-----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, K6yFofuj+CHkWLs27wa8DxSg6bBWiBXPKVRPY7vcKgiCHnLawAdNgrqf4Ej8VCzw PyHCLzrh6NWXIOwTF/zbsQ== 0000070530-03-000004.txt : 20030106 0000070530-03-000004.hdr.sgml : 20030106 20030106154149 ACCESSION NUMBER: 0000070530-03-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021124 FILED AS OF DATE: 20030106 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06453 FILM NUMBER: 03505038 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-Q 1 form10q_10603.txt FORM 10Q FOR FY03 Q2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 24, 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 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of Each Class Outstanding at November 24, 2002. Common stock, par value $0.50 per share 181,681,544 NATIONAL SEMICONDUCTOR CORPORATION INDEX Page No. Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Operations (Unaudited) for the Three Months and Six Months Ended November 24, 2002 and November 25, 2001 3 Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three Months and Six Months Ended November 24, 2002 and November 25, 2001 4 Condensed Consolidated Balance Sheets (Unaudited) as of November 24, 2002 and May 26, 2002 5 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended November 24, 2002 and November 25, 2001 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Item 4. Controls and Procedures 21 Part II. Other Information Item 1. Legal Proceedings 22 Item 4. Submission of Matters To a Vote of Security Holders 22 Item 6. Exhibits and Reports on Form 8-K 23 Signature 24 Certifications 25-26 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NATIONAL SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in millions, except per share amounts) Three Months Ended Six Months Ended Nov. 24, Nov. 25, Nov. 24, Nov. 25, 2002 2001 2002 2001 ------- ------- ------- ------- Net sales ........................... $ 422.3 $ 366.5 $ 842.9 $ 705.8 Operating costs and expenses: Cost of sales ..................... 241.2 237.0 479.5 466.2 Research and development .......... 107.1 110.4 217.8 219.4 Selling, general and administrative 68.3 66.8 138.2 129.3 Special items ..................... 0.7 -- 0.7 1.1 ------- ------- ------- ------- Total operating costs and expenses .. 417.3 414.2 836.2 816.0 ------- ------- ------- ------- Operating income (loss) ............. 5.0 (47.7) 6.7 (110.2) Interest income, net ................ 3.6 5.5 7.7 12.5 Other income (expense), net ......... (0.4) (1.9) (1.9) 1.5 ------- ------- ------- ------- Income (loss) before income taxes ... 8.2 (44.1) 12.5 (96.2) Income tax expense .................. 2.0 2.5 5.0 5.0 ------- ------- ------- ------- Net income (loss) ................... $ 6.2 $ (46.6) $ 7.5 $ (101.2) ======= ======= ======= ======= Earnings (loss) per share: Basic .......................... $ 0.03 $ (0.26) $ 0.04 $ (0.58) Diluted ........................ $ 0.03 $ (0.26) $ 0.04 $ (0.58) Weighted-average shares: Basic .......................... 181.3 176.8 181.0 175.8 Diluted ........................ 182.0 176.8 184.5 175.8 See accompanying Notes to Condensed Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (in millions) Three Months Ended Six Months Ended Nov. 24, Nov. 25, Nov. 24, Nov. 25, 2002 2001 2002 2001 ---- ----- ----- ------ Net income (loss) ...................... $ 6.2 $(46.6) $ 7.5 $(101.2) Other comprehensive income (loss), net of tax: Reclassification adjustment for net realized (gain) loss on available-for-sale securities included in net income (loss) ........ (2.9) 0.2 (3.6) (5.4) Unrealized gain (loss) on available-for-sale securities .... 4.1 1.4 (24.0) (6.9) Derivative instruments: Unrealized gain on cash flow hedges ........................... 0.1 0.1 0.5 -- ---- ----- ----- ------ Comprehensive income (loss) ............ $ 7.5 $(44.9) $(19.6) $(113.5) ==== ===== ===== ====== See accompanying Notes to Condensed Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in millions) Nov. 24, May 26, 2002 2002 -------- -------- ASSETS Current assets: Cash and cash equivalents ....................... $ 686.4 $ 681.3 Short-term marketable investments ............... -- 18.1 Receivables, less allowances of $37.2 at Nov. 24, 2002 and $37.8 at May 26, 2002 ................ 144.4 131.7 Inventories ..................................... 153.0 145.0 Deferred tax assets ............................. 58.7 58.7 Other current assets ............................ 36.3 38.3 -------- -------- Total current assets ............................ 1,078.8 1,073.1 Property, plant and equipment, net ................. 739.4 737.1 Long-term marketable debt securities ............... 152.9 145.0 Goodwill ........................................... 173.3 173.3 Other assets ....................................... 159.5 160.3 -------- -------- Total assets ....................................... $2,303.9 $2,288.8 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt ............... $ 4.0 $ 5.5 Accounts payable ................................ 109.6 123.7 Accrued expenses ................................ 238.9 226.7 Income taxes payable ............................ 56.5 47.9 -------- -------- Total current liabilities ....................... 409.0 403.8 Long-term debt ..................................... 19.5 20.4 Other noncurrent liabilities ....................... 92.7 83.5 -------- -------- Total liabilities ............................... 521.2 507.7 -------- -------- Commitments and contingencies Shareholders' equity: Common stock .................................... 90.8 90.2 Additional paid-in capital ...................... 1,423.1 1,402.5 Retained earnings ............................... 318.0 310.5 Accumulated other comprehensive loss ............ (49.2) (22.1) -------- -------- Total shareholders' equity ...................... 1,782.7 1,781.1 -------- -------- Total liabilities and shareholders' equity ......... $2,303.9 $2,288.8 ======== ======== See accompanying Notes to Condensed Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions) Six Months Ended Nov. 24, Nov. 25, 2002 2001 --------- -------- Cash flows from operating activities: Net income (loss) ................................ $ 7.5 $ (101.2) Adjustments to reconcile net income (loss) with net cash provided by operating activities: Depreciation and amortization ................. 113.8 114.8 Net gain on investments ....................... (0.5) (5.4) Loss on disposal of equipment ................. 1.6 1.6 Noncash special items ......................... 0.7 1.1 Other, net .................................... 0.3 0.2 Changes in certain assets and liabilities, net: Receivables ................................ (12.6) 20.3 Inventories ................................ (8.0) 23.1 Other current assets ....................... (9.8) (8.7) Accounts payable and accrued expenses ...... (1.9) (52.2) Current and deferred income taxes payable .. 8.6 21.8 Other noncurrent liabilities ............... 7.3 4.6 --------- -------- Net cash provided by operating activities ........ 107.0 20.0 --------- -------- Cash flows from investing activities: Purchase of property, plant and equipment ........ (112.2) (85.4) Sale and maturity of available-for-sale securities 300.1 24.0 Purchase of available-for-sale securities ........ (290.2) (74.6) Sale of investments .............................. 8.7 6.7 Sale of equipment ................................ 2.3 -- Business acquisition, net of cash acquired ....... (11.0) (27.5) Purchase of nonmarketable investments ............ (12.2) (10.1) Funding of benefit plan .......................... (3.6) (14.4) Other, net ....................................... 0.3 5.8 --------- -------- Net cash used by investing activities ............ (117.8) (175.5) --------- -------- Cash flows from financing activities: Repayment of debt ................................ (3.5) (8.9) Issuance of common stock, net .................... 19.4 54.8 --------- -------- Net cash provided by financing activities ........ 15.9 45.9 --------- -------- Net change in cash and cash equivalents .......... 5.1 (109.6) Cash and cash equivalents at beginning of period . 681.3 817.8 --------- -------- Cash and cash equivalents at end of period ....... $ 686.4 $ 708.2 ========= ======== See accompanying Notes to Condensed Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies Interim Financial Statements: In the opinion of our management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position and results of operations of National Semiconductor Corporation and our majority-owned subsidiaries. You should not expect interim results of operations to necessarily be indicative of the results to be expected for the full fiscal year. This report should be read in conjunction with the consolidated financial statements and the accompanying notes included in our annual report on Form 10-K for the fiscal year ended May 26, 2002. Earnings Per Share: A reconciliation of the shares used in the computation of basic and diluted earnings per share follows (in millions): Three Months Ended Six Months Ended Nov. 24, Nov. 25, Nov. 24,Nov. 25, 2002 2001 2002 2001 ------ ------ ------ ------ Net income (loss) used for basic and diluted earnings (loss) per share ..... $ 6.2 $(46.6) $ 7.5 $(101.2) ====== ====== ====== ====== Number of shares: Weighted-average common shares outstanding used for basic earnings (loss) per share ...................... 181.3 176.8 181.0 175.8 Effect of dilutive securities: Stock options ......................... 0.7 -- 3.5 -- ------ ------ ------ ------ Weighted-average common and potential common shares outstanding used for diluted earnings (loss) per share ..... 182.0 176.8 184.5 175.8 ====== ====== ====== ====== At November 24, 2002, we had options outstanding to purchase 35.0 million shares of common stock with a weighted-average exercise price of $32.20, which were not included in diluted earnings per share for the three months ended November 24, 2002 since their effect was antidilutive. These options could potentially dilute basic earnings per share in the future. At November 25, 2001, we had options outstanding to purchase 36.5 million shares of common stock with a weighted-average exercise price of $27.50, which were not included in diluted earnings per share for the three months ended November 25, 2001 since their effect was antidilutive. These options could also potentially dilute basic earnings per share in the future. Note 2. Consolidated Financial Statement Details Balance sheets (in millions): Nov. 24, May 26, 2002 2002 ------- ------- Inventories: Raw materials .........................................$ 7.9 $ 6.4 Work in process ....................................... 102.9 86.9 Finished goods ........................................ 42.2 51.7 ------- ------- Total inventories .......................................$ 153.0 $ 145.0 ======= ======= Statements of operations (in millions): Three Months Ended Six Months Ended Nov. 24, Nov. 25, Nov. 24, Nov. 25, 2002 2001 2002 2001 -------------- -------------- Special items: In-process research and development charge.............................. $ 0.7 $-- $ 0.7 $ 1.1 Interest income, net: Interest income ...................... $ 4.1 $ 6.6 $ 8.6 $ 14.8 Interest expense ..................... (0.5) (0.9) (2.3) (1.1) ---- ---- ---- ----- Interest income, net ................... $ 3.6 $ 5.5 $ 7.7 $ 12.5 ==== ==== ==== ===== Other income (expense), net: Net intellectual property income ..... $ 2.5 $ 0.4 $ 4.1 $ 1.7 Net gain (loss) on investments, including equity-method investments ........................ (2.9) (6.0) 0.4 (1.7) Other ................................ -- -- (0.6) (0.6) ---- ---- ---- ----- Total other income (expense), net ...... $ (0.4) $ (1.9) $ (1.9) $ 1.5 ==== ==== ==== ===== Note 3. Consolidated Statement of Cash Flows Information (in millions) Six Months Ended Nov. 24, Nov. 25, 2002 2001 ----------------- Supplemental Disclosure of Cash Flows Information: Cash paid for: Interest ............................................. $ 1.0 $ 0.8 Income taxes ......................................... $ 10.2 $ 6.5 Supplemental Schedule of Non-cash Investing and Financing Activities: Issuance of stock for employee benefit plans .............. $ 0.8 $ 4.3 Issuance of common stock to directors ..................... $ 0.3 $ 0.2 Unearned compensation relating to restricted stock issuance $ 0.2 $ 1.4 Restricted stock cancellation ............................. $ 0.9 $ 1.4 Issuance of common stock upon conversion of convertible subordinated promissory note ............................ $ -- $ 10.0 Change in unrealized gain on cash flow hedges ............. $ 0.5 $ -- Change in unrealized gain on available-for-sale securities $ (27.6) $ 12.3 Note 4. Restructuring of Operations and Cost Reduction Programs During the second quarter of fiscal 2003, we paid severance of $0.9 million to 17 employees as part of the cost reduction action we announced in May 2002. We also paid an additional $0.7 million for other costs, which are costs primarily related to exiting of certain business activities, as part of the cost reduction announced in May 2002 and restructuring announced in fiscal 1999. This amounts to a total of $7.9 million of severance to 149 employees and $1.5 million of other costs that we have paid during the first six months of fiscal 2003 for these actions. The following table provides a summary of the activities related to our cost reduction and restructuring actions included in accrued liabilities for the six months ended November 24, 2002: Balance at beginning of fiscal year $16.4 Cash payments (9.4) ----------- Ending balance $ 7.0 =========== The balance at November 24, 2002 includes $3.1 million related to the May 2002 cost reduction action for activities that are not yet completed. The remainder primarily represents lease obligations related to other previously announced cost reduction and restructuring actions. Note 5. Acquisitions In late August 2002, we completed the acquisition of DigitalQuake, Inc., a development stage enterprise engaged in the development of digital display products located in Campbell, California. We expect the addition of DigitalQuake's digital display products, which include a fourth-generation scaling solution, a triple analog-to-digital converter and an advanced digital video interface with encryption/decryption technologies, to help us provide a broad range of system solutions for flat panel monitors. The purchase was completed through a step-acquisition where during the six months prior to the closing we acquired approximately a 30 percent equity interest through investments totaling $6.4 million. In August 2002, the remaining equity interest was acquired for an additional consideration of $14.8 million. Of this amount, we paid $12.7 million upon the closing of the transaction and recorded the remaining liability of $2.1 million to be paid in 2 installments over the next two years. We allocated approximately $18.6 million of the total purchase price to developed technology, $1.9 million to net tangible assets, and $0.7 million to in-process research and development. The in-process research and development was expensed upon completing the acquisition and is included as a component of special items in the consolidated statement of operations for fiscal 2003. No amounts were allocated to goodwill. The developed technology is an intangible asset that is being amortized ratably over its estimated useful life of six years. Employees and former shareholders of DigitalQuake will also receive additional contingent consideration of up to $9.9 million if certain revenue targets are achieved over the 24 months following the acquisition. The contingent consideration will be recognized when it is probable that the revenue targets will be achieved. Of the total contingent consideration, $5.7 million is also contingent on future employment and will be recognized as compensation expense. The remainder will be recognized as additional purchase price. Note 6. Segment Information The following tables present information related to our reportable segments (in millions): Information Analog Appliance All Total Segment Segment Others Consolidated ------- ------- -------- ------- Three months ended November 24, 2002: Sales to unaffiliated customers ................ $ 321.6 $ 54.4 $ 46.3 $422.3 ======= ======= ======== ====== Segment income (loss) before Income taxes $ 18.6 $ (8.5) $ (1.9) $ 8.2 ======= ======= ======== ====== Three months ended November 25, 2001: Sales to unaffiliated Customers ................ $ 275.9 $ 52.9 $ 37.7 $366.5 ======= ======= ======== ====== Segment loss before income taxes .................... $ (13.0) $(19.2) $ (11.9) $(44.1) ======= ======= ======== ====== Information Analog Appliance All Total Segment Segment Others Consolidated ------ ------ ----- ------ Six months ended November 24, 2002: Sales to unaffiliated Customers ................ $ 646.9 $ 107.9 $ 88.1 $ 842.9 ------ ------ ----- ------ Segment income (loss) before income taxes $ 34.5 $ (19.7) $ (2.3) $ 12.5 ====== ====== ===== ====== Six months ended November 25, 2001: Sales to unaffiliated Customers ................ $ 527.9 $ 96.6 $ 81.3 $ 705.8 ------ ------ ----- ------ Segment loss before income taxes .................... $ (35.8) $ (49.0) $ (11.4) $ (96.2) ====== ====== ===== ====== Note 7. Contingencies - Legal Proceedings As we reported in our annual report on Form 10-K for the fiscal year ended May 26, 2002, we face the following material contingencies in the form of legal proceedings: We have been named to the National Priorities List for our Santa Clara, California, site and have completed a remedial investigation/feasibility study with the Regional Water Quality Control Board, acting as an agent for the Federal Environmental Protection Agency. We have agreed in principle with the RWQCB to a site remediation plan. In addition to the Santa Clara site, from time to time we have been designated as a potentially responsible party by federal and state agencies for certain environmental sites with which we may have had direct or indirect involvement. These designations are made regardless of the extent of our involvement. These claims are in various stages of administrative or judicial proceedings and include demands for recovery of past governmental costs and for future investigations and remedial actions. In many cases, the dollar amounts of the claims have not been specified, and 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 the second quarter and first half of fiscal 2003. 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 and in December 2002, the U.S. Court of Appeals for the Third Circuit reversed the district court's grant of our motion to dismiss and remanded the case to the district court for further proceedings consistent with the appeals court decision. We intend to vigorously contest the action. Our tax returns for certain years are under examination in the U.S. by the IRS (See Note 8 to our financial statements in our annual report on Form 10-K for the year ended May 26, 2002 and the information provided in response to item 1 of Part II of the Form 10-Q for the quarter ended August 25, 2002). 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. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements relate to, among other things, sales, gross margins, operating expenses, capital expenditures, and acquisitions and investments in other companies and are indicated by words or phrases such as "expect," "outlook," "foresee," "we believe," "we intend," and similar words or phrases. These statements are based on our current plans and expectations and involve risks and uncertainties. The following are among the principal factors that could cause actual results to differ materially from the forward-looking statements: general business and economic conditions in the semiconductor industry and the growth rate in the wireless, PC and communications infrastructure industries; pricing pressures and competitive factors; delays in the introduction of new products or lack of market acceptance for new products; the ability to integrate any companies we acquire and achieve operating improvements at those companies; risks of international operations; changes in legislation and regulation; the outcome of legal, administrative and other proceedings to which we are a party; and the results of our programs to control or reduce costs. Consequently, actual events and results may vary significantly from those included in or contemplated or implied by such statements. We undertake no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaim any obligation to do so. This discussion should be read in conjunction with the consolidated financial statements and the accompanying notes included in this Form 10-Q and in our annual report on Form 10-K for the fiscal year ended May 26, 2002. 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 amount is fixed or determinable and collection of the revenue is reasonably assured. Service revenues are recognized as the services are provided or as milestones are achieved, depending on the terms of the arrangement. We record at the time of shipment a provision for estimated future returns. At this time, approximately 49 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 materially 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, collection of the fee is probable 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. To date the actual amount of obsolete or unmarketable inventory has been materially consistent with previously estimated write-downs we have actually recorded. 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 the estimated cost of disposal. When necessary, we reduce the carrying value of inventory to net realizable value. If actual market conditions and resulting product sales were to be less favorable than what we have projected, additional inventory write-downs may be required. 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 and amortizable intangible assets. We assess the impairment of goodwill annually in our fourth fiscal quarter and whenever events or changes in circumstances indicate that it is more likely than not that an impairment loss has been incurred. Intangible assets other than goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. Other intangible assets subject to this evaluation include acquired developed technology, patents and technology licenses. We are required to make judgments and assumptions in identifying those events or changes in circumstances that may trigger impairment. Some of the factors we consider include: o Significant decrease in the market value of an asset o Significant changes in the extent or manner for which the asset is being used or in its physical condition o A significant change, delay or departure in our business strategy related to the asset o Significant negative changes in the business climate, industry or economic conditions o Current period operating losses or negative cash flow combined with a history of similar losses or a forecast that indicates continuing losses associated with the use of an asset In view of the generally weak economic climate that currently exists, we are periodically evaluating whether an impairment of our amortizable intangible assets and other long-lived assets has occurred. Our evaluation includes an analysis of estimated future undiscounted net cash flows expected to be generated by the assets over their remaining estimated useful lives. If the estimated future undiscounted net cash flows are insufficient to recover the carrying value of the assets over the remaining estimated useful lives, we will record an impairment loss in the amount by which the carrying value of the assets exceeds the fair value. We determine fair value based on discounted cash flows using a discount rate commensurate with the risk inherent in our current business model. If, as a result of our analysis, we determine that our amortizable intangible assets or other long-lived assets have been impaired, we will recognize an impairment loss in the period in which the impairment is determined. Any such impairment charge could be significant and could have a material adverse effect on our financial position and results of operations. Major factors that influence our cash flow analysis are our estimates for future revenue and expenses associated with the use of the asset. Different estimates could have a significant impact on the results of our evaluation. We performed 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 quarter of fiscal 2002 and plan to perform another review in the fourth quarter of fiscal 2003. Our impairment review is based on comparing the fair value to the carrying value of the reporting units with goodwill. The fair value of a reporting unit is measured at the business unit level using a discounted cash flow approach that incorporates our estimates of future revenues and costs for those business units. Reporting units with goodwill include our wireless, displays and power business units that are operating segments within our Analog reportable segment and our wired communications group that is not part of a reportable segment. 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, or if the products fail to gain expected market acceptance, or market conditions for these businesses fail to improve, our revenue and cost forecasts may not be achieved and we may incur charges for goodwill impairment, which could be significant and could have a material adverse effect on our financial position and results of operations. o OVERVIEW We recorded net sales of $422.3 million for the second quarter of fiscal 2003 and $842.9 million for the first six months of fiscal 2003. This represented increases of 15 percent from sales of $366.5 million for the second quarter of fiscal 2002 and 19 percent from sales of $705.8 million for the first six months of fiscal 2002. The sales increase comes from higher demand, particularly from customers in our wireless handset market, one of our target markets, as we have seen business conditions for the semiconductor industry slowly improve from a year ago. We earned net income of $6.2 million in the second quarter of fiscal 2003 and $7.5 million in the first six months of fiscal 2003. This compares to a net loss of $46.6 million in the second quarter of fiscal 2002 and a net loss of $101.2 million for the first six months of fiscal 2002. The improvement in operating results is primarily due to the higher sales and corresponding improvements in gross margin. Net income for the second quarter and first six months of fiscal 2003 included a special item of $0.7 million for an in-process R&D charge related to the acquisition in the second quarter of DigitalQuake. In comparison, no special items were included in the net loss for the second quarter of fiscal 2002. However, the net loss for the first six months of fiscal 2002 included a special item of $1.1 million for an in-process R&D charge related to the acquisition in the first quarter of Wireless Solutions Sweden AB. o SALES The following discussion is based on our reportable segments described in Note 13 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended May 26, 2002. The Analog segment, which represents 76 percent of our total sales, recorded an increase in sales of 17 percent for the second quarter and 23 percent for the first six months of fiscal 2003 compared to the corresponding periods of fiscal 2002. The increases were mostly due to an increase in unit volume, offset partially by some decreases in average selling prices. The decrease in average selling prices was caused by changes in mix toward lower priced products as well as actual declines in prices. A significant portion of the increased mix of lower priced products came from a variety of high performance analog products that are offered in very small form factors due to our advanced chip-packaging technologies. Although these products may be relatively lower in price, their gross margins are relatively higher within our portfolio of products. Within the Analog segment, sales of application-specific wireless products, including radio frequency building blocks, increased by 10 percent and 11 percent for the second quarter and first six months of fiscal 2003 over sales for the corresponding periods of fiscal 2002. In the broad-based analog markets, sales of power management and amplifier products were up in the second quarter of fiscal 2003 by 35 percent and 27 percent from the same period last year. For the first six months in fiscal 2003, sales of these products were up by 44 percent and 30 percent from sales in fiscal 2002. Sales in the second quarter and first six months of fiscal 2003 for the Information Appliance segment increased 3 percent and 12 percent from sales for the comparable periods of fiscal 2002. The increases were primarily due to higher volume of GeodeTM integrated processor products and integrated DVD products. Average selling prices declined slightly for GeodeTM products but increased for integrated DVD products. o GROSS MARGIN Gross margin as a percentage of sales increased to 43 percent for both the second quarter and the first six months of fiscal 2003, from gross margin of 35 percent and 34 percent for the second quarter and first six months of fiscal 2002, respectively. The increase in gross margin was primarily driven by higher factory utilization. Wafer fabrication capacity utilization during the first half of fiscal 2003 was 68 percent, compared to 48 percent in the first half of fiscal 2002, when production activity was much lower due to weaker business conditions in the semiconductor industry. The impact of actual price declines on selected products was offset by improvement in overall product mix and lower manufacturing costs. o RESEARCH AND DEVELOPMENT Our research and development expenses for the second quarter and first six months of fiscal 2003 decreased 3 percent and 1 percent from R&D expenses for the comparable periods of fiscal 2002. These R&D expenses exclude amounts of $0.7 million for the second quarter and first six months of fiscal 2003 and $1.1 million for the first six months of fiscal 2002 for in-process R&D charges related to acquisitions. The in-process R&D charges are separately included as a component of special items in the condensed consolidated statement of operations. Slightly lower R&D expenses reflect our effort to control the level of expenditures and prioritize spending toward more critical projects in light of current business conditions. Through the first half of fiscal 2003, we devoted approximately 78 percent of our R&D effort towards new product development and 22 percent towards the development of process and support technology. Compared to the first half of fiscal 2002, this represents a 2 percent increase in spending for new product development and a 9 percent decrease in spending for process and support technology. We continue to invest in the development of new analog and mixed-signal technology-based products for applications in the wireless handsets, displays, 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. o SELLING, GENERAL AND ADMINISTRATIVE Our selling, general and administrative expenses in the second quarter and first six months of fiscal 2003 increased 2 percent and 7 percent from SG&A expenses for the comparable periods of fiscal 2002. The overall increase in SG&A expenses was mainly from higher payroll and employee benefit expenses. The expenses for fiscal 2003 also reflect higher expenses from foreign currency translation losses of $2.6 million compared to $1.0 million for the first half of fiscal 2002. o INTEREST INCOME AND INTEREST EXPENSE For the second quarter and first six months of fiscal 2003, we earned net interest income of $3.6 million and $7.7 million compared to $5.5 million and $12.5 million for the comparable periods of fiscal 2002. The overall decrease in net interest income was primarily due to lower average interest rates on lower average cash balances during fiscal 2003 compared to fiscal 2002. Offsetting interest expense was slightly lower for fiscal 2003 as we continued to reduce our outstanding debt balances. o OTHER INCOME (EXPENSE), NET Other expense, net, was $0.4 million and $1.9 million for the second quarter and first six months of fiscal 2003. This compares to other expense, net, of $1.9 million for the second quarter of fiscal 2002 and other income, net, of $1.5 million for the first six months of fiscal 2002. The components of other expense, net, for the second quarter included $2.5 million of net intellectual property income, which was offset by a $2.9 million net loss from investments. The components of other expense, net, for the second quarter of fiscal 2002 included $0.4 million of net intellectual property income, a $1.7 million loss on investments and $0.6 million of other miscellaneous losses. For the first six months of fiscal 2003, other expense, net, included $4.1 million of net intellectual property income offset by a $6.0 million loss from investments. For the first six months of fiscal 2002, other income, net, included $1.7 million of net intellectual property income, a $0.4 million gain on investments and $0.6 million of other miscellaneous losses. o INCOME TAX EXPENSE We recorded income tax expense of $2.0 million and $5.0 million for the second quarter and first six months of fiscal 2003. This compares to income tax expense of $2.5 million and $5.0 million for the corresponding periods of fiscal 2002. The fiscal 2003 and 2002 tax expense represents non-U.S. income taxes on international income. We did not incur U.S. income taxes during these periods. o LIQUIDITY AND CAPITAL RESOURCES During the first six months of fiscal 2003, cash and cash equivalents increased $5.1 million compared to a decrease of $109.6 million for the first six months of fiscal 2002. The primary factors contributing to these changes are described below: Operating activities generated cash of $107.0 million for the first six months of fiscal 2003, compared to $20.0 million for the first six months of fiscal 2002. Cash was generated from operating activities because net income, when adjusted for noncash items (primarily depreciation and amortization), was greater than the negative impact that came from changes in working capital components. The negative changes from working capital components for fiscal 2003 came primarily from increases in receivables, inventories and other current assets and were partially offset by increases in income taxes payable and other noncurrent liabilities. For fiscal 2002, the net loss for the first six months significantly reduced cash generated from operating activities, while a net positive change in working capital components had minimal impact. The positive effects from decreases in receivables and inventories were mostly offset by the net decrease from changes in accounts payable, accrued expenses and income taxes payable. Our investing activities used cash of $117.8 million for the first six months of fiscal 2003, compared to $175.5 million used for the first six months of fiscal 2002. Major uses of cash in the first half of fiscal 2003 included the acquisition of DigitalQuake for $11.0 million (net of cash received) and investment in property, plant and equipment of $112.2 million, primarily for machinery and equipment and the renewal of a major portion of our CAD software licenses. Major uses of cash in the first half of fiscal 2002 included investment in property, plant and equipment of $85.4 million primarily for machinery and equipment, net purchases of marketable securities of $50.6 million and the acquisition of Wireless Solutions Sweden AB for $27.5 million. Our financing activities generated cash of $15.9 million for the first six months of fiscal 2003 and $45.9 million for the first six months of fiscal 2002. The primary source of cash was from the issuance of common stock under employee benefit plans in the amount of $19.4 million in fiscal 2003 compared to $54.8 million in fiscal 2002. This was slightly offset by repayment of outstanding debt balances of $3.5 million in the first six months of fiscal 2003 and $8.9 million in the first six months of fiscal 2002. We foresee 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 improved manufacturing efficiency and productivity. During the second quarter of fiscal 2003, we began construction of an assembly and test facility in China to expand our business presence in the Asia markets. The fiscal 2003 capital expenditure level is expected to be higher than the fiscal 2002 level. However, we will continue to manage capital expenditures in light of business conditions. We expect existing cash and investment balances, together with existing lines of credit, to be sufficient to finance planned fiscal 2003 capital investments. Our cash and investment balances are dependent on continued collection of customer receivables and the ability to sell inventories. Although we have not experienced major problems with our customer receivables, significant declines in overall economic conditions could lead to deterioration in the quality of customer receivables. In addition, major declines in financial markets would likely cause reductions in our cash equivalents and marketable investments. The following table provides a summary of the effect on liquidity and cash flows from our contractual obligations and commercial commitments as of November 24, 2002: (in millions) Fiscal year: 2008 and 2003 2004 2005 2006 2007 thereafter Total ----- ----- ----- ----- ---- ----- ------ Contractual obligations: Debt obligations ......... $ 0.6 $22.9 $ -- $ -- $ -- $ -- $ 23.5 Noncancellable Operating leases ....... 10.2 17.5 13.7 9.3 8.1 10.5 69.3 Licensing agreements: TSMC ................... 16.0 32.0 32.0 19.0 -- -- 99.0 Other .................. 15.4 21.0 22.0 2.4 0.3 0.6 61.7 ------ ----- ----- ----- ---- ----- ------ Total .................... $42.2 $93.4 $67.7 $30.7 $8.4 $11.1 $253.5 ====== ===== ===== ===== ==== ===== ====== Commercial Commitments: Standby letters of credit under bank multicurrency agreement .............. $11.9 -- -- -- -- -- $ 11.9 ====== ===== ===== ===== ==== ===== ====== In addition, as of November 24, 2002, material capital purchase commitments amount to approximately $25.0 million. o RECENTLY ISSUED ACCOUNTING STANDARDS In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 establishes standards of accounting and reporting for costs associated with exit or disposal activities. It supercedes EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." One of the principal differences between SFAS No. 146 and EITF Issue No. 94-3 concerns the recognition of a liability for costs associated with an exit or disposal activity. SFAS No. 146 requires that a liability be recognized for those costs only when the liability is incurred. Under EITF Issue No. 94-3, a liability for such costs was recognized as of the date of the commitment to an exit plan. SFAS No. 146 also requires that an exit or disposal liability be initially measured at fair value. This Statement will be effective in fiscal 2003 for exit or disposal activities that are begun after December 31, 2002. The adoption of this statement will not have a material impact on the remaining activities of our previously reported cost reduction and restructuring actions. o OUTLOOK While demand levels are better than they were at this same time a year ago, our total orders received in the second quarter of fiscal 2003 were down from the levels for the immediately preceding quarter, despite a noticeable pick up in order rates in the later half of the second quarter. The sequential decline in orders was largely attributed to the distribution channel as distributors reduced inventories during the second quarter and continued to be cautious about their inventory commitments going forward. At the same time, we saw higher distributor resales of our products in all regions in the second quarter of fiscal 2003 compared to the first quarter. If the resale rate continues at these higher levels or if the resale rates do not seasonally decline as much as distributors have anticipated, the distributors may have to increase their short-term orders in our fiscal third quarter so that they have sufficient inventory to meet their demand. If this were to occur, it could have a favorable impact on sales for our fiscal third quarter. Meanwhile our opening 13-week backlog going into our fiscal third quarter was slightly lower than it was at the beginning of the previous quarter. Therefore, the level of sales we achieve for the third quarter will be dependent on the level of turns orders, which are orders received with delivery requested in the same quarter. From a historical perspective, we have typically experienced a seasonal slowdown in demand in the third quarter as our customers reduce their build rates to reflect lower post-holiday end demand in certain key markets. The level of turns orders we receive in the third quarter will depend somewhat on the interplay between the post-holiday end demand and the level of inventories our customers are carrying. Based on these factors and our view on the likely level of turns orders, our current outlook is for third-quarter fiscal 2003 sales to be sequentially flat to down 5 percent from the second quarter. We also expect gross margin to be slightly down, as we are planning slightly lower production activity in the third quarter based on our current range of sales. Operating expenses will be up slightly as we move forward on some key research and development programs that involve incremental spending. As noted in our discussion of planned capital expenditures, as part of our efforts to expand our business presence in the Asia markets, we began construction of an assembly and test facility in China's Suzhou Industrial Park in the Jiangsu Province of China during the second quarter of fiscal 2003. The facility is expected to provide products quickly and cost effectively to our customers in China, as well as other regions as necessary. The facility also will increase our overall assembly and test capacity to support increasing product volume. Increasing product volume will be dependent upon demand from our customers. However, there is a risk that we may not achieve such increases in product volume. If we are unable to do so, lower than expected factory utilization, which results in higher manufacturing cost per unit, will unfavorably impact operating results. In addition, unexpected start-up expenses, inefficiencies and delays in the start of production in the facility may reduce our expected future gross margin. o RISK FACTORS Set forth below and elsewhere in this Form 10-Q and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Form 10-Q. Conditions inherent in the semiconductor industry cause periodic fluctuations in our operating results. Rapid technological change and frequent introduction of new technology leading to more complex and more integrated products characterize the semiconductor industry. The result is a cyclical environment with short product life cycles, price erosion and high sensitivity to the overall business cycle. Substantial capital and R&D investment are also required to support products and manufacturing processes. As a result of these industry conditions, we have experienced in the past and expect to experience in the future periodic fluctuations in our operating results. Shifts in product mix toward, or away from, higher margin products can also have a significant impact on our operating results. As a result of these and other factors, our financial results can fluctuate significantly from period to period. Our business will be harmed if we are unable to compete successfully in our markets. Competition in the semiconductor industry is intense. We compete with a number of major corporations in the high-volume segment of the industry. These include several multinational companies whose semiconductor business may be only part of their overall operations, such as 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 and Linear Technology. Competition is based on design and quality of products, product performance, price and service, with the relative importance of these factors varying among products and markets. We cannot assure you that we will be able to compete successfully in the future against existing or new competitors or that our operating results will not be adversely affected by increased price competition. We may also compete with several of our customers, particularly customers in the networking and personal systems markets. We face risks from our international operations, many of which are beyond our control. We conduct a substantial portion of our operations outside the United States, and our business is subject to risks associated with many factors beyond our control. These factors include: - - fluctuations in foreign currency rates; - - instability of foreign economies; - - emerging infrastructures in foreign markets; - - support required abroad for demanding manufacturing requirements; - - foreign government instability and changes; and - - U.S. and foreign laws and policies affecting trade and investment. Although we did not experience any materially adverse effects from our foreign operations as a result of these factors in the last year, one or more of these factors has had an adverse effect on us in the past and we could be adversely 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. If development of new products is delayed or market acceptance is below expectations, future operating results may be unfavorably affected. We believe that continued focused investment in research and development, especially the timely development and market acceptance of new products, is a key factor to our successful growth and our ability to achieve strong financial performance. We will continue to invest resources to develop more highly integrated system-on-a-chip and higher-margin analog products that are targeted towards wireless handsets, displays, information appliances and information infrastructure. Acquisitions. We have made and will continue to make strategic business acquisitions and investments in order to gain access to key technologies that we believe augment our existing technical capability or enable us to achieve faster time to market. These acquisitions and investments 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. In addition, with any acquisition there are risks that future operating results may be unfavorably affected by acquisition related costs, including in-process R&D charges and incremental R&D spending. Taxes. 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. Current World Events. The current investigation of Iraq's compliance with the United Nations resolution on weapons of mass destruction, the September 2001 terrorist attacks on the U.S. and other acts of violence have resulted in additional uncertainty on the overall state of the U.S. economy. There is no assurance that the consequences from these events will not disrupt our operations either in the U.S. or other regions of the world where we have operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended May 26, 2002 and to the subheading "Financial Market Risks" under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 25 of our Annual Report on Form 10-K for the year ended May 26, 2002 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 of our 2002 Form 10-K. There have been no material changes from the information reported in these sections. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are intended to ensure that the information required to be disclosed in our Exchange Act filings is properly and timely recorded and reported. We have formed a disclosure controls committee comprised of key individuals from a variety of disciplines in the company that are involved in the disclosure and reporting process. The committee meets periodically to ensure the timeliness, accuracy and completeness of the information required to be disclosed in our filings. The committee also meets with the Chief Executive Officer and the Chief Financial Officer to review the required disclosures and the effectiveness of the design and operation of our disclosure controls and procedures. Within 90 days prior to the filing date of this report, the committee performed an evaluation, with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation and their supervision of and participation in the process, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. (b) Changes in internal controls. There have been no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the date of the evaluation described above. PART II. OTHER INFORMATION Item 1. Legal Proceedings In November 2000, a derivative action was filed in the U.S. District Court in Delaware against us, Fairchild Semiconductor International, Inc. and Sterling Holding Company, LLC by Mark Levy, a Fairchild stockholder. The action was brought under Section 16(b) of the Securities Exchange Act of 1934 and the rules issued under that Act by the Securities and Exchange Commission. The plaintiff seeks disgorgement of alleged short-swing insider trading profits. We had originally acquired Fairchild common and preferred stock in March 1997 at the time we disposed of the Fairchild business. Prior to its initial public offering in August 1999, Fairchild had amended its certificate of incorporation to provide that all Fairchild preferred stock would convert automatically to common stock upon completion of the initial public offering. As a result, our shares of preferred stock converted to common stock in August 1999. Plaintiff has alleged that the acquisition of common stock through the conversion constituted an acquisition that should be "matched" against our sale in January 2000 of Fairchild common stock for purposes of computing short-swing trading profits. The action seeks to recover from us on behalf of Fairchild alleged recoverable profits of approximately $14.1 million. In February 2002, the judge in the case granted the motion to dismiss filed by us and our co-defendants and dismissed the case, ruling that the conversion was done pursuant to a reclassification which is exempt from the scope of Section 16(b). Plaintiff appealed the dismissal of the case and in December 2002, the U.S. Court of Appeals for the Third Circuit reversed the district court's grant of our motion to dismiss and remanded the case to the district court for further proceedings consistent with the appeals court decision. We intend to vigorously contest the action. You should refer to the Legal Proceedings Section in our Form 10-K for the fiscal year ended May 26, 2002 and in our Form 10-Q for the quarter ended August 25, 2002 for a complete description of our other existing material legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders (a) National Semiconductor Corporation's Annual Meeting was held on October 18, 2002. (b) The following directors were elected at the meeting: DIRECTOR FOR AUTHORITY WITHHELD Brian L. Halla 159,263,459 2,723,221 Steven R. Appleton 157,769,892 4,216,788 Gary P. Arnold 156,959,882 5,026,798 Richard J. Danzig 155,705,770 6,280,910 Robert J. Frankenberg 157,749,745 4,236,935 E. Floyd Kvamme 121,619,532 40,367,148 Modesto A. Maidique 157,656,840 4,329,840 Edward R. McCracken 155,660,586 6,326,094 (c) The following matter was also voted on at the meeting: Proposal to approve KPMG as auditors of the Company: For: 157,290,076 Against: 3,922,776 Abstain: 773,828 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Second Restated Certificate of Incorporation of the Company as amended (incorporated by reference from the Exhibits to our Registration Statement on Form S-3 Registration No. 33-52775, which became effective March 22, 1994); Certificate of Amendment of Certificate of Incorporation dated September 30, 1994 (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 333-09957, which became effective August 12, 1996); Certificate of Amendment of Certificate of Incorporation dated September 22, 2000 (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 333-48424, which became effective October 23, 2000). 3.2 By Laws of the Company, as amended effective October 30, 2001. (incorporated by reference from the Exhibits to our Form 10-K for the year ended May 26, 2002 filed August 16, 2002). 4.1 Form of Common Stock Certificate (incorporated by reference from the Exhibits to our Registration Statement on Form S-3 Registration No. 33-48935, which became effective October 5, 1992). 4.2 Rights Agreement (incorporated by reference from the Exhibits to our Registration Statement on Form 8-A filed August 10, 1988); First Amendment to the Rights Agreement dated as of October 31, 1995 (incorporated by reference from the Exhibits to our Amendment No. 1 to the Registration Statement on Form 8-A filed December 11, 1995); Second Amendment to the Rights Agreement dated as of December 17, 1996 (incorporated by reference from the Exhibits to our Amendment No. 2 to the Registration Statement on Form 8-A filed January 17, 1997). 10.1 Management Contract or Compensatory Plan or Arrangement: Executive Physical Exam Plan effective January 1, 2003. 10.2 Management Contract or Compensatory Plan or Agreement: Executive Long Term Disability Plan as amended January 1, 2002, as restated July 2002. 10.3 Management Contract or Compensatory Plan or Agreement: Executive Staff Long Term Disability Plan as amended January 1, 2002, as restated July 2002. (b) Reports on Form 8-K We filed one report on Form 8-K during the second quarter of fiscal 2003 as follows: 1. A Form 8-K containing the certifications signed by our Chief Executive Officer and Chief Financial Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002 was filed October 1 , 2002 in connection with our Form 10-Q for the first quarter of fiscal 2003. SIGNATURE Pursuant to the requirements 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: January 6, 2003 \s\ Robert E. DeBarr Robert E. DeBarr Controller Signing on behalf of the registrant and as principal accounting officer CERTIFICATION I, Brian L. Halla, certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Semiconductor Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors and material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 6, 2003 \s\ Brian L. Halla Brian L. Halla President and Chief Executive Officer CERTIFICATION I, Lewis Chew, certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Semiconductor Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): d) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors and material weaknesses in internal controls; and e) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 6, 2003 \s\ Lewis Chew Lewis Chew Senior Vice President, Finance and Chief Financial Officer EX-10 3 form10q_12091.txt EXHIBIT 10.1 - PLAN FOR PHYSICAL EXAM PLAN Exhibit 10.1 =============================================================================== =============================================================================== PLAN DOCUMENT FOR NATIONAL SEMICONDUCTOR CORPORATION EXECUTIVE PHYSICAL EXAM PLAN EFFECTIVE JANUARY 1, 2003 PLAN DOCUMENT FOR NATIONAL SEMICONDUCTOR CORPORATION EXECUTIVE PHYSICAL EXAM PLAN National Semiconductor Corporation, a corporation organized under the laws of the State of Delaware (the "Company"), does hereby implement the Executive Physical Exam Plan (the "Plan") for the benefit of eligible Executives of the Company on the terms and conditions described hereinafter. WHEREAS, the Company desires to amend and restate such plan effective January 1, 2003. NOW, THEREFORE, this Plan is hereby established to read as follows: ARTICLE I EFFECTIVE DATE, PURPOSE AND LEGAL EFFECT ---------------------------------------- Section 1.1. Effective Date of the Plan. The effective date of the Plan is January 1, 2003. Section 1.2. Purpose. The purpose of this Plan is to provide Physical Exam services to eligible Executives of the Company. Section 1.3. Legal Effect. The terms and conditions of this Plan as stated herein shall amend and supersede prospectively and in their entirety the terms and conditions of any similar plan previously maintained by the Company. All benefits provided prior to the effective date of this Plan shall be made in accordance with the plan then in effect and maintained by the Company. ARTICLE II DEFINITIONS ----------- Except as otherwise provided in this Plan, the definitions used in the Agreements, which are expressly incorporated herein by reference, shall have the same meaning wherever used in this Plan, unless the context clearly indicates otherwise. Section 2.1. Agreement shall mean any contract or agreement entered into between the Company and a Service Provider relating to the provisions of services under the Plan to eligible Executives. Section 2.2. Code shall mean the Internal Revenue Code of 1986, as amended, or as it may be amended from time to time. Section 2.3. Company shall mean the National Semiconductor Corporation. Section 2.4. ERISA shall mean the Employee Retirement Income Security Act of 1974, as from time to time amended. Section 2.5. Executive shall mean any employee of the Company who is a member of the executive staff of the Company's chief executive officer. Section 2.6. Physical Exam shall mean a medical examination performed by a physician licensed to perform such examinations to determine the general physical health of the Executive. It shall also mean the tests ordered by the physician required to evaluate the general physical health of the Executive. The physician shall provide services as part of a program designed and managed by the Service Provider. Section 2.7. Plan shall mean the National Semiconductor Corporation Executive Physical Exam Plan. Section 2.8. Plan Administrator shall mean the person(s) responsible for the functions and management of the Plan, within the meaning of ERISA 3(16)A. The Plan Administrator shall be the Director of Benefits for National Semiconductor Corporation. Section 2.9. Plan Year shall mean the twelve-month period ending on December 31 of each year. Section 2.10. Service Provider shall mean the entity or entities chosen by the Company to provide services to Executives of the Company for Physical Exams. Section 2.11. Gender and Number. The masculine gender shall be deemed to include the feminine and the singular shall include the plural, unless otherwise clearly required by the context ARTICLE III CONTRIBUTIONS ------------- Section 3.1. Contributions. Executives may be required to pay for a portion of the cost of services available under the Plan. The Company shall determine the required contributions and communicate this information to affected individuals prior to the beginning of each Plan Year. The level of Executive contributions may be determined by the services that the Executive chooses to use. Section 3.2. Taxation of Employer Contributions. The Physical Exam services provided under the Plan are designed to qualify as a "self-insured medical reimbursement plan" under Section 105 of the Code. Under this Code provision, any portion of costs paid by the Company will not be considered taxable income to the Executive. There are services provided by the Plan for Physical Exams that may not qualify under Section 105. The Company portion of costs for these services will be considered taxable income to the Executive. While the Company will provide the Executive with general tax information regarding the Plan, the Executive has the final responsibility for the correct payment of associated taxes. ARTICLE IV PARTICIPATION IN THE PLAN ------------------------- Section 4.1. Eligibility to Participate. The terms and conditions related to Executive eligibility to participate and continued participation in the Plan shall be governed by the Company and communicated to Executives. The eligibility to participate is described in the definition of Executive shown in Section 2.5 of this Plan Document. Section 4.2. Continuation of Coverage. If a qualifying event, within the meaning of Code Section 4980B, occurs with respect to a covered Executive, the Company (or its designee) shall give such individual(s) the opportunity to continue coverage, as is required by Code Section 4980B and Title VI of ERISA. ARTICLE V PLAN SERVICES ------------- Section 5.1. Services. The terms and conditions governing services that are available to Executives under the Plan shall be described in the applicable Plan Summary that is maintained as Exhibit A of this Plan Document. ARTICLE VI ALLOCATION OF FIDUCIARY RESPONSIBILITIES AND ADMINISTRATION ----------------------------------------------------------- Section 6.1. Allocation of Fiduciary Responsibilities. The responsibilities allocated to the named fiduciaries are as follows: (a) The Company shall have the sole authority: (1) to amend the Plan, (2) to appoint and remove Plan Administrator, (3) to determine the amount to be contributed to the Plan each year by the Company, and (4) to terminate the Plan. (b) The Service Provider shall have the sole authority: (1) to interpret the provisions of the Agreement applicable to the Plan and to determine the rights of the Executives under this Agreement, and (2) to administer the Agreement in accordance with their terms. (c) The Plan Administrator shall have the sole authority: (1) to appoint and remove the Service Provider, (2) to interpret the provisions of the Plan and to determine the rights of Executives under the Plan, and (3) to administer the Plan in accordance with its terms, except to the extent powers to administer the Plan are specifically delegated to the Service Provider or another named fiduciary or other person or persons as provided in the Plan. (d) Notwithstanding any other provision of this Article VI to the contrary, with respect to benefit coverage provided under an Agreement, the Service Provider, in lieu of the Plan Administrator shall make all determinations with respect to the rights of an Executive for benefits provided under an Agreement. (e) Fiduciary Discretion. Plan fiduciaries are empowered to exercise exclusive and absolute discretion with respect to matters for which they are responsible, including the interpretation of the terms of the Plan. Such discretionary determinations, including those regarding Plan terms and eligibility, shall be final and conclusive and shall bind all Executives and the Company. The Plan Administrator shall have all authority and responsibility for the administration and interpretation of the Plan. For purposes of ERISA, the Plan Administrator shall be the "administrator" of the Plan and its "named fiduciary" with respect to matters for which it is responsible, provided that the Company shall have the sole authority to amend or terminate the Plan. The Plan Administrator may from time to time allocate or delegate to any subcommittee or Service Administrator such duties relative to the administration and interpretation of the Plan as it deems necessary or appropriate, including matters involving the exercise of discretion. To the maximum extent permitted by ERISA, every action and determination of the Plan Administrator in accordance with this Article shall be final and binding upon each eligible Executive. The Plan Administrator shall not be entitled to act on or decide any matter relating solely to himself or any of his rights or benefits under the Plan. Section 6.2. Specific Responsibilities and Authority of the Plan Administrator. In furtherance of, and not by way of limitation on, the responsibilities and authority conferred on the Plan Administrator in Section 6.1 hereof, the Plan Administrator shall administer the Plan in accordance with its terms and provisions and shall have the following specific responsibilities and authorities: (a) to appoint, remove or substitute the Service Provider and to enter into, amend, suspend or terminate the Plan, (b) to construe and interpret the Plan and determine all questions arising in its operation, provided that the Service Provider shall determine on behalf of the Plan Administrator, in accordance with the Plan and generally accepted claims administration procedures and practices, the initial qualification of claims submitted for benefits hereunder, (c) to make such amendments in the Plan as it deems necessary or appropriate in order to enable the Plan to comply with ERISA and any other applicable legal requirements, (d) to prepare, distribute and maintain all documents, records or data as may be necessary or appropriate for the reporting, disclosure and recordkeeping requirements contained in ERISA, as well as such other records or data as may be necessary or appropriate for the proper administration of the Plan, provided that the Service Provider shall promptly furnish and certify to the Plan Administrator such information as it shall require in order to satisfy the reporting and disclosure provisions of ERISA or to otherwise perform its respective duties hereunder and to fully and faithfully perform all other duties assigned to it under the Plan. (e) to employ such independent consulting actuary, certified public accountants, legal counsel and other persons as may be required by ERISA or as it shall otherwise deem necessary or appropriate in connection with the administration and operation of the Plan, (f) to adopt such rules and procedures as the Plan Administrator deems necessary or appropriate in order to fulfill its responsibilities with respect to the Plan, provided that such rules and procedures are uniformly and consistently applied to persons in similar circumstances, (g) to hold regular meetings designed to ensure the discharge of its responsibilities hereunder and to maintain an accurate written record of all such meetings, (h) to furnish the Company with reports, including subjects reported upon to it by the Service Provider, and (i) to take all other actions not expressly enumerated herein necessary for effective administration of the Plan. Section 6.3. Rules of Procedure. The Plan Administrator shall establish its own rules of procedure and the time and place of its meetings. Section 6.4. Expenses. Except as otherwise provided in the Plan, all expenses and charges incurred in the administration and operation of the Plan, including fees and expenses which the Plan Administrator agrees to pay the Service Provider or other agents or professionals employed or retained pursuant hereto, shall be paid out of the assets of the Company. No compensation shall be paid by the Plan to the Plan Administrator if employed by the Company, but said persons may be reimbursed for their reasonable expenses incurred in carrying out their duties, responsibilities and authority hereunder. No bond shall be required of the Plan Administrator, except as otherwise required by law. Section 6.5. Notices. Any notice, application, instruction, designation or other form of communication required to be given or submitted by any Executive or other interested person shall be in such form as is prescribed from time to time by the Plan Administrator, sent by first class mail or delivered in person to the Plan Administrator. Any notice, statement, report or other communication from the Company or the Plan Administrator to any Executive or other interested person required or permitted by the Plan shall be deemed to have been duly delivered when given to such person or mailed by first class mail to such person at his address last appearing on the records of the Company. Each person entitled to receive services under the Plan shall file in accordance herewith his complete mailing address and each change therein. If the Plan Administrator shall be in doubt as to whether services are being received by the person entitled thereto, it may, by registered mail addressed to such person at his address last known to the Plan Administrator, notify such person that all future payments will be withheld until such person submits to the Plan Administrator his proper mailing address and such other information as the Plan Administrator may reasonably request. Section 6.6. Agent for Service of Legal Process. The agent for the service of legal process under the Plan shall be the Plan Administrator or its designated representative. ARTICLE VII AMENDMENT AND TERMINATION ------------------------- Section 7.1. Right to Amend or Terminate. The Company shall have the right at any time to amend, terminate, partially terminate, or modify the Plan, retroactively or otherwise. No such change shall impair the right of an Executive to services under the Plan to which such Executive became entitled prior to such amendment, termination, partial termination, or modification. Section 7.2. Effect of Termination. Upon complete or partial termination of the Plan, the Plan Administrator shall provide for the services to each Executive with respect to those services available on the date of termination. ARTICLE VIII MISCELLANEOUS ------------- Section 8.1. In General. Any and all rights accruing to any Executive under the Plan shall be subject to all terms and conditions of the Plan. The adoption and maintenance of the Plan shall not constitute a contract between the Company and an Executive or be a consideration for, or an inducement or condition of, employment of any Executive. Neither participation nor anything contained in the Plan shall give any Executive the right to be retained in the employ of the Company, nor shall it interfere with the right of the Company to discharge any Executive at any time. Section 8.2. Filing of Information. Each eligible Executive or other interested person shall file with the Plan Administrator such pertinent information concerning himself as the Plan Administrator may specify, including proof or continued proof of eligibility, and in such manner and form as the Plan Administrator may specify or provide, and such person shall not have rights or be entitled to any services hereunder unless such information is filed by him or on his behalf. Section 8.3. No Waiver or Estoppel. No term, condition or provision of the Plan shall be deemed to have been waived, and there shall be no estoppel against the enforcement of any provision of the Plan, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. Section 8.4. Limitation on Actions. No action at law or in equity shall be instituted to recover under the Plan prior to the expiration of ninety (90) days after a claim for benefits has been filed in accordance with the requirements of the Plan; nor shall any such action be instituted at any time unless instituted within three (3) years after the date the expenses which are the subject of or are otherwise involved in such action are incurred or are alleged to have been incurred; provided, that any limitation on actions regarding benefits shall be as provided in the Plan. Section 8.5. Plan Funding. The Plan shall be unfunded with respect to the services provided. Section 8.6. Construction. Except to the extent preempted by ERISA, the Plan shall be construed according to the laws of the State of California, and all provisions hereof shall be administered according to the laws of said state. Section 8.7. Headings. All article and section headings herein have been inserted for convenience only and shall not affect the meaning of the language contained herein. Section 8.8. No Guarantee of Tax Consequences. Neither the Plan Administrator nor the Company makes any commitment or guarantee that any amounts paid by the Company on behalf of an Executive shall be excludable from the Executive's gross income for federal or state income tax purposes, or that any other federal or state tax treatment shall apply to or be available to any Executive. It shall be the obligation of each Executive to determine whether such payment under the Plan is excludable from the Executive's gross income for federal or state income tax purposes, and to notify the Company if the Executive has reason to believe that any such payment is not so excludable. Section 8.9. Severability of Provisions. If any provision of this Plan is determined to be invalid or unenforceable, that provision shall be severable from the other provisions of the Plan. Section 8.10. Additional Standards Under ERISA Section 609. Notwithstanding any other provision of the Plan to the contrary, in all instances the Plan shall be operated in accordance with the requirements of Section 609 of ERISA and Section 1908 of the Social Security Act. EXHIBIT A Executive Physical Exam Plan - Tempus Clinic Program Summary for 2003 The Comprehensive Physical Exam includes the following: - Extensive BerkeleyHeartLab blood testing - Body Imaging - Infectious Disease Screening - Biometric Analysis - 2 hours spent with Tempus physician to review results Total cost for the above exam is $6,300 per participant. National will contribute up to $5,000 towards the total cost. EX-10 4 form10q_12092.txt EXHIBIT 10.2 LT DISABILITY PLAN Exhibit 10.2 Executive Long Term Disability Plan Policy No. 517969.021 Underwritten by Unum Life Insurance Company of America As amended 1-1-2002 As restated 07-2002 National Semiconductor Corporation Your Group Long Term Disability Plan CERTIFICATE OF COVERAGE This certificate of coverage does not apply unless this space is covered by a sticker indicating the employee's name, policy number and effective date of coverage. Unum Life Insurance Company of America (referred to as Unum) welcomes you as a client. This is your certificate of coverage as long as you are eligible for coverage and you become insured. You will want to read it carefully and keep it in a safe place. Unum has written your certificate of coverage in plain English. However, a few terms and provisions are written as required by insurance law. If you have any questions about any of the terms and provisions, please consult Unum's claims paying office. Unum will assist you in any way to help you understand your benefits. If the terms and provisions of the certificate of coverage (issued to you) are different from the policy (issued to the policyholder), the policy will govern. Your coverage may be cancelled or changed in whole or in part under the terms and provisions of the policy. The policy is delivered in and is governed by the laws of the governing jurisdiction and to the extent applicable by the Employee Retirement Income Security Act of 1974 (ERISA) and any amendments. When making a benefit determination under the policy, Unum has discretionary authority to determine your eligibility for benefits and to interpret the terms and provisions of the policy. For purposes of effective dates and ending dates under the group policy, all days begin at 12:01 a.m. and end at 12:00 midnight at the Policyholder's address. Unum Life Insurance Company of America 2211 Congress Street Portland, Maine 04122 BENEFITS AT A GLANCE LONG TERM DISABILITY PLAN This long term disability plan provides financial protection for you by paying a portion of your income while you are disabled. The amount you receive is based on the amount you earned before your disability began. In some cases, you can receive disability payments even if you work while you are disabled. EMPLOYER'S ORIGINAL PLAN EFFECTIVE DATE: July 1, 1997 POLICY NUMBER: 517969 021 ELIGIBLE GROUP(S): All U.S. employees earning over $210,000 annually in active employment MINIMUM HOURS REQUIREMENT: Employees must be working at least 30 hours per week. WAITING PERIOD: For employees in an eligible group on or before July 1, 1997: None For employees entering an eligible group after July 1, 1997: None REHIRE: If your employment ends and you are rehired within 12 months, your previous work while in an eligible group will apply toward the waiting period. All other policy provisions apply. WHO PAYS FOR THE COVERAGE: You pay the cost of your coverage. ELIMINATION PERIOD: 360 days Benefits begin the day after the elimination period is completed. MONTHLY BENEFIT: 60% of monthly earnings to a maximum benefit of $20,000 per month. Your payment may be reduced by deductible sources of income and disability earnings. Some disabilities may not be covered or may have limited coverage under this plan. MAXIMUM PERIOD OF PAYMENT: Age at Disability Maximum Period of Payment Less than age 60 To age 65, but not less than 5 years Age 60 60 months Age 61 48 months Age 62 42 months Age 63 36 months Age 64 30 months Age 65 24 months Age 66 21 months Age 67 18 months Age 68 15 months Age 69 and over 12 months No premium payments are required for your coverage while you are receiving payments under this plan. OTHER FEATURES: Continuity of Coverage Minimum Benefit Pre-Existing: 3/12 Survivor Benefit The above items are only highlights of this plan. For a full description of your coverage, continue reading your certificate of coverage section. CLAIM INFORMATION LONG TERM DISABILITY WHEN DO YOU NOTIFY UNUM OF A CLAIM? We encourage you to notify us of your claim as soon as possible, so that a claim decision can be made in a timely manner. Written notice of a claim should be sent within 30 days after the date your disability begins. However, you must send Unum written proof of your claim no later than 90 days after your elimination period. If it is not possible to give proof within 90 days, it must be given no later than 1 year after the time proof is otherwise required except in the absence of legal capacity. The claim form is available from your Employer, or you can request a claim form from us. If you do not receive the form from Unum within 15 days of your request, send Unum written proof of claim without waiting for the form. You must notify us immediately when you return to work in any capacity. HOW DO YOU FILE A CLAIM? You and your Employer must fill out your own sections of the claim form and then give it to your attending physician. Your physician should fill out his or her section of the form and send it directly to Unum. WHAT INFORMATION IS NEEDED AS PROOF OF YOUR CLAIM? Your proof of claim, provided at your expense, must show: - - that you are under the regular care of a physician; - - the appropriate documentation of your monthly earnings; - - the date your disability began; - - the cause of your disability; - - the extent of your disability, including restrictions and limitations preventing you from performing your regular occupation; and - - the name and address of any hospital or institution where you received treatment, including all attending physicians. We may request that you send proof of continuing disability indicating that you are under the regular care of a physician. This proof, provided at your expense, must be received within 45 days of a request by us. In some cases, you will be required to give Unum authorization to obtain additional medical information and to provide non-medical information as part of your proof of claim, or proof of continuing disability. Unum will deny your claim, or stop sending you payments, if the appropriate information is not submitted. TO WHOM WILL UNUM MAKE PAYMENTS? Unum will make payments to you. WHAT HAPPENS IF UNUM OVERPAYS YOUR CLAIM? Unum has the right to recover any overpayments due to: - - fraud; - - any error Unum makes in processing a claim; and - - your receipt of deductible sources of income. You must reimburse us in full. We will determine the method by which the repayment is to be made. Unum will not recover more money than the amount we paid you. GENERAL PROVISIONS WHAT IS THE CERTIFICATE OF COVERAGE? This certificate of coverage is a written statement prepared by Unum and may include attachments. It tells you: - - the coverage for which you may be entitled; - - to whom Unum will make a payment; and - - the limitations, exclusions and requirements that apply within a plan. WHEN ARE YOU ELIGIBLE FOR COVERAGE? If you are working for your Employer in an eligible group, the date you are eligible for coverage is the later of: - - the plan effective date; or - - the day after you complete your waiting period. WHEN DOES YOUR COVERAGE BEGIN? When your Employer pays 100% of the cost of your coverage under a plan, you will be covered at 12:01 a.m. on the date you are eligible for coverage. When you and your Employer share the cost of your coverage under a plan or when you pay 100% of the cost yourself, you will be covered at 12:01 a.m. on the latest of: - - the date you are eligible for coverage, if you apply for insurance on or before that date; - - the date you apply for insurance, if you apply within 31 days after your eligibility date; or - - the date Unum approves your application, if evidence of insurability is required. Evidence of insurability is required if you: - - are a late applicant, which means you apply for coverage more than 31 days after the date you are eligible for coverage; or - - voluntarily cancelled your coverage and are reapplying. An evidence of insurability form can be obtained from your Employer. WHAT IF YOU ARE ABSENT FROM WORK ON THE DATE YOUR COVERAGE WOULD NORMALLY BEGIN? If you are absent from work due to injury, sickness, temporary layoff or leave of absence, your coverage will begin on the date you return to active employment. ONCE YOUR COVERAGE BEGINS, WHAT HAPPENS IF YOU ARE TEMPORARILY NOT WORKING? If you are on a temporary layoff, and if premium is paid, you will be covered through the end of the month that immediately follows the month in which your temporary layoff begins. If you are on a leave of absence, and if premium is paid, you will be covered through the end of the month that immediately follows the month in which your leave of absence begins. WHEN WILL CHANGES TO YOUR COVERAGE TAKE EFFECT? Once your coverage begins, any increased or additional coverage will take effect immediately if you are in active employment or if you are on a covered layoff or leave of absence. If you are not in active employment due to injury or sickness, any increased or additional coverage will begin on the date you return to active employment. Any decrease in coverage will take effect immediately but will not affect a payable claim that occurs prior to the decrease. WHEN DOES YOUR COVERAGE END? Your coverage under the policy or a plan ends on the earliest of: - - the date the policy or a plan is cancelled; - - the date you no longer are in an eligible group; - - the date your eligible group is no longer covered; - - the last day of the period for which you made any required contributions; or - - the last day you are in active employment except as provided under the covered layoff or leave of absence provision. Unum will provide coverage for a payable claim which occurs while you are covered under the policy or plan. WHAT ARE THE TIME LIMITS FOR LEGAL PROCEEDINGS? You can start legal action regarding your claim 60 days after proof of claim has been given and up to 3 years from the time proof of claim is required, unless otherwise provided under federal law. HOW CAN STATEMENTS MADE IN YOUR APPLICATION FOR THIS COVERAGE BE USED? Unum considers any statements you or your Employer make in a signed application for coverage a representation and not a warranty. If any of the statements you or your Employer make are not complete and/or not true at the time they are made, we can: - - reduce or deny any claim; or - - cancel your coverage from the original effective date. We will use only statements made in a signed application as a basis for doing this. If the Employer gives us information about you that is incorrect, we will: - - use the facts to decide whether you have coverage under the plan and in what amounts; and - - make a fair adjustment of the premium. HOW WILL UNUM HANDLE INSURANCE FRAUD? Unum wants to ensure you and your Employer do not incur additional insurance costs as a result of the undermining effects of insurance fraud. Unum promises to focus on all means necessary to support fraud detection, investigation, and prosecution. Any person who knowingly files a statement of claim containing any false or misleading information is subject to criminal and civil penalties. In addition, submission of false information in connection with the claim form may also constitute a crime under federal laws. Unum will pursue any appropriate legal remedies in the event of insurance fraud, including prosecuting under federal mail fraud, federal wire fraud, and/or the federal Racketeer Influenced and Corrupt Organizations Act statutes. Any false statements made herein may be reported to state and federal tax and regulatory authorities as is appropriate. DOES THE POLICY REPLACE OR AFFECT ANY WORKERS' COMPENSATION OR STATE DISABILITY INSURANCE? The policy does not replace or affect the requirements for coverage by any workers' compensation or state disability insurance. DOES YOUR EMPLOYER ACT AS YOUR AGENT OR UNUM'S AGENT? For purposes of the policy, your Employer acts on its own behalf or as your agent. Under no circumstances will your Employer be deemed the agent of Unum. LONG TERM DISABILITY BENEFIT INFORMATION HOW DOES UNUM DEFINE DISABILITY? You are disabled when Unum determines that: - - you are limited from performing the material and substantial duties of your regular occupation due to your sickness or injury; and - - you have a 20% or more loss in your indexed monthly earnings due to the same sickness or injury. After 24 months of payments, you are disabled when Unum determines that due to the same sickness or injury, you are unable to perform the duties of any gainful occupation for which you are reasonably fitted by education, training or experience. The loss of a professional or occupational license or certification does not, in itself, constitute disability. We may require you to be examined by a physician, other medical practitioner or vocational expert of our choice. Unum will pay for this examination. We can require an examination as often as it is reasonable to do so. We may also require you to be interviewed by an authorized Unum Representative. HOW LONG MUST YOU BE DISABLED BEFORE YOU ARE ELIGIBLE TO RECEIVE BENEFITS? You must be continuously disabled through your elimination period. Unum will treat your disability as continuous if your disability stops for 30 days or less during the elimination period. The days that you are not disabled will not count toward your elimination period. Your elimination period is 360 days. CAN YOU SATISFY YOUR ELIMINATION PERIOD IF YOU ARE WORKING? Yes, provided you meet the definition of disability. WHEN WILL YOU BEGIN TO RECEIVE PAYMENTS? You will begin to receive payments when we approve your claim, providing the elimination period has been met. We will send you a payment monthly for any period for which Unum is liable. HOW MUCH WILL UNUM PAY YOU IF YOU ARE DISABLED? We will follow this process to figure your payment: 1. Multiply your monthly earnings by 60%. 2. The maximum monthly benefit is $20,000. 3. Compare the answer from Item 1 with the maximum monthly benefit. The lesser of these two amounts is your gross disability payment. 4. Subtract from your gross disability payment any deductible sources of income. The amount figured in Item 4 is your monthly payment. WHAT ARE YOUR MONTHLY EARNINGS? "Monthly Earnings" means your gross monthly income from your Employer in effect just prior to your date of disability. It includes your total income before taxes. It is prior to any deductions made for pre-tax contributions to a qualified deferred compensation plan, Section 125 plan, or flexible spending account. It includes income actually received from commissions but does not include renewal commissions, bonuses, overtime pay or any other extra compensation, or income received from sources other than your Employer. Commissions will be averaged for the lesser of: a. the 12 full calendar month period of your employment with your Employer just prior to the date disability begins; or b. the period of actual employment with your Employer. WHAT WILL WE USE FOR MONTHLY EARNINGS IF YOU BECOME DISABLED DURING A COVERED LAYOFF OR LEAVE OF ABSENCE? If you become disabled while you are on a covered layoff or leave of absence, we will use your monthly earnings from your Employer in effect just prior to the date your absence begins. HOW MUCH WILL UNUM PAY YOU IF YOU ARE DISABLED AND WORKING? We will send you the monthly payment if you are disabled and your monthly disability earnings, if any, are less than 20% of your indexed monthly earnings, due to the same sickness or injury. If you are disabled and your monthly disability earnings are 20% or more of your indexed monthly earnings, due to the same sickness or injury, Unum will figure your payment as follows: During the first 12 months of payments, while working, your monthly payment will not be reduced as long as disability earnings plus the gross disability payment does not exceed 100% of indexed monthly earnings. 1. Add your monthly disability earnings to your gross disability payment. 2. Compare the answer in Item 1 to your indexed monthly earnings. If the answer from Item 1 is less than or equal to 100% of your indexed monthly earnings, Unum will not further reduce your monthly payment. If the answer from Item 1 is more than 100% of your indexed monthly earnings, Unum will subtract the amount over 100% from your monthly payment. After 12 months of payments, while working, you will receive payments based on the percentage of income you are losing due to your disability. 1. Subtract your disability earnings from your indexed monthly earnings. 2. Divide the answer in Item 1 by your indexed monthly earnings. This is your percentage of lost earnings. 3. Multiply your monthly payment by the answer in Item 2. This is the amount Unum will pay you each month. During the first 24 months of disability payments, if your monthly disability earnings exceed 80% of your indexed monthly earnings, Unum will stop sending you payments and your claim will end. Beyond 24 months of disability payments, if your monthly disability earnings exceed the gross disability payment, Unum will stop sending you payments and your claim will end. Unum may require you to send proof of your monthly disability earnings at least quarterly. We will adjust your payment based on your quarterly disability earnings. As part of your proof of disability earnings, we can require that you send us appropriate financial records which we believe are necessary to substantiate your income. After the elimination period, if you are disabled for less than 1 month, we will send you 1/30 of your payment for each day of disability. HOW CAN WE PROTECT YOU IF YOUR DISABILITY EARNINGS FLUCTUATE? If your disability earnings routinely fluctuate widely from month to month, Unum may average your disability earnings over the most recent 3 months to determine if your claim should continue. If Unum averages your disability earnings, we will not terminate your claim unless: - - During the first 24 months of disability payments, the average of your disability earnings from the last 3 months exceeds 80% of indexed monthly earnings; or - - Beyond 24 months of disability payments, the average of your disability earnings from the last 3 months exceeds the gross disability payment. We will not pay you for any month during which disability earnings exceed the amount allowable under the plan. WHAT ARE DEDUCTIBLE SOURCES OF INCOME? Unum will subtract from your gross disability payment the following deductible sources of income: 1) The amount that you receive or are entitled to receive under: - - a workers' compensation law. - - an occupational disease law. - - any other act or law with similar intent. 2) The amount that you receive or are entitled to receive as disability income payments under any: - - state compulsory benefit act or law. - - automobile liability insurance policy. - - other group insurance plan. - - governmental retirement system as a result of your job with your Employer. 3) The amount that you, your spouse and your children receive or are entitled to receive as disability payments because of your disability under: - - the United States Social Security Act. - - the Canada Pension Plan. - - the Quebec Pension Plan. - - any similar plan or act. 4) The amount that you receive as retirement payments or the amount your spouse and children receive as retirement payments because you are receiving retirement payments under: - - the United States Social Security Act. - - the Canada Pension Plan. - - the Quebec Pension Plan. - - any similar plan or act. 5) The amount that you: - - receive as disability payments under your Employer's retirement plan. - - voluntarily elect to receive as retirement payments under your Employer's retirement plan. - - receive as retirement payments when you reach the later of age 62 or normal retirement age, as defined in your Employer's retirement plan. Disability payments under a retirement plan will be those benefits which are paid due to disability and do not reduce the retirement benefit which would have been paid if the disability had not occurred. Retirement payments will be those benefits which are based on your Employer's contribution to the retirement plan. Disability benefits which reduce the retirement benefit under the plan will also be considered as a retirement benefit. Regardless of how the retirement funds from the retirement plan are distributed, Unum will consider your and your Employer's contributions to be distributed simultaneously throughout your lifetime. Amounts received do not include amounts rolled over or transferred to any eligible retirement plan. Unum will use the definition of eligible retirement plan as defined in Section 402 of the Internal Revenue Code including any future amendments which affect the definition. 6) The amount that you receive under Title 46, United States Code Section 688 (The Jones Act). 7) The amount that you receive from a third party (after subtracting attorney's fees) by judgment, settlement or otherwise. With the exception of retirement payments, Unum will only subtract deductible sources of income which are payable as a result of the same disability. We will not reduce your payment by your Social Security retirement income if your disability begins after age 65 and you were already receiving Social Security retirement payments. WHAT ARE NOT DEDUCTIBLE SOURCES OF INCOME? Unum will not subtract from your gross disability payment income you receive from, but not limited to, the following: - - 401(k) plans - - profit sharing plans - - thrift plans - - tax sheltered annuities - - stock ownership plans - - non-qualified plans of deferred compensation - - pension plans for partners - - military pension and disability income plans - - credit disability insurance - - franchise disability income plans - - a retirement plan from another Employer - - individual retirement accounts (IRA) - - individual disability income plans - - salary continuation or accumulated sick leave plans WHAT IF SUBTRACTING DEDUCTIBLE SOURCES OF INCOME RESULTS IN A ZERO BENEFIT? (Minimum Benefit) The minimum monthly payment is the greater of: - - $100; or - - 10% of your gross disability payment. Unum may apply this amount toward an outstanding overpayment. WHAT HAPPENS WHEN YOU RECEIVE A COST OF LIVING INCREASE FROM DEDUCTIBLE SOURCES OF INCOME? Once Unum has subtracted any deductible source of income from your gross disability payment, Unum will not further reduce your payment due to a cost of living increase from that source. WHAT IF UNUM DETERMINES YOU MAY QUALIFY FOR DEDUCTIBLE INCOME BENEFITS? When we determine that you may qualify for benefits under Item(s) 1), 2) and 3) in the deductible sources of income section, we will estimate your entitlement to these benefits. We can reduce your payment by the estimated amounts if such benefits: - - have not been awarded; and - - have not been denied; or - - have been denied and the denial is being appealed. Your Long Term Disability payment will NOT be reduced by the estimated amount if you: - - apply for the disability payments under Item(s) 1), 2) and 3) in the deductible sources of income section and appeal your denial to all administrative levels Unum feels are necessary; and - - sign Unum's payment option form. This form states that you promise to pay us any overpayment caused by an award. If your payment has been reduced by an estimated amount, your payment will be adjusted when we receive proof: - - of the amount awarded; or - - that benefits have been denied and all appeals Unum feels are necessary have been completed. In this case, a lump sum refund of the estimated amount will be made to you. If you receive a lump sum payment from any deductible sources of income, the lump sum will be pro-rated on a monthly basis over the time period for which the sum was given. If no time period is stated, we will use a reasonable one. HOW LONG WILL UNUM CONTINUE TO SEND YOU PAYMENTS? Unum will send you a payment each month up to the maximum period of payment. Your maximum period of payment is based on your age at disability as follows: Age at Disability Maximum Period of Payment Less than age 60 To age 65, but not less than 5 years Age 60 60 months Age 61 48 months Age 62 42 months Age 63 36 months Age 64 30 months Age 65 24 months Age 66 21 months Age 67 18 months Age 68 15 months Age 69 and over 12 months WHEN WILL PAYMENTS STOP? We will stop sending you payments and your claim will end on the earliest of the following: - - during the first 24 months of payments, when you are able to work in your regular occupation on a part-time basis but you choose not to; - - after 24 months of payments, when you are able to work in any gainful occupation on a part-time basis but you choose not to; - - the end of the maximum period of payment; - - the date you are no longer disabled under the terms of the plan; - - the date you fail to submit proof of continuing disability; - - the date your disability earnings exceed the amount allowable under the plan; - - the date you die. WHAT DISABILITIES HAVE A LIMITED PAY PERIOD UNDER YOUR PLAN? Disabilities, due to sickness or injury, which are primarily based on self-reported symptoms, and disabilities due to mental illness have a limited pay period up to 24 months. Unum will continue to send you payments beyond the 24 month period if you meet one or both of these conditions: 1. If you are confined to a hospital or institution at the end of the 24 month period, Unum will continue to send you payments during your confinement. If you are still disabled when you are discharged, Unum will send you payments for a recovery period of up to 90 days. If you become reconfined at any time during the recovery period and remain confined for at least 14 days in a row, Unum will send payments during that additional confinement and for one additional recovery period up to 90 more days. 2. In addition to Item 1, if, after the 24 month period for which you have received payments, you continue to be disabled and subsequently become confined to a hospital or institution for at least 14 days in a row, Unum will send payments during the length of the reconfinement, Unum will not pay beyond the limited pay period as indicated above, or the maximum period of payment, whichever occurs first. Unum will not apply the mental illness limitation to dementia if it is a result of: - - stroke; - - trauma; - - viral infection; - - Alzheimer's disease; or - - other conditions not listed which are not usually treated by a mental health provider or other qualified provider using psychotherapy, psychotropic drugs, or other similar methods of treatment. WHAT DISABILITIES ARE NOT COVERED UNDER YOUR PLAN? Your plan does not cover any disabilities caused by, contributed to by, or resulting from your: - - intentionally self-inflicted injuries. - - active participation in a riot. - - loss of a professional license, occupational license or certification. - - commission of a crime for which you have been convicted under state or federal law. - - pre-existing condition. Your plan will not cover a disability due to war, declared or undeclared, or any act of war. Unum will not pay a benefit for any period of disability during which you are incarcerated. WHAT IS A PRE-EXISTING CONDITION? The following applies to your monthly benefit up to and including $15,000: You have a pre-existing condition if: - - you received medical treatment, consultation, care or services including diagnostic measures, or took prescribed drugs or medicines in the 3 months just prior to your effective date of coverage; or you had symptoms for which an ordinarily prudent person would have consulted a health care provider in the 3 months just prior to your effective date of coverage; and - - the disability begins in the first 12 months after your effective date of coverage. The following applies to your monthly benefit in excess of $15,000: You have a pre-existing condition if: - - you received medical treatment, consultation, care or services including diagnostic measures, or took prescribed drugs or medicines in the 24 months just prior to the date your maximum monthly benefit in excess of $15,000 was effective; or you had symptoms for which an ordinarily prudent person would have consulted a health care provider in the 24 months just prior to the date your maximum monthly benefit in excess of $15,000 was effective; and - - your disability begins before you have been treatment free for 12 consecutive months starting on or after the date your monthly benefit in excess of $15,000 is effective. WHAT HAPPENS IF YOU RETURN TO WORK FULL TIME AND YOUR DISABILITY OCCURS AGAIN? If you have a recurrent disability, Unum will treat your disability as part of your prior claim and you will not have to complete another elimination period if: - - you were continuously insured under the plan for the period between your prior claim and your recurrent disability; and - - your recurrent disability occurs within 6 months of the end of your prior claim. Your recurrent disability will be subject to the same terms of this plan as your prior claim. Any disability which occurs after 6 months from the date your prior claim ended will be treated as a new claim. The new claim will be subject to all of the policy provisions. If you become entitled to payments under any other group long term disability plan, you will not be eligible for payments under the Unum plan. LONG TERM DISABILITY OTHER BENEFIT FEATURES WHAT BENEFITS WILL BE PROVIDED TO YOUR FAMILY IF YOU DIE? (Survivor Benefit) When Unum receives proof that you have died, we will pay your eligible survivor a lump sum benefit equal to 3 months of your gross disability payment if, on the date of your death: - - your disability had continued for 180 or more consecutive days; and - - you were receiving or were entitled to receive payments under the plan. If you have no eligible survivors, payment will be made to your estate, unless there is none. In this case, no payment will be made. However, we will first apply the survivor benefit to any overpayment which may exist on your claim. WHAT IF YOU ARE NOT IN ACTIVE EMPLOYMENT WHEN YOUR EMPLOYER CHANGES INSURANCE CARRIERS TO UNUM? (Continuity of Coverage) When the plan becomes effective, Unum will provide coverage for you if: - - you are not in active employment because of a sickness or injury; and - - you were covered by the prior policy. Your coverage is subject to payment of premium. Your payment will be limited to the amount that would have been paid by the prior carrier. Unum will reduce your payment by any amount for which your prior carrier is liable. WHAT IF YOU HAVE A DISABILITY DUE TO A PRE-EXISTING CONDITION WHEN YOUR EMPLOYER CHANGES INSURANCE CARRIERS TO UNUM? (Continuity of Coverage) Unum may send a payment if your disability results from a pre-existing condition if,you were: - - in active employment and insured under the plan on its effective date; and - - insured by the prior policy at the time of change. In order to receive a payment you must satisfy the pre-existing condition provision under: 1. the Unum plan; or 2. the prior carrier's plan, if benefits would have been paid had that policy remained in force. If you do not satisfy Item 1 or 2 above, Unum will not make any payments. If you satisfy Item 1, we will determine your payments according to the Unum plan provisions. If you only satisfy Item 2, we will administer your claim according to the Unum plan provisions. However, your payment will be the lesser of: a. the monthly benefit that would have been payable under the terms of the prior plan if it had remained inforce; or b. the monthly payment under the Unum plan. Your benefits will end on the earlier of the following dates: 1. the end of the maximum benefit period under the plan; or 2. the date benefits would have ended under the prior plan if it had remained in force. STATE REQUIREMENTS CALIFORNIA CONTACT NOTICE GENERAL QUESTIONS: If you have any general questions about your insurance, you may contact the Insurance Company by: CALLING: 1-800-421-0344 (Customer Information Call Center) - -OR- WRITING TO: Unum Life Insurance Company of America 2211 Congress Street Portland, Maine 04122 COMPLAINTS: If a complaint arises about your insurance, you may contact the Insurance Company by: CALLING: (Compliance Center Complaint Line) Toll free: 1-800-321-3889, Option 2 Direct: 207-575-7568 - -OR- WRITING TO: Deborah J. Jewett, Manager, Customer Relations Unum Life Insurance Company of America 2211 Congress Street Portland, Maine 04122 WHEN CALLING OR WRITING TO THE INSURANCE COMPANY, PLEASE PROVIDE YOUR INSURANCE POLICY NUMBER. If the Policy or Certificate of Coverage was issued or delivered by an agent or broker, please contact your agent or broker for assistance. You also can contact the California Department of Insurance. However, the California Department of Insurance should be contacted only after discussions with the Insurance Company or its agent or other representative, or both, have failed to produce a satisfactory resolution to the problem. Department of Insurance Consumer Communications Bureau 300 South Spring Street - South Tower Los Angeles, California 90013 Toll Free Hotline Telephone Number: 1-800-927-4357 Local Telephone Number: 213-897-8921 Fax: 213 736-2562 Office Hours: 8:00 a.m. - 5:00 p.m. This form is for contact information only, and it is not to be considered a condition for the Policy. OTHER SERVICES These services are also available from us as part of your Unum Long Term Disability plan. HOW CAN UNUM HELP YOUR EMPLOYER IDENTIFY AND PROVIDE WORKSITE MODIFICATION? A worksite modification might be what is needed to allow you to perform the material and substantial duties of your regular occupation with your Employer. One of our designated professionals will assist you and your Employer to identify a modification we agree is likely to help you remain at work or return to work. This agreement will be in writing and must be signed by you, your Employer and Unum. When this occurs, Unum will reimburse your Employer for the cost of the modification, up to the greater of: - - $1,000; or - - the equivalent of 2 months of your monthly benefit. This benefit is available to you on a one time only basis. HOW CAN UNUM'S REHABILITATION SERVICE HELP YOU RETURN TO WORK? Unum has a vocational rehabilitation program available to assist you to return to work. This program is offered as a service, and is voluntary on your part and on Unum's part. In addition to referrals made to the rehabilitation program by our claims paying personnel, you may request to have your claim file reviewed by one of Unum's rehabilitation professionals. As your file is reviewed, medical and vocational information will be analyzed to determine if rehabilitation services might help you return to gainful employment. Once the initial review is completed, Unum may elect to offer you a return-to-work program. The return-to-work program may include, but is not limited to, the following services: - - coordination with your Employer to assist you to return to work; - - evaluation of adaptive equipment to allow you to return to work; - - vocational evaluation to determine how your disability may impact your employment options; - - job placement services; - - resume preparation; - - job seeking skills training; or - - retraining for a new occupation. HOW CAN UNUM'S SOCIAL SECURITY CLAIMANT ADVOCACY PROGRAM ASSIST YOU WITH OBTAINING SOCIAL SECURITY DISABILITY BENEFITS? In order to be eligible for assistance from Unum's Social Security claimant advocacy program, you must be receiving monthly payments from us. Unum can provide expert advice regarding your claim and assist you with your application or appeal. Receiving Social Security benefits may enable: - - you to receive Medicare after 24 months of disability payments; - - you to protect your retirement benefits; and - - your family to be eligible for Social Security benefits. We can assist you in obtaining Social Security disability benefits by: - - helping you find appropriate legal representation; - - obtaining medical and vocational evidence; and - - reimbursing pre-approved case management expenses. ERISA Additional Summary Plan Description Information Name of Plan: National Semiconductor Corporation Name and Address of Employer: National Semiconductor Corporation 2900 Semiconductor Drive Santa Clara, California 95051 Plan Identification Number: a. Employer IRS Identification #: 95-2095071 b. Plan #: 505 Type of Welfare Plan: Disability Type of Administration: The Plan is administered by the Plan Administrator. Benefits are administered by the insurer and provided in accordance with the insurance policy issued to the Plan. ERISA Plan Year Ends: December 31 Plan Administrator, Name, Address, and Telephone Number: National Semiconductor Corporation 2900 Semiconductor Drive Santa Clara, California 95051 (408) 721-5000 National Semiconductor Corporation is the Plan Administrator and named fiduciary of the Plan, with authority to delegate its duties. The Plan Administrator may designate Trustees of the Plan, in which case the Administrator will advise you separately of the name, title and address of each Trustee. Agent for Service of Legal Process on the Plan: National Semiconductor Corporation 2900 Semiconductor Drive Santa Clara, California 95051 Service of legal process may also be made upon the Plan Administrator, and any Trustee of the Plan. Funding and Contributions: The Plan is funded as an insured plan under policy number 517969 021, issued by Unum Life Insurance Company of America, 2211 Congress Street, Portland, Maine 04122. Contributions to the Plan are made as stated under "WHO PAYS FOR THE COVERAGE" in the Certificate of Coverage. EMPLOYER'S RIGHT TO AMEND THE PLAN The Employer reserves the right, in its sole and absolute discretion, to amend, modify, or terminate, in whole or in part, any or all of the provisions of this Plan (including any related documents and underlying policies), at any time and for any reason or no reason. Any amendment, modification, or termination must be in writing and endorsed on or attached to the Plan. EMPLOYER'S RIGHT TO REQUEST POLICY CHANGE The Employer can request a policy change. Only an officer or registrar of Unum can approve a change. The change must be in writing and endorsed on or attached to the policy. CANCELLING THE POLICY OR A PLAN UNDER THE POLICY The policy or a plan under the policy can be cancelled: - - by Unum; or - - by the Policyholder. Unum may cancel or offer to modify the policy or a plan if: - - there is less than 75% participation of those eligible employees who pay all or part of their premium for a plan; or - - there is less than 100% participation of those eligible employees for a Policyholder paid plan; - - the Policyholder does not promptly provide Unum with information that is reasonably required; - - the Policyholder fails to perform any of its obligations that relate to the policy; - - fewer than 10 employees are insured under a plan; - - the Policyholder fails to pay any premium within the 31 day grace period. If Unum cancels the policy or a plan for reasons other than the Policyholder's failure to pay premium, a written notice will be delivered to the Policyholder at least 31 days prior to the cancellation date. If the premium is not paid during the grace period, the policy or plan will terminate automatically at the end of the grace period. The Policyholder is liable for premium for coverage during the grace period. The Policyholder must pay Unum all premium due for the full period each plan is in force. The Policyholder may cancel the policy or a plan by written notice delivered to Unum at least 31 days prior to the cancellation date. When both the Policyholder and Unum agree, the policy or a plan can be cancelled on an earlier date. If Unum or the Policyholder cancels the policy or a plan, coverage will end at 12:00 midnight on the last day of coverage. If the policy or a plan is cancelled, the cancellation will not affect a payable claim. HOW TO FILE A CLAIM If you wish to file a claim for benefits, you should follow the claim procedures described in your group insurance certificate. Unum must receive a completed claim form. The form must be completed by you, your authorized representative, your attending physician and your Employer. If you or your authorized representative has any questions about what to do, you or your authorized representative should contact Unum directly. CLAIMS PROCEDURES Unum will give you notice of the decision no later than 45 days after the claim is filed. This time period may be extended twice by 30 days if Unum both determines that such an extension is necessary due to matters beyond the control of the Plan and notifies you of the circumstances requiring the extension of time and the date by which Unum expects to render a decision. If such an extension is necessary due to your failure to submit the information necessary to decide the claim, the notice of extension will specifically describe the required information, and you will be afforded at least 45 days within which to provide the specified information. If you deliver the requested information within the time specified, any 30 day extension period will begin after you have provided that information. If you fail to deliver the requested information within the time specified, Unum may decide your claim without that information. If your claim for benefits is wholly or partially denied, the notice of adverse benefit determination under the Plan will: - - state the specific reason(s) for the determination; - - reference specific Plan provision(s) on which the determination is based; - - describe additional material or information necessary to complete the claim and why such information is necessary; - - describe Plan procedures and time limits for appealing the determination, and your right to obtain information about those procedures and the right to sue in federal court; and - - disclose any internal rule, guidelines, protocol or similar criterion relied on in making the adverse determination (or state that such information will be provided free of charge upon request). Notice of the determination may be provided in written or electronic form. Electronic notices will be provided in a form that complies with any applicable legal requirements. APPEAL PROCEDURES You have 180 days from the receipt of notice of an adverse benefit determination to file an appeal. Requests for appeals should be sent to the address specified in the claim denial. A decision on review will be made not later than 45 days following receipt of the written request for review. If Unum determines that special circumstances require an extension of time for a decision on review, the review period may be extended by an additional 45 days (90 days in total). Unum will notify you in writing if an additional 45 day extension is needed. If an extension is necessary due to your failure to submit the information necessary to decide the appeal, the notice of extension will specifically describe the required information, and you will be afforded at least 45 days to provide the specified information. If you deliver the requested information within the time specified, the 45 day extension of the appeal period will begin after you have provided that information. If you fail to deliver the requested information within the time specified, Unum may decide your appeal without that information. You will have the opportunity to submit written comments, documents, or other information in support of your appeal. You will have access to all relevant documents as defined by applicable U.S. Department of Labor regulations. The review of the adverse benefit determination will take into account all new information, whether or not presented or available at the initial determination. No deference will be afforded to the initial determination. The review will be conducted by Unum and will be made by a person different from the person who made the initial determination and such person will not be the original decision maker's subordinate. In the case of a claim denied on the grounds of a medical judgment, Unum will consult with a health professional with appropriate training and experience. The health care professional who is consulted on appeal will not be the individual who was consulted during the initial determination or a subordinate. If the advice of a medical or vocational expert was obtained by the Plan in connection with the denial of your claim, Unum will provide you with the names of each such expert, regardless of whether the advice was relied upon. A notice that your request on appeal is denied will contain the following information: - - the specific reason(s) for the determination; - - a reference to the specific Plan provision(s) on which the determination is based; - - a statement disclosing any internal rule, guidelines, protocol or similar criterion relied on in making the adverse determination (or a statement that such information will be provided free of charge upon request); - - a statement describing your right to bring a civil suit under federal law; - - the statement that you are entitled to receive upon request, and without charge, reasonable access to or copies of all documents, records or other information relevant to the determination; and - - the statement that "You or your plan may have other voluntary alternative dispute resolution options, such as mediation. One way to find out what may be available is to contact your local U.S. Department of Labor Office and your State insurance regulatory agency". Notice of the determination may be provided in written or electronic form. Electronic notices will be provided in a form that complies with any applicable legal requirements. Unless there are special circumstances, this administrative appeal process must be completed before you begin any legal action regarding your claim. YOUR RIGHTS UNDER ERISA As a participant in this Plan you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that all Plan participants shall be entitled to: Receive Information About Your Plan and Benefits - ------------------------------------------------ Examine, without charge, at the Plan Administrator's office and at other specified locations, all documents governing the Plan, including insurance contracts, and a copy of the latest annual report (Form 5500 Series) filed by the Plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Pension and Welfare Benefits Administration. Obtain, upon written request to the Plan Administrator, copies of documents governing the operation of the Plan, including insurance contracts, and copies of the latest annual report (Form 5500 Series) and updated summary plan description. The Plan Administrator may make a reasonable charge for the copies. Receive a summary of the Plan's annual financial report. The Plan Administrator is required by law to furnish each participant with a copy of this summary annual report. Prudent Actions by Plan Fiduciaries - ----------------------------------- In addition to creating rights for plan participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit plan. The people who operate your Plan, called "fiduciaries" of the Plan, have a duty to do so prudently and in the interest of you and other Plan participants and beneficiaries. No one, including your Employer or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a benefit or exercising your rights under ERISA. Enforce Your Rights - ------------------- If your claim for a benefit is denied or ignored, in whole or in part, you have a right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules. Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request a copy of plan documents or the latest annual report from the Plan and do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator. If you have a claim for benefits that is denied or ignored, in whole or in part, you may file suit in a state or federal court. If it should happen that Plan fiduciaries misuse the Plan's money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, if, for example, it finds your claim is frivolous. Assistance with Your Questions - ------------------------------ If you have any questions about your Plan, you should contact the Plan Administrator. If you have any questions about this statement or about your rights under ERISA, or if you need assistance in obtaining documents from the Plan Administrator, you should contact the nearest office of the Pension and Welfare Benefits Administration, U.S. Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquiries, Pension and Welfare Benefits Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210. You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Pension and Welfare Benefits Administration. DISCRETIONARY ACTS - ------------------ In exercising its discretionary powers under the Plan, the Plan Administrator, and any designee (which shall include Unum as a claims fiduciary) will have the broadest discretion permissible under ERISA and any other applicable laws, and its decisions will constitute final review of your claim by the Plan. Benefits under this Plan will be paid only if the Plan Administrator or its designee (including Unum), decides in its discretion that the applicant is entitled to them. GLOSSARY ACTIVE EMPLOYMENT means you are working for your Employer for earnings that are paid regularly and that you are performing the material and substantial duties of your regular occupation. You must be working at least the minimum number of hours as described under Eligible Group(s) in each plan. Your work site must be: - - your Employer's usual place of business; - - an alternative work site at the direction of your Employer, including your home; or - - a location to which your job requires you to travel. Normal vacation is considered active employment. Temporary and seasonal workers are excluded from coverage. DEDUCTIBLE SOURCES OF INCOME means income from deductible sources listed in the plan which you receive or are entitled to receive while you are disabled. This income will be subtracted from your gross disability payment. DISABILITY EARNINGS means the earnings which you receive while you are disabled and working, plus the earnings you could receive if you were working to your maximum capacity. ELIMINATION PERIOD means a period of continuous disability which must be satisfied before you are eligible to receive benefits from Unum. EMPLOYEE means a person who is in active employment with the Employer. EMPLOYER means the Policyholder, and includes any division, subsidiary or affiliated company named in the policy. EVIDENCE OF INSURABILITY means a statement of your medical history which Unum will use to determine if you are approved for coverage. Evidence of insurability will be at Unum's expense. GAINFUL OCCUPATION means an occupation that is or can be expected to provide you with an income at least equal to your gross disability payment within 12 months of your return to work. GRACE PERIOD means the period of time following the premium due date during which premium payment may be made. GROSS DISABILITY PAYMENT means the benefit amount before Unum subtracts deductible sources of income and disability earnings. HOSPITAL OR INSTITUTION means an accredited facility licensed to provide care and treatment for the condition causing your disability. INDEXED MONTHLY EARNINGS means your monthly earnings adjusted on each anniversary of benefit payments by the lesser of 10% or the current annual percentage increase in the Consumer Price Index. Your indexed monthly earnings may increase or remain the same, but will never decrease. The Consumer Price Index (CPI-W) is published by the U.S. Department of Labor. Unum reserves the right to use some other similar measurement if the Department of Labor changes or stops publishing the CPI-W. Indexing is only used to determine your percentage of lost earnings while you are disabled and working. INJURY means a bodily injury that is the direct result of an accident and not related to any other cause. Disability must begin while you are covered under the plan. INSURED means any person covered under a plan. LAW, PLAN OR ACT means the original enactments of the law, plan or act and all amendments. LAYOFF or LEAVE OF ABSENCE means you are temporarily absent from active employment for a period of time that has been agreed to in advance in writing by your Employer. Your normal vacation time or any period of disability is not considered a temporary layoff or leave of absence. LIMITED means what you cannot or are unable to do. MATERIAL AND SUBSTANTIAL DUTIES means duties that: - - are normally required for the performance of your regular occupation; and - - cannot be reasonably omitted or modified, except that if you are required to work on average in excess of 40 hours per week, Unum will consider you able to perform that requirement if you are working or have the capacity to work 40 hours per week. MAXIMUM CAPACITY means, based on your restrictions and limitations: - - during the first 24 months of disability, the greatest extent of work you are able to do in your regular occupation, that is reasonably available. - - beyond 24 months of disability, the greatest extent of work you are able to do in any occupation, that is reasonably available, for which you are reasonably fitted by education, training or experience. MAXIMUM PERIOD OF PAYMENT means the longest period of time Unum will make payments to you for any one period of disability. MENTAL ILLNESS means a psychiatric or psychological condition regardless of cause such as schizophrenia, depression, manic depressive or bipolar illness, anxiety, personality disorders and/or adjustment disorders or other conditions. These conditions are usually treated by a mental health provider or other qualified provider using psychotherapy, psychotropic drugs, or other similar methods of treatment. MONTHLY BENEFIT means the total benefit amount for which an employee is insured under this plan subject to the maximum benefit. MONTHLY EARNINGS means your gross monthly income from your Employer as defined in the plan. MONTHLY PAYMENT means your payment after any deductible sources of income have been subtracted from your gross disability payment. PART-TIME BASIS means the ability to work and earn 20% or more of your indexed monthly earnings. PAYABLE CLAIM means a claim for which Unum is liable under the terms of the policy. PHYSICIAN means: - - a person performing tasks that are within the limits of his or her medical license; and - - a person who is licensed to practice medicine and prescribe and administer drugs or to perform surgery; or - - a person with a doctoral degree in Psychology (Ph.D. or Psy.D.) whose primary practice is treating patients; or - - a person who is a legally qualified medical practitioner according to the laws and regulations of the governing jurisdiction. Unum will not recognize you, or your spouse, children, parents or siblings as a physician for a claim that you send to us. PLAN means a line of coverage under the policy. PRE-EXISTING CONDITION means a condition for which you received medical treatment, consultation, care or services including diagnostic measures, or took prescribed drugs or medicines for your condition during the given period of time as stated in the plan; or you had symptoms for which an ordinarily prudent person would have consulted a health care provider during the given period of time as stated in the plan. RECURRENT DISABILITY means a disability which is: - - caused by a worsening in your condition; and - - due to the same cause(s) as your prior disability for which Unum made a Long Term Disability payment. REGULAR CARE means: - - you personally visit a physician as frequently as is medically required, according to generally accepted medical standards, to effectively manage and treat your disabling condition(s); and - - you are receiving the most appropriate treatment and care which conforms with generally accepted medical standards, for your disabling condition(s) by a physician whose specialty or experience is the most appropriate for your disabling condition(s), according to generally accepted medical standards. REGULAR OCCUPATION means the occupation you are routinely performing when your disability begins. Unum will look at your occupation as it is normally performed in the national economy, instead of how the work tasks are performed for a specific employer or at a specific location. RETIREMENT PLAN means a defined contribution plan or defined benefit plan. These are plans which provide retirement benefits to employees and are not funded entirely by employee contributions. Retirement Plan includes but is not limited to any plan which is part of any federal, state, county, municipal or association retirement system. SALARY CONTINUATION OR ACCUMULATED SICK LEAVE means continued payments to you by your Employer of all or part of your monthly earnings, after you become disabled as defined by the Policy. This continued payment must be part of an established plan maintained by your Employer for the benefit of all employees covered under the Policy. Salary continuation or accumulated sick leave does not include compensation paid to you by your Employer for work you actually perform after your disability begins. Such compensation is considered disability earnings, and would be taken into account in calculating your monthly payment. SELF-REPORTED SYMPTOMS means the manifestations of your condition which you tell your physician, that are not verifiable using tests, procedures or clinical examinations standardly accepted in the practice of medicine. Examples of self-reported symptoms include, but are not limited to headaches, pain, fatigue, stiffness, soreness, ringing in ears, dizziness, numbness and loss of energy. SICKNESS means an illness or disease. Disability must begin while you are covered under the plan. SURVIVOR, ELIGIBLE means your spouse, if living; otherwise your children under age 25 equally. TREATMENT FREE means you have not received medical treatment, consultation,care or services including diagnostic measures, or taken prescribed drugs or medicines for the pre-existing condition. WAITING PERIOD means the continuous period of time (shown in each plan) that you must be in active employment in an eligible group before you are eligible for coverage under a plan. WE, US and OUR means Unum Life Insurance Company of America. YOU means an employee who is eligible for Unum coverage. EX-10 5 form10q_12093.txt EXHIBIT 10.3 LT DISABILITY PLAN EXEC. Exhibit 10.3 Long Term Disability Plan Executive Staff Policy No. 517969.011 Underwritten by Unum Life Insurance Company of America As amended 1-1-2002 As restated 07-2002 National Semiconductor Corporation Your Group Long Term Disability Plan CERTIFICATE OF COVERAGE This certificate of coverage does not apply unless this space is covered by a sticker indicating the employee's name, policy number and effective date of coverage. Unum Life Insurance Company of America (referred to as Unum) welcomes you as a client. This is your certificate of coverage as long as you are eligible for coverage and you become insured. You will want to read it carefully and keep it in a safe place. Unum has written your certificate of coverage in plain English. However, a few terms and provisions are written as required by insurance law. If you have any questions about any of the terms and provisions, please consult Unum's claims paying office. Unum will assist you in any way to help you understand your benefits. If the terms and provisions of the certificate of coverage (issued to you) are different from the policy (issued to the policyholder), the policy will govern. Your coverage may be cancelled or changed in whole or in part under the terms and provisions of the policy. The policy is delivered in and is governed by the laws of the governing jurisdiction and to the extent applicable by the Employee Retirement Income Security Act of 1974 (ERISA) and any amendments. When making a benefit determination under the policy, Unum has discretionary authority to determine your eligibility for benefits and to interpret the terms and provisions of the policy. For purposes of effective dates and ending dates under the group policy, all days begin at 12:01 a.m. and end at 12:00 midnight at the Policyholder's address. Unum Life Insurance Company of America 2211 Congress Street Portland, Maine 04122 BENEFITS AT A GLANCE LONG TERM DISABILITY PLAN This long term disability plan provides financial protection for you by paying a portion of your income while you are disabled. The amount you receive is based on the amount you earned before your disability began. In some cases, you can receive disability payments even if you work while you are disabled. EMPLOYER'S ORIGINAL PLAN EFFECTIVE DATE: July 1, 1997 POLICY NUMBER: 517969 011 ELIGIBLE GROUP(S): U.S. Executive Committee in active employment MINIMUM HOURS REQUIREMENT: Employees must be working at least 30 hours per week. WAITING PERIOD: For employees in an eligible group on or before July 1, 1997: None For employees entering an eligible group after July 1, 1997: None REHIRE: If your employment ends and you are rehired within 12 months, your previous work while in an eligible group will apply toward the waiting period. All other policy provisions apply. WHO PAYS FOR THE COVERAGE: You pay the cost of your coverage. ELIMINATION PERIOD: 360 days Benefits begin the day after the elimination period is completed. MONTHLY BENEFIT: 60% of monthly earnings to a maximum benefit of $20,000 per month. Your payment may be reduced by deductible sources of income and disability earnings. Some disabilities may not be covered or may have limited coverage under this plan. MAXIMUM PERIOD OF PAYMENT: Age at Disability Maximum Period of Payment Less than age 60 To age 65, but not less than 5 years Age 60 60 months Age 61 48 months Age 62 42 months Age 63 36 months Age 64 30 months Age 65 24 months Age 66 21 months Age 67 18 months Age 68 15 months Age 69 and over 12 months No premium payments are required for your coverage while you are receiving payments under this plan. OTHER FEATURES: Continuity of Coverage Minimum Benefit Pre-Existing: 3/12 Survivor Benefit The above items are only highlights of this plan. For a full description of your coverage, continue reading your certificate of coverage section. CLAIM INFORMATION LONG TERM DISABILITY WHEN DO YOU NOTIFY UNUM OF A CLAIM? We encourage you to notify us of your claim as soon as possible, so that a claim decision can be made in a timely manner. Written notice of a claim should be sent within 30 days after the date your disability begins. However, you must send Unum written proof of your claim no later than 90 days after your elimination period. If it is not possible to give proof within 90 days, it must be given no later than 1 year after the time proof is otherwise required except in the absence of legal capacity. The claim form is available from your Employer, or you can request a claim form from us. If you do not receive the form from Unum within 15 days of your request, send Unum written proof of claim without waiting for the form. You must notify us immediately when you return to work in any capacity. HOW DO YOU FILE A CLAIM? You and your Employer must fill out your own sections of the claim form and then give it to your attending physician. Your physician should fill out his or her section of the form and send it directly to Unum. WHAT INFORMATION IS NEEDED AS PROOF OF YOUR CLAIM? Your proof of claim, provided at your expense, must show: - - that you are under the regular care of a physician; - - the appropriate documentation of your monthly earnings; - - the date your disability began; - - the cause of your disability; - - the extent of your disability, including restrictions and limitations preventing you from performing your regular occupation; and - - the name and address of any hospital or institution where you received treatment, including all attending physicians. We may request that you send proof of continuing disability indicating that you are under the regular care of a physician. This proof, provided at your expense, must be received within 45 days of a request by us. In some cases, you will be required to give Unum authorization to obtain additional medical information and to provide non-medical information as part of your proof of claim, or proof of continuing disability. Unum will deny your claim, or stop sending you payments, if the appropriate information is not submitted. TO WHOM WILL UNUM MAKE PAYMENTS? Unum will make payments to you. WHAT HAPPENS IF UNUM OVERPAYS YOUR CLAIM? Unum has the right to recover any overpayments due to: - - fraud; - - any error Unum makes in processing a claim; and - - your receipt of deductible sources of income. You must reimburse us in full. We will determine the method by which the repayment is to be made. Unum will not recover more money than the amount we paid you. GENERAL PROVISIONS WHAT IS THE CERTIFICATE OF COVERAGE? This certificate of coverage is a written statement prepared by Unum and may include attachments. It tells you: - - the coverage for which you may be entitled; - - to whom Unum will make a payment; and - - the limitations, exclusions and requirements that apply within a plan. WHEN ARE YOU ELIGIBLE FOR COVERAGE? If you are working for your Employer in an eligible group, the date you are eligible for coverage is the later of: - - the plan effective date; or - - the day after you complete your waiting period. WHEN DOES YOUR COVERAGE BEGIN? When your Employer pays 100% of the cost of your coverage under a plan, you will be covered at 12:01 a.m. on the date you are eligible for coverage. When you and your Employer share the cost of your coverage under a plan or when you pay 100% of the cost yourself, you will be covered at 12:01 a.m. on the latest of: - - the date you are eligible for coverage, if you apply for insurance on or before that date; - - the date you apply for insurance, if you apply within 31 days after your eligibility date; or - - the date Unum approves your application, if evidence of insurability is required. Evidence of insurability is required if you: - - are a late applicant, which means you apply for coverage more than 31 days after the date you are eligible for coverage; or - - voluntarily cancelled your coverage and are reapplying. An evidence of insurability form can be obtained from your Employer. WHAT IF YOU ARE ABSENT FROM WORK ON THE DATE YOUR COVERAGE WOULD NORMALLY BEGIN? If you are absent from work due to injury, sickness, temporary layoff or leave of absence, your coverage will begin on the date you return to active employment. ONCE YOUR COVERAGE BEGINS, WHAT HAPPENS IF YOU ARE TEMPORARILY NOT WORKING? If you are on a temporary layoff, and if premium is paid, you will be covered through the end of the month that immediately follows the month in which your temporary layoff begins. If you are on a leave of absence, and if premium is paid, you will be covered through the end of the month that immediately follows the month in which your leave of absence begins. WHEN WILL CHANGES TO YOUR COVERAGE TAKE EFFECT? Once your coverage begins, any increased or additional coverage will take effect immediately if you are in active employment or if you are on a covered layoff or leave of absence. If you are not in active employment due to injury or sickness, any increased or additional coverage will begin on the date you return to active employment. Any decrease in coverage will take effect immediately but will not affect a payable claim that occurs prior to the decrease. WHEN DOES YOUR COVERAGE END? Your coverage under the policy or a plan ends on the earliest of: - - the date the policy or a plan is cancelled; - - the date you no longer are in an eligible group; - - the date your eligible group is no longer covered; - - the last day of the period for which you made any required contributions; or - - the last day you are in active employment except as provided under the covered layoff or leave of absence provision. Unum will provide coverage for a payable claim which occurs while you are covered under the policy or plan. WHAT ARE THE TIME LIMITS FOR LEGAL PROCEEDINGS? You can start legal action regarding your claim 60 days after proof of claim has been given and up to 3 years from the time proof of claim is required, unless otherwise provided under federal law. HOW CAN STATEMENTS MADE IN YOUR APPLICATION FOR THIS COVERAGE BE USED? Unum considers any statements you or your Employer make in a signed application for coverage a representation and not a warranty. If any of the statements you or your Employer make are not complete and/or not true at the time they are made, we can: - - reduce or deny any claim; or - - cancel your coverage from the original effective date. We will use only statements made in a signed application as a basis for doing this. If the Employer gives us information about you that is incorrect, we will: - - use the facts to decide whether you have coverage under the plan and in what amounts; and - - make a fair adjustment of the premium. HOW WILL UNUM HANDLE INSURANCE FRAUD? Unum wants to ensure you and your Employer do not incur additional insurance costs as a result of the undermining effects of insurance fraud. Unum promises to focus on all means necessary to support fraud detection, investigation, and prosecution. Any person who knowingly files a statement of claim containing any false or misleading information is subject to criminal and civil penalties. In addition, submission of false information in connection with the claim form may also constitute a crime under federal laws. Unum will pursue any appropriate legal remedies in the event of insurance fraud, including prosecuting under federal mail fraud, federal wire fraud, and/or the federal Racketeer Influenced and Corrupt Organizations Act statutes. Any false statements made herein may be reported to state and federal tax and regulatory authorities as is appropriate. DOES THE POLICY REPLACE OR AFFECT ANY WORKERS' COMPENSATION OR STATE DISABILITY INSURANCE? The policy does not replace or affect the requirements for coverage by any workers' compensation or state disability insurance. DOES YOUR EMPLOYER ACT AS YOUR AGENT OR UNUM'S AGENT? For purposes of the policy, your Employer acts on its own behalf or as your agent. Under no circumstances will your Employer be deemed the agent of Unum. LONG TERM DISABILITY BENEFIT INFORMATION HOW DOES UNUM DEFINE DISABILITY? You are disabled when Unum determines that: - - you are limited from performing the material and substantial duties of your regular occupation due to your sickness or injury; and - - you have a 20% or more loss in your indexed monthly earnings due to the same sickness or injury. The loss of a professional or occupational license or certification does not, in itself, constitute disability. We may require you to be examined by a physician, other medical practitioner or vocational expert of our choice. Unum will pay for this examination. We can require an examination as often as it is reasonable to do so. We may also require you to be interviewed by an authorized Unum Representative. HOW LONG MUST YOU BE DISABLED BEFORE YOU ARE ELIGIBLE TO RECEIVE BENEFITS? You must be continuously disabled through your elimination period. Unum will treat your disability as continuous if your disability stops for 30 days or less during the elimination period. The days that you are not disabled will not count toward your elimination period. Your elimination period is 360 days. CAN YOU SATISFY YOUR ELIMINATION PERIOD IF YOU ARE WORKING? Yes, provided you meet the definition of disability. WHEN WILL YOU BEGIN TO RECEIVE PAYMENTS? You will begin to receive payments when we approve your claim, providing the elimination period has been met. We will send you a payment monthly for any period for which Unum is liable. HOW MUCH WILL UNUM PAY YOU IF YOU ARE DISABLED? We will follow this process to figure your payment: 1. Multiply your monthly earnings by 60%. 2. The maximum monthly benefit is $20,000. 3. Compare the answer from Item 1 with the maximum monthly benefit. The lesser of these two amounts is your gross disability payment. 4. Subtract from your gross disability payment any deductible sources of income. The amount figured in Item 4 is your monthly payment. WHAT ARE YOUR MONTHLY EARNINGS? "Monthly Earnings" means your gross monthly income from your Employer in effect just prior to your date of disability. It includes your total income before taxes. It is prior to any deductions made for pre-tax contributions to a qualified deferred compensation plan, Section 125 plan, or flexible spending account. It includes income actually received from commissions but does not include renewal commissions, bonuses, overtime pay or any other extra compensation, or income received from sources other than your Employer. Commissions will be averaged for the lesser of: a. the 12 full calendar month period of your employment with your Employer just prior to the date disability begins; or b. the period of actual employment with your Employer. WHAT WILL WE USE FOR MONTHLY EARNINGS IF YOU BECOME DISABLED DURING A COVERED LAYOFF OR LEAVE OF ABSENCE? If you become disabled while you are on a covered layoff or leave of absence, we will use your monthly earnings from your Employer in effect just prior to the date your absence begins. HOW MUCH WILL UNUM PAY YOU IF YOU ARE DISABLED AND WORKING? We will send you the monthly payment if you are disabled and your monthly disability earnings, if any, are less than 20% of your indexed monthly earnings, due to the same sickness or injury. If you are disabled and your monthly disability earnings are from 20% through 80% of your indexed monthly earnings, due to the same sickness or injury, Unum will figure your payment as follows: During the first 12 months of payments, while working, your monthly payment will not be reduced as long as disability earnings plus the gross disability payment does not exceed 100% of indexed monthly earnings. 1. Add your monthly disability earnings to your gross disability payment. 2. Compare the answer in Item 1 to your indexed monthly earnings. If the answer from Item 1 is less than or equal to 100% of your indexed monthly earnings, Unum will not further reduce your monthly payment. If the answer from Item 1 is more than 100% of your indexed monthly earnings, Unum will subtract the amount over 100% from your monthly payment. After 12 months of payments, while working, you will receive payments based on the percentage of income you are losing due to your disability. 1. Subtract your disability earnings from your indexed monthly earnings. 2. Divide the answer in Item 1 by your indexed monthly earnings. This is your percentage of lost earnings. 3. Multiply your monthly payment by the answer in Item 2. This is the amount Unum will pay you each month. Unum may require you to send proof of your monthly disability earnings at least quarterly. We will adjust your payment based on your quarterly disability earnings. As part of your proof of disability earnings, we can require that you send us appropriate financial records which we believe are necessary to substantiate your income. After the elimination period, if you are disabled for less than 1 month, we will send you 1/30 of your payment for each day of disability. HOW CAN WE PROTECT YOU IF YOUR DISABILITY EARNINGS FLUCTUATE? If your disability earnings routinely fluctuate widely from month to month, Unum may average your disability earnings over the most recent 3 months to determine if your claim should continue. If Unum averages your disability earnings, we will not terminate your claim unless the average of your disability earnings from the last 3 months exceeds 80% of indexed monthly earnings. We will not pay you for any month during which disability earnings exceed 80% of indexed monthly earnings. WHAT ARE DEDUCTIBLE SOURCES OF INCOME? Unum will subtract from your gross disability payment the following deductible sources of income: 1) The amount that you receive or are entitled to receive under: - - a workers' compensation law. - - an occupational disease law. - - any other act or law with similar intent. 2) The amount that you receive or are entitled to receive as disability income payments under any: - - state compulsory benefit act or law. - - automobile liability insurance policy. - - other group insurance plan. - - governmental retirement system as a result of your job with your Employer. 3) The amount that you, your spouse and your children receive or are entitled to receive as disability payments because of your disability under: - - the United States Social Security Act. - - the Canada Pension Plan. - - the Quebec Pension Plan. - - any similar plan or act. 4) The amount that you receive as retirement payments or the amount your spouse and children receive as retirement payments because you are receiving retirement payments under: - - the United States Social Security Act. - - the Canada Pension Plan. - - the Quebec Pension Plan. - - any similar plan or act. 5) The amount that you: - - receive as disability payments under your Employer's retirement plan. - - voluntarily elect to receive as retirement payments under your Employer's retirement plan. - - receive as retirement payments when you reach the later of age 62 or normal retirement age, as defined in your Employer's retirement plan. Disability payments under a retirement plan will be those benefits which are paid due to disability and do not reduce the retirement benefit which would have been paid if the disability had not occurred. Retirement payments will be those benefits which are based on your Employer's contribution to the retirement plan. Disability benefits which reduce the retirement benefit under the plan will also be considered as a retirement benefit. Regardless of how the retirement funds from the retirement plan are distributed, Unum will consider your and your Employer's contributions to be distributed simultaneously throughout your lifetime. Amounts received do not include amounts rolled over or transferred to any eligible retirement plan. Unum will use the definition of eligible retirement plan as defined in Section 402 of the Internal Revenue Code including any future amendments which affect the definition. 6) The amount that you receive under Title 46, United States Code Section 688 (The Jones Act). 7) The amount that you receive from a third party (after subtracting attorney's fees) by judgment, settlement or otherwise. With the exception of retirement payments, Unum will only subtract deductible sources of income which are payable as a result of the same disability. We will not reduce your payment by your Social Security retirement income if your disability begins after age 65 and you were already receiving Social Security retirement payments. WHAT ARE NOT DEDUCTIBLE SOURCES OF INCOME? Unum will not subtract from your gross disability payment income you receive from, but not limited to, the following: - - 401(k) plans - - profit sharing plans - - thrift plans - - tax sheltered annuities - - stock ownership plans - - non-qualified plans of deferred compensation - - pension plans for partners - - military pension and disability income plans - - credit disability insurance - - franchise disability income plans - - a retirement plan from another Employer - - individual retirement accounts (IRA) - - individual disability income plans - - salary continuation or accumulated sick leave plans WHAT IF SUBTRACTING DEDUCTIBLE SOURCES OF INCOME RESULTS IN A ZERO BENEFIT? (Minimum Benefit) The minimum monthly payment is the greater of: - - $100; or - - 10% of your gross disability payment. Unum may apply this amount toward an outstanding overpayment. WHAT HAPPENS WHEN YOU RECEIVE A COST OF LIVING INCREASE FROM DEDUCTIBLE SOURCES OF INCOME? Once Unum has subtracted any deductible source of income from your gross disability payment, Unum will not further reduce your payment due to a cost of living increase from that source. WHAT IF UNUM DETERMINES YOU MAY QUALIFY FOR DEDUCTIBLE INCOME BENEFITS? When we determine that you may qualify for benefits under Item(s) 1), 2) and 3) in the deductible sources of income section, we will estimate your entitlement to these benefits. We can reduce your payment by the estimated amounts if such benefits: - - have not been awarded; and - - have not been denied; or - - have been denied and the denial is being appealed. Your Long Term Disability payment will NOT be reduced by the estimated amount if you: - - apply for the disability payments under Item(s) 1), 2) and 3) in the deductible sources of income section and appeal your denial to all administrative levels Unum feels are necessary; and - - sign Unum's payment option form. This form states that you promise to pay us any overpayment caused by an award. If your payment has been reduced by an estimated amount, your payment will be adjusted when we receive proof: - - of the amount awarded; or - - that benefits have been denied and all appeals Unum feels are necessary have been completed. In this case, a lump sum refund of the estimated amount will be made to you. If you receive a lump sum payment from any deductible sources of income, the lump sum will be pro-rated on a monthly basis over the time period for which the sum was given. If no time period is stated, we will use a reasonable one. HOW LONG WILL UNUM CONTINUE TO SEND YOU PAYMENTS? Unum will send you a payment each month up to the maximum period of payment. Your maximum period of payment is based on your age at disability as follows: Age at Disability Maximum Period of Payment Less than age 60 To age 65, but not less than 5 years Age 60 60 months Age 61 48 months Age 62 42 months Age 63 36 months Age 64 30 months Age 65 24 months Age 66 21 months Age 67 18 months Age 68 15 months Age 69 and over 12 months WHEN WILL PAYMENTS STOP? We will stop sending you payments and your claim will end on the earliest of the following: - - when you are able to work in your regular occupation on a part-time basis but you choose not to; - - the end of the maximum period of payment; - - the date you are no longer disabled under the terms of the plan; - - the date you fail to submit proof of continuing disability; - - the date your disability earnings exceed the amount allowable under the plan; - - the date you die. WHAT DISABILITIES HAVE A LIMITED PAY PERIOD UNDER YOUR PLAN? Disabilities, due to sickness or injury, which are primarily based on self-reported symptoms, and disabilities due to mental illness have a limited pay period up to 24 months. Unum will continue to send you payments beyond the 24 month period if you meet one or both of these conditions: 1. If you are confined to a hospital or institution at the end of the 24 month period, Unum will continue to send you payments during your confinement. If you are still disabled when you are discharged, Unum will send you payments for a recovery period of up to 90 days. If you become reconfined at any time during the recovery period and remain confined for at least 14 days in a row, Unum will send payments during that additional confinement and for one additional recovery period up to 90 more days. 2. In addition to Item 1, if, after the 24 month period for which you have received payments, you continue to be disabled and subsequently become confined to a hospital or institution for at least 14 days in a row, Unum will send payments during the length of the reconfinement. Unum will not pay beyond the limited pay period as indicated above, or the maximum period of payment, whichever occurs first. Unum will not apply the mental illness limitation to dementia if it is a result of: - - stroke; - - trauma; - - viral infection; - - Alzheimer's disease; or - - other conditions not listed which are not usually treated by a mental health provider or other qualified provider using psychotherapy, psychotropic drugs, or other similar methods of treatment. WHAT DISABILITIES ARE NOT COVERED UNDER YOUR PLAN? Your plan does not cover any disabilities caused by, contributed to by, or resulting from your: - - intentionally self-inflicted injuries. - - active participation in a riot. - - loss of a professional license, occupational license or certification. - - commission of a crime for which you have been convicted under state or federal law. - - pre-existing condition. Your plan will not cover a disability due to war, declared or undeclared, or any act of war. Unum will not pay a benefit for any period of disability during which you are incarcerated. WHAT IS A PRE-EXISTING CONDITION? The following applies to your monthly benefit up to and including $15,000: You have a pre-existing condition if: - - you received medical treatment, consultation, care or services including diagnostic measures, or took prescribed drugs or medicines in the 3 months just prior to your effective date of coverage; or you had symptoms for which an ordinarily prudent person would have consulted a health care provider in the 3 months just prior to your effective date of coverage; and - - the disability begins in the first 12 months after your effective date of coverage. The following applies to your monthly benefit in excess of $15,000: You have a pre-existing condition if: - - you received medical treatment, consultation, care or services including diagnostic measures, or took prescribed drugs or medicines in the 24 months just prior to the date your maximum monthly benefit in excess of $15,000 was effective; or you had symptoms for which an ordinarily prudent person would have consulted a health care provider in the 24 months just prior to the date your maximum monthly benefit in excess of $15,000 was effective; and - - your disability begins before you have been treatment free for 12 consecutive months starting on or after the date your monthly benefit in excess of $15,000 is effective. WHAT HAPPENS IF YOU RETURN TO WORK FULL TIME AND YOUR DISABILITY OCCURS AGAIN? If you have a recurrent disability, Unum will treat your disability as part of your prior claim and you will not have to complete another elimination period if: - - you were continuously insured under the plan for the period between your prior claim and your recurrent disability; and - - your recurrent disability occurs within 6 months of the end of your prior claim. Your recurrent disability will be subject to the same terms of this plan as your prior claim. Any disability which occurs after 6 months from the date your prior claim ended will be treated as a new claim. The new claim will be subject to all of the policy provisions. If you become entitled to payments under any other group long term disability plan, you will not be eligible for payments under the Unum plan. LONG TERM DISABILITY OTHER BENEFIT FEATURES WHAT BENEFITS WILL BE PROVIDED TO YOUR FAMILY IF YOU DIE? (Survivor Benefit) When Unum receives proof that you have died, we will pay your eligible survivor a lump sum benefit equal to 3 months of your gross disability payment if, on the date of your death: - - your disability had continued for 180 or more consecutive days; and - - you were receiving or were entitled to receive payments under the plan. If you have no eligible survivors, payment will be made to your estate, unless there is none. In this case, no payment will be made. However, we will first apply the survivor benefit to any overpayment which may exist on your claim. WHAT IF YOU ARE NOT IN ACTIVE EMPLOYMENT WHEN YOUR EMPLOYER CHANGES INSURANCE CARRIERS TO UNUM? (Continuity of Coverage) When the plan becomes effective, Unum will provide coverage for you if: - - you are not in active employment because of a sickness or injury; and - - you were covered by the prior policy. Your coverage is subject to payment of premium. Your payment will be limited to the amount that would have been paid by the prior carrier. Unum will reduce your payment by any amount for which your prior carrier is liable. WHAT IF YOU HAVE A DISABILITY DUE TO A PRE-EXISTING CONDITION WHEN YOUR EMPLOYER CHANGES INSURANCE CARRIERS TO UNUM? (Continuity of Coverage) Unum may send a payment if your disability results from a pre-existing condition if, you were: - - in active employment and insured under the plan on its effective date; and - - insured by the prior policy at the time of change. In order to receive a payment you must satisfy the pre-existing condition provision under: 1. the Unum plan; or 2. the prior carrier's plan, if benefits would have been paid had that policy remained in force. If you do not satisfy Item 1 or 2 above, Unum will not make any payments. If you satisfy Item 1, we will determine your payments according to the Unum plan provisions. If you only satisfy Item 2, we will administer your claim according to the Unum plan provisions. However, your payment will be the lesser of: a. the monthly benefit that would have been payable under the terms of the prior plan if it had remained inforce; or b. the monthly payment under the Unum plan. Your benefits will end on the earlier of the following dates: 1. the end of the maximum benefit period under the plan; or 2. the date benefits would have ended under the prior plan if it had remained in force. STATE REQUIREMENTS CALIFORNIA CONTACT NOTICE GENERAL QUESTIONS: If you have any general questions about your insurance, you may contact the Insurance Company by: CALLING: 1-800-421-0344 (Customer Information Call Center) - -OR- WRITING TO: Unum Life Insurance Company of America 2211 Congress Street Portland, Maine 04122 COMPLAINTS: If a complaint arises about your insurance, you may contact the Insurance Company by: CALLING: (Compliance Center Complaint Line) Toll free: 1-800-321-3889, Option 2 Direct: 207-575-7568 - -OR- WRITING TO: Deborah J. Jewett, Manager, Customer Relations Unum Life Insurance Company of America 2211 Congress Street Portland, Maine 04122 WHEN CALLING OR WRITING TO THE INSURANCE COMPANY, PLEASE PROVIDE YOUR INSURANCE POLICY NUMBER. If the Policy or Certificate of Coverage was issued or delivered by an agent or broker, please contact your agent or broker for assistance. You also can contact the California Department of Insurance. However, the California Department of Insurance should be contacted only after discussions with the Insurance Company or its agent or other representative, or both, have failed to produce a satisfactory resolution to the problem. Department of Insurance Consumer Communications Bureau 300 South Spring Street - South Tower Los Angeles, California 90013 Toll Free Hotline Telephone Number: 1-800-927-4357 Local Telephone Number: 213-897-8921 Fax: 213 736-2562 Office Hours: 8:00 a.m. - 5:00 p.m. This form is for contact information only, and it is not to be considered a condition for the Policy. OTHER SERVICES These services are also available from us as part of your Unum Long Term Disability plan. HOW CAN UNUM HELP YOUR EMPLOYER IDENTIFY AND PROVIDE WORKSITE MODIFICATION? A worksite modification might be what is needed to allow you to perform the material and substantial duties of your regular occupation with your Employer. One of our designated professionals will assist you and your Employer to identify a modification we agree is likely to help you remain at work or return to work. This agreement will be in writing and must be signed by you, your Employer and Unum. When this occurs, Unum will reimburse your Employer for the cost of the modification, up to the greater of: - - $1,000; or - - the equivalent of 2 months of your monthly benefit. This benefit is available to you on a one time only basis. HOW CAN UNUM'S REHABILITATION SERVICE HELP YOU RETURN TO WORK? Unum has a vocational rehabilitation program available to assist you to return to work. This program is offered as a service, and is voluntary on your part and on Unum's part. In addition to referrals made to the rehabilitation program by our claims paying personnel, you may request to have your claim file reviewed by one of Unum's rehabilitation professionals. As your file is reviewed, medical and vocational information will be analyzed to determine if rehabilitation services might help you return to gainful employment. Once the initial review is completed, Unum may elect to offer you a return-to-work program. The return-to-work program may include, but is not limited to, the following services: - - coordination with your Employer to assist you to return to work; - - evaluation of adaptive equipment to allow you to return to work; - - vocational evaluation to determine how your disability may impact your employment options; - - job placement services; - - resume preparation; - - job seeking skills training; or - - retraining for a new occupation. HOW CAN UNUM'S SOCIAL SECURITY CLAIMANT ADVOCACY PROGRAM ASSIST YOU WITH OBTAINING SOCIAL SECURITY DISABILITY BENEFITS? In order to be eligible for assistance from Unum's Social Security claimant advocacy program, you must be receiving monthly payments from us. Unum can provide expert advice regarding your claim and assist you with your application or appeal. Receiving Social Security benefits may enable: - - you to receive Medicare after 24 months of disability payments; - - you to protect your retirement benefits; and - - your family to be eligible for Social Security benefits. We can assist you in obtaining Social Security disability benefits by: - - helping you find appropriate legal representation; - - obtaining medical and vocational evidence; and - - reimbursing pre-approved case management expenses. ERISA Additional Summary Plan Description Information Name of Plan: National Semiconductor Corporation Name and Address of Employer: National Semiconductor Corporation 2900 Semiconductor Drive Santa Clara, California 95051 Plan Identification Number: a. Employer IRS Identification #: 95-2095071 b. Plan #: 505 Type of Welfare Plan: Disability Type of Administration: The Plan is administered by the Plan Administrator. Benefits are administered by the insurer and provided in accordance with the insurance policy issued to the Plan. ERISA Plan Year Ends: December 31 Plan Administrator, Name, Address, and Telephone Number: National Semiconductor Corporation 2900 Semiconductor Drive Santa Clara, California 95051 (408) 721-5000 National Semiconductor Corporation is the Plan Administrator and named fiduciary of the Plan, with authority to delegate its duties. The Plan Administrator may designate Trustees of the Plan, in which case the Administrator will advise you separately of the name, title and address of each Trustee. Agent for Service of Legal Process on the Plan: National Semiconductor Corporation 2900 Semiconductor Drive Santa Clara, California 95051 Service of legal process may also be made upon the Plan Administrator, and any Trustee of the Plan. Funding and Contributions: The Plan is funded as an insured plan under policy number 517969 011, issued by Unum Life Insurance Company of America, 2211 Congress Street, Portland, Maine 04122. Contributions to the Plan are made as stated under "WHO PAYS FOR THE COVERAGE" in the Certificate of Coverage. EMPLOYER'S RIGHT TO AMEND THE PLAN The Employer reserves the right, in its sole and absolute discretion, to amend, modify, or terminate, in whole or in part, any or all of the provisions of this Plan (including any related documents and underlying policies), at any time and for any reason or no reason. Any amendment, modification, or termination must be in writing and endorsed on or attached to the Plan. EMPLOYER'S RIGHT TO REQUEST POLICY CHANGE The Employer can request a policy change. Only an officer or registrar of Unum can approve a change. The change must be in writing and endorsed on or attached to the policy. CANCELLING THE POLICY OR A PLAN UNDER THE POLICY The policy or a plan under the policy can be cancelled: - - by Unum; or - - by the Policyholder. Unum may cancel or offer to modify the policy or a plan if: - - there is less than 75% participation of those eligible employees who pay all or part of their premium for a plan; or - - there is less than 100% participation of those eligible employees for a Policyholder paid plan; - - the Policyholder does not promptly provide Unum with information that is reasonably required; - - the Policyholder fails to perform any of its obligations that relate to the policy; - - fewer than 10 employees are insured under a plan; - - the Policyholder fails to pay any premium within the 31 day grace period. If Unum cancels the policy or a plan for reasons other than the Policyholder's failure to pay premium, a written notice will be delivered to the Policyholder at least 31 days prior to the cancellation date. If the premium is not paid during the grace period, the policy or plan will terminate automatically at the end of the grace period. The Policyholder is liable for premium for coverage during the grace period. The Policyholder must pay Unum all premium due for the full period each plan is in force. The Policyholder may cancel the policy or a plan by written notice delivered to Unum at least 31 days prior to the cancellation date. When both the Policyholder and Unum agree, the policy or a plan can be cancelled on an earlier date. If Unum or the Policyholder cancels the policy or a plan, coverage will end at 12:00 midnight on the last day of coverage. If the policy or a plan is cancelled, the cancellation will not affect a payable claim. HOW TO FILE A CLAIM If you wish to file a claim for benefits, you should follow the claim procedures described in your group insurance certificate. Unum must receive a completed claim form. The form must be completed by you, your authorized representative, your attending physician and your Employer. If you or your authorized representative has any questions about what to do, you or your authorized representative should contact Unum directly. CLAIMS PROCEDURES Unum will give you notice of the decision no later than 45 days after the claim is filed. This time period may be extended twice by 30 days if Unum both determines that such an extension is necessary due to matters beyond the control of the Plan and notifies you of the circumstances requiring the extension of time and the date by which Unum expects to render a decision. If such an extension is necessary due to your failure to submit the information necessary to decide the claim, the notice of extension will specifically describe the required information, and you will be afforded at least 45 days within which to provide the specified information. If you deliver therequested information within the time specified, any 30 day extension period will begin after you have provided that information. If you fail to deliver the requested information within the time specified, Unum may decide your claim without that information. If your claim for benefits is wholly or partially denied, the notice of adverse benefit determination under the Plan will: - - state the specific reason(s) for the determination; - - reference specific Plan provision(s) on which the determination is based; - - describe additional material or information necessary to complete the claim and why such information is necessary; - - describe Plan procedures and time limits for appealing the determination, and your right to obtain information about those procedures and the right to sue in federal court; and - - disclose any internal rule, guidelines, protocol or similar criterion relied on in making the adverse determination (or state that such information will be provided free of charge upon request). Notice of the determination may be provided in written or electronic form. Electronic notices will be provided in a form that complies with any applicable legal requirements. APPEAL PROCEDURES You have 180 days from the receipt of notice of an adverse benefit determination to file an appeal. Requests for appeals should be sent to the address specified in the claim denial. A decision on review will be made not later than 45 days following receipt of the written request for review. If Unum determines that special circumstances require an extension of time for a decision on review, the review period may be extended by an additional 45 days (90 days in total). Unum will notify you in writing if an additional 45 day extension is needed. If an extension is necessary due to your failure to submit the information necessary to decide the appeal, the notice of extension will specifically describe the required information, and you will be afforded at least 45 days to provide the specified information. If you deliver the requested information within the time specified, the 45 day extension of the appeal period will begin after you have provided that information. If you fail to deliver the requested information within the time specified, Unum may decide your appeal without that information. You will have the opportunity to submit written comments, documents, or other information in support of your appeal. You will have access to all relevant documents as defined by applicable U.S. Department of Labor regulations. The review of the adverse benefit determination will take into account all new information, whether or not presented or available at the initial determination. No deference will be afforded to the initial determination. The review will be conducted by Unum and will be made by a person different from the person who made the initial determination and such person will not be the original decision maker's subordinate. In the case of a claim denied on the grounds of a medical judgment, Unum will consult with a health professional with appropriate training and experience. The health care professional who is consulted on appeal will not be the individual who was consulted during the initial determination or a subordinate. If the advice of a medical or vocational expert was obtained by the Plan in connection with the denial of your claim, Unum will provide you with the names of each such expert, regardless of whether the advice was relied upon. A notice that your request on appeal is denied will contain the following information: - - the specific reason(s) for the determination; - - a reference to the specific Plan provision(s) on which the determination is based; - - a statement disclosing any internal rule, guidelines, protocol or similar criterion relied on in making the adverse determination (or a statement that such information will be provided free of charge upon request); - - a statement describing your right to bring a civil suit under federal law; - - the statement that you are entitled to receive upon request, and without charge, reasonable access to or copies of all documents, records or other information relevant to the determination; and - - the statement that "You or your plan may have other voluntary alternative dispute resolution options, such as mediation. One way to find out what may be available is to contact your local U.S. Department of Labor Office and your State insurance regulatory agency". Notice of the determination may be provided in written or electronic form. Electronic notices will be provided in a form that complies with any applicable legal requirements. Unless there are special circumstances, this administrative appeal process must be completed before you begin any legal action regarding your claim. YOUR RIGHTS UNDER ERISA As a participant in this Plan you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that all Plan participants shall be entitled to: Receive Information About Your Plan and Benefits Examine, without charge, at the Plan Administrator's office and at other specified locations, all documents governing the Plan, including insurance contracts, and a copy of the latest annual report (Form 5500 Series) filed by the Plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Pension and Welfare Benefits Administration. Obtain, upon written request to the Plan Administrator, copies of documents governing the operation of the Plan, including insurance contracts, and copies of the latest annual report (Form 5500 Series) and updated summary plan description. The Plan Administrator may make a reasonable charge for the copies. Receive a summary of the Plan's annual financial report. The Plan Administrator is required by law to furnish each participant with a copy of this summary annual report. Prudent Actions by Plan Fiduciaries In addition to creating rights for plan participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit plan. The people who operate your Plan, called "fiduciaries" of the Plan, have a duty to do so prudently and in the interest of you and other Plan participants and beneficiaries. No one, including your Employer or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a benefit or exercising your rights under ERISA. Enforce Your Rights If your claim for a benefit is denied or ignored, in whole or in part, you have a right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules. Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request a copy of plan documents or the latest annual report from the Plan and do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator. If you have a claim for benefits that is denied or ignored, in whole or in part, you may file suit in a state or federal court. If it should happen that Plan fiduciaries misuse the Plan's money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, if, for example, it finds your claim is frivolous. Assistance with Your Questions If you have any questions about your Plan, you should contact the Plan Administrator. If you have any questions about this statement or about your rights under ERISA, or if you need assistance in obtaining documents from the Plan Administrator, you should contact the nearest office of the Pension and Welfare Benefits Administration, U.S. Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquiries, Pension and Welfare Benefits Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210. You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Pension and Welfare Benefits Administration. DISCRETIONARY ACTS In exercising its discretionary powers under the Plan, the Plan Administrator, and any designee (which shall include Unum as a claims fiduciary) will have the broadest discretion permissible under ERISA and any other applicable laws, and its decisions will constitute final review of your claim by the Plan. Benefits under this Plan will be paid only if the Plan Administrator or its designee (including Unum), decides in its discretion that the applicant is entitled to them. GLOSSARY ACTIVE EMPLOYMENT means you are working for your Employer for earnings that are paid regularly and that you are performing the material and substantial duties of your regular occupation. You must be working at least the minimum number of hours as described under Eligible Group(s) in each plan. Your work site must be: - - your Employer's usual place of business; - - an alternative work site at the direction of your Employer, including your home; or - - a location to which your job requires you to travel. Normal vacation is considered active employment. Temporary and seasonal workers are excluded from coverage. DEDUCTIBLE SOURCES OF INCOME means income from deductible sources listed in the plan which you receive or are entitled to receive while you are disabled. This income will be subtracted from your gross disability payment. DISABILITY EARNINGS means the earnings which you receive while you are disabled and working, plus the earnings you could receive if you were working to your maximum capacity. ELIMINATION PERIOD means a period of continuous disability which must be satisfied before you are eligible to receive benefits from Unum. EMPLOYEE means a person who is in active employment with the Employer. EMPLOYER means the Policyholder, and includes any division, subsidiary or affiliated company named in the policy. EVIDENCE OF INSURABILITY means a statement of your medical history which Unum will use to determine if you are approved for coverage. Evidence of insurability will be at Unum's expense. GRACE PERIOD means the period of time following the premium due date during which premium payment may be made. GROSS DISABILITY PAYMENT means the benefit amount before Unum subtracts deductible sources of income and disability earnings. HOSPITAL OR INSTITUTION means an accredited facility licensed to provide care and treatment for the condition causing your disability. INDEXED MONTHLY EARNINGS means your monthly earnings adjusted on each anniversary of benefit payments by the lesser of 10% or the current annual percentage increase in the Consumer Price Index. Your indexed monthly earnings may increase or remain the same, but will never decrease. The Consumer Price Index (CPI-W) is published by the U.S. Department of Labor. Unum reserves the right to use some other similar measurement if the Department of Labor changes or stops publishing the CPI-W. Indexing is only used to determine your percentage of lost earnings while you are disabled and working. INJURY means a bodily injury that is the direct result of an accident and not related to any other cause. Disability must begin while you are covered under the plan. INSURED means any person covered under a plan. LAW, PLAN OR ACT means the original enactments of the law, plan or act and all amendments. LAYOFF or LEAVE OF ABSENCE means you are temporarily absent from active employment for a period of time that has been agreed to in advance in writing by your Employer. Your normal vacation time or any period of disability is not considered a temporary layoff or leave of absence. LIMITED means what you cannot or are unable to do. MATERIAL AND SUBSTANTIAL DUTIES means duties that: - - are normally required for the performance of your regular occupation; and - - cannot be reasonably omitted or modified, except that if you are required to work on average in excess of 40 hours per week, Unum will consider you able to perform that requirement if you are working or have the capacity to work 40 hours per week. MAXIMUM CAPACITY means, based on your restrictions and limitations, the greatest extent of work you are able to do in your regular occupation, that is reasonably available. MAXIMUM PERIOD OF PAYMENT means the longest period of time Unum will make payments to you for any one period of disability. MENTAL ILLNESS means a psychiatric or psychological condition regardless of cause such as schizophrenia, depression, manic depressive or bipolar illness, anxiety, personality disorders and/or adjustment disorders or other conditions. These conditions are usually treated by a mental health provider or other qualified provider using psychotherapy, psychotropic drugs, or other similar methods of treatment. MONTHLY BENEFIT means the total benefit amount for which an employee is insured under this plan subject to the maximum benefit. MONTHLY EARNINGS means your gross monthly income from your Employer as defined in the plan. MONTHLY PAYMENT means your payment after any deductible sources of income have been subtracted from your gross disability payment. PART-TIME BASIS means the ability to work and earn between 20% and 80% of your indexed monthly earnings. PAYABLE CLAIM means a claim for which Unum is liable under the terms of the policy. PHYSICIAN means: - - a person performing tasks that are within the limits of his or her medical license; and - - a person who is licensed to practice medicine and prescribe and administer drugs or to perform surgery; or - - a person with a doctoral degree in Psychology (Ph.D. or Psy.D.) whose primary practice is treating patients; or - - a person who is a legally qualified medical practitioner according to the laws and regulations of the governing jurisdiction. Unum will not recognize you, or your spouse, children, parents or siblings as a physician for a claim that you send to us. PLAN means a line of coverage under the policy. PRE-EXISTING CONDITION means a condition for which you received medical treatment, consultation, care or services including diagnostic measures, or took prescribed drugs or medicines for your condition during the given period of time as stated in the plan; or you had symptoms for which an ordinarily prudent person would have consulted a health care provider during the given period of time as stated in the plan. RECURRENT DISABILITY means a disability which is: - - caused by a worsening in your condition; and - - due to the same cause(s) as your prior disability for which Unum made a Long Term Disability payment. REGULAR CARE means: - - you personally visit a physician as frequently as is medically required, according to generally accepted medical standards, to effectively manage and treat your disabling condition(s); and - - you are receiving the most appropriate treatment and care which conforms with generally accepted medical standards, for your disabling condition(s) by a physician whose specialty or experience is the most appropriate for your disabling condition(s), according to generally accepted medical standards. REGULAR OCCUPATION means the occupation you are routinely performing when your disability begins. Unum will look at your occupation as it is normally performed in the national economy, instead of how the work tasks are performed for a specific employer or at a specific location. RETIREMENT PLAN means a defined contribution plan or defined benefit plan. These are plans which provide retirement benefits to employees and are not funded entirely by employee contributions. Retirement Plan includes but is not limited to any plan which is part of any federal, state, county, municipal or association retirement system. SALARY CONTINUATION OR ACCUMULATED SICK LEAVE means continued payments to you by your Employer of all or part of your monthly earnings, after you become disabled as defined by the Policy. This continued payment must be part of an established plan maintained by your Employer for the benefit of all employees covered under the Policy. Salary continuation or accumulated sick leave does not include compensation paid to you by your Employer for work you actually perform after your disability begins. Such compensation is considered disability earnings, and would be taken into account in calculating your monthly payment. SELF-REPORTED SYMPTOMS means the manifestations of your condition which you tell your physician, that are not verifiable using tests, procedures or clinical examinations standardly accepted in the practice of medicine. Examples of self-reported symptoms include, but are not limited to headaches, pain, fatigue, stiffness, soreness, ringing in ears, dizziness, numbness and loss of energy. SICKNESS means an illness or disease. Disability must begin while you are covered under the plan. SURVIVOR, ELIGIBLE means your spouse, if living; otherwise your children under age 25 equally. TREATMENT FREE means you have not received medical treatment, consultation, care or services including diagnostic measures, or taken prescribed drugs or medicines for the pre-existing condition. WAITING PERIOD means the continuous period of time (shown in each plan) that you must be in active employment in an eligible group before you are eligible for coverage under a plan. WE, US and OUR means Unum Life Insurance Company of America. YOU means an employee who is eligible for Unum coverage. -----END PRIVACY-ENHANCED MESSAGE-----