-----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, Vwy6EhYvqmVhYfyXMkEB3QuxNToQkbKcNe6RFaRusmvcr4HrIJfBWH1+6bn4ithx xgnDofWgS7ecXeG8MRYcNw== 0000070530-02-000012.txt : 20020816 0000070530-02-000012.hdr.sgml : 20020816 20020816144613 ACCESSION NUMBER: 0000070530-02-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020526 FILED AS OF DATE: 20020816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL SEMICONDUCTOR CORP CENTRAL INDEX KEY: 0000070530 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 952095071 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06453 FILM NUMBER: 02741068 BUSINESS ADDRESS: STREET 1: 2900 SEMICONDUCTOR DR STREET 2: PO BOX 58090 CITY: SANTA CLARA STATE: CA ZIP: 95052-8090 BUSINESS PHONE: 4087215000 MAIL ADDRESS: STREET 1: 2900 SEMICONDUCTOR DR CITY: SANTA CLARA STATE: CA ZIP: 95052-8090 10-K 1 form10k_081202.txt ANNUAL REPORT TO FY02 NATIONAL SEMICONDUCTOR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 26, 2002 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number: 1-6453 NATIONAL SEMICONDUCTOR CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2095071 (State of incorporation) (I.R.S. Employer Identification Number) 2900 SEMICONDUCTOR DRIVE, P.O. BOX 58090 SANTA CLARA, CALIFORNIA 95052-8090 (Address of principal executive offices) Registrant's telephone number, including area code: (408) 721-5000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered Common stock, par value New York Stock Exchange $0.50 per share Pacific Exchange Preferred Stock Purchase Rights New York Stock Exchange Pacific Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of class) --Continued on next page-- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of National as of June 28, 2002, was approximately $4,059,592,390. Shares of common stock held by each officer and director and by each person who owns 5 percent or more of the outstanding common stock have been excluded because these persons may be considered to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the registrant's common stock, $0.50 par value, as of June 28, 2002, was 180,799,043. DOCUMENTS INCORPORATED BY REFERENCE Document Location in Form 10-K -------- --------------------- Portions of the Proxy Statement for the Annual Meeting of Part III Stockholders to be held on or about October 18, 2002. Portions of the Company's Registration Statement on Form S-3, Part IV Registration No. 33-48935, which became effective October 5, 1992. Portions of the Company's Registration Statement on Form S-3, Part IV Registration No. 33-52775, which became effective March 22, 1994. Portions of the Company's Registration Statement on Form S-8, Part IV Registration No. 333-57029, which became effective June 17, 1998. Portions of the Company's Registration Statement on Form S-8, Part IV Registration No. 33-61381, which became effective July 28, 1995. Portions of the Company's Registration Statement on Form S-8, Part IV Registration No. 333-53801, which became effective May 28, 1998. Portions of the Company's Registration Statement on Form S-8, Part IV Registration No. 333-09957, which became effective August 12, 1996. Portions of Cyrix Corporation's Registration Statement on Form S-3, Part IV Registration No. 333-10669, which became effective August 22, 1996. Portions of the Company's Registration Statement on Form S-8, Part IV Registration No. 333-48424, which became effective October 23, 2000. Portions of the Proxy Statement for the Annual Meeting held Part IV September 26, 1997. Portions of the Company's Post Effective Ammendment No. 1 Part IV on Form S-8 to Registration Statement on Form S-4, Registration No. 333-38033-01 whichBecame effective November 18, 1997. Portions of the Company's Registration Statement on Form S-8, Part IV RegistrationNo. 333-23477 which became effective March 17, 1997. Portions of the Company's Registration Statement on Form S-8, Part IV Registration No. 333-63614, which became effective June 22, 2001. Portions of the Company's Registration Statement on Form S-8, Part IV Registration No. 333-70040, which became effective September 24, 2001. The Index to Exhibits is located on pages 72-74. ITEM 1. BUSINESS The statements contained in this report that are forward-looking are based on current expectations and estimates. Actual results may differ materially from our forward-looking statements. Forward-looking statements involve a number of risks and uncertainties. These risks and uncertainties include, but are not limited to, the general economy, regulatory and international economic conditions, the changing environment of the semiconductor industry, competitive products and pricing, growth in the wireless, personal computer and communications infrastructure industries, the effects of legal and administrative cases and proceedings, and other risks and uncertainties that we may discuss from time to time in our other reports and filings with the SEC. General Our strategy is to provide systems on a chip for our key trendsetting data highway partners, using our analog expertise as a starting point for forward integration. We design, develop, manufacture and market a wide array of semiconductor products, including a broad line of analog, mixed-signal and other integrated circuits. These products address a variety of markets and applications, including: o wireless communications; o power management; o flat panel and CRT displays; o imaging; o information appliances; o local and wide area networks; o personal systems; o consumer. National was originally incorporated in the state of Delaware in 1959 and our headquarters have been in Santa Clara, California since 1967. Recent Acquisitions In April 2002, we acquired the Finnish company Fincitec Oy, and its related company, ARSmikro OU, based in Estonia. These two companies develop low-voltage, low-power application specific integrated circuits for battery-powered devices. We made this acquisition to strengthen our development capabilities for power management circuits for the portable market and to expand our suite of integrated and discrete silicon solutions for handheld devices, including cell phones, personal digital assistants, digital cameras and similar electronic devices. In June 2001, we acquired Wireless Solutions Sweden AB, a former subsidiary of Allgon AB. Wireless Solutions is a developer of wireless solutions ranging from telemetry to mobile phones to wireless networking, including BluetoothTM. This acquisition should help us to deliver complete wireless reference designs, including silicon chipsets, hardware and software. These acquisitions were accounted for using the purchase method of accounting. Products Semiconductors are integrated circuits (in which a number of transistors and other elements are combined to form a more complicated circuit) or discrete devices (such as individual transistors). In an integrated circuit, various components are fabricated in a small area or "chip" of silicon, which is then encapsulated in plastic, ceramic or other advanced forms of packaging and connected to a circuit board or substrate. We manufacture an extensive range of analog intensive, mixed-signal and digital products, which are used in numerous vertical markets. While no precise industry standard exists for analog and mixed-signal devices, we consider products which process analog information or convert analog to digital or digital to analog as analog and mixed-signal devices. We are a leading supplier of analog and mixed-signal products, serving both broad based markets such as the industrial and consumer market, and more narrowly defined markets such as wireless handsets; displays, imaging and human interface; information infrastructure and information appliances. Our analog and mixed-signal devices include: o amplifiers and regulators; o image sensors; o power monitors and line drivers; o radio frequency; o audio amplifiers; o display drivers and signal processors. Other products with significant digital to analog or analog to digital capability include products for local area and wireless networking and wireless communications, as well as products for personal systems and personal communications, such as input/output devices. We use the brand name 'Super I/O' to describe our integrated circuits that handle system peripheral and input/output functions on the personal computer motherboard. Corporate Organization; Product Line Business Units We are comprised of various product line business units which are combined to form groups. In fiscal 2002, our operations were organized in the following five groups: the Analog Group, the Information Appliance and Wireless Group, the Displays Group, the Wired Communications Group and the Custom Solutions Group. Analog Group: Analog products are a vital technology link that connects the physical world with digital information. They are used to enable and enrich the experience of sight and sound of many electronic applications. In addition to the real world interfaces, analog products are used extensively in power management and signal conditioning applications. We have achieved a leadership position with our power management technology. Our diverse portfolio of innovative intellectual property enables us to develop building block products, application specific standard products and full custom large-scale integrations for our key customers in applications such as wireless handsets and flat panel displays. In signal path applications, our innovative and high-performance building blocks and application specific standard products allow our customers to differentiate their systems. The Analog Group designs, develops and manufactures a wide range of products including: o Power management products (power conversion, regulation and conservation); o High-performance operational amplifiers; o High-performance analog-to-digital converters; o High efficiency audio amplifiers; o Thermal management products. With our leadership in small and innovative packages and process technology, we are focusing on high growth markets that require portability, such as cellular telephones and wireless handheld devices. We are using our analog expertise as the initial point to integrate systems on a chip aimed at the wireless, displays, notebook computer and information appliance markets. Current offerings include audio subsystems and a complete power management unit for the GSM wireless product applications. We are increasing our penetration into the top tier original equipment manufacturer customer base in the wireless and display market segment. Nearly 42 percent of the Analog Group's revenues are derived from original equipment manufacturers, while the remaining 58 percent come from authorized distributors worldwide. The Enhanced Solutions business unit, which is part of the Analog Group, supplies integrated circuits and contract services to the high reliability market, which includes avionics, defense, space and the federal government. Displays Group: The Displays Group consists of our Flat Panel Displays and CRT Displays business units. We are a leader in analog video processing solutions for the displays market. The Displays Group develops and manufactures various products that provide higher resolution and brighter color for flat panel monitors, CRT monitors and notebook TFT displays. The Flat Panel Displays business unit provides a variety of innovative products for notebook TFT displays and flat panel monitors. Our products include a variety of timing controllers, low voltage differential signal (LVDS) data receivers, LVDS transmitters and column drivers. In the notebook TFT displays segment, we maintain approximately 40% market share in the integrated LVDS receiver and timing controllers. The Flat Panel Displays business unit also continues to expand its position in the discrete LVDS market. Recent new product introductions include a new family of column drivers that use the industry standard reduced swing differential signaling (RSDS) digital interface technology. The Flat Panel Displays business unit continues to drive towards integration by developing a scaler chip targeted at high-end notebooks and stand-alone flat panel monitors. We are also developing new product offerings for the mobile handset market. The CRT Displays business unit offers a variety of video drivers and pre-amplifiers that go into CRT monitors. While unit volume of CRT monitors is generally expected to decline over time due to the increasing penetration of flat panel displays, the size of the overall market and the benefits of video neckboard integration continue to drive innovation at the integrated circuit level. Our product offerings include the integrated low cost family of CMOS pre-amplifiers with on-screen display, high gain drivers and integrated bias clamp. Information Appliance and Wireless Group: The Information Appliance and Wireless Group consists of our Information Appliance, Wireless and Advanced I/O business units. The Information Appliances business unit focuses on providing easier access to the internet with our Geode product family of silicon and system solutions. The Geode technology merges complex functionality, such as processing, system logic, graphics, audio and video decompression on to one highly integrated device. Built around the core of the x86 microprocessor, this technology allows for optimized power, performance and price. Coupled with our analog and mixed-signal communication capabilities, this technology allows us to offer efficient flexible solutions, making communication and information access easier. The Information Appliance business unit focuses on serving three market segments: o Enterprise thin-clients that are computer systems with low power consumption and minimal memory that leverage application software from a centralized server; o Personal access devices that are lightweight, hand held internet access terminals; o Interactive TV set-top boxes that provide internet access through the television. The Wireless business unit delivers solutions that perform the radio, baseband controller, power management and related functions primarily for handsets and base stations in the cellular and cordless telephone markets. The Wireless business unit leverages three technologies: o Global Systems for Mobile Communications; o BluetoothTM; o Digital Cordless Telephone technology. Our GSM chipset solution combines the radio transceiver, digital baseband, analog baseband and power management into one solution. Our BluetoothTM enabled product offering provides wireless connectivity between various consumer and commercial applications. The newest generation of BluetoothTM devices and the wide personal access BluetoothTM module offers a highly integrated solution for future applications. Our digital cordless technology allows us to offer some of the most flexible system solutions available today for the digital cordless telephone. With a unique baseband platform, one single baseband chip supports combined voice/data, repeaters, base stations and handsets. The Advanced I/O business unit provides input/output, including our Super I/O product, and manageability solutions to the server, desktop client, mobile client and the emerging trusted client market segments. We have recently introduced products that address remote server management and security technology for future generations of customers. Wired Communications Group: The Wired Communications Group consists of the Enterprise Networks and Network Interface business units. The Enterprise Network business unit provides complete solutions for networking security and networking management. Combining state-of-the-art analog and digital technologies, Enterprise Network products include ultra-low power physical layer devices, wire-speed packet processors, cost effective switch fabrics and highly scalable next-generation EthernetMAXTM products. In fiscal 2002, we announced our collaboration efforts with Vitesse Semiconductor for developing end-to-end solutions to accelerate adoption of high-performance and cost-effective gigabit ethernet technologies. Vitesse Semiconductor is a designer and supplier of innovative, high-performance integrated circuits and optical modules used in next generation networking and optical communications equipment. As a result of the collaboration efforts, we introduced a high-performance, low power, cost-effective 16-port gigabit ethernet switch, which is a complete gigabit switch solution for enterprise networking systems. By leveraging our innovation, technology breadth of building blocks and our analog expertise, we now offer a complete end-to-end solution, the Gigabit MAC and Gigabit PHY for network interface cards, and the Gigabit Switch system solution. In fiscal 2002, we formed a strategic relationship with iReady Corporation to deliver the industry's first fully integrated line-speed transport off-load solution, the EthernetMAX core (Media Access Xcclerator). iReady is a leader in hardware accelerated internet protocol processing. This strategic partnership is aimed at delivering next-generation semiconductor solutions for the Gigabit Ethernet and iSCSI storage networking markets. iSCSI, a new IP-based storage networking standard for linking data storage facilities, is expected to help bring about rapid development of the storage area network market by increasing the capabilities and performance of storage data transmission. The Network Interface business unit is focused on the development of high-speed differential interconnect products for infrastructure equipment that support wireless, telecom, data networking and professional video applications. Our products are used in backplane and cable intraconnects within these systems. Custom Solutions Group: Custom Solutions supplies a range of application-specific and standard integrated circuits for targeted customers in the telecommunications, automotive and consumer electronics markets. This group engages with other internal product line business units to facilitate the exchange and acquisition of intellectual property to deliver systems-on-a-chip solutions for key strategic partners. The breadth of Custom Solutions product offerings include: o Custom-specific designs that provide systems-on-a-chip solutions; o A wide range of CMOS image sensors specifically designed for a variety of commercial and industrial imaging applications; o CR16 core and ARM 7 processors, combined with dedicated application specific software to address the device connectivity market; o General-purpose 8-bit and 16-bit microcontrollers to address a wide variety of applications in the communication, consumer and automotive segments. Worldwide Marketing and Sales and Central Technology and Manufacturing Group. Separately from our business operating groups, our corporate structure includes centralized Worldwide Marketing and Sales and a Central Technology and Manufacturing Group. Worldwide Marketing and Sales is structured around the four major regions of the world where we operate -- the Americas (North and South Americas), Europe, Japan and Asia Pacific -- and unites our worldwide sales and marketing organization. CTMG manages all production, including manufacturing requirements that are outsourced, and Central Support Technology. Central Support Technology includes process technology, which provides pure research and process development necessary for many of our core production processes, packaging technology and leading edge research. CTMG provides a range of process libraries, product cores and software that is shared among our product lines to develop system level solutions. It is also responsible for the selection and usage of common support tools, including integrated computer-aided design for design, layout and simulation. Segment Financial Information and Geographic Information. For segment reporting purposes, each of our product line business units represents an operating segment as defined under Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information. Business units that have similarities, including economic characteristics, underlying technology, markets and customers, are aggregated into segments. Under the criteria in SFAS No. 131, only the Analog segment and the Information Appliance segment are considered reportable segments. All other segments are included in the caption 'All Others.' For further financial information on these segments, refer to the information contained in Note 13, 'Segment and Geographic Information,' in the Notes to the Consolidated Financial Statements included in Item 8. Marketing and Sales We market our products globally to original equipment manufacturers through a direct sales force. Major OEMs include: o Hewlett Packard; o Nokia; o IBM; o Samsung; o LG Electronics; o Siemens; o L.M. Ericsson; o Sony; o Motorola; o Sony - Ericsson Mobile Communication. There has been an increasing trend in the technology industry where OEMs use contract manufacturers to build their products and original design manufacturers to design and build products. As a result, our design wins with major OEMs, particularly in the personal computer and cellular phone markets, can ultimately result in sales to a contract manufacturer. In addition to our direct sales force, we use distributors in our four business regions, and approximately 47 percent of our total worldwide revenues are channeled through distributors. In an increasing portion of our distribution sales, the distributor acts as the logistics partner for our OEM customers and their contract manufacturers. In line with industry practices, we generally credit distributors for the effect of price reductions on their inventory of our products and, under specific conditions, we repurchase products that we have discontinued. Our comprehensive central facilities in the United States, Europe and Singapore handle customer support. These customer support centers respond to inquiries on product pricing and availability, customer technical support requests, order entry and scheduling. We augment our sales effort with application engineers based in the field. These engineers are specialists in our product portfolio and work with customers to identify and design our integrated circuits into customers' products and applications. These engineers also help identify emerging markets for new products and are supported by our design centers in the field or at manufacturing sites. Customers We are not dependent upon any single customer, the loss of which would have a material effect on our operating results. The distributor Avnet accounted for approximately 10 percent of total net sales in fiscal 2002 as a result of its acquisition of EBV in Europe. No one customer or distributor accounted for 10 percent or more of total net sales in fiscal 2001 or 2000. Backlog Consistent with industry practice, we frequently revise semiconductor backlog quantities and shipment schedules under outstanding purchase orders to reflect changes in customer needs, and therefore we do not believe it is meaningful to disclose the amount of backlog at any particular date. Seasonality Generally, we are affected by the seasonal trends of the semiconductor and related industries. We typically experience lower sales in our third fiscal quarter, primarily due to customer holiday schedules. Sales usually reach a seasonal peak in our fourth fiscal quarter. During fiscal 2002, this typical trend did not occur. While business conditions for the semiconductor industry were weak in fiscal 2002, we experienced sequential quarterly growth in sales as new orders improved throughout the fiscal year. Revenue in our third fiscal quarter, which is typically down, grew slightly over sales in the preceding second fiscal quarter. Manufacturing The design of semiconductor and integrated circuit products is shaped by general market needs and customer requirements. Following product design and development, we generally produce integrated circuits in the following steps: o Wafer Fabrication. Product designs are compiled and digitized by state of the art design equipment and then transferred to silicon wafers in a series of complex precision processes that include oxidation, lithography, chemical etching, diffusion, deposition, implantation and metallization. o Wafer Sort. The silicon wafers are tested and separated into individual circuit devices. o Product Assembly. Tiny wires are used to connect the electronic circuits on the device to the stronger metal leads of the package in which the device is encapsulated for protection. o Final Test. The devices are subjected to a series of vigorous tests using computerized circuit testers and, for certain applications, environmental testers such as burn-in ovens, centrifuges, temperature cycle or moisture resistance testers, salt atmosphere testers and thermal shock testers. o Coating. Certain devices in the analog portfolio are designed to be used without traditional packaging. In this case, the integrated circuit is coated with a protective material and mounted directly onto the circuit board. We conduct product design and development work predominantly in the United States. Wafer fabrication is concentrated in two facilities in the United States and one in Scotland. Nearly all product assembly and final test operations are performed in facilities in Southeast Asia. For capacity utilization and other economic reasons, we employ subcontractors to perform certain manufacturing functions in the United States, Europe, Israel, Southeast Asia and Japan. Our wafer manufacturing processes span Bipolar, Metal Oxide Silicon, Complementary Metal Oxide Silicon and Bipolar Complementary Metal Oxide Silicon technologies, including Silicon Germanium. We are focusing our wafer fabrication processes to emphasize integration of analog and digital capabilities to support our strategy to develop system-on-a-chip products. Bipolar processes primarily support our standard products. The width of the individual transistors on a chip is measured in microns; one micron equals one millionth of a meter. As products decrease in size and increase in functionality, wafer fabrication facilities must be able to manufacture integrated circuits with sub-micron circuit pattern widths. This precision fabrication carries over to assembly and test operations, where advanced packaging technology and comprehensive testing are required to address the ever increasing performance and complexity embedded in current integrated circuits. We have a long-term technology licensing agreement with Taiwan Semiconductor Manufacturing Company (TSMC). This licensing agreement allows us to gain access to a variety of TSMC's advanced sub-micron processes for use in our wafer fabrication facility in Maine as desired, if and when those processes are developed by TSMC. Our arrangement with TSMC will enable us to gain access ultimately to TSMC's 0.10-micron process technology. These advanced process technologies should accelerate the development of high performance digital and mixed-signal products that support our target markets. Raw Materials Our manufacturing processes use certain key raw materials critical to our products. These include silicon wafers, certain chemicals and gases, ceramic and plastic packaging materials and various precious metals. We also rely on subcontractors to supply finished or semi-finished products which we then market through our sales channels. We obtain raw materials and semi-finished or finished products from various sources, although the number of sources for any particular material or product is relatively limited. We feel our current supply of essential materials is adequate. However, shortages have occurred from time to time and could occur again. Significant increases in demand, rapid product mix changes or natural disasters could affect our ability to procure materials or goods. Research and Development Our research and development efforts consist of pure research in metallurgical, electro-mechanical and solid-state sciences, manufacturing process development and product design. Research functions and development of most process technologies are done by CTMG's process technology group. Total R&D expenses were $441.0 million for fiscal 2002, or 30 percent of sales, compared to $435.6 million for fiscal 2001, or 21 percent of sales, and $386.1 million for fiscal 2000, or 18 percent of sales. These amounts exclude in-process R&D charges of $1.3 million related to the acquisitions of Fincitec, ARSmikro and Wireless Solutions Sweden in fiscal 2002, $16.2 million related to the acquisitions of innoComm Wireless and Vivid Semiconductor in fiscal 2001 and $4.2 million related to the acquisition of Algorex in fiscal 2000. These in-process R&D charges are included in our consolidated statements of operations as a component of special items. During fiscal 2002, we expended 75 percent of our R&D spending toward new product development and 25 percent toward the development of process and support technology. Compared to fiscal 2001, this represents an increase in spending of 13 percent toward development of process and support technology and a 6 percent reduction in spending toward new product development. Patents We own numerous United States and non-U.S. patents and have many patent applications pending. We consider the development of patents and the maintenance of an active patent program advantageous to the conduct of our business. However, we believe that continued success will depend more on engineering, production, marketing, financial and managerial skills than on our patent program. We license certain of our patents to other manufacturers and participate in a number of cross licensing arrangements and agreements with other parties. Each license agreement has unique terms and conditions, with variations as to length of term, royalties payable, permitted uses and scope. The majority of these agreements are cross-licenses in which we grant broad licenses to our intellectual property in exchange for receiving a license; none are exclusive. The amount of income we have received from licensing agreements has varied in the past, and we cannot precisely forecast the amount and timing of future income from licensing agreements. On an overall basis, we believe that none of the license agreements is material to us, either in terms of royalty payments due or payable or intellectual property rights granted or received. Employees At May 26, 2002, we employed approximately 10,100 people of whom approximately 4,600 were employed in the United States, 1,300 in Europe, 4,100 in Southeast Asia and 100 in other areas. We believe that our future success depends fundamentally on our ability to recruit and retain skilled technical and professional personnel. Our employees in the United States are not covered by collective bargaining agreements. We consider our employee relations worldwide to be favorable. Competition and Risks In addition to the risks discussed below and elsewhere in this 'Business' section, see the 'Outlook' section included in Item 7, 'Management's Discussion and Analysis,' for further discussion of other risks and uncertainties that may affect our business. Conditions inherent in the semiconductor industry cause periodic fluctuations in our operating results. Rapid technological change and frequent introduction of new technology leading to more complex and more integrated products characterize the semiconductor industry. The result is a cyclical environment with short product life, price erosion and high sensitivity to the overall business cycle. Substantial capital and R&D investment are also required to support products and manufacturing processes. As a result of these industry conditions, we have experienced in the past and may experience in the future periodic fluctuations in our operating results. Shifts in product mix toward, or away from, higher margin products can also have a significant impact on our operating results. As a result of these and other factors, our financial results can fluctuate significantly from period to period. For example, we incurred a loss in fiscal 2002, while we generated net income in fiscal 2001 and 2000. Prior to that we experienced substantial losses in fiscal 1999 and 1998. We generated net income in fiscal 1993 through 1997, while we incurred losses in fiscal 1989 through 1992. Our business will be harmed if we are unable to compete successfully in our markets. Competition in the semiconductor industry is intense. We compete with a number of major corporations in the high-volume segment of the industry. These include several multinational companies whose semiconductor business may be only part of their overall operations, such as IBM, Motorola, Koninklijke (Royal) Philips Electronics, NEC and Toshiba. We also compete with a large number of corporations that target particular markets such as Texas Instruments, ST Microelectronics, Maxim, Analog Devices, Linear Technology, Intel and LSI Logic. Competition is based on design and quality of products, product performance, price and service, with the relative importance of these factors varying among products and markets. We currently see significant competition in the networking market from both large established companies such as Intel and Lucent, as well as newer companies such as Broadcom and Marvell Technology. We cannot assure you that we will be able to compete successfully in the future against existing or new competitors or that our operating results will not be adversely affected by increased price competition. We may also compete with several of our customers, particularly customers in the networking and personal systems markets. We face risks from our international operations, many of which are beyond our control. We conduct a substantial portion of our operations outside the United States, and our business is subject to risks associated with many factors beyond our control. These factors include: o fluctuations in foreign currency rates; o instability of foreign economies; o emerging infrastructures in foreign markets; o support required abroad for demanding manufacturing requirements; o foreign government instability and changes; and o U.S. and foreign laws and policies affecting trade and investment. Although we have not experienced any materially adverse effects from our foreign operations as a result of these factors in the last year, one or more of these factors has had an effect on us in the past and we could be affected by them in the future. In addition, although we seek to hedge our exposure to currency exchange rate fluctuations, our competitive position relative to non-U.S. suppliers can be affected by the exchange rate of the U.S. dollar against other currencies, particularly the Japanese yen. Environmental Regulations To date, our compliance with federal, state and local laws or regulations that have been enacted to regulate the environment has not had a material adverse effect on our capital expenditures, earnings, competitive or financial position. For more information, see Item 3, "Legal Proceedings" and Note 12, "Commitments and Contingencies" in the Consolidated Financial Statements in Item 8. However, we could be subject to fines, suspension of production, alteration of our manufacturing processes or cessation of our operations if we fail to comply with present or future government regulations related to the use, storage, handling, discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes. ITEM 2. PROPERTIES We conduct manufacturing, as well as process research and product development, in our wafer fabrication facilities located in Arlington, Texas; South Portland, Maine; and Greenock, Scotland. As part of our consolidation of our wafer manufacturing operations in Greenock, Scotland, we closed our 4-inch wafer fabrication facility in October 2000. The manufacturing processes from our 4-inch wafer fabrication facility were transferred to our 6-inch wafer fabrication facility at the same site, as well as to our manufacturing facility in Arlington, Texas. Wafer fabrication capacity utilization during fiscal 2002 ran at 55 percent, as production activity was reduced considerably by low demand in the semiconductor industry. This compares with wafer fabrication capacity utilization for fiscal 2001 of 69 percent when business conditions were much stronger, particularly in the first half of the fiscal year. We expect our captive manufacturing capacity and our third-party subcontract manufacturing arrangements to be adequate to supply our needs in the foreseeable future. Our assembly and test functions are performed primarily in Southeast Asia. These facilities are located in Melaka, Malaysia and Toa Payoh, Singapore. Our principal administrative and research facilities are located in Santa Clara, California. Our regional headquarters for Worldwide Sales and Marketing are located in Santa Clara, California; Munich, Germany; Tokyo, Japan; and Kowloon, Hong Kong. We maintain local sales offices and sales service centers in various locations and countries throughout our four business regions. We also operate small design facilities in various locations in the U.S., including: Austin, Texas Grass Valley, California Rochester, NY Calabasas, California Irvine, California Salem, New Hampshire Chandler, Arizona Longmont, Colorado San Diego, California Federal Way, Washington Nashua, New Hampshire Santa Clara, California Fort Collins, Colorado Norcross, Georgia South Portland, Maine Fremont, California Phoenix, Arizona Tucson, Arizona and at overseas locations including China, Estonia, Finland, Germany, India, Israel, Japan, the Netherlands, Sweden and the United Kingdom. In general, we own our manufacturing facilities and lease most of our sales and administrative offices. ITEM 3. LEGAL PROCEEDINGS Tax Matters We have settled with the IRS all outstanding issues relating to our federal tax liability for the 1986-1996 fiscal years. After taking into account overpayments, deficiencies, and loss and credit carryovers, the tax deficiency for these years was approximately $3.4 million. We have paid this amount to the IRS. The interest amount on the deficiency has been finalized. The IRS has begun examination of our tax returns for fiscal years 1997 through 2000. We believe we have made adequate tax payments and/or accrued adequate amounts in our financial statements to cover all years in question. Customs Proceedings In April 1988, we received a notice from the U.S. Customs Service in San Francisco alleging that we had underpaid duties of approximately $19.5 million on goods we had imported from our foreign subsidiaries from June 1, 1979 to March 1, 1985. We had been contesting the notice in various proceedings since 1988. The amount of the alleged underpayment was reduced to approximately $3.6 million by the Assistant Commissioner of Customs in March 1998. The underpayment was subject to penalties computed as a multiple of the underpayment. In July 2001, the Customs Service accepted our offer to settle the matter for $2.5 million, which we had previously paid to the Customs Service. The matter is now concluded. Environmental Matters 1. National has been named to the National Priorities List (Superfund) for our Santa Clara, California site and we have completed a remedial investigation/feasibility study with the Regional Water Quality Control Board, which is acting as agent for the EPA. We have agreed in principle with the RWQCB on a site remediation plan. We were sued by AMD, which sought recovery of AMD's cleanup costs in the Santa Clara, California area under the RWQCB remediation orders. AMD alleged that certain contamination for which the RWQCB had found AMD responsible was originally caused by National. The settlement of this case was completed in fiscal 2002 and the matter is now concluded. In addition to the Santa Clara site, National has been designated as a potentially responsible party by federal and state agencies for certain sites with which we may have had direct or indirect involvement. These designations are made regardless of the extent of our involvement. These claims are in various stages of administrative or judicial proceedings and include demands for recovery of past governmental costs and for future investigations and remedial actions. In many cases, the dollar amounts of the claims have not been specified and the claims have been asserted against a number of other entities for the same cost recovery or other relief as is sought from us. We also retained liability for environmental matters arising from our former operations of Dynacraft, Inc. and the Fairchild business but we are not currently involved in any legal proceedings relating to those liabilities. We accrue costs associated with environmental matters when they become probable and reasonably estimable. The amount of all environmental charges to earnings, including charges relating to the Santa Clara site remediation, which did not include potential reimbursements from insurance coverage, has not been material during the last three fiscal years. We believe that the potential liability for environmental matters, if any, in excess of amounts already accrued in our financial statements will not have a material effect on our financial position or results of operations. 2. In March 2001, the U.S. Environmental Protection Agency served us with an administrative complaint, compliance order and notice of opportunity for hearing. The complaint alleged that the EPA found certain violations of the Resource Conservation and Recovery Act in an inspection conducted in August 1999 at the Maine facility. In October 2001, we entered into a Consent Agreement and Final Order with the EPA settling this matter. We have agreed to pay a penalty of $42,120 and undertake certain environmental projects at the Maine plant costing at least $156,296. We will also submit reports about the environmental projects to the EPA. The matter is now concluded. Other 1. In November 2000, a derivative action was filed in the U.S. District Court in Delaware against us, Fairchild Semiconductor International, Inc. and Sterling Holding Company, LLC, by Mark Levy, a Fairchild stockholder. The action was brought under Section 16(b) of the Securities Exchange Act of 1934 and the rules issued under that Act by the Securities and Exchange Commission. The plaintiff sought disgorgement of alleged short-swing insider trading profits. We had originally acquired Fairchild common and preferred stock in March 1997 at the time we disposed of the Fairchild business. Prior to its initial public offering in August 1999, Fairchild had amended its certificate of incorporation to provide that all Fairchild preferred stock would convert automatically to common stock upon completion of the initial public offering. As a result, our shares of preferred stock converted to common stock in August 1999. Plaintiff has alleged that the acquisition of common stock through the conversion constituted an acquisition that should be "matched" against our sale in January 2000 of Fairchild common stock for purposes of computing short-swing trading profits. The action seeks to recover from us on behalf of Fairchild alleged recoverable profits of approximately $14 million. In February 2002, the judge in the case granted the motion to dismiss filed by us and our co-defendants and dismissed the case, ruling that the conversion was done pursuant to a reclassification which is exempt from the scope of Section 16(b). Plaintiff has appealed the dismissal of the case. 2. In January 1999, a class action suit was filed against us and a number of our suppliers in California Superior Court by James Harris and other former and present employees claiming damages for personal injury. The complaint alleges that cancer and/or reproductive harm were caused to employees as a result of alleged exposure to toxic chemicals while working at the company. Plaintiffs claim to have worked at sites in Santa Clara and/or in Greenock, Scotland. In addition, one plaintiff claims to represent a class of children of company employees who allegedly sustained developmental harm as a result of alleged in utero exposure to toxic chemicals while their mothers worked at the company. Although no specific amount of monetary damages is claimed, plaintiffs seek damages on behalf of the classes for personal injuries, nervous shock, physical and mental pain, fear of future illness, medical expenses and loss of earnings and earnings capacity. At the present time, the court has required the Scottish employees to seek their remedies in Scottish courts. Plaintiffs presently seek a certification of a medical monitoring class which we oppose. Discovery in the case is proceeding and we intend to defend this action vigorously. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE REGISTRANT * Name Current Title Age - ---- ------------- --- Kamal K. Aggarwal (1) Executive Vice President, Central 64 Technology and Manufacturing Group Jean-Louis Bories (2) Executive Vice President and General Manager, 47 Information Appliance Group Lewis Chew (3) Senior Vice President, Finance and Chief 39 Financial Officer John M. Clark III (4) Senior Vice President, General Counsel 52 and Secretary Brian L. Halla (5) Chairman of the Board, President and 55 Chief Executive Officer Detlev J. Kunz (6) Senior Vice President and General Manager, 51 Worldwide Marketing and Sales Donald Macleod (7) Executive Vice President and Chief 53 Operating Officer Suneil V. Parulekar (8) Senior Vice President, Analog Group 54 Ulrich Seif (9) Senior Vice President and Chief 44 Information Officer Edward J. Sweeney (10) Senior Vice President, Human Resources 45 * all information as of May 26, 2002 Business Experience During Last Five Years (1) Mr. Aggarwal joined National in November 1996 as the Executive Vice President of the Central Technology and Manufacturing Group. Prior to joining National, Mr. Aggarwal had held positions at LSI Logic as Vice President, Worldwide Logistics and Customer Service and Vice President, Assembly and Test. (2) Mr. Bories joined National in October 1997. Prior to becoming Executive Vice President and General Manager of the Information Appliance Group in September 1999, he held positions as Executive Vice President and General Manager of the Cyrix Group and as Senior Vice President, Core Technology Group. Prior to joining National, he had held positions at LSI Logic as Vice President and General Manager, ASIC Division; Vice President, Engineering/CAD; Director, Advanced Methodology; and Director, 500K Program. (3) Mr. Chew joined National in May 1997 as Director of Internal Audit and was made Vice President and Controller in December 1998 and Acting Chief Financial Officer in April 2001. Prior to joining National, Mr. Chew had been a partner at KPMG LLP. Mr. Chew was named Senior Vice President, Finance and Chief Financial Officer in June 2001. (4) Mr. Clark joined National in May 1978. Prior to becoming Senior Vice President, General Counsel and Secretary in April 1992, he held the position of Vice President, Associate General Counsel and Assistant Secretary. (5) Mr. Halla joined National in May 1996 as Chairman of the Board, President and Chief Executive Officer. Prior to that, Mr. Halla held positions at LSI Logic as Executive Vice President, LSI Logic Products; Senior Vice President and General Manager, Microprocessor/DSP Products Group; and Vice President and General Manager, Microprocessor Products Group. (6) Mr. Kunz joined National in July 1981 and has held a number of marketing positions since then. Prior to becoming Senior Vice President and General Manager, Worldwide Marketing and Sales in July 2001, he had held positions in the company as the Regional Vice President and General Manager, Europe; European Sales and Distribution Director; Director of European Communications and Consumer Product Marketing; and Manager, European Telecom Business Center. (7) Mr. Macleod joined National in February 1978 and was named Executive Vice President and Chief Operating Officer in April 2001. Prior to that, he had been Executive Vice President, Finance and Chief Financial Officer since June 1995 and had previously held positions as Senior Vice President, Finance and Chief Financial Officer; Vice President, Finance and Chief Financial Officer; Vice President, Financial Projects; Vice President and General Manager, Volume Products - Europe; and Director of Finance and Management Services - Europe. (8) Mr. Parulekar joined National in January 1989. Prior to becoming Senior Vice President, Analog Products Group in April 2001, he held positions as Vice President, Amplifier/Audio Products; Product Line Director, Amplifier/Audio Products; Director of Marketing, Mediamatics; Director of Strategy, Communications and Consumer Group; and Director of Marketing, Power Management Group. (9) Mr. Seif first joined National in January 1980 and had held a number of positions in MIS related operations when he left the company in 1996 to become the Chief Information Officer and Vice President of Information Services at Cirrus Logic. He returned to National in May 1997 as the Chief Information Officer and Vice President of Information Services and was made Senior Vice President and Chief Information Officer in April 2001. (10) Mr. Sweeney first joined National in February 1983 and had held a number of human resources positions and was serving as Vice President, Human Resources for the Central Technology and Manufacturing Group when he left the company in 1998 to become the Vice President of Human Resources at Candescent Technologies Corporation. He later became the Vice President of Human Resources at Vitria Technology Inc. Mr. Sweeney rejoined National in May 2002 as Senior Vice President, Human Resources. Executive officers serve at the pleasure of our Board of Directors. There is no family relationship among any of our directors and executive officers. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS During the past three fiscal years, we have not sold any unregistered securities. See information appearing in Notes 7, Debt; Note 9, Shareholders' Equity; and Note 15, Financial Information by Quarter (Unaudited) in the Notes to the Consolidated Financial Statements included in Item 8. Our common stock is traded on the New York Stock Exchange and the Pacific Exchange. Market price range data are based on the New York Stock Exchange Composite Tape. Market price per share at the close of business on July 26, 2002 was $18.47. At July 26, 2002, the number of record holders of our common stock was 8,134. The following table summarizes share and exercise price information about our equity compensation plans as of May 26, 2002.
Number of Securities To Weighted Average Be Issued Upon Exercise Exercise Price of Number of Securities Remaining Plan Category of Outstanding Options, Outstanding Options, Available For Future Issuance Warrants, and Rights Warrants and Rights Under Equity Compensation Plans - --------------------------------------- ------------------------- -------------------------- -------------------------------- Equity Compensation plans approved by Shareholders: Option Plans 11,372,224 $27.75 4,960,975 Employee Stock Purchase Plans - - 7,334,621 Director Stock Plan 114,376 Equity Compensation plans not approved by Shareholders: Option Plans (1) 31,427,410 $28.58 32,279,236 Restricted Stock Plan - - 1,073,250 401K and Profit Sharing Plans - - 6,102,626 - --------------------------------------- ------------------------ -------------------------- -------------------------------- Total 42,799,634 51,865,084 =============== =============
(1) Includes options assumed in the acquisitions of Mediamatics, Cyrix and ComCore and options issued as part of the consideration paid in the acquisition of innoComm. ITEM 6. SELECTED FINANCIAL DATA The following selected financial information has been derived from audited consolidated financial statements. The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with 'Management's Discussion and Analysis of Financial Condition and Results of Operations' in Item 7 and the consolidated financial statements and related notes thereto in Item 8. FIVE-YEAR SELECTED FINANCIAL DATA
Years Ended May 26, May 27, May 28, May 30, May 31, In Millions, Except Per Share Amounts 2002 2001 2000 1999 1998 ----------- ----------- ------------ ------------ ----------- OPERATING RESULTS Net sales $ 1,494.8 $ 2,112.6 $ 2,139.9 $ 1,956.8 $ 2,536.7 Operating costs and expenses 1,652.6 1,887.3 1,795.1 3,040.6 2,682.5 ----------- ----------- ------------ ------------ ----------- Operating income (loss) (157.8) 225.3 344.8 (1,083.8) (145.8) Interest income (expense), net 21.3 52.0 15.3 (2.2) 22.3 Other income, net 13.1 29.8 282.4 0.6 23.8 ----------- ----------- ------------ ------------ ----------- Income (loss) before income taxes and extraordinary item (123.4) 307.1 642.5 (1,085.4) (99.7) Income tax expense (benefit) (1.5) 61.4 14.9 (75.5) (1.1) ----------- ----------- ------------ ------------ ----------- Income (loss) before extraordinary item $ (121.9) $ 245.7 $ 627.6 $ (1,009.9) $ (98.6) =========== =========== ============ ============ =========== Net income (loss) $ (121.9) $ 245.7 $ 620.8 $ (1,009.9) $ (98.6) =========== =========== ============ ============ =========== Earnings (loss) per share: Income (loss) before extraordinary item: Basic $ (0.69) $ 1.40 $ 3.62 $ (6.04) $ (0.60) =========== =========== ============ ============ =========== Diluted $ (0.69) $ 1.30 $ 3.27 $ (6.04) $ (0.60) =========== =========== ============ ============ =========== Net income (loss): Basic $ (0.69) $ 1.40 $ 3.58 $ (6.04) $ (0.60) =========== =========== ============ ============ =========== Diluted $ (0.69) $ 1.30 $ 3.24 $ (6.04) $ (0.60) =========== =========== ============ ============ =========== Weighted-average common and potential common shares outstanding: Basic 177.5 175.9 173.6 167.1 163.9 =========== =========== ============ ============ =========== Diluted 177.5 188.4 191.7 167.1 163.9 =========== =========== ============ ============ =========== FINANCIAL POSITION AT YEAR-END Working capital $ 669.3 $ 803.2 $ 791.1 $ 324.2 $ 514.6 Total assets $ 2,288.8 $ 2,362.3 $ 2,382.2 $ 2,044.3 $ 3,100.7 Long-term debt $ 20.4 $ 26.2 $ 48.6 $ 416.3 $ 390.7 Total debt $ 25.9 $ 55.6 $ 80.0 $ 465.6 $ 444.6 Shareholders' equity $ 1,781.1 $ 1,767.9 $ 1,643.3 $ 900.8 $ 1,858.9 - -------------------------------------------------------- ----------- ------------ ------------ ------------ ----------- OTHER DATA Research and development $ 441.0 $ 435.6 $ 386.1 $ 471.3 $ 482.0 Capital additions $ 138.0 $ 239.5 $ 168.7 $ 317.5 $ 655.8 Number of employees (in thousands) 10.1 10.3 10.5 11.6 13.0 - -------------------------------------------------------- ----------- ------------ ------------ ------------ -----------
National has not paid cash dividends on the common stock in any of the years presented above. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in the outlook section and within certain sections of management's discussion and analysis are forward-looking based on our current expectations and management's estimates and actual results may differ materially. The forward-looking statements reference a number of risks and uncertainties. Other risks and uncertainties include, but are not limited to, the general economy, the changing environment of the semiconductor industry, competitive products and pricing, growth in the wireless, PC and communications infrastructure industries, regulatory and international conditions, the effects of legal and administrative cases and proceedings, and other risks and uncertainties that we may detail from time to time in our reports and filings with the SEC. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto: o Critical Accounting Policies We believe the following critical accounting policies are those policies that have a significant effect on the determination of our financial position and results of operations. These policies also require us to make our most difficult and subjective judgments: 1. Revenue Recognition We recognize revenue from the sale of semiconductor products upon shipment, provided title and risk of loss have passed to the customer, the fee is fixed or determinable and collection of the revenue is reasonably assured. Service revenues are recognized as the services are provided or as milestones are achieved, depending on the terms of the arrangement. We record at the time of shipment a provision for estimated future returns. Approximately 47 percent of our semiconductor product sales are sold through distributors. We have agreements with our distributors for various programs, including pricing adjustments based on resales, scrap allowances and volume incentives. The revenue we record for these distribution sales is net of estimated provisions for these programs. When determining this net distribution revenue, we must make significant judgments and estimates. Our estimates are based upon historical experience rates, inventory levels in the distribution channel, current economic trends and other related factors. To date the actual distributor activity has been consistent with the provisions we made based on our estimates. However, because of the inherent nature of estimates, there is always a risk that there could be significant differences between actual amounts and our estimates. Our financial condition and operating results are dependent on our ability to make reliable estimates and we believe that our estimates are reasonable. However, different judgments or estimates could result in variances that might be significant to reported operating results. Intellectual property income is not classified as revenue. This income is classified as non-operating income and is recognized when the license is delivered and no further obligations to the other party exist. 2. Inventories Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market. We reduce the carrying value of inventory for estimated obsolescence or unmarketable inventory by an amount that is the difference between its cost and the estimated market value based upon assumptions about future demand and market conditions. Our products are classified as either custom, which are those products manufactured with customer-specified features or characteristics, or non-custom, which are those products that do not have customer-specified features or characteristics. We evaluate obsolescence by analyzing the inventory aging, order backlog and future customer demand on an individual product basis. If actual demand were to be substantially lower than what we have estimated, we may be required to write-down inventory below the current carrying value. While our estimates require us to make significant judgments and assumptions regarding future events, we believe our relationships with our customers, combined with our understanding of the end-markets we serve, provide us the ability to make reliable estimates. We also evaluate the carrying value of inventory for lower of cost or market on an individual product basis, and these evaluations are based on the difference between net realizable value and standard cost. Net realizable value is determined as the selling price of the product less estimated cost of disposal. When necessary, we reduce the carrying value of inventory to the lower of cost or the net realizable value. If actual market conditions and resulting product sales were to be less favorable than what we have projected, additional inventory write-downs may be required. 3. Impairment of Goodwill, Intangible Assets and Other Long-lived Assets We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use and eventual disposition. Our long-lived assets subject to this evaluation include property, plant and equipment. We assess the impairment of goodwill annually in our fourth fiscal quarter and whenever events or changes in circumstances indicate that it is more likely than not that an impairment loss has been incurred. Intangible assets other than goodwill are reviewed for impairment whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Other intangible assets subject to this evaluation include acquired patented and unpatented technology. We are required to make judgments and assumptions in identifying those events or changes in circumstances that may trigger impairment. Some of those factors we consider include: o Significant decrease in the market value of an asset o Significant changes in the extent or manner for which the asset is being used or in its physical condition o A significant change, delay or departure in our business strategy related to the asset o Significant negative change in the business climate, industry or economic conditions o Current period operating losses or negative cash flow combined with a history of similar losses or a forecast that indicates continuing losses associated with the use of an asset In view of the recent general economic decline, we are periodically evaluating whether an impairment of our identifiable intangible assets and other long-lived assets has occurred. Our evaluation includes an analysis of estimated future undiscounted net cash flows expected to be generated by the assets over their remaining estimated useful lives. If the estimated future undiscounted net cash flows are insufficient to recover the carrying value of the assets over the remaining estimated useful lives, we will record an impairment loss in the amount by which the carrying value of the assets exceeds the fair value. We determine fair value based on discounted cash flows using a discount rate commensurate with the risk inherent in our current business model. If, as a result of our analysis, we determine that our identifiable intangible assets or other long-lived assets have been impaired, we will recognize an impairment loss in the period in which the impairment is determined. Any such impairment charge could be significant and could have a material adverse effect on our financial position and results of operations, if and when the impairment is recorded. Major factors that influence our cash flow analysis are our estimates for future revenue and expenses associated with the use of the asset. Different estimates could have a significant impact on the results of our evaluation. We performed a goodwill impairment review upon initial adoption of the new accounting rules for goodwill as of the beginning of fiscal 2002. We also performed an annual review for goodwill impairment in our fourth fiscal quarter. Our impairment review is based on comparing the fair value to the carrying value of the reporting units with goodwill. The fair value of a reporting unit is measured at the business unit level using a discounted cash flow approach that incorporates our estimates of future revenues and costs for those business units with goodwill. We use a discount rate that is commensurate with the risk inherent in the current business model for each business unit with goodwill. Reporting units with goodwill include our wireless, displays and power business units that are operating segments within our Analog reportable segment and our wired communications group that is reported within other operating segments. The estimates we have used are consistent with the plans and estimates that we are using to manage the underlying businesses. If we fail to deliver new products for these business units, if the products fail to gain expected market acceptance, or market conditions for these businesses fail to improve, our revenue and cost forecasts may not be achieved and we may incur charges for goodwill impairment, which could be significant and could have a material adverse effect on our financial position and results of operations. o Overview We recorded net sales of $1.5 billion in fiscal 2002. This compares to $2.1 billion in both fiscal 2001 and fiscal 2000. The decline in sales for fiscal 2002 came from lower demand seen broadly across semiconductor markets, as business conditions in the semiconductor industry remained weak throughout the fiscal year. In contrast, market conditions were very strong in the first half of fiscal 2001. As we entered into the second half of fiscal 2001, market conditions for the semiconductor industry quickly weakened. As a result, we experienced growth in sales for the first half of fiscal 2001 over sales for the first half of fiscal 2000. This was essentially offset by a sharp decline in sales for the second half of fiscal 2001, resulting in year over year flat sales. In fiscal 2002, we recorded a net loss of $121.9 million. This compares to net income of $245.7 million in fiscal 2001 and $620.8 million in fiscal 2000. Our operating results for fiscal 2002 have been primarily affected by lower sales as a result of slower demand from the overall economic slowdown. The net loss for fiscal 2002 included $9.3 million of special items. The special items included $1.3 million for in-process R&D charges related to the acquisitions of Fincitec Oy, ARSmikro OU and Wireless Solutions Sweden AB (See Note 4). Special items also included a net charge of $8.0 million related to cost reduction actions (See Note 3). Net income for fiscal 2001 included special items of $51.9 million, including $16.2 million for in-process R&D charges related to acquisitions during the year (See Note 4) and a $35.7 million net charge for cost reduction actions (See Note 3). For fiscal 2000, net income included special items of $55.3 million. Special items in fiscal 2000 included a $26.8 million gain from the sale of assets of the Cyrix PC microprocessor business (See Note 3) and a $4.2 million in-process R&D charge related to an acquisition (See Note 4). Special items also included credits of $14.7 million related to restructuring of operations (See Note 3) and $18.0 million related to an indemnity agreement with Fairchild Semiconductor that expired in March 2000 (See Note 5). In addition to these special items, fiscal 2000 net income included a $270.7 million gain from our sale of shares of Fairchild stock and an extraordinary loss of $6.8 million (net of taxes of $0.4 million). We sold the shares of Fairchild stock as part of an initial public offering and a secondary offering that Fairchild completed during the year. We recorded the extraordinary loss in connection with the early redemption of our 6.5 percent convertible subordinated notes due 2002. o Sales The following discussion is based on our reportable segments described in Note 13 to the consolidated financial statements. Our sales for fiscal 2002 declined significantly year on year, as market conditions for the semiconductor industry remained weak compared to fiscal 2001. Although we saw a slight increase in unit volume in the second half of fiscal 2002, the sales decline for the year was primarily due to a decreased volume of shipments. Lower average selling prices were also a factor, as we saw a shift in product mix toward lower priced products and took some pricing actions under programs to gain increased market share in target areas. The Analog segment, which represents 75 percent of our total sales, experienced a decline in sales of 26 percent for fiscal 2002 from sales for fiscal 2001. The decline in fiscal 2002 was due to a drop in unit volume together with decreases in average selling prices. Average selling prices were down due to shifts in product mix as well as some decline in prices, particularly on multisource products, which tend to be viewed as commodity products. Within the Analog segment, sales of application-specific wireless products, including radio frequency building blocks, declined in fiscal 2002 by 36 percent from sales in fiscal 2001. In the broad-based analog markets, sales of power management and amplifier products were also down in fiscal 2002 from sales in fiscal 2001 by 33 percent and 30 percent, respectively. Only sales of display products increased in fiscal 2002. Those sales increased by 6 percent over sales in fiscal 2001, as a large increase in unit volume more than offset decreases in average selling prices. Sales for fiscal 2002 for the Information Appliances segment declined 12 percent from sales for fiscal 2001. The decline was primarily driven by lower unit volume, as average selling prices increased slightly. Since a large part of our portfolio of information appliance products is still consumed in the PC marketplace, the year-to-year slowdown in demand for personal computers and PC-related products had a significant effect in the decline in sales for the Information Appliance segment. In addition, the market adoption of emerging information appliances that are not PCs has been slower than expected. For fiscal 2002, sales declined in all geographic regions compared to sales for fiscal 2001. The decreases were 46 percent in the Americas, 40 percent in Europe, 32 percent in Japan and 2 percent in the Asia Pacific region. Sales for fiscal 2002 as a percentage of total sales increased to 44 percent for the Asia Pacific region, while decreasing to 25 percent in the Americas and 21 percent in Europe. Sales as a percentage of total sales held at 10 percent in Japan. Foreign currency-denominated sales in fiscal 2002 were unfavorably affected by foreign currency exchange rate fluctuations as the Japanese yen, pound sterling and euro all weakened against the dollar, but the impact from this was minimal since less than a quarter of our total sales for fiscal 2002 was denominated in foreign currency. Sales overall for fiscal 2001 were flat compared to sales for fiscal 2000. For the first half of fiscal 2001, we experienced growing sales as a result of higher volumes while average selling prices were relatively flat. Our sales declined significantly in the second half of fiscal 2001, as market conditions for the semiconductor industry quickly weakened. The decline was shown in reduced shipments, as average selling prices remained relatively the same. Fiscal 2001 sales for the Analog segment were flat compared to sales in fiscal 2000. Sales of analog products led the growth in sales for the first half of fiscal 2001 with an increase of 25 percent over sales for the comparable first half of fiscal 2000. This growth was attributable to higher unit volume combined with slightly higher average selling prices. A significant decline in sales for analog products in the second half of fiscal 2001 essentially offset the growth experienced in the first half of the fiscal year. Analog product sales in the second half of fiscal 2001 declined 21 percent compared to sales in the comparable second half of fiscal 2000, mainly due to a sharp drop in unit volume while average selling prices remained fairly stable. Sales of application-specific wireless products, including radio frequency building blocks, grew 3 percent in fiscal 2001 over fiscal 2000. This was driven by sales growth of 24 percent in the first half of fiscal 2001 over the comparable first half of fiscal 2000 followed by a decline of 16 percent in sales for the second half of fiscal 2001. Sales of amplifiers, interface and power management products also grew in fiscal 2001 by 7 percent, 5 percent and 2 percent, respectively, over sales in fiscal 2000. This was driven by sales growth in the first half of fiscal 2001 of 39 percent, 42 percent and 31 percent, respectively, over the comparable first half of fiscal 2000. Declines in the second half of the fiscal year of 20 percent, 23 percent and 22 percent, respectively, from the comparable second half of fiscal 2000, partially offset the growth in the first half of the fiscal year. Sales in fiscal 2001 for the Information Appliance segment declined by 5 percent from sales in fiscal 2000 due to decreases in both unit shipments and average selling prices. While the Information Appliance segment experienced an 18 percent growth in sales for the first half of fiscal 2001 over the comparable first half of fiscal 2000, it was more than offset by a 25 percent decline in sales for the second half of fiscal 2001 from the comparable second half of fiscal 2000. The slowdown in demand for personal computers and PC-related products contributed to the decline in sales for the Information Appliance segment since a large part of the portfolio of information appliance products is still consumed in the PC marketplace. The slower than expected adoption of emerging information appliances that are not PCs also had a negative impact on growth. The fiscal 2000 comparison excludes sales from the Cyrix PC microprocessor unit, which we sold in September 1999. Compared to sales in fiscal 2000, fiscal 2001 sales increased in Japan by 11 percent and in the Asia Pacific region by 2 percent, while sales decreased in the Americas by 8 percent and in Europe by 1 percent. As the Japanese yen and most European currencies weakened against the dollar, foreign currency exchange rate fluctuation had an unfavorable impact on foreign currency-denominated sales for fiscal 2001. However, this impact was minimal since less than a quarter of our total sales was denominated in foreign currency. Sales for fiscal 2001 as a percentage of total sales increased to 32 percent in the Asia Pacific region and 10 percent in Japan, while declining to 33 percent in the Americas and remaining flat at 25 percent in Europe. o Gross Margin Gross margin as a percentage of sales was 37 percent in fiscal 2002 compared to 49 percent in fiscal 2001 and 46 percent in fiscal 2000. The erosion in gross margin was primarily driven by lower factory utilization. Wafer fabrication capacity utilization during fiscal 2002 ran at 55 percent, as production activity was reduced considerably by the weakened business conditions in the semiconductor industry. This compares with wafer fabrication capacity utilization for fiscal 2001 of 69 percent when business conditions in the semiconductor industry were much stronger, particularly in the first half of the fiscal year. We also saw lower margins from some products in fiscal 2002, caused mostly from a shift in product sales mix and to a lesser extent from pricing pressure, which also impacted the lower gross margin. The increase in gross margin for fiscal 2001 was primarily driven by improved product mix, as we shipped more high contribution analog and wireless products, combined with improved manufacturing efficiency and higher factory utilization during the first half of fiscal 2001. Wafer fabrication capacity utilization in the first half of fiscal 2001 ran at 88 percent, but dropped to 53 percent in the second half of the fiscal year when business conditions in the semiconductor industry quickly deteriorated and production activity was significantly reduced. For the year as a whole, wafer fabrication capacity utilization was 69 percent compared to 75 percent in fiscal 2000. o Research and Development Research and development expenses in fiscal 2002 were $441.0 million, or 30 percent of sales, compared to $435.6 million in fiscal 2001, or 21 percent of sales, and $386.1 million in fiscal 2000, or 18 percent of sales. These amounts exclude in-process R&D charges of $1.3 million in fiscal 2002, $16.2 million in fiscal 2001 and $4.2 million in fiscal 2000 related to acquisitions (see Note 4). The in-process R&D charges are included in the consolidated statements of operations as a component of special items. Higher R&D expenses for fiscal 2002 result mainly from a license agreement with Taiwan Semiconductor Manufacturing Company. The agreement, which began in fiscal 2001, allows us to gain access to a variety of TSMC's advanced sub-micron processes for use in our Maine facility as desired, if and when those processes are developed by TSMC. These advanced process technologies are expected to accelerate the development of high performance digital and mixed-signal products in the markets for wireless handsets, displays, information appliances and information infrastructure. During fiscal 2002, we devoted approximately 75 percent of our R&D effort towards new product development and 25 percent towards the development of process and support technology. Compared to fiscal 2001, this represents a 6 percent decrease in spending for new product development and a 13 percent increase towards the development of process and support technology. While spending for new product development declined slightly, we continue to focus our R&D investment on our key strategic programs. We continue to invest in the development of new analog and mixed-signal technology-based products for applications in the wireless handsets, displays, information appliances and information infrastructure markets. We also continue to devote resources towards developing new cores and integrating those cores with other technological capabilities to create system-on-a-chip solutions. The increase in R&D expenses for fiscal 2001 reflected increased investment in the development of new analog and mixed-signal technology-based products for applications in the wireless handsets, displays, information appliances and information infrastructure markets, as well as in the process technologies needed to support these products. o Selling, General and Administrative Selling, general and administrative expenses in fiscal 2002 were $260.9 million, or 18 percent of sales, compared to $324.7 million in fiscal 2001, or 15 percent of sales, and $309.4 million in fiscal 2000, or 15 percent of sales. The fiscal 2001 SG&A expenses included a $20.5 million expense associated with the charitable donation of equity securities that were part of our investment portfolio. We donated the securities to establish the National Semiconductor Foundation. The fiscal 2001 SG&A expenses also included goodwill amortization of $13.0 million. We no longer record goodwill amortization since adopting new accounting rules beginning in fiscal 2002. Excluding these expenses, SG&A expenses for fiscal 2002 declined 10 percent from SG&A expenses for fiscal 2001. Overall the decline in fiscal 2002 expenses reflects actions that we implemented in the second half of fiscal 2001 to reduce our spending in response to weakened business conditions, combined with our efforts to further control spending as business conditions remained weak throughout fiscal 2002. These actions reduced payroll and employee benefit expenses, as well as discretionary selling and marketing program expenses. The increase in SG&A expenses for fiscal 2001 compared to fiscal 2000 is primarily due to the $20.5 million donation expense that we recorded in fiscal 2001. Excluding that expense, SG&A expenses in fiscal 2001 actually declined by two percent from SG&A expenses in fiscal 2000. Actions that we implemented to reduce spending in the second half of fiscal 2001 in response to weakened business conditions contributed to the decline in these expenses for fiscal 2001. The effect of those cost reduction actions was largely offset by higher pay rates in fiscal 2001 over fiscal 2000. o Cost-Reduction Programs and Restructuring of Operations For fiscal 2002, we recorded a charge of $12.5 million for cost-reduction actions associated with the plan we announced in May 2002 to reposition our resources. This charge was partially offset by a credit of $4.5 million of remaining reserves that were no longer needed for previously announced actions because the activities were completed in fiscal 2002 at a lower cost than originally estimated. See Note 3 of the consolidated financial statements for a more complete discussion of these charges, as well as other activity during fiscal 2002 related to previously announced actions. o Charge for Acquired In-Process Research and Development In connection with our acquisitions during fiscal 2002 of the combined companies of Fincitec Oy and ARSmikro OU, and separately of Wireless Solutions Sweden AB, $0.2 million and $1.1 million of the total purchase price for each acquisition were respectively allocated to the value of in-process R&D. In connection with our acquisitions during fiscal 2001 of Vivid Semiconductor and innoComm Wireless, $4.1 million and $12.1 million of the total purchase price for each acquisition were respectively allocated to the value of in-process R&D. In connection with the acquisition of Algorex in fiscal 2000, we allocated $4.2 million of the total purchase price to the value of in-process R&D. These amounts were expensed upon acquisition because technological feasibility had not been established and no alternative uses existed for the technologies. Fincitec OY and ARSmikro OU develop low-voltage, low-power application-specific integrated circuits for battery-powered devices. The acquisition is expected to strengthen our development capabilities for power management circuits for the portable market. It should help us expand our suite of integrated and discrete silicon solutions for handheld devices, including cell phones, personal digital assistants, digital cameras and similar electronic devices. Wireless Solutions Sweden AB is a developer of wireless solutions ranging from telemetry to mobile phones to wireless networking, including Bluetooth. This acquisition should help us to deliver complete wireless reference designs, including silicon chipsets, hardware and software. InnoComm is a developer of chipsets for wireless networking applications. Its expertise in short-range wireless technologies such as Bluetooth and HomeRF is intended to complement our existing base of design and product expertise. We intend to use Vivid's technologies and analog engineering resources to increase our strength in creating silicon solutions for the flat-panel display market. Algorex is a provider of high performance digital signal processing products, architecture and software technologies for the wireless communication markets and these technologies should enhance our future capability to provide complete chipset solutions for the cellular phone and wireless information appliance markets. For each acquisition, the fair value of the in-process R&D was based on discounted projected net cash flows expected to be derived after successful completion of the existing R&D projects. Estimates of future cash flows from revenues were based primarily on market growth assumptions, lives of underlying technologies and our expected share of market. Gross profit projections were based on our experience with products that were similar in nature or products sold into markets with similar characteristics. Estimated operating expenses, income taxes and capital charges were deducted from gross profit to determine net operating income for the in-process R&D projects. Operating expenses were estimated as a percentage of revenue and included sales and marketing expenses and development costs to maintain the technology once it has achieved technological feasibility. We discounted the net cash flows of the in-process R&D projects using probable adjusted discount rates that approximated the overall rate of return for each acquisition as a whole and reflected the inherent uncertainties surrounding the development of in-process R&D projects. o Interest Income and Interest Expense For fiscal 2002, we earned net interest income of $21.3 million compared to $52.0 million in fiscal 2001 and $15.3 million in fiscal 2000. The decrease in fiscal 2002 was primarily due to lower average interest rates on lower average cash balances during fiscal 2002 compared to fiscal 2001. Offsetting interest expense was slightly lower for fiscal 2002 as we continued to reduce our outstanding debt balances. The increase in net interest income for fiscal 2001 over fiscal 2000 was due to both higher average cash balances and slightly higher interest rates in fiscal 2001 than in fiscal 2000. In addition, interest expense in fiscal 2001 was significantly lower than in fiscal 2000 due to lower debt, since we repaid our $258.8 million convertible subordinated notes in November 1999. o Other Income, Net Other income, net was $13.1 million for fiscal 2002, compared to $29.8 million for fiscal 2001 and $282.4 million for fiscal 2000. The components of other income, net for fiscal 2002 included $11.6 million of net intellectual property income, a $2.1 million net gain from equity investments and $0.6 million from other miscellaneous losses. Net intellectual property income for fiscal 2002 included a gain of $8.3 million from the settlement of a patent infringement lawsuit. The remaining intellectual property income was from a number of individually small agreements. Beginning in fiscal 2002, equity in losses of investments accounted for under the equity method was included in net gain from equity investments. Other income, net for fiscal 2001 and 2000 has been re-characterized to conform with this classification. Other income, net for fiscal 2001 included a net gain from equity investments of $23.5 million and net intellectual property income of $6.3 million. The net gain from equity investments for fiscal 2001 included a gain of $20.5 million from the distribution of equity securities that were part of our investment portfolio, which we donated to establish the National Semiconductor Foundation. An expense for the same amount associated with the donation was included in SG&A expenses for fiscal 2001. Net intellectual property income for fiscal 2001 included $2.4 million from a single significant licensing agreement with a Korean company and the remainder from a number of individually small agreements. Other income, net for 2000 included a net gain from equity investments of $269.6 million, $11.5 million of net intellectual property income and other miscellaneous income of $1.3 million. Net intellectual property income for fiscal 2000 related primarily to two significant licensing agreements. o Income Tax Expense We recorded an income tax benefit of $1.5 million in fiscal 2002, compared to income tax expense of $61.4 million in fiscal 2001 and $14.9 million in fiscal 2000. The fiscal 2002 tax benefit represented an expected refund of U.S. taxes as a result of the new federal tax act, which was partially offset by taxes due on international income. The effective tax rate for fiscal 2002 was one percent compared to effective tax rates of 20 percent for fiscal 2001 and two percent for fiscal 2000. Our ability to realize net deferred tax assets ($84.4 million at May 26, 2002) is primarily dependent on our ability to generate future U.S. taxable income. We believe that it is more likely than not that forecasted U.S. taxable income will be sufficient to utilize these tax assets. However, it is always possible that we will not be able to meet our expectations of future U.S. taxable income. o Foreign Operations Our foreign operations include manufacturing facilities in the Asia Pacific region and Europe and sales offices throughout the Asia Pacific region, Europe and Japan. A portion of the transactions at these facilities is denominated in local currency, which exposes us to risk from exchange rate fluctuations. Our exposure from expenses at foreign manufacturing facilities is concentrated in pound sterling, Singapore dollar and Malaysian ringgit. Where practical, we hedge net non-U.S. dollar denominated asset and liability positions using forward exchange and purchased option contracts. Our exposure from foreign revenue is limited to the Japanese yen and the euro. We hedge up to 100 percent of the notional value of outstanding customer orders denominated in foreign currency, using forward exchange contracts and over-the-counter foreign currency options. A portion of anticipated foreign sales commitments is, at times, hedged using purchased option contracts that have an original maturity of one year or less. o Financial Market Risks We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks, we use derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes. Due to the short-term nature of the major portion of our cash portfolio, a series of severe cuts in interest rates, such as those recently experienced, does have a significant impact on the amount of interest income we can earn from our cash portfolio. An increase in interest rates benefits us due to our large net cash position. An increase in interest rates would not necessarily increase interest expense due to the fixed rates of our existing debt obligations. A substantial majority of our revenue and capital spending is transacted in U.S. dollars. However, we enter into transactions in other currencies, primarily the Japanese yen, euro and certain other Asian currencies. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we have established programs to hedge our exposure to these changes in foreign currency exchange rates. Our hedging programs reduce, but do not always eliminate, the impact of foreign currency exchange rate movements. An adverse change (defined as 15 percent in all currencies) in exchange rates would result in a decline in income before taxes of less than $5 million. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, these changes typically affect the volume of sales or the foreign currency sales price as competitors' products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency selling prices. All of the potential changes noted above are based on sensitivity analyses performed on our balances as of May 26, 2002. o Liquidity and Capital Resources As of May 26, 2002, cash, cash equivalents and marketable debt securities were $844.4 million, slightly down from $869.4 million at May 27, 2001. Cash and cash equivalents decreased $136.5 million in fiscal 2002 compared to increases of $39.0 million in fiscal 2001 and $360.1 million in fiscal 2000. We describe the primary factors contributing to these changes below: We generated cash from operating activities of $100.3 million during fiscal 2002 compared to $488.2 million in fiscal 2001 and $399.7 million in fiscal 2000. We generated cash from operating activities in fiscal 2002 because the noncash components of our net loss, primarily depreciation and amortization, were greater than the reported net loss and the negative impact from changes in working capital components. Decreases in accounts payable, accrued expenses and other liabilities more than offset the positive effect to working capital from a decrease in inventories. For fiscal 2001, operating cash was generated primarily from net income adjusted for noncash expenses, which was partially offset by a negative impact from changes in working capital components. The negative impact from changes in working capital components was softened as the decreases in accounts payable and accrued liabilities were substantially offset by the positive effect to working capital from a decrease in receivables. For fiscal 2000, net income adjusted for noncash items was negatively affected by changes in working capital components primarily due to increases in receivables and inventories. Our investing activities used cash of $323.3 million in fiscal 2002, compared to $298.6 million used in fiscal 2001. In fiscal 2000 our investing activities generated cash of $207.5 million. Major uses of cash in fiscal 2002 included investment in property, plant and equipment of $138.0 million, net purchases of available-for-sale securities of $111.5 million and the acquisitions of Fincitec Oy, ARSmikro OU and Wireless Solutions Sweden AB for a total of $42.1 million, net of cash acquired (See Note 4). Major uses of cash in fiscal 2001 included investment in property, plant and equipment of $239.5 million and the acquisitions of innoCOMM and Vivid for a total of $99.1 million, net of cash acquired (See Note 4). In contrast, proceeds of $286.0 million, primarily from the sale of Fairchild Semiconductor stock, and $75.0 million from the sale of the Cyrix PC microprocessor business were the main contributors to cash generated from our investing activities in fiscal 2000. This was partially offset by our investment in property, plant and equipment of $168.7 million in fiscal 2000. Our financing activities generated cash of $86.5 million for fiscal 2002, while they used cash of $150.6 million in fiscal 2001 and $247.1 million in fiscal 2000. The primary source of cash was from the issuance of common stock under employee benefit plans in the amount of $107.1 million in fiscal 2002, which was partially offset by repayment of $20.6 million of our outstanding debt balances. The primary use of cash in fiscal 2001 was for our repurchase of 8.3 million shares of common stock on the open market for $194.4 million. All of these shares were retired during fiscal 2001. This more than offset cash inflow of $68.2 million from the issuance of common stock under employee benefit plans. For fiscal 2000 the primary use of cash was for the payment of $265.8 million to redeem our 6.5 percent convertible subordinated notes. Other debt repayment of $114.7 million was offset by proceeds of $133.4 million from the issuance of common stock under employee benefits plans during fiscal 2000. Management foresees substantial cash outlays for plant and equipment throughout fiscal 2003, with primary focus on new capabilities that support our target growth markets, as well as improvements to provide more capacity in selected areas and also better manufacturing efficiency and productivity. Based on current economic conditions, the fiscal 2003 capital expenditure level is expected to be higher than the fiscal 2002 level. However, we will continue to manage capital expenditures consistent with ongoing business conditions. We expect existing cash and investment balances, together with existing lines of credit, to be sufficient to finance capital investments planned for fiscal 2003. Our cash and investment balances are dependent on continued collection of customer receivables and the ability to sell inventories. Although we have not experienced major problems with our customer receivables, continued and significant declines in overall economic conditions would probably impact sales and may lead to problems with customer receivables. In addition, major declines in financial markets would probably cause reductions in our cash equivalents and marketable investments. The following table provides a summary of the effect on liquidity and cash flows from our contractual obligations as of May 26, 2002:
(in millions) Fiscal Year: 2008 and 2003 2004 2005 2006 2007 thereafter Total --------------- ---------- --------- --------- -------- ------------- ---------- Contractual obligations: Debt obligations $ 5.5 $20.4 $ - $ - $ - $ - $ 25.9 Noncancellable operating leases 16.5 14.1 11.7 7.9 6.0 9.9 66.1 Fairchild manufacturing agreement 20.0 - - - - - 20.0 Licensing agreements: TSMC 32.0 32.0 32.0 19.0 - - 115.0 Other 12.8 7.9 0.4 0.3 0.3 0.6 22.3 --------------- ---------- --------- --------- -------- ------------- ---------- Total $86.8 $74.4 $44.1 $27.2 $6.3 $10.5 $249.3 =============== ========== ========= ========= ======== ============= ========== Commercial Commitments: Standby letters of credit under bank multicurrency agreement $18.6 $ - $ - $ - $- $ - $ 18.6 =============== ========== ========= ========= ======== ============= ==========
o Recently Issued Accounting Standards At the beginning of fiscal 2002, we adopted SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities.' The adoption of this statement did not have a material impact on our financial statements as described in Note 1 to the consolidated financial state' at the beginning of fiscal 2002. The impact of adoption of this statement is described in Note 1 to the consolidated financial statements. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, 'Business Combinations' and SFAS No. 143, 'Accounting for Asset Retirement Obligations.' SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and eliminates the use of the pooling-of-interests method. We adopted SFAS No. 141 in fiscal 2002 and applied its provisions to acquisitions closed after June 30, 2001. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We are currently analyzing this statement and have not yet determined its impact on our consolidated financial statements. This Statement will be effective for our fiscal year 2003. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, 'Accounting for the Impairment or Disposal of Long-Lived Assets,' which replaces SFAS No. 121, 'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.' Although SFAS No. 144 retains the basic requirements of SFAS No. 121 regarding when and how to measure an impairment loss, it provides additional implementation guidance. SFAS No. 144 also supersedes the provisions of APB Opinion No. 30, 'Reporting Results of Operations,' pertaining to discontinued operations. Separate reporting of a discontinued operation is still required, but SFAS No. 144 expands the presentation to include a component of an entity, rather than strictly a business segment. We are currently analyzing this statement and have not yet determined its impact on our consolidated financial statements. This statement will be effective for our fiscal year 2003. In April 2002, the Financial Accounting Standard Board issued SFAS No. 145, 'Rescission of FASB Statements No. 4, 44, 64, Amendment of FASB No. 13, and Technical Corrections.' Among other provisions, SFAS No. 145 rescinds SFAS No. 4, 'Reporting Gains and Losses from Extinguishment of Debt.' Accordingly, gains or losses from extinguishment of debt shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of APB No. 30. Gains or losses from extinguishment of debt that do not meet the criteria of APB No. 30 should be reclassified to income from continuing operations in all prior periods presented. This statement will be effective for our fiscal year 2003. We do not expect the adoption of SFAS 145 to have a material impact on our financial position or results of operations. o Outlook Rapid technological change and frequent introduction of new technology leading to more complex and more integrated products characterize the semiconductor industry. The result is a cyclical environment with short product life, price erosion and high sensitivity to the overall business cycle. Substantial capital and R&D investment are also required to support products and manufacturing processes. As a result of these industry conditions, we have experienced in the past and may experience in the future periodic fluctuations in our operating results. Although semiconductor market conditions for fiscal 2002 continued to be weak compared to that in fiscal 2001, we experienced sequential quarterly growth in new orders in each of our fiscal 2002 quarters. The sequential improvement was driven by new orders for our products that are aimed at wireless handsets, displays, notebook computers and other electronic devices. Our 13-week backlog as we entered the first quarter of fiscal 2003 was greater than it was at the beginning of the previous quarter. This was driven by a strong pattern of new orders we saw in the second half of fiscal 2002. As order levels have improved, the aging of orders has become more normalized as our customers place more orders further out in time. Consequently, this affects the amount they place in turns orders, which are orders received with delivery requested in the same quarter. Based on expectations of turns orders for the quarter, our outlook is for first quarter fiscal 2003 sales to be around the same level as in the fourth quarter of fiscal 2002, when we reported sales of $419.5 million. Historically, sales in our first quarter have usually been flat or down from the preceding fourth quarter. Weekly orders in July compared to June have improved, but the expected level of sales for the fiscal 2003 first quarter remains dependent on receiving the anticipated turns orders in the remaining August period. We also expect our gross margin percentage for the first quarter of fiscal 2003 to be comparabale with the fourth quarter of fiscal 2002. Overall, we expect to remain profitable for the first quarter of fiscal 2003. In May 2002, we announced a plan to reposition our resources, including a shift of more sales and marketing resources to the Asia Pacific region to support growing opportunities in that region as sales in the region grew to 44 percent of total sales in fiscal 2002 from 32 percent in fiscal 2001. If we are unsuccessful in growing those market opportunities or if the economic environment in the region declines, our future sales may be unfavorably affected. Our focus is to continue to introduce new products, particularly more highly integrated system-on-a-chip products and higher-margin analog products that are targeted towards wireless handsets, displays, information appliances and information infrastructure. If the development of new products is delayed or market acceptance is below expectations, future gross margin may be unfavorably affected. The wireless handset market continues to be important to our future growth plans. New integrated chipsets are being developed to provide added dollar content in targeted entry-level handsets. New products are also being developed to address new features and functionality in handsets, such as color displays and image capture. Due to high levels of competition, as well as complex technological requirements, there is no assurance that we will ultimately be successful in this targeted market. Although the number of wireless handsets sold worldwide is a large market, near-term growth trends are highly uncertain and difficult to predict with accuracy. Delayed introduction of next-generation wireless base stations also negatively impacts potential growth in the wireless handset market. There is also uncertainty related to the standards that ultimately will be adopted for the next-generation wireless base stations. As a result, we remain cautious on near-term trends in our wireless-related businesses. We continue to hold numerous design wins for our highly integrated information appliance products, but end-user adoption of the various devices that utilize our products has been slower than anticipated. A design win is when a customer has chosen our semiconductor product and designed it into their device. It is not yet clear which form factors, specific customers' products or customers' business models will ultimately be successful in this emerging market. Revenue for our information appliance products is dependent on the outcome and the timing of product acceptance trends. We believe that continued focused investment in research and development, especially the timely development and market acceptance of new products, is a key factor to our successful growth and our ability to achieve strong financial performance. Our product portfolio generally has short product life cycles. Successful development and introduction of new products are critical to our ability to maintain a competitive position in the marketplace. We will continue to invest resources to develop new cores and integrate those cores with our other capabilities to create system-on-a-chip products that leverage our leading edge analog and mixed-signal technology. We will also continue to prioritize our investments by focusing on applications in the wireless handsets, displays, information appliances and information infrastructure markets, as well as in process technologies needed to support those products. Given the uncertainty in the current economic climate, it is difficult to accurately predict at this time our financial performance beyond the first quarter of fiscal 2003. Assuming no significant improvement in the economy, we anticipate R&D spending for fiscal 2003 to be slightly higher than the fiscal 2002 level driven by increased investments in our key focus areas. Overall SG&A expense is expected to be slightly higher than the fiscal 2002 level due to higher payroll and employee costs, but we will continue to align our cost structure with current business conditions. We have made and will continue to make strategic business acquisitions or investments in order to gain access to key technologies that can augment our existing technical capability or enable us to achieve faster time to market. These can involve risks and uncertainties that may unfavorably impact our future financial performance. We cannot assure you that we will be able to integrate and develop acquired technologies as expected. If the technology is not developed in a timely manner, we may be unsuccessful in penetrating target markets. With acquisition activity, there are risks that future operating results may be unfavorably affected by certain acquisition related costs, such as but not limited to, in-process R&D charges and incremental R&D spending. Because of significant international sales, we benefit overall from a weaker dollar and are adversely affected by a stronger dollar relative to major currencies worldwide. Changes in exchange rates, and in particular a strengthening of the U.S. dollar, may unfavorably affect our consolidated sales and operating results. Although we attempt to manage short-term exposures to foreign currency fluctuations, we cannot assure you that our risk management activities will fully offset the adverse financial impact resulting from unfavorable movements in foreign exchange rates. From time to time, we have received notices of tax assessments from certain governments of countries in which we operate. We cannot assure you that these governments or other government entities will not serve future notices of assessments on us, or that the amounts of such assessments and our failure to favorably resolve such assessments would not have a material adverse effect on our financial condition or results of operations. In addition, our tax returns for certain years are under examination in the U.S. While we believe we have sufficiently provided for all tax obligations, we cannot assure you that the ultimate outcome of the tax examinations will not have a material adverse effect on our future financial condition or results of operations. The September terrorist attacks on the U.S. and subsequent associated events have created additional uncertainty on the state of the U.S. economy overall. Although we did not experience any immediate direct adverse effect on our operations from the terrorist attacks, the longer-term and indirect consequences from this catastrophic event are not yet known. There can be no assurance that the economic and political climate will improve in the near future. If the slow business conditions in the global economy continue or become more severe, our future sales and operating results will be negatively impacted. Appendix to MD&A Graphs (3 yrs)
2002 2001 2000 ------------- ------------- ------------- Net Sales per Employee $150.2 $201.2 $198.0 Net Operating Margin as a Percent of Sales (10.6)% 10.7% 16.1% Operating Costs and Expenses (As a Percent of Sales): Selling, General, and Administrative 17.5% 15.4% 14.5% Research and Development 29.5% 20.6% 18.0% Cost of Sales 63.0% 50.9% 54.0% Net Property, Plant, And Equipment $737.1 $832.8 $822.0 Stock Price Ending $ 32.13 $ 28.12 $ 49.63
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See information/discussion appearing in subcaption 'Financial Market Risks' of Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and in Note 1, 'Summary of Significant Accounting Policies,' and Note 2, 'Financial Instruments,' in the Notes to the Consolidated Financial Statements included in Item 8. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Page ---- Financial Statements: - --------------------- Consolidated Balance Sheets at May 26, 2002 and May 27, 2001 32 Consolidated Statements of Operations for each of the years in the three-year period ended May 26, 2002 33 Consolidated Statements of Comprehensive Income (Loss) for each of the years in the three-year period ended May 26, 2002 34 Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended May 26, 2002 35 Consolidated Statements of Cash Flows for each of the years in the three-year period ended May 26, 2002 36 Notes to Consolidated Financial Statements 37-64 Independent Auditors' Report 65 Financial Statement Schedule: For the three years ended May 26, 2002 Schedule II -- Valuation and Qualifying Accounts 69 NATIONAL SEMICONDUCTOR CORPORATION CONSOLIDATED BALANCE SHEETS
May 26, May 27, In Millions, Except Share Amounts 2002 2001 ------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 681.3 $ 817.8 Short-term marketable investments 18.1 5.0 Receivables, less allowances of $37.8 in 2002 and $45.1 in 2001 131.7 123.4 Inventories 145.0 195.5 Deferred tax assets 58.7 97.2 Other current assets 38.3 36.1 ------------- -------------- Total current assets 1,073.1 1,275.0 Property, plant and equipment, net 737.1 832.8 Long-term marketable debt securities 145.0 46.6 Long-term marketable equity securities 46.4 18.5 Goodwill 173.3 132.1 Other assets 113.9 57.3 ------------- -------------- Total assets $2,288.8 $2,362.3 ============= ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 5.5 $ 29.4 Accounts payable 123.7 126.4 Accrued expenses 226.7 262.9 Income taxes payable 47.9 53.1 ------------- -------------- Total current liabilities 403.8 471.8 Long-term debt 20.4 26.2 Other noncurrent liabilities 83.5 96.4 ------------- -------------- Total liabilities $ 507.7 $ 594.4 Commitments and contingencies Shareholders' equity: Common stock of $0.50 par value. Authorized 850,000,000 shares. Issued and outstanding 180,361,609 in 2002 and 173,806,633 in 2001 $ 90.2 $ 86.9 Additional paid-in capital 1,415.3 1,294.7 Retained earnings 310.5 432.4 Unearned compensation (12.8) (13.9) Accumulated other comprehensive loss (22.1) (32.2) ------------- -------------- Total shareholders' equity $1,781.1 $1,767.9 ------------- -------------- Total liabilities and shareholders' equity $2,288.8 $2,362.3 ============= ==============
See accompanying Notes to Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended May 26, May 27, May 28, In Millions, Except Per Share Amounts 2002 2001 2000 ------------ ------------ ------------ Net sales $1,494.8 $2,112.6 $2,139.9 Operating costs and expenses: Cost of sales 941.4 1,075.1 1,154.9 Research and development 441.0 435.6 386.1 Selling, general and administrative 260.9 324.7 309.4 Special items 9.3 51.9 (55.3) ------------ ------------ ------------ Total operating costs and expenses 1,652.6 1,887.3 1,795.1 ------------ ------------ ------------ Operating income (loss) (157.8) 225.3 344.8 Interest income, net 21.3 52.0 15.3 Other income, net 13.1 29.8 282.4 ------------ ------------ ------------ Income (loss) before income taxes and extraordinary item (123.4) 307.1 642.5 Income tax expense (benefit) (1.5) 61.4 14.9 ------------ ------------ ------------ Income (loss) before extraordinary item (121.9) 245.7 627.6 Extraordinary loss on early extinguishment of debt, net of taxes of $0.4 million - - 6.8 ------------ ------------ ------------ Net income (loss) $ (121.9) $ 245.7 $ 620.8 ============ ============ ============ Earnings (loss) per share: Income (loss) before extraordinary item: Basic $(0.69) $1.40 $3.62 Diluted $(0.69) $1.30 $3.27 Net income (loss): Basic $(0.69) $1.40 $3.58 Diluted $(0.69) $1.30 $3.24 Weighted-average common and potential common shares outstanding: Basic 177.5 175.9 173.6 Diluted 177.5 188.4 191.7
See accompanying Notes to Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended May 26, May 27, May 28, In millions 2002 2001 2000 ------------- ------------- -------------- Net income (loss) $(121.9) $245.7 $620.8 Other comprehensive income (loss), net of tax: Unrealized gain on available-for-sale securities 32.6 32.6 206.0 Reclassification adjustment for realized gain included in net income (loss) (9.4) (21.3) (224.6) Minimum pension liability (12.7) (16.0) (6.2) Derivative instruments: Unrealized loss on cash flow hedges (0.4) - - ------------- ------------- -------------- Other comprehensive income (loss) 10.1 (4.7) (24.8) ------------- ------------- -------------- Comprehensive income (loss) $(111.8) $241.0 $596.0 ============= ============= ==============
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
NATIONAL SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Accumulated Additional Retained Other Common Paid-In Earnings Unearned Comprehensive In Millions Stock Capital (Deficit) Compensation Loss Total ------- ------------- ----------- -------------- ------------- ------------ Balances at May 30, 1999 $84.5 $1,268.1 $(434.1) $(15.0) $ (2.7) $ 900.8 Net income - - 620.8 - - 620.8 Issuance of common stock under option, 4.1 130.6 - - - 134.7 purchase, and profit sharing plans Unearned compensation relating to issuance of 0.1 8.2 - (8.3) - - restricted stock Cancellation of restricted stock - (6.0) - 2.7 - (3.3) Amortization of unearned compensation - - - 8.0 - 8.0 Issuance of common stock upon conversion of a 0.1 7.0 - - - 7.1 convertible subordinated promissory note Other comprehensive loss - - - - (24.8) (24.8) - ------------------------------------------------ --------- ------------- ----------- ----------------- ---------------- ------------ Balances at May 28, 2000 88.8 1,407.9 186.7 (12.6) (27.5) 1,643.3 Net income - - 245.7 - - 245.7 Issuance of common stock under option, 2.2 70.0 - - - 72.2 purchase, and profit sharing plans Unearned compensation relating to issuance of 0.1 7.4 - (7.5) - - restricted stock Cancellation of restricted stock - (2.8) - 2.0 - (0.8) Amortization of unearned compensation - - - 4.2 - 4.2 Proceeds from sale of put warrants - 0.4 - - - 0.4 Stock compensation charge - 2.0 - - - 2.0 Purchase and retirement of treasury stock (4.2) (190.2) - - - (194.4) Other comprehensive loss - - - - (4.7) (4.7) - ------------------------------------------------ --------- ------------ ------------ ----------------- ---------------- ------------ Balances at May 27, 2001 86.9 1,294.7 432.4 (13.9) (32.2) 1,767.9 Net loss - - (121.9) - - (121.9) Issuance of common stock under option, 3.0 108.6 - - - 111.6 purchase, and profit sharing plans Unearned compensation relating to issuance of - 3.1 - (3.1) - - restricted stock Cancellation of restricted stock - (0.9) - 0.8 - (0.1) Amortization of unearned compensation - - - 3.4 - 3.4 Stock compensation charge - 0.1 - - - 0.1 Issuance of common stock upon conversion of 0.3 9.7 - - - 10.0 convertible subordinated promissory notes Other comprehensive income - - - - 10.1 10.1 - ------------------------------------------------ --------- ------------ -------------- ----------------- ---------------- ---------- Balances at May 26, 2002 $90.2 $1,415.3 $ 310.5 $(12.8) $ (22.1) $1,781.1 - ------------------------------------------------ --------- ------------ -------------- ----------------- ---------------- ----------
See accompanying Notes to Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended May 26, May 27, May 28, In Millions 2002 2001 2000 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(121.9) $245.7 $620.8 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 230.4 243.3 263.8 Gain on investments (9.4) (30.6) (272.5) Loss on disposal of equipment 4.4 3.1 11.9 Donation of equity securities - 20.5 - Deferred tax provision 18.0 27.6 (12.1) Noncash special items (2.3) 21.9 (55.3) Other, net 0.2 0.3 1.6 Changes in certain assets and liabilities, net: Receivables (6.4) 135.2 (86.7) Inventories 51.0 (2.6) (57.0) Other current assets - 0.8 (8.3) Accounts payable and accrued expenses (32.9) (138.9) (9.7) Income taxes payable (5.2) (33.7) 9.0 Other noncurrent liabilities (25.6) (4.4) (5.8) ------------ ------------ ------------ Net cash provided by operating activities 100.3 488.2 399.7 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (138.0) (239.5) (168.7) Sale of equipment - - 8.6 Sale and maturity of available-for-sale securities 88.6 48.2 151.2 Purchase of available-for-sale securities (200.1) (28.0) (115.1) Disposition of Cyrix PC microprocessor business - - 75.0 Sale of investments 11.2 34.8 286.0 Purchase of nonmarketable investments, net (26.3) (14.9) (8.5) Business acquisitions, net of cash acquired (42.1) (99.1) (22.2) Funding of benefit plan (14.9) (2.4) - Other, net (1.7) 2.3 1.2 ------------ ------------ ------------ Net cash provided by (used by) investing activities (323.3) (298.6) 207.5 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Redemption of convertible subordinated notes - - (265.8) Repayment of debt (20.6) (24.4) (114.7) Issuance of common stock, net 107.1 68.2 133.4 Purchase and retirement of treasury stock - (194.4) - ------------ ------------ ------------ Net cash provided by (used by) financing activities 86.5 (150.6) (247.1) ------------ ------------ ------------ Net change in cash and cash equivalents (136.5) 39.0 360.1 Cash and cash equivalents at beginning of year 817.8 778.8 418.7 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 681.3 $817.8 $778.8 ============ ============ ============
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 our majority-owned subsidiaries. All significant intercompany transactions are eliminated in consolidation. Our fiscal year ends on the last Sunday of May. The fiscal years ended May 26, 2002, May 27, 2001 and May 28, 2000 were all 52-week years. Revenue Recognition - ------------------- We recognize revenue from the sale of semiconductor products upon shipment, provided title and risk of loss has passed to the customer, the fee is fixed or determinable and collection of the revenue is reasonably assured. We record at the time of shipment a provision for estimated future returns. Approximately 47 percent of our semiconductor product sales are sold through distributors. We have agreements with our distributors for various programs, including pricing adjustments based on resales, scrap allowances and volume incentives. The revenue we record for these distribution sales is net of the estimated provisions for these programs. Service revenues are recognized as the services are provided or as milestones are achieved, depending on the terms of the arrangement. Intellectual property income is not classified as revenue. This income is classified as non-operating income and is recognized when the license is delivered, collection is reasonably assured and no further obligations to the other party exist. Inventories - ----------- Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market. We reduce the carrying value of inventory for estimated obsolescence or unmarketable inventory by an amount that is the difference between its cost and the estimated market value based upon assumptions about future demand and market conditions. Property, Plant and Equipment - ----------------------------- Property, plant and equipment are recorded at cost. We use the straight-line method to depreciate machinery and equipment over their estimated useful life (3-5 years). Buildings and improvements are depreciated using both straight-line and declining-balance methods over the assets' remaining estimated useful life (3-50 years), or, in the case of leasehold improvements, over the lesser of the estimated useful life or lease term. We capitalize eligible costs to acquire or develop software used internally. We use the straight-line method to amortize software used internally over its estimated useful life (3-5 years). Effective May 26, 2002, and for all years presented, we reclassified software used internally to property, plant and equipment. Prior to this, we had classified software used internally on the consolidated balance sheets in other assets. We review the carrying value of property, plant and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. If our estimate of future undiscounted net cash flows is insufficient to recover the carrying value of the assets over the estimated useful life, we will record an impairment loss in the amount by which the carrying value of the assets exceeds the fair value. Goodwill - -------- Goodwill represents the excess of the purchase price over the fair value of identifiable net tangible and intangible assets acquired in a business combination. We adopted SFAS No. 142, 'Goodwill and Other Intangible Assets,' and discontinued amortizing goodwill as of the beginning of fiscal 2002. Instead we evaluate goodwill for impairment on an annual basis and whenever events or changes in circumstance suggest that it is more likely than not that an impairment loss has been incurred. Upon adoption of this financial standard, we established reporting units based on operating segments as defined by our current segment reporting structure and assigned all existing goodwill to the reporting units. As of May 26, 2002, we have four reporting units that contain goodwill. During fiscal 2002, we evaluated goodwill impairment as of the date of adoption and in our fourth fiscal quarter, which has been selected as the period for our recurring annual evaluation for all reporting units. In each evaluation, we completed the first step of the goodwill impairment test and determined that no potential impairment existed. As a result, we did not recognize a transitional or other impairment loss in fiscal 2002. Income Taxes - ------------ We determine deferred tax liabilities and assets at the end of each period based on the future tax consequences that can be attributed to net operating loss and credit carryovers and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using the tax rate expected to be in effect when the taxes are actually paid or recovered. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. Earnings (Loss) per Share - ------------------------- We compute basic earnings (loss) per share using the weighted-average number of common shares outstanding. Diluted earnings (loss) per share are computed using the weighted-average common shares outstanding after giving effect to potential common shares from stock options based on the treasury stock method, plus other potentially dilutive securities outstanding, such as convertible subordinated notes. For all years presented, the reported net income (loss) was used in our computation of basic and diluted earnings (loss) per share. A reconciliation of the shares used in the computation follows:
Years Ended May 26, May 27, May 28, (In Millions) 2002 2001 2000 --------------- ---------------- --------------- Weighted-average common shares outstanding used for basic earnings (loss) per share 177.5 175.9 173.6 Effect of dilutive securities: Stock options - 12.5 18.1 --------------- ---------------- --------------- Weighted-average common and potential common shares outstanding used for diluted earnings (loss) per share 177.5 188.4 191.7 =============== ================ ===============
As of May 26, 2002, we had options outstanding to purchase 36.9 million shares of common stock with a weighted-average exercise price of $28.24, which were excluded from the fiscal 2002 computation of diluted earnings per share because their effect was antidilutive. These options could potentially dilute the computation of earnings per share in the future. As of May 27, 2001, we had options outstanding to purchase 10.0 million shares of common stock with a weighted-average exercise price of $53.58, which were excluded from the fiscal 2001 computation of diluted earnings per share because their effect was antidilutive. As of May 28, 2000, we had options outstanding to purchase 8.4 million shares of common stock with a weighted-average exercise price of $59.49, which were excluded from the fiscal 2000 computation of diluted earnings per share because their effect was antidilutive. Currencies - ---------- The functional currency for all operations worldwide is the U.S. dollar. We include gains and losses arising from translation of foreign currency financial statement balances into U.S. dollars in current earnings. We also include gains and losses resulting from foreign currency transactions in current earnings. Financial Instruments - --------------------- Cash and Cash Equivalents. Cash equivalents are highly liquid instruments with a remaining maturity of three months or less at the time of purchase. We maintain cash balances in various currencies and in a variety of financial instruments. We have not experienced any material losses related to any short-term financial instruments. Marketable Investments. Debt and marketable equity securities are classified into held-to-maturity or available-for-sale categories. Debt securities are classified as held-to-maturity when we have the positive intent and ability to hold the securities to maturity. We record held-to-maturity securities, which are stated at amortized cost, as either short-term or long-term on the balance sheet based upon contractual maturity date. Debt and marketable equity securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair market value, with the unrealized gains and losses, net of tax, reported in shareholders' equity as a component of accumulated other comprehensive loss. Gains or losses on securities sold are based on the specific identification method. Nonmarketable investments. We have investments in nonpublicly traded companies as a result of various strategic business ventures. These nonmarketable investments are included on the balance sheet in other assets. For nonmarketable investments in which we have less than 20 percent voting interest and where we do not have the ability to exercise significant influence or control, we record these at cost and periodically review them for impairment. For nonmarketable investments in which we do have the ability to exercise significant influence, but do not hold a controlling interest, we record these using the equity method. Under the equity method we record our proportionate share of income or loss from these investments in nonoperating income based on our share of voting interest in the investment. Derivative Financial Instruments. As part of our risk management strategy we use derivative financial instruments, including forwards, swaps and purchased options, to hedge certain foreign currency and interest rate exposures. Our intent is to offset gains and losses that occur from our underlying exposure with gains and losses on the derivative contracts used to hedge them. As a matter of company policy, we do not enter into speculative positions with derivative instruments. The criteria we use for designating an instrument as a hedge include the instrument's effectiveness in risk reduction and direct matching of the financial instrument to the underlying transaction. At the beginning of fiscal 2002, we adopted Statement of Financial Accounting Standards No. 133, 'Accounting for Derivative Instruments and Hedging Activities,' as amended by SFAS No. 138, 'Accounting for Certain Derivative Instruments and Certain Hedging Activities.' SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. We record all derivatives on the balance sheet at fair value. Gains or losses resulting from changes in the values of these derivatives are accounted for based on the use of the derivative and whether it qualifies for hedge accounting. The cumulative effect of adoption of this statement was immaterial to both our financial position and results of operations. See Note 2 to the Consolidated Financial Statements for a full description of our hedging activities and related accounting policies. Fair Values of Financial Instruments - ------------------------------------ The carrying amounts for cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses approximate their fair values due to the short period of time until their maturity. Fair values of long-term investments, long-term debt, interest rate derivatives, currency forward contracts and currency options are based on quoted market prices or pricing models using prevailing financial market information as of May 26, 2002 and May 27, 2001. The estimated fair value of debt was $26.8 million at May 26, 2002 and $62.4 million at May 27, 2001. See Note 2 to the Consolidated Financial Statements for fair values of marketable securities and derivative financial instruments. Employee Stock Plans - -------------------- We account for our stock option plans and our employee stock purchase plans in accordance with the intrinsic method of Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees.' Use of Estimates in Preparation of Financial Statements - ------------------------------------------------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications - ----------------- Certain amounts in prior years' consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the fiscal 2002 presentation. Net operating results have not been affected by these reclassifications. Note 2. Financial Instruments Marketable Investments - ---------------------- Our policy is to diversify our investment portfolio to reduce risk to principal that could arise from credit, geographic and investment sector risk. At May 26, 2002, investments were placed with a variety of different financial institutions and other issuers. Investments with a maturity of less than one year have a rating of A1/P1 or better. Investments with a maturity of more than one year have a minimum rating of AA/Aa2. At May 26, 2002, we held $17.7 million of available-for-sale securities and $605.5 million of held-to-maturity securities, which are classified as cash equivalents on the consolidated balance sheet. These cash equivalents consist of the following (in millions): bank time deposits ($178.0), institutional money market funds ($167.0) and commercial paper ($278.2). At May 27, 2001, we held $48.7 million of available-for-sale securities and $723.2 million of held-to-maturity securities, which are classified as cash equivalents on the consolidated balance sheet. These cash equivalents consist of the following (in millions): bank time deposits ($193.3), institutional money market funds ($105.1) and commercial paper ($473.5). Marketable investments at fiscal year-end comprised:
(In Millions) Gross Gross Amortized Unrealized Unrealized EstimatedFair Cost Gains Losses Value ------------- ------------- ------------- ------------- 2002 SHORT-TERM MARKETABLE INVESTMENTS Available-for-sale securities: Corporate notes $ 18.0 $ 0.1 $ - $ 18.1 ------------- ------------- ------------- ------------- Total short-term marketable investments $ 18.0 $ 0.1 $ - $ 18.1 ============= ============= ============= ============= LONG-TERM MARKETABLE INVESTMENTS Available-for-sale securities: Debt securities: Government debt securities $ 144.5 $ 0.5 $ - $ 145.0 ------------- ------------- ------------- ------------- Equity securities 8.8 38.9 $(1.3) 46.4 ------------- ------------- ------------- ------------- Total long-term marketable investments $ 153.3 $ 39.4 $(1.3) $ 191.4 ============= ============= ============= ============= 2001 SHORT-TERM MARKETABLE INVESTMENTS Available-for-sale securities: Certificates of deposit $ 5.0 $ - $ - $ 5.0 ------------- ------------- ------------- ------------- Total short-term marketable investments $ 5.0 $ - $ - $ 5.0 ============= ============= ============= ============= LONG-TERM MARKETABLE INVESTMENTS Available-for-sale securities: Debt securities: Government debt securities $ 14.0 $ 0.1 - $ 14.1 Corporate notes 32.0 0.5 - 32.5 ------------- ------------- ------------- ------------- 46.0 0.6 - 46.6 ------------- ------------- ------------- ------------- Equity securities 4.1 15.4 (1.0) 18.5 ------------- ------------- ------------- ------------- Total long-term marketable investments $ 50.1 $ 16.0 $(1.0) $ 65.1 ============= ============= ============= =============
Net unrealized gains on available-for-sale securities of $38.2 million at May 26, 2002 and $15.0 million at May 27, 2001 are included in accumulated other comprehensive loss. The related tax effects are not significant. Scheduled maturities of investments in debt securities were:
(In Millions) ---------------- 2003 $ 18.1 2004 15.0 2005 130.0 ---------------- Total $163.1 ================
Gross realized gains on available-for-sale securities were $8.1 million, $25.5 million and $224.6 million for fiscal 2002, 2001 and 2000, respectively. We realized impairment losses for other than temporary declines in fair value of available-for-sale securities in fiscal 2002 of $0.2 million and in fiscal 2001 of $4.2 million. Gross realized losses on available-for-sale securities were not material for fiscal 2000. We recognized gross realized gains from nonmarketable investments of $1.5 million, $22.4 million and $48.4 million in fiscal 2002, 2001 and 2000, respectively. These gains come primarily from the sale of shares in connection with initial public offerings and acquisitions by third parties. Although we recognized $12.7 million of gross impairment losses on nonmarketable investments in fiscal 2001, no such losses were recognized in either fiscal 2002 or 2000. Derivative Financial Instruments The objective of our foreign exchange risk management policy is to preserve the U.S. dollar value of after-tax cash inflow in relation to non-U.S. dollar currency movements. We are exposed to foreign currency exchange rate risk that is inherent in orders, sales, cost of sales, expenses and assets and liabilities denominated in currencies other than the U.S. dollar. We enter into foreign exchange contracts, primarily forwards and purchased options, to hedge against exposure to changes in foreign currency exchange rates. These contracts are matched at inception to the related foreign currency exposures that are being hedged. Exposures which are hedged include sales by subsidiaries, and assets and liabilities denominated in currencies other than the U.S. dollar. Our foreign currency hedges typically mature within one year. We measure hedge effectiveness for foreign currency forward contracts by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item, both of which are based on forward rates. For purchased options, we measure hedge effectiveness by the change in the option's intrinsic value, which represents the change in the forward rate relative to the option's strike price. Any changes in the time value of the option are excluded from the assessment of effectiveness of the hedge and recognized in current earnings. We designate derivative instruments that are used to hedge exposures to variability in expected future foreign denominated cash flows as cash flow hedges. We record the effective portion of the gains or losses on the derivative instrument in accumulated other comprehensive loss as a separate component of shareholders' equity and reclassify amounts into earnings in the period when the hedged transaction affects earnings. Derivative instruments that we use to hedge exposures to reduce or eliminate changes in the fair value of an asset or liability denominated in foreign currency are designated as fair value hedges. The gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, is included in selling, general and administrative expenses. We are also exposed to variable cash flow that is inherent in our variable-rate debt. We use an interest rate swap to convert the variable interest payments to fixed interest payments. We designate this derivative as a cash flow hedge. For interest rate swaps, the critical terms of the interest rate swap and hedged item are designed to match up, enabling us to assume effectiveness under SFAS No. 133. We recognize amounts as interest expense as cash settlements are paid or received. We report hedge ineffectiveness from foreign currency derivatives for both forward contracts and options in current earnings. We also report ineffectiveness related to interest rate swaps in current earnings. Hedge ineffectiveness was not material for fiscal 2002. No cash flow hedges were terminated as a result of forecasted transactions that did not occur. The effective portion of all changes in derivatives is reported in the same financial statement line item as the changes in the hedged item. At May 26, 2002, the estimated net amount of existing gains or losses from cash flow hedges expected to be reclassified into earnings within the next year was $0.4 million. For fiscal 2002, net realized losses recognized from cash flow hedges were $0.2 million and fair value hedges were $0.5 million. Fair Value and Notional Principal of Derivative Financial Instruments The table below shows the fair value and notional principal of derivative financial instruments as of May 26, 2002 and May 27, 2001. The notional principal amounts for derivative financial instruments provide one measure of the transaction volume outstanding as of year-end and do not represent the amount of the exposure to credit or market loss. The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information as of May 26, 2002 and May 27, 2001. The fair value of interest rate swap agreements represents the estimated amount we would receive or pay to terminate the agreements taking into consideration current interest rates. The fair value of forward foreign currency exchange contracts represents the present value difference between the stated forward contract rate and the current market forward rate at settlement. The fair value of foreign currency option contracts represents the probable weighted net amount we would expect to receive at maturity. The credit risk amount shown in the table represents the gross exposure to potential accounting loss on these transactions if all counterparties failed to perform according to the terms of the contract, based on the then-current currency exchange rate or interest rate at each respective date. Although the following table reflects the notional principal, fair value and credit risk amounts of the derivative financial instruments, it does not reflect the gains or losses associated with the exposures and transactions that the derivative financial instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
Carrying Notional Estimated Credit (In Millions) Amount Principal Fair Value Risk -------------- ----------- ------------- ------------- 2002 INTEREST RATE INSTRUMENTS Swaps: Variable to fixed $ - $ 18.2 $ - $ - ============== =========== ============= ============= FOREIGN EXCHANGE INSTRUMENTS Forward contracts: To sell dollars: Pound sterling $ 0.1 $ 6.5 $ 0.1 $ 0.1 Singapore dollar - 4.4 0.1 0.1 -------------- ----------- ------------- ------------- Total $ 0.1 $ 10.9 $ 0.2 $ 0.2 ============== =========== ============= ============= Purchased options: Japanese yen $ - $ 23.0 $ - $ - ============== =========== ============= ============= 2001 INTEREST RATE INSTRUMENTS Swaps: Variable to fixed $ - $ 19.4 $ - $ - ============== =========== ============= ============= FOREIGN EXCHANGE INSTRUMENTS Forward contracts: To buy dollars: Japanese yen $ - $ 3.1 $ - $ - ============== =========== ============= ============= To sell dollars: Pound sterling $ (0.3) $ 16.0 $ (0.4) $ - Singapore dollar (0.2) 9.7 (0.2) - -------------- ----------- ------------- ------------- Total $ (0.5) $ 25.7 $ (0.6) $ - ============== =========== ============= ============= Purchased options: Japanese yen $ 0.1 $ 18.0 $ 0.2 $ 0.2 Other - 4.5 - - -------------- ----------- ------------- ------------- Total $ 0.1 $ 22.5 $ 0.2 $ 0.2 ============== =========== ============= =============
Concentrations of Credit Risk Financial instruments that may subject us to concentrations of credit risk are primarily investments and trade receivables. Our investment policy requires cash investments to be placed with high-credit quality counterparties and limits the amount of investments with any one financial institution or direct issuer. We sell our products to distributors and original equipment manufacturers involved in a variety of industries including computers and peripherals, wireless communications, automotive and networking. We perform continuing credit evaluations of our customers whenever necessary and we generally do not require collateral. Our top ten customers combined represented approximately 38 percent of total accounts receivable at May 26, 2002, and approximately 27 percent at May 27, 2001. One of our distributors accounted for approximately 10 percent of total net sales in fiscal 2002 as a result of its acquisition of another distributor located in Europe. No one customer or distributor accounted for 10 percent or more of total net sales in fiscal 2001 and 2000. Historically, we have not experienced significant losses related to receivables from individual customers or groups of customers in any particular industry or geographic area. Note 3. Cost Reduction Programs and Restructuring of Operations Fiscal 2002 Included as a component of special items in the consolidated statement of operations for fiscal 2002, we reported a net charge of $8.0 million related to the actions described below: In May 2002, we announced a plan to reposition our resources and reduce costs. The plan scales back efforts in some wireless networking technologies, such as the IEEE 802.11 technology standard, and narrows investment in the set-top box portion of our information appliance business. We will also reallocate investment to support our growing opportunities in the wireless handset and flat-panel display markets, and our broadening capability in the analog power management area. We are also shifting more sales and marketing resources to Asia Pacific to support growth in that region. The plan resulted in a net reduction of approximately 150 positions from our global workforce, which is expected to be completed prior to the end of fiscal 2003. In connection with these actions, we recorded a charge of $12.5 million. The charge includes $8.5 million for severance, $3.2 million for other exit related costs and $0.8 million for the write-off of equipment related to activity that was eliminated as part of the repositioning. Other exit costs primarily represent facility lease obligations related to closure of sales offices and design centers. Noncash charges related to write-off of equipment. The total charge was partially offset by a credit of $4.5 million of remaining reserves that were no longer needed for previously announced actions because the activities were completed in fiscal 2002 at a lower cost than originally estimated. Fiscal 2001 Included as a component of special items in the consolidated statement of operations for fiscal 2001, we reported a net charge of $35.7 million comprised of the items described below: In May 2001, we announced a cost-reduction program that included the elimination of approximately 790 positions worldwide. This action was taken due to continued weakness in the semiconductor industry experienced during the second half of fiscal 2001. As a result, we recorded a net charge of $33.4 million. The charge included $25.5 million for severance, $4.2 million for other exit related costs and $4.8 million for the write-off of equipment related to activity that was eliminated as part of the cost-reduction program. The charge was partially offset by a credit of $1.1 million of residual restructure reserves for activities that were completed in fiscal 2001. The noncash portion totaled $6.8 million, consisting of the write-off of equipment and $2.0 million for noncash severance relating to stock options. In August 2000, we recorded a $2.3 million restructure charge in connection with the consolidation of the wafer manufacturing operations in Greenock, Scotland. This charge represented additional severance costs associated with the termination of certain remaining employees who were originally scheduled to depart the company upon final closure of the 4-inch wafer fabrication facility. The closure of the 4-inch wafer fabrication facility and the transfer of products and processes to the 6-inch wafer fabrication facility on the same site were substantially completed by the end of September 2000. Fiscal 2000 Included as a component of special items in the consolidated statement of operations for fiscal 2000, we reported a $14.7 million credit from restructuring of operations related to the actions described below: For all activities related to restructuring actions we announced in May 1999 that were substantially completed during fiscal 2000, we recorded a credit of $9.0 million for severance and other exit-related costs for which reserves were no longer required. The May 1999 actions included our decision to exit the Cyrix PC microprocessor business, the elimination of approximately 1,126 positions worldwide and the closure of the 8-inch development wafer fabrication facility in Santa Clara, California. In connection with the closure of the Santa Clara wafer fabrication facility, we also recorded a credit of $2.6 million from the final disposition of related equipment. In September 1999, we completed the sale of the assets of the Cyrix PC microprocessor business to VIA Technologies. The sale included the MII x86 compatible microprocessor and successor products. We retained the integrated Media GX microprocessor, which forms the core of the GeodeTM family of solutions for the information appliance market. Assets sold included inventories, land, buildings and equipment, primarily located in Richardson, Texas; Arlington, Texas; Mesa, Arizona; and Santa Clara, California. Some PC microprocessor-related manufacturing assets in Toa Payoh, Singapore were also included. Proceeds from this transaction were $75.0 million, of which $8.2 million represented reimbursement to us for certain employee retention costs incurred solely as a result of completing the sale. The remaining $66.8 million represented payment for the assets sold. We recorded a gain of $26.8 million on the sale. In September 1999, we also announced we would retain full ownership of our semiconductor manufacturing facility in Greenock and ceased our efforts originally announced in October 1998 to seek an investor to acquire and operate that facility as an independent foundry business. As a result, we recorded a credit of $3.1 million from the reduction of the restructure reserve related to a penalty that would no longer be incurred. The following table provides a summary of the activities related to our cost reduction and restructuring actions included in accrued liabilities for the years ended May 26, 2002 and May 27, 2001:
(In Millions) 2002 2001 -------------- --------------- Beginning balance $30.3 $19.1 Cash payments (20.8) (17.7) Cost reduction program charges 11.7 30.0 Credit for residual reserves (4.8) (1.1) -------------- --------------- Ending balance $16.4 $30.3 ============== ===============
During fiscal 2002, we paid severance of $14.6 million to 473 employees in connection with the cost reduction action announced in May 2001. We also paid $6.2 million for other exit-related costs during fiscal 2002. Those costs were primarily associated with restructuring actions we originally announced in fiscal 1999. As of May 26, 2002, no amounts had yet been paid in connection with the actions announced in May 2002. Note 4. Acquisitions Fiscal 2002 In April 2002, we acquired the Finnish company Fincitec Oy and ARSmikro OU, based in Estonia. These two related companies develop low-voltage, low-power application specific integrated circuits for battery-powered devices. We expect this acquisition to strengthen our development capabilities for power management circuits for the portable market and to expand our suite of integrated and discrete silicon solutions for handheld devices, including cell phones, personal digital assistants, digital cameras and similar electronic devices. The acquisition was accounted for using the purchase method with a purchase price of $15.6 million for all of the outstanding shares of the combined companies' common stock. In connection with the acquisition, we recorded a $0.2 million in-process research and development charge, which is included as a component of special items in the consolidated statement of operations for fiscal 2002. The remainder of the purchase price was allocated to net assets of $1.0 million, intangible assets of $0.8 million and goodwill of $13.6 million based on fair values. In June 2001, we acquired Wireless Solutions Sweden AB, a leading developer of wireless solutions ranging from telemetry to mobile phones to wireless networking, including Bluetooth. This acquisition was intended to help us deliver complete wireless reference designs, including silicon chipsets, hardware and software. The acquisition was accounted for using the purchase method with a purchase price of $27.7 million for all of the outstanding shares of Wireless Solutions common stock. In connection with the acquisition, we recorded a $1.1 million in-process research and development charge, which is included as a component of special items in the consolidated statement of operations for fiscal 2002. The remainder of the purchase price was allocated to net liabilities of $1.0 million and goodwill of $27.6 million based on fair values. Fiscal 2001 In February 2001, we acquired innoComm Wireless, a developer of chipsets for wireless networking applications based in San Diego, California. InnoComm's expertise ranges from short-range wireless technologies, such as Bluetooth and HomeRF, to full wireless local area networking based on the IEEE 802.11 standard, which allows interoperability for wireless LANs similar to how ethernet allows interoperability of wired LANs, and the acquisition was intended to complement our existing base of design and product expertise. The acquisition was accounted for using the purchase method with a purchase price of $118.8 million. Of the total purchase price, $74.3 million was paid in cash upon the closing of the transaction. A liability of $44.5 million was recorded, primarily representing two installments to be paid twelve and twenty-four months after the closing date. In connection with the acquisition, we recorded a $12.1 million in-process research and development charge, which is included as a component of special items in the consolidated statement of operations for fiscal 2001. The remainder of the purchase price was allocated to net assets of $0.2 million and intangible assets of $106.5 million based on fair values. The intangible assets consist primarily of goodwill. Under terms of employee retention arrangements, we also expect to pay a total of approximately $18.3 million to innoComm employees upon the completion of their first and second year service anniversaries. These amounts are being charged ratably to operations over the related service periods. In July 2000, we acquired the business and assets of Vivid Semiconductor, a semiconductor company based in Chandler, Arizona. Vivid's technologies and analog engineering resources are expected to expand our strengths in creating silicon solutions for the flat-panel display market. The acquisition was accounted for using the purchase method with a purchase price of $25.1 million in cash. In connection with the acquisition, we recorded a $4.1 million in-process research and development charge, which is included as a component of special items in the consolidated statement of operations for fiscal 2001. The remainder of the purchase price was allocated to net assets of $1.3 million and intangible assets of $19.7 million based on fair values. The intangible assets consist primarily of goodwill. Fiscal 2000 In December 1999, we acquired Algorex, a provider of high performance digital signal processing products, architecture and software technologies for the wireless communication markets. These technologies should enhance our future capability to provide complete chipset solutions for the cellular phone and wireless information appliance markets. The acquisition was accounted for using the purchase method with a purchase price of $21.5 million. In connection with the acquisition, we recorded a $4.2 million in-process research and development charge, which is included as a component of special items in the consolidated statement of operations for fiscal 2000. The remainder of the purchase price was allocated primarily to goodwill. The amount allocated to the in-process research and development charge for each of these acquisitions was determined through an established valuation technique used in the high technology industry. The research and development charge was expensed upon acquisition because technological feasibility had not been established and no alternative uses exist. The costs of research and development to bring the products to technological feasibility are not expected to have a material impact on future operating results. Pro forma results of operations related to these acquisitions have not been presented since the results of their operations were immaterial in relation to National. Note 5. Consolidated Financial Statement Details
(In Millions) 2002 2001 -------------- --------------- RECEIVABLE ALLOWANCES Doubtful accounts $ 7.5 $ 7.3 Returns and allowances 30.3 37.8 -------------- --------------- Total receivable allowances $ 37.8 $ 45.1 ============== =============== INVENTORIES Raw materials $ 6.4 $ 8.1 Work in process 86.9 113.8 Finished goods 51.7 73.6 -------------- --------------- Total inventories $ 145.0 $ 195.5 ============== =============== PROPERTY, PLANT AND EQUIPMENT Land $ 23.3 $ 21.7 Buildings and improvements 524.2 520.6 Machinery and equipment 1,774.1 1,778.1 Internal-use software 87.5 86.9 Construction in progress 47.8 98.7 -------------- --------------- Total property, plant and equipment 2,456.9 2,506.0 Less accumulated depreciation and amortization 1,719.8 1,673.2 -------------- --------------- Property, plant and equipment, net $ 737.1 $ 832.8 ============== =============== ACCRUED EXPENSES Payroll and employee related $ 115.6 $ 123.7 Cost reduction charges and restructuring of operations 16.4 30.3 Other 94.7 108.9 -------------- --------------- Total accrued expenses $ 226.7 $ 262.9 ============== =============== ACCUMULATED OTHER COMPREHENSIVE LOSS Unrealized gain on available-for-sale securities $ 38.2 $ 15.0 Minimum pension liability (59.9) (47.2) Unrealized loss on cash flow hedges (0.4) - -------------- --------------- $ (22.1) $ (32.2) ============== ===============
(In Millions) 2002 2001 2000 ------------- ------------- -------------- SPECIAL ITEMS - Income (expense) Cost reduction charges and restructuring of operations $ (8.0) $ (35.7) $ 14.7 In-process research and development charges (1.3) (16.2) (4.2) Gain on disposition of Cyrix PC microprocessor business - - 26.8 Other - - 18.0 ------------- ------------- -------------- $ (9.3) $ (51.9) $ 55.3 ============= ============= ==============
For fiscal 2000 special items, a credit to reduce the excess portion of a contingent liability related to an indemnity agreement with Fairchild Semiconductor that expired in March 2000 is included in Other. The agreement was connected with the disposition of the Fairchild business in fiscal 1997.
(In Millions) 2002 2001 2000 ------------- ------------- -------------- INTEREST INCOME, NET Interest income $ 25.2 $ 57.3 $ 33.2 Interest expense (3.9) (5.3) (17.9) ------------- ------------- -------------- Interest income, net $ 21.3 $ 52.0 $ 15.3 ============= ============= ============== OTHER INCOME, NET Net intellectual property income $ 11.6 $ 6.3 $ 11.5 Gain on investments, net 2.1 23.5 269.6 Other (0.6) - 1.3 ------------- ------------- -------------- Total other income, net $ 13.1 $ 29.8 $ 282.4 ============= ============= ==============
Beginning in fiscal 2002, equity in losses of investments accounted for under the equity method is included in gain (loss) on investments, net. The presentation of $3.8 million in fiscal 2001 and $2.9 million in fiscal 2000 of such losses previously reported in selling, general and administrative expenses in fiscal 2001 and 2000, respectively, has been re-characterized to conform to this classification. Note 6. Goodwill and Intangible Assets The changes in the carrying amount of goodwill for fiscal 2002 are as follows (in millions):
Analog Segment All Others Total --------------- -------------- -------------- Balances at May 27, 2001 $130.4 $1.7 $132.1 Goodwill acquired during fiscal 2002 41.2 - 41.2 --------------- -------------- -------------- Balances at May 26, 2002 $171.6 $1.7 $173.3 =============== ============== ==============
Other intangible assets, which are included in other assets on the consolidated balance sheet, will continue to be amortized and consist of the following (in millions):
Weighted-Average Weighted-Average Amortization Amortization Period Period May 26, (Years) May 27, (Years) 2002 2001 ---------------- --------------- ------------ ---------------- Patents $4.9 5.0 $4.9 5.0 Unpatented technology 0.8 2.4 - - ---------------- ------------ 5.7 4.9 Less accumulated amortization 1.7 0.8 ---------------- ------------ $4.0 4.6 $4.1 5.0 ================ ============
We expect annual amortization expense in the following fiscal years to be (in millions):
2003 $1.4 2004 1.4 2005 1.0 2006 0.2 -------- $4.0 ========
Annual amortization expense was (in millions):
2002 2001 2000 ------------ ----------- ----------- Goodwill amortization $ - $ 13.0 $ 5.3 Patent and technology amortization 0.9 0.8 - ------------ ----------- ----------- Total amortization $ 0.9 $ 13.8 $ 5.3 ============ =========== ===========
Adjusted net income (loss) and net income (loss) per share exclusive of amortization expense related to goodwill was (in millions, except per share amounts):
2002 2001 2000 ------------ ----------- ----------- Net income (loss) - as reported $(121.9) $245.7 $620.8 Add back: Goodwill amortization - 13.0 5.3 ------------ ----------- ----------- Net income (loss) - adjusted $(121.9) $258.7 $626.1 ============ =========== =========== Basic earnings (loss) per share - as reported $ (0.69) $ 1.40 $ 3.58 Add back: Goodwill amortization - 0.07 0.03 ------------ ----------- ----------- Basic earnings (loss) per share - adjusted $ (0.69) $ 1.47 $ 3.61 ============ =========== =========== Diluted earnings (loss) per share - as reported $ (0.69) $ 1.30 $ 3.24 Add back: Goodwill amortization - 0.07 0.03 ------------ ----------- ----------- Diluted earnings (loss) per share - adjusted $ (0.69) $ 1.37 $ 3.27 ============ =========== ===========
Note 7. Debt Debt at fiscal year-end consisted of the following:
May 26, May 27, (In Millions) 2002 2001 ------------- ------------ Unsecured promissory note at 1.2% $18.2 $19.4 Notes secured by equipment at 7.0% - 8.0% 6.8 21.5 Convertible subordinated promissory notes - 10.0 Note secured by real estate at 12.6% - 4.6 Other 0.9 0.1 ------------- ------------ Total debt 25.9 55.6 Less current portion of long-term debt 5.5 29.4 ------------- ------------ Long-term debt $20.4 $26.2 ============= ============
The unsecured promissory note, which is due August 2004, is denominated in Japanese yen (2,408,750,000). Interest is based on 1.125 percent over the 3-month Japanese libor rate and is reset quarterly. Under the terms of the note, we are also required to comply with the covenants set forth under our multicurrency credit agreement. Notes secured by equipment are collateralized by the underlying equipment. Under the terms of the agreements, principal and interest are due monthly over various original maturity periods ranging from four to five years. Maturities of loans under these agreements range from November 2002 to November 2003. These financing agreements contain certain covenant and default provisions that require us to maintain a certain level of tangible net worth and permit the lenders cross-acceleration rights against certain other credit facilities. The convertible subordinated promissory notes were issued in connection with a retention arrangement related to the acquisition of ComCore Semiconductor in fiscal 1998. They were issued to each of the founding shareholders of ComCore for a total of $15.0 million. As a result of the termination of one ComCore founding shareholder during fiscal 2000, we issued 247,104 shares of common stock upon the conversion of one of the promissory notes. In fiscal 2001, we issued 617,760 shares of common stock to the two remaining ComCore founding shareholders upon conversion of the remaining $10.0 million promissory notes. The remaining note secured by real estate was assumed as part of the repurchase of the equity interest in our Arlington, Texas, facility, which we sold and leased back prior to 1990. The note was fully repaid in March 2002. Our outstanding debt obligations mature in future fiscal years as follows:
Total Debt (In Millions) (Principal Only) ------------------- 2003 $ 5.5 2004 20.4 ------------------- Total $ 25.9 ===================
We have a multicurrency credit agreement that provides for multicurrency loans, letters of credit and standby letters of credit. The total amount of credit under the agreement is $35.0 million. The agreement expires in October, 2002 and we expect to renew or replace it prior to expiration. At May 26, 2002, we had utilized $18.6 million of the credit available under the agreement. This agreement contains restrictive covenants, conditions and default provisions that, among other terms, restrict payment of dividends and require the maintenance of financial ratios and certain levels of tangible net worth. At May 26, 2002, under the most restrictive of these covenants, $206.0 million of tangible net worth was unrestricted and available for payment of dividends on common stock. Note 8. Income Taxes Worldwide pretax income (loss) from operations and income taxes consist of the following:
(In Millions) 2002 2001 2000 ------------- ------------- ------------ INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM U.S. $(168.6) $231.0 $589.3 Non-U.S. 45.2 76.1 53.2 ------------- ------------- ------------ $(123.4) $307.1 $642.5 ============= ============= ============ INCOME TAX EXPENSE (BENEFIT) Current: U.S. federal $ (26.9) $ 20.2 $ - U.S. state and local 0.4 0.4 - Non-U.S. 7.0 13.2 27.0 ------------ ------------ ------------- (19.5) 33.8 27.0 Deferred: U.S. federal and state 15.0 22.3 - Non-U.S. 3.0 5.3 (12.1) ------------ ------------ ------------- 18.0 27.6 (12.1) ------------ ------------ ------------- Income tax expense (benefit) $ (1.5) $ 61.4 $ 14.9 ============ ============ =============
The fiscal 2002 tax benefit represented a refund of U.S. taxes of $11.5 million as a result of the new federal tax act effective March 9, 2002, which was partially offset by $10.0 million of taxes due on international income. The tax effects of temporary differences that constitute significant portions of the deferred tax assets and deferred tax liabilities are presented below:
May 26, May 27, (In Millions) 2002 2001 -------------- -------------- DEFERRED TAX ASSETS Allowances and accruals $136.6 $170.9 Non-U.S. loss carryovers and other allowances 19.4 24.9 Federal and state credit carryovers 302.4 249.2 Other 79.6 10.6 -------------- -------------- Total gross deferred assets 538.0 455.6 Valuation allowance (447.3) (342.9) -------------- -------------- Net deferred assets 90.7 112.7 -------------- -------------- DEFERRED TAX LIABILITIES Other liabilities (6.3) (10.3) -------------- -------------- Total gross deferred liabilities (6.3) (10.3) -------------- -------------- Net deferred tax assets $ 84.4 $102.4 ============== ==============
We record a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized. This occurs primarily when net operating losses and tax credit carryovers expire. The valuation allowance increased by $104.4 million in fiscal 2002 compared to decreases of $108.3 million in fiscal 2001 and $85.5 million in fiscal 2000. The valuation allowance for deferred tax assets includes $125.7 million and $100.2 million for stock option deductions at May 26, 2002 and May 27, 2001, respectively. The benefit of these deductions will be credited to equity if realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider projected future taxable income and tax planning strategies in making this assessment. Based on the historical taxable income and projections for future taxable income over the periods that the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of valuation allowances as of May 26, 2002. The reconciliation between the income tax rate computed by applying the U.S. federal statutory rate and the reported worldwide tax rate follows:
2002 2001 2000 --------------- -------------- -------------- U.S. federal statutory tax rate 35.0% 35.0% 35.0% Non-U.S. losses and tax differential related to non-U.S. income 5.2 (5.6) (1.3) Dividend and Subpart F income (26.3) 1.2 0.3 U.S. state and local taxes net of federal benefits (0.1) 0.1 - Current year loss and credits not benefited (20.6) (6.5) (19.3) Changes in beginning of year valuation allowances 9.3 (7.8) (12.7) Other (1.3) 3.6 0.3 --------------- -------------- -------------- Effective tax rate 1.2% 20.0% 2.3% =============== ============== ==============
U.S. income taxes were provided on repatriated earnings of non-U.S. subsidiaries. U.S. income taxes were also provided for deferred taxes on undistributed earnings of non-U.S. subsidiaries that are not expected to be permanently reinvested in the subsidiaries. There has been no provision for U.S. income taxes for the remaining undistributed earnings of approximately $433.2 million at May 26, 2002, because we intend to reinvest these earnings indefinitely in operations outside the United States. If these earnings were distributed, additional U.S. taxes of approximately $91.3 million would accrue after utilization of U.S. tax credits. At May 26, 2002, we had U.S. and state credit carryovers of approximately $198.9 million and $103.6 million, respectively, for tax return purposes, which primarily expire between 2003 and 2022. Included in the state credits, we had California R&D credits of approximately $84.0 million at May 26, 2002, which can be carried forward indefinitely. We also had capital and investment allowance carryovers of approximately $56.9 million from certain non-U.S. jurisdictions. National and the IRS have settled all issues and finalized the federal income tax computations connected with the IRS's examination of tax returns for fiscal years 1986 through 1996. After giving effect to loss and credit carryovers, the tax deficiency for these years was approximately $3.4 million, all of which has been paid. The interest amount on the final deficiency has been finalized. The IRS has begun examination of our tax returns for fiscal 1997 through 2000. We believe that we have made adequate tax payments and/or accrued adequate amounts in our financial statements to cover all years in question. Note 9. Shareholders' Equity Stock Purchase Rights Each outstanding share of common stock carries with it a stock purchase right. The rights are issued pursuant to a dividend distribution that was initially declared on August 5, 1988. If and when the rights become exercisable, each right entitles the registered holder to purchase one one-thousandth of a share of series A junior participating preferred stock at a price of $60.00 per one-thousandth share, subject to adjustment. The rights are attached to all outstanding shares of common stock and no separate rights certificates have been distributed. If any individual or group acquires 20 percent or more of common stock or announces a tender or exchange offer which, if completed, would result in that person or group owning at least 20 percent of the common stock, the rights become exercisable and will detach from the common stock. If the person or group actually acquires 20 percent or more of the common stock (except in certain cash tender offers for all of the common stock), each right will entitle the holder to purchase, at the right's then-current exercise price, the common stock in an amount having a market value equal to twice the exercise price. Similarly, if, after the rights become exercisable, National merges or consolidates with or sells 50 percent or more of its assets or earning power to another person or entity, each right will then entitle the holder to purchase, at the right's then-current exercise price, the stock of the acquiring company in an amount having a market value equal to twice the exercise price. National may redeem the rights at $0.01 per right at any time prior to the acquisition by a person or group of 20 percent or more of the outstanding common stock. Unless they are redeemed earlier, the rights will expire on August 8, 2006. Stock reserves During fiscal 1998, we reserved 926,640 shares of common stock for issuance upon conversion of convertible subordinated promissory notes issued to three individuals as partial consideration for the acquisition of ComCore Semiconductor. During fiscal 2000, 247,104 shares were issued to one of these individuals (See Note 7), leaving a balance in the reserve of 679,536 shares. In fiscal 2002, 617,760 shares were issued to the remaining two individuals as final payment on the notes. The reserve for the remaining 61,776 shares was cancelled. When we merged with Cyrix in November 1997, 16.4 million shares of common stock were issued to the holders of Cyrix common stock. In addition, we reserved up to 2.7 million shares of common stock for issuance upon exercise of Cyrix employee or director stock options or pursuant to Cyrix employee benefit plans and up to 2.6 million shares of common stock for issuance upon conversion of Cyrix 5.5 percent convertible subordinated notes due June 1, 2001. We repurchased substantially all of the outstanding Cyrix convertible subordinated notes in fiscal 1998. The last remaining notes were paid off in June 2001 and the reserve held for the conversion of the notes was cancelled. We have paid no cash dividends on our common stock and we intend to continue our practice of reinvesting all earnings. Note 10. Stock-Based Compensation Plans Stock Option Plans We have three stock option plans under which employees and officers may be granted stock options to purchase shares of common stock. One plan, which has been in effect since 1977, authorizes the grant of up to 39,354,929 shares of common stock for nonqualified or incentive stock options (as defined in the U.S. tax code) to officers and key employees. Another plan authorizes the grant of up to 70,000,000 shares of common stock for nonqualified stock options to employees who are not executive officers. There is also an executive officer stock option plan, which authorizes the grant of up to 6,000,000 shares of common stock for nonqualified options only to the company's executive officers. These plans generally provide that options are granted at the market price on the date of grant and expire up to a maximum of ten years and one day after grant or three months after termination of employment (up to five years after termination due to death, disability or retirement), whichever occurs first. We have historically used options as a major component of employee compensation packages, consistent with practices throughout the semiconductor and high technology industry. Options can vest after a six-month period, but most vest ratably over a four-year period. When we merged with Cyrix in fiscal 1998, we assumed Cyrix's outstanding obligations under its 1988 incentive stock plan. Each option under the Cyrix plan converted into the right or option to purchase 0.825 share of National common stock. The purchase price of the option was also adjusted accordingly. Options under the Cyrix 1988 incentive stock plan expire up to a maximum of ten years after grant, subject to earlier expiration upon termination of employment. No more options will be granted under the Cyrix 1988 incentive stock plan. As part of the acquisitions of ComCore Semiconductor in fiscal 1998 and Mediamatics in fiscal 1997, we assumed ComCore's and Mediamatics' outstanding obligations under their stock option plans and stock option agreements for their employees and consultants. ComCore and Mediamatics optionees received an option for equivalent shares of National common stock based on an exchange rate determined under the applicable acquisition agreements. The options expire up to a maximum of ten years after grant, subject to earlier expiration upon termination of employment. No more options will be granted under either of these stock option plans. The Mediamatics transaction resulted in a new measurement date for these options and we recorded related unearned compensation in the amount of $9.2 million. Amortization of this unearned compensation, which was recorded ratably over the vesting period of these options, was fully expensed by February 2001. The compensation expense for these Mediamatics options was $1.2 million in fiscal 2001 and $2.8 million in fiscal 2000. The following table summarizes information about options outstanding under these plans at May 26, 2002:
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 3.2 5.4 $0.69 Mediamatics option plan $2.85 2.9 4.8 $2.85
We have a director stock option plan that was first approved by shareholders in fiscal 1998 which authorizes the grant of up to 1,000,000 shares of common stock to eligible directors who are not employees of the company. Options were granted automatically upon approval of the plan by stockholders and are granted automatically to eligible directors upon their appointment to the board and subsequent election to the board by stockholders. Director stock options vest in full after six months. Under this plan, options to purchase 280,000 shares of common stock with a weighted-average exercise price of $30.75 and weighted-average remaining contractual life of 7.3 years were outstanding as of May 26, 2002. Upon his retirement in May 1995, we granted the former chairman of the company an option to purchase 300,000 shares of common stock at $27.875 per share. The option was granted outside the company's stock option plans at the market price on the date of grant. It expires ten years and one day after grant and became exercisable ratably over a four-year period. As of May 26, 2002, options to purchase 140,000 shares of common stock were outstanding under this option grant. In connection with the acquisition of innoComm Wireless, we granted options to purchase 799,339 shares of common stock at $27.44 to three founding shareholders of innoComm. The options were granted outside the stock option plans at the market price on the date of grant and become exercisable two years after grant. The option gives the innoComm Wireless founding shareholders the right to receive all or a portion of their third installment of the purchase price in cash or shares of common stock. Changes in shares of common stock outstanding under the option plans during fiscal 2002, 2001 and 2000 or otherwise (but excluding the ComCore, Mediamatics, innoComm Wireless, director and former chairman options), were as follows:
Weighted-Average (In Millions) Number of Shares Exercise Price ------------------------------ ------------------------------ Outstanding May 30, 1999 35.4 $14.80 Granted 9.4 $56.96 Exercised (6.6) $15.74 Cancelled (5.2) $14.81 ------------------------------ ------------------------------ Outstanding at May 28, 2000 33.0 $26.55 Granted 11.5 $27.15 Exercised (3.0) $13.29 Cancelled (3.0) $31.69 ------------------------------ ------------------------------ Outstanding May 27, 2001 38.5 $27.35 Granted 9.8 $32.33 Exercised (4.5) $18.15 Cancelled (2.3) $34.92 ------------------------------ ------------------------------ Outstanding May 26, 2002 41.5 $29.08 ============================== ==============================
Expiration dates for options outstanding at May 26, 2002 range from July 13, 2002 to May 6, 2012. The following tables summarize information about options outstanding under these plans (excluding the ComCore, Mediamatics, innoComm Wireless, director and former chairman options) at May 26, 2002:
Outstanding Options ------------------------------------------------------------------------- Weighted-Average Remaining Contractual Number of Shares Life Weighted-Average Range of Exercise Prices (In Millions) (In Years) Exercise Price ------------------------ ------------------------ ----------------------- $8.38-$13.00 8.5 6.5 $12.74 $13.06-$23.00 6.6 5.5 $15.70 $23.05-$25.95 7.6 8.8 $25.76 $26.00-$31.37 3.7 7.6 $28.29 $31.44-$34.20 7.7 9.7 $34.16 $34.49-$59.75 1.0 8.0 $46.67 $59.88-$79.62 6.4 7.9 $60.11 ------------------------ ------------------------ ----------------------- Total 41.5 7.7 $29.08 ======================== ======================== =======================
Options Exercisable ----------------------------------------------- Number of Shares (In Weighted-Average Range of Exercise Prices Millions) Exercise Price ---------------------- ------------------------ $8.38-$13.00 5.8 $12.73 $13.06-$23.00 4.9 $15.44 $23.05-$25.95 1.9 $25.71 $26.00-$31.37 1.4 $29.38 $31.44-$34.20 0.2 $33.73 $34.49-$59.75 0.4 $48.17 $59.88-$79.62 3.2 $60.04 ---------------------- ------------------------ Total 17.8 $25.62 ====================== ========================
On October 24, 2000, an option grant was made to employees who had received options in the prior calendar year. Excluded from this grant were the president and chief executive officer and executive staff members. This special grant was made because of the significant decline in the stock's market price during the first half of fiscal 2001. Shares under the option grant vested 100 percent one year from the date of grant and expired 15 months from the date of grant. Options to purchase a total 1.9 million shares at $24.125 per share were granted in the special option grant. As of May 26, 2002, approximately 83.9 million shares were reserved for issuance under all option plans, including shares available for future option grants. Stock Purchase Plans We have an employee stock purchase plan that has been in effect since 1977 that authorizes the issuance of up to 24,950,000 shares of stock in quarterly offerings to eligible employees at a price that is equal to 85 percent of the lower of the common stock's fair market value at the beginning or the end of a quarterly period. We also have an employee stock purchase plan available to employees at international locations that has been in effect since 1994. This plan authorizes the issuance of up to 5,000,000 shares of stock in quarterly offerings to eligible employees at a price equal to 85 percent of the lower of its fair market value at the beginning or the end of a quarterly period. Both purchase plans use a captive broker and we deposit shares purchased by the employee with the captive broker. In addition, for the international purchase plan, the participant's local employer is responsible for paying the difference between the purchase price set by the terms of the plan and the fair market value at the time of the purchase. Both purchase plans have been approved by stockholders. Under the terms of the stock purchase plan and the global stock purchase plan, we issued 1.2 million shares in fiscal 2002, 1.1 million shares in fiscal 2001 and 1.3 million shares in fiscal 2000 to employees for $26.7 million, $27.3 million and $26.3 million, respectively. As of May 26, 2002, approximately 7.3 million shares were reserved for issuance under the two stock purchase plans. Other Stock Plans We have a director stock plan that authorizes the issuance of up to 200,000 shares of common stock to eligible directors who are not employees of the company. The common stock is issued automatically to eligible new directors upon their appointment to the board and to all eligible directors on their subsequent election to the board by shareholders. Directors may also elect to take their annual retainer fees for board and committee membership in stock under the plan. As of May 26, 2002, 85,624 shares had been issued under the director stock plan and 114,376 shares were reserved for future issuances. We have a restricted stock plan, which authorizes the issuance of up to 2,000,000 shares of common stock to employees who are not officers of the company. The plan has been made available to a limited group of employees with technical expertise we consider important. During fiscal 2002, 2001 and 2000, 112,000, 240,000 and 166,500 shares, respectively, were issued under the restricted stock plan. Restrictions expire over time, ranging from two to six years after issuance. Based upon the market value on the dates of issuance, we recorded $3.1 million, $7.5 million and $8.3 million of unearned compensation during fiscal 2002, 2001 and 2000, respectively. This unearned compensation is included as a separate component of shareholders' equity in the financial statements and is amortized to operations ratably over the applicable restriction. In May 1996, we issued 200,000 shares of restricted stock to Brian L. Halla, then newly hired president and chief executive officer. These shares were not issued under the restricted stock plan and had restrictions that expired annually over a four-year period. The shares were recorded at the market value on the date of issuance as unearned compensation included as a separate component of shareholders' equity in the consolidated financial statements and were amortized to operations over the four-year vesting period. These restricted shares were granted to Mr. Halla specifically as part of his compensation package when he joined the company. Compensation expense for fiscal 2002, 2001 and 2000 related to all shares of restricted stock, including the shares granted to Mr. Halla, was $3.4 million, $3.0 million and $2.0 million, respectively. At May 26, 2002, the weighted-average grant date fair value for all outstanding shares of restricted stock was $28.78. Pro forma information regarding net income and earnings per share is required by SFAS No. 123. This information is required to be determined as if we had accounted for stock-based awards to employees under the fair value method specified by SFAS No. 123. The weighted-average fair value of stock options granted during fiscal 2002, 2001 and 2000 was $17.49, $15.88 and $36.36 per share, respectively. The weighted-average fair value of rights granted under the stock purchase plans was $6.47, $9.73 and $7.38 for fiscal 2002, 2001 and 2000. The fair value of the stock-based awards to employees was estimated using a Black-Scholes option pricing model that assumes no expected dividends and the following weighted-average assumptions for fiscal 2002, 2001 and 2000:
2002 2001 2000 ------------------ ----------------- ------------------ Stock Option Plans Expected life (in years) 5.1 5.7 5.8 Expected volatility 75% 73% 64% Risk-free interest rate 4.5% 5.0% 6.6% Stock Purchase Plans Expected life (in years) 0.3 0.3 0.3 Expected volatility 57% 95% 100% Risk-free interest rate 1.7% 3.7% 5.8%
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) 2002 2001 2000 -------------- -------------- ---------------- Net income (loss) - as reported $(121.9) $245.7 $620.8 Net income (loss) - pro forma $(280.5) $132.9 $550.3 Basic earnings (loss) per share - as reported $ (0.69) $ 1.40 $ 3.58 Basic earnings (loss) per share - pro forma $ (1.58) $ 0.76 $ 3.17 Diluted earnings (loss) per share - as reported $ (0.69) $ 1.30 $ 3.24 Diluted earnings (loss) per share - pro forma $ (1.58) $ 0.71 $ 2.87
Note 11. Retirement and Pension Plans Our retirement and savings program for U.S. employees consists of two plans, as follows: The profit sharing plan requires contributions of the greater of 5 percent of consolidated net earnings before income taxes (subject to a limit of 5% of payroll) or 1 percent of payroll. Contributions are made 25 percent in National stock and 75 percent in cash and contributions made in National stock must remain in National stock until the employee leaves the company and terminates participation in the plan. Total shares contributed under the profit sharing plan during fiscal 2002, 2001 and 2000 were 128,919 shares, 104,151 shares and 34,025 shares, respectively. As of May 26, 2002, 1.1 million shares of common stock were reserved for future contributions. The salary deferral 401(k) plan allows employees to defer up to 15 percent of their salaries, subject to certain limitations, with partially matching company contributions. Contributions are invested in one or more of thirteen investment funds at the discretion of the employee. One of the investment funds is a stock fund in which contributions are invested in National common stock at the discretion of the employee. 401(K) investments made by the employee in National stock may be sold at any time upon direction of the employee. Although 5.0 million shares of common stock are reserved for issuance to the stock fund, shares purchased to date with contributions have been purchased on the open market and we have not issued any stock directly to the stock fund. We also have a deferred compensation plan, which allows highly compensated employees (as defined by IRS regulations) to receive a higher profit sharing plan allocation than would otherwise be permitted under IRS regulations and to defer greater percentages of compensation than would otherwise be permitted under the salary deferral 401(k) plan and IRS regulations. The deferred compensation plan is a nonqualified plan of deferred compensation maintained in a rabbi trust. Participants can direct the investment of their deferred compensation plan accounts in the same investment funds offered by the 401(k) plan (with the exception of the company stock fund, which is not available for the nonqualified plan). Certain of our subsidiaries that are not located in the U.S. have varying types of defined benefit pension and retirement plans that are consistent with local statutes and practices. The annual expense for all plans was as follows:
(In Millions) 2002 2001 2000 ------------- ------------ ------------ Profit sharing plan $ 3.6 $19.9 $15.5 Salary deferral 401(k) plan $ 11.0 $10.6 $10.8 Non-U.S. pension and retirement plans $ 10.6 $ 8.3 $10.7
Defined benefit pension plans maintained in the U.K., Germany and Japan cover all eligible employees within each respective country. Pension plan benefits are based primarily on participants' compensation and years of service credited as specified under the terms of each country's plan. The funding policy is consistent with the local requirements of each country. The plans' assets consist primarily of U.S. and foreign equity securities, bonds, property and cash. Net annual periodic pension cost of these non U.S. defined benefit pension plans is presented in the following table:
(In Millions) 2002 2001 2000 ----------------- ----------------- ----------------- Service cost of benefits earned during the year $4.3 $4.1 $5.5 Plan participant contributions (0.9) (0.7) (1.3) Interest cost on projected benefit obligation 7.5 7.0 6.5 Expected return on plan assets (5.3) (5.6) (5.2) Net amortization and deferral 1.3 0.2 0.9 ----------------- ----------------- ----------------- Net periodic pension cost $6.9 $5.0 $6.4 ================= ================= =================
Benefit obligation and asset data of these plans at fiscal year-end and details of their changes during the year are presented in the following tables:
(In Millions) 2002 2001 ----------------- ----------------- BENEFIT OBILGATION Beginning balance $122.9 $120.0 Service cost 4.3 4.1 Interest cost 7.5 7.0 Benefits paid (1.9) (2.6) Actuarial loss 2.2 6.6 Exchange rate adjustment 1.9 (12.2) ----------------- ----------------- Ending balance $136.9 $122.9 ================= ================= PLAN ASSETS AT FAIR VALUE Beginning balance $ 75.7 $ 82.3 Actual return on plan assets (5.3) (7.9) Company contributions 11.9 12.2 Plan participant contributions 0.9 0.7 Benefits paid (1.8) (2.5) Exchange rate adjustment 1.7 (9.1) ----------------- ----------------- Ending balance $ 83.1 $ 75.7 ================= ================= RECONCILIATION OF FUNDED STATUS Fund status - Benefit obligation in excess of plan assets $ 53.8 $ 47.2 Unrecognized net loss (59.7) (47.1) Unrecognized net transition obligation 2.1 2.1 Adjustment to recognize minimum liability 59.9 47.2 ----------------- ----------------- Accrued pension cost $ 56.1 $ 49.4 ================= =================
The projected benefit obligations and net periodic pension cost were determined using the following assumptions:
2002 2001 2000 ----------------- ----------------- ----------------- Discount rate 2.8%-6.5% 3.0%-6.5% 3.0%-6.5% Rate of increase in compensation levels 2.8%-3.8% 3.0%-4.3% 3.0%-4.5% Expected long-term return on assets 3.8%-7.5% 4.0%-7.5% 4.0%-8.0%
In each of fiscal years presented, we recorded adjustments for minimum liability to adjust the liability related to one of our plans to equal the amount of the unfunded accumulated benefit obligation as required by the pension accounting standard. The corresponding offset is recorded in the financial statements as a component of accumulated other comprehensive loss. Note 12. Commitments and Contingencies Commitments We lease certain facilities and equipment under operating lease arrangements. Rental expenses under operating leases were $25.3 million, $26.3 million and $28.1 million in fiscal 2002, 2001 and 2000, respectively. Future minimum commitments under noncancellable operating leases are as follows:
(In Millions) ------------------------------ 2003 $16.5 2004 14.1 2005 11.7 2006 7.9 2007 6.0 Thereafter 9.9 ------------------------------ Total $66.1 ==============================
As part of the Fairchild transaction in fiscal 1997, we entered into a manufacturing agreement with Fairchild where we committed to purchase a minimum of $330.0 million in goods and services during the first 39 months after the transaction, based on specified wafer prices, which are intended to approximate market prices. The agreement expired in June 2000. During fiscal 2000, our total purchases under the agreement were $87.5 million. In June 2000, we extended the manufacturing arrangement for one year with similar terms. Total purchases from Fairchild in fiscal 2001 were $55.4 million, most of which were made under the one-year extension. Prior to the end of fiscal 2001, we entered into a two-year extension under similar terms where we have committed to purchase a minimum of $30.0 million and $20.0 million of product from Fairchild in fiscal 2002 and 2003, respectively. Under this extension, our purchases from Fairchild during fiscal 2002 totaled $32.3 million. In June 2000, we entered into a ten-year licensing agreement with Taiwan Semiconductor Manufacturing Company to gain access to a variety of TSMC's advanced sub-micron processes for use in our wafer fabrication facility in Maine as desired, if and when those processes are developed by TSMC. Prior to this agreement, we were only utilizing our own process technology in Maine. Total license fees of $187.0 million are to be paid quarterly through April 2006. We paid license fees of $37.0 million in fiscal 2002 and $35.0 million in fiscal 2001. In connection with this agreement, we are also required to pay a royalty of 5 percent on wafers we manufacture utilizing the TSMC process technology that are in excess of a pre-determined minimum level in any calendar quarter. No royalties have been paid during either fiscal 2002 or 2001 under this agreement. Contingencies -- Legal Proceedings In April 1988, we received a notice from the of U.S. Customs Service in San Francisco alleging that we had underpaid duties of approximately $19.5 million on goods that we had imported from our foreign subsidiaries from June 1, 1979 to March 1, 1985. We had been contesting the notice in various proceedings since 1988. In March 1998, the Assistant Commissioner of Customs reduced the amount of the alleged underpayment to approximately $3.6 million. The underpayment was subject to penalties computed as a multiple of the underpayment. In July 2001, the Customs Service accepted our offer to settle the matter for $2.5 million. We had already paid this amount to the Customs Service. The matter is now concluded. We have been named to the National Priorities List for our Santa Clara, California, site and have completed a remedial investigation/feasibility study with the Regional Water Quality Control Board, acting as an agent for the Federal Environmental Protection Agency. We have agreed in principle with the RWQCB to a site remediation plan. We were sued by AMD, which sought recovery of cleanup costs AMD incurred in the Santa Clara area under the RWQCB orders for contamination that AMD alleged were originally caused by us. The settlement of this case was completed in fiscal 2002 and the AMD suit is now concluded. In addition to the Santa Clara site, from time to time we have been designated as a potentially responsible party by federal and state agencies for certain environmental sites with which we may have had direct or indirect involvement. These designations are made regardless of the extent of our involvement. These claims are in various stages of administrative or judicial proceedings and include demands for recovery of past governmental costs and for future investigations and remedial actions. In many cases, the dollar amounts of the claims have not been specified, and with respect to a number of the PRP claims, have been asserted against a number of other entities for the same cost recovery or other relief as was sought from us. We accrue costs associated with environmental matters when they become probable and reasonably estimable. The amount of all environmental charges to earnings, including charges for the Santa Clara site remediation, (excluding potential reimbursements from insurance coverage), were not material during fiscal 2002, 2001 and 2000. As part of the disposition in fiscal 1996 of the Dynacraft assets and business, we retained responsibility for environmental claims connected with Dynacraft's Santa Clara, California, operations and for other environmental claims arising from our conduct of the Dynacraft business prior to the disposition. As part of the Fairchild disposition in fiscal 1997, we also agreed to retain liability for current remediation projects and environmental matters arising from our prior operation of Fairchild's plants in South Portland, Maine; West Jordan, Utah; Cebu, Philippines; and Penang, Malaysia; and Fairchild agreed to arrange for and perform the remediation and cleanup. We prepaid to Fairchild the estimated costs of the remediation and cleanup and remain responsible for costs and expenses incurred by Fairchild in excess of the prepaid amounts. In January 1999, a class action suit was filed against us and our chemical suppliers by former and present employees claiming damages for personal injuries. The complaint alleges that cancer and reproductive harm were caused to employees exposed to chemicals in the workplace. Plaintiffs presently seek a certification of a medical monitoring class, which we oppose. Discovery in the case is proceeding. In November, 2000, a derivative action was brought against us and other defendants by a shareholder of Fairchild Semiconductor International, Inc. Plaintiff seeks recovery of alleged 'short-swing' profits under section 16(b) of the Securities Exchange Act of 1934 from the sale by the defendants in January 2000 of Fairchild common stock. The complaint alleges that Fairchild's conversion of preferred stock held by the defendants at the time of Fairchild's initial public offering in August 1999 constitutes a 'purchase' that must be matched with the January 2000 sale for purposes of computing the 'short-swing' profits. Plaintiff seeks from National alleged recoverable profits of approximately $14.1 million. In February, 2002, the judge in the case granted the motion to dismiss filed by us and our co-defendants and dismissed the case, ruling that the conversion was done pursuant to a reclassification which is exempt from the scope of Section 16(b). Plaintiff appealed the dismissal of the case in March 2002. Our tax returns for certain years are under examination in the U.S. by the IRS (See Note 8). In addition to the foregoing, we are a party to other suits and claims that arise in the normal course of business. Based on current information, we do not believe that it is probable that losses associated with the proceedings discussed above that exceed amounts already recognized will be incurred in amounts that would be material to our financial position or results of operations. Note 13. Segment and Geographic Information We design, develop, manufacture and market a wide array of semiconductor products for applications in a variety of markets. We are organized by various product line business units. For segment reporting purposes, each of our product line business units represents an operating segment as defined under SFAS No. 131, 'Disclosures about Segments of an Enterprise and Related Information,' and our chief executive officer is considered the chief operating decision-maker. Business units that have similarities, including economic characteristics, underlying technology, markets and customers, are aggregated into segments. Under the criteria in SFAS No. 131, only the Analog segment and the Information Appliance segment are considered reportable segments. All other segments are included in the caption 'All Others.' Prior to fiscal 2000, the former Cyrix business unit was also considered a separate reportable operating segment. The Analog segment includes a wide range of building block products such as high-performance operational amplifiers, power management circuits, data acquisition circuits, interface circuits and circuits targeted towards leading-edge monitor applications such as ultra-thin flat panel displays. The Analog segment's wireless circuits perform the radio, baseband controller, power management and other related functions primarily for handsets and base stations in the cellular and cordless telephones. The segment is heavily focused on using our analog expertise as the initial point to integrate systems on a chip aimed at the cellular, personal systems and information appliance markets. Current offerings include a complete GSM chipset solution, audio subsystems and flat panel display column drivers, integrated receivers and timing controllers. The Information Appliance segment contains all business units focused on providing component and system solutions to the emerging information appliance market, which we are strategically focusing on to provide next-generation solutions. These products include application-specific integrated microprocessors based on our GeodeTM technology and diverse advanced input/output controllers. The Information Appliance segment is focused on three key market segments that include enterprise thin clients (computers that have minimal memory and access software from a centralized server network), interactive TV set-top boxes (equipped with digital video) and personal information access devices, such as those currently being designed for the Microsoft Mira project. The former Cyrix business unit primarily offered a line of Cyrix M II microprocessors, which were stand-alone central processing units that were targeted toward the sub-$1,000 PC market. In this market, which is currently dominated by two major competitors, we experienced highly competitive pricing trends and constant pressure to rapidly release new microprocessors with higher operating speeds. As a result, we decided to exit the Cyrix PC microprocessor business in May 1999 and completed the sale of the assets of this business to VIA Technologies in September 1999 (See Note 3). Aside from these operating segments, our corporate structure also includes the centralized Worldwide Marketing and Sales Group, the Central Technology and Manufacturing Group, and the Corporate Group. Certain expenses of these groups are allocated to the operating segments and are included in their segment operating results. With the exception of the allocation of certain expenses, the significant accounting policies and practices used to prepare the consolidated financial statements as described in Note 1 are generally followed in measuring the sales, segment income or loss and determination of assets for each reportable segment. We allocate certain expenses associated with centralized manufacturing, selling, marketing and general administration to reporting segments based on either the percentage of net trade sales for each operating segment to total net trade sales or headcount, as appropriate. Certain R&D expenses primarily associated with centralized activities such as process development are allocated to operating segments based on the percentage of dedicated R&D expenses for each operating segment to total dedicated R&D expenses. A portion of interest income and interest expense is indirectly allocated to operating segments and is included in segment operating results. The following table presents specified amounts included in the measure of segment results or the determination of segment assets:
Information Cyrix (In Millions) Analog Appliance Business All Eliminations Total Segment Segment Unit Others Consolidated ----------- --------------- ----------- ------------- --------------- --------------- 2002 Sales to unaffiliated customers $ 1,126.8 $ 198.7 $ - $ 169.3 $ - $ 1,494.8 =========== =============== =========== ============= =============== =============== Segment loss before income taxes $ (12.2) $ (88.4) $ - $ (22.8) $ - $ (123.4) =========== =============== =========== ============= =============== =============== Depreciation and amortization $ 14.0 $ 7.1 $ - $ 209.3 $ 230.4 Interest income $ - $ - $ - $ 25.2 $ 25.2 Interest expense $ - $ - $ - $ 3.9 $ 3.9 Segment assets $ 286.9 $ 18.6 $ - $ 1,983.3 $ 2,288.8 2001 Sales to unaffiliated customers $ 1,516.8 $ 227.0 $ - $ 368.8 $ - $ 2,112.6 Inter-segment sales - 0.1 - - (0.1) - ----------- --------------- ----------- ------------- --------------- --------------- Net sales $ 1,516.8 $ 227.1 $ - $ 368.8 $ (0.1) $ 2,112.6 =========== =============== =========== ============= =============== =============== Segment income (loss) before income taxes $ 364.1 $ (106.5) $ - $ 49.5 $ - $ 307.1 =========== =============== =========== ============= =============== =============== Depreciation and amortization $ 24.9 $ 9.7 $ - $ 208.7 $ 243.3 Interest income $ - $ - $ - $ 57.3 $ 57.3 Interest expense $ - $ - $ - $ 5.3 $ 5.3 Segment assets $ 145.7 $ 28.1 $ - $ 2,188.5 $ 2,362.3 2000 Sales to unaffiliated customers $ 1,514.1 $ 239.1 $ 18.6 $ 368.1 $ - $2,139.9 Inter-segment sales - 0.3 - - (0.3) - ----------- --------------- ----------- ------------- --------------- --------------- Net sales $ 1,514.1 $ 239.4 $ 18.6 $ 368.1 $ (0.3) $2,139.9 =========== =============== =========== ============= =============== =============== Segment income (loss) before income taxes and extraordinary item $ 454.1 $ (99.8) $ (22.6) $ 310.8 $ - $ 642.5 =========== =============== =========== ============= =============== =============== Depreciation and amortization $ 13.8 $ 13.9 $ 3.3 $ 232.8 $ 263.8 Interest income $ - $ - $ - $ 33.2 $ 33.2 Interest expense $ - $ - $ - $ 17.9 $ 17.9 Segment assets $ 133.0 $ 30.8 $ - $ 2,218.4 $2,382.2
Depreciation and amortization presented for each segment include only such charges on dedicated segment assets. The measurement of segment profit and loss includes an allocation of depreciation expense for shared manufacturing facilities contained in each segment's product standard cost. We operate in three main geographic areas that include the Americas, Europe and the Asia Pacific region including Japan. In the information that follows, sales include local sales and exports made by operations within each area. Total sales by geographic area include sales to unaffiliated customers and inter-geographic transfers, which are based on standard cost. To control costs, a substantial portion of our products are transported between the Americas, Europe and the Asia Pacific region in the process of being manufactured and sold. Sales to unaffiliated customers have little correlation with the location of manufacture. The following tables provides geographic sales and asset information by major countries within the main geographic areas (Japan is included with the rest of the world):
(In Millions) United United Hong Singapore Rest of Eliminations Total States Kingdom Kong World Consolidated ------------ ----------- ---------- ------------ ------------- --------------- -------------- 2002 Sales to unaffiliated customers $ 377.7 $ 169.7 $ 423.0 $ 229.4 $ 295.0 $ 1,494.8 Transfers between geographic areas 364.1 126.0 0.2 619.1 0.3 $(1,109.7) - ------------ ----------- ---------- ------------ ------------- --------------- -------------- Net sales $ 741.8 $ 295.7 $ 423.2 $ 848.5 $ 295.3 $(1,109.7) $ 1,494.8 ============ =========== ========== ============ ============= =============== ============== Long-lived assets $ 788.9 $ 42.3 $ 0.7 $ 68.8 $ 123.6 $ - $ 1,024.3 ============ =========== ========== ============ ============= =============== ============== 2001 Sales to unaffiliated customers $ 702.3 $ 313.5 $ 445.8 $ 221.5 $ 429.5 $ 2,112.6 Transfers between geographic areas 470.2 181.1 0.7 747.4 1.0 $(1,400.4) - ------------ ---------- ---------- ------------ ------------- --------------- -------------- Net sales $ 1,172.5 $ 494.6 $ 446.5 $ 968.9 $ 430.5 $(1,400.4) $ 2,112.6 ============ =========== ========== ============ ============= =============== ============== Long-lived assets $ 742.4 $ 49.1 $ 0.9 $ 87.9 $ 141.9 $ - $ 1,022.2 ============ =========== ========== ============ ============= =============== ============== 2000 Sales to unaffiliated customers $ 761.7 $ 348.8 $ 439.1 $ 214.6 $ 375.7 $ 2,139.9 Transfers between geographic areas 544.2 192.1 0.1 875.8 0.7 $(1,612.9) - ------------ ----------- ---------- ------------ ------------- --------------- -------------- Net sales $ 1,305.9 $ 540.9 $ 439.2 $ 1,090.4 $ 376.4 $(1,612.9) $ 2,139.9 ============ =========== ========== ============ ============= =============== ============== Long-lived assets $ 632.7 $ 37.1 $ 1.2 $ 93.6 $ 137.3 $ - $ 901.9 ============ =========== ========== ============ ============= =============== ==============
Note 14. Supplemental Disclosure of Cash Flow Information and Noncash Investing and Financing Activities
(In Millions) 2002 2001 2000 --------------- -------------- -------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for: Interest expense $ 4.0 $ 5.6 $ 21.5 Income taxes $ 16.2 $ 80.1 $ 21.6
(In Millions) 2002 2001 2000 --------------- -------------- -------------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Issuance of stock for employee benefit plans $ 4.3 $ 4.1 $ 0.9 Issuance of stock for director stock plan $ 0.2 $ 0.3 $ 0.4 Change in unrealized gain on available-for-sale securities $ 23.2 $ 11.3 $ (18.6) Change in unrealized loss on cash flow hedges $ 0.4 $ - $ - Unearned compensation relating to restricted stock issuance $ 3.1 $ 7.5 $ 8.3 Issuance of common stock upon conversion of convertible subordinated promissory notes $ 10.0 $ - $ 7.1 Restricted stock cancellation $ 0.9 $ 2.8 $ 6.0 Minimum pension liability $ 12.7 $ 16.0 $ 6.2
Note 15. Financial Information by Quarter (Unaudited) The following table presents the quarterly information for fiscal 2002 and 2001:
Fourth Third Second First (In Millions, Except Per Share Amounts) Quarter Quarter Quarter Quarter -------------- --------------- --------------- --------------- 2002 Net sales $ 419.5 $ 369.5 $ 366.5 $ 339.3 Gross margin $ 180.5 $ 133.3 $ 129.5 $ 110.1 Net income (loss) $ 17.1 $ (37.8) $ (46.6) $ (54.6) Earnings (loss) per share: Net income (loss): Basic $ 0.10 $ (0.21) $ (0.26) $ (0.31) Diluted $ 0.09 $ (0.21) $ (0.26) $ (0.31) Weighted-average common and potential common shares outstanding: Basic 179.8 178.4 176.8 174.9 Diluted 190.6 178.4 176.8 174.9 Common stock price - high $ 37.30 $ 34.91 $ 35.10 $ 34.97 Common stock price - low $ 24.93 $ 25.03 $ 19.70 $ 24.86 - --------------------------------------------------- -------------- --------------- --------------- --------------- 2001 Net sales $ 401.2 $ 475.6 $ 595.0 $ 640.8 Gross margin $ 164.4 $ 233.0 $ 300.7 $ 339.4 Net income (loss) $ (44.4) $ 39.2 $ 106.7 $ 144.2 Earnings (loss) per share: Net income (loss): Basic $ (0.26) $ 0.23 $ 0.60 $ 0.81 Diluted $ (0.26) $ 0.21 $ 0.56 $ 0.74 Weighted-average common and potential common shares outstanding: Basic 173.6 174.0 178.1 178.1 Diluted 173.6 183.0 191.9 195.8 Common stock price - high $ 30.97 $ 29.41 $ 47.94 $ 73.88 Common stock price - low $ 19.71 $ 17.13 $ 19.69 $ 31.25 - --------------------------------------------------- -------------- --------------- --------------- ---------------
Our common stock is traded on the New York Stock Exchange and the Pacific Exchange. The quoted market prices are as reported on the New York Stock Exchange Composite Tape. At May 26, 2002, there were approximately 8,194 holders of common stock. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders National Semiconductor Corporation: We have audited the accompanying consolidated balance sheets of National Semiconductor Corporation and subsidiaries as of May 26, 2002 and May 27, 2001, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the years in the three-year period ended May 26, 2002. In connection with our audits of the consolidated financial statements, we have also audited the related financial statement Schedule II, 'Valuation and Qualifying Accounts.' These consolidated financial statements and financial statement schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Semiconductor Corporation and subsidiaries as of May 26, 2002 and May 27, 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended May 26, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Mountain View, California June 5, 2002 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning directors and executive officers appearing under the caption 'Election of Directors' (including subcaptions thereof) and 'Section 16(a) Beneficial Ownership Reporting Compliance' in our Proxy Statement for the 2002 annual meeting of shareholders to be held on or about October 18, 2002 and which will be filed in definitive form pursuant to Regulation 14A on or about September 1, 2002 (hereinafter '2002 Proxy Statement'), is incorporated herein by reference. Information concerning our executive officers is set forth in Part I of the Form 10-K under the caption 'Executive Officers of the Registrant.' ITEM 11. EXECUTIVE COMPENSATION The information appearing under the captions 'Director Compensation', 'Compensation Committee Interlocks and Insider Participation' and 'Executive Compensation' (including all related sub captions thereof) in the 2002 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information concerning the only known ownership of more than 5 percent of our outstanding common stock 'Outstanding Capital Stock, Quorum and Votin' in the 2002 Proxy Statement, is incorporated herein by reference. The information concerning the ownership of our equity securities by directors, certain executive officers and directors and officers as a group, appearing under the caption 'Security Ownership of Management' in the 2002 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Pages in (a) 1. Financial Statements this document For the three years ended May 26, 2002- 31 refer to Index in Item 8 (a) 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts 69 All other schedules are omitted since the required information is inapplicable or the information is presented in the consolidated financial statements or notes thereto. Separate financial statements of National are omitted because we are primarily an operating company and all subsidiaries included in the consolidated financial statements being filed, in the aggregate, do not have minority equity interest or indebtedness to any person other than us in an amount which exceeds five percent of the total assets as shown by the most recent year end consolidated balance sheet filed herein. (a) 3. Exhibits The exhibits listed in the accompanying Index to Exhibits on pages 72 to 74 of this report are filed or incorporated by reference as part of this report. (b) Reports on Form 8-K During the quarter ended May 26, 2002, we did not file any reports on Form 8-K. NATIONAL SEMICONDUCTOR CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (In Millions) Deducted from receivables in the consolidated balance sheets
Doubtful Returns and Description Accounts Allowances Total Balances at May 30, 1999 $ 9.1 $ 58.9 $ 68.0 Additions charged against revenue - 223.9 223.9 Additions charged against costs and expenses 0.3 - 0.3 Deductions (2.0) (1) (231.6) (233.6) ------------ --------- ---------- Balances at May 28, 2000 7.4 51.2 58.6 Additions charged against revenue - 243.9 243.9 Additions charged against costs and expenses 2.0 - 2.0 Deductions (2.1) (1) (257.3) (259.4) ------------ --------- ---------- Balances at May 27, 2001 7.3 37.8 45.1 Additions charged against revenue - 151.3 151.3 Additions charged against costs and expenses 0.2 - 0.2 Deductions - (158.8) (158.8) ------------ --------- ---------- Balances at May 26, 2002 $ 7.5 $ 30.3 $ 37.8 ============= ========= ==========
________________________________________________ (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 16, 2002 /S/ BRIAN L. HALLA* Brian L. Halla Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities stated and on the 16th day of August 2002. Signature Title /S/ BRIAN L. HALLA* Chairman of the Board, President Brian L. Halla and Chief Executive Officer (Principal Executive Officer) /S/ LEWIS CHEW* Senior Vice President, Finance Lewis Chew and Chief Financial Officer (Principal Financial Officer) /S/ ROBERT E. DEBARR * Controller Robert E. DeBarr. (Principal Accounting Officer) /S/ STEVEN R. APPLETON * Director Steven R. Appleton /S/ GARY P. ARNOLD * Director Gary P. Arnold /S/ RICHARD J. DANZIG * Director Richard J. Danzig /S/ ROBERT J. FRANKENBERG * Director Robert J. Frankenberg /S/ E. FLOYD KVAMME* Director E. Floyd Kvamme /S/ MODESTO A. MAIDIQUE * Director Modesto A. Maidique /S/ EDWARD R. McCRACKEN * Director Edward R. McCracken * By /S/ LEWIS CHEW Lewis Chew, Attorney-in-fact CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders National Semiconductor Corporation: We consent to incorporation by reference in the Registration Statements No. 33-48943, 33-54931, 33-55703, 33-61381, 333-09957, 333-23477, 333-36733, 333-53801, 333-63614, 333-88269, 333-48424 and 333-70040 on Form S-8, and Post Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement No. 333-38033-01 of National Semiconductor Corporation and subsidiaries of our report dated June 5, 2002, relating to the consolidated balance sheets of National Semiconductor Corporation and subsidiaries as of May 26, 2002 and May 27, 2001, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the years in the three-year period ended May 26, 2002 and the related financial statement schedule, which report appears on page 69 of the 2002 Annual Report on Form 10-K of National Semiconductor Corporation. KPMG LLP Mountain View, California August 16, 2002 INDEX TO EXHIBITS Item 14(a) (3) The following documents are filed as part of this report: 1. Financial Statements: reference is made to the Financial Statements described under Part IV, Item 14(a) (1). 2. Other Exhibits: 3.1 Second Restated Certificate of Incorporation of the Company, as amended (incorporated by reference from the Exhibits to our Registration Statement on Form S-3 Registration No. 33-52775, which became effective March 22, 1994); Certificate of Amendment of Certificate of Incorporation dated September 30, 1994 (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 333-09957 which became effective August 12, 1996); Certificate of Amendment of Certificate of Incorporation dated September 22, 2000 (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 333-48424, which became effective October 23, 2000). 3.2 By-Laws of the Company. 4.1 Form of Common Stock Certificate (incorporated by reference from the Exhibits to our Registration Statement on Form S-3 Registration No. 33-48935, which became effective October 5, 1992). 4.2 Rights Agreement (incorporated by reference from the Exhibits to our Registration Statement on Form 8-A filed August 10, 1988). First Amendment to the Rights Agreement dated as of October 31, 1995 (incorporated by reference from the Exhibits to our Amendment No. 1 to the Registration Statement on Form 8-A filed December 11, 1995). Second Amendment to the Rights Agreement dated as of December 17, 1996 (incorporated by reference from the Exhibits to our Amendment No. 2 to the Registration Statement on Form 8-A filed January 17, 1997). 4.3 Indenture dated as of May 28, 1996 between Cyrix Corporation ('Cyrix') and Bank of Montreal Trust Company as Trustee (incorporated by reference from the Exhibits to Cyrix's Registration Statement on Form S-3 Registration No. 333-10669, which became effective August 22, 1996). 4.4 Registration Rights Agreement dated as of May 28, 1996 between Cyrix and Goldman, Sachs & Co. (incorporated by reference from the Exhibits to Cyrix's Registration Statement on Form S-3 Registration No. 333-10669, which became effective August 22, 1996). 10.1 Management Contract or Compensatory Plan or Arrangement: Executive Officer Incentive Plan (incorporated by reference from the Exhibits to our Form 10-K for the fiscal year ended May 30, 1999 filed July 29, 1999). Fiscal Year 2002 Executive Officer Incentive Plan Agreement (incorporated by reference from the Exhibits to our Form 10-Q for the quarter ended August 26, 2001 filed October 4, 2001). 10.2 Management Contract or Compensatory Plan or Agreement: Stock Option Plan, as amended through April 26, 1998 (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 333-57029, which became effective June 17, 1998). 10.3 Management Contract or Compensatory Plan or Agreement: Executive Officer Stock Option Plan (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 333-48424, which became effective October 23, 2000). 10.4 Management Contract or Compensatory Plan or Arrangement; Equity Compensation Plan not approved by Stockholders: Agreement with Peter J. Sprague dated May 17, 1995 (incorporated by reference from the Exhibits to our Form 10-K for fiscal year ended May 27, 2000 filed August 3, 2000). Non Qualified Stock Option Agreement with Peter J. Sprague dated May 18, 1995 (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 33-61381 which became effective July 28, 1995). 10.5 Management Contract or Compensatory Plan or Arrangement: Director Stock Plan as amended through June 26, 1997 (incorporated by reference from the Exhibits to our definitive Proxy Statement for the Annual Meeting of Stockholders held September 26, 1997 filed August 12, 1997). 10.6 Management Contract or Compensatory Plan or Arrangement: Director Stock Option Plan (incorporated by reference from the Exhibits to our Form 10-Q for the quarter ended August 29, 1999 filed October 12, 1999). 10.7 Management Contract or Compensatory Plan or Arrangement: Director Deferral Plan (incorporated by reference from the Exhibits to our Form 10-Q for the quarter ended August 29, 1999 filed October 12, 1999). 10.8 Management Contract or Compensatory Plan or Arrangement: Board Retirement Policy (incorporated by reference from the Exhibits to our Form 10-K for the fiscal year ended May 30, 1999 filed July 29, 1999). 10.9 Management Contract or Compensatory Plan or Arrangement: Preferred Life Insurance Program (incorporated by reference from the Exhibits to our Form 10-K for the fiscal year ended May 30, 1999 filed July 29, 1999). 10.10Management Contract or Compensatory Plan or Arrangement: Retired Officers and Directors Health Plan (incorporated by reference from the Exhibits to our Form 10-K for the fiscal year ended May 28, 2000 filed August 3, 2000). 10.11Management Contract or Compensatory Plan or Agreement: National Semiconductor Corporation Long Term Disability Coverage Plan Summary, National Semiconductor Corporate Executive Staff as amended January 1, 2000 (incorporated by reference from the Exhibits to our Form 10-Q for the quarter ended February 27, 2000 filed April 11, 2000). 10.12Management Contract or Compensatory Plan or Agreement: Long Term Disability Plan Summary, National Semiconductor Executive Employees (incorporated by reference from the Exhibits to our Form 10-Q for the quarter ended February 27, 2000 filed April 11, 2000). 10.13Management Contract or Compensatory Plan or Agreement: Form of Change of Control Employment Agreement entered into with Executive Officers of the Company (incorporated by reference from our Form 10-K for fiscal year ended May 31, 1998 filed August 3, 1998). 10.14Management Contract or Compensatory Plan or Agreement: National Semiconductor Corporation Deferred Compensation Plan (incorporated by reference from the Exhibits to our Form 10-Q for the quarter ended February 24, 2002 filed April 10, 2002). 10.15Equity Compensation Plan not approved by Stockholders: Cyrix Corporation 1998 Incentive Stock Plan (incorporated by reference from the Exhibits to our Post-Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement Registration No. 333-38033-01 filed November 18, 1997). 10.16Equity Compensation Plan not approved by Stockholders: ComCore Semiconductor, Inc. 1997 Stock Option Plan (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 333-53801 filed May 28, 1998). 10.17Equity Compensation Plan not approved by Stockholders: 1995 Stock Option Plan for officers and Key Employees of Mediamatics, Inc. and 1997 Stock Option Plan of Mediamatics, Inc. (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 333-23477 filed March 17, 1997). 10.18Equity Compensation Plan not approved by Stockholders: Restricted Stock Plan (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 333-09957 filed August 12, 1996). 10.19Equity Compensation Plan not approved by Stockholders: 1997 Employees Stock Option Plan (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 333-63614 filed June 22, 2001). 10.20Equity Compensation Plan not approved by Stockholders: Agreement and Plan of Merger by and among National Semiconductor Corporation, Nesshin Acquisition Sub, Inc., innoComm Wireless, Inc., and Bernard Xavier, Daniel Meacham and Ibrahim Yayla dated as of February 2, 2001; Letter Agreement with Daniel Meacham; Letter Agreement with Bernard Xavier; Letter Agreement with Ibrahim Yayla (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 333-70040 filed September 24, 2001). 10.21Equity Compensation Plan not approved by Stockholders: Retirement and Savings Program. 10.22Management Contract or Compensatory Plan or Arrangement: 2002 Key Employee Incentive Plan. 10.23Management Contract or Compensatory Plan or Arrangement: Relocation Package made available to Detlev Kunz. 21.0 List of Subsidiaries. 23.0 Consent of Independent Auditors (included in Part IV). 24.1 Power of Attorney. Exhibit 21.0 NATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT The following table shows certain information with respect to the active subsidiaries as of May 26, 2002, all of which are included in consolidated financial statements: State or Other Country Percent of Other In Which Voting Jurisdiction Subsidiary Securities Name of Incorporation is Registered by National Owned - --------------------- ------------- ----------- ---------- Algorex Inc. California 100% ComCore Semiconductor, Inc. California 100% innoComm WIRELESS California 100% Mediamatics, Inc. California 100% National Semiconductor International, Inc. Delaware 100% National Semiconductor Netsales, Inc. Delaware 100% National Semiconductor (Maine), Inc. Delaware 100% ASIC II Limited Hawaii 100% National Semiconductor B.V. Corporation Delaware 100% National Semiconductor France S.A.R.L. France 100% National Semiconductor GmbH Germany Belgium 100% National Semiconductor (I.C.) Ltd. Israel 100% National Semiconductor S.r.l. Italy 100% National Semiconductor Aktiebolog (A.B). Sweden 100% National Semiconductor Sweden Aktiebolog. Sweden 100% National Semiconductor (U.K.) Ltd. Great Britain Denmark/Ireland 100% Finland/Norway/Spain National Semiconductor (U.K.)Pension Trust Company Ltd. Great Britain 100% National Semiconductor Benelux B.V. Netherlands 100% National Semiconductor B.V. Netherlands 100% National Semiconductor International B.V. Netherlands 100% National Semiconductor International Finance S.A. Switzerland 100% Arsmikro oui. Estonia 100% National Semiconductor Finland Oy Finland 100% Natsem India Designs Pvt. Ltd. India 100% National Semiconductor (Australia)Pty.Ltd. Australia 100% National Semiconductor (Hong Kong) Limited Hong Kong 100% National Semiconductor (Far East) Limited Hong Kong Taiwan 100% National Semiconductor Hong Kong Sales Limited Hong Kong 100% National Semiconductor Services Limited Hong Kong 100% National Semiconductor Japan Ltd. Japan 100% N.S. Microelectronics Co., LTD. Japan 19% National Semiconductor Korea Limited. Korea 100% National Semiconductor SDN. BHD. Malaysia 100% National Semiconductor Technology SDN.BHD. Malaysia 100% National Semiconductor Services Malaysia SDN.BHD. Malaysia 100% National Semiconductor Pte. Ltd. Singapore 100% National Semiconductor Asia Pacific Pte. Ltd. Singapore 100% National Semiconductor Manufacturer Singapore Pte. Ltd. Singapore 100% Shanghai National Semiconductor Technology Limited People's Republic of China 95% National Semiconductor Shanghai Ltd. People's Republic of China 100% National Semiconductor Canada Inc. Canada 100% National Semiconductores do Brazil Ltda. Brazil 100% Electronica NSC de Mexico, S.A. Mexico 100% National Semiconductor (Barbados) 100% Limited Barbados 100% EX-3 3 form10k_exh3-2.txt EXHIBIT 3.2 NLL\SecMtrs\bylaw1001 10/20/01 Exhibit 3.2 BY-LAWS OF NATIONAL SEMICONDUCTOR CORPORATION AMENDED AS OF OCTOBER 30, 2001 ARTICLE I. OFFICES Section 1. Registered Office. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. Other Offices. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. 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 eight directors subject to such automatic increase as may be required by the corporation's Restated Articles of Incorporation. The board may enlarge or reduce the size of the board in a vote of the majority of the directors in office. No director need be a stockholder. Section 2. Election and Term. Except as provided in Section 3 of this Article, the directors shall be elected by a plurality vote at the annual meeting of the stockholders. Each director shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Section 3. Vacancies and Newly Created Directorships. Any vacancy on the board of directors, or any newly created directorships, however occurring, may be filled by a majority of the directors then in office, though less than a quorum or by a sole remaining director. Any vacancy in the board of directors may also be filled by a plurality vote of the stockholders unless such vacancy shall have been previously filled by the board of directors. Section 4. Powers. The business of the corporation shall be managed by its board of directors which shall have and may exercise all such powers of the corporation, including the power to make, alter or repeal the bylaws of the corporation, and do all such lawful acts and things as are not by statute directed or required to be exercised or done by the stockholders. Section 5. Place of Meetings. The board of directors of the corporation may hold meetings both regular and special, either within or without the State of Delaware. Members of the board of directors or any committee designated by the board, may participate in a meeting of such board or committee by means of a conference telephone by means of which all persons participating in the meeting can hear each other, and participation shall constitute presence in person at such meeting. Section 6. Regular Meetings. Regular meetings of the board of directors may be held without call or notice immediately following the annual meeting of the stockholders and at such time and at such place as shall from time to time be selected by the board of directors, provided that in respect of any director who is absent when such selection is made, the notice, waiver and attendance provisions of Section 7 of this Article shall apply to such regular meetings. Section 7. Special Meetings and Notice. Special meetings of the board of directors may be called by the chairman of the board of directors, a majority of the directors or the president on notice given to each director, either personally (including by telephone) or by hand delivery, first-class mail, overnight mail, courier service, telegram or facsimile transmission sent to his business or home address, stating the place, date and hour of the meeting. If mailed by first-class mail, such notice shall be deemed to have been adequately given when deposited in the United States mail, postage prepaid, directed to the director at his business or home address, at least five (5) days before such meeting. Notice given by telegraph, overnight mail or courier service shall be deemed adequately given upon delivery of the message to the telegraph company or to the overnight mail or courier service company at least two days before such meeting. Notice given by facsimile transmission shall be deemed adequately given upon transmission of the message at least twelve (12) hours before such meeting. Notice given by hand delivery or personally shall be deemed adequately given when delivered at least twelve (12) hours before such meeting. Notice of a meeting need not be given to any director who signs a waiver of notice, whether before or after the meeting. The attendance of any director at a meeting, without protesting either prior thereto or at its commencement the lack of notice of such meeting, shall constitute a waiver of notice by him. Any notice or waiver of notice of a meeting of the board of directors need not specify the purposes of the meeting. Section 8. Quorum and Voting. At all meetings of the board of directors a majority less one of the total number of directors then in office shall constitute a quorum for the transaction of business, except that in no case shall less than two directors be deemed to constitute a quorum, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors. If a quorum shall not be present at any meeting of the board of directors, a majority of less than a quorum may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Action by Consent. Any action required or permitted to be taken at any meeting of the board of directors may be taken without a meeting, if all members of the board of directors, then in office, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board of directors. Section 10. Resignation. Any director may resign at any time upon written notice delivered to the corporation at its principal office. The resignation shall take effect at the time specified therein, and if no time be specified, at the time of its dispatch to the corporation. Section 11. Removal. A director may be removed for cause by the vote of a majority of the stockholders at a special or annual meeting after the director has been given reasonable notice and opportunity to be heard before the stockholders. Section 12. Committees. The board of directors may, by resolution passed by a majority of the whole board of directors, designate one or more committees, each committee to consist of one or more of the directors of the corporation, which committee, to the extent provided in the resolution, shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 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 4 form10k_exhibit.txt EXHIBIT 10.21 SAVINGS AND RETIREMENT NATIONAL SEMICONDUCTOR CORPORATION RETIREMENT AND SAVINGS PROGRAM Originally Effective June 1, 1975 Amended and Restated Effective June 1, 1997 - 1 - 7/23/02 11:00 AM Doc. #83279 v.1 TABLE OF CONTENTS ARTICLE I.....................................................................1 1.01 Name..............................................................1 1.02 Effective Date....................................................1 ARTICLE II....................................................................2 2.01 Accounts..........................................................2 2.02 Accrued Benefit...................................................2 2.03 Actual Deferral Percentage........................................2 2.04 Allocation Date...................................................2 2.05 Annual Profit Sharing Contributions...............................2 2.06 Beneficiary.......................................................3 2.07 Board.............................................................3 2.08 Code..............................................................3 2.09 Comlinear 401(k) Plan.............................................3 2.10 Committee.........................................................3 2.11 Compensation......................................................3 2.12 Consolidated Group................................................3 2.13 Disability........................................................4 2.14 Disability Benefit Plan...........................................4 2.15 Electronic Access System..........................................4 2.16 Employee..........................................................5 2.17 Employer..........................................................5 2.18 Employer Match....................................................5 2.19 Employment Date...................................................5 2.20 ERISA.............................................................5 2.21 Fairchild 1988 Rollover Account...................................6 2.22 Fiscal Year.......................................................6 2.23 401(k) Account....................................................6 2.24 Highly Compensated Employee.......................................6 2.25 Hour of Service...................................................7 2.26 Inactive Participant..............................................7 2.27 Investment Fund...................................................7 2.28 Layoff or Laid Off................................................7 2.29 Non-Highly Compensated Employee...................................7 2.30 NSC Stock.........................................................7 2.31 NSC Stock Fund....................................................7 2.32 One-Year Break-in-Service.........................................8 2.33 Participant.......................................................8 2.34 Participant Elected Contribution..................................8 2.35 Plan..............................................................8 2.36 Plan Quarter......................................................8 2.37 Plan Year.........................................................8 2.38 Profit Sharing Account............................................8 2.39 Rollover Account..................................................8 2.40 Rollover Contribution.............................................9 2.41 Spouse and Surviving Spouse.......................................9 2.42 Stock Bonus Account...............................................9 2.43 Termination Date..................................................9 2.44 Trust or Trust Agreement..........................................10 2.45 Trust Fund or Fund................................................10 2.46 Trustee...........................................................10 2.47 Valuation Date....................................................10 2.48 Voluntary Contributions...........................................10 2.49 Voluntary After-Tax Account.......................................10 2.50 Years of Service..................................................10 ARTICLE III...................................................................13 3.01 Eligibility Requirements..........................................13 3.02 Ineligible Employees..............................................13 3.03 Credit for Predecessor Employment.................................14 3.04 Credit for Consolidated Group Employment..........................15 ARTICLE IV....................................................................16 4.01 Participation on Re-employment....................................16 4.02 Inactive Participants.............................................16 ARTICLE V.....................................................................17 5.01 Employer's Annual Profit Sharing Contributions....................17 5.02 Participant Elected Contributions.................................18 5.03 Employer Match....................................................20 5.04 Discontinued Contributions........................................21 5.05 Limitation on Contributions.......................................21 5.06 Rollover Contributions............................................21 ARTICLE VI....................................................................23 6.01 Accounts..........................................................23 6.02 Employment Required at End of Plan Year...........................23 6.03 Allocation and Crediting of Contributions.........................23 6.04 Disposition of Forfeitures from Former Participant's Profit Sharing Accounts...........................................24 6.05 Adjustment of the Participant's Accounts..........................25 6.06 Title to Assets in Trustee........................................25 6.07 Participant's NSC Stock Voting Rights.............................25 6.09 Limits with Respect to Transactions in NSC Stock..................26 ARTICLE VII...................................................................27 7.01 Investment Funds in General.......................................27 7.02 Investment of Accounts............................................27 7.03 Election of Investment Funds......................................28 7.04 Expenses..........................................................29 ARTICLE VIII..................................................................30 8.01 Vested Amounts....................................................30 8.02 Forfeiture of Nonvested Accounts..................................32 8.03 Vesting on Re-Employment..........................................32 8.04 Lost Participant or Beneficiary...................................33 ARTICLE IX....................................................................34 9.01 Retirement........................................................34 ARTICLE X.....................................................................35 10.01 Death of Participant..............................................35 10.02 Payments Upon Failure to Designate Beneficiary....................35 ARTICLE XI....................................................................36 ARTICLE XII...................................................................37 12.01 Distribution of Benefits..........................................37 12.02 Required Distributions............................................41 12.03 Distribution to Minors and Incompetents...........................42 12.04 Qualified Domestic Relations Order................................42 12.05 Hardship Withdrawals..............................................44 12.06 In-Service Withdrawals............................................45 12.07 Participant Loans.................................................46 12.08 Direct Rollovers..................................................47 ARTICLE XIII..................................................................50 13.01 Actual Deferral Percentage and Actual Contribution Percentage Testing................................................50 13.02 Limitations on Allocations........................................53 13.03 Controlled Groups.................................................55 ARTICLE XIV...................................................................56 14.01 Applicability.....................................................56 14.02 Definitions.......................................................56 14.03 Top Heavy Requirements............................................60 14.04 Limitations on Contributions......................................61 14.05 Benefits Under Different Plans....................................61 ARTICLE XV....................................................................63 ARTICLE XVI...................................................................64 16.01 Appointment of Committee..........................................64 16.02 Committee Action..................................................64 16.03 Rights and Duties of Committee....................................64 16.04 Investments.......................................................65 16.05 Information, Reporting and Disclosure.............................66 16.06 Independent Qualified Accountant..................................66 16.07 Standard of Care Imposed Upon the Committee.......................66 16.08 Allocation and Delegation of Responsibility.......................66 16.09 Bonding...........................................................67 16.10 Claims Procedure..................................................67 16.11 Indemnification...................................................68 ARTICLE XVII..................................................................69 17.01 Authority for Appointment.........................................69 17.02 Investment Manager Discretion.....................................69 ARTICLE XVIII.................................................................70 ARTICLE XIX...................................................................71 ARTICLE XX....................................................................72 ARTICLE XXI...................................................................73 21.01 Right to Amend and Terminate......................................73 21.02 Administrative Amendments.........................................73 21.03 Protection of Accrued Benefits....................................73 21.04 No Re-vesting.....................................................74 21.05 Exclusive Benefit of Participants.................................74 21.06 Termination and Discontinuance of Contributions...................74 ARTICLE XXII..................................................................75 22.01 Subsidiaries......................................................75 22.02 Termination of Participation......................................75 22.03 Contributions and Allocations.....................................75 22.04 Committee.........................................................76 22.05 Accounts..........................................................76 ARTICLE XXIII.................................................................77 ARTICLE XXIV..................................................................78 24.01 Internal Revenue Service Approval.................................78 24.02 Mistake of Fact...................................................78 24.03 Disallowance of Deductibility.....................................78 ARTICLE XXV...................................................................79 25.01 Governing Law.....................................................79 25.02 Severability of Provisions........................................79 25.03 Counterparts......................................................79 25.04 Captions..........................................................79 25.05 Interchangeable Word Usage........................................79 25.06 USERRA Provisions.................................................79 ARTICLE I NAME AND EFFECTIVE DATE 1.01 Name. This Plan shall be known as the National Semiconductor Corporation Retirement and Savings Program ("Plan"). 1.02 Effective Date. The original effective date of the Plan was June 1, 1975. This Restatement reflects the consolidation of all amendments adopted since the date of the latest restatement, as well as amendments adopted to conform with the requirements of GUST (changes made by "GATT" (the Uruguay Round Agreements Act, PL 103-465); "USERRA" (provisions in the Uniformed Services Employment and Reemployment Rights Act of 1994, PL 103-353); "SBJPA" (the Small Business Job Protection Act of '96, PL 104-188); "TRA '97" (the Taxpayer Relief Act of '97, PL 105-34); "RRA '98" (the Internal Revenue Service Restructuring and Reform Act of '98, PL 105-206) and "CRA" (the Community Renewal Tax Relief Act of 2000, PL 106-554)). Finally, this Restatement reflects the adoption of amendments to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). Unless otherwise stated, the effective date of the amendments made by this restated Plan is June 1, 1997. This restated Plan shall only apply to Participants who perform one or more Hours of Service on or after June 1, 1997. ARTICLE II DEFINITIONS Whenever used herein, unless the context clearly indicates otherwise, the following words and phrases have the meanings indicated: 2.01 Accounts. Accounts means the separate accounts and sub-accounts established by the Committee in the name of each Participant, in accordance with Section 6.01. 2.02 Accrued Benefit. Accrued Benefit means the balance of a Participant's Accounts including investment experience as of the most recent Valuation Date, plus accumulated contributions since such date and less any distributions since such date. 2.03 Actual Deferral Percentage. Actual Deferral Percentage means, with respect to the group of Highly Compensated Participants and Non-Highly Compensated Participants, the average of the ratios (calculated separately for each Employee in each such group) of the sum of Employee elective contributions and any other contributions (which the Plan Administrator may under Treasury regulations elect to include in the calculation), to the Employee's compensation, as defined under Internal Revenue Code Section 414(s), received during the Plan Year. 2.04 Allocation Date. Allocation Date means the last day of each Plan Year for the purpose of allocating Annual Profit Sharing Contributions made under Section 5.01 hereof, each pay date of the Employer (or, prior to December 1, 1999, the last day of each Plan Quarter) for which an Employee has made a Participant Elected Contribution for the purpose of allocating the Employer Match made pursuant to Section 5.03 hereof and such other dates as the Committee may determine pursuant to Article VI hereof. The term Allocation Date refers to the date on which a Participant is determined to be entitled to receive a contribution, and not to the date on which such contribution is credited to the Participant's Accounts. 2.05 Annual Profit Sharing Contributions. Annual Profit Sharing Contributions means the contribution made in respect of any Plan Year by the Employer in accordance with Section 5.01. 2.06 Beneficiary. Beneficiary means the person or persons designated as such by a Participant in accordance with Article X. 2.07 Board. Board means the Board of Directors of National Semiconductor Corporation. 2.08 Code. Code means the Internal Revenue Code of 1986, as amended. 2.09 Comlinear 401(k) Plan. Comlinear 401(k) Plan means the 401(k) plan formerly maintained by Comlinear, Inc., the assets of which were merged into the Plan effective 12/31/95. 2.10 Committee. Committee means the Administrative Committee appointed by the Board in accordance with Article XVI. 2.11 Compensation. A. Compensation means the sum of: 1. the Employee's basic or regular rate of compensation for each pay date during that portion of the Plan Year in which the Employee is a Participant in the Plan; plus 2. all overtime, lead time, sales commissions and shift differential income received for pay dates during the Plan Year. B. For Plan Years beginning after December 31, 1993 and before December 31, 2001, no more than $150,000 (or such other amount as adjusted for costs of living under Section 401(a)(17)(B) of the Code) of annual Compensation shall be taken into consideration for any Employee for any reason under this Plan. For Plan Years beginning after December 31, 2001, no more than $200,000 (or such other amount as adjusted for costs of living under Section 401(a)(17)(B) of the Code) of annual Compensation shall be taken into consideration for any Employee for any reason under this Plan. 2.12 Consolidated Group. Consolidated Group means those corporations whose earnings are taken into account for purposes of preparing a consolidated annual report to shareholders of the Employer. 2.13 Disability. Disability means: A. Any medically determinable physical or mental impairment that causes a Participant to be qualified for disability benefits (or that would have qualified the Participant for disability benefits if the Participant had elected disability coverage) under the Employer's Disability Benefit Plan, so long as the Employer has a Disability Benefit Plan in effect; or B. If there is no Disability Benefit Plan in effect, any medically determinable physical or mental impairment that causes a Participant to be unable: 1. During the first twelve (12) months following determination of such impairment, to substantially perform the regular material duties of the same occupation or occupations for which the Participant has been employed by the Employer; and 2. Subsequent to the first twelve (12) months following determination of such impairment, to substantially perform the material duties of any occupation for which the Participant is or becomes qualified by reason of education, training, or experience. Disability shall be established by the certification of a physician, selected by the Participant and approved by the Committee, that the Participant has suffered a permanent disability, or, if the physician selected by the Participant shall not be approved by the Committee, by a majority of three physicians, one selected by the Participant (or his or her spouse, child, parent or legal representative in the event of the Participant's inability to select a physician), one by the Committee, and the third by the two physicians selected by the Participant and the Committee. The decisions of the majority of such three physicians shall be final and conclusive. 2.14 Disability Benefit Plan. Disability Benefit Plan means the long term disability benefit provisions of the income benefit plan created by the Employer and executed by and between the Employer and the trustees of the trust created for such plan on July 13, 1981, which were incorporated into a separate Long Term Disability Plan in 1992, as such Disability Benefit Plan may hereafter be amended. 2.15 Electronic Access System. Electronic Access System means the Retirement Connection or any other interactive telephone, computer or electronic system adopted by the Committee or its delegate for use in receiving communications from and/or providing information to Participants and/or Beneficiaries. 2.16 Employee. "Employee" shall mean any person who renders services to the Employer in the status of an employee as that term is defined in Code Section 3121(d) and specifically excludes any independent contractor. An individual shall only be treated as an Employee if he or she is reported on the payroll records of the Employer as a common law employee. This term does not include any other common law employee. In particular, it is expressly intended that individuals not treated as common law employees on the payroll records of the Employer are to be excluded from Plan participation even if a determination is subsequently made by the Internal Revenue Service, another governmental agency, a court or other tribunal that such individuals are common law employees of the Employer for purposes of pertinent Code sections or for any other purpose. An individual who performs services for the Employer as a leased employee within the meaning of Code Section 414(n) shall not be considered an Employee hereunder for a Plan Year provided the Plan satisfies the coverage requirements of Code Section 410(b) on one day during each quarter of such Plan Year, after counting all such leased employees as nonparticipating employees for purposes of testing whether such requirements are satisfied. If the Plan fails to satisfy such requirements in any Plan Year, all such leased employees shall be treated as Employees for such Plan Year in the manner and to the extent provided for in Code Section 414(n), except as provided in Code Section 414(n)(1)(B) or Code Section 414(n)(5). For purposes of this Subsection, effective for Plan Years commencing after December 31, 1996, "leased employee" means any person (other than an Employee) who pursuant to an agreement between the Employer and any other person ("leasing organization") has performed services for the Employer (or for the Employer and related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least one year, and such services are performed under the primary direction or control of the Employer. 2.17 Employer. Employer means National Semiconductor Corporation; any subsidiary or affiliate which, with the consent of National Semiconductor Corporation adopts this Plan; and any corporation which acquires the Employer's business and adopts this Plan. 2.18 Employer Match. Employer Match means the contribution made by the Employer in respect of Participants' Elected Contributions for any Plan Year in accordance with Section 5.03. 2.19 Employment Date. Employment Date means the first day on which Employee completes an Hour of Service. 2.20 ERISA. ERISA means the Employee Retirement Income Security Act of 1974, as amended. 2.21 Fairchild 1988 Rollover Account. The Account of a Participant who was employed at Fairchild Semiconductor Corporation prior to October 8, 1987 to which were credited contributions under its Profit Sharing Plan, which Account was rolled over into this Plan as of January 1, 1988. 2.22 Fiscal Year. Fiscal Year means the Employer's fiscal year for federal income tax purposes. 2.23 401(k) Account. 401(k) Account means the separately allocated Account of a Participant arising from Participant Elected Contributions made in accordance with Section 5.02 and the Employer Match made in accordance with Section 5.03. 2.24 Highly Compensated Employee. The term Highly Compensated Employee includes highly compensated active employees and highly compensated former employees, determined pursuant to the following rules: A. A highly compensated active employee is any Employee who: 1. at any time during the Plan Year or the preceding Plan Year was a Five Percent Owner; or 2. received compensation from the Employer or any affiliated Employer during the preceding Plan Year in excess of $80,000 (as adjusted pursuant to Section 414(q)(1) of the Code). B. A highly compensated former employee is determined based on the rules applicable to determining highly compensated employee status as in effect for the Plan Year (determination year), in accordance with section 1.414(q)-1T, A-4 of the temporary Income Tax Regulations and Notice 97-45. C. In determining whether an Employee is a Highly Compensated Employee for years beginning in 1997, the amendments to Code section 414(q) stated above are treated as having been in effect for years beginning in 1996. D. For purposes of this Section 2.24, "compensation" has the meaning given to it under Code section 415(c)(3), as that Code section has been amended by GUST to reflect the inclusion of any elective deferrals (as defined in Code section 402(g)(3)), and any amount which is contributed or deferred by the Employer at the election of the Employee and which is not includible in the gross income of the Employee by reasons of Code sections 125, 132(f)(4) or 457. 2.25 Hour of Service. Hour of Service means each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. 2.26 Inactive Participant. Inactive Participant means a Participant who is ineligible to participate in the allocation of Employer contributions and forfeitures pursuant to Section 4.02, but remains employed by the Employer or within the Consolidated Group and continues to have Accounts under this Plan. 2.27 Investment Fund. Investment Fund means any investment option authorized by the Committee for the investment of Participants' Accounts pursuant to Article VII hereof. 2.28 Layoff or Laid Off. Layoff or Laid Off means the involuntary cessation of an Employee's employment with the Employer for business reasons administered in accordance with the Employer's standard personnel practices. 2.29 Non-Highly Compensated Employee. Non-Highly Compensated Employee means an Employee who is not a Highly Compensated Employee. 2.30 NSC Stock. NSC Stock means the common stock of National Semiconductor Corporation. 2.31 NSC Stock Fund. NSC Stock Fund means the fund consisting of shares of NSC Stock and short-term liquid investments, which is maintained by the Trustee to hold Employer Profit Sharing Contributions made in the form of NSC Stock, and for the investment of Stock Bonus Accounts and Participants' Accounts which are directed to be invested in NSC Stock. Each Participant's interest in the NSC Stock Fund shall be measured in units of participation, rather than shares of NSC Stock. Such units shall represent a proportionate interest in all of the assets of the NSC Stock Fund in accordance with the Trust Agreement. 2.32 One-Year Break-in-Service. One-Year Break-in-Service means a twelve-consecutive-month period commencing on an Employee's Termination Date (except in the case of a Laid Off Employee, commencing on the first anniversary of the Termination Date) during which an Employee fails to complete an Hour of Service. 2.33 Participant. Participant means an Employee who has satisfied the requirements for eligibility under Section 3.01 or 4.01. 2.34 Participant Elected Contribution. Participant Elected Contribution means the contribution made by the Employer from salary deferrals elected by the Participant in accordance with Section 5.02. 2.35 Plan. Plan means this Retirement and Savings Program and each part thereof. 2.36 Plan Quarter. Plan Quarter means the three-consecutive-month period corresponding to quarters of the Employer's Fiscal Year during each Plan Year. 2.37 Plan Year. Plan Year means the twelve-consecutive-month period ending on the last day of the Employer's Fiscal Year and in which period the records of this Plan are kept and which period is also the limitation year for purposes of applying the limits of Section 415 of the Code. 2.38 Profit Sharing Account. Profit Sharing Account means the Account of a Participant which arises from Annual Profit Sharing Contributions made by the Employer pursuant to Section 5.01. 2.39 Rollover Account. Rollover Account means the Account of a Participant which arises from any rollover Contribution made by such Participant. 2.40 Rollover Contribution. Rollover Contribution means a contribution made by an Employee to the Trust from the proceeds of a distribution to such Employee from another qualified retirement Plan. Rollover Contributions shall be accepted by the Trustee in accordance with the provisions of Section 5.06. 2.41 Spouse and Surviving Spouse. Spouse means the lawful husband or wife of the Participant and Surviving Spouse means the Participant's Spouse surviving at the date of the Participant's death, or a former Spouse of the Participant if a qualified domestic relations order, as defined under Section 414(p) of the Code, requires that such former Spouse be treated as a Surviving Spouse for purposes of determining survivor benefits upon the Participant's death. 2.42 Stock Bonus Account. Stock Bonus Account means the separately allocated Account of a Participant arising from stock bonus contributions made by the Employer prior to May 31, 1987 pursuant to Section 5.04. 2.43 Termination Date. Termination Date means the earliest of: A. The date on which the Employee quits, is discharged, dies, or retires from employment with the Consolidated Group; B. The second anniversary of the Employee's absence on account of: 1. the individual's pregnancy; 2. the birth of a child of the individual; 3. the placement of a child with the individual in connection with the adoption of such child by the individual; 4. caring for such a child for a period immediately following such birth or placement; or 5. approved medical or industrial leave. C. The date on which the Employee is Laid Off, as that term is defined under Section 2.28 above; or D. The first anniversary of the date the Employee is not performing duties for any corporation in the Consolidated Group for any other reason. Provided, however, that in the case of an absence due to service in the Armed Forces of the United States which gives rise to re-employment rights under federal law, Termination Date shall be the date provided pursuant to such law, notwithstanding the one-year limitation, provided that the Employee complies with the relevant provisions of federal law establishing such re-employment rights and, in fact, returns to employment with the Company within the period provided by law. 2.44 Trust or Trust Agreement. Trust or Trust Agreement means the National Semiconductor Corporation Retirement and Savings Program Trust made and executed by and between the Employer and the Trustee, effective September 1, 1996 as amended. 2.45 Trust Fund or Fund. Trust Fund or Fund means all contributions received by the Trustee for purposes of the Plan, the investment thereof, and the earnings, losses and appreciation or depreciation thereon, less payments made to carry out the Plan. 2.46 Trustee. Trustee means Fidelity Management Trust Company, or any successor Trustee or Trustees hereunder. 2.47 Valuation Date. Valuation Date means any business day on which the stock market is open. 2.48 Voluntary Contributions. Voluntary Contributions means the voluntary after-tax contributions of a Participant made on or before May 31, 1984. 2.49 Voluntary After-Tax Account. Voluntary After-Tax Account means the separately allocated Account of a Participant arising from Voluntary Contributions made by such Participant on or before May 31, 1984. No additional contributions are expected to be made to this account. 2.50 Years of Service. A. Years of Service to determine a Participant's vested interest under Article VIII means the whole number (disregarding any fraction) derived by dividing 365 into the sum of: 1. The period of time beginning on the Employee's Employment Date and ending on his or her Termination Date, provided, that in applying the rule of this paragraph 1 to a Laid Off Employee, the period of time shall end on the first anniversary of the Employee's Termination Date; 2. The period of time beginning on the Employee's re-employment date and ending on his or her Termination Date, provided, that in applying the rule to this paragraph 2 to a Laid Off Employee, the period of time shall end on the first anniversary of the Employee's Termination Date; 3. The period of time commencing on the Employee's Termination Date and ending on the Employee's resumption of employment with the Employer providing the Employee resumes such employment prior to incurring a One-Year Break-in-Service, as defined in Section 2.32, provided, that in applying the rule of this paragraph 3 to a Laid Off Employee, the period of time shall commence on the first anniversary of the Employee's Termination Date; 4. The purpose of these Years of Service rules regarding vesting is to grant an employee credit for all Years of Service as long as the Employee is in the employ of the Employer. Under paragraphs 1 and 2, an Employee who is Laid Off is granted one additional year for vesting. Under paragraph 3, the time between the Termination Date and re-employment date also take into account the additional year of vesting. The effect of 1, 2 and 3 together, is to give an Employee who has been Laid-Off only one, not two, extra Years of Service for vesting. 5. In addition to Years of Service credited pursuant to paragraphs 1 through 4 above, Employees shall be given credit for Years of Service credited under the following predecessor plans, effective as of the date of acquisition by the Employer of the plan sponsors, as follows: - ------------------------------------------------- ----------------------------- Predecessor Plan Acquisition Date - ------------------------------------------------- ----------------------------- - ------------------------------------------------- ----------------------------- Mediamatics, Inc. 401(k) Plan March 17, 1997 - ------------------------------------------------- ----------------------------- - ------------------------------------------------- ----------------------------- - ------------------------------------------------- ----------------------------- - ------------------------------------------------- ----------------------------- Future Integrated System 401(k) Profit October 20, 1997 Sharing Plan ------------------------------------------------ ----------------------------- ------------------------------------------------ ----------------------------- ------------------------------------------------ ----------------------------- ------------------------------------------------ ----------------------------- Cyrix 401(k) Retirement Plan November 17, 1997 - ------------------------------------------------- ----------------------------- Provided, however, that for the year of acquisition, Employees shall receive credit for the greater of the number of Years of Service that would have been credited pursuant to the provisions of the applicable predecessor plan, or the Years of Service that would be credited hereunder for such period. 6. In addition to Years of Service credited pursuant to paragraphs 1 through 5 above, Employees shall be given credit for Years of Service with the following predecessor employers, effective as of the date of hire of the Employees by the employer, as follows: ------------------------------------------------- ----------------------------- Predecessor Employer Date of Hire ------------------------------------------------- ----------------------------- ------------------------------------------------- ----------------------------- Hughes Aircraft Company August 7, 1995 ------------------------------------------------- ----------------------------- ------------------------------------------------- ----------------------------- ------------------------------------------------- ----------------------------- ------------------------------------------------- ----------------------------- Comlinear, Inc. January 1, 1996 ------------------------------------------------- ----------------------------- ------------------------------------------------- ----------------------------- ------------------------------------------------- ----------------------------- ------------------------------------------------- ----------------------------- East Coast Labs October 1, 1996 ------------------------------------------------- ----------------------------- ------------------------------------------------- ----------------------------- ------------------------------------------------- ----------------------------- ------------------------------------------------- ----------------------------- Gulbransen, Inc. January 22, 1998 ------------------------------------------------- ----------------------------- ------------------------------------------------- ----------------------------- ------------------------------------------------- ----------------------------- ------------------------------------------------- ----------------------------- ComCore Semiconductor, Inc. May 27, 1998 - -------------------------------------------------- ----------------------------- - -------------------------------------------------- ----------------------------- - -------------------------------------------------- ----------------------------- - -------------------------------------------------- ----------------------------- Algorex, Inc. January 1, 2000 - -------------------------------------------------- ----------------------------- - -------------------------------------------------- ----------------------------- - -------------------------------------------------- ----------------------------- - -------------------------------------------------- ----------------------------- Vivid Semiconductor, Inc. August 14, 2000 - -------------------------------------------------- ----------------------------- - -------------------------------------------------- ----------------------------- - -------------------------------------------------- ----------------------------- - -------------------------------------------------- ----------------------------- innoCOMM Wireless, Inc. February 24, 2001 - -------------------------------------------------- ----------------------------- B. If a Participant has had any One-Year Break-in-Service, the Participant's Years of Service before the One-Year Break-in-Service shall be included in computing Years of Service as soon as the Participant completes one Hour of Service after his or her re-employment date. C. For purposes of calculating benefits upon re-employment, the following rule shall be applied: Years of Services completed by a Participant after five (5) consecutive One-Year Breaks-in-Service shall not be taken into account in determining the Participant's nonforfeitable interest in his or her Accounts which accrued before the five (5) year period of Breaks-in-Service. D. Years of Service completed with Fairchild Semiconductor Corporation ("FSC"), or an affiliate of FSC, by an Employee who was in the service of FSC, or one of its affiliates, on January 1, 1988, or was transferred from FSC, or one of its affiliates, to NSC and was in NSC's service on January 1, 1988, shall be counted to determine the Participant's vested interest under Article VIII. Notwithstanding the first sentence of this paragraph D, an Employee described in this paragraph D shall be fully vested under the Plan upon attainment of age 55 while in the service of the Employer. ARTICLE III ELIGIBLE EMPLOYEES 3.01 Eligibility Requirements. A. General Eligibility. Unless ineligible under Section 3.02, an Employee shall be eligible to participate in the Plan on the date on which the Employee commences employment with the Employer. Any election to defer Compensation pursuant to Section 5.02 hereof shall be effective as soon as administratively feasible following the Employee's election in accordance with Section 5.02. B. Eligibility Under Prior Plan. Employees who were eligible to participate in this Plan on August 31, 1996 shall continue to participate in the Plan subject to the provisions of this restated Plan. C. Expatriate Status. Foreign nationals employed by the Employer, on "expatriate status" from the United States, in locations outside of the United States or its territories shall, provided they meet the eligibility requirements above, be eligible to participate in this Plan. 3.02 Ineligible Employees. A. Collective Bargaining Agreement. An Employee shall not participate in this Plan if the Employee is included in a unit covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers if retirement benefits were the subject of good faith bargaining and the agreement does not require participation in this Plan. For purposes of the preceding sentence, an agreement shall not be considered a collective bargaining agreement if it has been bargained for by an employee representative which is an organization in which more than one-half of the members are owners, officers or executives of the Employer. B. Foreign Nationals. 1. Temporary Duty in United States. Foreign nationals employed in the United States or its territories on temporary duty assignment as defined under administrative policies of the Employer shall not be eligible to participate in this Plan. 2. Non-resident Aliens. Foreign nationals employed by the Employer at locations outside of the United States or its territories shall not be eligible to participate in this Plan, except as provided in Section 3.01.C. 3. Participation in Foreign Plan. Foreign nationals temporarily employed by the Employer in the United States or its territories who continue to be covered under a foreign retirement plan sponsored by a company included in the Consolidated Group during such employment shall not be eligible to participate in this Plan. C. Interim Contract Employees. Employees who are hired or rehired, by the Employer after May 31, 1988 and designated by the Employer as interim contract employees or co-op employees (hereinafter referred to as "Interim Contract Employees or CO-OP Employees") shall not be eligible to participate in this Plan. If an Employee who formerly participated in this Plan is rehired as an Interim Contract Employee or CO-OP Employee after May 31, 1988 and an earlier forfeiture of such Employee's Accrued Benefit is restored under the provisions of Sections 8.04 and 8.05, such restoration shall be made, but the Employee shall not be entitled to make further Participant Elected Contributions under the Plan nor be entitled to further Employer contributions while the Employee is employed as an Interim Contract Employee or CO-OP Employee. 3.03 Credit for Predecessor Employment. In the event the Employer acquires all or a part of the assets of an unrelated entity, and, as a result of such acquisition employs some or all of the unrelated entity's employees, the Committee may provide that such employees be treated as having been employed by the Employer for purposes of vesting and/or participation for the period they were continuously employed by the predecessor employer from whom the assets were acquired. While the Committee may provide vesting and/or participation credit on an acquisition-by-acquisition basis, the Committee shall treat all employees of each acquisition in a nondiscriminatory manner. 3.04 Credit for Consolidated Group Employment. In the event an Employee of a corporation in the Consolidated Group becomes an Employee of the Employer under this Plan, he or she shall receive credit for vesting and participation for his or her employment within the Consolidated Group. ARTICLE IV RE-EMPLOYMENT AND INACTIVE PARTICIPANTS 4.01 Participation on Re-employment. A former Participant shall become a Participant immediately upon the Employee's return to the employ of the Employer in an eligible class of Employees. 4.02 Inactive Participants. A. In the event a Participant becomes ineligible to participate because he or she is no longer a member of an eligible class of Employees, such Employee shall participate immediately upon his or her return to an eligible class of Employees. B. Such Employee shall participate in any contribution for the year that the Employee left the eligible class, to the extent provided herein, on the basis of the amount of his or her Compensation during that portion of the year that he or she is eligible. C. For each succeeding year that such individual remains in the employment of the Employer or a Consolidated Group corporation, no part of the Employer's contribution and no forfeitures shall be allocated to his or her Accounts, but such Accounts shall share proportionately in investment earnings, gains and losses in accordance with Section 6.05 of this Plan. D. Benefits shall be paid to such individual upon termination of his or her employment, in accordance with Article XII. ARTICLE V CONTRIBUTIONS 5.01 Employer's Annual Profit Sharing Contributions. A. Annual Profit Sharing Contributions. For each Fiscal Year, the Employer intends, as a part of a regular plan and program (but, except as otherwise provided herein, does not hereby bind itself), to contribute from its current or accumulated net profit an amount computed in the manner set forth in paragraph B below. B. Computation of Profit Sharing Contributions. 1. For purposes of computing the Employer's Annual Profit Sharing Contribution, the term "net pre-tax profits" for any Fiscal Year means: a. The earnings for such year of the Consolidated Group as reported for purposes of its consolidated financial statements and the annual report to stockholders of the Employer before the deduction of the Employer's Annual Profit Sharing Contribution and any taxes based upon or measured by net income; but b. After excluding all extraordinary items of income or gain, charges or credits to income; and c. After excluding such other items of income or gain or charges to income not classified as extraordinary, but which have been designated for exclusion by the Board. 2. The Employer's Annual Profit Sharing Contribution for each Plan Year (beginning with the June 1, 1992 Plan Year) shall be seventy-five percent (75%) in cash and twenty-five percent (25%) in the form of NSC Stock, except as otherwise determined by the Committee in its sole discretion. In making the NSC Stock contribution, the Employer may contribute NSC Stock or cash to be used to purchase NSC Stock as it deems appropriate during the Plan Year and the portion of the Employer's Annual Profit Sharing Contribution required to be made in NSC Stock shall be determined using the closing price of NSC Stock on any national securities exchange on the date of contribution, or if the Employer made a cash contribution, the amount of such cash without regard to the market price of NSC Stock purchased with such cash. 3. Except as otherwise provided below, the amount of the Employer's Annual Profit Sharing Contribution for any Fiscal Year (beginning with the June 1, 1992 Fiscal Year) shall be the greater of: a. Five percent (5%) of net pre-tax profits for such year; b. One percent (1%) of the Compensation paid during the Plan Year to Participants who, in accordance with Section 6.02, are entitled to an allocation of an Annual Profit Sharing Contribution; or c. Such other amount as is determined for that Fiscal Year by the Board, in its sole discretion, by a resolution adopted no later than the date permitted by law for a tax deduction with respect to such contribution for that Fiscal Year. 4. In the case of the merger or disposition of a corporate entity or division by the Employer, the Committee shall have discretion to determine the amount of the Annual Profit Sharing Contribution to be made by the Employer for affected Employees with respect to the portion of any Plan Year during which the affected Employees are Employees of the Employer. 5. The Employer's determination of its Annual Profit Sharing Contribution shall be binding on all Participants, the Committee and the Employer. 6. Effective for Plan Years beginning after May 28, 2000, in no event shall the amount of the Employer's Annual Profit Sharing Contribution for any Plan Year exceed five percent (5%) of the Compensation paid during the Plan Year to Participants who, in accordance with Section 6.02, are entitled to an allocation of an Annual Profit Sharing Contribution. C. Date of Payment. The Employer shall pay its Annual Profit Sharing Contribution to the Trustee not later than the due date (including extensions thereof) for the filing of its federal income tax return for the close of the Fiscal Year for which such contribution is made. 5.02 Participant Elected Contributions. A. Election to Defer Compensation. Each Participant may elect to defer any whole percentage of the Participant's Compensation up to the maximum percentage deferral determined by the Committee. Prior to January 1, 2002, the amount of deferral shall not exceed $9,500 (or such amount as adjusted under Section 402(g)(5) of the Code) during any calendar year. After December 31, 2001, the amount of deferral shall not exceed the dollar limitation contained in Section 402(g) of the Code in effect for such taxable year, except to the extent permitted under Paragraph B of this Section and Section 414(v) of the Code, if applicable. Such deferred amounts shall be contributed by the Employer to the Participant's 401(k) Account. Except as authorized by the Committee, contributions shall be made from payroll deductions as authorized by the Participant through use of the Electronic Access System or by written notification made in accordance with uniform procedures established by the Committee. Each Participant may, through use of the Electronic Access System or by written notification made in accordance with uniform procedures established by the Committee, specify the percentage of Compensation to be deferred and contributed to the Trust, and thereafter the Participant may increase or decrease said contribution in accordance with uniform procedures established by the Committee. A Participant's elections hereunder shall be effective as soon as administratively feasible following the Participant's election. B. Catch-Up Contributions. This paragraph B shall apply to contributions after December 31, 2001. All Participants who make elective deferrals under this Plan and who will attain age 50 before the close of the calendar year, shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Section 414(v) of the Code. Such catch-up contributions shall not be taken into account for purposes of the provisions of the Plan implementing the required limitations of sections 402(g) and 415 of the Code. The Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of Sections 401(k)(3), 401(k)(11), 401(k)(12), 410(b), or 416 of the Code, as applicable, by reason of the making of such catch-up contributions. C. Payment to Trustee. The Employer shall transmit to the Trustee the amounts withheld by it, pursuant to Paragraph A above, as soon as practicable, but in no event later than fifteenth (15th) business day of the month following the month in which the amount is withheld. However, the Employer shall not transmit to the Trustee any deferred amounts withheld by it for a Highly Compensated Employee, which in the Committee's opinion, as communicated to the Employer, would cause the Plan to fail to meet the requirements of Section 401(k) of the Internal Revenue Code for that Plan Year. D. Suspension of Deferrals. A Participant may, through use of the Electronic Access System or upon written notice made in accordance with uniform procedures established by the Committee, suspend his or her election under this Section 5.02 to have a portion of his or her Compensation deferred. In the event of such a suspension, a Participant shall not be entitled to make Participant Elected Contributions to this Plan for such period as established by the Committee under uniform procedures. The Participant shall, nevertheless, be considered a Participant hereunder for all other purposes during such period of time if his or her employment continues during that time. At any time after the expiration of such period, such Participant may, upon application, again elect to have contributions made under this Section 5.02. 5.03 Employer Match. Prior to October 1, 2000, on behalf of each Participant who elects to defer Compensation pursuant to Section 5.02 of the Plan (and, prior to December 1, 1999, who is employed as of the last day of the Plan Quarter during which such Compensation is deferred, or who retires, dies, is Laid Off, becomes Disabled, or becomes an Inactive Participant during the Plan Quarter), the Employer shall contribute an amount equal to fifty percent (50%), or any other percentage as the Board may determine for any given Plan Year or Years, of the Participant's Elected Contributions made as of any given pay date (or, prior to December 1, 1999, during the Plan Quarter) that are not in excess of six percent (6%) of such Participant's Compensation during such pay date (or, prior to December 1, 1999, such Plan Quarter). As of the last day of each Plan Year, the Employer shall contribute an additional amount, if necessary, so that each Participant who is employed on the last day of the Plan Year (or who retires, dies, is Laid Off, becomes Disabled or becomes an Inactive Participant during the Plan Year) receives an Employer Match for the Plan Year equal to fifty percent (50%), or such other percentage as the Board may determine for any given Plan Year or Years, of the Participant's Elected Contributions made during the Plan Year that are not in excess of six percent (6%) of the Participant's Compensation for such Plan Year. Effective October 1, 2000, on behalf of each Participant who elects to defer Compensation pursuant to Section 5.02 of the Plan, the Employer shall contribute an amount equal to one-hundred percent (100%), or any other percentage as the Board may determine for any given Plan Year or Years, of the Participant's Elected Contributions made as of any given pay date that are not in excess of four percent (4%) of such Participant's Compensation for such pay date. As of the last day of each Plan Year, the Employer shall contribute an additional amount, if necessary, so that each Participant who is employed on the last day of the Plan Year (or who retires, dies, is Laid Off, becomes Disabled or becomes an Inactive Participant during the Plan Year) receives an Employer Match for the Plan Year equal to one-hundred percent (100%), or such other percentage as the Board may determine for any given Plan Year or Years, of the Participant's Elected Contributions made during the Plan Year that are not in excess of four percent (4%) of the Participant's Compensation for all such pay dates within the Plan Year. Such Employer Match shall be remitted to the Trustee by the Employer no later than the due date (including extensions thereof) for the filing of its federal income tax return for the close of the Fiscal Year for which such contributions are made. 5.04 Discontinued Contributions. All contributions to Stock Bonus Accounts hereunder were suspended after May 31, 1987, due to changes in the Internal Revenue Code affecting credits for stock bonus plans. All Participants were 100% vested in their Stock Bonus Accounts at that time. No further contributions to Voluntary After-Tax Accounts were made after May 31, 1984. No further contributions were made to Fairchild 1988 Rollover Accounts after December 31, 1987. 5.05 Limitation on Contributions. Prior to January 1, 2002, in no event shall the sum of the deductible contributions made by the Employer, in respect of any Plan Year, pursuant to this Article V, be greater than: A. Fifteen percent (15%) of the total Compensation paid to or accrued for all Participants; plus B. The maximum amount allowed as a deduction for federal income taxes in accordance with Section 404 of the Code relating to the "carrying over" of contributions allowed for Plan Years prior to January 1, 1987 in which less than the maximum amount was contributed to the Plan. 5.06 Rollover Contributions. An Employee of the Employer who has received an eligible rollover distribution, within the meaning of Section 402 of the Code, from the qualified retirement plan of a predecessor employer, may, in accordance with uniform procedures established by the Committee, contribute a part or the entire amount of such distribution to the Trust Fund. Such contribution may be made either as a direct rollover from the qualified retirement plan, as a rollover contribution made by the Employee within 60 days of the receipt of the distribution by such Employee, or as a rollover contribution from an individual retirement account or annuity into which such eligible rollover distribution was rolled over (a "conduit IRA"), in accordance with Section 408(d)(3) of the Code. Such contributions must be in cash arising from contributions made by one or more predecessor employers to one or more qualified retirement plans in which the contributing Employee was a participant and investment earnings on such contribution and/or investment earnings on contributions made by the contributing Employee under the provisions of such plans. An Employee wishing to make a Rollover Contribution shall provide written representation that the contribution satisfies these requirements. Upon receipt of a Rollover Contribution and election, the Committee shall establish a Rollover Account or Accounts in the name of the contributing Employee. Except in the case of a direct rollover, such contributions must be made by the contributing Employee on or before sixty (60) days following the receipt of the distribution from the qualified retirement plan or conduit IRA. Each Rollover Account will be separately accounted for by the Committee and invested together with the 401(k) Accounts of Participants in accordance with the contributing Employee's election, made through use of the Electronic Access System or in writing under procedures established by the Committee. Neither the Committee nor the Trustee shall have any responsibility for determining the taxability of such contributions or earnings arising therefrom upon the ultimate distribution of such funds from this Plan. Administration of required tax withholding on such monies in accordance with provisions of the Code or regulations pertaining thereto shall not be construed by any person to constitute a determination of the taxability of such funds. The Plan will accept participant rollover contributions and/or direct rollovers of distributions made after December 31, 2001, from: A. a qualified plan described in Sections 401(a) or 403(a) of the Code; B. an annuity contract described in Section 403(b) of the Code; C. an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state; or D. an individual retirement account or annuity described in Sections 408(a) or 408(b) of the Code that is eligible to be rolled over and would otherwise be includible in gross income. ARTICLE VI PARTICIPANT ACCOUNTS AND CREDITING OF CONTRIBUTIONS 6.01 Accounts. The Committee shall establish, in the name of each Participant, a Profit Sharing Account, a 401(k) Account, and if applicable, a Stock Bonus Account, a Voluntary After-Tax Account, a Fairchild 1988 Rollover Account and a Rollover Account. In addition, the Committee shall establish, in the name of each Participant, subaccounts within each Participant's Accounts. These subaccounts shall correspond to the various Investment Funds in which the Participant's Accounts are invested in accordance with Article VII. Amounts credited to the foregoing Accounts and Subaccounts shall be accounted for in accordance with Article VII. 6.02 Employment Required at End of Plan Year. There shall be no Annual Profit Sharing Contribution allocated to any Participant who is not in the actual employ of the Employer at the close of the Plan Year for which the contribution is made, except that a Participant who retires, dies, is Laid Off, becomes Disabled, or becomes an Inactive Participant during a Plan Year shall share in the contributions and forfeitures for such year. 6.03 Allocation and Crediting of Contributions. A. Allocation of the Employer's Annual Profit Sharing Contribution. Beginning with the June 1, 1992 Plan Year, each Participant will receive an allocation pursuant to the following formula: A = B*(C/D) where: A = a Participant's allocated share for the Plan Year; B = the total amount of the Employer's Annual Profit-Sharing Contribution; C = the amount of the Participant's Compensation for the Plan Year; and D = the total amount of Compensation of all Participants for such Plan Year. The Employer's Annual Profit Sharing Contribution shall be allocated to each Participant's Profit Sharing Account as of the Allocation Date for Profit Sharing Contributions, and shall be credited to such Account on the day such contribution is deemed to be received by the Trustee. B. Crediting of Participant Elected Contributions. Employer Contributions arising from a Participant's election to defer Compensation shall be credited to such Participant's 401(k) Account as soon as they are received by the Trustee, and shall be allocated among the Participant's 401(k) Subaccounts in such proportions as the Participant has elected pursuant to Article VII. C. Crediting of the Employer Match. The Employer Match shall be credited to a Participant's 401(k) Account on the date such contributions are deemed to be received by the Trustee, and shall be allocated among the Participant's 401(k) Subaccounts in the same proportions as his or her Participant Elected Contributions. 6.04 Disposition of Forfeitures from Former Participant's Profit Sharing Accounts. Beginning with the June 1, 1992 Plan Year, Profit Sharing Account balances forfeited by former Participants whose employment has terminated prior to becoming fully vested, in accordance with Article VIII of the Plan, shall first be used to restore the accounts of any reemployed Participant, in accordance with Section 8.04. Any remaining amounts forfeited during the Plan Year shall be re-allocated, as of the last day of each Plan Year, to the Profit Sharing Accounts of all remaining Participants in the same manner as the Employer's Annual Profit Sharing Contribution is allocated under Section 6.03 A. In the event the amount available to be re-allocated for a Plan Year but for the preceding sentence is insufficient to be re-allocated for such Plan Year, such unallocated amount shall be carried over until there are sufficient amounts to be re-allocated during a Plan Year. Notwithstanding the foregoing, if it is determined that a Participant has been credited in any Plan Year with less than the amount of Employer contributions or forfeitures to which the Participant was entitled under this Plan for such year, then any forfeitures shall be allocated to such Participant, to the extent necessary to correct any deficiencies in his or her Accounts (including foregone earnings, if any), before such forfeitures are allocated in the manner prescribed above. In the event that more than one Participant has been credited with less than the amount of Employer contributions and forfeitures to which he or she is entitled, and the forfeitures are insufficient in amount to correct the deficiencies in the Accounts of each such Participant, then such forfeitures shall be allocated to such Participants in accordance with rules established by the Committee. Notwithstanding the foregoing, effective November 17, 1997, the forfeitures of former Cyrix employees shall be used to reduce the Employer Match due on behalf of Employees who were former Cyrix employees for the third Plan Quarter of the Plan Year in which the Cyrix acquisition date occurred. Any remaining forfeitures of former Cyrix employees shall be used to reduce the Employer Match due on behalf of Employees who were former Cyrix employees for the fourth Plan Quarter of the Plan Year in which the Cyrix acquisition occurred. If there are additional forfeitures of former Cyrix employees after such allocation, they shall reduce the Employer's Annual Profit Sharing Contribution for the Fiscal Year end following such acquisition. 6.05 Adjustment of the Participant's Accounts. The Trustee shall, on each Valuation Date, value all assets of the Trust Fund, allocate net gains or losses, and process additions to and withdrawals from Participants' Accounts in the following manner: A. The Trustee shall first compute the fair market value of securities and/or the other assets comprising each Investment Fund. Each Participant Account balance invested in each Investment Fund shall be adjusted each business day by applying the closing market price of the Investment Fund on the current business day to the share-unit balance of Participant's Account invested in the Investment Fund as of the close of business on the current business day; B. The Trustee shall then account for any requests for withdrawals made by any Participant, and for allocations of contributions to Participants' Accounts. In completing the valuation procedure described above, such adjustments in the amounts credited to such Participants' Accounts shall be made on the business day to which the investment activity relates. 6.06 Title to Assets in Trustee. Title to all assets under this Plan shall be vested in the Trustee, who shall hold the Trust Fund and the income as a part thereof and make payments therefrom as provided in this Plan. 6.07 Participant's NSC Stock Voting Rights. A Participant or Beneficiary shall be entitled to direct the Trustee how to exercise the voting rights on NSC Stock allocated to his or her Accounts, and the Trustee shall vote NSC Stock allocated to a Participant or Beneficiary's Accounts as directed by such Participant or Beneficiary. In the case of combined fractional shares of NSC Stock allocated to the Accounts of all Participants and Beneficiaries, NSC Stock credited to Participants' and Beneficiaries' Accounts as to which the Trustee does not receive voting directions, and all unallocated NSC Stock held by the Trustee, such NSC Stock shall be voted by the Trustee proportionately in the same manner as it votes NSC Stock on which it receives voting directions, provided, however, that the Trustee shall not exercise the voting rights for any NSC Stock allocated to a Stock Bonus Account for which the Participant or Beneficiary fails to give a direction. The Employer shall provide the Trustee and each Participant with such notices and information statements relating to the time and manner in which voting rights are to be exercised as is required by applicable law and the Employer's charter and bylaws and as provided to shareholders other than Participants. The provisions of this Section 6.07 shall not prevent the Board, or one or more designees of the Board, from soliciting and exercising a Participant's voting rights under a proxy provision applicable to all shareholders of NSC Stock. In the case of one or more tender offers for NSC Stock, a Participant shall be entitled to direct the Trustee on the acceptance or rejection of such offer in regard to the NSC Stock allocated to such Participant's Accounts. Each Participant's direction to the Trustee shall be treated as confidential. 6.09 Limits with Respect to Transactions in NSC Stock. Each Participant subject to Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, relating to employee benefit plans, shall be subject to such limitations as the Committee, in its sole discretion, deems necessary to comply with the rules of the Exchange Act. ARTICLE VII INVESTMENT FUNDS 7.01 Investment Funds in General. The Investment Funds available hereunder shall be selected by the Committee, and shall include at least three (3) investment alternatives: A. each of which is diversified; B. each of which has materially different risk and return characteristics; C. which in the aggregate enable the Participant or Beneficiary by choosing among them to achieve a portfolio with aggregate risk and return characteristics at any point within the range normally appropriate for the Participant or Beneficiary; and D. each of which when combined with investments in the other alternatives tend to minimize through diversification the overall risk of a Participant's or Beneficiary's portfolio. 7.02 Investment of Accounts. A. Profit Sharing Accounts and Fairchild 1988 Rollover Accounts. All amounts in the Profit Sharing Accounts and Fairchild 1988 Rollover Accounts of Participants shall be invested by the Trustee acting under the direction of the Committee in accordance with Section 16.04 hereof and pursuant to the terms of the Trust Agreement. B. Stock Bonus Accounts. All amounts in the Stock Bonus Accounts shall be invested by the Trustee at the direction of the Committee in the NSC Stock Fund. C. 401(k) Accounts, Voluntary After-Tax Accounts and Rollover Accounts. All amounts in each Participant's 401(k), Voluntary After-Tax and Rollover Contributions Accounts shall be invested in one or a combination of the available Investment Funds selected by the Committee, in accordance with the election of such Participant (or Beneficiary, if applicable), made pursuant to this Article VII and pursuant to Section 404(c) of ERISA. This Plan permits Participants and Beneficiaries to exercise control over the assets in their accounts in a manner that is intended to bring the Plan within the rules of Section 404(c) of ERISA. Fiduciaries of the Plan shall be relieved of liability for any losses or by reason of any breach which results from the Participant's or Beneficiary's exercise of control under this Section. 7.03 Election of Investment Funds. The following procedures shall govern the making of elections regarding Investment Funds. A. Initial Elections. When an Employee first becomes a Participant hereunder, an Investment Fund or Funds shall be specified for the investment of all amounts to be allocated to his Accounts subject to Participant direction pursuant to Section 7.02.C. The elected Investment Fund or Funds shall be effective with respect to Participant Elected Contributions and the Employer Match made on and after the date upon which the election is made. A separate election of the Investment Fund or Funds shall be made with respect to the investment of any Rollover Contribution made by a Participant. Each Participant must specify the Investment Funds for 100% of such Participant's Participant Elected Contributions, Employer Match and Rollover Contributions, if any. B. Subsequent Elections. A Participant (or Beneficiary) may elect a new Investment Fund for future contributions and may change the allocation of his existing Accounts among the Investment Funds at any time, in accordance with procedures established by the Committee. Each Participant must specify the Investment Funds for 100% of such Participant's current contributions subject to Participant direction and for 100% of the value of such Participant's 401(k) Account, Voluntary After-Tax Account and Rollover Account. C. Elections Regarding Investments. A Participant's election to change the allocation of his existing Accounts must specify either the percent of such Accounts to be reallocated, the specific dollar amount to be transferred, or the specific number of shares to be purchased and/or sold. A Participant's election to change the allocation of his current contributions must specify the percent of such contributions to be allocated to each elected Investment Fund. In addition, a Participant's election of a new Investment Fund for future or existing amounts may be subject to restriction pursuant to the terms of the contract(s) comprising the Investment Funds. Unless the Participant's election otherwise specifies, the pattern of allocations elected as to past Participant Elected Contributions and Employer Match shall apply to all current and future contributions unless or until the Participant (or Beneficiary) otherwise elects pursuant to B. above. D. Elections Involving NSC Stock Fund. Any election by a Participant or Beneficiary regarding investment in or transfers from the NSC Stock Fund shall be made in accordance with DOL Reg. Section 2550.404c-1(d)(2)(ii)(E)(4). The Committee shall ensure that procedures are designed to safeguard the confidentiality of all information relating to the purchase, holding and sale of NSC Stock and the exercise of voting, tender and similar rights with respect to NSC Stock by Participants and Beneficiaries, and that such procedures are followed. An independent fiduciary shall be appointed to carry out activities relating to any situations which the Committee determines involve a potential for undue Employer influence upon Participants and Beneficiaries with regard to the direct or indirect exercise of shareholder rights. E. Additional Election Procedures. The Committee shall comply with the Participant's (or Beneficiary's) instructions except as otherwise provided in DOL Reg. Section 2550.404c-1(b)(2)(ii)(B) or (d)(2)(ii). Upon request, a Participant or Beneficiary may obtain a written confirmation of his election instructions. F. Fees. The fees of each Investment Fund shall be charged to the Accounts of the Participants invested in such Investment Fund, unless such expenses are paid by the Employer in accordance with Section 7.04 below. In accordance with Section 404(c) of ERISA, the Committee shall inform Participants and Beneficiaries of any fees charged to their individual Accounts. 7.04 Expenses. Unless otherwise provided herein, the expenses of Plan administration shall be paid out of Trust assets, unless paid by the Employer. The Employer may pay directly any expenses of administering the Plan, including the compensation, if any, of the Trustee. The Employer may advance such expenses subject to reimbursement out of Trust assets, without obligating itself to pay such expenses. In addition, except as otherwise provided, Investment Fund fees shall be paid by Participants in accordance with Section 7.03. ARTICLE VIII VESTED PERCENTAGE AND TERMINATION BENEFIT 8.01 Vested Amounts. Upon death, retirement or Disability, the full amount credited to the Participant's Accounts shall become fully vested. In the event of termination of the employment of a Participant for any reason other than death, Disability, or retirement, the Participant will receive a percentage of the balance of his or her Accounts, according to said Participant's Years of Service as follows: A. Profit Sharing Accounts. Years of Service Vested Percent Less than 3 years 0% 3 years, but less than 4 20% 4 years, but less than 5 40% 5 years, but less than 6 60% 6 years, but less than 7 80% 7 years or more 100% B. 401(k) Accounts. 1. The portion of a Participant's 401(k) Account attributable to his or her Participant Elected Contributions is 100% vested at all times. 2. The portion of a Participant's 401(k) Account attributable to Employer Match for Plan Years beginning before June 1, 1990 shall be vested as follows: Years of Service Vested Percent ---------------------------------------------------------- Less than 3 years 0% 3 years or more 100% 3. The portion of a Participant's 401(k) Account attributable to the Employer Match for Plan Years beginning after May 31, 1990 shall be 100% vested at all times. C. Stock Bonus Accounts. The total balance of each Participant's Stock Bonus Account is 100% vested at all times. D. Voluntary After-Tax Accounts. The total balance of each Participant's Voluntary After-Tax Account is 100% vested at all times. E. Profit Sharing Accounts of Former Cyrix Employees. The Profit Sharing account of any Employee who was an employee of Cyrix as of November 16, 1997, and who transferred to the service of the Employer as of November 17, 1997 (including contributions made pursuant to this Plan as well as to the Cyrix Plan) shall vest at the rate of 25% per Year of Service, as provided under the Cyrix Plan. F. Matching Contribution Accounts of Former Cyrix Employees. Any Employee who was a participant in the Cyrix 401(k) Plan as of November 16, 1997, and who transferred to the service of the Employer as of November 17, 1997 shall be fully vested in the value of his employer matching contribution account under the Cyrix Plan as of November 17, 1997, as well as in the portion of his 401(k) Accounts attributable to any Employer Match allocated to his Accounts thereafter, regardless of the number of his Years of Service. Any former employee of Cyrix who was not an employee as of November 16, 1997 and who had not taken a distribution from the Cyrix Plan shall be 100% vested in his accounts there under attributable to employer matching contributions. Any such former employee of Cyrix who had previously obtained a distribution from the Cyrix Plan shall forfeit the nonvested portion of his accounts under the Cyrix Plan; provided, however, that such nonvested portion shall be reinstated to the credit of the former participant if such former participant is rehired by National and becomes an Employee hereunder before incurring five consecutive One-Year Breaks in Service, determined beginning on the date of his or her termination from Cyrix. G. Vesting for FSC Employees. 1. Special Vesting Schedule. An Employee of FSC, or an affiliate of FSC, on January 1, 1988, or an Employee of NSC on January 1, 1988 who transferred to NSC from FSC, or an FSC affiliate, who completed 5 or more years of Service (whether or not consecutive and without regard to Breaks in Service) with FSC (or an FSC affiliate) on or before January 1, 1988, shall have the Employee's vested interest under this Article VIII determined under the vesting schedule of the FSC Profit Sharing Plan as such schedule existed immediately prior to January 1, 1988. In the case of an FSC employee whose vested interest is not calculated under the vesting schedule of the FSC Profit Sharing Plan by reason of the first sentence of this paragraph B, such Employee's vested interest shall be determined under the vesting schedule of Section 8.01, provided, that such an Employee's vested interest shall not be less than the Employee's vested interest under the vesting schedule of the FSC Profit Sharing Plan immediately prior to January 1, 1988. 2. Rehired FSC Employees. If an Employee terminated from the service of FSC, or an FSC affiliate, prior to September 30, 1987, and is rehired by the Employer after January 1, 1988, and before the Employee incurs five (5) consecutive One-Year Breaks in Service, the Employee shall be entitled to a restoration of the Employee's forfeited Accrued Benefit, if any, under the rules of the FSC Profit Sharing Plan as it existed immediately prior to January 1, 1988. 8.02 Forfeiture of Nonvested Accounts. The forfeitable portion of the Accounts of a Participant whose service with the Consolidated Group terminates as defined under Section 2.43 shall be forfeited in accordance with the following rules. A. The forfeitable amounts of an affected Participant shall be forfeited and transferred to the forfeiture suspense account as of the earlier of the date on which the Participant receives a distribution of his entire nonforfeitable interest in the Plan, or the date on which the Participant incurs five (5) consecutive One-Year Breaks-in-Service. Provided, however, that the amounts forfeited on behalf of a Participant shall be restored to such Participant's Accounts if the Participant returns to the service of the Consolidated Group before incurring five (5) consecutive One-Year Breaks-in-Service. The forfeited amount shall be restored to the Participant in accordance with paragraph B below. B. Forfeited amounts, unadjusted by any investment increases or decreases, of an Employee who returns to the Employer's service before incurring five (5) consecutive One-Year Breaks-in-Service shall be restored to the Participant's Account. If the forfeitable amount is reallocated by reason of a One-Year Break-in-Service which occurs in a Plan Year beginning before January 1, 1985, no restoration of the forfeitable amount shall be made. 8.03 Vesting on Re-Employment. A separate account shall be maintained for a Participant's interest remaining in the Plan at the time of distribution if the Participant separates from the Employer's service, is paid his or her nonforfeitable interest under the Plan and returns to the Employer's service before incurring five (5) consecutive One-Year Breaks-in-Service. At any relevant time, the Participant's vested portion of the separate account shall not be less than an amount "X" determined by the formula: X = P(AB + (R x D))-(R x D) For purposes of applying the formula: ------------------------------------- P is the vested percentage at the relevant time; AB is the account balance at the relevant time; D is the amount of the distribution; and R is the ratio of the account balance at the relevant time to the account balance after distribution. 8.04 Lost Participant or Beneficiary. In the event a benefit is payable to a Participant or a Beneficiary, but the payee cannot be located, then at the close of the twelve-consecutive-month period following the Employee's Termination Date or the date on which the amount becomes payable to the Beneficiary, the benefit payable to the person shall be treated as a forfeiture subject to Section 6.04. The benefit forfeited under this Section 8.04 shall nevertheless be reinstated if the Participant, or Beneficiary if applicable, makes a claim for the forfeited benefit. ARTICLE IX RETIREMENT 9.01 Retirement. A Participant shall be eligible for normal retirement on attainment of age sixty-five (65), or, if a Participant is Laid Off by the Employer and has attained the age of sixty-four (64), at the time of such lay-off. A Participant may continue in the service of the Employer as a Participant in this Plan beyond normal retirement age. In the event such Participant continues in the service of the Employer, the Participant shall continue to be treated in all respects as a Participant until actual retirement. No benefits shall become payable to such a Participant until actual retirement and separation from employment, except as provided for in Section 12.02. When a Participant retires, such Participant shall be entitled to receive the entire amount credited to his or her Accounts under Article VI as of the Plan Year-end following the Participant's actual date of retirement. In addition, any Participant who terminates from employment after attaining at least age fifty-five (55), provided that the sum of such Participant's age plus Years of Service equals or exceeds sixty-five (65), will be considered to have retired, and shall be 100% vested and entitled to share in contributions for the Plan Year of termination pursuant to Sections 5.01 and 5.02. ARTICLE X DEATH BENEFIT 10.01 Death of Participant. A Participant who dies while in the service of the Employer shall be 100 percent (100%) vested in the Participant's Accounts upon the Participant's death. Upon the Participant's death, the nonforfeitable portion of the Participant's Accounts (reduced by any security interest held by the Plan by reason of a loan outstanding to the deceased Participant) shall be payable to the Participant's Surviving Spouse, or the Participant's designated Beneficiary if the Participant has no Surviving Spouse at the time of death, or if the Spouse has consented to the designation of a Beneficiary other than the Surviving Spouse. The designation of a Beneficiary to whom the Spouse has consented shall not be changed without the Spouse's consent to such change. A Spouse's consent must be in writing, it must acknowledge the effect of the Beneficiary designation, and it must be witnessed by a notary public. A spouse's consent to a Beneficiary designation as provided for under this Section is effective only with respect to the Spouse. Payment of the death benefit shall be made in accordance with the provisions of Article XII, provided that, the Surviving Spouse may request that the payment be made within a reasonable time following the Participant's death. Provided, however, nothing in this Section 10.01 shall override the provisions of a Qualified Domestic Relations Order as set forth in Section 12.04. 10.02 Payments Upon Failure to Designate Beneficiary. Any portion of the amount payable which is undisposed of because of the failure to designate a Beneficiary or the failure of the Beneficiary to survive the Participant shall be paid in order of survivorship to: A. The Participant's Spouse; B. The Participant's children, in equal shares; C. The Participant's brothers and/or sisters, in equal shares; D. The Surviving heirs of the Participant's estate, their respective identities and shares determined by the laws of interstate succession in California at the time of the Participant's death; or E. If none of the individuals in A through D survive the death of the Participant, then such remaining benefit shall be forfeited in accordance with Section 8.06. Notwithstanding the above, if the Committee is unable to locate any of the persons listed above within twelve (12) months, the Committee shall forfeit the remaining benefit in accordance with Section 8.06. ARTICLE XI DISABILITY BENEFIT Upon incurring a Disability, a Participant shall be fully vested and entitled to receive the entire value of his or her Accounts. Disability benefits shall be payable two (2) years after the date of the commencement of the Participant's leave of absence attributable to such Disability, provided that the Participant remains Disabled. Effective September 15, 1997, payment of benefits may commence prior to such date, in the case of a Disabled Participant whose life expectancy at the time of payment is certified by a medical professional to be less than 6 months, provided that the Participant (or his representative) and his spouse, if applicable, consents to such distribution. The Trustee shall pay, at the direction of the Committee, to said Participant his or her Disability benefit from the Plan in accordance with Section 12.01. ARTICLE XII DISTRIBUTIONS, WITHDRAWALS AND LOANS 12.01 Distribution of Benefits. A. Forms of Distribution. Except as otherwise provided below, the entire vested balance of a Participant's Accounts shall be paid either: 1. in equal monthly, quarterly or annual installments over a period certain not to exceed the life expectancy of the Participant (or Beneficiary in the case of a Participant who dies prior to the time his benefits commenced) or the joint and last survivor life expectancy of the Participant and his Beneficiary, or 2. as a single-sum distribution consisting of a distribution: a. in kind of the number of whole shares of NSC Stock representing the vested balance of his or her Accounts invested in the NSC Stock Fund; and b. cash, representing the remaining fair market value of his or her vested interest in all Accounts, or 3. as a single sum representing the fair market value of his or her entire vested interest in the Accounts. In paying a Participant or Beneficiary in accordance with this Section 12.01 A.3, the value of his or her units in the NSC Stock Fund shall be added to the cash representing the remaining fair market value of his or her Accounts and the vested portion of such total cash amounts shall be the single sum payment made to the Participant or Beneficiary. 4. Benefits of Former Comlinear Participants. a. In the case of a Participant who was participating in the Comlinear 401(k) Plan, the portion of the Participant's Accrued Benefit equal to the Participant's initial Account balance as of December 31, 1995, which was transferred into the Plan shall be payable in the forms of benefit available under the Comlinear 401(k) Plan. Unless the Participant otherwise elects, subject to the consent of his spouse, if applicable, such benefits shall be paid in the form of a Qualified Joint and Survivor Annuity. The Qualified Joint and Survivor Annuity is, for a Participant who is not married, a single life annuity, and, for a Participant who is married, an annuity for the life of the Participant with a benefit continued after the death of the Participant for the life of the surviving spouse in an amount equal to 50% of the amount payable to the Participant. b. A Participant may, with the consent of his spouse, elect to waive the Qualified Joint and Survivor Annuity. An election by the Participant to waive the joint and survivor annuity must be made in writing during the 90-day election period ending on the annuity starting date and must include the consent of the Participant's spouse. The spouse's consent must specifically acknowledge the designated Beneficiary, if any, and the effect of such election and must be witnessed by a Plan representative or a notary public. The consent shall not be required if it is established to the satisfaction of the Committee that it cannot be obtained because there is no spouse, the spouse cannot be located, or under such other circumstances as may be prescribed by Treasury regulations. The Participant's election to waive the joint and survivor annuity may be revoked in writing without the consent of the spouse at any time during the election period. A change in designated Beneficiary made subsequent to a spousal consent shall be deemed to be a revocation of the Participant's election to waive the joint and survivor annuity unless the spousal consent expressly permits designations by the Participant without any requirement for further consent by the spouse. Any subsequent election to waive the joint and survivor annuity must comply with the requirements of this paragraph. The annuity starting date means the first day of the first period for which an amount is payable as an annuity, or, for a benefit not payable as an annuity, the first day on which all events have occurred that entitle the Participant to such benefit. c. The Committee shall provide the Participant no less than thirty (30) days (unless Regulations or administrative pronouncements permit a shorter period) and no more than ninety (90) days before the annuity starting date, a written explanation of: (i) the terms and conditions of the joint and survivor annuity; (ii) the Participant's right to make, and the effect of, an election to waive the joint and survivor annuity; (iii)the requirement that the Participant's spouse consent to the waiver of the joint and survivor annuity; and (iv) the Participant's right to revoke the waiver, and the effect thereof. Notwithstanding the foregoing, the written explanation may be provided after the annuity starting date, provided that the election period shall not end before the thirtieth (30th) day after the date on which the explanation is provided. A Participant may elect (with spousal consent) to waive the thirty (30) day period if the distribution commences more than seven (7) days after such explanation is provided. d. If the Participant has waived the Qualified Joint and Survivor Annuity pursuant to Section 12.01 A.4.b, above, his benefit shall be paid to him under one of the following options selected by the Participant with the consent of his spouse: (i) Lump sum distribution in cash; (ii) Single life annuity for the Participant's life only; (iii)Life annuity with a guaranteed period of 5, 10 or 15 years; (iv) Life annuity with an installment refund; (v) Life annuity with 50%, 66-2/3% or 100% continued after the Participant's death to his Beneficiary; or (vi) Installments over months not exceeding the life expectancies of the Participant and his or her spouse with any amounts remaining upon the death of the Participant payable to his or her Beneficiary. The Participant shall make his selection on an application for benefits filed with the Committee in accordance with Section 16.10 hereof. Upon the Participant's written request, the Committee shall furnish an explanation of the effect of any other methods of distribution the Participant may select from the available options. e. The accrued benefit of any Participant electing a distribution under this Section 12.01 A.4 shall be debited to the extent necessary to pay the expenses relating to the provision of the optional forms of benefit hereunder. B. Time of Distribution. 1. Termination Benefits. Payment to a terminated Participant shall be made within a reasonable time following the Participant's Termination Date. Provided, however, if the value of a Participant's nonforfeitable Account balance exceeds (or, for distributions prior to March 23, 1999 has ever, at the time of any previous distribution, exceeded) $3,500 ($5,000 effective for Plan Years commencing on or after August 6, 1997), payment shall not be made unless the Participant and the Participant's Spouse, if applicable, consent in writing to the payment. For purposes of the preceding sentence, after December 31, 2001, the value of a Participant's nonforfeitable Account balance shall be determined without regard to that portion of the Account balance that is attributable to rollover contributions (and earnings allocable thereto) within the meaning of sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16) of the Code. If the Participant and the Participant's spouse, if applicable, fail to consent to the distribution, such failure shall be deemed to be an election to defer distribution. Distribution may commence as of any subsequent date as of which the Participant and spouse, if applicable, elect to receive such distribution, subject to section 12.01 B.3 below. In the case of a Participant who is Laid Off, the Committee may authorize a payment to such Participant of his or her nonforfeitable interest as of any date after the end of the Plan Year following the Participant's Termination Date. In the event the Committee authorizes an earlier payment to a Laid Off Participant, the Committee may make the payment based on the nonforfeitable percentage the Participant will have as of the first anniversary of his or her Termination Date. 2. Retirement, Death and Disability Benefits. Benefits due to a Participant or Beneficiary as a result of retirement, death, or Disability shall be paid within a reasonable time after the end of the Plan Year of such retirement, death or Disability, or at such earlier time as the Committee, in its sole discretion, may determine. Provided that, in the case of payment to a Participant or his surviving Spouse, the payment shall be made in accordance with Section 12.01 B.1 above. The Committee may, acting in its sole discretion, authorize an early distribution to a Participant or Beneficiary of the balance of such Participant's Accounts valued as of any Valuation Date following death or retirement. Such distribution shall be a total distribution of the entire amount available to such Participant. Such Participant or Beneficiary shall still be entitled to receive a share of the Employer's Annual Profit Sharing and Employer Match as of the next applicable Allocation Date. 3. Consent to Distribution. If a Participant does not consent to receive payment of his or her benefit, payment shall be made not later than sixty (60) days after the close of the Plan Year in which the later of the following events occurs: a. The Participant attains age sixty-five (65); or b. The termination of the Participant's service with the Employer. Payment shall be in accordance with Section 12.01 B.1 above. 12.02 Required Distributions. Notwithstanding any other provisions of this Plan to the contrary, the minimum distribution requirements of Section 401(a)(9) of the Code and the regulations there under are hereby incorporated by reference and the following shall apply to active Participants. A. For Plan Years beginning after December 31, 1988, the interest of an active Participant who attains age seventy and one-half (70 1/2) while employed shall be distributed in periodic installments designed to satisfy the minimum distribution requirements of Section 401(a)(9) of the Code and regulations there under, commencing not later than the April 1st following the calendar year in which the Participant attains age seventy and one-half (70 1/2). Provided, however, that the distribution of a Participant's benefit need not commence earlier than the April 1st following the calendar year in which the Participant retires if the Participant attained age seventy and one-half (70 1/2) before January 1, 1988 and such Participant is not a five percent (5%) owner (as defined under Section 416(i) of the Code) at any time during the Plan Year ending with or within the calendar year in which the Participant attained age sixty-six and one-half (66 1/2) and during any subsequent Plan Year. For those Participants who attained age seventy and one-half (70 1/2) in the calendar year 1988, their deemed retirement date shall be January 1, 1989 for purposes of this paragraph A, and such Participant's distribution must commence by April 1, 1990. Payment to a Participant who terminates employment on or after attainment of age seventy and one-half (70 1/2) shall be made in accordance with Section 12.01 B.2 above. Notwithstanding the foregoing, effective January 1, 1997, for a Participant who attains age seventy and one-half on or after January 1, 1997 and who has not yet retired, distribution of benefits from the Plan shall not commence prior to retirement unless elected by the Participant; provided, however, that in no event shall commencement of benefit distributions from the Plan be delayed beyond April 1 of the calendar year following the later of the calendar year in which the Participant attains age seventy and one-half (70 1/2) or retires. B. If a Participant dies before distribution of the Participant's interest has commenced, the Participant's entire interest shall be distributed within a reasonable time, not to exceed five (5) years, following the Valuation Date next following the Participant's death. In the event the Participant's designated Beneficiary is the Participant's Spouse, payment to the Spouse shall be made in accordance with Section 12.01 B.1 above, and shall in any event commence no later than the date on which the Participant would have reached age seventy and one-half (70-1/2). If a deceased Participant's designated Beneficiary is the Participant's Spouse and the Spouse dies before payments commence, the Participant's entire interest shall be distributed by applying the rules of this paragraph as though the deceased spouse were the Participant. 12.03 Distribution to Minors and Incompetents. Distributions to minors or incompetents may be made to the legal guardian of said person, or to the parent of said minor. The trustee shall not be required to see to the application of any such distribution so made to any of said persons, but said person's receipt shall be a full discharge of the Trustee's duties. 12.04 Qualified Domestic Relations Order. A. Distributions. In the event a person (hereafter called the "alternate payee") is designated by a qualified domestic relations order, as defined under Section 414(p) of the Code, as having a right to receive all or a portion of the benefits payable under the Plan to a Participant, payment to the alternate payee may begin on the date on which Participant is entitled to a distribution under the Plan, or such earlier date as the alternate payee may elect, consistent with the terms of the QDRO. B. The Committee shall abide by the terms of any qualified domestic relations order A "qualified domestic relations order" means any judgment, decree, or order (including approval of a property settlement agreement) which creates or recognizes the existence of an alternate payee's right to receive all or a portion of the benefits payable to a Participant hereunder pursuant to a State's domestic relations law relating to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of the Participant; provided, however, that such order specifically states: 1. The name and last known mailing address of the Participant and of each alternate payee covered by such order; 2. The amount or percentage of the Participant's benefits to be paid by the Plan to each alternate payee or the manner in which such amount or percentage is to be determined; 3. The number of payments or the period to which such order applies; and 4. The name of each plan to which such order applies. C. The Committee shall establish reasonable written procedures to determine the qualified status of domestic relations orders and to administer distributions made there under in a manner consistent with the following: 1. The Committee shall promptly notify the Participant and any named alternate payee of the receipt of a domestic relations order and the Plan procedures used for determining whether such order is a qualified domestic relations order; 2. The Committee shall, within a reasonable period following receipt, determine whether such order is qualified and notify the Participant and each alternate payee of such determination; 3. The Committee shall separately account for any amounts affected by the Order (except for any amounts that would not be distributable in any event during the period in which the qualified status of the Order is being determined), and shall make no distribution, withdrawal or loan from such amounts until the earlier of the date of determination of the qualified status of the order or the expiration of 18 months from the date on which the first payment would be required to be made under the order; 4. If, within the 18-month period referred to in 3. above, the order is determined to be qualified, the Committee shall segregate the amounts payable to the alternate payee into separate Accounts in the name of such alternate payee, and shall administer such Accounts in all ways as if such alternate payee were a Participant hereunder. The Committee shall pay the segregated amounts to the alternative payee(s) pursuant to the terms of such order. If, within such 18 month period, the order is determined not to be qualified, or the order's status is unresolved, the Committee shall pay the segregated amounts to the person or persons, if any, who would be entitled to such amounts if no order had been received; and 5. A determination that a domestic relations order is qualified which is made later than 18 months after the receipt of such order shall operate prospectively only. D. Distributions made pursuant to this Section 12.04 shall completely discharge the Plan of its obligations with respect to the Participant, his Beneficiary and each alternate payee to the extent of any distributions made. 12.05 Hardship Withdrawals. A distribution from a Participant's vested Profit Sharing Account, 401(k) Account (provided that income on Participant Elected Contributions after May 30, 1989 shall not be available for distribution upon hardship), Fairchild 1988 Rollover Account or Stock Bonus Account may be made to a Participant, upon the Participant's request, if it is established that the Participant has an immediate and heavy financial need and the distribution is necessary to satisfy such need. The Committee shall establish the existence of the Participant's immediate and heavy financial need and the Participant's need for a distribution to satisfy such need by applying the following standards: A. Immediate and Heavy Financial Need. The existence of an immediate and heavy financial need shall be established by determining one of more of the following: 1. Expenses incurred or necessary for medical care, described in Section 213(d) of the Code, of the Participant, the Participant's Spouse, or any dependent of the Participant (a dependent shall be determined under Section 152 of the Code); 2. Costs directly related to the purchase (excluding mortgage payments) of a principal residence for the Participant; 3. Payment of tuition and related educational fees (and room and board expenses) for the next twelve (12) months of post-secondary education for the Participant, or a member of the Participant's immediate family; 4. The need to prevent eviction of the Participant from the Participant's principal residence or foreclosure on the mortgage of the Participant's principal residence; 5. The need to pay the funeral expenses of a family member; or 6. Any other reason recognized to constitute an immediate and heavy financial need by the Commissioner of Internal Revenue Service in a revenue ruling, notice or other document of general applicability. B. Distribution Necessary to Satisfy the Financial Need. The Participant's need for a distribution to satisfy a financial need as established under paragraph A shall be determined as follows: 1. The Committee shall consider all relevant facts and circumstances of the Participant to determine whether the need may be satisfied from other resources that are available to the Participant; 2. The Participant represents, and swears under penalty of perjury, that the financial need cannot be satisfied without causing further undue hardship: a. Through reimbursement or compensation by insurance or otherwise; b. By reasonable liquidation of savings or assets, to the extent such liquidation would not itself cause an immediate and heavy financial need; c. By the Participant ceasing elective contributions under this Plan; and d. By other distributions or nontaxable loans from plans maintained by the Employer or by any other employer, or by borrowing from commercial sources on reasonable commercial terms. 3. The Committee may impose such conditions on hardship distributions, as it deems necessary, so long as such conditions are applied equally to all Participants who request hardship distributions. C. Additional Rules. The following rules shall apply to each request for a hardship distribution by a Participant: 1. The Participant's request for a hardship distribution shall be made on such forms as are provided by the Trustee from time to time and the Participant shall furnish the Trustee with such information as the Committee requests in its evaluation of the Participant's request; and 2. The amount distributed, if any, shall in no event exceed the amount required to satisfy the immediate and heavy financial need of the Participant and to pay any federal, state, or local taxes or penalties reasonably anticipated to result from the distribution. Immediate and heavy financial need may include any taxes or penalties paid by such Participant on such hardship distribution. 12.06 In-Service Withdrawals. As of any Valuation Date, a Participant who has a Voluntary Contributions or a Rollover Account may elect an in-service withdrawal. Such withdrawal will be taken first from the Voluntary After-Tax Account, if any, and then from the Rollover Account. 12.07 Participant Loans. Loans may be made to Participants under this Plan in accordance with the following provisions: A. At the request of a Participant, and under rules to be established from time-to-time by the Committee, the Plan may make a loan of money to such Participant from the Participant's Accounts (excluding any Voluntary After-Tax Account), but not exceeding fifty percent (50%) of the cumulative vested interest of the Participant in all of his or her Plan Accounts. All loans shall be made available to Participants on a reasonably equivalent basis. A Participant shall request a loan by submitting a completed loan application form or initiate a loan by use of the Electronic Access System, together with such application fee as the Committee may require on a uniform basis from Participants applying for loans, and in the case of a residential loan application, also submitting copies of the Purchase and Sales Agreement or Contractor's bid, whichever the case may be. A Participant may have no more than two (2) loans outstanding at the same time, which may be residential and/or nonresidential loans. B. Notwithstanding the preceding, no loan may be made to the extent that such loan (when added to the outstanding balance of any other loan to such Participant) exceeds the lesser of: 1. $50,000, reduced by the excess (if any) of the highest outstanding balance of loans from the Plan during the one-year period ending on the day before the date on which such loan was made, over the outstanding balance of loans from the Plan on the date on which such loan was made; or 2. one-half (1/2) of the vested balance of all accounts of the Participant in the Plan, determined as of the origination date of the loan. In no event will a loan be made which would be taxed under Code section 72(p) as a distribution from the Plan. A nonresidential loan shall, by its terms, be repaid within six (6) to sixty (60) months, and a residential loan shall, by its terms, be repaid within six (6) to one hundred twenty (120) months. Loan payments may generally be made only by way of automatic payroll deduction, and a Participant shall be entitled to an extension in loan payments in the event that due to a shutdown or short work week the payroll check for a Participant is insufficient to cover the loan payment due, but not beyond the time period required for loan repayment under Section 72(p) of the Code, or pursuant to Regulations there under. In the event that Participant is Laid Off, on an authorized leave of absence, is for any other reason not receiving a paycheck, or is separated from service, such Participant shall make direct monthly payments on any loan outstanding. In the event that payment is not received by ninety (90) days after the due date, the loan will be in default pursuant to subparagraph G. hereunder. C. The outstanding balance of any such loans, including interest at a reasonable rate based on the prime rate as published in the Wall Street Journal, shall constitute a lien against the Accounts of a Participant and shall be deductible therefrom in the event of a distribution to the Participant for any reason whatsoever. The interest rate to be charged on loans shall be established on the first business day of each month for loans initiated during such month. D. Loans shall be secured by the Participant's Retirement and Savings Program Accounts. E. Effective October 12, 1998, no assignment of a Comlinear Participant's vested Accrued Benefit shall be made to secure a loan unless the Comlinear Participant's Spouse consents in writing to the assignment, the consent acknowledges that the Comlinear Participant's vested Retirement and Savings Program Account Balance may be used to pay the loan if the Comlinear Participant's service with the Employer terminates and the loan is delinquent, and the Spouse's consent is witnessed by a notary public or a Plan representative. To be effective, the Spouse's consent to the assignment must be signed during the 30-day period ending on the date on which the loan is to be assigned. Such consent shall thereafter be binding with respect to the consenting Spouse or any subsequent Spouse with respect to that loan. A new consent shall be required of the Spouse if there is a renegotiation, extension, renewal, or other revision of the loan. F. Any loan shall require substantially level amortization of the loan (with payments not less frequently than quarterly) over the term of the loan. G. In the event of default, foreclosure on the note and attachment of the security will not occur until a distributable event occurs in the Plan. Events that constitute a default include, but are not limited to: 1) a missed monthly payment due on or before the 15th day of the month in the case of a Participant who is terminated, Laid Off, who is on an authorized leave of absence, or who is not receiving a paycheck for any other reason. Default will occur as of the end of the Plan Quarter following the Plan Quarter in which the failure to remit a monthly payment occurs. 12.08 Direct Rollovers. A. This Section 12.08 applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Article XII, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. For purposes of this Section, the following terms shall be defined as follows: 1. Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities), and, effective January 1, 1999, any hardship distribution described in Code section 401(k)(2)(B)(i)(IV). 2. Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. 3. Distributee: A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's Surviving Spouse and the Employee's or former Employee's Spouse or former Spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the Spouse or former Spouse. 4. Direct rollover: A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee. B. The Committee shall prescribe reasonable procedures for the election of direct rollovers under this Section, including, but not limited to: 1. Requirements that adequate information be provided by the distributee, including the name of the eligible retirement plan to which the rollover is to be made, representation from the eligible retirement plan as to the type of eligible retirement plan it is, and that it will accept the direct rollover, and other information necessary to make the direct rollover, such as the name and address of the trustee of the eligible retirement plan; 2. Requirements that direct rollover elections be made within the time periods permitted for electing optional forms of payment pursuant to this Article XII; and 3. Limitations on the amount of a direct rollover, providing that direct rollover may not be elected by a distributee whose eligible rollover distributions during a year are reasonably expected to be less than $200, and providing that, in the case of a distributee who elects to receive part of his distribution in cash and to have the remainder paid to an eligible retirement plan, the portion to be directly rolled over must be equal to at least $500. C. This paragraph C shall apply to distributions made after December 31, 2001: 1. For purposes of the direct rollover provisions of this Section 12.08 of the Plan, an eligible retirement plan shall also mean an annuity contract described in Section 403(b) of the Code and an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state of political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan. The definition of eligible retirement plan shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relation order, as defined in Section 414(p) of the Code. 2. In addition, any amount that is distributed on account of hardship shall not be an eligible rollover distribution and the distributee may not elect to have any portion of such a distribution paid directly to an eligible retirement plan. 3. Moreover, a portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to be an individual retirement account or annuity described in Section 408(a) of the Code, or to a qualified defined contribution plan described in Section 401(a) or 403(a) of the Code that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible. ARTICLE XIII NONDISCRIMINATION TESTING AND LIMITATIONS ON ALLOCATIONS 13.01 Actual Deferral Percentage and Actual Contribution Percentage Testing. A. Limitation on Deferral of Compensation. The Committee shall establish uniform rules and procedures for administering Participant Elected Contributions. Such rules and procedures must satisfy one of the following tests or be nondiscriminatory in operation within the meaning of the Code: 1) the Actual Deferral Percentage of the eligible Highly Compensated Employees may not be greater than the Actual Deferral Percentage of the eligible Non-Highly Compensated for the current Plan Year multiplied by 1.25; or 2) the lesser of (i) the Actual Deferral Percentage for the Non-Highly Compensated Employees for the current Plan Year multiplied by two (2) and (ii) the Actual Deferral Percentage for the Non-Highly Compensated Employees for the current Plan Year, plus two (2) percentage points. The above tests shall be performed in accordance with Section 401(k) of the Code, as amended, and any applicable regulation there under; and Section 401(k) of the Code and its regulations are hereby incorporated in this Document by reference as provided under Regulation section 1.401(k)-1(b)(2)(iii). In order to satisfy the above requirements, the Committee may, in its sole discretion, require the Employer to reduce the future percentage deferrals elected by the Highly Compensated Employees and/or the Committee shall direct the return of a portion of the amounts deferred by the Highly Compensated Employees, in accordance with paragraph B below. Except as provided in Section 5.02B, if an amount is returned to an Employee because the Employee's elective deferral for the calendar year exceeds $9,500 ($11,000 for Plan Years commencing on or after January 1, 2002) (or such amount as adjusted under Section 402(g)(5) of the Code), such excess deferral shall be counted in determining the Employee's Actual Deferral Percentage for the Plan Year in which such excess deferral was made. If two or more cash or deferred arrangements (as determined under Section 401(k) of the Code) are treated as a single Plan for purposes of Section 401(a)(4) or 410(b) of the Code, such arrangements shall be treated as a single Plan for purposes of the limitations of this Section. If a Highly Compensated Employee participates in two or more cash or deferred arrangements (as determined under Section 401(k) of the Code) maintained by the Employer, all of such cash or deferred arrangements shall be treated as a single plan for purposes of determining the Actual Deferral Percentage of each Employee. B. Return of Excess Deferrals Withheld. 1. Nondiscrimination Test. If it is determined after the end of a Plan Year that any amounts deferred by Highly Compensated Employees would cause the Plan to fail to meet the requirements of Section 5.02 C, excess contributions and income thereon shall be returned as soon as possible following the Plan Year, but in any event no later than the end of the Plan Year following the Plan Year for which they were made. In determining the amount of excess contributions to be returned to Highly Compensated Employees, the Committee shall direct the Employer to distribute to the Highly Compensated Participant with the largest amount of deferrals (and so forth) his or her excess portions in accordance with Code section 401(k)(8)(C), the regulations there under, and any subsequent Internal Revenue Service guidance issued there under such that any amounts remaining satisfy this Section and Code section 401(k). The income or loss allocable to excess contributions shall be income or loss attributable to such excess contributions for the Plan Year determined pursuant to Section 6.05. Income or loss between the end of the Plan Year and the date of distribution shall be disregarded. Any Employer Match attributable to excess contributions which are returned to a Highly Compensated Employee shall be forfeited. 2. Deferral Limit. Except as provided in Section 5.02B, if a Participant's elective deferral under Section 401(k) of the Code exceeds $9,500 ($11,000 commencing on or after January 1, 2002) (or such amount as adjusted under Section 402(g)(5) of the Code) for a calendar year, an excess deferral occurs. A Participant may assign to this Plan any excess deferral made during a taxable year by notifying the Committee on or before March 15 following the end of such year. In the event the excess deferral arises solely by taking into account qualified plans of the Employer, the Participant will be deemed to have notified the Committee. The excess amount shall be returned not later than the April 15th immediately following the year of the excess deferral and shall include earnings for the calendar year attributable to such excess deferral, determined pursuant to Section 6.05. Income or loss attributable to the period from the end of the calendar year to the date of distribution shall be disregarded. The amount returned shall reduce the Participant's elective deferrals for the year to not more than the allowable amount for such year. The excess amount shall be determined from all plans under which the Participant made elective deferrals for the year. C. Limitation on Contribution Percentages. Employer Matches shall satisfy one of the following tests: 1) The contribution percentage of the eligible Highly Compensated Employees shall be not greater than the contribution percentage of the eligible Non-Highly Compensated Employees for the current Plan Year multiplied by 1.25; or 2) the lesser of (i) the contribution percentage for the Non-Highly Compensated Employees for the current Plan Year multiplied by two (2) and (ii) the contribution percentage for the Non-Highly Compensated Employees for the current Plan Year, plus two (2) percentage points. For Plan Years beginning before January 1, 2002, if a Highly Compensated Employee participates in a Plan or Plans maintained by the Employer under which the Highly Compensated Employee is eligible to make elective contributions subject to the requirements of Section 401(k) of the Code and one or more of such Plans is also subject to Section 401(m) of the Code, the tests applied to the contributions for the Highly Compensated Employee shall be performed in accordance with Section 401(m) of the Code and the regulations there under to prevent the multiple use of the alternative limitations as provided in Section 401(m) of the Code. If two or more plans are aggregated for purposes of Section 410(b) of the Code or a Highly Compensated Employee participates in two or more plans of the Employer to which matching contributions or Employee voluntary contributions are made, all such contributions shall be aggregated to apply the tests above. The contribution percentage for a specified group of Employees for a Plan Year shall be the average of the ratios (calculated separately for each Employee in such group), of the sum of the Employer Match and Employee nondeductible contributions (and such other contributions as permitted to be included in the calculation under U.S. Treasury regulations) to the Employee's compensation during the Plan Year as defined under Section 414(s) of the Code. D. Return of Contributions. Any Employer Match which causes the contribution percentage of the eligible Highly Compensated Employees to exceed the limits of this Section shall be returned, or forfeited if forfeitable, (together with income attributable to such contributions through the end of the Plan Year, determined in accordance with Section 6.05) before the close of the following Plan Year. Amounts returned (or forfeited if applicable) shall be the amounts for the Highly Compensated Employees who have the highest contribution amounts, and successive amounts shall be returned or forfeited in accordance with Code section 401(m)(6), regulations there under, and any subsequent Internal Revenue Service guidance issued there under, until the amounts remaining satisfy the requirements of this Section and Section 401(m) of the Code. Forfeited amounts may not be allocated to a Highly Compensated Employee whose contributions for such Plan Year are reduced by reason of this Section. 13.02 Limitations on Allocations. A. Notwithstanding any other provisions of the Plan, the total annual addition credited to a Participant's Accounts for any Plan Year shall not exceed an amount equal to the smaller of: 1) $30,000 for Plan Years commencing prior to January 1, 2002 ($40,000 for Plan Years commencing on or after January 1, 2002), as adjusted for increases in the cost-of-living under Code section 415(d), or, for limitation years starting before December 31, 1994, if greater, one-fourth of the dollar limitation in effect under Section 415(b)(1)(A) of the Code; or 2) effective for Plan Years commencing prior to January 1, 2002, twenty-five percent (25%) of the compensation paid by the Employer to the Participant during the Plan Year. Effective for Plan Years commencing on or after January 1, 2002, the limit in (2) shall be equal to one-hundred percent (100%) of the amount of the Participant's compensation for the Plan Year. B. For purposes of imposing the limitations of Section 415 of the Code, "annual additions" shall mean the sum of the following credited to the Participant's Accounts for the Plan Year: 1) Employer contributions; 2) the Participant's contributions other than a rollover contribution as defined under Section 402(a)(5) of the Code; 3) Forfeitures; and, 4) Amounts allocated to a separate account under a pension or annuity plan for a key employee (as defined under Section 416(i) of the Code) in Plan Years beginning after March 31, 1984, to provide post-retirement medical benefits to such Participant and his or her spouse and dependents, and amounts paid after December 31, 1985, in tax years ending after that date to a separate account under a welfare benefit plan (as defined under Section 419(e) of the Code) of the Employer for a Participant who is or was a key employee (as defined under Section 416(i) of the Code) to provide post-retirement medical benefits to such Participant. Excess elective deferrals determined pursuant to Section 5.02 D.2 of the Plan shall constitute annual additions unless distributed pursuant to Section 5.02 D.2. Excess contributions and excess aggregate contributions pursuant to Sections 5.02 C and 5.03 shall be treated as annual additions even if distributed from the Plan. C. For purposes of imposing the limitations of Section 415 of the Code, "compensation" shall mean the Employee's wages, salary, and other amounts received for personal services actually rendered, including but not limited to overtime, bonuses, and commissions. Compensation shall not include Employer contributions to deferred compensation plans, deductible contributions to simplified employee pension plans under Section 408(k) of the Code, distributions from deferred compensation plans, amounts realized from the exercise of nonqualified stock options, amounts realized from the vesting of rights in restricted property, amounts realized from the sale of stock acquired under a stock option, or other amounts which receive special tax benefits. Notwithstanding the foregoing, effective for Plan Years commencing after December 31, 1997, "compensation" for purposes of this Section 13.02 shall have the meaning given to it under Code section 415(c)(3), as that Code section has been amended by GUST to reflect the inclusion of any elective deferrals (as defined in Code section 402(g)(3)), and any amount which is contributed or deferred by the Employer at the election of the Employee and which is not includible in the gross income of the Employee by reasons of Code sections 125, 132(f)(4) or 457. D. All defined contribution plans maintained by the Employer shall be treated as a single plan for purposes of the limitations of this Section. E. If, due to a reasonable error in the calculation of a Participant's Compensation or the amount that may be deferred under the Plan or under other limited facts and circumstances which the Commissioner of Internal Revenue finds justifiable, the annual addition to the Account of a Participant exceeds the limitation of this Section during a Plan Year, then such excess amount shall be eliminated first by returning, to the extent necessary, the Employer's contribution to the Participant's Account made by reason of the Participant's election to defer compensation in excess of 4% of such Participant's Compensation (or, prior to October 1, 2000, 6% of such Participant's Compensation) and then the Employer's contribution to the Participant's Account made by reason of the Participant's election to defer compensation that is not in excess of 4% of such Participant's Compensation (or, prior to October 1, 2000, 6% of such Participant's Compensation), together with the Employer Match attributable to such Elected Contributions, and finally, to the extent necessary, by reducing the Employer's contribution to the Participant's Profit Sharing Account. The amount of the reduction (hereafter called the excess amount) shall be used to reduce the Employer's contribution for the next Plan Year, and each succeeding Plan Year, for that Participant if covered by the Plan as of the end of such Plan Year. If the Participant is not covered by the Plan as of the end of the Plan Year and the excess amount is a Participant elective deferral, the amount shall be returned to the Participant. If the excess amount is an Employer contribution, then the excess amount shall be held unallocated in a suspense account for the Plan Year and allocated and reallocated in the next Plan Year, to the extent possible, to reduce the Employer's contribution for such year. If a suspense account is in existence during a Plan Year, other than the Year in which it is established, the Employer shall make no contribution to the Plan until all amounts in the suspense account have been allocated and reallocated to Participant. No investment gains or losses or other income or expense shall be allocated to a suspense account. In the event a suspense account is in existence at the time this Plan terminates, any amount in the suspense account which cannot then be allocated to Participants shall be returned to the Employer. F. Effective for Plan Years commencing prior to January 1, 2000, in any case in which an individual is a Participant in both a defined benefit plan and a defined contribution plan maintained by the Employer, the sum of the defined benefit plan fraction and the defined contribution plan fraction, as defined in Code section 415(e), for any year may not exceed 1.0. G. Effective for Plan Years commencing prior to January 1, 2000, in the case of a Participant whose combined plan fractions exceed the limitation of Subsection 13.02(F), such Participant's annual benefit or annual addition shall be reduced to meet such limitation by making the necessary reduction in the following sequence: First- The Participant's voluntary nondeductible contribution shall be returned, to the extent necessary, to comply with this Section. Next - The Participant's annual benefit under the defined benefit plan shall be limited, to the extent necessary, to comply with this Section. Next - The annual addition for a Participant in a plan in which the contribution is discretionary shall be reduced, to the extent necessary, to comply with this Section. Next - The annual addition for a Participant in a plan in which the contribution is mandatory shall be reduced, to the extent necessary, to comply with this Section. 13.03 Controlled Groups. In applying the Section 415 limitations of Section 13.02 above, each member of a controlled group of corporations (as defined in Section 414(b) as modified by Section 415(h) of the Code), each member of a group of trades or businesses (whether or not incorporated) which are under common control (as defined in Section 414(c) as modified by Section 415(h) of the Code), and each member of an affiliated service group (as defined in Section 414(m) of the Code) of which the adopting Employer is a member shall be treated as a single employer. ARTICLE XIV TOP HEAVY PROVISIONS 14.01 Applicability. Notwithstanding any other provision of this Plan to the contrary, the provisions of this Article shall apply for any Plan Year, beginning after December 31, 1983, in which this Plan is a Top-Heavy Plan as defined in Section 416(g) of the Code. 14.02 Definitions. A. Aggregation Group. Aggregation Group includes each plan maintained by the Employer (and as required under Section 414(b), (c) or (m) of the Code each related Employer) in which a Key Employee participates and such other plan maintained by the related Employers which enables any plan in which a Key Employee participates to meet the requirements of Section 401(a)(4) or 410 of the Code. In addition, the Employer may elect to include other plans in the Aggregation Group which satisfy the requirements of Code Sections 401(a)(4) and 410 when considered together with the plans which are required to be aggregated. Any plan, however, which is or may be permissively included in the Aggregation Group upon an election by the Employer, shall not be subject to the provisions of this Article. B. Compensation. For purposes of applying the Top-Heavy provisions of this Article, compensation as defined in Article II of this Plan shall not exclude amounts contributed under a salary reduction agreement on behalf of the Employee to this Plan or similar plans maintained by the Employer or to plans established under Section 125 of the Code. Compensation for the Plan Year shall be taken into consideration. Notwithstanding the foregoing, effective for Plan Years commencing after December 31, 1997, for purposes of this Article XIV, the term compensation has the meaning given such term by Code section 415(c)(3), as that Code section has been amended by GUST to reflect the inclusion of any elective deferrals (as defined in Code section 402(g)(3)), and any amount which is contributed or deferred by the Employer at the election of the Employee and which is not includible in the gross income of the Employee by reasons of Code sections 125, 132(f)(4) or 457. C. Determination Date. Determination Date shall be the last day of the preceding Plan Year, or, if such Plan Year is the first Plan Year of the Plan, the last day of such Plan Year. In the case of plans included in an Aggregation Group, the present value of accrued benefits or accounts shall be combined for all aggregated plans which have a Determination Date which falls in the same calendar year. D. Key Employee. For Plan Years beginning before January 1, 2002, Key Employee means an Employee or a former Employee (or the beneficiary of such an Employee) who during the Plan Year ending on the Determination Date or during the four (4) preceding Plan Years is, as determined under Section 416(i) of the Code: 1. An officer of the Employer having an annual compensation greater than 50 percent of the amount in effect under Section 415(b)(1)(A) of the Code for any such Plan Year; 2. One of the ten Employees having annual compensation from the Employer greater than the amount in effect under Section 415(c)(1)(A) of the Code and owning (or considered as owning within the meaning of Section 318 of the Code) the largest interest in the Employer; 3. A five (5) percent owner of the Employer; or 4. A one (1) percent owner of the Employer who has annual compensation from the Employer in excess of $150,000. Section 416(i) of the Code is hereby incorporated in the Plan by reference for the purpose of determining whether an Employee is a Key Employee, a former Key Employee, or a non-Key Employee. For Plan Years beginning after December 31, 2001, Key Employee means any employee or former employee (including any deceased employee) who at any time during the plan year that includes the determination date was an officer of the employer having annual compensation greater than $130,000 (as adjusted under Section 416(i)(1) of the Code for plan years beginning after December 31, 2002), a 5-percent owner of the employer, or a 1-percent owner of the employer having annual compensation of more than $150,000. For this purpose, annual compensation means compensation within the meaning of Section 415(c)(3) of the Code. The determination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Code and the applicable regulations and other guidance of general applicability issued there under. E. Non-Key Employee. Non-Key Employee means an Employee or a former Employee (or the beneficiary of such an Employee) who is not a Key Employee or former Key Employee as defined under Section 416(i) of the Code. F. Super Top-Heavy. A plan or plans required to be included in the Aggregation Group shall be Super Top-Heavy for a Plan Year if on the Determination Date for such Plan Year the Top-Heavy Ratio exceeds ninety percent (90%). G. Top-Heavy. A plan or plans required to be included in the Aggregation Group shall be Top-Heavy for a Plan Year if on the Determination Date for such Plan Year the Top-Heavy Ratio exceeds sixty percent (60%). H. Top-Heavy Ratio. Top-Heavy Ratio means the ratio determined from dividing the value of accrued benefits and accounts for Key Employees by the total value of accrued benefits and accounts for Key Employees and non-Key Employees. The value of accrued benefits and accounts shall be determined as prescribed under subsection I below. I. Valuation of Accrued Benefit. 1. Defined Contribution Plan. For Plan Years beginning prior to January 1, 2002, the present value of an accrued benefit under a defined contribution plan is the account balance derived from Employer and nondeductible Employee contributions as of the most recent valuation date within the twelve (12) month period ending on the Determination Date, plus any contributions actually made since such date or, in the case of a plan subject to minimum funding requirements, contributions required to be made as of the Determination Date. All defined contribution plans required to be included or permissively included in the Aggregation Group shall be treated as a single plan. 2. Defined Benefit Plan. For Plan Years beginning prior to January 1, 2002, the present value of an accrued benefit under a defined benefit plan is the value of the monthly retirement benefit derived from Employer and nondeductible Employee contributions, determined as of the most recent valuation date within the twelve (12) month period ending on the Determination Date, and determined as though the individual terminated service as of such valuation date. The benefit of an Employee, other than a Key Employee, shall be treated as accruing under the method used to accrue benefits under the Plan or if no accrual method is specified under the Plan, then under the slowest accrual method permitted under Section 411(b)(1)(C) of the Code. Reasonable actuarial assumptions shall be used to determine the value of the benefit under the Plan, provided, that assumptions as to future withdrawal or future salary increases shall not be used. All defined benefit plans required to be included or permissively included in the Aggregation Group shall be treated as a single plan and the same actuarial assumptions shall be used to value benefits under each of the plans included in the Aggregation Group. 3. Accrued Benefits. In determining the accrued benefits to be used to determine the Top-Heavy Ratio, distributions within the period of five (5) consecutive Plan Years ending on the Determination Date, and such rollover accounts as prescribed by regulation by the Secretary of the Treasury, shall be added to the value of accrued benefits as of such Date. The accrued benefits of a former Key Employee and the accrued benefits of an individual who has not performed any services for the Employer maintaining the Plan at any time during the five (5) year period ending on the Determination Date shall, however, be disregarded. J. Determination of Present Value and Amounts for Plan Years Beginning After December 31, 2001. 1. For Plan Years beginning after December 31, 2001, the present values of accrued benefits and the amounts of account balances of an employee as of the determination date shall be increased by the distributions made with respect to the employee under the Plan and any plan aggregated with the Plan under Section 416(g)(2) of the Code during the 1-year period ending on the determination date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the plan under Section 416(g)(2)(A)(i) of the Code. In the case of a distribution made for a reason other than severance from employment, death, or disability, this provision shall be applied by substituting "5-year period" for "1-year period." 2. For Plan Years beginning after December 31, 2001, the accrued benefits and accounts of any individual who has not performed services for the employer during the 1-year period ending on the determination date shall not be taken into account. 14.03 Top Heavy Requirements. For any Plan Year in which this Plan's Aggregation Group is Top-Heavy, the following shall apply: A. Compensation. Compensation taken into account under the Plan for any Participant shall not exceed $150,000 or such other amount as determined under Code Section 401(a)(17) as in effect on the first day of the Plan Year in question. B. Minimum Contribution. The Employer contribution (excluding elective deferrals and, prior to January 1, 2002, matching contributions) and forfeitures allocated to a Participant who is a non-Key Employee in the employ of the Employer on the last day of the Plan Year shall be not less than the lesser of: 1. Three percent (3%) of the Participant's compensation (within the meaning of Code Section 415); or 2. The percentage at which contributions are made under this Plan for the Key Employee for whom such percentage is the highest for the Year. For Plan Years beginning prior to January 1, 1989, this percentage shall be determined for such Key Employee by dividing the contributions and forfeitures for such Employee by so much of his total compensation for the Year as does not exceed $150,000, or such other amount as is determined by the Secretary under Code Section 401(a)(17) to be in effect for that year. In determining the contribution rate for a Key Employee, such Key Employee's elective contributions under a plan qualified under Section 401(k) of the Code shall be counted. If the Plan is required to be included in an Aggregation Group and this Plan allows a defined benefit plan required to be in such Group to meet the requirements of Section 401(a)(4) or 410 of the Code, the minimum contribution, in such circumstances, shall be not less than three (3%) percent of the Participant's compensation for the Year. All defined contribution plans required to be included in the Aggregation Group shall be treated as a single plan. C. Minimum Vested Amounts. A Participant's nonforfeitable interest under the Plan shall not be less than a nonforfeitable interest determined under the following schedule, based upon the Years of Service completed by the Participant: Completed Years Nonforfeitable Of Service Percentage Less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100% The number of a Participant's Years of service shall be determined as provided for under this Plan, using the applicable Vesting Computation period to determine Years of Service and Breaks in Service, provided, that a Participant's nonforfeitable interest shall be determined under this Section only in the event he completes at least One Hour of Service with the Employer after the date on which the Plan becomes Top-Heavy. A change in the Plan's vesting schedule (whether into or out of the Top-Heavy schedule) shall not cause a Participant's nonforfeitable interest to be less than his nonforfeitable interest immediately prior to the change. In the case of a change in the Plan's vesting schedule (whether into or out of the Top-Heavy schedule), a Participant who is credited with three (3) or more Years of Service for vesting purposes at the time of the change shall have his vested interest under the Plan determined under the schedule which gives the Participant the largest nonforfeitable interest. For purposes of the preceding sentence, the time at which a change in the vesting schedule occurs shall be the later of the effective date of such change or the execution date of an amendment which causes such change. 14.04 Limitations on Contributions. Effective for Plan Years commencing prior to January 1, 2000, in any Plan Year in which this Plan's Aggregation Group is Top-Heavy, the combined Plan Limits imposed by Sections 14.02 G and 14.02 H shall be applied by substituting 1.0 for 1.25 unless the following conditions are met: A. The Plan's Aggregation Group is not Super Top-Heavy; and B. The minimum contribution required for a non-Key Employee is at least equal to the amount set forth in Section 14.03 calculated by substituting four percent (4%) for three percent (3%) in Section 14.03 B.1. 14.05 Benefits Under Different Plans. If the Employer maintains one or more defined contribution plans (which shall be treated as a single defined contribution plan for purposes of this Article) in addition to a defined benefit plan and a non-Key Employee participates in both types of plans, the Employer shall provide such Participant with the minimum benefit required under the defined benefit pension plan, offset however, by any benefit provided under the Employer's defined contribution plan. ARTICLE XV PROVISIONS AGAINST ANTICIPATION Until distribution pursuant to the terms hereof, no Participant shall have the right or power to alienate, anticipate, commute, pledge, encumber or assign any of the benefits, proceeds or avails set aside for him under the terms of this Plan, and no such benefits, proceeds or avails shall be subject to seizure by any creditor of the Participant under any writ or proceedings at law or in equity, provided, that the terms of this Section shall not prohibit the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant if such creation, assignment, or recognition of a right is made under a qualified domestic relations order as defined under Section 414(p) of the Code. Effective with respect to judgments, orders and decrees issued and settlements entered into on or after August 4, 1997, this Article XV shall not prevent the Trustee from offsetting a Participant's Account against an amount that the Participant is ordered or required to pay to the Plan pursuant to a judgment, order, decree or settlement that satisfies the requirements of Code section 401(a)(13)(C). ARTICLE XVI ADMINISTRATIVE COMMITTEE NAMED FIDUCIARY AND ADMINISTRATOR 16.01 Appointment of Committee. The Board or such person(s) as it designates shall appoint a Committee comprised of three or more persons (herein referred to as the Committee) to serve for such terms as the Board may designate, or until a successor has been appointed or until removal by the Board or its designee. The Committee shall be the Plan Administrator and Named Fiduciary of the Plan within the meaning of ERISA. The Board or its designee shall advise the Trustee in writing of the names of the members of the Committee and any changes thereafter made in the membership of the Committee. Vacancies due to resignation, death, removal or other causes shall be filled by the Board or its designee. Members shall service without bond, except as may otherwise be required by law, and without compensation for service. All reasonable expenses of the Committee shall be paid by the Employer. The number of the Committee may be changed by the Board at any time. 16.02 Committee Action. The Committee shall appoint a secretary, who may or may not be a Member of the Committee, who shall keep minutes of the Committee's proceedings and all data, records and documents pertaining to the Committee's administration of the Plan. The Committee shall act by majority vote of its members in office at that time, such vote to be taken at a meeting or, in writing, without a meeting. The Committee may, by such majority action, authorize its secretary, or any one or more of its members, or any other person to execute any document or documents on behalf of the Committee, in which event the Committee shall notify the Trustee in writing of such action and the name or names of those so designated. The Trustee shall accept and rely conclusively upon any direction or document executed by such person(s) as representing action by the Committee, until the Committee shall file with the Trustee a written revocation of such designation. A member of the Committee who is also a Participant hereunder shall not vote or act upon any matter relating solely to such member. In the event of a deadlock or other situation which prevents agreement of a majority of the Committee members, the matter shall be decided by the Board. 16.03 Rights and Duties of Committee. The Committee shall have the authority to control and manage the operation and administration of the Plan and shall have all powers necessary to accomplish those purposes. Actions taken and decisions made by the Committee shall be final and binding on all parties. The Committee shall have full power and complete discretionary authority to discharge the Committee's responsibility and authority hereunder, including, but not limited to, full power and discretionary authority to: A. Determine all questions relating to the eligibility of Employees to participate; B. Compute and certify to the Trustee the amount manner and time of payment of benefits payable to Participants, Spouses and/or their Beneficiaries; C. Authorize all disbursements by the Trustee from the Trust; D. Maintain all necessary records for the administration of the Plan other than those which the Trustee has specifically agreed to maintain; E. Construe and interpret the provisions of the Plan and publish such rules for the regulation of the Plan as are deemed necessary and not inconsistent with the terms of the Plan; F. Establish reasonable procedures to determine the qualified status of domestic relations orders and administer distributions under such qualified orders; and to notify the Participant and any other alternate payee, as defined under Section 414(p)(8) of the Code, of the receipt of a domestic relations order, the Plan's procedure for determining the qualified status of such an order, and the determination made in connection with such order; G. Delegate and/or allocate responsibility and/or authority for one or more of its duties to another person or persons, including but not limited to, individual members of the Committee; and H. Approve and adopt Plan amendments and execute all documents required therewith, in accordance with Section 21.02. The interpretation and construction of any provisions of the Plan and the exercise of any discretion granted hereunder to the Committee or any other fiduciary with respect to the Plan (within the meaning of Section 3(21) of ERISA) shall be final and binding on the Participants, their dependents and all other interested persons. 16.04 Investments. The Committee, as Named Fiduciary with respect to control and management of assets of the Plan, and in accordance with provisions of the Trust Agreement, may appoint in writing an investment manager(s) to manage and control all of the investments of the Plan, or may delegate the responsibility for making investment decisions to the Trustee, in which case the Trustee, to the extent permitted by governing law, shall be the fiduciary of the Plan. No such appointment shall be effective until the investment manger has acknowledged in writing that he or she is a fiduciary of the Plan, and that he or she has complied with the bonding requirements of ERISA. The Committee shall be responsible for establishing and carrying out an investment policy for the Plan. The investment policy and method so established shall be communicated to the Trustee and/or the investment manager(s). 16.05 Information, Reporting and Disclosure. To enable the Committee to perform its functions, the Employer shall supply full and timely information to the Committee on all matters relating to the Compensation of all Participants; their continuous, regular employment; their retirement, death or the cause for termination of employment; and such other pertinent facts as the Committee may require, and the Committee shall furnish the Trustee such information as may be pertinent to the Trustee's administration of the Plan. The Committee shall be entitled to rely upon the information it receives from the Employer. The Committee, as Plan Administrator, shall have the responsibility of complying with the reporting and disclosure requirements of ERISA and, to the extent applicable, any other federal or state law. 16.06 Independent Qualified Accountant. Unless the Plan is exempt from the requirement by applicable law or regulation, the Committee shall engage, on behalf of all Plan Participants, an independent qualified public accountant who shall conduct such examinations of the financial statements of the Plan and of other books and records of the Plan as the accountant may deem necessary to enable the accountant to form an opinion as to whether the financial statements and schedules required by law to be included in any reports are presented fairly and in conformity with generally accepted accounting principles applied on a basis consistent with that of any preceding year. 16.07 Standard of Care Imposed Upon the Committee. The Committee shall discharge its duties with respect to the Plan solely in the interest of the Participants and Beneficiaries: A. For the Exclusive purpose of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of the Plan; B. With the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person, acting in a like capacity and familiar with such matters, would use in the conduct of an enterprise of like character and with like aims; and C. In accordance with the provisions of this Plan and any amendments to the Plan. 16.08 Allocation and Delegation of Responsibility. The Committee may, by written rule promulgated under Section 16.03 above, allocate fiduciary responsibilities among Committee members and may delegate to persons other than Committee members the authority to carry out fiduciary responsibilities under the Plan, provided that no such responsibility shall be allocated or delegated to the Trustee without its written consent. As used in this Section, the term "fiduciary responsibility" shall not include any responsibility to manage or control the assets of the Plan. The Committee, in making the above allocation of fiduciary responsibilities, may provide that a person or group of persons may serve, with respect to the Plan, in more than one fiduciary capacity. The Committee or, so long as the Committee shall have made written approval, persons to whom fiduciary responsibilities have been delegated by the Committee may employ one or more persons to render advice with regard to any responsibility such fiduciary has under the Plan. In the event a fiduciary responsibility is allocated to a Committee member, no other Committee member shall be liable for any such act or omission of the person to whom the responsibility is allocated except as required by law. If a fiduciary responsibility is delegated to a person other than a Committee member, the Committee shall not be responsible or liable for an act or omission of such person in carrying out such responsibility except as may otherwise be required by law. 16.09 Bonding. When required by law, each fiduciary of the Plan and every person handling Plan funds shall be bonded. It shall be the obligation of the Committee to assure compliance with applicable bonding requirements. The Trustee shall not be responsible for assuring that bonding requirements are complied with and such responsibility is specifically allocated to the Committee. 16.10 Claims Procedure. Benefit Request. A request for a distribution of Plan benefits shall be sent to the Committee in writing on any forms prescribed by the Committee and signed by the Participant, or, if for a death benefit, by the Participant's Beneficiary. Such request shall be acted on within thirty (30) days after receipt. If any request is denied in whole or in part, the Committee shall notify the claimant in writing of the denial within ninety (90) days of receipt thereof, unless the Committee determines that special circumstances require additional time, in which case a decision shall be rendered not later than one-hundred eighty days (180) after receipt of the claim by the Plan. If such extension of time is required, written notice of the extension shall be furnished to the claimant before the end of the original ninety (90) day period which explains the reasons for the extension and the date a decision is expected. The notice of denial shall set forth the following: the specific reason or reasons for the denial; reference to the specific Plan provisions on which such denial is based; a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such additional material or information is necessary; a description of the Plan's review procedures and time limits; and a statement of the claimant's right to bring a civil action under section 502(a) of ERISA following a denial on review. Benefit Denials. In the case of any claimant whose application for benefits is denied in whole or in part, the claimant or the duly authorized representative may appeal such denial to the Committee for a full and fair review thereof by sending to the Committee a written request for review within sixty (60) days after the date on which such denial is received. The claimant making the request for review or his duly authorized representative may discuss any issues relevant to the claim, may review pertinent documents and may submit issues and comments in writing. The review of a request which has been denied shall be made by the Committee within sixty (60) days of the receipt of the request for review, unless the Committee determines that special circumstances require additional time, in which case a decision shall be rendered not later than one hundred twenty (120) days after receipt of the request for review. If such an extension of time is required, written notice of the extension shall be furnished to the claimant before the end of the original sixty (60) day period which explains the reasons for the extension and the date a decision is expected. The decision on review shall be in writing, shall be written in a manner calculated to be understood by the claimant, and shall include the following: the specific reason or reasons for the denial; reference to the specific Plan provisions on which such denial is based; a statement that the claimant is entitled to receive, upon request and free of charge, access to and copies of all documents, records and other information relevant to the claim; a statement of the claimant's right to bring a civil action under Section 502(a) of ERISA; and a description of any voluntary appeals procedures offered by the Plan. All interpretations, determinations and decisions of the Committee, with respect to any claim under the Plan, shall be made in its sole and absolute discretion and shall be final and conclusive. Disability Benefits Notwithstanding the foregoing, if the provisions of Section 2.13(B) apply, the claims procedures under 29 CFR. Section 2560.503-1 relating to disability plans shall apply. 16.11 Indemnification. The Employer does hereby indemnify and hold harmless each Committee member or its agents who are employees of a member of the Consolidated Group from any loss, claim or suit arising out of the performance of obligations imposed hereunder and not arising from said Committee member's or agent's willful neglect, misconduct or gross negligence. ARTICLE XVII APPOINTMENT OF INVESTMENT MANAGER 17.01 Authority for Appointment. The Committee shall have the authority prescribed in ERISA Section 402 (c)(3) and under Section 16.04 of this Plan to appoint one or more investment managers and contract with each for management of any part of the Trust Fund. Selection and retention of an investment manager shall be in the Committee's discretion. Each investment manager shall have the power to manage, acquire and dispose of that part of the Trust Fund designated by the Committee. The investment manager has no responsibility for Plan operation or administration. 17.02 Investment Manager Discretion. Without limitation of the foregoing and if an investment manager is appointed: A. The Trustee, on Committee direction, shall segregate the Trust Fund or any part thereof into one or more investment manager accounts. The Committee shall appoint an investment manager for each account and designate to the Trustee the part of the Trust Fund to be managed by each investment manager. The Trustee shall follow the investment manager's directions, with respect to such investment manager's account, and shall sign and vote the proxies under the direction received from the investment manager with respect to such account. B. The Committee, by notice to the Trustee, may terminate at any time the authority of an investment manager to manage the account. In such event or upon resignation of an investment manager, the Committee shall either appoint a successor investment manager for the account or direct the Trustee to assume responsibility for the investment management of the assets in the accounts, in which case such assets shall no longer be segregated from the other assets of the Trust Fund. C. Each investment manager to whom any fiduciary responsibility with respect to the Plan or Trust Funds is delegated shall discharge such responsibility in accordance with the standards set forth in ERISA Section 404(a). ARTICLE XVIII INVESTMENT OF ASSETS BY TRUSTEE The Trustee, in accordance with the directions of the Committee, shall exercise authority or discretion in the management and control of the assets of the Plan, except to the extent the management of any part of the Trust Fund has been delegated to any investment manager pursuant to Article XVII. Without limiting the generality of the foregoing, the Trustee shall invest and reinvest the principal and income of the Trust Fund in common investment funds, real estate, government, municipal or corporation bonds, debentures or notes, common and preferred stocks, or other forms of property whether real, personal or mixed, including investments for which interest is guaranteed by a bank, insurance company, or other financial institutions. ARTICLE XIX CONSTRUCTION This Plan shall be constructed in accordance with ERISA and regulations issued there under and, to the extent applicable, the laws of the state in which the principal office of the Employer is located. ARTICLE XX MERGERS AND CONSOLIDATIONS In the case of any merger or consolidation with any other plan or a transfer of assets or liabilities to any other plan, each Participant shall be entitled to be credited with a benefit immediately after such merger, consolidation or transfer which is equal to the benefit to which he would have been entitled immediately before such merger or consolidation had the Plan then terminated. ARTICLE XXI AMENDMENT OR TERMINATION OF PLAN 21.01 Right to Amend and Terminate. The Employer represents that the Plan is intended to be a continuing and permanent program for Participants, but reserves the right to terminate the Plan or any part of it at any time. The Employer may, by action of its Board or, with respect to administrative provisions, by action of the Committee, modify, alter, or amend this Plan in whole or in part. Such termination or amendment shall be effective on the date specified by the Board. No such action shall reduce a protected Accrued Benefit of a Participant. 21.02 Administrative Amendments. Subject to the foregoing provisions of this Article, the Board hereby delegates to the Committee the right to make administrative amendments to this Plan and the Trust Agreement. An amendment will be considered an administrative amendment properly within the delegated authority of the Committee only if such amendment does not change the amount or level of Employer contributions under this Plan (except as otherwise permitted in Section 5.01), the method of allocation or crediting contributions as provided for in Article VI, or any other provision specifically governed by action of the Board in accordance with the provisions of this Plan or the Trust Agreement. The adoption of specific provisions concerning contributions, distributions or Plan provisions affecting employees involved in a corporate acquisition or disposition or similar transaction shall be considered an administrative amendment within the delegated authority of the Committee. Any amendment adopted by the Committee pursuant to the delegated authority shall be reported to the Board within a reasonable period following its adoption, but in no event later than two and one-half (2-1/2) months after the close of the Plan Year in which it becomes effective. Any such amendment shall become effective as of the date specified by the Committee. 21.03 Protection of Accrued Benefits. With the exception of an amendment described under Section 412(c)(8) of the Code, no amendment to the Plan shall reduce the Accrued Benefit to a Participant determined as of the date immediately preceding the adoption of the amendment. In the case of any change in the Plan's vesting schedule, a Participant who is credited with three (3) or more Years of Service for vesting purposes at the time of the change shall have his vested interest under the Plan determined under the schedule which gives the Participant the largest nonforfeitable interest. For purposes of the preceding sentence, the time at which a change in the vesting schedule occurs shall be the later of the effective date of such change or the execution date of an amendment which causes such change. 21.04 No Re-Vesting. No termination, modification, alteration or amendment shall have the effect of re-vesting in the Employer any of its contributions or the income derived therefrom. 21.05 Exclusive Benefit of Participants. At no time during the existence hereof or at its termination may the Plan assets be used for or directed to purposes other than for the exclusive benefit of Participants or their Beneficiaries. 21.06 Termination and Discontinuance of Contributions. The Employer shall have the right, at any time, to discontinue its contributions hereunder and to terminate, or partially terminate, this Plan and the Trust by delivering to the Trustee written notice of such discontinuance or termination. Such termination or discontinuance shall be effective on the date specified by the Board. Upon complete discontinuance of the Employer's contributions or full or partial termination of the Trust, the Accounts and rights to benefits of all affected Participants shall become fully vested and shall not thereafter be subject to forfeiture, except to the extent that law or regulations may preclude such vesting in order to prevent discrimination in favor of Highly Compensated Employees. Upon final termination of the Trust, the Committee shall direct the Trustee to distribute to the Participants all assets remaining in the Trust after payment of any expenses properly chargeable against the Trust in accordance with the value credited to such Participants, as of the date of such termination, in cash or in kind and in such manner as the Committee shall determine. ARTICLE XXII OTHER PARTIES TO THIS PLAN 22.01 Subsidiaries. Any corporation which is a subsidiary of National Semiconductor Corporation may become a party to this Plan by a written agreement to this effect between National Semiconductor Corporation and such subsidiary which shall set out, among other things, the date on which the subsidiary shall become a party to this Plan. Unless otherwise provided in the written agreement, service with such subsidiary prior to the time it became a member of the Consolidated Group shall be disregarded. Any such party to this Plan shall be subject to the following special provisions of this Article, except as otherwise specifically provided in the agreement making the subsidiary a party to this Plan. As used herein, the term "subsidiary" shall mean a corporation with which National Semiconductor Corporation is eligible to file a consolidated income tax return under the federal income tax law and regulations, irrespective of whether such consolidated return is actually filed. 22.02 Termination of Participation. Upon approval of the Board, any party to this Plan, including National Semiconductor Corporation, may at any time elect to terminate its participation in this Plan in a manner set forth in Article XXI; or National Semiconductor Corporation or any other party to this Plan may elect at any time by appropriate amendment or action affecting only its own status hereunder to disassociate itself from this Plan but to continue the Plan as it pertains to itself and its Employees as an entity separate and distinct from this Plan. Termination of the participation of National Semiconductor Corporation or any other party to this Plan, or disassociation, shall not affect the participation of National Semiconductor Corporation or any other party to this Plan nor terminate the Plan or Trust with respect to them and their Employees; provided that, if National Semiconductor Corporation shall terminate its participation, or disassociate itself, then each remaining party to this Plan shall make such arrangements and take such action as may be necessary to assume the duties of National Semiconductor Corporation in providing for the operation and continued administration of the Plan as the same pertains to the other parties to this Plan. 22.03 Contributions and Allocations. With respect to any Plan Year during which one or more subsidiaries of National Semiconductor Corporation are parties to this Plan, National Semiconductor Corporation and its subsidiary or subsidiaries which are parties to this Plan shall together make contributions to the Trust for such Plan Year. Such aggregate contributions shall be divided among the parties to this Plan in the proportion that the Compensation of the Participants for the Plan Year of each party to this Plan bears to the Compensation of all the Participants of all such parties to this Plan for such Plan Year; provided, however, that if any party is prevented from making a contribution because it has no current or accumulated earnings or profits or has less earning or profits than the contribution which would otherwise have been made, the other party or parties to this Plan may make contributions in behalf of such deficient party in accordance with the provisions of Section 404(a)(3)(B) of the Internal Revenue Code and the regulations promulgated there under. Such aggregate contribution for each Plan Year shall be allocated among the Participants of all parties to this Plan in accordance with Article VI. 22.04 Committee. The Committee which administers this Plan as applied to National Semiconductor Corporation shall also be the Committee as applied to each other party to this Plan. 22.05 Accounts. The Accounts under this Plan with respect to all of the Participants of all of the parties to this Plan shall be maintained in accordance with the provisions of Article VI. ARTICLE XXIII RIGHT TO DISCHARGE EMPLOYEES Neither the establishment of this Plan, nor any modification thereof, nor the payment of any benefit shall be construed as giving any Participant or any other person any legal or equitable right against the Employer or the Trustee, unless the same shall be specifically provided for in this Plan, nor as giving any Employee or Participant the right to be retained in the employ of the Employer. All Employees shall remain subject to discharge by the Employer to the same extent as if this Plan had never been adopted. ARTICLE XXIV DECLARATION OF PLAN CONTINGENT UPON INTERNAL REVENUE SERVICE APPROVAL 24.01 Internal Revenue Service Approval. Upon adopting the Plan, or upon adopting a qualifying amendment to this Plan, the Employer shall immediately apply to the Internal Revenue Service for a determination letter that the Plan, as adopted or amended by the Employer, is a qualified Plan under Internal Revenue Code Section 401(a). In the event the Employer receives an unfavorable determination on a qualifying amendment and does not effect an amendment which will cure the defect, such qualifying amendment shall be null and void and this restated Plan shall remain in effect. 24.02 Mistake of Fact. In the event a contribution is made by reason of a mistake of fact, the amount that would not have been contributed had the mistake not occurred may be returned to the Employer if the amount is returned within one year of the mistaken contribution. 24.03 Disallowance of Deductibility. In the event a contribution is conditioned upon its deductibility and the deduction is disallowed, the amount that would not have been contributed had there been no mistake in determining the deduction may be returned to the Employer if the amount is returned within one year of the disallowance. ARTICLE XXV MISCELLANEOUS 25.01 Governing Law. The parties agree that all disputes relating to the performance or interpretation of any term of this Plan shall be governed by the laws of the State of California. 25.02 Severability of Provisions. If a court of competent jurisdiction determines that any term of this Plan is invalid or unenforceable to any extent under applicable law, the remainder of this Plan shall not be affected thereby, and each remaining term shall be valid and enforceable to the fullest extent permitted by law. 25.03 Counterparts. This Plan may be executed in several counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument. 25.04 Captions. The Table of Contents and captions to the Articles and Sections of this Plan are for the convenience of reference only and in no way define, limit, describe, or affect the scope or intent of any part of this Plan. 25.05 Interchangeable Word Usage. Unless some other meaning and intent is apparent from the context, the plural shall mean the singular and vice versa; and masculine, feminine and neuter words shall be used interchangeably. 25.06 USERRA Provisions. Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Internal Revenue Code. Loan repayments will be suspended under this plan as permitted under Section 414(u)(4) of the Internal Revenue Code. The terms of this Section are effective October 13, 1996 with respect to reemployments initiated on or after December 12, 1994. EX-10 5 form10k_exh10-22.txt EXHIBIT 10.22 2002 KEY EMPLOYEE INCENTIVE PLAN Ben\Bonus\KEIPL02 Exhibit 10.22 NATIONAL SEMICONDUCTOR CORPORATION 2002 KEY EMPLOYEE INCENTIVE PLAN 1. Objective The National Semiconductor Key Employee Incentive Plan ("the Plan") is designed to retain executives and other selected employees and reward them for making major contributions to the success and profitability of the Company. These objectives are accomplished by making incentive awards under the Plan and providing Participants with a proprietary interest in the growth and performance of the Company. 2. Definitions Whenever used in the Plan, unless otherwise indicated, the following terms shall have the respective meanings set forth below: Award: ------ The amount to be paid to a Plan Participant at the end of the Plan Period. Award Date: ----------- The date forty days after the Company makes its consolidated financial statements for the fiscal year generally available to the press. Annual Incentive Base Salary: ----------------------------- Generally, the annualized base remuneration received by a Participant from the Company at the end of the Plan Period. Extraordinary items, including but not limited to prior awards, relocation expenses, car allowances, international assignment allowances and tax adjustments, sales incentives, amounts recognized as income from stock or stock options, disability benefits (whether paid by the Company or a third party), and other similar kinds of extra or additional remuneration are excluded from the computation of Annual Incentive Base Salary. Company: -------- National Semiconductor Corporation ("NSC") and any corporation in which NSC controls directly or indirectly fifty percent (50%) or more of the combined voting power of voting securities, and which has adopted this plan. Committee: ---------- The Stock Option and Compensation Committee of the Board of Directors of the Company. Disability: ----------- Inability to perform any services for the Company and eligible to receive disability benefits under the standards used by the Company's disability benefit plans or any successor plan thereto. Employee: --------- An individual in the regular employ of the Company at any time during the Plan Period. Executive Officer: ------------------ An Employee of the Company who is subject to the reporting and liability provisions of Section 16 of the Securities and Exchange Act of 1934. Extraordinary Occurrence: ------------------------- Events that, in the opinion of the Committee, are beyond the significant influence of Plan Participants or the Company and cause a significant unintended effect, positive or negative, on Company operating and financial results. Incentive Levels: ----------------- Percentage of Base Salary assigned to a Participant as a Target Award. Participant: ------------ An Employee who at the time shall be a Participant in accordance with the provisions of Article 4. Performance Goal: ----------------- Performance measures and factors considered and scored in calculating a Participant's Award. Individual Performance Goals will be defined with a Target level of performance, which shall mean expected performance, reflecting a degree of difficulty which has a reasonable probability of achievement. Plan Period: ------------ The fiscal year of the Company. Retirement: ----------- Permanent termination of employment with the Company, and (a) age is either sixty-five (65) or age is at least fifty-five (55) and age plus years of service in the employ of the Company is sixty five (65) or more, and (b) the terminating employee has confirmed to the Vice President - Finance of the Company that he or she does not intend to engage in a full time vocation. Target Award: ------------- The Award, expressed as a percentage of Annual Incentive Base Salary at the assigned Incentive Level, that is earned by a Participant for achievement of the Target level of performance. 3. Effective Date The Plan will be effective for the Company's fiscal year 2002. 4. Eligibility for Plan Participation A. At the beginning of the Plan Period, management will recommend to the President and CEO of the Company potential Participants for the Plan Period and their Incentive Level. The President and CEO of the Company shall have the final authority to designate Plan Participants and their Incentive Level for the Plan Period. Executive Officers participating in the Executive Officer Incentive Plan may not participate in the Plan. B. Participants will be notified of their participation on or about the beginning of the Plan Period. Continued participation will be re-evaluated at the beginning of each Plan Period and there is no guarantee that a Participant during one Plan Period will be a Participant in a subsequent Plan Period. C. Newly hired Employees and newly promoted Employees may be added as Participants to the Plan during the Plan Period. Participants who are added to the Plan during the Plan Period will receive a prorated Award based on length of time of participation in the Plan. D. Participants may be removed from the Plan during the Plan Period at the discretion of management. Participants so removed will receive a prorated Award based on length of time of participation in the Plan. E. To receive an Award, a Participant must be an Employee on the last working day of the Plan Period. 5. Target Awards and Incentive Levels A. Each Participant will be assigned an Incentive Level with an associated Target Award expressed as a percentage of the Participant's Annual Incentive Base Salary. B. In the event that a Participant changes positions during the Plan Period and the change results in a change in Incentive Level, whether due to promotion or demotion, the Incentive Level will be prorated to reflect the time spent in each position. 6. Plan Performance Goals A. Management will determine corporate financial Performance Goals at the start of the Plan Period. For fiscal year 2002, the corporate financial Performance Goal will be profit before tax. Corporate financial Performance Goals will determine overall levels of incentive pools. B. Individual and group Performance Goals and associated weights will be established at the start of each Plan Period for each Participant. Participants in defined business or corporate groups may have the same Performance Goals or they may have different Performance Goals, as determined by management. Each Performance Goal will have a defined Target level of performance. Performance Goals and their associated weights may change from one Plan Period to another Plan Period to reflect the Company's operational and strategic goals. C. Weights for all Performance Goals will be established at the beginning of the Plan Period. D. Awards may range between 0% and 200% of Target, based on performance as scored by management at the end of the Plan Period. The sum of the scoring on the Performance Goals will determine the total performance level. For individual and group Performance Goals, management judgment will be used to determine scores for performance above or below the Target Level of performance. As a general rule, the minimum level of 50% must be achieved in order for any Award to be paid, but management has the authority, in its sole judgment, to pay Awards even if the minimum level of performance is not met. E. Under exceptional circumstances, revisions to Performance Goals may be proposed at the midpoint of the Plan Period if the business environment or key planning assumptions change significantly from conditions assumed at the start of the Plan Period. Such revisions are subject to approval by the President and CEO of the Company. F. Performance Goals, performance scales and Awards may be adjusted in the event the Committee or the President and CEO of the Company determine there has been an Extraordinary Occurrence during the Plan Period that (i) affects one or more Performance Goals; (ii) unreasonably distorts Award calculations; or (iii) results in undue benefit or detriment to the Plan Participants. Such adjustments will be made solely for the purpose of neutralizing the effect of the Extraordinary Occurrence. 7. Calculation and Payment of Awards A. The Company shall set incentive pools for groups, which shall constitute a maximum limit on Awards to all Participants for the Plan Period. Subject to this limitation set by the incentive pool, a Participant's Award will be calculated as a percentage of Annual Incentive Base Salary as follows: 1) The Participant's Target Award is determined at the beginning of the Plan Period, based on the Participant's Incentive Level and Annual Incentive Base Salary as reflected by the Company's human resources information systems. 2) The performance of the group on group Performance Goals and individuals on individual Performance Goals is scored at the end of the Plan Period. 3) The group's overall performance score and the corporate financial performance score creates an incentive pool for the group. 4) The group's incentive pool is divided among the Participants within the group based generally on each Participant's individual performance score. Management has discretion to adjust Awards based on individual contributions toward the group's overall performance score. Without the approval of the Company's President and CEO, no one individual Award may exceed 200% of the Participant's Target Award amount. 5) Total Awards for each group may not exceed the maximum limit set for that group's incentive pool. As a result, Award amounts may be adjusted to ensure conformance with the incentive pool limit set for the business group. B. Measurement of performance on Performance Goals for Participants will be scored by the Company. C. Awards will be paid in cash on or about the Award Date. D. Awards will reflect the Participant's Annual Incentive Base Salary in effect at the end of the Plan Period. Participants who take a leave of absence during the Plan Period will have their Awards reduced on a prorata basis to reflect the leave of absence. E. Any Awards that are prorated for any reason under the terms of this Plan will be prorated based on the effective date of the change that resulted in the proration and will be calculated based on data contained in the Company's human resource information systems. 8. Termination of Employment A. To be eligible to receive an Award, the Participant must be employed by the Company on the last working day of the Plan Period. A Participant who terminates employment prior to the last working day of the Plan Period for any reason other than Disability, Retirement or death will forfeit all rights to an Award. B. If a Participant's employment is terminated during the Plan Period by Disability, Retirement or death, the Participant will receive an Award prorated to reflect the Participant's actual period of employment during the Plan Period. C. Unless local law or regulation provides otherwise, payments of Awards made upon termination of employment by death shall be made on the Award Date to: (i) beneficiaries designated by the Participant; if none, then (ii) to a legal representative of the Participant; if none, then (iii) to the persons entitled thereto as determined by a court of competent jurisdiction. D. Awards paid to Participants who have taken a leave of absence during the Plan Period will be prorated to reflect the actual period of time spent on the leave of absence. Participants on leaves of absence on the Award Date who are otherwise eligible to receive an Award will receive the Award at the time all other Participants receive their Awards. E. Notwithstanding any other provisions of the Plan to the contrary, the right of any Participant to receive an Award under this Plan shall be forfeited if the Participant's employment is terminated because of or the Participant is discovered to have engaged in fraud, embezzlement, dishonesty against the Company, obtaining funds or property under false pretenses, assisting a competitor without permission, or interfering with the relationship of the Company with a customer. A Participant's Award, including any Award that may have been previously deferred, will be forfeited for any of the above reasons regardless of whether such act is discovered prior to or subsequent to the Participant's termination of employment or payment of an award. If an Award has been paid, such payment shall be repaid to the Company by the Participant. 9. Deferral of Awards Participants who are eligible under the National Semiconductor Corporation Deferred Compensation Plan (the "Deferred Compensation Plan") may elect to make an irrevocable election to defer receipt of all or any portion of any Award pursuant to and in accordance with the terms of the Deferred Compensation Plan. 10. Interpretations and Rule-Making The Company shall have the right and power to: (i) interpret the provisions of the Plan, and resolve questions thereunder, which interpretations and resolutions shall be final and conclusive; (ii) adopt such rules and regulations with regard to the administration of the Plan as it deems necessary in its discretion, and (iii) generally take all action to equitably administer the operation of the Plan. The President and CEO of the Company may delegate his rights and duties under this Plan, including administration of the Plan, to other management of the Company. 11. Declaration of Incentives, Amendment, or Discontinuance The President and CEO of the Company acting within his sole discretion may on or before the Award Date: (i) determine not to make any Awards to any or all Participants for any Plan Period; (ii) make any modification or amendment to the Plan for any or all Participants; or (iii) discontinue the Plan for any or all Participants. 12. Miscellaneous A. Except as provided in the Deferred Compensation Plan, no right or interest in the Plan is transferable or assignable except by will or the laws of descent and distribution. B. Participation in this Plan does not guarantee any right to continued employment and management reserves the right to dismiss Participants for any reason whatsoever. Participation in one Plan Period does not guarantee the Participant the right to participation in any subsequent Plan Period. C. The Company reserves the right to deduct from all Awards under this Plan any taxes or other amounts required by law to be withheld with respect to Award payments. D. Maintenance of financial information relevant to measuring performance during the Plan Period will be the responsibility of the Chief Financial Officer of the Company. E. The provisions of the Plan shall not limit, or restrict, the right or power of the Company's Board of Directors to adopt such other plans or programs, or to make salary, bonus, incentive, or other payments, with respect to compensation of officers or Employees, as in its sole judgment it may deem proper. F. No member of the Company's Board of Directors or any officer, employee, or agent of the Company shall have any liability to any person, firm or corporation based on or arising out of this Plan. EX-10 6 form10k_exh10-23.txt EXHIBIT 10.23 RELOCATION PACKAGE NLL/SECMtrs/DKrelo Exhibit 10.23 Relocation Package made available to Detlev Kunz Position: - --------- Senior Vice President and General Manager, Worldwide Marketing and Sales Position Acceptance Bonus Transition Assistance: - ---------------------- >> Payment of temporary living expenses pending relocation International Relocation Package: - --------------------------------- >> Payment of selling expenses on old home >> Housing allowance >> Payment for storing and moving of household goods >> Payment of home finding travel and orientation expenses >> Two month salary allowance >> Reimbursement for payment of taxes associated with nondeductible portions of relocation package >> Payment of car rental expenses >> Home purchase allowance EX-24 7 form10k_exh10-24.txt EXHIBIT 24.1 Nll/secmtrs/0210KPOA1 Exhibit 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned persons hereby constitutes and appoints Brian L. Halla, Lewis Chew, and John M. Clark III, and each of them singly, his true and lawful attorney-in-fact and in his name, place, and stead, and in any and all of his offices and capacities with National Semiconductor Corporation (the "Company"), to sign the Annual Report on Form 10-K for the Company's 2002 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 17, 2002 Brian L. Halla //S// STEVEN R. APPLETON June 25, 2002 Steven R. Appleton //S// GARY P. ARNOLD June 21, 2002 Gary P. Arnold //S// RICHARD J. DANZIG June 30, 2002 Richard J. Danzig //S// ROBERT J. FRANKENBERG June 26, 2002 Robert J. Frankenberg //S// E. FLOYD KVAMME June 25, 2002 E. Floyd Kvamme //S// MODESTO A. MAIDIQUE June 29, 2002 Modesto A. Maidique //S// EDWARD R. McCRACKEN June 24, 2002 Edward R. McCracken //S// LEWIS CHEW June 17, 2002 Lewis Chew //S// ROBERT E. DEBARR June 18, 2002 Robert E. DeBarr -----END PRIVACY-ENHANCED MESSAGE-----