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