recorded a $4.2 million in-process research and development charge, which is included as a component of special items in the consolidated statement of operations. The amount allocated to the in-process research and development charge was determined through an established valuation technique used in the high technology industry. It was expensed upon acquisition, because technological feasibility had not been established and no alternative uses exist for the technology. Research and development costs to bring the products to technological feasibility are not expected to have a material impact on future operating results. As discussed in Note 1, the company completed its merger with Cyrix in November 1997. In connection with the merger, the company recorded a special charge of $30.0 million related to certain merger and related expenses, which is included as part of special items in the statement of operations for the year ended May 31, 1998. These expenses primarily included transaction fees for investment bankers, attorneys and accountants ($18.3 million); financial printing costs ($2.0 million); and costs associated with the elimination of duplicate facilities and operations ($9.7 million). The company also expected to pay approximately $10.1 million in retention bonuses to certain Cyrix employees. These amounts were expensed to operations ratably over the employees' service period, which were generally 18 months following the consummation of the merger. The following table summarizes the results of operations previously reported by the separate companies through November 23, 1997, which represents the closest interim period to the date the merger was consummated:
Six Months Ended November 23, 1997 ------------------------------------------- (In Millions) Net Sales Net Income ------------------- ----------------------- National $1,241.1 $ 120.1 Cyrix 135.6 (28.6) ------------------- ----------------------- Net income $1,376.7 $ 91.5 =================== =======================
There were no transactions between Cyrix and National prior to the combination, and no adjustments were necessary to conform the accounting policies of the combining companies. Certain amounts for Cyrix were reclassified to conform with the financial statement presentation followed by National. Note 5. Consolidated Financial Statement Details
(In Millions) 2000 1999 -------------- --------------- RECEIVABLE ALLOWANCES Doubtful accounts $ 7.4 $ 9.1 Returns and allowances 51.2 58.9 -------------- --------------- Total receivable allowances $ 58.6 $ 68.0 ============== =============== INVENTORIES Raw materials $ 16.6 $ 13.0 Work in process 112.0 81.0 Finished goods 64.3 47.3 -------------- --------------- Total inventories $ 192.9 $ 141.3 ============== =============== PROPERTY, PLANT AND EQUIPMENT Land $ 20.5 $ 17.0 Buildings and improvements 514.3 531.3 Machinery and equipment 1,693.8 1,728.6 Construction in progress 74.5 42.2 -------------- --------------- Total property, plant and equipment 2,303.1 2,319.1 Less accumulated depreciation and amortization 1,499.4 1,403.1 -------------- --------------- Property, plant and equipment, net $ 803.7 $ 916.0 ============== =============== ACCRUED EXPENSES Payroll and employee related $ 182.4 $ 131.0 Restructuring of operations 19.1 79.5 Other 113.6 137.6 -------------- --------------- Total accrued expenses $ 315.1 $ 348.1 ============== ===============
(In Millions) 2000 1999 1998 ------------- ------------- ----------- SPECIAL ITEMS - Income (expense) Restructuring of operations $ 14.7 $(700.9) $ (63.8) Gain on disposition of Cyrix PC microprocessor business 26.8 - - In-process research and development charge (4.2) - (102.9) Other 18.0 - (30.0) ------------- ------------- ----------- $ 55.3 $(700.9) $(196.7) ============= ============= ===========
For fiscal 2000 special items, a credit of $18.0 million to reduce the excess portion of a contingent liability related to an indemnity agreement with Fairchild Semiconductor that expired in March 2000 is included in other. The agreement was connected with the disposition of Fairchild Semiconductor in fiscal 1997. For fiscal 1998 special items, merger costs of $30.0 million related to the merger with Cyrix in fiscal 1998 is included in other (See Note 4). The in-process research and development charge of $102.9 million in fiscal 1998 was related to the acquisition of ComCore Semiconductor, Inc. ($95.2 million), Future Integrated Systems, Inc. ($2.5 million) and the digital audio technology business of Gulbransen, Inc. ($5.2 million).
(In Millions) 2000 1999 1998 ------------- ------------- ----------- INTEREST INCOME (EXPENSE), NET Interest income $ 33.2 $ 26.9 $ 48.6 Interest expense (17.9) (29.1) (26.3) ------------- ------------- ----------- Interest income (expense), net $ 15.3 $ (2.2) $ 22.3 ============= ============= =========== OTHER INCOME, NET Net intellectual property income $ 11.5 $ 11.3 $ 15.7 Gain on investments, net 272.5 (0.1) 10.3 Other 1.3 (8.1) (1.1) ------------- ------------- ----------- Total other income, net $285.3 $ 3.1 $ 24.9 ============= ============= ===========
Intellectual property income is net of commissions. Net intellectual property income for fiscal 2000 included $9.7 million related to two separate single license arrangements, one with a Japanese company and the other with a U.S. company. For fiscal 1999 and 1998, net intellectual property income included $10.5 million and $11.2 million related to single licensing arrangements in each year with separate Korean companies. Aside from these single licensing agreements, none of the other license agreements in fiscal 2000, 1999 or 1998 were considered individually material. Note 6. Debt Debt at fiscal year-end consisted of the following:
(In Millions) 2000 1999 ------------- ------------ Convertible subordinated notes payable at 6.5%, net of debt issuance costs $ - $255.8 Notes secured by real estate payable at 12.5% - 12.6% 8.8 16.0 Notes secured by equipment payable at 7.0% - 8.0% 38.6 157.1 Convertible subordinated promissory notes 10.0 15.0 Other debt 22.6 21.7 ------------- ------------ Total debt 80.0 465.6 Less current portion of long-term debt 31.4 49.3 ------------- ------------ Long-term debt $ 48.6 $416.3 ============= ============
On November 12, 1999, the company paid $265.8 million from its existing cash balances to redeem substantially all of the outstanding amounts related to its $258.8 million, 6.5 percent convertible subordinated notes due 2002. Pursuant to the terms of the Note Indenture, the notes were redeemed at a price of 102.786 percent of the principal amount. Holders of the notes also received accrued interest through November 11, 1999. In connection with the redemption, the company recorded a $6.8 million extraordinary loss, net of income taxes of $0.4 million, for fiscal 2000. Notes secured by real estate include two notes assumed as part of the repurchase of the equity interest in the company's Arlington, Texas, facility, which was sold and leased back prior to 1990. Interest on these notes is due semi-annually, principal payments vary and maturities range from March 2001 to March 2002. Notes secured by equipment are collateralized by the underlying equipment. Under the terms of the agreements, principal and interest are due monthly over various periods ranging from three to five years. Maturities of loans under these agreements range from November 2001 to November 2003. These financing agreements contain certain covenant and default provisions that require the company to maintain a certain level of tangible net worth and permit the lenders cross-acceleration rights against certain other credit facilities. In connection with a retention arrangement related to the acquisition of ComCore Semiconductor, Inc. in fiscal 1998, the company issued convertible subordinated promissory notes to each of the founding shareholders of ComCore for a total of $15.0 million. As a result of the termination of one ComCore founding shareholder during fiscal 2000, the company issued 247,104 shares of common stock upon the conversion of one of the promissory notes. The remaining notes for a total of $10.0 million are noninterest-bearing and are due the earlier of either the date of termination of the employee or May 2001. Each note is convertible, in whole or in part, into shares of common stock on the maturity date or within 30 days thereafter, based on an initial conversion price of $16.1875. For each of the next five fiscal years and thereafter, debt obligations mature as follows: Total Debt (In Millions) (Principal Only) ------------------ 2001 $ 31.4 2002 41.8 2003 4.7 2004 2.1 Thereafter - ------------------ Total $ 80.0 ================== The company's multicurrency and revolving financing agreements provide for multicurrency loans, letters of credit and standby letters of credit. Both the multicurrency loan agreement ($15 million) and the revolving credit agreement ($225 million), which includes standby letters of credit, expire in October 2000. The company anticipates both of these agreements will be renewed or replaced on or prior to expiration. At May 28, 2000, $24.0 million of the combined total commitments under the multicurrency and revolving financing agreements was utilized. These agreements contain 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 28, 2000, under the most restrictive covenant, $114.4 million of tangible net worth was unrestricted and available for payment of dividends on the company's common stock. Note 7. Income Taxes Worldwide pretax income (loss) from operations and income taxes consist of the following:
(In Millions) 2000 1999 1998 ----------- -------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM U.S. $589.3 $(1,136.2) $(168.7) Non-U.S. 53.2 50.8 69.0 ----------- -------------- -------------- $642.5 $(1,085.4) $ (99.7) =========== ============== ============== INCOME TAX EXPENSE (BENEFIT) Current: U.S. federal $ - $ (142.5) $ (45.6) U.S. state and local - - 0.4 Non-U.S. 27.0 14.2 21.7 ----------- -------------- -------------- 27.0 (128.3) (23.5) Deferred: U.S. federal and state - 57.2 9.4 Non-U.S. (12.1) (4.4) (4.5) ----------- -------------- -------------- (12.1) 52.8 4.9 Charge in lieu of taxes attributable to employee stock plans - - 17.5 ----------- -------------- -------------- Income tax expense (benefit) $ 14.9 $ (75.5) $ (1.1) =========== ============== ==============
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at May 28, 2000 and May 30, 1999 are presented below:
(In Millions) 2000 1999 -------------- -------------- DEFERRED TAX ASSETS Reserves and accruals $269.1 $432.1 Non-U.S. loss carryovers and other allowances 36.6 48.4 Federal and state credit carryovers 251.0 183.3 Other 59.4 95.6 -------------- -------------- Total gross deferred assets 616.1 759.4 Valuation allowance (451.2) (536.7) -------------- -------------- Net deferred assets 164.9 222.7 -------------- -------------- DEFERRED TAX LIABILITIES Depreciation - (69.3) Other liabilities (34.9) (35.5) -------------- -------------- Total gross deferred liabilities (34.9) (104.8) -------------- -------------- Net deferred tax assets $130.0 $117.9 ============== ==============
The company recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized due to the expiration of net operating losses and tax credit carryovers. The valuation allowance for deferred tax assets as of May 28, 2000 includes $47.8 million attributable to stock option deductions. The benefit of the deductions will be credited to equity when realized. Included in other assets on the consolidated balance sheet at May 28, 2000 is $4.3 million of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. Based on the historical taxable income and projections for future taxable income over the periods that the deferred tax assets are deductible, management believes it is more likely than not that the company will realize the benefits of these deductible differences, net of valuation allowances as of May 28, 2000. The reconciliation between the income tax rate computed by applying the U.S. federal statutory rate and the reported worldwide tax rate follows:
2000 1999 1998 --------------- -------------- -------------- U.S. federal statutory tax rate 35.0% (35.0)% (35.0)% Non-U.S. losses and tax differential related to non-U.S. income (1.0) (0.6) (7.9) U.S. state and local taxes net of federal benefits - - 0.4 Utilization of loss carryovers (19.3) - - Changes in valuation allowances (12.7) 32.4 - Change in estimate for tax contingencies - (6.8) - Write-off of in-process R&D - - 38.4 Other 0.3 3.0 3.0 --------------- -------------- -------------- Effective tax rate 2.3% (7.0)% (1.1)% =============== ============== ==============
U.S. income taxes were provided for deferred taxes on undistributed earnings of non-U.S. subsidiaries that are not expected to be permanently reinvested in such companies. There has been no provision for U.S. income taxes for the remaining undistributed earnings of approximately $428.8 million at May 28, 2000, because the company intends to reinvest these earnings indefinitely in operations outside the United States. If such earnings were distributed, additional U.S. taxes of approximately $115.0 million would accrue after utilization of U.S. tax credits. At May 28, 2000, the company had U.S. and state credit carryovers of approximately $154.8 million and $96.2 million, respectively, for tax return purposes, which primarily expire from 2001 through 2020. In addition, the company had U.S. operating loss carryovers of approximately $99.4 million that expire in 2020. The company also had operating loss carryovers and other allowances of $138.5 million from certain non-U.S. jurisdictions. In November 1999, the company and the IRS filed a stipulation of settled issue with the United States Tax Court. The stipulation confirms the settlement between the company and the IRS of all outstanding issues related to a deficiency notice previously issued by the IRS seeking additional taxes for fiscal 1989. The issues giving rise to the additional taxes primarily related to the company's former Israeli operation and the purchase price paid in fiscal 1988 for Fairchild Semiconductor Corporation. The computations of the deficiency for 1989 and any related deficiency liabilities, or refunds, if any, for subsequent years have not been finalized. The IRS is also examining the company's tax returns for fiscal 1994 through 1996. The company believes that adequate tax payments have been made or accrued for all years. Note 8. Shareholders' Equity Each outstanding share of common stock carries with it a stock purchase right. The rights were issued pursuant to a dividend distribution declared on August 5, 1988. If and when the rights become exercisable, each right entitles the registered holder to purchase one one-thousandth of a share of series A junior participating preferred stock at a price of $60.00 per one-thousandth share, subject to adjustment. The rights are attached to all outstanding shares of common stock and no separate rights certificates have been distributed. If any individual or group acquires 20 percent or more of common stock, or announces a tender or exchange offer which, if consummated, would result in that person or group owning at least 20 percent of the company's common stock, the rights become exercisable and will detach from the common stock. If the person or group actually acquires 20 percent or more of the common stock (except in certain cash tender offers for all of the common stock), each right will entitle the holder to purchase, at the right's then-current exercise price, the common stock in an amount having a market value equal to twice the exercise price. Similarly, if the company merges or consolidates with or sells 50 percent or more of its assets or earning power to another person or entity, after the rights become exercisable, 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. The company may redeem the rights at $0.01 per right at any time prior to the acquisition by a person or group of 20 percent or more of the outstanding common stock. The rights will expire on August 8, 2006, unless redeemed earlier. During fiscal 1998, the company reserved for issuance 926,640 shares of common stock issuable upon conversion of certain convertible subordinated promissory notes issued to three individuals as partial consideration for the acquisition of ComCore Semiconductor, Inc. in fiscal 1998. During fiscal 2000, 247,104 shares were issued to one of these individuals (See Note 6), leaving a balance in the reserve of 679,536 shares. In connection with the company's merger with Cyrix, 16.4 million shares of common stock were issued to the holders of Cyrix common stock. In addition, up to 2.7 million shares of common stock were reserved for issuance in the future upon exercise of Cyrix employee or director stock options or pursuant to Cyrix employee benefits plans and up to 2.6 million shares of common stock were reserved for issuance in the future upon conversion of Cyrix 5.5 percent convertible subordinated notes due June 1, 2001. Since the company repurchased substantially all of the outstanding convertible subordinated notes in fiscal 1998, conversion of the remaining outstanding subordinated notes outstanding will only require issuance of up to 1,619 shares of common stock. National has paid no cash dividends on its common stock and intends to continue its practice of reinvesting all earnings. Note 9. Stock-Based Compensation Plans Stock Option and Purchase Plans National has two stock option plans under which employees may be granted stock options to purchase shares of common stock. One plan, which has been in effect since 1977, authorizes the grant of up to 39,354,929 nonqualified or incentive stock options to officers and key employees. The other plan authorizes the grant of up to 40,000,000 nonqualified stock options to employees who are not executive officers of the company. The terms of these plans generally provide that options are granted at the market price on the date of grant and expire up to a maximum of ten years and one day after grant or three months after termination of employment (up to five years after termination due to death, disability or retirement), whichever occurs first. Options can vest after a six-month period, but most vest ratably over a four-year period. The company has also adopted an executive officer stock option plan, which authorizes the grant of 6,000,000 nonqualified options to the company's executive officers. The plan is being submitted to stockholders for approval and no options have been granted under it. In connection with National's merger with Cyrix in fiscal 1998, National assumed Cyrix's outstanding obligations under its employee stock purchase plan, 1988 incentive stock plan and non-discretionary non-employee directors stock plan. As a result, each purchase right under the Cyrix employee stock purchase plan and each option under the other two plans were converted into the right or option to purchase 0.825 share of National common stock and the purchase price was adjusted accordingly. The Cyrix employee stock purchase plan and the Cyrix non-discretionary non-employee directors stock plan have now expired and no more shares can be issued under them. Options under the Cyrix 1988 incentive stock plan expire up to a maximum of ten years after grant, subject to earlier expiration upon termination of employment. No more options will be granted under the Cyrix 1988 incentive stock plan. In connection with the acquisitions of ComCore Semiconductor, Inc. in fiscal 1998 and Mediamatics, Inc. in fiscal 1997, National assumed each of their outstanding obligations under their respective stock option plans and related stock option agreements for their employees and consultants. As a result, ComCore and Mediamatics optionees received an option for equivalent shares of National common stock based on an exchange rate as determined under the respective acquisition agreements. The options expire up to a maximum of ten years after grant, subject to earlier expiration upon termination of employment. No more options will be granted under either of these stock option plans. The Mediamatics transaction resulted in a new measurement date for these options and the company recorded related unearned compensation in the amount of $9.2 million. Unearned compensation that is included as a separate component of shareholders' equity is amortized to operations over the vesting period of the respective options. Related compensation expense for fiscal 2000 was $2.8 million and for both fiscal 1999 and 1998, was $2.3 million. The following table summarizes information about options outstanding under these plans at May 28, 2000:
Outstanding Options ------------------------------------------------------------------------------------------ Weighted- Average Remaining Range of Exercise Number of Shares Contractual Life Weighted- Average Prices (In Thousands) (In Years) Exercise Price --------------------- ---------------------- ---------------------- ---------------------- ComCore option plan $0.50-$0.77 48.9 7.2 $0.59 Mediamatics option plan $1.59-$3.19 195.4 5.3 $2.63
National has a director stock option plan first approved in fiscal 1998 authorizing the grant of up to 1,000,000 shares of common stock to the company's eligible non-employee directors. Options were granted automatically upon approval of the plan by stockholders and are granted automatically to eligible directors upon their appointment to the Board and subsequent election to the Board by the stockholders. Director stock options vest in full after six months. As of May 28, 2000, options to purchase 170,000 shares of common stock had been granted under the director stock option plan with a weighted-average exercise price of $31.31 and weighted-average remaining contractual life of 8.3 years. The former chairman of the company was granted an option to purchase 300,000 shares of common stock at $27.875 per share in May 1995 in connection with his retirement. The option was granted outside the company's stock option plans at 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. As of May 28, 2000, options to purchase 150,000 shares of common stock were outstanding under this option grant. National has an employee stock purchase plan that authorizes the issuance of up to 24,950,000 shares of common stock in quarterly offerings to eligible employees at a price that is equal to 85 percent of the lower of the common stock's fair market value at the beginning or the end of a quarterly period. National also has an employee stock purchase plan available to employees at international locations, which authorizes the issuance of up to 5.0 million shares of common stock in quarterly offerings to eligible employees at a price equal to 85 percent of the lower of its fair market value at the beginning or the end of a quarterly period. Both purchase plans now use a captive broker and the company deposits shares purchased by the employee with the captive broker. In addition, for the international purchase plan, the participant's local operation is responsible for paying the difference between the purchase price set by the terms of the plan and the fair market value at the time of the purchase. Changes in options outstanding under the option plans during fiscal 2000, 1999 and 1998 or otherwise (but excluding the ComCore, Mediamatics and director options), were as follows:
Weighted-Average Number of Shares Exercise Price (in millions) (In Millions) ------------------------------ ------------------------------ Outstanding May 25, 1997 17.0 $17.67 Granted 9.9 $30.48 Exercised (2.5) $31.70 Cancelled (2.4) $25.48 ------------------------------ ------------------------------ Outstanding May 31, 1998 22.0 $23.28 Granted 26.2 $13.17 Exercised (0.4) $14.65 Cancelled (12.1) $26.52 ------------------------------ ------------------------------ Outstanding May 30, 1999 35.7 $14.91 Granted 9.4 $56.96 Exercised (6.7) $15.92 Cancelled (5.2) $14.81 ------------------------------ ------------------------------ Outstanding at May 28, 2000 33.2 $26.56 ============================== ==============================
Expiration dates for options outstanding at May 28, 2000 range from July 27, 2000 to May 26, 2010. The following tables summarize information about options outstanding under these plans (excluding the ComCore, Mediamatics and director options) at May 28, 2000:
Outstanding Options ------------------------------------------------------------------------- Weighted-Average Remaining Contractual Number of Shares Life Weighted-Average Range of Exercise Prices (In Millions) (In Years) Exercise Price ------------------------ ------------------------ ----------------------- $2.87-$9.44 0.9 4.3 $ 6.79 $9.56-$13.88 17.1 8.4 $13.13 $14.00-$23.00 4.1 6.2 $16.52 $23.33-$55.00 3.2 7.4 $34.09 $55.50-$61.00 7.7 9.9 $59.86 $61.25-$83.50 0.2 9.8 $67.83 ------------------------ ------------------------ ----------------------- Total 33.2 8.3 $26.56 ======================== ======================== =======================
Options Exercisable ----------------------------------------------- Number of Shares (In Weighted-Average Range of Exercise Prices Millions) Exercise Price ---------------------- ------------------------ $2.87-$9.44 0.6 $ 5.52 $9.56-$13.88 3.4 $13.01 $14.00-$23.00 2.8 $16.43 $23.33-$55.00 1.5 $28.44 $55.50-$61.00 - - $61.25-$83.50 - - ---------------------- ------------------------ Total 8.3 $16.47 ====================== ========================
Under the terms of the stock purchase plan and the global stock purchase plan, the company issued 1.3 million shares in fiscal 2000, 2.7 million shares in fiscal 1999 and 1.1 million shares in fiscal 1998 to employees for $26.3 million, $24.1 million and $23.4 million, respectively. Under all stock option plans, 7.0 million shares of common stock were issued during fiscal 2000. As of May 28, 2000, 84.8 million shares were reserved for issuance under all stock purchase and option plans and other options granted by the company, including shares available for future option grants. On June 29, 1998, the stock option and compensation committee of the board of directors approved an option reissuance grant for employees. The company's president and chief executive officer and executive staff members were excluded from the reissuance grant. Under the reissuance grant, each employee was able to exchange options outstanding as of June 29, 1998, which had been previously granted in plans that permit reissuance grants, for new options to purchase the same number of shares of common stock at $13.875 per share. Vesting on the reissuance grants restarted as of June 29, 1998. The options vest over a four-year period with one-fourth of the shares vesting on June 29, 1999, and the remaining shares vesting ratably over the next three years. The reissuance grant was made as a result of the significant decrease in the market price of common stock in the fourth quarter of fiscal 1998 and was intended to ensure that options previously granted provide a meaningful incentive to employees. Options to purchase approximately 8.4 million shares were cancelled in the reissuance grant. Other Stock Plans National has a director stock plan that authorizes the issuance of up to 200,000 shares of common stock to eligible non-employee directors of the company. The common stock is issued automatically to eligible new directors upon their appointment to the Board and to all eligible directors on their subsequent election to the Board by shareholders. Directors may also elect to take their annual retainer fees for Board and committee membership in stock that is issued under the director stock plan. As of May 28, 2000, 67,632 shares had been issued under the director stock plan and 132,368 shares were reserved for future issuances. National's performance award plan, which covered performance cycles of three to five years, was terminated and paid out in fiscal 1999. The company had discontinued new awards under the plan beginning in fiscal 1997. Performance cycles begun in fiscal 1995 and 1996 were paid out based on performance against the goals in July 1998. The plan authorized the issuance of up to 1.0 million shares of the company's common stock as full or partial payment of awards to plan participants based on performance units and the achievement of certain specific performance goals during a performance plan cycle. Participants were limited to a small group of senior executives and the last performance cycle started in fiscal 1996. No shares have been issued under the performance award plan since fiscal 1997, and the final payouts were made in cash. The company has a restricted stock plan, which authorizes the issuance of up to 2.0 million shares of common stock to non-officer employees of the company. The plan has been made available to a limited group of employees with technical expertise considered important to the company. During fiscal 2000, 1999 and 1998, 166,500, 272,000 and 21,000 shares, respectively, were issued under the restricted stock plan. Restrictions expire over time, ranging from two to six years after issuance. Based upon the market value on the dates of issuance, the company recorded $8.3 million, $3.5 million and $0.7 million of unearned compensation during fiscal 2000, 1999 and 1998, respectively, included as a separate component of shareholders' equity to be amortized to operations ratably over the respective restriction periods. As of May 28, 2000, 1,291,500 shares were reserved for future issuances. In May 1996, the company issued 200,000 shares of restricted stock to Brian L. Halla, then newly hired president and chief executive officer. These shares were not issued under the restricted stock plan and had restrictions that expired annually over a four-year period. The shares were recorded at the market value on the date of issuance as unearned compensation included as a separate component of shareholders' equity to be amortized to operations over the vesting period. Compensation expense for fiscal 2000, 1999 and 1998 related to all shares of restricted stock was $2.0 million, $4.5 million and $4.9 million, respectively. At May 28, 2000, the weighted-average grant date fair value for all outstanding shares of restricted stock was $27.04. Pro forma information regarding net income and earnings per share is required by SFAS No. 123. This information is required to be determined as if the company had accounted for its stock-based awards to employees under the fair value method contained in SFAS No. 123. The weighted-average fair value of stock options granted during fiscal 2000, 1999 and 1998 was $36.36, $6.95 and $14.22 per share, respectively. The weighted-average fair value of shares granted under the stock purchase plans was $7.38, $5.10 and $12.60 for fiscal 2000, 1999 and 1998. The fair value of the stock-based awards to employees was estimated using a Black-Scholes option pricing model, assuming no expected dividends and the following weighted-average assumptions for fiscal 2000, 1999 and 1998:
2000 1999 1998 ------------------ ----------------- ------------------ Stock Option Plans Expected life (in years) 5.8 4.6 4.4 Expected volatility 64% 57% 50% Risk-free interest rate 6.6% 5.7% 5.5% Stock Purchase Plans Expected life (in years) 0.3 0.3 0.3 Expected volatility 100% 78% 53% Risk-free interest rate 5.8% 4.6% 5.4%
For pro forma purposes, the estimated fair value of stock-based awards to employees is amortized over the options' vesting period (for options) and the three-month purchase period (for stock purchases) under the stock purchase plans. The pro forma information follows:
(In Millions, Except Per Share Amounts) 2000 1999 1998 -------------- ---------------- ------------- Net income (loss) - as reported $620.8 $(1,009.9) $(98.6) Net income (loss) - pro forma $550.3 $(1,069.1) $(134.1) Basic earnings (loss) per share - as reported $3.58 $(6.04) $(0.60) Basic earnings (loss) per share - pro forma $3.17 $(6.40) $(0.82) Diluted earnings (loss) per share - as reported $3.24 $(6.04) $(0.60) Diluted earnings (loss) per share - pro forma $2.87 $(6.40) $(0.82)
Note 10. Retirement and Pension Plans National's retirement and savings program for U.S. employees consists of three plans, as follows: The profit sharing plan requires contributions of the greater of 5 percent of consolidated net earnings before income taxes or 1 percent of payroll (as defined by the plan). Contributions are made 25 percent in common stock and 75 percent in cash. Total shares contributed under the profit sharing plan during fiscal 2000, 1999 and 1998 were 34,025 shares, 95,126 shares and 74,651 shares, respectively. As of May 28, 2000, 1.34 million shares of common stock were reserved for future contributions. The salary deferral 401(k) plan allows employees to defer up to 15 percent of their salaries, subject to certain limitations, with partially matching company contributions. Contributions are invested in one or more of eleven 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. Although 5.0 million shares of common stock are reserved for issuance to the stock fund, shares purchased to date with contributions have been purchased on the open market and the company has not issued any stock directly to the stock fund. The benefit restoration plan allows certain highly compensated employees 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 benefit restoration plan is a nonqualified plan of deferred compensation maintained in a rabbi trust. Participants can direct the investment of their benefit restoration 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 non-U.S. subsidiaries have varying types of defined benefit pension and retirement plans that are consistent with local statutes and practices. The annual expense for all plans was as follows:
(In Millions) 2000 1999 1998 ------------- ------------ ------------ Profit sharing plan $ 4.9 $ 3.7 $ 5.1 Salary deferral 401(k) plan $10.8 $ 9.1 $ 9.4 Non-U.S. pension and retirement plans $10.7 $11.2 $12.9
The defined benefit pension plans, which are maintained in the U.K., Germany and Japan, cover all eligible employees within each respective country. Pension plan benefits are based primarily on participants' compensation and years of service credited as specified under the terms of each country's plan. The company's 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 the plans is presented in the following table:
(In Millions) 2000 1999 1998 ----------------- ----------------- ----------------- Service cost of benefits earned during the year $ 5.5 $ 6.9 $ 6.1 Plan participant's contribution (1.3) (1.4) (1.5) Interest cost on projected benefit obligation 6.5 5.5 3.8 Actual return on plan assets (5.2) - (9.2) Net amortization and deferral 0.9 (4.2) 7.2 ----------------- ----------------- ----------------- Net periodic pension cost $ 6.4 $ 6.8 $ 6.4 ================= ================= =================
Obligation and asset data of the plans at fiscal year-end and details of their changes during the year are presented in the following tables:
(In Millions) 2000 1999 ----------------- ----------------- BENEFIT OBILGATION Beginning balance $102.2 87.5 Service cost 5.5 6.9 Interest cost 6.5 5.5 Benefits paid (4.4) (3.1) Actuarial gain 11.4 7.2 Exchange rate adjustment (1.2) (1.8) ----------------- ----------------- Ending balance $120.0 $102.2 ================= ================= PLAN ASSETS AT FAIR VALUE Beginning balance $ 59.9 $ 54.0 Actual return on plan assets 10.4 - Company contributions 14.3 8.4 Plan participants' contributions 1.3 1.4 Benefits paid (4.3) (3.0) Exchange rate adjustment 0.7 (0.9) ----------------- ----------------- Ending balance $ 82.3 $ 59.9 ================= ================= RECONCILIATION OF FUNDED STATUS Fund status - Benefit obligation in excess of plan assets $ 37.7 $ 42.3 Unrecognized net loss (31.3) (25.7) Unrecognized net transition obligation 3.2 2.6 Adjustment to recognize minimum liability 31.2 25.0 ----------------- ----------------- Accrued pension cost $ 40.8 $ 44.2 ================= =================
The projected benefit obligations and net periodic pension cost were determined using the following assumptions:
2000 1999 1998 ----------------- ----------------- ----------------- Discount rate 3.0%-6.5% 3.0%-7.0% 3.0%-7.0% Rate of increase in compensation levels 3.0%-4.5% 3.0%-4.5% 3.0%-4.5% Expected long-term return on assets 4.0%-8.0% 4.0%-9.0% 4.0%-9.0%
For fiscal 2000 and 1999, the company recorded adjustments for minimum liability of $6.2 million and $12.5 million, respectively. This was related to one of its defined benefit plans representing an excess of unfunded accumulated benefit obligations over previously recorded pension cost liabilities. The increase in unfunded accumulated benefit obligations was primarily attributable to a reduction in the assumed discount rate. This was combined with the effect of fixed rate increases in benefits under the terms of the plan in excess of current inflation rates. The corresponding offset was recorded as a component of accumulated other comprehensive loss. Note 11. Commitments and Contingencies Commitments The company leases certain facilities and equipment under operating lease arrangements. Rental expenses under operating leases were $28.1 million, $34.9 million and $36.9 million in fiscal 2000, 1999 and 1998, respectively. Future minimum commitments under noncancellable operating leases are as follows: (n Millions) ------------------------------ 2001 $ 25.3 2002 21.7 2003 14.0 2004 12.2 2005 10.2 Thereafter 17.3 ------------------------------ Total $100.7 ============================== In connection with the Fairchild transaction in fiscal 1997, Fairchild and the company entered into a manufacturing agreement whereby the company committed to purchase a minimum of $330.0 million in goods and services during the first 39 months after the transaction, based on specified wafer prices, which the company believes approximate market prices. The agreement expired in June 2000. During fiscal 2000, 1999 and 1998, the company's total purchases under the agreement were $87.5 million, $84.4 million and $155.0 million, respectively. In September 1999, the company reached agreement with International Business Machines Corporation for termination of the wafer manufacturing and marketing agreements that previously existed between Cyrix and IBM. Under terms of the agreement, the company was relieved of its obligations to purchase wafers from IBM and IBM ceased the competitive sale of Cyrix-designed microprocessors to customers other than National. In addition, the company transferred to IBM ownership of certain assets that physically resided at an IBM facility. Total purchases under the previously existing agreements were $21.0 million and $130.7 million during fiscal 1999 and 1998, respectively. Contingencies -- Legal Proceedings In April 1988, the company received a notice from the district director of U.S. Customs in San Francisco alleging underpayment of duties of approximately $19.5 million for the period June 1, 1979 to March 1, 1985 on merchandise imported from the company's non-U.S. subsidiaries. The company filed an administrative appeal in September 1988. On May 23, 1991, the district director revised the customs action and issued a notice of penalty claim and demand for restoration of duties, alleging underpayment of duties of approximately $6.9 million for the same period. The company filed an administrative petition for relief in October 1991 and the alleged underpayment was reduced in April 1994 to approximately $3.6 million. The revised alleged underpayment could be subject to penalties that may be computed as a multiple of the underpayment. The company filed a supplemental petition for relief in October 1994. The assistant commissioner of customs issued a decision in March 1998, which left the alleged underpayment at approximately $3.6 million. Although the company may consider an administrative settlement of the matter, and settlement negotiations are ongoing, it intends to continue to contest the assessment through all available means if a favorable settlement cannot be achieved. In July 1988, the Customs Service liquidated various duty drawback claims previously filed by the company and demanded repayment of accelerated drawback previously paid to the company plus accrued interest. In March 1996, the Customs Service approved in part and denied in part administrative protests filed by the company contesting the denied drawback claims. In order to obtain judicial review, the company paid the denied drawback and associated interest totaling $5.2 million and filed summonses in the Court of International Trade seeking a refund. Settlement negotiations are underway. The company has been named to the National Priorities List for its Santa Clara, California, site and has completed a remedial investigation/feasibility study with the Regional Water Quality Control Board, acting as an agent for the Federal Environmental Protection Agency. The company has agreed in principle with the RWQCB to a site remediation plan. The company has been sued by Advanced Micro Devices, Inc., which seeks recovery of cleanup costs AMD has incurred in the Santa Clara area under the RWQCB orders for contamination that AMD alleges was originally caused by the company. In addition to the Santa Clara site, the company has been designated as a potentially responsible party by federal and state agencies with respect to certain sites with which the company may have had direct or indirect involvement. Such designations are made regardless of the extent of the company's involvement. These claims are in various stages of administrative or judicial proceedings and include demands for recovery of past governmental costs and for future investigations and remedial actions. In many cases, the dollar amounts of the claims have not been specified, and with respect to a number of the PRP claims, have been asserted against a number of other entities for the same cost recovery or other relief as was asserted against the company. The company accrues costs associated with environmental matters when they become probable and reasonably estimable. The amount of all environmental charges to earnings, including charges relating to the Santa Clara site remediation, which did not include potential reimbursements from insurance coverage, were not material during fiscal 2000, 1999 and 1998. In connection with disposition in fiscal 1996 of the Dynacraft, Inc. assets and business, the company retained responsibility for environmental claims connected with Dynacraft's Santa Clara, California, operations and for environmental claims arising from National's conduct of the Dynacraft business prior to the disposition. With respect to environmental matters involved in the Fairchild disposition, the company agreed to retain liability for current remediation projects and environmental matters arising from National's prior operation of Fairchild's plants in South Portland, Maine; West Jordan, Utah; Cebu, Philippines; and Penang, Malaysia; and Fairchild agreed to arrange for and perform the remediation and cleanup. The company prepaid to Fairchild the estimated costs of the remediation and cleanup and remains responsible for costs and expenses incurred by Fairchild in excess of the prepaid amounts. The company's tax returns for certain years are under examination in the U.S. by the IRS (See Note 7). In January 1999, a class action suit was filed against the company 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. The company filed demurrers to the initial complaints and has now answered the fifth amended complaint. Only limited discovery has taken place to date. In addition to the foregoing, National is a party to other suits and claims that arise in the normal course of business. With respect to these proceedings discussed above, based on current information, the company does not believe that there is a reasonable possibility that losses associated with the proceedings exceeding amounts already recognized will be incurred in an amount that would be material to the company's financial position or results of operations. Note 12. Segment and Geographic Information The company designs, develops, manufactures and markets a wide array of semiconductor products for applications in a variety of markets. It is organized by various product line business units. For segment reporting purposes, each of the company's 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 similar economic characteristics have been combined to form three main operating segments that include the Analog segment, the Information Appliance segment and the Network Products segment. All operating segments are managed by one of three vice presidents who report directly to the chief executive officer, who is considered the company's chief operating decision-maker. Based on the criteria under SFAS No. 131, only the Analog segment and the Information Appliance segment are considered reportable segments. The Network Products segment, as well as other business units that did not meet the aggregation criteria to be included in the three main operating segments, is included in the caption, "All Others." Prior to fiscal 2000, the former Cyrix business unit was also considered a separate reportable operating segment. The Analog segment includes a wide range of building block products such as high-performance operational amplifiers, power management circuits, data acquisition circuits, interface circuits and circuits targeted towards leading-edge monitor applications such as ultra-thin flat panel displays. The Analog segment's wireless circuits perform the radio, baseband controller, power management and other related functions primarily for handsets and base stations in the cellular and cordless telephone markets. The segment is heavily focused on using its analog expertise as the initial point to integrate systems on a chip aimed at the cellular, personal systems and information appliance markets. Current offerings include scanners on a chip, systems health monitoring and integrated power management systems, and wireless handset integrations. The Information Appliance segment contains all business units focused on providing component and system solutions to the emerging information appliance market, where the company is strategically directed to provide next-generation solutions. These products include application-specific integrated microprocessors based on National's GeodeTM technology, MPEG software and hardware products and diverse advanced input/output controllers. The Information Appliance segment is focused on three key market segments that include interactive TV set-top boxes (equipped with digital video), enterprise thin clients (computers that have minimal memory and access software from a centralized server network) and personal information access devices, such as WebPADTM. The Network Products segment offers a line of ethernet products that address a range of applications. The majority of network product sales for fiscal 2000 were derived from relatively mature 10/100 Mb products. Utilizing the digital signal processing technology that was initially obtained through the ComCore acquisition, the company has now developed new network products with higher bandwidth applications. These include MACPHYTERTM, a fast ethernet 10/100 Mb device combined with a media access controller, and GIGPHYTERTM, which offers expanded 10/100/1000 Mbps bandwidth and addresses transmission over copper networks. The former Cyrix business unit primarily offered a line of Cyrix M II microprocessors, which were stand-alone central processing units that were targeted toward the sub-$1,000 PC market. In this market, which is currently dominated by two major competitors, the company experienced highly competitive pricing trends and constant pressure to rapidly release new microprocessors with higher operating speeds. As a result, the company decided to exit the Cyrix PC microprocessor business in May 1999 and completed the sale of the assets of this business to VIA Technologies, Inc. in September 1999 (See Note 3). Aside from these operating segments, the company's corporate structure also includes centralized Worldwide Marketing and Sales, the Central Technology and Manufacturing Group, and the Corporate Group. Certain expenses of these groups are allocated to the operating segments and are included in their segment operating results. With the exception of the allocation of certain expenses, the significant accounting policies and practices used to prepare the consolidated financial statements as described in Note 1 are generally followed in measuring the sales, segment income or loss and determination of assets for each reportable segment. The company allocates certain expenses associated with centralized manufacturing, selling, marketing and general administration to reporting segments based on either the percentage of net trade sales for each operating segment to total net trade sales or headcount, as appropriate. Certain R&D expenses primarily associated with 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. For fiscal 1998, interest income and interest expense were allocated to operating segments based on the percentage of their net trade sales to total net trade sales. For fiscal 2000 and 1999, a portion of interest income and interest expense was indirectly allocated to operating segments. The following table presents specified amounts included in the measure of segment results or the determination of segment assets:
Information Cyrix (In Millions) Analog Appliance Business Total Segment Segment Unit All Others Eliminations Consolidated ----------- --------------- ----------- ------------- --------------- --------------- 2000 Sales to unaffiliated customers $1,514.1 $ 239.1 $ 18.6 $ 368.1 $ - $2,139.9 Inter-segment sales - 0.3 - - (0.3) - ----------- --------------- ----------- ------------- --------------- --------------- Net sales $1,514.1 $ 239.4 $ 18.6 $ 368.1 $ (0.3) $2,139.9 =========== =============== =========== ============= =============== =============== Segment income (loss) before income taxes and extraordinary item $ 642.5 $ 454.1 $ (99.8) $ (22.6) $ 310.8 =========== =============== =========== ============= =============== Depreciation and amortization $ 13.8 $ 13.9 $ 3.3 $ 232.8 $ 263.8 Interest income $ - $ - $ - $ 33.2 $ 33.2 Interest expense $ - $ - $ - $ 17.9 $ 17.9 Segment assets $ 133.0 $ 30.8 $ - $2,218.4 $2,382.2 1999 Sales to unaffiliated customers $1,164.1 $ 203.4 $ 179.2 $ 410.1 $ - $1,956.8 Inter-segment sales - 0.5 - - (0.5) - ----------- --------------- ----------- ------------- --------------- --------------- Net sales $1,164.1 $ 203.9 $ 179.2 $ 410.1 $ (0.5) $1,956.8 =========== =============== =========== ============= =============== =============== Segment income (loss) before $(1,085.4) income taxes $ 35.9 $ (190.7) $ (161.9) $ (768.7) =========== =============== =========== ============= =============== Depreciation and amortization $ 13.8 $ 19.0 $ 11.2 $ 361.6 $ 405.6 Interest income $ - $ - $ - $ 26.9 $ 26.9 Interest expense $ - $ - $ - $ 29.1 $ 29.1 Segment assets $ 98.4 $ 16.1 $ 10.9 $1,918.9 $2,044.3 1998 Sales to unaffiliated customers $1,333.6 $ 307.6 $ 226.0 $ 669.5 $ - $2,536.7 Inter-segment sales - 0.9 - - (0.9) - ----------- --------------- ----------- ------------- --------------- --------------- Net sales $1,333.6 $ 308.5 $ 226.0 $ 669.5 $ (0.9) $2,536.7 =========== =============== =========== ============= =============== =============== Segment income (loss) before income taxes $ 151.1 $ (90.6) $ (108.4) $ (51.8) $ (99.7) =========== =============== =========== ============= =============== Depreciation and amortization $ 9.8 $ 8.9 $ 14.4 $ 273.6 $ 306.7 Interest income $ - $ - $ 2.7 $ 45.9 $ 48.6 Interest expense $ 2.6 $ 0.8 $ 6.4 $ 16.5 $ 26.3 Segment assets $ 149.4 $ 56.0 $ 30.1 $2,865.2 $3,100.7
Depreciation and amortization presented for each segment includes only such charges on dedicated segment assets. The measurement of segment profit and loss includes an allocation of depreciation expense for shared manufacturing facilities contained in each segment's product standard cost. Segment profit or loss for fiscal 1999 of each reportable segment included allocations of expenses associated with the shared manufacturing facility in Maine, expenses associated with activity of the development wafer fabrication facility in Santa Clara and expenses incurred at corporate headquarters. The outcome of the actions announced in May 1999 significantly reduced allocations of these expenses to operating segments for fiscal 2000. The company operates in three main geographic areas that include the Americas, Europe and the Asia Pacific region including Japan. In the information that follows, sales include local sales and exports made by operations within each area. Total sales by geographic area include sales to unaffiliated customers and inter-geographic transfers, which are based on standard cost. To control costs, a substantial portion of National's 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. National is not dependent upon any single customer, the loss of which would have a material effect on the company. In addition, no one customer or distributor accounted for 10 percent or more of total net sales in fiscal 2000, 1999 and 1998. The following tables provides geographic sales and asset information by major countries within the main geographic areas (Japan is included with the rest of the world):
(In Millions) United United Hong Kong Singapore Rest of Eliminations Total States Kingdom World Consolidated 2000 Sales to unaffiliated customers $ 761.7 $ 348.8 $ 439.1 $ 214.6 $ 375.7 $2,139.9 Transfers between geographic area 544.2 192.1 0.1 875.8 0.7 $(1,612.9) - ------------ ------------ ----------- ------------- ----------- --------------- --------------- Net sales $1,305.9 $ 540.9 $ 439.2 $1,090.4 $ 376.4 $(1,612.9) $2,139.9 ============ ============ =========== ============= =========== =============== =============== Total assets $1,557.7 $ 111.2 $ 52.9 $ 297.7 $ 362.7 $2,382.2 ============ ============ =========== ============= =========== =============== 1999 Sales to unaffiliated customers $ 738.3 $ 325.5 $ 386.4 $ 218.0 $ 288.6 $1,956.8 Transfer between geographic area 555.8 162.4 2.2 883.1 2.1 $(1,605.6) - ------------ ------------ ----------- ------------- ----------- --------------- --------------- Net sales $1,294.1 $ 487.9 $ 388.6 $1,101.1 $ 290.7 $(1,605.6) $1,956.8 ============ ============ =========== ============= =========== =============== Total assets $1,181.5 $ 104.3 $ 40.6 $ 372.2 $ 345.7 $2,044.3 ============ ============ =========== ============= =========== =============== 1998 Sales to unaffiliated customers $1,101.1 $ 436.1 $ 435.9 $ 213.5 $ 350.1 $2,536.7 Transfers between geographic area 571.5 203.0 2.1 987.8 3.2 $(1,767.6) - ------------ ------------ ----------- ------------- ----------- --------------- --------------- Net sales $1,672.6 $ 639.1 $438.0 $1,201.3 $ 353.3 $(1,767.6) $2,536.7 ============ ============ =========== ============= =========== =============== =============== Total assets $2,177.7 $ 155.2 $58.8 $ 329.5 $ 379.5 $3,100.7 ============ ============ =========== ============= =========== ===============
Note 13. Supplemental Disclosure of Cash Flow Information and Noncash Investing and Financing Activities
(In Millions) 2000 1999 1998 --------------- -------------- ------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid (refunded) for: Interest expense $ 21.5 $ 26.1 $ 34.8 Interest payment on tax settlements $ - $ 2.8 $ 0.1 Income taxes (refund) $ 18.1 $(17.0) $ 12.0 (In Millions) 2000 1999 1998 --------------- -------------- ------------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Issuance of stock for employee benefit plans $ 0.9 $ 0.3 $ 2.5 Issuance of stock for director stock plan $ 0.4 $ - $ - Tax benefit for employee stock option plans $ - $ - $ 17.5 Change in unrealized gain on available-for-sale securities $ 8.6 $ 22.2 $ (4.2) Unearned compensation charge relating to restricted stock issuance $ 8.3 $ 3.5 $ 0.7 Issuance of convertible subordinated promissory notes in connection with ComCore acquisition $ - $ - $ 15.0 Issuance of common stock upon conversion of convertible subordinated promissory notes $ 7.1 $ - $ - Fair value of stock options assumed in ComCore acquisition $ - $ - $ 4.3 Restricted stock cancellation $ 6.0 $ 2.0 $ 0.9 Minimum pension liability $ 6.2 $ 12.5 $ 12.5
Note 14. Financial Information by Quarter (Unaudited) The following table presents the quarterly information for fiscal 2000 and 1999:
First Second Third Fourth (In Millions, Except Per Share Amounts) Quarter Quarter Quarter Quarter -------------- --------------- --------------- --------------- 2000 Net sales $ 481.8 $ 513.9 $ 548.9 $ 595.3 Gross margin $ 185.1 $ 232.4 $ 263.7 $ 303.8 Income before extraordinary item $ 47.1 $ 98.8 $ 327.8 $ 153.9 Net income $ 47.1 $ 92.0 $ 327.8 $ 153.9 - --------------------------------------------------- -------------- --------------- --------------- --------------- Basic earnings per share: Income before extraordinary item $ 0.28 $ 0.57 $ 1.88 $ 0.87 Net income $ 0.28 $ 0.53 $ 1.88 $ 0.87 - --------------------------------------------------- -------------- --------------- --------------- --------------- Weighted-average common shares outstanding used in basic earnings per share 170.3 172.2 174.7 177.1 - --------------------------------------------------- -------------- --------------- --------------- --------------- Diluted loss per share: Income before extraordinary item $ 0.25 $ 0.52 $ 1.68 $ 0.78 Net income $ 0.25 $ 0.49 $ 1.68 $ 0.78 - --------------------------------------------------- -------------- --------------- --------------- --------------- Weighted-average common and potential common shares outstanding used in diluted earnings per share 185.4 189.5 194.8 197.0 - --------------------------------------------------- -------------- --------------- --------------- --------------- Common stock price - high $ 31.13 $ 42.69 $ 74.00 $ 85.94 Common stock price - low $ 17.69 $ 23.50 $ 40.56 $ 43.75 - --------------------------------------------------- -------------- --------------- --------------- --------------- 1999 Net sales $ 469.6 $ 510.1 $ 500.1 $ 477.0 Gross margin $ 55.0 $ 93.0 $ 155.1 $ 100.2 Net loss $(104.8) $ (94.4) $ (27.2) $(783.5) - --------------------------------------------------- -------------- --------------- --------------- --------------- Basic and diluted loss per share $ (0.63) $ (0.57) $ (0.16) $ (4.65) - --------------------------------------------------- -------------- --------------- --------------- --------------- Weighted-average common shares outstanding used in basic and diluted loss per share 165.8 166.6 167.5 168.5 - --------------------------------------------------- -------------- --------------- --------------- --------------- Common stock price - high $ 16.88 $ 15.75 $ 17.63 $ 22.75 Common stock price - low $ 9.63 $ 7.44 $ 10.25 $ 8.88 - --------------------------------------------------- -------------- --------------- --------------- ---------------
The company's 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 28, 2000, there were approximately 9,019 holders of common stock. Note 15. Subsequent Event On July 11, 2000, a jury returned a verdict in favor of the company and its board of directors in connection with a federal securities class action suit that was originally filed in November 1997. The case arose out of the 1997 merger between National and Cyrix (See Note 4). The plaintiff, who represented a class of approximately 25,000 former Cyrix shareholders, claimed that the company's proxy and prospectus misrepresented material information about the company's ability to manufacture Cyrix PC microprocessors. The company does not know at this time if plaintiff intends to appeal. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders National Semiconductor Corporation: We have audited the accompanying consolidated balance sheets of National Semiconductor Corporation and subsidiaries (the Company) as of May 28, 2000 and May 30, 1999, 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 28, 2000. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement Schedule II, "Valuation and Qualifying Accounts." These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Semiconductor Corporation and subsidiaries as of May 28, 2000 and May 30, 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended May 28, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Mountain View, California June 7, 2000 (except as to Note 15, which is as of July 11, 2000) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to directors, appearing under the caption "Election of Directors" including subcaptions thereof, and "Section 16(a) Beneficial Ownership Reporting Compliance" in the registrant's Proxy Statement for the 2000 annual meeting of shareholders to be held on or about September 22, 2000 and which will be filed in definitive form pursuant to Regulation 14a on or about August 18, 2000 (hereinafter "2000 Proxy Statement"), is incorporated herein by reference. Information concerning executive officers is set forth in Part I hereof under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information appearing under the captions "Director Compensation", "Compensation Committee Interlocks and Insider Participation" and "Executive Compensation" (including all related sub captions thereof) in the 2000 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information concerning the only known ownership of more than 5 percent of the company's outstanding common stock "Outstanding Capital Stock, Quorum and Voting" in the 2000 Proxy Statement, is incorporated herein by reference. The information concerning the ownership of the company's equity securities by directors, certain executive officers and directors and officers as a group, appearing under the caption "Security Ownership of Management" in the 2000 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing under the caption "Compensation Committee Interlocks and Insider Participation" in the 2000 Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Pages in (a)1. Financial Statements this document - --------------------------- ------------- For the three years ended May 28, 2000- 27 refer to Index in Item 8 Independent Auditors' Report 60 (a) 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts 64 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 the registrant are omitted because the registrant is 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 the registrant 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 67 to 69 of this report are filed or incorporated by reference as part of this report. (b) Reports on Form 8-K During the quarter ended May 28, 2000, no reports on Form 8-K were filed by the registrant. 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 25, 1997 $ 4.1 $ 37.3 $ 41.4 Additions charged against revenue - 214.0 214.0 Additions charged against costs and expenses 5.4 - 5.4 Deductions (0.6) (1) (209.9) (210.5) ---------- ---------- --------- Balances at May 31, 1998 8.9 41.4 50.3 Additions charged against revenue - 222.2 225.2 Additions charged against costs and expenses 3.4 - 3.4 Deductions (3.2) (1) (204.7) (207.9) ---------- ----------- --------- Balances at May 30, 1999 9.1 58.9 68.0 Additions charged against revenue - 223.9 223.9 Additions charged against costs and expenses 0.3 - 0.3 Deductions (2.0) (1) (231.6) (233.6) ---------- ---------- --------- Balances at May 28, 2000 $ 7.4 $ 51.2 $ 58.6 ======= ======= ======= - ------------------------------------------------ (1) Doubtful accounts written off, less recoveries. 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 1, 2000 By: /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 1st day of August 2000. Signature Title /S/ BRIAN L. HALLA* Chairman of the Board, President --------------- and Chief Executive Officer Brian L. Halla (Principal Executive Officer) /S/ DONALD MACLEOD Executive Vice President, Finance --------------- and Chief Financial Officer Donald Macleod (Principal Financial Officer) /S/ LEWIS CHEW * Vice President and Controller ---------- (Principal Accounting Officer) Lewis Chew /S/ GARY P. ARNOLD * Director -------------- Gary P. Arnold /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 /S/ DONALD E. WEEDEN * Director ---------------- Donald E. Weeden * By /S/ DONALD MACLEOD ---------------- Donald Macleod, Attorney-in-fact CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders National Semiconductor Corporation: We consent to incorporation by reference in the Registration Statements No. 33-48935, 33-54931, 33-55699, 33-55703, 33-61381, 333-09957, 333-23477, 333-36733, 333-53801, 333-77195, and 333-88269 on Form S-8, and Post Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement No. 333-38033-01 of National Semiconductor Corporation and subsidiaries of our report dated June 7, 2000 (except as to Note 15, which is as of July 11, 2000), relating to the consolidated balance sheets of National Semiconductor Corporation and subsidiaries as of May 28, 2000 and May 30, 1999, 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 28, 2000 and the related financial statement schedule, which report appears on page 60 of the 2000 Annual Report on Form 10-K of National Semiconductor Corporation. KPMG LLP Mountain View, California August 1, 2000 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: 2.1 Agreement and Plan of Merger by and among National Semiconductor Corporation, Nova Acquisition Corporation and Cyrix Corporation dated as of July 28, 1997 (incorporated by reference from the Exhibits to the Company's Form 10-K for the fiscal year ended May 25, 1997 filed August 6, 1997). 3.1 Second Restated Certificate of Incorporation of the Company, as amended (incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-3 Registration No. 33-52775, which became effective March 22, 1994); Certificate of Amendment of Certificate of Incorporation dated September 30, 1994 (incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-8 Registration No. 333-09957 which became effective August 12, 1996). 3.2 By-Laws of the Company 4.1 Form of Common Stock Certificate (incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-3 Registration No. 33-48935, which became effective October 5, 1992). 4.2 Rights Agreement (incorporated by reference from the Exhibits to the Company's 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 the Company's 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 the Company's Amendment No. 2 to the Registration Statement on Form 8-A filed January 17, 1997). 4.3 Indenture dated as of September 15, 1995 (incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-3 Registration No. 33-63649, which became effective November 6, 1995). 4.4 Form of Note (incorporated by reference from the Exhibits to the Company's Registration Statement on From S-3 Registration No. 33-63649, which became effective November 6, 1995). 4.5 Indenture dated as of May 28, 1996 between Cyrix Corporation ("Cyrix") and Bank of Montreal Trust Company as Trustee (incorporated by reference from the Exhibits to Cyrix's Registration Statement on Form S-3 Registration No. 333-10669, which became effective August 22, 1996). 4.6 Registration Rights Agreement dated as of May 28, 1996 between Cyrix and Goldman, Sachs & Co. (incorporated by reference from the Exhibits to Cyrix's Registration Statement on Form S-3 Registration No. 333-10669, which became effective August 22, 1996). 10.1 Stock Option Agreement between National Semiconductor Corporation and Cyrix Corporation (incorporated by reference from the Exhibits to the Company's 10-K for the fiscal year ended May 25, 1997 filed August 6, 1997). 10.2 Management Contract or Compensatory Plan or Arrangement: Executive Officer Incentive Plan (incorporated by reference from the Exhibits to the Company's Form 10-K for the fiscal year ended May 30, 1999 filed July 29, 1999). Fiscal Year 2000 Executive Officer Incentive Plan Agreement (incorporated by reference from the Exhibits to the Company's Form 10-Q for the quarter ended August 29, 1999 filed October 12, 1999). 10.3 Management Contract or Compensatory Plan or Agreement: Stock Option Plan, as amended through April 26, 1998 (incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-8 Registration No. 333-57029, which became effective June 17, 1998). 10.4 Management Contract or Compensatory Plan or Agreement: Executive Officer Stock Option Plan. 10.5 Management Contract or Compensatory Plan or Arrangement: Benefit Restoration Plan as amended through January 1, 2000 (incorporated by reference from the Exhibits to the Company's Form 10-Q for the quarter ended November 28, 1999 filed January 12, 2000). 10.6 Management Contract or Compensatory Plan or Arrangement: Agreement with Peter J. Sprague dated May 17, 1995. Non Qualified Stock Option Agreement with Peter J. Sprague dated May 18, 1995 (incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-8 Registration No. 33-61381 which became effective July 28, 1995). 10.7 Management Contract or Compensatory Plan or Arrangement: Director Stock Plan as amended through June 26, 1997 (incorporated by reference from the Exhibits to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders held September 26, 1997 filed August 12, 1997). 10.8 Management Contract or Compensatory Plan or Arrangement: Director Stock Option Plan (incorporated by reference from the Exhibits to the Company's Form 10-Q for the quarter ended August 29, 1999 filed October 12, 1999). 10.9 Management Contract or Compensatory Plan or Arrangement: Director Deferral Plan (incorporated by reference from the Exhibits to the Company's Form 10-Q for the quarter ended August 29, 1999 filed October 12, 1999). 10.10Management Contract or Compensatory Plan or Arrangement: Board Retirement Policy (incorporated by reference from the Exhibits to the Company's Form 10-K for the fiscal year ended May 30, 1999 filed July 29, 1999). 10.11Management Contract or Compensatory Plan or Arrangement: Preferred Life Insurance Program (incorporated by reference from the Exhibits to the Company's Form 10-K for the fiscal year ended May 30, 1999 filed July 29, 1999). 10.12Management Contract or Compensatory Plan or Arrangement: Retired Officers and Directors Health Plan. 10.13Management Contract or Compensatory Plan or Arrangement: Terms of Employment Offered Brian L. Halla (incorporated by reference from the Exhibits to the Company's Form 10-K for the fiscal year ended May 26, 1996 filed August 5, 1996). 10.14Management Contract Compensatory Plan or Arrangement: Restricted Stock Agreement with Brian L. Halla (incorporated by reference from the Exhibits to the Company's Registration Statement No. 333-09957, which became effective August 12, 1996). 10.15Management Contract or Compensatory Plan or Agreement: National Semiconductor Corporation Long Term Disability Coverage Plan Summary, National Semiconductor Corporate Executive Staff as amended January 1, 2000 (incorporated by reference from the Exhibits to the Company's Form 10-Q for the quarter ended February 27, 2000 filed April 11, 2000). 10.16Management Contract or Compensatory Plan or Agreement: Long Term Disability Plan Summary, National Semiconductor Executive Employees (incorporated by reference from the Exhibits to the Company's Form 10-Q for the quarter ended February 27, 2000 filed April 11, 2000). 10.17Management Contract or Compensatory Plan or Agreement: Form of Change of Control Employment Agreement entered into with Executive Officers of the Company (incorporated by reference from the Company's Form 10-K for fiscal year ended May 31, 1998 filed August 3, 1998). 10.18Management Contract or Compensatory Plan or Agreement: Cyrix Corporation 1988 Incentive Stock Plan (incorporated by reference from the exhibits to the Post Effective Amendment No. 1 on Form S-8 to Form S-4 Registration No. 333-38033-01, which became effective November 18, 1997). 10.19Management Contract on Compensatory Plan or Agreement: Settlement Agreement and General Release with Michael Bereziuk, dated December 22, 1999 as amended May 31, 2000. 21.0 List of Subsidiaries. 23.0 Consent of Independent Auditors (included in Part IV). 24.0 Power of Attorney. 27.0 Financial Data Schedule. Exhibit 21.0 NATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT The following table shows certain information with respect to the active subsidiaries of the Company as of May 28, 2000, all of which are included in the consolidated financial statements of the Company: Percent of Other Country Voting State or Other In Which Securities Jurisdiction of Subisidiary is Owned by Name Incorporation Registered National Algorex Inc. California 100% ComCore Semiconductor, Inc. California 100% National Semiconductor (Texas), Inc. Delaware 100% Mediamatics, Inc. California 100% National Semiconductor Delaware 100% International, Inc. National Semiconductor Netsales, Inc. Delaware 100% National Semiconductor (Maine), Inc. Delaware 100% ASIC II Limited Hawaii 100% National Semiconductor B.V. Corporation Delaware 100% National Semiconductor France S.A.R.L. France 100% National Semiconductor GmbH Germany Belgium 100% National Semiconductor (I.C.) Ltd. Israel 100% National Semiconductor S.r.l. Italy 100% National Semiconductor Aktiebolog (A.B). Sweden 100% National Semiconductor (U.K.) Ltd. Great Britain Denmark/Ireland 100% Finland/Norway/Spain National Semiconductor (U.K.) Great Britain 100% Pension Trust Company Ltd. National Semiconductor Benelux B.V. Netherlands 100% National Semiconductor B.V. Netherlands 100% National Semiconductor International B.V. Netherlands 100% National Semiconductor International Finance S.A. Switzerland 100% Natsem India Designs Pvt.Ltd. India 100% National Semiconductor (Australia)Pty. Ltd. Australia 100% National Semiconductor Hong Kong Limited Hong Kong 100% National Semiconductor Hong Kong Sales Limited Hong Kong 100% National Semiconductor (Far East)Limited Hong Kong Taiwan 100% National Semiconductor Hong Kong 100% Services Limited National Semiconductor Japan 100% Japan Ltd. N.S. Microelectronics Co., Ltd. Japan 49% National Semiconductor SDN. BHD. Malaysia 100% National Semiconductor Technology SDN. BHD. Malaysia 100% National Semiconductor Services Malaysia SDN.BHD. Malaysia 100% National Semiconductor Pte. Ltd. Singapore 100% National Semiconductor Asia Pacific Singapore 100% Pte. Ltd. National Semiconductor Manufacturer Singapore Pte. Ltd. Singapore 100% Shanghai National Semiconductor People's Republic Technology Limited of China 95% National Semiconductor Korea Limited Korea 100% National Semiconductor Canada Inc. Canada 100% National Semiconductores Brazil 100% do Brazil Ltda. Electronica NSC de Mexico, S.A. Mexico 100% ASIC Limited Bermuda 100% National Semiconductor (Barbados) Barbados 100% Limited Exhibit 24.0 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned persons hereby constitutes and appoints Brian L. Halla, Donald Macleod, and John M. Clark III, and each of them singly, his true and lawful attorney-in-fact and in his name, place, and stead, and in any and all of his offices and capacities with National Semiconductor Corporation (the "Company"), to sign the Annual Report on Form 10-K for the Company's 2000 fiscal year, and any and all amendments to said Annual Report on Form 10-K, and generally to do and perform all things and acts necessary or advisable in connection therewith, and each of the undersigned hereby ratifies and confirms all that each of said attorneys-in-fact may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has hereunto executed this Power of Attorney as of the date set forth opposite his signature. SIGNATURE DATE //S// BRIAN L. HALLA June 21, 2000 - ---------------------------------- Brian L. Halla //S// GARY P. ARNOLD June 21, 2000 - ---------------------------------- Gary P. Arnold //S// ROBERT J. FRANKENBERG June 21, 2000 - ---------------------------------- Robert J. Frankenberg //S// E. FLOYD KVAMME June 21, 2000 - ---------------------------------- E. Floyd Kvamme //S// MODESTO A. MAIDIQUE June 20, 2000 - ---------------------------------- Modesto A. Maidique //S// EDWARD R. McCRACKEN June 21, 2000 - ---------------------------------- Edward R. McCracken //S// DONALD E. WEEDEN June 20, 2000 - ---------------------------------- Donald E. Weeden //S// DONALD MACLEOD June 22, 2000 - ---------------------------------- Donald Macleod //S// LEWIS CHEW June 22, 2000 - ---------------------------------- Lewis Chew Word\NLL\SecMtrs\bylwnw400 EX-3.(II) 2 0002.txt BY-LAWS OF THE COMPANY 4/20/00 Exhibit 3.2 AMENDED AND RESTATED BY-LAWS OF NATIONAL SEMICONDUCTOR CORPORATION ARTICLE I. OFFICES Section 1. Registered Office. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. Other Offices. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II. STOCKHOLDERS Section 1. Place of Meetings. Meetings of stockholders shall be held at such place either within or without the State of Delaware as may be designated by the board of directors. Section 2. Annual Meeting. An annual meeting of stockholders shall be held on the fourth Friday in September of each year, at 10:30 A.M., or at such other date and time as shall be designated by the board of directors. At the annual meeting the stockholders shall elect a board of directors and transact such other business as may be properly brought before the meeting. Section 3. Special Meetings. Subject to the rights of the holders of any series of stock having a preference over the Common Stock of the corporation as to dividends or upon liquidation ("Preferred Stock") with respect to such series of Preferred Stock, special meetings of the stockholders may be called only by the chairman of the board or by the board of directors pursuant to a resolution adopted by a majority of the total number of directors which the corporation would have if there were no vacancies (the "Whole Board"). Section 4. Notice of Meetings. The secretary or such other officer of the corporation as is designated by the board of directors shall serve personally or send through the mails or by telegraph a written notice of annual or special meetings of stockholders, addressed to each stockholder of record entitled to vote at his address as it appears on the stock transfer books of the corporation, stating the time and place of the meeting and the purpose or purposes for which the meeting is called, not less than ten nor more than sixty days before the date of the meeting. If mailed, notice shall be deemed to have been given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. Notice given by telegraph shall be deemed to have been given upon delivery of the message to the telegraph company. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the corporation's notice of meeting. Any previously scheduled meeting of the stockholders may be postponed, and (unless the Certificate of Incorporation otherwise provides) any special meeting of the stockholders may be cancelled, by resolution of the board of directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. Section 5. Waiver of Notice. Notice of a meeting need not be given to any stockholder who signs a waiver of notice, in person or by proxy, whether before or after a meeting. The attendance of any stockholder at a meeting, in person or by proxy, without protesting either prior thereto or at its commencement the lack of notice of such meeting, shall constitute a waiver of notice by him. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. Section 6. Stockholder's List. The officer who has charge of the stock transfer book of the corporation shall prepare and make, at least ten days before every meeting of the stockholders at which directors are to be elected, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to examination by any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 7. Quorum and Adjournment. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the outstanding shares of the corporation entitled to vote generally in the election of directors (the "Voting Stock"), present in person or represented by proxy, shall constitute a quorum at all meetings of stockholders for the transaction of business, except that when specified business is to be voted on by a class or series of stock voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum of such class or series for the transaction of such business. The chairman of the meeting or a majority of the shares so represented may adjourn the meeting from time to time, whether or not there is such a quorum. The stockholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote. Section 8. Proxies. At all meetings of stockholders, each stockholder entitled to vote shall have one vote, to be exercised in person or by proxy, for each share of capital stock having voting power, held by such stockholder. All proxies shall be in writing, shall relate only to a specific meeting (including continuations and adjournments of the same), and shall be filed with the secretary at or before the time of the meeting. Each proxy must be signed by the shareholder or his attorney-in-fact. The person or persons named in a proxy for a specific meeting may vote at any adjournment of the meeting for which the proxy was given. If more than one person is named as proxy, a majority of such persons so named present at the meeting, or if only one shall be present, then that one, shall have and exercise all the powers conferred upon all of the persons unless the proxy shall provide otherwise. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged prior to or at its exercise and the burden of proving invalidity shall rest on the challenger. Section 9. Notice of Stockholder Business and Nominations. a. Annual Meetings of Stockholders. 1) Nominations of persons for election to the board of directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the corporation's notice of meeting, (b) by or at the direction of the board of directors or (c) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in this By-Law, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (a)(1) of this By-Law, the stockholder must have given timely notice thereof in writing to the secretary of the corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the corporation not later than the close of business on the 120th day nor earlier than the close of business on the 150th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 120 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 150th day prior to such annual meeting and not later than the close of business on the later of the 120th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner and (ii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this By-Law to the contrary, in the event that the number of directors to be elected to the board of directors of the corporation is increased and there is no public announcement by the corporation naming all of the nominees for director or specifying the size of the increased board of directors at least 130 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive offices of the corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the corporation. b. Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the corporation's notice of meeting. Nominations of persons for election to the board of directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the corporation's notice of meeting (a) by or at the direction of the board of directors or (b) provided that the board of directors has determined that directors shall be elected at such meeting, by any stockholder of the corporation who is a stockholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. In the event the corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the board of directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the corporation's notice of meeting, if the stockholder's notice required by paragraph (a)(2) of this By-Law shall be delivered to the secretary at the principal executive offices of the corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the board of directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. c. General. (1) Only such persons who are nominated in accordance with the procedures set forth in this By-Law shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with this By-Law, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this By-Law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. Section 10. Voting. When a quorum is present at any meeting, the affirmative vote of the holders of a majority of the capital stock having voting power present in person or represented by proxy and entitled to vote on the matter shall decide any question brought before such meeting, except (i) in respect of elections of directors which shall be decided, subject to the rights of the holders of any series of Preferred Stock, by a plurality of the votes cast, and (ii) when the question is one which by express provision of statute or Certificate of Incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question. No vote need be taken by ballot unless required by statute. Section 11. Inspectors of Elections; Opening and Closing the Polls. The board of directors by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of stockholders and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by law. The chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting. Section 12. Record Date for Action by Written Consent. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the board of directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the secretary, request the board of directors to fix a record date. The board of directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date (unless a record date has previously been fixed by the board of directors pursuant to the first sentence of this Section). If no record date has been fixed by the board of directors pursuant to the first sentence of this Section or otherwise within ten (10) days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or to any officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the board of directors adopts the resolution taking such prior action. Section 13. Inspectors of Written Consent. In the event of the delivery, in the manner provided by Section 12 of this Article to the corporation of the requisite written consent or consents to take corporate action and/or any related revocation or revocations, the corporation shall engage independent inspectors of elections for the purpose of promptly performing a ministerial review of the validity of the consents and revocations. For the purpose of permitting the inspectors to perform such review, no action by written consent without a meeting shall be effective until such date as the independent inspectors certify to the corporation that the consents delivered to the corporation in accordance with Section 12 of this Article represent at least the minimum number of votes that would be necessary to take the corporate action. Nothing contained in this Section shall in any way be construed to suggest or imply that the board of directors or any stockholder shall not be entitled to contest the validity of any consent or revocation thereof, whether before or after such certification by the independent inspectors, or to take any other action (including, without limitation, the commencement, prosecution, or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). Section 14. Effectiveness of Written Consent. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated written consent received in accordance with Section 12 of this Article, a written consent or consents signed by a sufficient number of holders to take such action are delivered to the corporation in the manner prescribed in Section 12 of this Article. ARTICLE III. THE BOARD OF DIRECTORS Section 1. Composition. The board of directors shall consist of seven directors subject to such automatic increase as may be required by the corporation's Restated Articles of Incorporation. The board may enlarge or reduce the size of the board in a vote of the majority of the directors in office. No director need be a stockholder. Section 2. Election and Term. Except as provided in Section 3 of this Article, the directors shall be elected by a plurality vote at the annual meeting of the stockholders. Each director shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Section 3. Vacancies and Newly Created Directorships. Any vacancy on the board of directors, or any newly created directorships, however occurring, may be filled by a majority of the directors then in office, though less than a quorum or by a sole remaining director. Any vacancy in the board of directors may also be filled by a plurality vote of the stockholders unless such vacancy shall have been previously filled by the board of directors. Section 4. Powers. The business of the corporation shall be managed by its board of directors which shall have and may exercise all such powers of the corporation, including the power to make, alter or repeal the bylaws of the corporation, and do all such lawful acts and things as are not by statute directed or required to be exercised or done by the stockholders. Section 5. Place of Meetings. The board of directors of the corporation may hold meetings both regular and special, either within or without the State of Delaware. Members of the board of directors or any committee designated by the board, may participate in a meeting of such board or committee by means of a conference telephone by means of which all persons participating in the meeting can hear each other, and participation shall constitute presence in person at such meeting. Section 6. Regular Meetings. Regular meetings of the board of directors may be held without call or notice immediately following the annual meeting of the stockholders and at such time and at such place as shall from time to time be selected by the board of directors, provided that in respect of any director who is absent when such selection is made, the notice, waiver and attendance provisions of Section 7 of this Article shall apply to such regular meetings. Section 7. Special Meetings and Notice. Special meetings of the board of directors may be called by the chairman of the board of directors, a majority of the directors or the president on notice given to each director, either personally (including by telephone) or by hand delivery, first-class mail, overnight mail, courier service, telegram or facsimile transmission sent to his business or home address, stating the place, date and hour of the meeting. If mailed by first-class mail, such notice shall be deemed to have been adequately given when deposited in the United States mail, postage prepaid, directed to the director at his business or home address, at least five (5) days before such meeting. Notice given by telegraph, overnight mail or courier service shall be deemed adequately given upon delivery of the message to the telegraph company or to the overnight mail or courier service company at least two days before such meeting. Notice given by facsimile transmission shall be deemed adequately given upon transmission of the message at least twelve (12) hours before such meeting. Notice given by hand delivery or personally shall be deemed adequately given when delivered at least twelve (12) hours before such meeting. Notice of a meeting need not be given to any director who signs a waiver of notice, whether before or after the meeting. The attendance of any director at a meeting, without protesting either prior thereto or at its commencement the lack of notice of such meeting, shall constitute a waiver of notice by him. Any notice or waiver of notice of a meeting of the board of directors need not specify the purposes of the meeting. Section 8. Quorum and Voting. At all meetings of the board of directors a majority less one of the total number of directors then in office shall constitute a quorum for the transaction of business, except that in no case shall less than two directors be deemed to constitute a quorum, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors. If a quorum shall not be present at any meeting of the board of directors, a majority of less than a quorum may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Action by Consent. Any action required or permitted to be taken at any meeting of the board of directors may be taken without a meeting, if all members of the board of directors, then in office, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board of directors. Section 10. Resignation. Any director may resign at any time upon written notice delivered to the corporation at its principal office. The resignation shall take effect at the time specified therein, and if no time be specified, at the time of its dispatch to the corporation. Section 11. Removal. A director may be removed for cause by the vote of a majority of the stockholders at a special or annual meeting after the director has been given reasonable notice and opportunity to be heard before the stockholders. Section 12. Committees. The board of directors may, by resolution passed by a majority of the whole board of directors, designate one or more committees, each committee to consist of one or more of the directors of the corporation, which committee, to the extent provided in the resolution, shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. ARTICLE IV. OFFICERS Section 1. Designation. The officers of the corporation shall consist of a president, a treasurer, a secretary, and such other officers including a chairman of the board of directors, one or more group presidents, vice presidents (including group executive vice presidents, corporate vice presidents and senior vice presidents), assistant treasurers and assistant secretaries, as the board of directors or the stockholders may deem warranted. With the exception of the chairman of the board of directors who must be a director, no officer need be a director or a stockholder. Any number of offices may be held by the same person. Section 2. Election and Term. Except for officers to fill vacancies and newly created offices provided for in Section 6 of this Article, the officers shall be elected by the board of directors at the first meeting of the board of directors after the annual meeting of the stockholders. All officers shall hold office at the pleasure of the board of directors. Section 3. Duties of Officers. In addition to those duties that may from time to time be delegated to them by the board of directors, the officers of the corporation shall have the following duties: (a) Chairman of the Board. The chairman of the board shall preside at all meetings of the stockholders and of the board of directors at which he is present, shall be ex-officio a member of all committees formed by the board of directors and shall have such other duties and powers as the board of directors may prescribe. (b) President. The president shall be the chief executive officer of the corporation, shall have general and active management of the business of the corporation, shall see that all orders and resolutions of the board of directors are carried into effect, and, in the absence or nonelection of the chairman of the board of directors, shall preside at all meetings of the stockholders and the board of directors at which he is present if he is also a director. The president also shall execute bonds, mortgages, and other contracts requiring a seal under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be delegated expressly by the board of directors to some other officer or agent of the corporation and shall have such other powers and duties as the board of directors may prescribe. (c) Group President. The group president or group presidents, if any, shall have general and active management of the group for which they are designated as president by the board of directors and shall have such other duties and powers as vice-presidents or as the board of directors or the president may prescribe. (d) Vice-President. The vice-president or vice-presidents, if any, shall have such duties and powers as the board of directors or the president may prescribe. In the absence of the president or in the event of his inability or refusal to act, the group president or vice president, if any, or if there be more than one, the group presidents or vice-presidents, in the order designated by the board of directors, or, in the absence of such designation, then in the order of their election, shall perform the duties and exercise the powers of the president. (e) Secretaries and Assistant Secretaries. The secretary shall record the proceedings of all meetings of the stockholders and all meetings of the board of directors in books to be kept for that purpose, shall perform like duties for the standing committees when required, and shall give, or cause to be given, call and/or notices of all meetings of the stockholders and meetings of the board of directors in accordance with these by-laws. The secretary also shall have custody of the corporate seal of the corporation, affix the seal to any instrument requiring it and attest thereto when authorized by the board of directors or the president, and shall have such other duties and powers as the board of directors may prescribe. The assistant secretary, if any, or if there be more than one, the assistant secretaries, in the order designated by the board of directors, or, if there be no such designation, then in order of their election, shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall have such other duties and powers as the board of directors may prescribe. In the absence of the secretary or an assistant secretary at a meeting of the stockholders or the board of directors, an acting secretary shall be chosen by the stockholders or directors, as the case may be, to exercise the duties of the secretary at such meeting. In the absence of the secretary or an assistant secretary or in the event of the inability or refusal of the secretary or an assistant secretary to give, or cause to be given, any call and/or notice required by law or these by-laws, any such call and/or notice may be given by any person so directed by the board of directors, the president or stockholders, upon whose requisition the meeting is called in accordance with these by-laws. (f) Treasurer and Assistant Treasurer. The treasurer shall have the custody of the corporate funds and securities, shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. The treasurer shall also disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, shall render to the board of directors, when the board of directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation, and shall have such other duties and powers as the board of directors may prescribe. If required by the board of directors, the treasurer shall give the corporation a bond, which shall be renewed every six years, in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. The assistant treasurer, if any, or if there be more than one, the assistant treasurers in the order designated by the board of directors, or, in the absence of such designation, then in the order of their election, shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall have such other duties and powers as the board of directors may prescribe. (g) Other Officers. Any other officer shall have such powers and duties as the board of directors may prescribe. Section 4. Resignation. Any officer may resign at any time upon written notice delivered to the corporation at its principal office. The resignation shall take effect at the time specified therein, and if no time be specified, at the time of its dispatch to the corporation. Section 5. Removal. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Section 6. Vacancies and Newly Created Offices. A vacancy in office, however occurring, and newly created offices, shall be filled by the board of directors. ARTICLE V. CAPITAL STOCK Section 1. Stock Certificates. Each holder of stock in the corporation shall be entitled to have a certificate signed in an officer's official capacity or in the name of the corporation by the chairman of the board of directors, or the president or a vice-president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in the corporation. Where a certificate is countersigned (a) by a transfer agent other than the corporation or its employee, or, (b) by a registrar other than the corporation or its employee, any other signature on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Section 2. Lost, Stolen or Destroyed Certificates. The board of directors, or at their direction any officer of the company, may direct a new certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors, or at their direction any officer of the company, may, in its (his) discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 3. Transfer. Upon surrender to the secretary or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, and upon compliance with any provisions respecting restrictions on transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 4. Issue of Stock. From time to time, the board of directors may, by vote of a majority of the directors, issue any of the authorized capital stock of the corporation for cash, property, services rendered or expenses, or as a stock dividend and on any terms permitted by law. Section 5. Fixing Record Date. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. Section 6. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VI. GENERAL PROVISIONS Section 1. Dividends. Dividends upon the capital stock of the corporation may be declared by the board of directors in any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of capital stock. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 2. Checks. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate. Section 3. Fiscal Year. The fiscal year of the corporation shall be fixed by a resolution of the board of directors. Section 4. Seal. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VII. AMENDMENTS Section 1. Amendments. These by-laws may be amended at any proper meeting of the stockholders or of the board of directors. ARTICLE VIII. INDEMNIFICATION Section 1. Non-Derivative Proceedings. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contenders or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceedings, had reasonable cause to believe that his conduct was unlawful. Section 2. Derivative Proceedings. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 3. Amount of Indemnification. To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 or 2, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 4. Determination to Indemnify. Any indemnification under Sections 1 or 2 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 1 and 2. Such determination shall be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in written opinion, or (3) by the stockholders. Section 5. Advance Payment. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of a director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this section or otherwise pursuant to the law of Delaware. Section 6. Non-Exclusiveness of By-Law. The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statute, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. Section 7. Continuation of Indemnification. The indemnification and advancement of expenses provided by, or granted pursuant to this Article VIII, or permitted by statute or otherwise, shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 8. Indemnification Insurance. The corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this section. EX-10 3 0003.txt EXH 10.4 - EXECUTIVE OFFICER STOCK OPTION PLAN Ben\Stkopt\exofpln600 Exhibit 10.4 NATIONAL SEMICONDUCTOR CORPORATION EXECUTIVE OFFICER STOCK OPTION PLAN 1. TITLE OF PLAN The title of this Plan is the National Semiconductor Corporation Executive Officer Stock Option Plan, hereinafter referred to as the "Plan". 2. PURPOSE The Plan is intended to align the interests of executive officers of National Semiconductor Corporation (hereinafter called the "Corporation") and its subsidiaries (as hereinafter defined) with the interests of the stockholders of the Corporation and to provide incentives for such executive officers to exert maximum efforts for the success of the Corporation. By extending to executive officers the opportunity to acquire proprietary interests in the Corporation and to participate in its success, the Plan may be expected to benefit the Corporation and its stockholders by making it possible for the Corporation to attract and retain the best available executive talent and by rewarding them for their part in increasing the value of the Corporation's shares. It is further intended that options granted pursuant to this Plan shall only be options which are not incentive stock options, as that term is defined in Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). Such options which may be granted under this Plan shall be referred to herein as non-qualified stock options. 3. STOCK SUBJECT TO THE PLAN There will be reserved for issue upon the exercise of options granted under the Plan 6,000,000 shares of the Corporation's $.50 par value Common Stock, subject to adjustment as provided in Paragraph 8, which may be unissued shares, reacquired shares, or shares bought on the market. If any option which shall have been granted shall expire or terminate for any reason without having been exercised in full, the unpurchased shares shall again become available for the purposes of the Plan (unless the Plan shall have been terminated). 4. ADMINISTRATION (a) The Plan shall be administered by a committee of the Board of Directors of the Corporation (the "Committee") which shall be appointed by a majority of the whole Board. The Committee shall be constituted to permit the Plan to comply with Rule 16b-3 promulgated under the Securities Exchange Act of 1934 ("Exchange Act") and any successor rule. (b) The Committee shall have the plenary power, subject to and within the limits of the express provisions of the Plan: (i) To determine from time to time which of the eligible persons shall be granted options under the Plan; the time or times (during the term of the option) within which all or portions of each option may be exercised and the number of shares for which an option or options shall be granted to each of them. Notwithstanding the foregoing, no person may be granted more than 1,000,000 options during any one fiscal year of the Corporation. (ii) To construe and interpret the Plan and options granted under it, and to establish, amend, and revoke rules and regulations for its administration. The Committee, in the exercise of this power, shall generally determine all questions of policy and expediency that may arise, may correct any defect, or supply any omission or reconcile any inconsistency in the Plan or in any option agreement in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To prescribe the terms and provisions of each option granted (which need not be identical). (iv) To determine whether options granted shall be transferable without consideration to immediate family members or family trusts for the benefit of optionee's immediate family members. As used herein, "immediate family" means parents, spouses and children. (c) The Committee may not grant new options in exchange for the cancellation of stock options previously granted under the Plan or under any other stock option plan of the Corporation. 5. ELIGIBILITY Options may be granted only to regular salaried employees of the Corporation and its subsidiaries who are executive officers of the Corporation. The term "subsidiary" corporation shall mean any corporation in which the Corporation controls, directly or indirectly, fifty percent (50%) or more of the combined voting power of all classes of stock, and the term "executive officer" means any officer of the corporation subject to the reporting requirements of Section 16 of the Exchange Act. Directors of the Corporation who are not also officers shall not be eligible to be granted options under the Plan. 6. TERMS OF OPTION AND OPTION AGREEMENTS Each option shall be evidenced by a written Stock Option Agreement which shall be in such form and contain such provisions as the Committee shall from time to time deem appropriate; provided, however, that the grant of an option pursuant to this Plan shall in no way be construed to be an alternative to the right of an optionee to purchase stock pursuant to any other stock option heretofore or hereafter granted to an optionee pursuant to any stock option plans now in existence or hereafter adopted by the Corporation. The terms of the option agreements need not be identical, but each option agreement shall include, by appropriate language, or be subject to, the substance of all of the applicable following provisions: (a) The purchase price under each option granted shall be as determined by the Committee but shall in no instance be less than 100% of fair market value on the date of grant. The fair market value on the date of grant shall be the opening price of the Common Stock on the New York Stock Exchange on such date (or if there shall be no trading on such date, then on the first previous date on which there is such trading). (b) The maximum term of any stock option shall be ten years and one day from the date it was granted. (c) Except as provided in Paragraph 10 hereof, an option may not be exercised to any extent, either by the person to whom it was granted or by the grantee's transferee, or by any person after the grantee's death, unless the person to whom the option was granted has remained in the continuous employ of the Corporation, or of a subsidiary, for not less than six months from the date when the option was granted. Otherwise, each option shall be exercisable as determined by the Committee. (d) The Corporation, during the terms of options granted under the Plan, at all times will keep available the number of shares of stock required to satisfy such options. (e) The Corporation will seek to obtain from each regulatory commission or agency having jurisdiction such authority as may be required to issue and sell shares of stock to satisfy such options. Inability of the Corporation to obtain from any such regulatory commission or agency authority which counsel for the Corporation deems necessary for the lawful issuance and sale of its stock to satisfy such options shall relieve the Corporation from any liability for failure to issue and sell stock to satisfy such options pending the time when such authority is obtained or is obtainable. (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. 8. ADJUSTMENT IN NUMBER OF SHARES AND IN OPTION PRICE In the event there is any change in the shares of the Corporation through the declaration of stock dividends or a stock split-up, or through recapitalization resulting in share split-ups, or combinations or exchanges of shares, or otherwise, the number of shares available for option, as well as the shares subject to any option and the option price thereof, shall be appropriately adjusted by the Committee. 9. PAYMENT OF PURCHASE PRICE AND WITHHOLDING TAXES (a) The purchase price for all shares purchased pursuant to options exercised must be either paid in full in cash, or paid in full, with the consent of the Committee, in Common Stock of the Corporation that has been held by the optionee for at least six (6) months valued at fair market value on the date of exercise or a combination of cash and Common Stock. Fair market value on the date of exercise for these purposes is the opening price of the Common Stock on the New York Stock Exchange on such date, or if there shall be no trading on such date, then on the first previous date on which there was such trading. (b) The Committee may permit the payment of all or part of the applicable required withholding taxes due upon exercise of an option by the withholding of shares otherwise issuable upon exercise of the option. Option shares withheld in payment of such taxes shall be valued at the fair market value of the Corporation's Common Stock on the date of exercise as defined in Section 9(a) hereinabove. 10. CHANGE IN CONTROL In the event of a Change-of-Control (as defined in the attached Exhibit A) of the Corporation, any options granted hereunder which are outstanding as of the date such change-of-control is determined to have occurred, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant. 11. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN (a) The Board may amend, modify, suspend or terminate the Plan for the purpose of meeting or addressing any changes in legal requirements or for any other purpose permitted by law. The Board will seek stockholder approval of an amendment if determined to be required by or advisable under regulations of the Securities and Exchange Commission, the rules of any stock exchange on which the Corporation's stock is listed, or other applicable law or regulation. (b) The Plan shall continue in effect until all shares available for issuance under the Plan have been issued. An option may not be granted while the Plan is suspended or after it is terminated. (c) The rights and obligations under any options granted while the Plan is in effect shall not be altered or impaired by amendment, suspension or termination of the Plan, except with the consent of the person to whom the option was granted or the grantee's transferee or to whom rights under an option shall have passed by will or by the laws of descent and distribution. 12. EFFECTIVE DATE The Plan shall become effective on June 22, 2000, subject to approval by the stockholders within twelve (12) months thereafter. EXHIBIT A A "change of control" means: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (x) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock") or (y) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not be deemed to result in a change of control: (i)any acquisition directly from the Corporation, (ii) any acquisition by the Corporation, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii) and (iii) of subsection (c) below; or (b) individuals who, as of the date hereof, constitute the Board of Directors of the Corporation (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) the approval by the shareholders of the Corporation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation or the acquisition of assets of another corporation ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation) unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or any corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. EX-10 4 0004.txt EXH 10.6 - AGREEMENT W/P SPRAGUE Nll/secmtrs/10kexhpjsagr Exhibit 10.6 AGREEMENT This Agreement is made and entered into as of May 17, 1995, by and between National Semiconductor Corporation, a Delaware corporation (the "Company") and Peter J. Sprague ("Sprague"). Recitals Sprague has served as Chairman of the Board of Directors of the Company since 1965. Sprague now intends to retire as a member of the Board of Directors and as Chairman of the Board. In recognition of his many years of service as a member of the Board of Directors and as Chairman, the Company wishes to compensate Sprague in his retirement and to retain him as an independent consultant to the Company. Agreement Now, therefore, it is agreed as follows: 1. Retirement: Sprague hereby resigns as a member of the Board of Directors of the Company and as Chairman of the Board of Directors immediately effective as of the date of this Agreement. 2. Compensation: In recognition of Sprague's many years of service as a member of the Board of Directors of the Company and as Chairman of the Board, the Company hereby agrees to the following compensation for such retirement and for services rendered to the Company as an independent consultant as provided in paragraph 4 hereof: a. The Company shall pay to Sprague an annual amount of $250,000, payable in equal monthly installments, for a period of ten (10) years (the last payment to be made in May 2005). b. The outstanding indebtedness (principal and interest) of Sprague to the Company as a result of the loan made by the Company to Sprague and evidenced by that certain Promissory Note dated April 20, 1989, (the "Note"), with a balance currently outstanding of approximately $450,000, is hereby canceled and forgiven and deemed paid in full as of the date hereof. c. To the extent that the forgiveness of the Note and the outstanding balance thereunder as provided above, gives rise to state and federal income tax, the Company agrees to make a payment to Sprague in an amount sufficient to cover such tax on the forgiveness as well as the resulting tax on such payment (the "Tax Gross Up"). The Tax Gross Up shall be calculated in accordance with the Company's standard practice and shall be paid by the Company directly to Sprague within 30 days of the date of this Agrement. The Company shall have no further obligation with respect to taxes arising from forgiveness of the Note and the Tax Gross Up, and payment of such taxes shall be solely the responsibility of Sprague. d. As provided in paragraph 3 hereof, the Company shall grant to Sprague an option to purchase 300,000 shares of the Company's Common Stock at an exercise price per share equal to the opening price of the Common Stock on the New York Stock Exchange on the date of grant (the "Option"). The date of grant of the Option shall be the next business day following the date of execution of this Agreement. Except as provided by the Tax Gross Up, all compensation and benefits (including the Option) to Sprague under this agreement shall be reduced by all federal, state, local and other withholdings and similar taxes and payments required by applicable law. 3. The Option. The Option shall be evidenced by an option agreement in the form attached hereto as Exhibit A (the "Option Agreement"). The Option Agreement shall be executed simultaneously with the execution of this Agreement. Among other things, the Option Agreement provides for the following: a. The Option shall be exercisable in installments to the extent of 25% of the total number of shares subject to the Option after each anniversary of the date of the Option Agreement. b. The Option shall have a term of ten (10) years. c. The Option and any shares of Common Stock purchased upon exercise of the Option shall be acquired for investment and not with a view towards distribution. d. The Company shall use its reasonable efforts to register the Option and the underlying shares of Common Stock on Form S-8 as promptly as practicable, but only to the extent that Form S-8 is available and the Option is eligible for such registration. e. The Option shall be non-transferable by Sprague. 4. Consultant. During the term of the consulting arrangement as set forth below, Sprague agrees to provide consulting services to the Company upon the reasonable request of the Chief Executive Officer at the Company, but at such places and times as shall be reasonably convenient to Sprague in his sole discretion. a. Sprague shall devote such of his business time and skill to the provision of such services as shall, in his sole discretion, be reasonably necessary. b. Sprague agrees that the compensation provided by paragraph 2 and the Option provided by paragraph 3 above shall be the full and complete compensation due and payable to Sprague for services as such consultant. c. The term of the consulting arrangement shall be from the date hereof through May 5, 1999, or such later date as may be agreed to in writing by the Company and Sprague. d. During the term of the consulting arrangement, Sprague shall be deemed to be an independent contractor and not an employee or other representative or agent of the Company. e. At all times during and after the term of the consulting arrangement, Sprague shall keep and treat as confidential all information relating to the business or operations of the Company, except information which is in the public domain or comes within the public domain without any breach of this Consulting Agreement. f. The consulting arrangement shall not limit or prohibit Sprague from engaging in other business activities or services. g. The Company shall have the right to terminate the consulting arrangement with Sprague at any time after May 5, 1996, upon written notice; provided, however, that any such termination of the arrangement, for any reason whatsoever, shall not affect nor diminish the Option nor the compensation to be paid by the Company to Sprague as provided in this Agreement. 5. Representations of Sprague: Sprague hereby represents to the Company as follows: a. That he is acquiring the Option and the underlying shares of Common Stock upon exercise of the Option for investment and not with a view towards distribution thereof. In the event the Option is not registered on Form S-8, Sprague acknowledges that any Common Stock purchased upon exercise of the Option shall be deemed "restricted" securities within the meaning of Rule 144 under the Securities Act of 1933. b. Sprague shall comply with the terms of the Option Agreement. c. Sprague is not aware of any claims or causes of action which he, or any entity of which he is an officer, director, or a 1% shareholder or affiliate, has or may have against the Company, any subsidiary of the Company, or any officer or director of the Company or a Company subsidiary. d. Although nothing in this Agreement shall limit or prohibit Sprague from engaging in other business activities or services, whether or not competitive to the Company, Sprague does agree that during the term of the Option, Sprague will use reasonable efforts not to disparage the Company or its officers and directors nor engage in conduct (other than competition in the normal course of business) materially adverse to the interests of the Company. 6. Indemnification. Notwithstanding Sprague's retirement from the Board, Sprague shall remain entitled to indemnification by the Company for acts during the time he served as a member of the Company's Board of Directors to the extent permitted by the Company's governing documents. 7. Miscellaneous: a. This Agreement represents the entire understanding between the parties with respect to the subject matter hereof, and this Agreement supersedes any and all prior understandings or agreements, written or oral, with respect to the subject matter hereof, including without limitation, any understanding, agreements or obligations respecting any past or future compensation or other payments to Sprague by the Company. b. This Agreement shall be governed by and construed in accordance with the laws of the State of California. c. This Agreement shall be binding upon and enure to the benefit of the executors, administrators, heirs, successors and assigns of the parties hereto. d. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same agreement. e. The waiver by either party of any breach of any provision of this Agreement shall not operate or be construed as a waiver of any other subsequent breach of the same or other provision hereof. IN WITNESS WHEREOF, the parties have signed this Agreement as of the day and year first above written. NATIONAL SEMICONDUCTOR CORPORATION BY: //s// GILBERT F. AMELIO Gilbert F. Amelio President and Chief Executive Officer //s// PETER J. SPRAGUE PETER J. SPRAGUE EX-10 5 0005.txt EXH 10.12 HEALTH PLAN Nll/secmtrs/10k00exhodmedpln Exhibit 10.12 PLAN DOCUMENT FOR NATIONAL SEMICONDUCTOR CORPORATION RETIRED OFFICERS & DIRECTORS HEALTH PLAN EIN #95-2095071 ERISA PLAN #502 EFFECTIVE JULY 19, 1983 TABLE OF CONTENTS Page Section I. Purpose....................................................1 Section II. Definitions and Construction...............................2 Section III. Eligibility, Participation and Election Procedures.........5 Section IV. Contributions..............................................6 Section V. Funding Policy.............................................7 Section VI. Benefits...................................................8 Section VII. Claim Procedures...........................................9 Section VIII. Continuation of Coverage..................................10 Section IX. Administration............................................11 Section X. Amendments & Terminations.................................13 Section XI. Miscellaneous.............................................14 SECTION I. PURPOSE National Semiconductor Corporation has established over a period of time several welfare benefit plans for the exclusive benefit of its employees and their dependents. The purpose of this document is to set forth, or incorporate by reference, in one document all of these welfare benefits to which the subject eligible retired Officers and Directors of National Semiconductor Corporation are legally entitled. The Company intends that these plans be consolidated into this written instrument entitled the National Semiconductor Corporation Welfare Benefit Plan. This Plan is intended to conform to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). It is also the intent of the Company that any benefits provided under this Plan be eligible for exclusion from the employee's gross income for federal, Social Security, and where permissible, state and local income tax purposes, under Sections 79, 105, and 106 of the Code. SECTION II. DEFINITIONS AND CONSTRUCTION 2.1 Administrator. The Administrator is the person(s) appointed pursuant to Section IX below to control and manage the operations and administration of the Plan and carry out its provisions for purposes of the Employee Retirement Income Security Act of 1974 (ERISA). Except as may be provided in any Plan listed in Section 2.14 below and incorporated herein by reference, the Administrator also shall be the named fiduciary (within the meaning of ERISA) under the plan. 2.2 Administrative Agent. An Administrative Agent is appointed by the Administrator to assist in certain aspects of the administrative duties and functions. 2.3 Code. Code means the Internal Revenue Code of 1986, as now in effect or as it may be amended hereafter, and includes any regulations or rulings issued thereunder. 2.4 Company. Company means National Semiconductor Corporation and any designated companies within the Company's controlled group. 2.5 Contract. Contract means an agreement with any insurer listed in Section 2.14 below and incorporated herein by reference. 2.6 Contribution. The amount payable by the Company or the amount payable by the Participant for participation under the Plan. 2.7 Coverage. Coverage means the benefits provided according to the provisions of the Contract(s) listed under Section 2.14 below and incorporated herein by reference. 2.8 Dependent. Dependent means a Retired Officer or Director's dependents who are eligible for coverage according to the terms of the contract applicable to that retiree. 2.9 Effective Date. The Effective Date of this document is July 19, 1983. 2.10 Eligible Retired Officer or Director. An eligible retired Officer or Director is a retiree who is eligible to participate under the plan according to the contracts referenced under Section 2.14 below and incorporated herein by reference. 2.11 Fiduciary. The named Fiduciary is the plan Administrator as set forth under Section 2.1. 2.12 Insurer. Insurer means the insurer designated under Section 2.14 below with which the Company has entered in a Contract. 2.13 Participant. A Participant is an eligible retired Officer or Director who has become a participant as provided under Section III. 2.14 Plan. The Plan means the National Semiconductor Corporation Retired Officers and Directors Health Plan established to provide welfare benefits for the retired Officers and Directors of the Company and their Dependents according to the provisions of the Contracts listed below as they may be amended from time to time. Insurance Company Contract # Coverage Effective Date A. Prudential Ins. G-95678 Medical 6/1/81 Co. of America 94230-8 Stop Loss 6/1/81 94230-D Dental 6/1/81 2.15 Plan Year. Plan Year means a twelve consecutive month period that begins on June 1 and ends on every May 31 thereafter. 2.16 Similarly Situated Beneficiary. In the case of any former Participant or former Dependent who has a qualifying event within the meaning of Section 162(k) of the Code, an individual who has the same coverage options under the Plan that the former Participant or former Dependent would have had if the qualifying event had not occurred is a Similarly Situated Beneficiary; provided that for purposes of determining charges for continuation coverage under Section VIII below, a former spouse of an eligible retired Officer or Director whose coverage terminates by reason of divorce or legal separation, or death of the retired Officer or Director shall be treated as similarly situated to an unmarried individual, a former dependent child whose coverage terminates because he ceases to be a Dependent shall be treated as similarly situated to an unmarried individual, and other determinations of similar status shall be made by the Company in good faith and in a manner not inconsistent with applicable law or regulations requiring continued coverage for beneficiaries of the Plan. 2.17 Gender and Number. In construction of the Plan, reference to any gender shall include the masculine, feminine and neuter genders, the plural shall include the singular and the singular shall include the plural whenever appropriate. 2.18 Construction. The terms of the Plan shall be constructed under the laws of California, except to the extent such laws are preempted by federal law. SECTION III. ELIGIBILITY, PARTICIPATION AND ELECTION PROCEDURES 3.1 Eligibility. Members of the Board of Directors of the Company, the President of the Company, and Officers at the Vice President or higher level reporting directly to the President (whether appointed by the Board or otherwise appointed) who retire directly from the Company after July 19, 1983 and do not become affiliated with any business in competition with the Company will be eligible provided they meet the age and service requirements of the Plan. From and after April 24, 1992, Members of the Board of Directors or Directors of the Company, the President of the Company, and Officers at the Vice President or higher level appointed by the Board, who retire directly from the Company after April 24, 1992 and do not become affiliated with any business in competition with the Company and who meet the age and service requirements are eligible to participate in the plan provided they meet the age and service requirements of the Plan. 3.2 Age and Service Requirements. An eligible Officer or Director may participate in the Plan provided that he retires when: A. He has reached age 65; B. He has reached age 55 and the sum of his age plus years of service with the Company equals at least 65; or C. Provided he has the written consent of the President of the Company Company, he has reached age 50 and the sum of his age plus years of of service with the Company equals at least 65. Dependent eligibility will be dictated by the provisions of the Company indemnity medical/dental plan. 3.3 Termination of Coverage. Coverage for eligible retired Officers or Directors will continue until the first of the following events: A. 60 days following the last day of the month which required plan contributions were not received; or B. Death. Coverage for eligible dependents will cease when the retired Officer or Director's coverage ceases. SECTION IV. CONTRIBUTIONS 4.1 Contributions. Contributions shall be made by the Company and the Participants in accordance with Section IV and shall be paid to the Insurer(s) or HMO(s) in accordance with the provisions of the application Contract(s) listed in Section 2.14. 4.2 Contribution Schedule. The amount of contributions necessary shall be billed by the Company in accordance with the Participant's Election of Coverage on a semi-annual basis. These amounts are subject to change from time to time at the Company's discretion and any changes will be communicated to the Employees during each Open Enrollment Period. The Contribution Schedule is available from the Plan Administrator at any time during normal Company working hours. SECTION V. FUNDING POLICY 5.1 The Company's policies in funding the Plan are provided in the contracts referenced in Section 2.14 above and incorporated herein by reference. A separate fund or trust may (but need not) be established by the Company as necessary to hold any Company or Participant contributions hereunder. The Company reserves the right to change from time to time the funding policy for the Plan. SECTION VI. BENEFITS 6.1 Benefits. From the Effective Date of the Plan until amended or terminated in accordance with Section X below, benefits will be provided for under the contracts listed in Section 2.14 and incorporated herein by reference. 6.2 Nondiscriminatory Benefits. The Plan is intended not to discriminate in favor of Highly Compensated Employees (as that term is defined in the Code) as to eligibility to participate, Contributions and/or benefits, and to comply in this respect with the requirements of the Code. If in judgment of the Plan Administrator, the operation of the Plan in any Plan Year results in such discrimination, then such Plan Administrator shall either amend the Plan affecting the Highly Compensated Employees or impute income to such Highly Compensated Employees, all as shall be necessary to assure that, in the judgment of the Plan Administrator, the Plan does not discriminate. SECTION VII. CLAIMS PROCEDURES 7.1 Filing a Claim. Claims are to be submitted to the Insurer in accordance with the procedures outlined in the applicable contract listed in Section 2.14 above and incorporated herein by reference. A claimant may be required to submit whatever proof of loss the Insurer may require. All claims will be responded to within ninety (90) days of receipt unless special circumstances warrant a ninety (90) day extension. The Claimant will be notified of an extension during the first ninety (90) day period. 7.2 Denial of Claim. If any such claim is denied in whole or in part, the claimant shall be provided promptly with written notice setting forth in a manner calculated to be understood by the claimant: A. A specific reason or reasons for denial; B. Specific reference to pertinent Plan or contract provisions upon which the denial is based; C. A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and D. An explanation of the Plan's Claim Review Procedures set forth in Section 7.3 below. 7.3 Claim Review Procedures. Within sixty (60) days after denial of any claim filed under this Plan, the claimant may request, in writing from the Insurer, a review of the denial. Any claimant seeking review hereunder is entitled to examine all pertinent documents and to submit issues and comments in writing. Upon receipt of request for review, the Insurer must respond within sixty (60) days unless special circumstances require an extension of time to one hundred twenty (120) days after receipt of request for review. The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to pertinent Plan and contract provisions on which the decision is based. SECTION VIII. CONTINUATION OF COVERAGE 8.1 Continuation of Coverage. If a qualifying event within the meaning of Section 162(k) of the Code occurs with respect to any Participant or Dependent and, in the case of legal separation or divorce, death of retired Officer or Director, or a dependent child's ceasing to be a Dependent, such former Participant or dependent furnishes the Company with notice of the qualifying event within the time prescribed by the Company for doing so, he shall be entitled to continue Coverage of the type available to a Similarly Situated Beneficiary under the Plan. An election to continue Coverage shall be made on forms provided by the Company or an Administrative Agent thereof, in the manner prescribed by the Company or such Administrative Agent. 8.2 Waiver of Election and Revocation of Waiver. If a former Participant or Dependent who is entitled to elect to continue coverage under Section 8.1 above waives such election, but subsequently, within the election period for such coverage, as dictated by Section 162(k), revokes the waiver and elects to continue coverage, such election to continue coverage shall be effective on a retrospective basis from the date of the qualifying event. 8.3 Similarly Situated Beneficiary. Notwithstanding any provision in this Plan to the contrary, a former Participant or Dependent of a Participant who elects to continue Coverage under this Section VIII, shall be eligible to change such Coverage in the same manner and at the same time as an individual who is a Similarly Situated Beneficiary with respect to the Participant. 8.4 Cost of Continuation Coverage. A former Participant or Dependent who elects to continue Coverage under this Section VIII shall be charged for the Coverage 102% of the cost of such coverage to the Plan. SECTION IX. ADMINISTRATION 9.1 Administrator. The Company may appoint one or more Employees who shall have the authority and responsibility to take any reasonable actions necessary to control and manage operation of the Plan under the rules applied on a uniform and nondiscriminatory basis to all Participants. However, any action by the Company assigning any of its responsibilities to specific employees as Administrative Agents shall not constitute delegation of the Administrator's responsibility but rather shall be treated as the manner in which the Company has determined internally to discharge such responsibility. 9.2 Administrative Duties. The authority and responsibility to control and manage operations of the Plan includes but is not limited to (1) determination of eligibility; (2) preparation and filing of all reports required to be filed with any agency of the government; (3) compliance with all disclosure requirements imposed by law; and (4) maintenance of all books of accounts, records and all other data as may be necessary for proper administration of the Plan. 9.3 Rules of Administration. The Company shall adopt such rules for administration of the Plan as it considers desirable provided they do not conflict with the Plan or applicable law and may construe the Plan, correct defects, supply omissions to effectuate the Plan and, subject to Section VII above, such action shall be conclusive. Records of administration of the Plan shall be kept and Retired Officers and Directors may examine records pertaining directly to them. 9.4 Liability and Responsibility of Administrator. The Administrator shall be fully protected in respect to any action taken or suffered by them in good faith, in reliance upon the advice of his advisors. To the extent permitted by law, the Company shall indemnify the Administrator against any liability or loss sustained by reason of any act or failure to act in such capacity as Administrator, if such act or failure does not involve willful misconduct. Such indemnification includes attorney's fees and other costs and expenses reasonably incurred in defense of any action brought against such Administrator by reason of any such act or failure to act. No bond or other security shall be required of any Administrator or Administrative Agent, unless the individual handles funds or other property of the Plan. 9.5 Liability of the Company. Neither the Company nor any of its employees shall be liable for any loss due to its error or omission in administration of the Plan unless the loss is due to the failure of the Company or such employee to exercise the care, skill, prudence and diligence under the circumstances then prevailing that a person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. 9.6 Indemnification of Administrator and Administrative Agents. The Company shall indemnify each Officer, Director or employee of the Company for all expenses (other than amounts paid in settlement to which the Company does not consent) reasonably incurred by him in connection with any action to which he may be party by reason of this performance of administration functions and duties under the Plan, except in relation to matters as to which he shall be adjudged in such action to be personally guilty of willful misconduct in the performance of his duties. The foregoing rights to indemnification shall be in addition to such other rights as the individual may enjoy as a matter of law or by reason of insurance coverage of any kind. Rights granted hereunder shall be in addition to and not in lieu of any rights to indemnification to which the individual may be entitled pursuant to the Company's By-laws. 9.7 Limited Discretionary Authority. Notwithstanding anything in the Plan to the contrary, and to the extent permitted by applicable law, the Plan Administrator shall have due discretionary authority to determine whether the criteria set forth in this Plan, including the criteria for eligibility and for benefits, have been established. SECTION X. AMENDMENTS AND TERMINATION 10.1 Although termination of the Plan is not anticipated by the Company as of the Effective Date, the Company necessarily reserves the right to amend or terminate the Plan at any time; provided, however, that such amendment or termination shall not affect either the Company's obligation to pay all accrued benefits under the Plan or the right of any Participant to file claims for payment or reimbursement of covered expenses, to the extent that such amounts were payable prior to such amendment or termination under the terms of the Plan. SECTION XI. MISCELLANEOUS 11.1 No Personal Liability. Nothing contained herein shall impose on any Officers or Directors of the Company any personal liability for any benefits due a Participant or Dependent pursuant to the Plan. 11.2 Additional Procedures. Any rules, regulations, or procedures that may be necessary for the proper administration of functioning of the Plan that are not covered herein shall be promulgated and adopted by the Plan Administrator. 11.3 Severability. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision and this Plan shall be construed and enforced as if such provisions had not been included. In Witness, whereof, the Company has caused this document to be executed effective as of July 19, 1983. By: //s// John M. Clark III Date: June 5, 1995 Title: Senior Vice President EX-10 6 0006.txt AGREEMENT W/M BEREZIUK Exhibit 10.19 SETTLEMENT AGREEMENT AND GENERAL RELEASE This Settlement Agreement and General Release (hereinafter "Agreement") is entered into this 22nd day of December, 1999 ("Effective Date"), by and between Michael Bereziuk (hereinafter "Employee") and National Semiconductor Corporation (hereinafter "NSC"). WHEREAS, Employee and NSC have agreed that Employee's employment in the position of Senior Vice President, Worldwide Marketing and Sales at NSC will terminate effective as of January 14, 2000; and WHEREAS, Employee and NSC desire to locate an alternative position within NSC for Employee; and WHEREAS, NSC desires to provide termination benefits to Employee on the terms specified herein should such an alternative position not be available; and WHEREAS, NSC and Employee acknowledge that the termination benefits specified herein are greater than Employee would otherwise be entitled to upon termination of his employment; and WHEREAS, NSC and Employee desire to settle fully and finally all differences between them; NOW, THEREFORE, in consideration of the mutual covenants and promises set forth herein, Employee and NSC agree as follows: 1. Employee acknowledges and agrees that he received this Agreement on December 16, 1999, and shall have until close of business on January 6, 2000 to consider the terms of this Agreement. If Employee signs this Agreement prior to the expiration of this twenty-one (21) day review period, he does so in express waiver of his right to exercise such review period. Once signed by Employee, Employee shall have an additional seven (7) days to withdraw Employee's approval of this Agreement. This Agreement shall not become effective or enforceable until this revocation period has expired. If Employee withdraws his approval, this Agreement will be void and Employee will not be entitled to receive any benefits hereunder. 2. Employee shall continue as an active employee of NSC until January 14, 2000. Effective January 15, 2000, Employee shall be on an unpaid personal eleven (11) week leave of absence ("LOA"), during which time Employee's benefits will continue (as listed on Exhibit A hereto). During said LOA, Employee and NSC will attempt to locate a mutually acceptable position for Employee within NSC, to commence at the end of said LOA. If Employee accepts a position within NSC at the end of said LOA, the terms and conditions of Employee's employment in this position will be defined at that time, and the remainder of this Agreement will be void and not become effective. In the event a mutually acceptable position is not available, effective April 1, 2000 ("Resignation Date") Employee shall resign as an active employee and agrees to resign from all officer and director positions held by Employee in NSC or any of its subsidiaries, and shall be relieved of any further obligations to perform services as an employee on behalf of NSC. 3. Subject to the limitation set forth below, from and after the Resignation Date, as consideration for this Agreement and in lieu of any other severance payment, NSC will continue to pay Employee's salary (at current levels and less any withholdings required by law) and all associated benefits (for those individuals covered at the Resignation Date), as listed on Exhibit A but specifically excluding vacation accrual, as if Employee were an active employee for an additional period ending on May 1, 2001 (which date shall be referred to as the "Termination Date"). Employee's stock options will continue to vest through the Termination Date, in accordance with the terms of the relevant stock option agreement(s) and as stated on Exhibit B hereto, after which date Employee will have a ninety (90) day period in which to exercise any stock options that have vested through the Termination Date. If Employee accepts full-time employment (not including consulting) outside of NSC prior to the Termination Date, Employee shall so notify NSC's Vice President, Human Resources, and NSC shall pay to Employee in a lump sum the amount of additional salary (but not benefits) that would otherwise have been paid to Employee through the Termination Date. In this event, Employee's stock options will cease to vest at the time Employee accepts such employment, and Employee will have a ninety (90) day period thereafter to exercise any vested stock options. NSC's internal records shall reflect that Employee's employment terminated as a result of voluntary resignation on the date that salary and benefits end. In the event of the death of Employee prior to the Termination Date, NSC shall pay to "The Bereziuk Family Revocable Trust of December 6, 1999" in a lump sum the amount of additional salary (but not benefits) that would otherwise have been paid to Employee through the Termination Date, provided said sum has not already been paid to Employee. Employee's stock options will vest and may be exercised in accordance with the terms of the relevant stock option agreement(s). 4. Employee will be eligible for an Executive Officer Incentive Plan ("EOIP") award for fiscal year 2000. Employee's accomplishment score for fiscal 2000 shall be the average of all Executive Staff scores and Employee's Target Incentive level will be 65%. The EOIP Award for fiscal 2000, if any, will be paid in accordance with the provisions of the EOIP at the same time all other EOIP participants receive their payments. Employee shall be eligible for an EOIP award for fiscal 2001, based on an individual score of 50% or 50% of the average of all Executive Staff, whichever is greater. This will be paid at the same time all other EOIP participants receive their payments. The formula for calculation of Incentive is as per Exhibit C hereto. Employee shall not be eligible for any EOIP award after fiscal 2001. If Employee accepts employment outside of NSC during fiscal 2000, this will not affect his EOIP eligibility or payment for that fiscal year, but Employee will not be eligible for any EOIP award for fiscal 2001 or thereafter. If Employee accepts full-time employment (not including consulting) outside of NSC prior to the end of fiscal 2001, any EOIP award for fiscal 2001 will be prorated accordingly. 5. Until April 1, 2000, Employee will receive any and all benefits that may become due under the Change of Control Employment Agreement dated April 24, 1998, entered into by Employee with NSC. Effective April 1, 2000, said Change of Control Employment Agreement shall be terminated, Employee shall receive no benefits thereunder and NSC shall have no liability thereunder. 6. On January 14, 2000, NSC shall pay Employee any accrued vacation pay to which Employee is entitled under NSC's vacation program as of that date; vacation accrual will cease for Employee on January 14, 2000. 7. Employee acknowledges and agrees that the total amount received under this Agreement constitutes adequate consideration for his covenants and obligations set forth herein, it being an amount over and above any entitlements, severance or otherwise that he has, or may have had, by reason or his employment or separation of employment with NSC. 8. Employee, on behalf of himself, his representatives, heirs, successors and assigns does hereby completely release and forever discharge NSC and all other affiliated, related or subsidiary corporations or divisions, its and their present and former shareholders, officers, directors, agents, employees, attorneys, successors and assigns, (hereinafter collectively "NSC"), from all claims, rights, demands, actions, obligations, liabilities and causes of action of any and every kind, nature and character whatsoever, known or unknown, which Employee may now have, or has ever had, against NSC based upon any act or omission by NSC prior to the date of execution of this Agreement by Employee, including, but not limited to: (1) any and all claims for damages, declaratory or injunctive relief or attorneys' fees, arising from or in any way related to Employee's employment by NSC or the termination thereof, whether based on tort, contract (express or implied), or any federal, state or local law, statute or regulation, including without limitation rights or claims of age or other discrimination Employee may have under the Age Discrimination in Employment Act, as amended, the California Fair Employment and Housing Act, as amended, Title VII of the Civil Rights Act of 1964, as amended, or the California Labor Code, as amended; (2) all claims filed or caused to be filed in any court of law or before any state or federal administrative agency before execution of this Agreement; and (3) all claims to attorneys fees, however incurred, including, without limitation, fees incurred in connection with any released claims and review of this Agreement. Released claims shall not include any claims arising from acts or omissions occurring after the date of execution of this Agreement. This paragraph does not waive any indemnification rights Employee may have whether as an employee or an officer, pursuant to Labor Code Section 2802, NSC By-Laws or NSC policy, including any indemnification rights in the event of a shareholder lawsuit. This paragraph does not waive any rights either party may have against the other for failure to perform obligations under this Agreement. 9. It is understood and agreed that this is a full and final Agreement and release applying not only to all claims which are presently known, anticipated or disclosed to Employee, but also all claims which are presently unknown to Employee. Employee expressly waives any and all rights or benefits which he may have under the terms of Section 1542 of the California Civil Code, which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." 10. Employee hereby agrees that he will not initiate or cause to be initiated against NSC any claim, charge, suit, action, investigation, audit, compliance review or proceeding of any kind, or participate in same, individually or as a representative or member of a class, under any contract (express or implied), law, statute or regulation, federal, state or local, pertaining in any manner whatsoever to the claims, rights, demands, actions, obligations, liabilities, and causes of action herein released, including, without limitation, those relating to his employment by NSC or the termination thereof. This paragraph does not prevent Employee from testifying under compulsion of legal process. 11. It is understood and agreed that the furnishing of the consideration for this Agreement shall not be construed or deemed as an admission of liability or responsibility of NSC for any purpose. Employee and NSC agree that this Agreement is being entered into solely for the purpose of avoiding further expense and inconvenience from defending against any claims, rights, demands, actions, obligations, liabilities and causes of action. Liability for any and all claims is expressly denied by NSC. 12. Employee agrees to return all NSC property, credit cards, documents or other materials or equipment that have been furnished to him by NSC by April 1, 2000. Employee acknowledges that he has complied with and will continue to comply with the terms of the National Semiconductor Employment Agreement signed by him with NSC. 13. It is understood and agreed that this Agreement and each and every provision hereof shall be confidential and shall not be disclosed directly or indirectly by Employee to any other person, firm, organization or other entity, of any and every type, public or private, for any reason, at any time without the prior written request or consent of NSC, unless required by law. Employee shall not disclose directly or indirectly to any person or organization, except as expressly permitted herein, that Employee received any sum of money from NSC as a result of the termination of his employment with NSC. It is further understood and agreed that it shall not constitute a breach of this Agreement for Employee to disclose the terms hereof to his immediate family and to his attorney and his financial advisor and/or accountant; provided, however, that Employee shall be obliged to use his best efforts to assure that such persons do not disclose this Agreement or any provision hereof or the fact that Employee received any sum of money from NSC as a result of the termination of Employee's employment with NSC. It is understood and agreed that it shall not constitute a breach of this Agreement for Employee or NSC to respond to any unsolicited inquiry by stating only that Employee and NSC resolved their differences in a mutually-satisfactory manner. NSC shall make reasonable efforts to maintain the confidentiality of this Agreement and its contents and shall not disclose this Agreement or its contents, directly or indirectly, to any of NSC's employees or agents, unless such persons have a work-related need to know or unless required by law. Notwithstanding anything in this paragraph, it is understood that this Agreement and its terms may be required to be disclosed in NSC's filings with the Securities and Exchange Commission, and may become public as a result thereof. In this event, Employee may respond to any inquiries resulting from the disclosure. 14. Employee represents that he has had an opportunity, and been advised by NSC, to consult with an attorney of Employee's choosing, that he has read this Agreement, and has had an adequate opportunity to consider the Agreement, that he is fully aware of its contents and its legal effect, that the consideration set forth herein provides the sole consideration for the Agreement, that all agreements and understandings between the parties are embodied and expressed herein and that there are no understandings between the parties other than those specifically and expressly set forth herein, and that he is entering into this Agreement freely, without coercion, based on his own judgment and not in reliance upon any representations or promises other than those expressly contained in this Agreement. 15. This Agreement may not be amended or modified in any manner except upon written agreement by the parties. 16. Should any provision of this Agreement be held invalid or illegal, such illegality shall not invalidate the entire Agreement. Rather, this Agreement shall be construed as if it did not contain the illegal part, and the rights and obligations of the parties shall be construed and enforced accordingly. 17. With respect to any matters under this Agreement that are governed by state law, the parties agree that this Agreement shall be construed and governed by the laws of the State of California. The language of all parts of this Agreement shall in all cases be construed as a whole, according to its fair meaning, and not strictly for or against any party. 18. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. EMPLOYEE NATIONAL SEMICONDUCTOR CORPORATION By: //s// Michael Bereziuk By: //s// Richard A. Wilson MICHAEL BEREZIUK RICHARD A. WILSON Vice President, Human Resources EXHIBIT A Medical and Dental Insurance Retirement and Savings Program Benefit Restoration Plan (Deferred Compensation, Excess 401(k) Match, Excess Benefit) Employee Stock Purchase Plan Stock Option Plan Executive Financial Counseling Expense Reimbursement Executive Medical Examination Expense Reimbursement Long Term Disability Insurance Short Term Disability Insurance Accidental Death & Dismemberment Insurance Dependent (Spouse and Child) Life Insurance Life Insurance ADDENDUM This addendum is entered into as of the 31st day of May, 2000, and is intended to serve a clarification of certain matters discussed or referred to in the Settlement Agreement and General Release ("the Agreement") entered into between Michael Bereziuk ("Employee") and National Semiconductor Corporation ("NSC") dated December 22, 1999. Notwithstanding the language contained in paragraphs 1 and 2 of the Agreement, both Employee and NSC confirm that Employee is still considered to be an employee of NSC under common law and that Employee is not currently an employee of any company outside of NSC. Although Employee has been relieved currently of any obligation to perform ongoing services, this arrangement has been made at the discretion of NSC. During all periods which Employee is still a common law employee of NSC, NSC retains the discretion to direct Employee to perform mutually agreeable services. In the event that such services are requested, NSC must notify Employee in writing the nature of the services requested and the time period for which such services are to be performed. NATIONAL SEMICONDUCTOR CORPORATION By: //s// Richard A. Wilson //s// Michael Bereziuk Richard A. Wilson Michael Bereziuk Vice President, WW Human Resources 31st May 2000 EX-27 7 0007.txt FDS --
5 1,000,000 12-MOS May-28-2000 May-31-1999 May-28-2000 779 71 259 0 193 1,468 2,303 (1,499) 2,382 628 0 0 0 89 1,554 2,382 2,140 2,140 1,155 1,798 (285) 0 (15) 643 15 628 0 (7) 0 621 3.58 3.24
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