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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the fiscal year ended May 25, 1997
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
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(State of incorporation) (I.R.S. Employer Identification Number)
2900 SEMICONDUCTOR DRIVE, P.O. BOX 58090
SANTA CLARA, CALIFORNIA 95052-8090
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(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 721-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- ------------------- ------------------------
Common stock, par value New York Stock Exchange
$0.50 per share Pacific Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
--Continued on next page--
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d)of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes X . No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non affiliates of the
registrant as of June 22, 1997, was approximately $3,888,883,567.
Shares of Common Stock held by each officer and director and by each
person who owns 5 percent or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares of the registrant's common stock, $0.50 par value,
as of June 22, 1997, was 145,674,568.
DOCUMENTS INCORPORATED BY REFERENCE
Document Location in Form 10-K
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Portions of the Proxy Statement for the Annual Part III
Meeting of Stockholders to be held on or about
September 26, 1997.
Portions of the Company's Registration Part IV
Statement on Form S-3, Registration No. 33-48935,
which became effective October 5, 1992.
Portions of the Company's Registration Part IV
Statement on Form S-3, Registration No. 33-52775,
which became effective March 22, 1994.
Portions of the Company's Registration Part IV
Statement on Form S-8, Registration No. 333-26625,
which became effective May 7, 1997.
Portions of the Company's Registration Part IV
Statement on Form S-8, Registration No. 33-55699,
which became effective September 30, 1994.
Portions of the Proxy Statement for the Annual Part IV
Meeting of Stockholders held September 30, 1994
Portions of the Company's Registration Part IV
Statement on Form S-8, Registration No. 33-61381,
which became effective July 28, 1995.
Portions of the Company's Registration Part IV
Statement on Form S-3, Registration No. 33-63649,
which became effective November 6, 1995.
Portions of the Company's Registration Part IV
Statement on Form S-8, Registration No. 33-59431,
which became effective August 5, 1994.
Portions of the Company's Registration Part IV
Statement on Form S-8, Registration No. 333-09957,
which became effective August 12, 1996.
The Index to Exhibits is located on pages 60-62.
PART I
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ITEM 1. BUSINESS
General
National Semiconductor Corporation, including its subsidiaries
("National" or the "Company"), designs, develops, manufactures and
markets a broad line of analog, mixed signal and other integrated
circuits applications in a variety of markets, including the personal
computing, wireless communications, flat panel and CRT display, power
management, local and wide area networks, automotive, consumer and
military aerospace markets. National was incorporated under the laws of
the state of Delaware in 1959.
In June 1996, the Company reorganized its operating structure into
four business groups that included the Analog Group, the Communications
and Consumer Group, the Personal Systems Group and the Fairchild
Semiconductor Group ("Fairchild"). The reorganization was intended to
enhance the Company's focus in analog and mixed signal technologies and
further its strategy to develop certain highly integrated application
specific semiconductor products ("systems on a chip") for the personal
systems, communications and consumer markets. Fairchild was formed as a
separate organization consisting of the Company's family logic, memory
and discrete product lines which were more mature businesses with slower
growth rates and generally lower margins than the analog and mixed
signal product lines, which traditionally have higher margins. At the
time of the reorganization, the Company also announced it planned to
divest Fairchild. The Company completed the disposition of Fairchild
under a recapitalization transaction with Sterling, LLC, a Citicorp
Venture Capital, Ltd. investment portfolio company in related
businesses, and Fairchild's management, in March 1997.
The Company acquired the PicoPower Division of Cirrus Logic Inc.
("PicoPower") in August 1996 and Mediamatics, Inc. ("Mediamatics") in
March 1997. The acquisition of PicoPower, a well established designer
and marketer of chip sets for laptop personal computers, allows the
Company to compete as a supplier of complete chip sets for future
generations of products by combining its expertise in circuits for
peripheral and input/output functions on the personal computer
motherboard with PicoPower's advanced technologies and experience in
other components of the chip set. The Company believes its acquisition
of Mediamatics, a leading supplier of certain multimedia products in the
home connectivity market, will enable the Company to accelerate its
entry into the rapidly growing world of home entertainment appliances
based on new technologies such as Digital Versatile Disc-based video
players and Digital Video Broadcasting set-top boxes.
Subsequent to the end of the fiscal year, National announced that it
has entered into a definitive merger agreement with Cyrix Corporation
("Cyrix"). Cyrix designs, manufactures and markets innovative
microprocessors and is a supplier of high-performance microprocessors to the
personal computer industry. The transaction is expected to close in the
second quarter of fiscal 1998. National expects to use Cyrix's designs and
products in the development of system-on-a-chip products for the entry-level
personal computer, network personal computer and information-appliance
markets.
The Company operates in one industry segment. For information
with respect to sales and identifiable assets for National's geographic
segments, refer to the information contained in Note 12 of the Financial
Statements in Part 8 of this Report under the caption "Industry and
Geographic Segment Information."
Products
Semiconductors are integrated circuits (in which a number of transistors
and other elements are combined to form a more complicated circuit) or
discrete devices (such as individual transistors). In an integrated
circuit, various elements are fabricated in a small area or "chip" of
silicon, which is then encapsulated in plastic, ceramic or other
advanced forms of packaging and connected to a circuit board or
substrate.
National manufactures a broad variety of analog intensive, mixed
signal and digital products. National's products are used in numerous
commercial applications, including personal systems, telecommunications
and communications products, data processing, automotive, local and wide
area networking and other industrial applications as well as some
consumer applications.
The Company is a leading supplier of analog and mixed signal
products, serving both broad based markets such as the industrial and
consumer market, and more narrowly defined markets such as Ethernet
Local Area Networks ("LAN"), wireless communications and automotive.
While no precise industry standard for analog and mixed signal exists,
the Company considers products which process analog information, convert
analog to digital or convert digital to analog as analog and mixed
signal products. Analog and mixed signal products include amplifiers
and regulators, power monitors and line drivers, products optimized for
audio, video, automotive or display applications and data acquisition
products. Other Company products with significant digital to analog or
analog to digital capacity include products for local area networks,
wireless networking and wireless communications, as well as products for
personal systems and personal communications such as its office
automation and "Super I/O" offerings. Super I/O is the brand name used
by the Company to describe its integrated circuits that handle system
peripheral and input/output functions on the personal computer
motherboard. These analog and mixed signal products comprise the
Company's core businesses under the Analog Group, the Communications and
Consumer Group and the Personal Systems Group, which accounted for 82
percent of total sales for fiscal 1997. These product sales have
continued to increase over the past few years as a percentage of total
Company sales.
The Company completed the disposition of Fairchild in March 1997.
Under Fairchild, the Company sold bipolar and complimentary metal oxide
silicon ("CMOS") logic and memory products. These products were largely
older, more mature offerings serving broad markets in data processing,
switching equipment and personal computing. The Company's bipolar and
CMOS products included many of the mature logic families such as
Advanced Schottky ("AS") and Advanced Low Power Schottky ("ALS"), High
Performance CMOS ("HCMOS") as well as Electrically Erasable Programmable
Read Only Memory ("EEPROM") and Erasable Programmable Read Only Memory
("EPROM") products. Other product offerings under Fairchild included
discrete products. Fairchild sales which have been declining over the
past several years as a percentage of total sales accounted for 18
percent of total sales for fiscal 1997.
Corporate Structure and Organization. Prior to March 1997, the
Company's operating structure included the Analog Group, the
Communications and Consumer Group, the Personal Systems Group and
Fairchild. Fairchild was divested in March 1997. The remaining three
groups represent the National core businesses described as follows:
Analog Group: Analog circuits control continuously variable
functions (such as light, color, sound and power) and are used in
telecommunications, wireless, desktop and notebook computers, and many
industrial applications. Analog provides a variety of wireless and
analog products including standard products, application specific
products and full custom products. The Group's analog products include
high performance operational amplifiers, power management circuits, data
acquisition circuits, wireless circuits and interface communication
circuits. The Group's wireless circuits perform the radio, baseband
controller, power management and other related functions in the cellular
and cordless phone markets, including Global System for Mobile
Communication, Digital Enhanced Cordless Telephone, Personal Cordless
System, Code Division Multiple Access, Time Division Multiple Access and
Advanced Mobile Phone System, as well as other fast growing wireless
communication markets.
Communications and Consumer Group("CCG"): National through CCG is
a leading supplier of Local Area Network (LAN) Ethernet products, which
are currently the dominant protocol for LAN's. CCG has pioneered the
development of 10M and 10/100M technology and continues to be a major
technology contributor to the Giga-bit Ethernet effort. National is
also a large non-captive COMBO (Integrated CODEC filter) supplier to
telecom equipment manufacturers. CCG supplies ISDN (Integrated Services
Digital Network) chip sets to the telecom industry and complete voice
line card modules to developing countries.
CCG's present focus includes low voltage CMOS audio amplifiers
with controls targeted for personal computers (desktop and portables)
and cellular phone markets. National is a large supplier of audio
amplifiers to the portable personal computer market with its LM48XX
family of products, while the "Overture" family of bipolar products is
mostly targeted at the consumer market. National is also a leading
supplier of video pre-amps and monolithic drivers for the cathode-ray
tube market with the LM12XX and LM24XX family, respectively. CCG
provides gray scale reference buffers for thin film transistor flat
panel display applications. National's NCL3XX family of MR (magneto
resistive) pre-amps are currently used by industry leaders in their high
end drives.
The acquisition of Mediamatics, with its expertise in MPEG (Motion
Picture Experts Group), balanced hardware/software systems know-how and
home connectivity building-blocks is intended to accelerate National's
entry into the consumer-oriented home information appliance market.
Personal Systems Group("PSG"): National is a leader in integrated
circuits targeted to the personal systems peripheral business. PSG
does not attempt to compete with the host microprocessor for personal
computers, but instead designs and develops peripheral products which
work in tandem with the host microprocessor in either the personal
computer or workstation. PSG is organized into the following distinct
business units:
Personal Computer Systems Business Unit: This business unit
utilizes the Company's Super I/O expertise to provide motherboard system
logic solution chip sets that work with the main processor and also
integrate much of the input/output ("I/O") functions to X86-based
notebook, desktop and net personal computer manufacturers.
Network Computer and Communications Business Unit: This business
unit offers a family of companion I/O (Super I/O) solutions which work
with X86-based processors and system logic in desktop personal computers
and network computers. In addition, the business unit provides
embedded-RISC (Reduced Instruction Set Computing), using National's
CompactRISC embedded cores to multifunction peripheral manufacturers.
The business unit expects to provide in the future motherboard system
logic solutions for RISC-processor based network computers and
information appliances, integrating multi-media and communications
technologies.
Microcontroller Technologies Business Unit: The Microcontroller
Technologies Business Unit ("MCT") has a portfolio of 8-, 16- and 32-bit
microcontollers for a variety of markets. MCT provides peripheral
serial connectivity products for personal computers, using both the
IEEE1394 and USB serial communications standards. MCT also provides
motherboard system environmental controllers for personal computers.
MCT products utilize National's expertise in mixed signal technologies.
Arador Business Unit: The focus of the Arador Business Unit is
the NS486 product integrates a 486 Intel compatible core developed by
National with a full set of PC-compatible system service elements and a
wide variety of value-added peripherals.
Core Technology Unit: The Core Technology Unit ("CTU") is
responsible for providing the range of process cores and support tools
and software required by all of National's product lines, to service the
range of platforms and operating system environments for markets for
information appliances.
Aside from these operating groups, the Company's corporate
structure also includes centralized Worldwide Sales and Marketing and
the Central Technology and Manufacturing Group. Worldwide Sales and
Marketing is organized around the four major regions of the world in
which the Company operates: the Americas, Europe, Japan and Asia and is
comprised of the Company's worldwide sales and marketing organization.
Central Technology and Manufacturing manages production and technology
operations. The group is responsible for the Company's three strategic
imperatives: state-of-the-art process technology, world-class
manufacturing and six-month time-to-market methodology that have been
established as the delivery vehicles to enable the Company to develop
products constituting systems on a chip. The technology operations
include process technology, the central research arm of the Company,
which provides pure research, process development and initial product
prototyping necessary for many of the Company's core production
processes and leading edge products, and development technology, which
selects and implements integrated Computer Aided Design ("CAD") tools
for designing, performing layout, simulating and testing the logical and
physical representation of new products before they are actually
produced.
Marketing and Sales
The Company markets its products throughout the world to OEMs by way of
a direct sales force. Major OEMs include IBM, Hewlett-Packard, Compaq,
3COM, Intel, Dell and General Motors as well as Siemens, Samsung, L.M.
Ericsson and others. In addition to its direct sales force, National
uses distributors in all four of its business regions.
Customer support is handled by comprehensive, state of the art
central facilities in the United States, Europe and Singapore. These
Customer Support Centers ("CSCs") provide responses to inquiries on
product pricing and availability, technical support for customer
questions, order entry and scheduling.
National augments its sales effort with application engineers
based in the field. These engineers are specialists in National's
product portfolio and work with customers to design National integrated
circuits for their products and identify National products that can be
used in the customer's application. These engineers also help identify
emerging markets for new products and are supported by Company design
centers in the field or at manufacturing sites.
In line with industry practices, National generally credits
distributors for the effect of price reductions on their inventory of
National products and under specific conditions repurchases products
that have been discontinued by the Company.
Customers
National is not dependent upon any single customer, the loss of which
would have a material effect on the Company. In addition, no one
customer or distributor accounted for 10 percent or more of total net
sales in fiscal years 1997, 1996 and 1995.
Backlog
Semiconductor backlog quantities and shipment schedules under
outstanding purchase orders are frequently revised to reflect changes in
customer needs. Binding agreements calling for the sale of specific
quantities at specific prices which are contractually subject to price
or quantity revisions are, as a matter of industry practice, rarely
formally enforced. For these reasons, National does not believe that
the amount of backlog at any particular date is meaningful.
Seasonality
Generally, National is affected by the seasonal trends of the
semiconductor and related industries. As a result of these trends, the
Company typically experiences lower revenue in the third fiscal quarter,
primarily due to customer holiday demand adjustments. Revenue usually
has a seasonal peak in the Company's fourth quarter. In fiscal 1997,
the Company did not experience the typical seasonality in the third
fiscal quarter as a result of increased customer demand and certain
actions implemented by management to increase the Company's product
supply that began in the second half of the fiscal year.
Manufacturing
The design of semiconductor and integrated circuit products is
determined by customer requirements and general market trends and needs.
These designs are compiled and digitized by state of the art design
equipment and then transferred to silicon wafers in a series of complex
precision processes which include oxidation, lithography, chemical
etching, diffusion, deposition, implantation and metallization.
Production of integrated circuits continues with wafer sort, where the
wafers are tested and separated into individual circuit devices;
assembly, where tiny wires are used to connect the electronic circuits
on the device to the stronger metal leads or "prongs" of the package in
which the device is encapsulated for protection; and final test, where
the devices are subjected to a series of vigorous tests using
computerized circuit testers and for certain applications, environmental
testers such as burn in ovens, centrifuges, temperature cycle testers,
moisture resistance testers, salt atmosphere testers and thermal shock
testers.
The Company's product design and development activities are
conducted predominantly in the United States. Wafer fabrication is
concentrated in three facilities in the United States and in a facility
in Scotland. Nearly all product assembly and final test operations are
performed in facilities in Southeast Asia. For capacity utilization and
other economic reasons, National employs subcontractors to perform
certain manufacturing functions in the United States, Southeast Asia and
Japan. These arrangements include manufacturing agreements with
Fairchild under which the Company will purchase goods and services from
Fairchild through fiscal 2000 and with an Israeli company, in which the
Company has a small equity investment, that provides additional
manufacturing capacity, as well as various subcontract vendors in Asia.
National also utilizes some manufacturing capacity of a small, majority
owned joint venture in Shanghai, People's Republic of China, for the
assembly of boards using National integrated circuits. The Company
anticipates bringing new manufacturing capacity on line in early fiscal
1998 with the completion of its 8-inch wafer fabrication facility in
South Portland, Maine.
.....National's wafer manufacturing processes span Bipolar, Metal Oxide
Silicon ("MOS"), Complementary Metal Oxide Silicon ("CMOS") and Bipolar
Complementary Metal Oxide Silicon ("BiCMOS") technologies. The
Company's wafer fabrication processes are being adapted to emphasize
integration of analog and digital capabilities to support the Company's
strategy to develop systems-on-a-chip products. Bipolar processes
support primarily the Company's standard products. As products decrease
in size and increase in functionality, National's wafer fabrication
facilities are now required in many cases to be able to manufacture
integrated circuits with sub-micron circuit pattern widths. Precision
manufacturing in wafer fabrication has carried over to assembly and test
where advanced packaging technology and comprehensive test operations
are required for increasingly powerful integrated circuits.
Raw Materials
National's manufacturing processes make use of certain key raw materials
critical to its products. These include silicon wafers, certain
chemicals and gases, ceramic and plastic packaging materials and various
precious metals. The Company also is increasingly relying on
subcontractors to supply finished or semi-finished products which the
Company markets through its sales channels. Both raw materials and
semi-finished or finished products are obtained from various sources,
although the number of sources for any particular material or product is
relatively limited. Although the Company feels its current supply of
essential materials is adequate, shortages from time to time have
occurred and could occur again. Significant increases in demand, rapid
product mix changes or natural disasters all could affect the Company's
ability to procure materials or goods.
Research and Development
National's research and development ("R&D") consists of pure research in
metallurgical, electro-mechanical and solid state sciences,
manufacturing process development and product design. Research
functions and definition and development of most process technologies
are done by Central Technology and Manufacturing's process technology
group. Process capability is developed and prototyped at the Company's
8-inch pilot wafer fabrication facility located in Santa Clara,
California, and product design is done by the operating divisions. R&D
expenses were $372.1 million for fiscal 1997, $349.9 million for fiscal
1996 and $281.6 million for fiscal 1995 with all years experiencing
increases in R&D in the Company's core analog and mixed signal products
and critical process development. These amounts exclude in-process R&D
charges of $72.6 million related to the acquisitions of PicoPower ($10.6
million) and Mediamatics ($62.0 million) in fiscal 1997, $11.4 million
related to the acquisition of Sitel Sierra, B.V. in fiscal 1996 and $1.5
million related to the acquisition of Comlinear Corporation in fiscal
1995, which have been separately presented in the consolidated statement
of operations as special items. For fiscal 1997, the Company expended
34 percent of its R&D effort toward the development of state-of-the-art
process technology and the remaining 66 percent for new product
development.
Patents
National owns numerous United States and non-U.S. patents and has many
patent applications pending. It considers the development of patents
and the maintenance of an active patent program advantageous to the
conduct of its business but believes that continued success will depend
more on engineering, production, marketing, financial and managerial
skills than on its patent program. The Company licenses certain of its
patents to other manufacturers and participates in a number of cross
licensing arrangements and agreements with other parties. Each license
agreement has unique terms and conditions, with variations as to length
of term, royalties payable, permitted uses and scope. The majority of
the agreements are cross-licenses where the Company grants broad
licenses to its intellectual property in exchange for receiving a
license; none are exclusive. The amount of income from licensing
agreements has varied in the past and the amount and timing of future
income from licensing agreements cannot be precisely forecast. The
Company believes that none of the license agreements is material to the
Company in terms of either the royalty payments due or payable or the
intellectual property rights granted or received under any such
agreement.
Employees
At May 25, 1997, National employed approximately 12,400 people of whom
approximately 5,900 were employed in the United States, 1,800 in Europe,
4,300 in Southeast Asia and 400 in other areas. The Company believes
that its future success depends fundamentally on its ability to recruit
and retain skilled technical and professional personnel. National's
employees in the United States are not covered by collective bargaining
agreements. The Company considers its employee relations worldwide to
be favorable.
Competition and Risks
The Semiconductor Industry
The semiconductor industry is characterized by rapid technological
change and frequent introduction of new technology leading to more
complex and powerful products. The result is a cyclical economic
environment generally characterized by short product life cycles, rapid
selling price erosion and high sensitivity to the overall business
cycle. In addition, substantial capital and R&D investment is required
for development and manufacture of products and processes. The Company
may experience periodic fluctuations in its operating results because of
industry wide conditions.
Fluctuations in Financial Results
The Company's financial results are affected by the business cycles and
seasonal trends of the semiconductor and related industries. Shifts in
product mix toward, or away from, higher margin products can also have a
significant impact on the Company's operating results. As a result of
these and other factors, the Company's financial results can fluctuate
significantly from period to period. As an example, the Company
generated net income in fiscal years 1993 through 1997, but experienced
substantial losses, in fiscal years 1989 through 1992, and there were
substantial declines in net income in fiscal years 1997 and 1996 as
compared to fiscal 1995.
Competition
Competition in the semiconductor industry is intense. National competes
with a number of major companies in the high-volume segment of the
industry. These include several companies whose semiconductor business
may be only part of their overall operations, such as Motorola, Inc.,
Philips Electronics, NV, NEC Corporation and Toshiba Corporation.
National also competes with a large number of companies that target
particular markets such as Linear Technology Corporation, Analog
Devices, Inc., Advanced Micro Devices, Inc., LSI Logic Corporation, SGS-
Thompson Microelectronics SA, Intel Corporation, Cirrus Logic, Inc. and
Texas Instruments Incorporated. Competition is based on design and
quality of the products, product performance, price and service, with
the relative importance of such factors varying among products and
markets. There can be no assurance that the Company will be able to
compete successfully in the future against existing or new competitors
or that the Company's operating results will not be adversely affected
by increased price competition. The Company is also faced with
competition from several of its customers, particularly customers in the
networking and personal systems industries, but competition from
customers has had minimal affect on National's sales to date.
International Operations
National conducts a substantial portion of its operations outside the
United States and its business is subject to risks associated with many
factors beyond its control. These factors include fluctuations in
foreign currency rates, instability of foreign economies or their
emerging infrastructures to support demanding manufacturing
requirements, government changes and U.S. and foreign laws and policies
affecting trade and investment. Although the Company has not
experienced any materially adverse effects with respect to its foreign
operations arising from such factors, the Company has been impacted in
the past by one or more of these factors and could be impacted in the
future by such factors. In addition, although the Company seeks to
hedge its exposure to currency exchange rate fluctuations, the Company's
competitive position relative to non-U.S. suppliers can be affected by
the exchange rate of the U.S. dollar against other currencies,
particularly the Japanese yen.
Environmental Regulations
National believes that compliance with federal, state and local laws or
regulations which have been enacted or adopted to regulate the
environment has not had, nor will have, a material effect upon the
Company's capital expenditures, earnings, competitive or financial
position. (Also see Item 3, Legal Proceedings.)
In addition to the risks discussed above, further discussion of other
risks and uncertainties that may affect the Company's business is
included in the Outlook section of "Management's Discussion and
Analysis" appearing in Item 7.
ITEM 2. PROPERTIES
National's principal administrative and research facilities are located
in Santa Clara, California. The major concentrations of wafer
fabrication and product research and development capability are located
at the Company's plants in South Portland, Maine, Arlington, Texas, and
Greenock, Scotland. The Company also operates small design facilities
in various locations in the U.S. including Fort Collins, Colorado; West
Jordan, Utah; Atlanta, Georgia; Tucson, Arizona; Tacoma, Washington;
Boston, Massachusetts; Grass Valley, California; and overseas locations
including the United Kingdom, Israel, Germany and the Netherlands.
The Company conducts significant manufacturing offshore. One of
National's largest wafer fabrication facilities is in Greenock,
Scotland. Assembly and test functions are performed primarily in
Southeast Asia. These facilities are located in Melaka, Malaysia and
Singapore. A small manufacturing facility, majority owned by National,
was established in January 1995, in Shanghai, People's Republic of
China. The regional headquarters for National's Worldwide Sales and
Marketing are located in Santa Clara, California; Munich, Germany;
Tokyo, Japan; and Kowloon, Hong Kong. National maintains local sales
offices in various locations and countries throughout its four business
regions. In general, the Company owns its manufacturing facilities and
leases most of its sales and administrative offices.
In connection with the Fairchild transaction, National's 4-inch,
5-inch and 6-inch fabrication lines in South Portland, Maine, the wafer
fabrication plant in West Jordan, Utah and the test and assembly plants
in Cebu, the Philippines and Penang, Malaysia were transferred to
Fairchild. The Company has retained the 8-inch wafer fabrication
facility and other buildings in South Portland, Maine. The Company
believes that its remaining captive manufacturing capacity and its
third-party subcontract manufacturing arrangements, including
manufacturing arrangements with Fairchild, will be adequate to supply
the needs of its core business operations.
With the completion in early fiscal 1998 of its construction in
South Portland, Maine of the 8-inch wafer fabrication facility, the
Company expects to increase its manufacturing capacity. Wafer
fabrication capacity utilization declined to 67 percent for the first
half of fiscal 1997, but reached 80 percent in the second half of fiscal
1997 as new order rates that began improving in December 1996
strengthened through the remainder of the fiscal year. The Company
feels its current plant, property and leased facilities are well
maintained.
ITEM 3. LEGAL PROCEEDINGS
The United States Internal Revenue Service ("IRS") examination of
the Company's United States tax returns for fiscal years 1976 through
1982 and subsequent litigation related there to resulted in a final
decision being entered by the U.S. Tax Court on June 6, 1995. The
period for appealing the decision expired in early September 1995.
After giving effect to loss and credit carryovers, the final tax
deficiency was $4.1 million. The associated interest has not been
finally determined, but preliminary IRS calculations estimate it to be
approximately $44.9 million. The Company has made advance payments to
the IRS on the tax and interest deficiency, but disagrees with the IRS'
interest calculation and has filed a claim for refund on the disputed
difference with the IRS. With respect to the IRS' examination of tax
returns for other fiscal years, in April 1995, the IRS issued a Notice
of Deficiency for fiscal years 1986 through 1989 seeking additional
taxes of approximately $11 million (exclusive of interest). The issues
giving rise to this set of proposed adjustments relate primarily to the
Company's former Israeli operation and the allocation of the purchase
price paid in fiscal 1988 for Fairchild Semiconductor Corporation. The
Company has filed a protest with the appeals office of the IRS
contesting the Notice of Deficiency. The IRS is examining the Company's
tax returns for fiscal years 1990 through 1993 and expects the IRS to
soon begin examination of the Company's tax returns for fiscal years
1994 through 1996. The Company believes that adequate tax payments have
been made or accrued for all years.
On July 9, 1996, the Company received notices of assessment from
the Malaysian Inland Revenue Department relating to the Company's
manufacturing operations in Malaysia. The assessments total
approximately $59.2 million. The issues giving rise to the assessments
relate to intercompany transfer pricing, primarily for fiscal year 1993.
The Company believes the assessments are without merit and has been
contesting them administratively. The Company believes it has adequate
tax reserves to satisfy the ultimate resolution of the assessments.
On April 22, 1988, the District Director of the United States
Customs Service, San Francisco, issued a Notice of Proposed Action and a
Pre-penalty Notice to the Company alleging underpayment of duties of
approximately $19.5 million on merchandise imported from the Company's
foreign subsidiaries during the period from June 1, 1979 to March 1,
1985. The Company filed an administrative appeal in September 1988. On
May 23, 1991, the District Director revised the Customs action and
issued a Notice of Penalty Claim and Demand for Restoration of Duties,
reducing the alleged underpayment of duties for the same period to
approximately $6.9 million; the alleged underpayment was subsequently
reduced on April 22, 1994 to approximately $3.6 million. The revised
alleged underpayment could be subject to penalties that may be computed
as a multiple of the underpayment. The Company filed an administrative
petition for relief in October 1991 and a supplemental petition for
relief in October 1994 and is continuing to contest the Penalty Notice
in proceedings at the administrative agency level. On July 1, 1988, the
Customs Service liquidated various duty drawback claims previously filed
by the Company, denying the payment of drawback previously paid to the
Company and issued bills in the amount of $2.5 million seeking repayment
of the accelerated drawback. Timely protests of these liquidations were
filed in September 1988. These protests were denied in March 1996. The
Company is pursuing judicial review of the denial in the Court of
International Trade and has paid the denied duties and associated
interest totaling $5.2 million, which is a prerequisite to filing a
summons with the Court. The Company believes that resolution of these
Customs matters will not have a material impact on the Company's
financial position.
A sales tax examination conducted by the California State Board of
Equalization for the tax years 1984 to 1988 resulted in a proposed
assessment of approximately $12 million (exclusive of interest and
penalty) in October 1991. A final assessment in the amount of
approximately $4 million (including interest and penalty) was made by
the Board and payment was made by the company in August 1995. The
Company has subsequently filed a claim for refund of all amounts paid,
plus interest, with the Board. The sales tax examination and assessment
did not have a material adverse effect upon the Company's financial
position.
By letter dated January 6, 1994, the Company was notified by the
California Department of Toxic Substances Control ("DTSC") of a Report
of Violation ("ROV") listing 39 violations arising out of inspections of
certain facilities and operations of the Company and its wholly owned
subsidiary, Dynacraft, Inc. ("DCI") located in Santa Clara, California
and the DTSC's further review of information obtained during the
inspections. The deficiencies cited can be described as violations of
various provisions of the California Health and Safety Code and the
California Code of Regulations relating to the record keeping for and
the handling, treatment, storage, and disposal of hazardous products and
wastes. The Company worked with DTSC to correct the deficiencies noted
in the ROV and signed a Stipulation and Order with the DTSC on June 16,
1995 whereby the Company agreed to pay a fine of $490,000 and complete
several compliance projects. The Company completed the final project
and submitted its report on the projects to DTSC on May 6, 1996. On May
16, 1996, the DTSC notified the Company that it required the Company to
perform several tasks in connection with the projects. On October 10,
1996, the Company provided to DTSC further information requested by DTSC
and asked DTSC to provide the Company a "Return to Compliance" letter.
On October 25, 1996, the DTSC indicated that it had completed its
review, that the Company had met the requirements of the Stipulation and
Order, and had returned the compliance.
On June 18, 1991, the U.S. Environmental Protection Agency ("EPA")
issued a Finding of Violation and Order to the Company and DCI relating
to the alleged failure of the Company and DCI to comply with the federal
categorical pretreatment standards arising from the city of San Jose,
California's pretreatment program. The Order required the Company and
DCI to comply with all Federal categorical pretreatment standards and to
take further actions to maintain permanent compliance. A Consent Decree
concerning this matter was entered by the U.S. District Court, Northern
District of California on March 30, 1995. Under the terms of the
Consent Decree, National and DCI agreed to pay a civil penalty in the
amount of $50,000 and perform three Supplemental Environmental Projects
("SEPs"). The Company completed one of the SEPs. The $50,000 civil
penalty was paid in 1995. By letter dated August 13, 1996, the Company
sent a check in the amount of $151,483 to the U.S. Department of Justice
in lieu of completing the other two SEPs and stated that, in accordance
with the terms of the Consent Decree, the Consent Decree was terminated.
The Company has been named to the National Priorities List
("Superfund") for its Santa Clara, California site and has completed a
Remedial Investigation/Feasibility Study with the Regional Water Quality
Control Board ("RWQCB"), acting as agent for the EPA. The Company has
agreed in principle with the RWQCB to a site remediation plan. In
addition to the Santa Clara site, the Company has been designated as a
potentially responsible party by federal and state agencies with respect
to certain waste sites with which the Company may have had direct or
indirect involvement. Such designations are made regardless of the
extent of the Company's involvement. These claims are in various stages
of administrative or judicial proceedings and include demands for
recovery of past governmental costs and for future investigations and
remedial actions. In many cases, the dollar amounts of the claims have
not been specified and have been asserted against a number of other
entities for the same cost recovery or other relief as was asserted
against the Company. The Company has also retained liability for
environmental matters arising from its former operations of DCI and the
Fairchild business but is not currently involved in any legal
proceedings relating to those liabilities. The Company accrues costs
associated with such matters when they become probable and reasonably
estimable. The amount of all environmental charges to earnings,
including charges relating to the Santa Clara site remediation, which
did not include potential reimbursements from insurance coverage, have
not been material during the last three fiscal years. The Company
believes that the potential liability, if any, in excess of amounts
already accrued will not have a material effect on the Company's
financial position.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT *
Name Current Title Age
- ---- ------------- ---
Kamal K. Aggarwal (1) Executive Vice President, Central
Technology and Manufacturing Group 59
Michael Bereziuk (2) Senior Vice President and General
Manager, Personal Systems Group 44
Patrick J. Brockett (3) Executive Vice President, Worldwide
Sales and Marketing 49
John M. Clark III (4) Senior Vice President, General Counsel
and Secretary 47
Brian L. Halla (5) Chairman of the Board, President and
Chief Executive Officer 50
Donald Macleod (6) Executive Vice President, Finance and
Chief Financial Officer 48
Douglas M. McBurnie (7) Senior Vice President and
General Manager, Communications
and Consumer Group 54
Robert M. Penn (8) Senior Vice President and General
Manager, Analog Group 60
Richard L. Sanquini (9) Senior Vice President, Strategic
Business and Technology Development 62
Richard A. Wilson (10) Vice President, Human Resources 54
* all information as of May 25, 1997
Business Experience During Last Five Years
- ------------------------------------------
(1) Mr. Aggarwal joined the Company in November 1996. Prior to joining
the Company, Mr. Aggarwal held positions as Vice President,
Worldwide Logistics and Customer Service and Vice President,
Assembly and Test at LSI Logic Corporation.
(2) Mr. Bereziuk joined the Company in August 1984. Prior to becoming
Senior Vice President and General Manager of the Personal Systems
Group in June 1996, Mr. Bereziuk held positions at the Company as
Vice President and General Manager, Personal Systems Group; Vice
President and General Manager, Embedded Control Division; and Vice
President, Embedded Control Division.
(3) Mr. Brockett joined the Company in September 1979. Prior to
becoming Executive Vice President, Worldwide Sales and Marketing in
June 1996, he held positions in the Company as President,
International Business Group; Corporate Vice President,
International Business Group; Vice President, North America
Business Center; Vice President and Managing Director, European
Operations; and Vice President and Director of European Sales.
(4) Mr. Clark joined the Company in May 1978. Prior to becoming Senior
Vice President, General Counsel and Secretary in April 1992, he
held the position of Vice President, Associate General Counsel and
Assistant Secretary.
(5) Mr. Halla joined the Company in May 1996 as Chairman of the Board,
President and Chief Executive Officer. Prior to joining the
Company, Mr. Halla held positions at LSI Logic Corporation as
Executive Vice President, LSI Logic Products; Senior Vice President
and General Manager, Microprocessor/DSP Products Group; and Vice
President and General Manager, Microprocessor Products Group.
(6) Mr. Macleod joined the Company in February 1978. Prior to becoming
Executive Vice President, Finance and Chief Financial Officer in
June 1995, he held positions as Senior Vice President, Finance and
Chief Financial Officer; Vice President, Finance and Chief
Financial Officer; Vice President, Financial Projects; Vice
President and General Manager, Volume Products - Europe; and
Director of Finance and Management Services - Europe.
(7) Mr. McBurnie joined the Company in May 1994. Prior to becoming
Senior Vice President and General Manager, Communications and
Consumer Group in June 1996, he held the position at the Company as
Vice President and General Manager of the LAN Division. Prior to
joining the Company, Mr. McBurnie held senior positions at Opinicus
Corporation, Xidex Corporation and Precision Monolithics, Inc.
(8) Mr. Penn joined the Company in December 1993. Prior to becoming
Senior Vice President and General Manager of the Analog Group in
June 1996, he held the position of Vice President and General
Manager of the WAN Division. Prior to joining the Company, Mr.
Penn served as an executive level consultant with EMS Consulting
and held senior management positions at Gould Inc.'s Semiconductor
Division and American Microsystems, Inc.
(9) Mr. Sanquini first joined the Company in August 1980 and left in
June 1989. He rejoined the Company in November 1989. Prior to
becoming Senior Vice President, Strategic Business and Technology
Development in August 1996, he held the positions as Senior Vice
President, Business Development and Intellectual Property
Protection; Senior Vice President, Planning and Development; and
Vice President, Corporate Strategic Projects.
(10) Mr. Wilson joined the Company in February 1996 as Vice President,
Human Resources. Prior to joining the Company, he held the
position of Vice President, Human Resources at MCI Network Services
for 5 1/2 years.
Executive officers serve at the pleasure of the Company's Board of
Directors. There is no family relationship among any of the Company's
directors and executive officers.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
During fiscal 1997, the Company sold securities that were not
registered under the Securities Act, as follows:
On March 17, 1997, the Company issued a total of 2,640,089 shares
of Common Stock in connection with the Company's acquisition of
Mediamatics, Inc. ("Mediamatics"). The shares were issued to the former
stockholders of Mediamatics pursuant to the private placement exemption
of Section 4(2). The shares were issued to the stockholders of
Mediamatics as follows:
Name Number of Shares
- ---- ----------------
Hemant Bheda 887,642
Partha Srinivasan 665,837
Premnath Viswanath 554,934
Dr. T. Jaganathan 3,691
Institutional Venture Partners VI 489,648
Institutional Venture Management VI 10,417
IVP Founders Fund I, L.P. 20,836
Greater Bay Bancorp 7,084
131,463 of these shares were deposited into an indemnity escrow
and will be released on March 17, 1998 provided the Company has not
asserted claims for damages under the Mediamatics Stock Purchase
Agreement prior to that time. 808,628 of these shares were deposited
into an employment escrow and will be released in varying amounts to
Messrs. Bheda, Srinavasan, and Viswanath over time beginning December
17, 1998, provided, subject to certain conditions, they remain employed
by the Company. 1,699,998 of the shares have been registered under
Registration Statement on form S-3 No. 333-24113 which became effective
June 3, 1997. As consideration for the shares, National received all of
the issued and outstanding stock of Mediamatics. No underwriters were
involved in the Mediamatics acquisition.
See information appearing in Notes 6, Debt; Note 8, Shareholders'
Equity; and Note 14, Financial Information by Quarter (Unaudited) in the
Notes to the Consolidated Financial Statements included in Item 8. The
Company's common stock is traded on the New York Stock Exchange and the
Pacific Exchange. Market price range data are based on the New York
Stock Exchange Composite Tape. Market price per share at the close of
business on July 11, 1997 was $34.81. At July 11, 1997, the number of
record holders of the Company's common stock was 11,720.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from the
audited Consolidated Financial Statements. The information set forth
below is not necessarily indicative of results of future operations, and
should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7 and the
consolidated financial statements and related notes thereto in Item 8.
FIVE YEAR SELECTED FINANCIAL DATA
(In Millions, Except per Share Amounts)
May 25, May 26, May 28, May 29, May 30,
Years Ended 1997 1996 1995 1994 1993
- ----------- ------- ------- ------- ------- -------
OPERATING RESULTS
Net sales $2,507.3 $2,623.1 $2,379.4 $2,295.4 $2,013.7
Operating costs and
expenses 2,475.1 2,409.0 2,095.4 2,020.9 1,893.8
------- ------- ------- ------- -------
Operating income 32.2 214.1 284.0 274.5 119.9
Interest income, net 15.1 13.3 14.6 10.9 2.9
Other income, net 10.0 19.8 30.6 18.1 27.1
------- ------- ------- ------- -------
Income before income
taxes and cumulative
effect of accounting
change 57.3 247.2 329.2 303.5 149.9
Income taxes 29.8 61.8 65.0 44.4 19.6
------- ------- ------- ------- -------
Income from
continuing operations
before cumulative
effect of accounting
change $ 27.5 $ 185.4 $ 264.2 $ 259.1 $ 130.3
------- ------- ------- ------- --------
Net income $ 27.5 $ 185.4 $ 264.2 $ 264.0 $ 130.3
- ----------------------------------------------------------------------
Net income used in
primary earnings
per common share
calculation (reflecting
preferred dividends,
if applicable):
Income from continuing
operations before
cumulative effect of
accounting change $ 27.5 $ 179.8 $ 253.0 $ 240.4 $ 113.2
------- ------- ------- ------- --------
Net income $ 27.5 $ 179.8 $ 253.0 $ 245.3 $ 113.2
- ----------------------------------------------------------------------
Net income used in
fully diluted earnings
per share calculation
(reflecting adjustment
for interest on
convertible notes
when dilutive,
if applicable):
Income from continuing
operations
before cumulative effect
of accounting change $ 27.5 $ 185.4 $ 264.2 $ 259.1 $ 130.3
------- ------- ------- ------- --------
Net income $ 27.5 $ 185.4 $ 264.2 $ 264.0 $ 130.3
- ----------------------------------------------------------------------
Earnings per common
share:
From continuing
operations before
cumulative effect
of accounting change:
Primary $ 0.19 $ 1.36 $ 2.02 $ 1.98 $ 0.98
------- ------- ------- ------- --------
Fully diluted $ 0.19 $ 1.34 $ 1.92 $ 1.83 $ 0.98
Net income:
Primary $ 0.19 $ 1.36 $ 2.02 $ 2.02 $ 0.98
------- ------- ------- ------- --------
Fully diluted $ 0.19 $ 1.34 $ 1.92 $ 1.87 $ 0.98
- ----------------------------------------------------------------------
Weighted average common
and common equivalent
shares outstanding:
Primary 142.6 132.5 125.2 121.4 115.9
------- ------- ------- ------- --------
Fully diluted 142.9 138.6 137.5 141.4 115.9
- ----------------------------------------------------------------------
FINANCIAL POSITION AT YEAR-END
Working capital $ 761.2 $ 579.2 $ 492.4 $ 439.0 $ $336.6
Total assets $2,914.1 $2,658.0 $2,235.7 $1,747.7 $1,476.5
Long-term debt $ 324.3 $ 350.5 $ 82.5 $ 14.5 $ 37.3
Total debt $ 336.6 $ 372.0 $ 106.1 $ 30.1 $ 47.9
Shareholders' equity $1,748.8 $1,577.2 $1,406.7 $1,105.7 $ 837.4
- ----------------------------------------------------------------------
OTHER DATA
Research and
development expense $ 444.7 $ 361.3 $ 283.1 $ 257.8 $ 229.2
Capital additions $ 593.0 $ 628.1 $ 478.0 $ 270.7 $ 235.1
Number of employees
(in thousands) 12.4 20.3 22.4 22.3 23.4
- ----------------------------------------------------------------------
National has paid no cash dividends on its common stock in any of the
years presented above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto:
Overview
In the first quarter of fiscal 1997, under the leadership of the
Company's new Chief Executive Officer, National Semiconductor
Corporation ("National" or the "Company") adopted a strategy to provide
system-on-a-chip solutions for its key data highway strategic partners,
exploiting its analog and mixed signal expertise as a starting point for
forward integration. This strategy led to the Company's decision to de-
emphasize some of its existing business areas. In June 1996, the
Company reorganized its operating structure into four business groups
that included the Analog Group, the Communications and Consumer Group,
the Personal Systems Group and the Fairchild Semiconductor Group
("Fairchild"). The reorganization was intended to enhance the Company's
focus in analog and mixed signal technologies and further its strategy
to develop certain highly integrated, application specific semiconductor
products ("systems on a chip") for the personal systems, communications
and consumer markets. Fairchild was formed as a separate organization
consisting of the Company's family logic, memory and discrete product
lines, which the Company announced it planned to divest as part of this
strategy. The Fairchild product lines were more mature businesses with
slower growth rates and generally lower margins than the analog and
mixed signal products, which traditionally have higher margins. The
Company completed the disposition of Fairchild under a recapitalization
transaction with Sterling, LLC, a Citicorp Venture Capital, Ltd.
investment portfolio company in related businesses, and Fairchild's
management, in March 1997.
Early in fiscal 1997, the Company also established three strategic
imperatives: state-of-the-art process technology, world-class
manufacturing and a six-month time-to-market methodology as delivery
vehicles to enable the Company to develop system-on-a-chip products. In
line with the strategic imperatives, the Company aggressively developed
its own state-of-the-art, submicron wafer fabrication capability and
accelerated completion of its new 8-inch manufacturing facility in South
Portland, Maine, to provide the appropriate manufacturing technology for
the types of analog and mixed signal devices needed for system-on-a-chip
products. As a result, the Company also bypassed previously developed
processes that are used in its current manufacturing facilities. In May
1997, the Company announced a comprehensive realignment of its
manufacturing facilities intended to reduce costs, rationalize
production flows and accelerate its production transition to
manufacturing 8-inch wafers with 0.35-micron circuit geometries.
Also consistent with the new strategy were the Company's acquisitions
of the PicoPower Division of Cirrus Logic Inc. ("PicoPower") in August
1996 and Mediamatics, Inc. ("Mediamatics") in March 1997. The
acquisition of PicoPower, a well-established designer and marketer of
chip sets for laptop personal computers, allows the Company to compete
as a supplier of complete chip sets for future generations of products
by combining its expertise in circuits for peripheral and input/output
functions on the personal computer motherboard with PicoPower's advanced
technologies and experience in other components of chip sets. The
Company believes that the acquisition of Mediamatics, a leading supplier
of certain multimedia products in the home connectivity market, will
enable the Company to accelerate its entry into the rapidly growing
world of home entertainment appliances based on new technologies such as
Digital Versatile Disk-based video players and Digital Video
Broadcasting set-top boxes.
Results of Operations
The Company recorded net sales of $2.5 billion in fiscal 1997 compared
to $2.6 billion in fiscal 1996 and $2.4 billion in fiscal 1995. Net
income for fiscal 1997 was $27.5 million compared to $185.4 million in
fiscal 1996 and $264.2 million in fiscal 1995.
The decrease in net income was primarily attributable to a
combination of lower sales from Fairchild as a result of its disposition
early in the fourth quarter of fiscal 1997 and special charges of $166.2
million. The special charges comprised $134.2 million for restructuring
of operations that included $49.7 million related to the Company's
reorganization of its operating structure and $84.5 million related to
the planned realignment of its manufacturing facilities, plus $72.6
million for in-process research and development charges related to the
acquisition of PicoPower ($10.6 million) and Mediamatics ($62.0
million), offset by a $40.6 million gain from the disposition of
Fairchild.
In connection with the Company's acquisition of Mediamatics, the
Company issued or reserved for future issuance an aggregate of 3.4
million shares of common stock, with 1.6 million of these shares
reserved for stock options and employee retention arrangements. The
acquisition was accounted for using the purchase accounting method with
a net adjusted purchase price after acquisition expenses of $74.5
million. In addition to the charge to expense of in-process research
and development, the Company recorded $23.5 million of unearned
compensation related to employee retention arrangements which will be
charged to operating expenses, primarily research and development, over
the next 30 months.
The decrease in net income for fiscal 1996 from fiscal 1995 was
primarily attributable to a combination of lower than expected sales and
higher costs associated with reduced factory utilization experienced in
the second half of fiscal 1996 as the Company and the global
semiconductor industry experienced much slower order activity due to
over-inventory conditions at its customers and distributors. Results
for fiscal 1996 also included special charges of $11.4 million related
to the acquisition of Sitel Sierra, B.V. ("Sitel"), a Netherlands
company that designs and supplies integrated circuits and software based
on the Digital European Cordless Telephone ("DECT") telecommunications
protocol for the wireless market, and a charge of $19.3 million
associated with various cost reduction programs announced in late fiscal
1996 taken to align costs with market conditions.
The following table summarizes selected financial information for the
National core businesses excluding the effect of special charges related
to the Company's reorganization of its operating structure, its planned
realignment of manufacturing facilities and in-process research and
development charges related to the acquisitions of PicoPower and
Mediamatics in fiscal 1997 and Sitel in fiscal 1996, as previously
described, and the results of operations of Fairchild and Dynacraft,
Inc. ("DCI"), which was sold in the third quarter of fiscal 1996:
Years Ended: May 25, May 26, May 28,
(In Millions) 1997 1996 1995
------- ------- -------
Net sales $2,054.4 $1,871.6 $1,668.0
Gross profit $828.9 $861.5 $795.8
Gross margin 40.3% 46.0% 47.7%
Net income $122.1 $161.9 $220.2
Fully diluted
earnings per share $0.85 $1.17 $1.60
The presentation of these separate National core business earnings
per share ("EPS") amounts is not in accordance with generally accepted
accounting principles. The Company believes, however, that for
analytical purposes, these EPS amounts represent the contributions of
the National core businesses and are an appropriate basis for comparison
with future financial results from the National core businesses.
Sales
Sales in fiscal 1997 decreased overall by 4 percent from sales for
fiscal 1996. While sales declined in the first half of fiscal 1997 by
13 percent, sales for the second half of fiscal 1997 grew 6 percent
despite lower sales from Fairchild due to the disposition of Fairchild
in the fourth quarter of fiscal 1997. The decrease in sales for the
first half of fiscal 1997 reflected the general slowdown in new orders
that began in fiscal 1996 and continued into the first half of fiscal
1997 as customers and distributors reduced inventories. The sales
growth experienced in the second half of fiscal 1997 reflected an
improvement in new orders that began in the second half of calendar year
1996 and continued to strengthen through the rest of the fiscal year.
National core businesses include the Analog Group, the
Communications and Consumer Group, and the Personal Systems Group. The
sales discussion that follows for fiscal 1997 is presented separately
for the National core businesses and Fairchild.
Sales for fiscal 1997 for National's core businesses were $2.1
billion, or 81.9 percent of total sales, compared to $1.9 billion, or
73.7 percent, for fiscal 1996. This growth in sales for the National
core businesses was driven by the Company's focus on analog and mixed
signal market opportunities and reflects the continued growth in sales
for local area network products and wide area network products,
including application specific wireless communication products, each of
which grew with increases of 44.4 percent and 6.3 percent, respectively,
over fiscal 1996. In addition, sales strengthened for personal computer
products, which grew 32.9 percent over fiscal 1996. Sales increases for
all of these product areas were the result of increased unit shipments.
Overall, increased unit shipments for the National core businesses
resulted in increased sales for the year despite some modest price
declines.
Sales for fiscal 1997 for Fairchild were $0.5 billion, or 18.1
percent of total sales, compared to $0.7 billion, or 26.3 percent, for
fiscal 1996. The decline in sales for Fairchild reflects the Company's
continued de-emphasis of those businesses as well as the effect of the
disposition of Fairchild in the fourth quarter of fiscal 1997. Overall
decreases in unit shipments as older product lines were reduced,
together with some modest price declines, resulted in decreased sales
for Fairchild year over year.
Overall, fiscal 1997 sales decreased in all geographic regions
from fiscal 1996. The decreases were 2 percent for the Americas, 9
percent for Europe, 3 percent for Japan and 4 percent for Asia. Although
the dollar value of foreign currency denominated sales had an
unfavorable impact in Japan as the dollar strengthened against the
Japanese yen, it was offset by a favorable impact experienced in Europe,
particularly from the German deutsche mark. Overall, exchange rates had
a minimal effect on total sales since the majority of the Company's
sales are U.S. dollar denominated. In fiscal 1997, sales in the
Americas increased to 43 percent of total sales, while sales for Europe
declined to 23 percent of total sales and sales remained consistent at
10 percent of total sales for Japan and 24 percent of total sales for
Asia. The disposition of Fairchild had an immaterial effect on these
percentages.
Sales for fiscal 1996 increased overall by 10 percent over fiscal
1995. While sales growth for the first half of fiscal 1996 was 24
percent over sales for the first half of fiscal 1995, sales for the
second half of fiscal 1996 remained flat with sales for the second half
of fiscal 1995. Moreover, sales for the second half of fiscal 1996
actually declined 14 percent from sales for the first half of fiscal
1996, reflecting a general slowdown in new orders that was experienced
as customers and distributors reduced inventories.
Fiscal 1996 sales increased in all geographic regions over fiscal
1995. The increases were 8 percent for the Americas, 14 percent for
Europe, 13 percent for Japan and 9 percent for Asia. The dollar value
of foreign currency denominated sales was minimally affected by exchange
rates as favorable currency movements in the first half of the year were
offset in the second half of the year as the dollar began to strengthen
against the Japanese yen and major European currencies. Overall, the
Americas, Europe, Japan and Asia regions accounted for 42, 24, 10 and 24
percent of total fiscal 1996 sales, respectively.
Gross Margin
Gross margin as a percentage of sales declined to 39 percent in fiscal
1997 from 41 percent in fiscal 1996 and 42 percent in fiscal 1995. The
primary factor contributing to the decline was reduced factory
utilization, particularly in the first half of fiscal 1997 when factory
utilization was reduced due to the slowdown in new orders as customers
and distributors reduced inventories. Wafer fabrication capacity
utilization declined to 67 percent for the first half of fiscal 1997
resulting in gross margin of 34 percent for the first half of the year.
Although gross margin for fiscal 1997 was lower than fiscal 1996, it
reflects a recovery in gross margin since the beginning of the fiscal
year as factory utilization reached 80 percent in the second half of
fiscal 1997. This resulted in gross margin of 43 percent for the second
half of the year as new order rates that began improving in August 1996
strengthened through the remainder of the fiscal year. Gross margin for
fiscal 1997 also reflects the positive effect of ceasing depreciation
expense on the property and equipment of the Fairchild businesses held
for disposition. Had the Company continued to record depreciation
expense on those assets during the year, gross margin for the year would
have been 37 percent.
Included in the fiscal 1997 cost of sales are special charges of $2
million related to the write down of Fairchild inventory to net
realizable value and $3.6 million for other cost reduction activities
(see Restructuring of Operations). Gross margin for fiscal 1997 for the
National core businesses without Fairchild and excluding these special
charges was 40 percent.
Gross margin as a percentage of sales declined to 41 percent in
fiscal 1996 from 42 percent in fiscal 1995. The primary factor
contributing to the decline was reduced factory utilization in the
second half of fiscal 1996 due to the slowdown in new orders as
customers and distributors reduced inventories coupled with a general
increase in operating expenses.
In fiscal 1996, gross margin for the first half of the year increased
to 44 percent due to high product demand, particularly in the higher
margin analog products. Wafer fabrication capacity utilization reached
91 percent. In the second half of the year, wafer fabrication capacity
utilization declined to approximately 72 percent as the Company reduced
production output in an effort to keep inventories in balance with
decreasing demand. This resulted in a decline in gross margin to 37
percent for the second half of fiscal 1996.
Research and Development
Research and development ("R&D") expenses were $372.1 million for fiscal
1997, or 15 percent of sales, compared to $349.9 million in fiscal 1996,
or 13 percent of sales, and $281.6 million in fiscal 1995, or 12 percent
of sales. These amounts exclude in-process R&D charges of $72.6 million
related to the acquisitions of PicoPower ($10.6 million) and Mediamatics
($62.0 million) in fiscal 1997, $11.4 million related to the acquisition
of Sitel in fiscal 1996 and $1.5 million related to the acquisition of
Comlinear Corporation in fiscal 1995, which have been separately
presented in the consolidated statement of operations as special items.
The increase in fiscal 1997 R&D expenses reflects the Company's
accelerated investment in advanced submicron CMOS process technology,
which was directly attributable to the Company's strategic imperative
for state-of-the-art process technology. The increase also reflects
continued investment in the development of new analog and mixed signal
based products for applications in the personal systems, communications
and consumer markets. For fiscal 1997, the Company expended 34 percent
of its R&D effort toward the development of state-of-the art process
technology and the remaining 66 percent for new product development.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses decreased to
$395.7 million, or 16 percent of sales, in fiscal 1997 from $486.8
million, or 19 percent of sales, in fiscal 1996 and $433.3 million, or
18 percent of sales, in fiscal 1995. The decrease is attributable to
certain ongoing cost reduction actions that were implemented in response
to the slowdown in market conditions that affected the first half of
fiscal 1997 and the effect of centralization initiatives to reduce the
Company's infrastructure in both Fairchild and the continuing National
core business areas. The decrease also reflects lower expenses due to
the disposition of Fairchild in the fourth quarter of fiscal 1997.
Restructuring of Operations
In connection with the reorganization, the Company recorded a $55.3
million net special charge for fiscal 1997 that included a $49.7 million
restructuring charge for the write down of fixed assets to estimated
fair value, as well as costs associated with staffing reductions and
other exit costs necessary to reduce the Company's infrastructure in
both Fairchild and the remaining National core businesses. The
remaining components of the $55.3 million special charge are recorded in
cost of sales and consist of $2.0 million to write down certain
Fairchild inventory to net realizable value and $3.6 million for other
cost reduction activities.
In connection with the Company's planned realignment of its
manufacturing facilities, the Company recorded a restructuring charge of
$84.5 million that included an impairment loss of $60.1 million related
to the write down of certain assets in its Arlington, Texas, wafer
manufacturing facility. This impairment arose from the Company's
decision to cancel further investment in its 6-inch, 0.65-micron wafer
fabrication expansion that began in 1995. The Company's acceleration of
investment in its 8-inch wafer fabrication facility in Maine, which is
expected to result in availability of 0.35-micron capacity sooner than
previously expected, will allow the Company to bypass the 0.65-micron
generation of capacity.
In addition to the impairment loss, the Company also recorded $11.0
million of exit costs primarily related to the closure of its 5- and 6-
inch wafer fabrication facilities in Santa Clara, California. The
closure process, which began in May, is expected to occur over the next
15 months, during which time the Company will transfer the production
activities to other existing manufacturing lines. The exit costs
primarily relate to severance costs, the removal of production equipment
and the dismantling of the production facilities. Approximately 500
employees are currently employed in these two wafer fabrication
facilities and the Company does not expect to place the majority of the
affected employees elsewhere in the organization. The Company also
recorded $10.3 million of exit costs associated with the Company's
decision to halt expansion of its 6-inch wafer fabrication line in
Greenock, Scotland. These costs primarily relate to asset write-off of
previously capitalized construction in progress costs and other exit
costs including employee related costs. The remaining $3.1 million
relates to severance and other exit costs at other manufacturing
facilities. Included in accrued liabilities at May 25, 1997 is $20.2
million of the restructuring charge that represents cash charges.
Noncash charges of $64.3 million include the impairment loss and other
fixed asset write downs.
Interest Income and Interest Expense
Net interest income was $15.1 million for fiscal 1997 compared to $13.3
million in fiscal 1996 and $14.6 million in fiscal 1995. The increase
in fiscal 1997 was primarily due to lower interest expense reflecting
the Company's efforts to accelerate the paydown of certain debt
balances, as interest income remained constant. In addition, the
Company capitalized $13.8 million of interest associated with capital
expansion projects in fiscal 1997 compared to $6.0 million in fiscal
1996. Net interest income was lower in fiscal 1996 than in fiscal 1995
as the increase in interest expense associated with the $258.8 million
convertible subordinated notes issued in fiscal 1996 more than offset
the increase in interest income earned from higher cash balances during
fiscal 1996.
Other Income, Net
Other income, net was $10.0 million for fiscal 1997 compared to $19.8
million and $30.6 million for fiscal 1996 and fiscal 1995, respectively.
For fiscal 1997, other income, net included $3.4 million of net
intellectual property income, plus a $3.8 million net gain from the sale
of stock from the Company's investment holdings, a $4.2 million gain
from the sale of a digital answering machine integrated circuit business
and $1.6 million of dividend income from an investment holding, offset
by $3.0 million attributable to the write down of an investment to net
realizable value. This compares to net intellectual property income of
$14.0 million, plus a $7.2 million net gain from the sale of investment
holdings and a $1.5 million gain from the sale of DCI, offset by $2.9
million attributable to the write down of certain investments to net
realizable value for fiscal 1996 and net intellectual property income of
$28.7 million, plus a $6.9 million net gain from the sale of investment
holdings, offset by a special royalty charge of $5.0 million for fiscal
1995. In fiscal 1997, the Company's intellectual property income
declined because several large license arrangements expired in fiscal
1996. Although the expired licenses had generated an aggregate of $14.0
million and $28.7 million in fiscal 1996 and fiscal 1995, none of the
license arrangements was considered individually material.
Income Tax Expense
Income tax expense for fiscal 1997 was $29.8 million compared to $61.8
million in fiscal 1996 and $65.0 million in fiscal 1995. The effective
tax rate in fiscal 1997 was 52 percent as compared to approximately 25
percent and 20 percent in fiscal 1996 and 1995, respectively. The
increase in the effective tax rate from fiscal 1995 to fiscal 1996 was
attributable to the exhaustion of tax credits and certain net operating
loss carryovers in various tax jurisdictions. The primary cause of the
increase in the fiscal 1997 tax rate is the effect of the $62.0 million
nondeductible charge for in-process R&D related to the acquisition of
Mediamatics through the issuance of the Company's common stock.
Foreign Operations
The Company has manufacturing facilities in Southeast Asia and Europe
and sales offices throughout the United States, Southeast Asia, Europe
and Japan. A portion of the transactions at these facilities are
denominated in local currency, which exposes the Company to risk from
exchange rate fluctuations. The Company's risk exposure from expenses
at foreign manufacturing facilities is concentrated in pound sterling,
Singapore dollar and Malaysian ringgit. Net non-U.S. dollar denominated
asset and liability positions are hedged, where practical, using forward
exchange and purchased option contracts. The Company's risk exposure
from foreign revenue is limited to the Japanese yen and major European
currencies, primarily German deutsche marks, French francs and Italian
lira. The Company hedges up to 100 percent of the notional value of
outstanding customer orders denominated in foreign currency using
forward exchange contracts and over-the-counter foreign currency
options. A portion of anticipated foreign sales commitments is, at
times, managed using purchased option contracts that have an original
maturity of one year or less.
Financial Condition
As of May 25, 1997, cash and short-term investments increased to a total
of $889.7 million from a total of $504.3 million at May 26, 1996. Cash
generated from operating activities was $529.7 million in fiscal 1997,
up from $361.4 million in fiscal 1996 and $439.8 million in fiscal 1995,
primarily due to increasing working capital as a result of decreases in
inventories and receivables and an increase in income taxes.
Cash used for investing activities was $161.6 million in fiscal
1997 compared to $579.0 million in fiscal 1996 and $456.2 million in
fiscal 1995. For fiscal 1997, capital expenditures of $593.0 million
were offset by cash proceeds of $400.5 million from the disposition of
Fairchild and $65.0 million from the sale of a note receivable resulting
in decreased cash used for investing activities compared to previous
years. Capital expenditures for fiscal 1997 slightly decreased from
$628.1 million in fiscal 1996 as the Company continued to invest in
property, plant and equipment to expand its manufacturing capabilities
and modernize existing plants. The decrease reflects the effect of the
Fairchild disposition in the fourth quarter of fiscal 1997 as well as
the effect of the Company's decision to cancel further investment in the
6-inch wafer fabrication expansion in Arlington, Texas. Capital
expenditures in fiscal 1997 included construction of an 8-inch, 0.35-
micron pilot wafer fabrication line at its research and development
facility in Santa Clara, California; expansion of the Company's BiCMOS
6-inch wafer fabrication facility in South Portland, Maine, that was
later transferred to Fairchild; construction of an 8-inch, 0.35-micron
wafer fabrication facility, also in South Portland; and expansion of a
CMOS wafer fabrication facility in Arlington, Texas.
The Company's financing activities provided cash of $21.6 million
in fiscal 1997 primarily from the proceeds of a $50.2 million draw down
in November 1996 on a new equipment loan and $57.0 million from the
issuance of common stock under employee benefit plans, offset by general
debt repayment of $87.6 million. In fiscal 1996, cash provided by
financing activities of $239.7 million was primarily due to the proceeds
of $253.3 million, net of issuance costs, from the private placement of
convertible subordinated notes and $42.4 million from the issuance of
common stock under employee benefit plans, offset by the repurchase of
2,450,000 shares of common stock on the open market for $63.0 million.
In fiscal 1995, cash provided by financing activities of $38.6 million
was provided by debt proceeds of $157.8 million and $29.4 million from
issuance of common stock under employee benefit plans, offset by $83.0
million of debt repayment and the repurchase of 3,115,600 shares of
common stock on the open market for $54.4 million.
Management foresees significant cash outlays for plant and
equipment throughout fiscal 1998. The fiscal 1998 capital expenditure
level is expected to be slightly higher than the fiscal 1997 level.
Existing cash and investment balances, together with existing lines of
credit, are expected to be sufficient to finance planned fiscal 1998
capital investments.
Recently Issued Financial Accounting Standards
In 1997, the Financial Accounting Standards Board released three new
statements. Statement of Financial Accounting Standards ("SFAS") No.
129, "Disclosure of Information about Capital Structure," requires
certain disclosures regarding capital structure and is effective for
financial statements for fiscal years ending after December 15, 1997.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for reporting and display of comprehensive income and its components and
is effective for fiscal years beginning after December 15, 1997. SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and interim financial reports issued to
shareholders. It is effective for financial statements for fiscal years
beginning after December 15, 1997. The Company is presently analyzing
these statements and has not yet determined their impact on the
Company's financial statements.
Outlook
The statements contained in this Outlook and in the Financial Condition
section of Management's Discussion and Analysis are forward looking
based on current expectations and management's estimates. Actual results
may differ materially from those set forth in such forward looking
statements.
The semiconductor industry is characterized by rapid technological
change and frequent introduction of new technology leading to more
complex and more integrated products. The result is a cyclical
environment with short product life, price erosion and high sensitivity
to the overall business cycle. In addition, substantial capital and R&D
investment is required to support products and manufacturing processes.
As a result of industry conditions, the Company may experience periodic
fluctuations in its operating results.
The Company intends to continue to focus on major customers in the
personal systems, communications and consumer markets with continued
emphasis in analog and mixed signal market opportunities. The Company's
strategy is to provide system-on-a-chip solutions for its key data
highway strategic partners, exploiting its analog and mixed signal
expertise as a starting point for forward integration. The Company
expects to grow at or above market rates of growth in particular
segments of the analog and mixed signal markets.
Although business conditions for the semiconductor industry remained
weak as the Company entered fiscal 1997, the Company saw improving
resales in the semiconductor distribution channel in the U.S. market and
some improvement in orders from personal computer manufacturers during
the first half of fiscal 1997. By the second half of fiscal 1997, the
Company was experiencing significant improvement in new order rates.
New orders were strong and continued to strengthen through the rest of
the fiscal year. The Company expects this trend to continue into the
first half of fiscal 1998; however, the Company faces the risk that the
current improvement in the semiconductor industry may be of short
duration. If the rate of new orders does not continue to increase, the
Company may be unable to attain the level of revenue growth expected for
fiscal 1998 and operating results will be unfavorably affected.
Additionally, the rate of orders and product pricing may be affected by
continued and increasing competition and by growth rates in the personal
computer and networking industries.
While business conditions and overall market pricing have a major
influence on gross margin, the Company's planned expansion and
modernization of current facilities, improvements in manufacturing
efficiency, realignment of wafer fabrication facilities, focus on analog
and mixed signal products and introduction of new products are expected
to result in future gross margin improvement. Future gross margin
improvement is also predicated on increased new order rates in future
periods, particularly in the higher margin multimarket analog products.
The Company anticipates bringing new manufacturing capacity on line in
early fiscal 1998 with the accelerated investment in its 8-inch wafer
fabrication facility in South Portland, Maine, which will utilize
advanced 0.35-micron CMOS process technology. If the balance of fixed
costs associated with the realignment of wafer fabrication facilities is
affected because the new facility is not filled with new products going
into fiscal 1998, future gross margin will be unfavorably impacted.
The Company has committed substantial capital investments to bring
new manufacturing capacity on line for fiscal 1998. While management
expects to more fully utilize wafer capacity, there is no certainty that
the level of demand will be sufficient to fully utilize the additional
new capacity when it is brought on line. Failure to improve
manufacturing capacity utilization will lead to flat or decreased gross
margin for fiscal 1998. In addition, unexpected start-up expenses,
inefficiencies and delays in the start of production in the Company's
new 8-inch wafer fabrication facility in South Portland, Maine, may
result in lower than expected gross margin for fiscal 1998. The
Company's focus is to continue to introduce new products, particularly
higher margin analog and mixed signal based products, and to reposition
its product portfolio so that it is less exposed to the pricing declines
of older commodity products. If the development of new products is
delayed or market acceptance is below expectations, future gross margin
may also be affected. In connection with the Company's planned
comprehensive realignment of its manufacturing facilities, the Company
faces the risk that the transfer of product manufacturing from existing
facilities that are expected to be closed or where capacity levels are
expected to be reduced may extend beyond the estimated transition period
and that the transition process may not occur smoothly, resulting in an
unfavorable impact on future gross margin and operating results.
The Company believes that continued focused investment in research
and development is a key factor to the Company's successful growth.
Ongoing research and development spending for fiscal 1998 is expected to
exceed fiscal 1997 levels. National's product portfolio, particularly
products in the personal systems and communications area, have short
product life cycles and successfully developing and introducing new
products is critical to the Company's ability to maintain a competitive
position in the marketplace. The Company's ability to achieve strong
financial performance is also dependent on the development of new
manufacturing processes and the timely development and market acceptance
of new products. The Company does expect, however, that overall SG&A
expenses will be lower for fiscal 1998 than for fiscal 1997 as
management continues to evaluate strategies to align its cost structure
with current market conditions.
National continues to pursue opportunities to leverage its
intellectual property. However, the timing and amount of future
licensing income over time cannot be forecast with certainty. In
addition, the Company continues to pursue opportunities to develop joint
venture partnerships or potential acquisitions which enhance its product
portfolio in analog and mixed signal applications and pursue its system-
on-a-chip strategy. The Company expects that its involvement in such
opportunities, particularly in the acquisition of key technology, will
become more significant in the future, as the Company pursues
acquisitions of key technology to augment technical capability or
achieve faster time-to-market rather than internally developing them.
With such acquisitions, the Company faces the risk that future operating
performance may be unfavorably impacted due to acquisition related
costs, such as but not limited to, in-process R&D charges, added R&D
expenses, lower gross margins from acquired product portfolios and
restructure costs associated with duplicate facilities.
The Company's joint venture in the People's Republic of China
("China") to design, manufacture and market subscriber line interface
modules and other products using similar technologies is dependent on
the development of a telecommunication infrastructure in China. The
Company also has another joint venture in China to establish the DECT
technology in China and pursue the development, manufacturing and sale
of related products. The success of these joint ventures is subject to
market acceptance, as well as the general economic conditions and
political environment in China. The Company continues to critically
evaluate product lines and divisions where short- or long-term prospects
do not coincide with its overall strategic direction. In these cases,
the Company will consider dispositions of assets or business entities as
necessary. No assurance can be given that the Company will be
successful in these endeavors or that such endeavors will provide future
growth.
Because of significant international operations, the Company benefits
overall from a weaker dollar and is adversely affected by a stronger
dollar relative to major currencies worldwide. As such, changes in
exchange rates, and in particular a strengthening of the U.S. dollar,
may unfavorably affect the Company's consolidated sales and net income.
The Company attempts to manage the short-term exposures to foreign
currency fluctuations, but there can be no assurance that the Company's
risk management activities will offset the adverse financial impact
resulting from unfavorable movements in foreign exchange.
Although the Company transferred four manufacturing facilities as a
part of the Fairchild transaction, the Company believes that its
remaining captive manufacturing capacity and its third-party subcontract
manufacturing arrangements, including manufacturing arrangements with
Fairchild, will be adequate to supply the needs of its core business
operations. Moreover, the Company believes the portfolio of products
for its core businesses provides the Company the opportunity to improve
future profitability since such products have higher margins
historically than those of the Fairchild businesses.
As part of the Fairchild transaction, the Company has agreed not to
compete with Fairchild for five years in any business that has products
with substantially the same specifications as the products comprising
the Fairchild business immediately prior to the transaction. Fairchild
has agreed it will not compete with the Company in certain products for
a period of 39 months. The Company has also agreed not to encourage any
Fairchild customer, supplier, licensor, licensee or anyone else having a
business relationship with Fairchild to terminate its business
relationship with Fairchild. Since the Company has exited the logic,
memory and discrete product business, the Company does not believe these
noncompetition and nonsolicitation covenants will materially impact the
ongoing operations.
In connection with the Fairchild transaction, Fairchild and the
Company have entered into a manufacturing agreement under which the
Company will purchase goods and services from Fairchild during the first
39 months after the transaction. Historically, these goods and services
have been provided by Fairchild at cost. Under the agreement, the
Company has committed to purchase goods and services based on specified
wafer prices. Such prices may have an unfavorable impact on gross
margin. The agreement also requires the Company to purchase a minimum
of $330 million in goods and services based on annual minimum levels
over the term of the agreement. The Company is committed to these
minimum levels whether or not the minimum levels are required based on
future demand. The Company also has certain continuing obligations
arising from the Fairchild transaction that include providing certain
transition services to Fairchild and indemnification of certain
environmental and legal matters. There can be no assurance that the
ultimate satisfaction of these obligations would not have a material
adverse impact on the Company's future financial condition or results of
operations.
The Company has received notices of tax assessments from certain
governments of countries within which the Company operates. There can be
no assurance that these governments or other government entities will
not serve future notices of assessments on the Company, or that the
amounts of such assessments and the failure of the Company to favorably
resolve such assessments would not have a material adverse effect on the
Company's financial condition or results of operations. In addition, the
Company is engaged in administrative tax appeals with the IRS and the
Company's tax returns for certain years are under examination in the
U.S. and Malaysia. There can be no assurance that the ultimate outcome
of the tax appeals or tax examinations would not have a material adverse
effect on the Company's future financial condition or results of
operations.
The forward looking statements discussed or incorporated by reference
in this outlook section involve a number of risks and uncertainties.
Other risks and uncertainties include, but are not limited to, the
general economy, regulatory and international economic conditions, the
changing environment of the semiconductor industry, competitive products
and pricing, growth in the personal computer and communications
industries, the effects of legal and administrative cases and
proceedings, and such other risks and uncertainties as may be detailed
from time to time in the Company's SEC reports and filings.
APPENDIX TO MD&A GRAPHS
(3 Years)
1997 1996 1995
------ ------ ------
(MD&A - Within Sales Section)
Net Sales per Employee 140.1 120.3 106.2
(MD&A - Within Gross Margin Section)
Net Operating Margin
as a Percent of Sales 1.3% 8.2% 11.9%
(MD&A - Within SG&A Section; one graph, broken into 3 sections)
Operating Costs and
Expenses (As a Percent
of Sales):
Cost of Sales 61.5% 59.5% 58.2%
Research and Development 17.7% 13.8% 11.9%
Selling, General, and
Administrative 15.8% 18.6% 18.2%
(MD&A - Within Financial Condition Section)
Net Property, Plant,
and Equipment $1,263.4 $1,308.1 $962.4
(MD&A - Within Outlook)
Stock Price Ending $28.00 $16.25 $26.00
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements Page
- -------------------- ----
Consolidated Balance Sheets at May 25, 1997 and May 26, 1996 28
Consolidated Statements of Operations for each of the years
in the three-year period ended May 25, 1997 29
Consolidated Statements of Shareholders' Equity for each of
the years in the three-year period ended May 25, 1997 30
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended May 25, 1997 31
Notes to Consolidated Financial Statements 32-52
Independent Auditors' Report 53
Financial Statement Schedule
- ----------------------------
For the three years ended May 25, 1997:
Schedule II -- Valuation and Qualifying Accounts 57
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share Amounts)
May 25, May 26,
1997 1996
------ ------
ASSETS
Current assets:
Cash and cash equivalents $ 832.1 $ 442.4
Short-term marketable investments 57.6 61.9
Receivables, less allowances of
$37.2 in 1997 and $35.0 in 1996 255.8 281.2
Inventories 181.4 325.7
Deferred tax assets 168.5 71.1
Other current assets 57.2 73.7
------- -------
Total current assets 1,552.6 1,256.0
Property, plant and equipment, net 1,263.4 1,308.1
Long-term marketable investments 6.4 11.7
Other assets 91.7 82.2
------- -------
Total assets $2,914.1 $2,658.0
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 12.3 $ 21.5
Accounts payable 248.0 255.6
Accrued expenses 293.4 235.1
Income taxes payable 237.7 164.6
------- -------
Total current liabilities 791.4 676.8
Long-term debt 324.3 350.5
Deferred income taxes 8.9 12.1
Other noncurrent liabilities 40.7 41.4
------- -------
Total liabilities $1,165.3 $1,080.8
------- -------
Commitments and contingencies
Shareholders' equity:
Common stock of $0.50 par value
Authorized 300,000,000 shares
Issued and outstanding 145,180,818
in 1997; 136,923,332 in 1996 $ 72.6 $ 68.4
Additional paid-in capital 1,112.7 930.2
Retained earnings 605.5 581.9
Unearned compensation (42.0) (3.3)
------- -------
Total shareholders' equity $1,748.8 $1,577.2
------- -------
Total liabilities and
shareholders' equity $2,914.1 $2,658.0
======= =======
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Amounts)
Years Ended
--------------------------
May 25, May 26, May 28,
1997 1996 1995
------- ------- -------
Net sales $2,507.3 $2,623.1 $2,379.4
Operating costs and expenses:
Cost of sales 1,541.1 1,560.9 1,384.5
Research and development 372.1 349.9 281.6
Selling, general and administrative 395.7 486.8 433.3
Special items:
Restructuring of operations 134.2 - (5.5)
Gain on sale of Fairchild (40.6) - -
In-process R&D charge 72.6 11.4 1.5
------- ------- -------
Total operating costs and expenses 2,475.1 2,409.0 2,095.4
------- ------- -------
Operating income 32.2 214.1 284.0
Interest income, net 15.1 13.3 14.6
Other income, net 10.0 19.8 30.6
------- ------- -------
Income before income taxes and 57.3 247.2 329.2
Income taxes 29.8 61.8 65.0
------- ------- -------
Net income $ 27.5 $ 185.4 $ 264.2
======= ======= =======
Earnings per share:
Primary $ 0.19 $ 1.36 $ 2.02
Fully diluted $ 0.19 $ 1.34 $ 1.92
Weighted average shares:
Primary 142.6 132.5 125.2
Fully diluted 142.9 138.6 137.5
Net income used in primary earnings per
common share calculation (reflecting
preferred dividends, if applicable) $ 27.5 $ 179.8 $ 253.0
Net income used in fully diluted earnings
per share calculation (reflecting
adjustment for interest on convertible
notes when dilutive, if applicable) $ 27.5 $ 185.4 $ 264.2
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Millions, Except Per Share Amounts)
Convert- Un- Addi-
ible Com- earned Trea- tional
Preferred mon Compen- sury Paid-In Retained
Stock Stock sation Stock Capital Earnings Total
--------- ----- ------ ----- ------- -------- --------
Balances at
May 29, 1994 $0.2 $61.4 $ - $(9.5) $912.7 $140.9 1,105.7
Net income - - - - - 264.2 264.2
Convertible
preferred
dividends of
$32.50
per share - - - - - (11.2) (11.2)
Acquisition of
treasury stock - - - (54.4) - - (54.4)
Issuance of
common stock
under option,
purchase, and
profit sharing
plans and tax
benefit of $51.9 - 1.7 - 4.0 79.6 - 85.3
Unrealized gain
on available-
for-sale
securities
(net of tax) - - - - - 17.1 17.1
- ------------------------------------------------------------------------
Balances at
May 28, 1995 0.2 63.1 - (59.9) 992.3 411.0 1,406.7
Net income - - - - - 185.4 185.4
Conversion of
convertible
preferred shares (0.2) 6.1 - - (5.9) - -
Convertible
preferred
dividends of
$32.50 per share - - - -(5.6) (5.6)
Acquisition of
treasury stock - - - (63.0) - - (63.0)
Retirement of
treasury stock - (2.8) - 118.6 (115.8) - -
Issuance of
common stock
under option,
purchase, and
profit sharing
plans
and tax benefit
of $15.9 - 2.0 - 4.3 56.3 - 62.6
Unearned
compensation
charge
relating to
restricted
stock - - (3.3) - 3.3 - -
Unrealized loss
on available-
for-sale
securities
(net of tax) - - - - - (8.9) (8.9)
- ------------------------------------------------------------------------
Balances at
May 26, 1996 - 68.4 (3.3) - 930.2 581.9 1,577.2
Net income - - - - - 27.5 27.5
Issuance of
common stock
under option,
purchase, and
profit sharing
plans and tax
benefit of $18.1 - 2.7 - - 75.6 - 78.3
Issuance of
common stock
and unearned
compensation
charge
in connection
with Mediamatics
acquisition - 1.3 (32.7) - 96.2 - 64.8
Unearned
compensation
charge relating
to restricted
stock - 0.2 (10.9) - 10.7 - -
Amortization
of unearned
compensation - - 4.9 - - - 4.9
Unrealized
loss on
available-for
-sale securities
(net of tax) - - - - - (3.9) (3.9)
- ------------------------------------------------------------------------
Balances at
May 25, 1997 - $72.6 $(42.0) $ - $1,112.7 $ 605.5 $1,748.8
===== ======= ==== ======== ======= =========
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
Years Ended
----------------------------
May 25, May 26, May 28,
1997 1996 1995
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 27.5 $ 185.4 $ 264.2
Adjustments to reconcile net income
with net cash provided by operations:
Depreciation and amortization 231.0 232.6 185.4
Gain on disposition of Fairchild (40.6) - -
Gain on sale of investments (0.7) (4.3) (6.9)
Changes in deferred taxes (92.9) 3.3 (95.7)
Tax benefit associated with stock options 18.1 15.9 51.9
In-process research and development charge 72.6 11.4 1.5
Loss on disposal of equipment 8.2 4.8 8.6
Restructuring of operations 134.2 - (5.5)
Other, net 6.1 (0.5) (2.1)
Changes in certain assets
and liabilities, net:
Receivables 26.0 23.8 (26.5)
Inventories 72.6 (77.2) (48.4)
Other current assets 8.6 (33.3) (4.5)
Accounts payable and accrued expenses (13.3) (5.3) 32.7
Income taxes 73.1 5.0 76.1
Other liabilities (0.8) (0.2) 9.0
------- ------- -------
Net cash provided by operating activities 529.7 361.4 439.8
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (593.0) (628.1) (478.0)
Sale of equipment - 24.6 -
Sale and maturity of available-for-sale
securities 118.2 116.7 184.9
Maturity of held-to-maturity securities 1,202.1 820.2 707.1
Purchase of available-for-sale securities (124.4) (132.2) (144.9)
Purchase of held-to-maturity securities (1,191.6) (819.8) (696.7)
Disposition of Fairchild in 1997 and
Dynacraft in 1996 400.5 70.0 -
Sale of Fairchild note receivable 65.0 - -
Sale of investments 5.1 7.8 -
Business acquisitions, net of cash acquired (13.7) (19.2) (12.0)
Purchase of investments and other, net (29.8) (19.0) (16.6)
------- ------- -------
Net cash used by investing activities (161.6) (579.0) (456.2)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of convertible subordinated
notes, less issuance costs - 253.3 -
Issuance of debt 52.2 42.0 157.8
Repayment of debt (87.6) (29.4) (83.0)
Issuance of common stock, net 57.0 42.4 29.4
Purchase of treasury stock - (63.0) (54.4)
Payment of preferred dividends - (5.6) (11.2)
------- ------- -------
Net cash provided by financing activities 21.6 239.7 38.6
------- ------- -------
Net change in cash and cash equivalents 389.7 22.1 22.2
Cash and cash equivalents at
beginning of year 442.4 420.3 398.1
------- ------- -------
Cash and cash equivalents at
end of year $ 832.1 $ 442.4 $ 420.3
======= ======= =======
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include National Semiconductor
Corporation and its majority-owned subsidiaries ("National" or the
"Company"). All significant intercompany transactions are eliminated in
consolidation. Nonmarketable investments in which National has less
than 20 percent ownership and in which it does not have the ability to
exercise significant influence over the investee are initially recorded
at cost, and periodically reviewed for impairment.
Revenue Recognition
Revenue from the sale of semiconductor products is recognized when
shipped, with a provision for estimated returns and allowances recorded
at the time of shipment. Service and other revenues are recognized
ratably over the contractual period or as the services are performed.
Inventories
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Effective May 29,
1995, the Company changed its method of accounting for depreciation from
the 150 percent declining-balance method to the straight-line method for
machinery and equipment placed in service on or after that date. The
change was adopted because it conforms with predominant industry
practice and is expected to result in a more appropriate distribution of
the cost of the new machinery and equipment over its estimated useful
life. The effect of the change was an increase to net income of $11.1
million, or eight cents (fully diluted) per share, for fiscal year 1996.
Assets placed in service prior to fiscal year 1996 and assets other than
machinery and equipment are depreciated using prior years' depreciation
methods consisting of both straight-line and declining-balance methods
over the assets' remaining estimated useful lives, or in the case of
property under capital lease and leasehold improvements, over the lesser
of the estimated useful life or lease term.
The Company capitalizes interest on borrowings during the
construction period of major capital projects. Capitalized interest is
added to the cost of the underlying assets and is amortized over the
useful lives of the assets. For fiscal years 1997 and 1996, the Company
capitalized $13.8 million and $6.0 million of interest, respectively, in
connection with various capital expansion projects. Prior to fiscal
year 1996, capitalized interest costs were immaterial.
Effective the beginning of fiscal year 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds
the future undiscounted cash flows attributable to such assets. SFAS
No. 121 also requires, among other provisions, that long-lived assets
and certain identifiable intangibles that are to be disposed of, which
are not covered by Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," be reported at the lower of the
asset's carrying amount or its fair value less cost to sell. Adoption
of SFAS No. 121 had no material impact on the carrying values of the
Company's assets. In connection with the Company's announcement in May
1997 that it had planned a comprehensive realignment of its
manufacturing facilities designed to accelerate its production
transition to manufacturing 8-inch wafers with 0.35-micron circuit
geometries, reduce costs and rationalize production flows, the Company
recorded an impairment loss of $60.1 million under SFAS No. 121 related
to certain fixed assets in its Arlington, Texas, manufacturing facility.
(See Note 3.)
Income Taxes
Income taxes have been provided in accordance with SFAS No. 109,
"Accounting for Income Taxes," under which deferred tax liabilities and
assets at the end of each period are determined based on the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases using the tax rate expected to be in effect when the taxes are
actually paid or recovered. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance.
Earnings per Share
Primary earnings per share are computed using the weighted average
number of common shares and dilutive common stock equivalents
outstanding using the treasury stock method. Dilutive common stock
equivalents include stock options. Preferred dividends are reflected as
adjustments to reported net earnings in the calculation. Fully diluted
earnings per common share are computed using the weighted average common
and dilutive common stock equivalents outstanding, plus other
potentially dilutive securities outstanding which are not common stock
equivalents, such as convertible preferred shares for fiscal years 1997
and 1996 and convertible subordinated notes beginning in fiscal year
1996. If the result of assumed conversions is dilutive, the dividend
adjustments for the convertible preferred shares are reduced and net
earnings are adjusted for the interest expense on the convertible
subordinated notes while the average shares of common stock outstanding
are increased. For fiscal years 1997 and 1996, the effect of assumed
conversion of the convertible subordinated notes was antidilutive.
The Financial Accounting Standards Board recently issued SFAS No.
128, "Earnings per Share." SFAS No. 128 requires the presentation of
basic earnings per share ("EPS") and, for companies with complex capital
structures or potentially dilutive securities, such as convertible debt,
options and warrants, diluted EPS. SFAS No. 128 is effective for annual
and interim periods ending after December 15, 1997. Under SFAS No. 128,
the Company expects that basic EPS will be higher than primary earnings
per share as presented in the accompanying consolidated financial
statements and that diluted EPS will not differ materially from fully
diluted earnings per share as presented in the accompanying consolidated
financial statements.
Currencies
The Company's functional currency for all operations worldwide is the
U.S. dollar. Accordingly, gains and losses from translation of foreign
currency financial statements into U.S. dollars are included in current
results. Gains and losses resulting from foreign currency transactions
are also included in current results.
Financial Instruments
Cash and Cash Equivalents. Cash equivalents are highly liquid
instruments with a maturity of three months or less at the time of
purchase. National maintains its cash balances in various currencies
and a variety of financial instruments. The Company has not experienced
any material losses relating to any short-term financial instruments.
Marketable Investments. The Company classifies its debt and marketable
equity securities into held-to-maturity or available-for-sale categories
in accordance with the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Debt securities are
classified as held-to-maturity when the Company has the positive intent
and ability to hold the securities to maturity. Held-to-maturity
securities are recorded as either short-term or long-term on the balance
sheet based upon contractual maturity date and are stated at amortized
cost. Debt and marketable equity securities not classified as held-to-
maturity are classified as available-for-sale and are carried at fair
market value, with the unrealized gains and losses, net of tax, reported
in shareholders' equity. Gains or losses on securities sold are based on
the specific identification method.
Off-Balance Sheet Financial Instruments. The Company utilizes various
off-balance sheet financial instruments to manage market risks
associated with fluctuations in certain interest rates and foreign
currency exchange rates. It is the Company's policy to use derivative
financial instruments to protect against market risks arising in the
normal course of business. Company policies prohibit the use of
derivative instruments for the sole purpose of trading for profit on
price fluctuations or to enter into contracts which intentionally
increase the Company's underlying exposure.
Fair Values of Financial Instruments
Fair values of cash equivalents and short-term investments approximate
cost, and the fair value of short-term debt approximates carrying amount
due to the short period of time until maturity. Fair values of long-
term investments, long-term debt, currency forward contracts and
currency options are based on quoted market prices or pricing models
using prevailing financial market information as of May 25, 1997.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Employee Stock Plans
The Company accounts for its stock option plans and its employee stock
purchase plans in accordance with provisions of the Accounting
Principles Board's Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." In 1995, the Financial Accounting Standards Board
released SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 123 provides an alternative to APB 25 and is effective for fiscal
years beginning after December 15, 1995. As permitted under SFAS No.
123, the Company continues to account for its employee stock plans in
accordance with the provisions of APB 25 . (See Note 9.)
Reclassifications
Certain amounts in prior years' financial statements and related notes
have been reclassified to conform to the fiscal year 1997 presentation.
Note 2. Financial Instruments
Marketable Investments
The Company's policy is to diversify its investment portfolio to reduce
risk to principal that could arise from credit, geographic and
investment sector risk. At May 25, 1997, investments were placed with a
variety of different financial institutions or other issuers, and no
individual security, financial institution or obligation from a direct
issuer exceeded ten percent of total investments. Investments with a
maturity of less than one year have a rating of A1/P1 or better.
Investments with a maturity of more than one year have a minimum rating
of AA/Aa2. The Company's investment portfolio generally matures within
one year or less. Gross realized gains on available-for-sale securities
approximated $4.1 million, $7.2 million and $6.9 million for the years
ended May 25, 1997, May 26, 1996 and May 28, 1995, respectively. Gross
realized losses were not material for fiscal years 1997, 1996 or 1995.
Investments at fiscal year end comprise:
(In Millions)
Gross
Amortized Unrealized Estimated
Cost Gains Fair Value
--------- ---------- ----------
1997
SHORT-TERM INVESTMENTS
Available-for-sale securities:
Certificates of deposit $ 5.0 $ - $ 5.0
Corporate bonds 2.1 - 2.1
Auction rate preferred stock 29.0 - 29.0
Governmental agencies 7.0 - 7.0
Held-to-maturity securities:
Auction rate preferred stock 14.5 - 14.5
------- ------- -------
Total short-term investments $ 57.6 $ - $ 57.6
======= ======= =======
LONG-TERM INVESTMENTS
Available-for-sale securities:
Equity securities $ 2.1 $ 4.3 $ 6.4
------- ------- -------
Total long-term investments $ 2.1 $ 4.3 $ 6.4
======= ======= =======
1996
SHORT-TERM INVESTMENTS
Available-for-sale securities:
Certificates of deposit $ 11.0 $ - $ 11.0
Corporate bonds 1.0 - 1.0
Commercial paper 9.5 - 9.5
Governmental agencies 13.0 - 13.0
U.S. Treasury bills 2.4 - 2.4
Held-to-maturity securities:
Auction rate preferred stock 25.0 - 25.0
------- ------ -------
Total short-term investments $ 61.9 $ - $ 61.9
======= ====== =======
LONG-TERM INVESTMENTS
Available-for-sale securities:
Equity securities $ 3.5 $ 8.2 $ 11.7
------- ------ -------
Total long-term investments $ 3.5 $ 8.2 $ 11.7
======= ====== =======
Gross unrealized losses were not material for either fiscal year 1997 or
1996.
At May 25, 1997, the Company held $81.7 million and $714.9 million
of available-for-sale and held-to-maturity securities, respectively,
that are classified as cash equivalents on the consolidated balance
sheet. These cash equivalents consist of the following (in millions):
bank time deposits ($466.8), institutional money market funds ($129.2),
certificates of deposit ($15.0), commercial paper ($135.6), bankers
acceptances ($5.0) and demand notes ($45.0).
At May 26, 1996, the Company held $20.9 million and $410.1 million
of available-for-sale and held-to-maturity securities, respectively,
that are classified as cash equivalents on the consolidated balance
sheet. These cash equivalents consist of the following (in millions):
bank time deposits ($154.8), institutional money market funds ($45.6),
certificates of deposit ($2.0), commercial paper ($219.1) and government
securities ($9.5).
The net unrealized gain on available-for-sale securities of $4.3
million and $8.2 million is included in retained earnings at May 25,
1997 and May 26, 1996, respectively.
Off-Balance Sheet Financial Instruments
Foreign Currency Instruments
The objective of the Company's foreign exchange risk management policy
is to preserve the U.S. dollar value of after-tax cash flow in relation
to non-U.S. dollar currency movements. The Company uses forward and
option contracts to hedge firm commitments and anticipatory exposures.
These exposures primarily comprise sales of the Company's products in
currencies other than the U.S. dollar, a majority of which are made
through the Company's subsidiaries in Europe and Japan. Gains and
losses on financial instruments that are intended to hedge an
identifiable firm commitment are deferred and included in the
measurement of the underlying transaction. Gains and losses on hedges
of anticipated transactions are deferred until such time as the
underlying transactions are recognized or immediately when the
transaction is no longer expected to occur. In addition, the Company
uses forward and option contracts to hedge certain non-U.S. dollar
denominated asset and liability positions. Gains and losses on these
contracts are matched with the corresponding effect of currency
movements on these financial positions. Gains and losses from foreign
currency transactions were not significant for fiscal years 1997, 1996
and 1995.
Interest Rate Derivatives
The Company utilizes swap agreements to exchange the fixed interest rate
of certain long-term U.S. dollar debt for a variable U.S. dollar
interest rate and to exchange the variable interest rate of certain
long-term Japanese yen debt for a fixed Japanese yen interest rate. The
variable rates on swaps are based primarily on U.S. dollar LIBOR and
reset on a monthly, quarterly or semi-annual basis. These agreements
that have maturities of up to five years involve the exchange of fixed
rate interest payments for variable rate interest payments without
exchange of the underlying principal amounts. The differential between
fixed and variable rates to be paid or received is accrued as interest
rates change in accordance with the agreements and is included in
current interest expense.
The Company utilizes interest rate collars to limit the Company's
exposure to fluctuation in short-term returns on certain investments in
its portfolio by locking in a range of interest rates. An interest rate
collar is a no-cost structure that consists of a purchased option and a
sold option which are entered into simultaneously with the same
counterparty. The Company receives a payment when the three-month LIBOR
falls below predetermined levels and makes a payment when the three-
month LIBOR rises above predetermined levels. These payments are
recorded as gains or losses in interest income. All interest rate
option contracts outstanding at May 25, 1997 expire within two years.
Fair Value and Notional Principal of Off-Balance Sheet Financial
Instruments
The table below shows the fair value and notional principal of the
Company's off-balance sheet instruments as of May 25, 1997 and May 26,
1996. The notional principal amounts for off-balance sheet instruments
provide one measure of the transaction volume outstanding as of year end
and do not represent the amount of the Company's exposure to credit or
market loss. The estimates of fair value are based on applicable and
commonly used pricing models using prevailing financial market
information as of May 25, 1997 and May 26, 1996. The credit risk amount
shown in the table represents the Company's gross exposure to potential
accounting loss on these transactions if all counterparties failed to
perform according to the terms of the contract, based on then-current
currency exchange rate or interest rate at each respective date.
Although the following table reflects the notional principal, fair value
and credit risk amounts of the off-balance sheet instruments, it does
not reflect the gains or losses associated with the exposures and
transactions that the off-balance sheet instruments are intended to
hedge. The amounts ultimately realized upon settlement of these
financial instruments, together with the gains and losses on the
underlying exposures, will depend on actual market conditions during the
remaining life of the instruments.
Transactions Qualifying for Hedge Accounting:
(In Millions)
Notional Estimated Credit
Principal Fair Value Risk
--------- ---------- ------
1997
INTEREST RATE INSTRUMENTS
Swaps $ 194.4 $ - $ 0.4
Interest rate collars 50.0 - -
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts:
To buy dollars 20.4 - 0.5
To sell dollars 45.1 - 0.2
Purchased options 36.5 0.2 0.2
1996
INTEREST RATE INSTRUMENTS
Swaps $ 97.7 $ (0.2) $ 0.2
Interest rate collars 50.0 (0.2) -
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts:
To buy dollars 23.1 1.6 1.9
To sell dollars 55.7 0.9 0.9
Purchased options 33.8 0.8 0.8
The Company has outstanding currency exchange contracts to sell foreign
currency, predominantly Japanese yen, and to purchase U.S. dollars in
the future. The Company has outstanding currency exchange contracts
predominantly to buy Malaysian ringgit, Singapore dollar and pound
sterling and to sell U.S. dollars in the future. All foreign exchange
forward contracts expire within one year. Unrealized gains and losses
on foreign exchange forward contracts are deferred and recognized in
income in the same period as the hedged transactions. Unrealized gains
and losses on such agreements at May 25, 1997 and May 26, 1996 are
immaterial. The Company has purchased foreign currency options
denominated in Japanese yen and German deutsche mark. All foreign
currency option contracts expire within one year. Premiums on purchased
foreign exchange option contracts are amortized over the life of the
option. Deferred gains on these option contracts are deferred until the
occurrence of the hedged transaction and recognized as a component of
the hedged transaction. Deferred gains on such agreements at May 25,
1997 and May 26, 1996 are immaterial.
Fair Value of Financial Instruments
A summary table of estimated fair values of financial instruments at
fiscal year end follows:
1997 1996
--------------------- ----------------------
Carrying Estimated Carrying Estimated
(In Millions) Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Long-term investments $ 6.4 $ 6.4 $ 11.7 $ 11.7
Long-term debt (324.3) (331.2) (350.5) (327.1)
Currency forward contracts:
To buy dollars 0.7 - 2.0 1.6
To sell dollars (0.5) - - 0.9
Currency options 0.3 0.2 0.3 0.8
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily investments and trade
receivables. The Company's investment policy requires cash investments
to be placed with high-credit quality counterparties and to limit the
amount of credit from any one financial institution or direct issuer.
The Company sells its products to distributors and original equipment
manufacturers involved in a variety of industries including computers
and peripherals, automotive and telecommunications. National performs
continuing credit evaluations of its customers whenever deemed necessary
and generally does not require collateral. Historically, the Company
has not experienced significant losses related to receivables from
individual customers or groups of customers in any particular industry
or geographic area.
Note 3. Restructuring of Operations
Fairchild Semiconductor
In June 1996, the Company reorganized its operating structure into four
business groups that comprised the Analog Group, the Communications and
Consumer Group, the Personal Systems Group and the Fairchild
Semiconductor ("Fairchild") Group. The purpose of the reorganization
was to enhance the focus and support of the Company's strength in analog
and mixed signal technology. In connection with this reorganization,
Fairchild was formed as a separate organization consisting of the
Company's family logic, memory and discrete product lines, which the
Company announced it intended to divest. As a result, the Company
recorded a $55.3 million special charge that included a restructuring
charge of $49.7 million for the write down of fixed assets to estimated
fair value, as well as costs associated with staffing reductions and
other exit costs necessary to reduce the Company's infrastructure in
both Fairchild and the remaining National core businesses. Of the $49.7
million restructuring charge, $39.7 million represents cash charges and
$10.0 million represents fixed asset write downs and other noncash
items. The remaining components of the $55.3 million special charge are
recorded in cost of sales and consist of $2.0 million to write down
certain Fairchild inventory to net realizable value and $3.6 million for
other cost reduction activities.
As a result of the work force reductions that occurred during the
year, the Company paid $18.3 million of severance to approximately 460
terminated employees. The Company expects to have reduced its work
force by approximately 660 employees in manufacturing support, selling,
general and administrative areas of both the Fairchild and National core
business organizations by the time it completes all activities connected
with the Fairchild divestiture. To date the Company has also paid $1.6
million for other exit costs. Included in accrued liabilities at May
25, 1997 is $19.8 million related to remaining severance and other costs
of restructuring activities from the realignment of the Company's
selling, general and administrative expenses. These costs are expected
to be paid over the next 12 to 18 months. The Company also paid
approximately $5.2 million in retention bonuses to certain Fairchild
employees. These employee bonuses were expensed to operations ratably
over the employees' service period up through the final date of the
Fairchild disposition.
The Company's reorganization included plans to divest the
Fairchild businesses, including related assets, by the end of fiscal
year 1997. The Fairchild fixed assets held for disposition included
land, buildings and building improvements, and equipment associated with
the 4-inch, 5-inch and 6-inch wafer fabrication operations in South
Portland, Maine, the 6-inch wafer fabrication operation in West Jordan,
Utah, and the assembly and test operations in Penang, Malaysia, and
Cebu, Philippines. The carrying value of the Fairchild fixed assets
held for disposition was $318.5 million. The Company originally
recorded a $192.0 million charge, as part of the restructuring charge,
primarily to write down Fairchild assets to estimated fair value. This
charge was fully reversed in the third quarter of fiscal 1997 when the
disposition of the Fairchild businesses and related assets became
imminent and it was apparent that the reserves were no longer required.
In March 1997, the Company completed the disposition of Fairchild under
a recapitalization transaction with Sterling, LLC, a Citicorp Venture
Capital, Ltd. investment portfolio company in related businesses, and
Fairchild's management. The recapitalization was valued at $550
million. In addition to retaining a 15 percent equity interest in
Fairchild for which the Company invested $12.9 million, the Company
received cash of $401 million and a promissory note with a face value of
$77 million, and certain liabilities were assumed by Fairchild. The
Company recorded a gain of $40.6 million from the disposition.
Realignment of Manufacturing Facilities
In May 1997, the Company announced that it planned a comprehensive
realignment of its manufacturing facilities designed to accelerate its
production transition to manufacturing 8-inch wafers with 0.35-micron
circuit geometries, reduce costs and rationalize production flows. In
connection with this plan, the Company recorded a restructuring charge
of $84.5 million that included an impairment loss of $60.1 million
related to the write down of certain assets in its Arlington, Texas,
wafer manufacturing facility. This impairment arose from the Company's
cancellation of further investment in its 6-inch, 0.65- micron wafer
fabrication expansion that began in 1995. The Company's acceleration of
investment in its 8-inch wafer fabrication facility in Maine, which is
expected to result in availability of 0.35-micron capacity sooner than
previously expected, will allow the Company to bypass the 0.65-micron
generation of capacity. The fair value of the assets was determined
based on estimated future cash flows expected to be obtained from those
assets. Since the expected future cash flows were less than the
carrying value of the assets, the Company recorded an impairment loss to
write down the carrying value of the assets to the present value of the
expected future cash flows.
In addition to the impairment loss, the Company also recorded
$11.0 million of exit costs related to the closure of the 5- and 6-inch
wafer fabrication facilities in Santa Clara, California. The closure
process is expected to occur over the next 15 months, during which time
the Company will transfer the production activities to other existing
manufacturing lines. The exit costs primarily relate to severance
costs, the removal of production equipment and the dismantling of the
production facilities. Approximately 500 employees are currently
employed in these two wafer fabrication facilities and the Company does
not expect to place the majority of the affected employees elsewhere in
the organization. The Company also recorded $10.3 million of exit costs
associated with the Company's decision to halt expansion of its 6-inch
wafer fabrication line in Greenock, Scotland. These costs primarily
relate to asset write-off of previously capitalized construction in
progress costs and other exit costs including employee related costs.
The remaining $3.1 million relates to severance and other exit costs at
other manufacturing facilities. Included in accrued liabilities at May
25, 1997 is $20.2 million of the restructuring charge that represents
cash charges. Noncash charges of $64.3 million include the impairment
loss and other fixed asset write downs.
Other Restructuring Actions
During fiscal year 1996, the Company utilized $6.8 million of
restructuring reserves primarily attributable to severance and fixed
asset disposals related to the completion of the consolidation of two
California locations into one location for the Company's wholly owned
subsidiary, Dynacraft, Inc. ("DCI") and the transfer of the remaining
military assembly operations in South Portland, Maine, to Singapore.
Included in fiscal year 1995 results is the release of $10.1
million of restructuring reserves originally provided in 1994, partially
offset by $4.6 million in additional charges for existing programs
identified by the Company. The release of $10.1 million was
attributable to the Company's decision to retain certain facilities and
related support operations connected therewith. The additional
restructuring requirements included charges for the consolidation of the
DCI business and the decision by the Company to transfer the military
assembly operations in South Portland, Maine, to Singapore.
During fiscal year 1995, the Company utilized $14.5 million of
restructuring reserves, primarily attributable to the California
consolidation of the DCI business, closure of a wafer fabrication line
in West Jordan, Utah, and completion of reductions in headcount and
related infrastructure at its Santa Clara, California, plant. Of the
reserves, $9.6 million represented cash charges and the remainder
represented fixed asset write offs and other noncash items.
Note 4. Acquisition
In March 1997, the Company acquired Mediamatics, Inc. ("Mediamatics"), a
Fremont, California, company that is a major provider of MPEG (Motion
Picture Experts Group) audio/video capabilities to the personal computer
market. The Company completed the acquisition by issuing or reserving
for future issuance an aggregate of 3.4 million shares of common stock,
with 1.6 million of these shares reserved for stock options and employee
retention arrangements. The acquisition was accounted for using the
purchase accounting method with a net adjusted purchase price after
acquisition expenses of $74.5 million. In connection with the
acquisition, the Company incurred a special charge to expense of in-
process research and development of approximately $62.0 million. In
addition, the Company recorded $23.5 million of unearned compensation
related to employee retention arrangements which will be charged to
operating expenses, primarily research and development, over the next 30
months.
Pro forma results of operations for the Mediamatics acquisition have not
been presented, because Mediamatics is a development stage company and
results of operations to date have been insignificant.
Note 5. Consolidated Financial Statements Details
(In Millions) 1997 1996
------ ------
RECEIVABLE ALLOWANCES
Doubtful accounts $ 2.5 $ 2.5
Returns and allowances 34.7 32.5
------- -------
Total receivable allowances $ 37.2 $ 35.0
======= =======
INVENTORIES
Raw materials $ 15.4 $ 39.1
Work in process 118.8 208.5
Finished goods 47.2 78.1
------- -------
Total inventories $ 181.4 $ 325.7
======= =======
PROPERTY, PLANT AND EQUIPMENT
Land $ 19.1 $ 19.1
Buildings and improvements 460.7 523.9
Machinery and equipment 1,321.3 1,604.7
Construction in progress 470.8 369.0
------ --------
Total property, plant and equipment 2,271.9 2,516.7
Less accumulated depreciation and amortization 1,008.5 1,208.6
-------- --------
Property, plant and equipment, net $1,263.4 $1,308.1
======== ========
ACCRUED EXPENSES
Payroll and employee related $ 156.8 $ 161.1
Restructuring of Operations 88.2 25.6
Other 48.4 48.4
------- -------
Total accrued expenses $ 293.4 $ 235.1
======= =======
(In Millions) 1997 1996 1995
------ ------ ------
OTHER INCOME
Net intellectual property income $ 3.4 $ 14.0 $ 28.7
Gain on sale of investments, net 0.8 4.3 6.9
Other 5.8 1.5 (5.0)
------- ------- -------
Total other income, net $ 10.0 $ 19.8 $ 30.6
======= ======= =======
INTEREST
Interest income $ 28.9 $ 29.3 $ 21.3
Interest expense (13.8) (16.0) (6.7)
------- ------- -------
Interest, net $ 15.1 $ 13.3 $ 14.6
======= ======= =======
Intellectual property income is net of commissions and is derived from a
number of licensing arrangements with third parties, none of which are
material on an individual basis. In fiscal year 1997, intellectual
property income declined because several license arrangements expired at
the end of fiscal year 1996.
Note 6. Debt
Debt at fiscal year end consists of the following:
(In Millions) 1997 1996
------ ------
Convertible subordinated notes payable at 6.5%,
net of debt issuance costs of $4.4 $ 254.3 $ 253.6
Notes secured by real estate payable
at 12.5% and 12.6% 14.8 16.4
Notes secured by equipment payable at 6.6% 46.0 36.3
Unsecured loan payable at 6.2% 1.9 42.2
Other 19.4 22.7
Obligations under capital leases 0.2 0.8
------ ------
Total debt 336.6 372.0
Less current portion of long-term debt 12.3 21.5
------ ------
Long-term debt $ 324.3 $ 350.5
====== ======
In November 1996, the Company entered into an equipment financing
agreement with a group of banks, which provides the Company borrowings
in stated amounts up to $100 million over a one-year period. Borrowings
are collateralized by the underlying equipment. An initial loan draw of
$50.2 million was also made in November. Under the terms of the
agreement, the amounts financed bear interest at the one-month LIBOR
rate plus 90 basis points (6.59% at May 25, 1997) with principal and
interest due monthly over a five-year period. The agreement contains
certain covenant and default provisions that require the Company to
maintain a certain level of tangible net worth and permit the lenders
cross-acceleration rights against certain other credit facilities.
In September 1995, the Company completed a private placement of
convertible subordinated notes in the total amount of $258.8 million to
certain qualified investors. Interest is payable semi-annually at an
annual rate of 6.5 percent. The notes, which mature in 2002, are not
redeemable by the Company prior to October 3, 1998. Thereafter, the
notes are redeemable at the option of the Company, initially at 103.714
percent of face value and at decreasing prices thereafter to 100 percent
of face value at maturity, plus accrued interest. The notes are
convertible at any time into shares of the Company's common stock at a
conversion price of $42.78 per share and are subordinated to senior
indebtedness of the Company. The notes have not been and will not be
registered under the Securities Act of 1933 and may not be offered or
sold within the United States absent registration or exemption from such
registration requirements.
Notes secured by real estate consist of two notes assumed as part
of the repurchase of the equity interest in the Company's Arlington,
Texas, facility, which was sold and leased back prior to 1990. Interest
on these notes is due semi-annually, principal payments vary and
maturities range from March 1997 to March 2002. The unsecured 6.2
percent note is due in semi-annual installments through May 2007.
For each of the next five years and thereafter, debt and capital
lease obligations are as follows:
Total Debt
(In Millions) (Principal Only)
---------------
1998 $ 12.3
1999 31.8
2000 12.1
2001 14.4
2002 10.8
Thereafter 255.2
--------
Total $ 336.6
========
The Company's multicurrency and revolving financing agreements provide
for multicurrency loans, letters of credit and standby letters of
credit. The multicurrency loan agreement ($30 million) expires in
December 1997. The revolving credit agreement ($200 million), which
includes standby letters of credit, also expires in December 1997. The
Company anticipates both credit agreements will be renewed or replaced
on, or prior to, termination. At May 25, 1997, $38.1 million of the
combined total commitments was utilized. These agreements contain
restrictive covenants, conditions and default provisions which, among
other terms, restrict payment of dividends and require the maintenance
of financial ratios and certain levels of tangible net worth. At May
25, 1997, under the most restrictive covenant of the loan agreements, no
more than $190.2 million was available for payment of dividends on the
Company's common stock.
Note 7. Income Taxes
Worldwide pretax earnings from operations and income taxes consisted of
the following:
(In Millions) 1997 1996 1995
------ ------ ------
Income before income taxes:
U.S. $(23.5) $170.2 $233.5
Non-U.S 80.8 77. 95.7
------ ------ ------
$ 57.3 $247.2 $329.2
====== ====== ======
Income taxes:
Current:
U.S. federal $ 89.0 $ 16.2 $ 90.7
U.S. state and local - 1.0 5.0
Non-U.S 15.6 25.3 12.7
------ ------ ------
104.6 42.5 108.4
Deferred:
U.S. federal and state (89.6) 11.4 (96.8)
Non-U.S (3.3) (8.0) 1.5
Charge in lieu of taxes attributable
to employee stock plans 18.1 15.9 51.9
------ ------ ------
$ 29.8 $ 61.8 $ 65.0
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May
25, 1997 and May 26, 1996 are presented below:
(In Millions) 1997 1996
------ ------
DEFERRED TAX ASSETS
Reserves and accruals $ 131.8 $ 56.6
Loss carryovers and other allowances - foreign 55.8 56.9
Federal and state credit carryovers 47.7 38.9
Capitalized assets and other assets 26.4 31.0
Inventory capitalization and reserves 40.2 13.7
Foreign tax and AMT credit carryovers 9.0 9.0
Capitalized R&D - state 2.4 3.7
Other 6.5 2.5
------- -------
Total gross deferred assets 319.8 212.3
Valuation allowance (119.0) (107.3)
------- -------
Net deferred assets 200.8 105.0
------- -------
DEFERRED TAX LIABILITIES
Capital allowance - foreign (8.9) (12.1)
Other liabilities (23.0) (16.9)
------- -------
Total gross deferred liabilities (31.9) (29.0)
------- -------
Net deferred tax assets $ 168.9 $ 76.0
======= =======
Deferred tax assets and liabilities are classified in the consolidated
balance sheet based on the classification of the related asset or
liability. Included in other assets on the consolidated balance sheets
are $9.3 million and $17.0 million of deferred tax assets at May 25,
1997 and May 26, 1996, respectively.
The Company has recorded a valuation allowance to reflect the
estimated amount of deferred tax assets which may not be realized due to
the expiration of net operating losses and tax credit carryovers. The
increase in the valuation allowance primarily relates to state credits
and foreign net operating loss carryovers which may not be realized,
offset by utilization of federal research and development credits not
previously benefited.
The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers
projected future taxable income and tax planning strategies in making
this assessment. Based on the historical taxable income and projections
for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not
that the Company will realize the benefits of these deductible
differences, net of valuation allowances as of May 25, 1997.
The reconciliation between the income tax rate computed by
applying the U.S. federal statutory rate and the reported worldwide tax
rate follows:
1997 1996 1995
------ ------ ------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
Non-U.S. losses and tax differential
related to non-U.S. income (9.1) (3.8) (5.9)
U.S. state and local taxes net of
federal benefits 0.1 0.2 1.5
Research and development credits (17.3) (9.7) (2.8)
Change in beginning of year
valuation allowance - (1.1) (8.2)
Write off of in-process R&D 40.1 - -
Other 3.2 4.4 0.1
------ ------ ------
Effective rate 52.0% 25.0% 19.7%
====== ====== ======
U.S. income taxes were provided for deferred taxes on undistributed
earnings of non-U.S. subsidiaries to the extent that dividend payments
from such companies are expected to result in additional liability.
There has been no provision of U.S. income taxes for the remaining
undistributed earnings of approximately $292.8 million at May 25, 1997,
because the Company intends to reinvest these earnings indefinitely in
operations outside the United States. If such earnings were
distributed, additional U.S. taxes of approximately $88.8 million would
accrue after utilization of U.S. tax credits.
At May 25, 1997, National had U.S. credit carryovers of
approximately $37.7 million for tax return purposes, which expire from
1999 through 2011. In addition, National had state credit carryovers of
approximately $19.0 million, which primarily expire from 2004 through
2005. National also had operating loss carryovers of $196.8 million
from certain non-U.S. jurisdictions.
The U.S. Internal Revenue Service ("IRS") examinations of
National's U.S. federal income tax returns for fiscal years 1976 through
1982 and subsequent litigation related thereto resulted in a final
decision being entered by the U.S. Tax Court in June 1995. The period
for appealing the decision expired in September 1995. After giving
effect to loss and credit carryovers, the final tax deficiency was $4.1
million. The associated interest has not been finally determined, but
preliminary IRS calculations estimate it to be approximately $44.9
million. The Company has made advance payments to the IRS on the tax
and interest deficiency, but disagrees with the IRS' interest
calculation and has filed a claim for refund on the disputed difference
with the IRS.
In April 1995, the IRS issued a deficiency notice for fiscal years
1986 through 1989 seeking additional taxes of approximately $11.0
million (exclusive of interest). The issues raised by the deficiency
notice relate primarily to the Company's former Israeli operation and
the allocation of the purchase price paid for Fairchild Semiconductor
Corporation. The Company has filed a protest of the deficiency notice.
The IRS is examining the Company's tax returns for fiscal years 1990
through 1993. The Company expects the IRS to soon begin examination of
its tax returns for fiscal years 1994 through 1996.
In July 1996, the Company received invoices of assessment from the
Malaysian Inland Revenue Department relating to the Company's Malaysian
manufacturing operations and totaling approximately $59.2 million. The
issues giving rise to the assessments relate to intercompany transfer
pricing, primarily for fiscal year 1993. The Company believes the
assessments are without merit and has been contesting them
administratively. The Company believes that adequate tax payments have
been made and accruals recorded for all tax matters for the years in
question.
Note 8. Shareholders' Equity
Each outstanding share of the Company's common stock carries a stock
purchase right ("Right") issued pursuant to a dividend distribution
declared on August 5, 1988. When exercisable, each Right entitles the
registered holder to purchase one one-thousandth of a share of the
Company's Series A Junior Participating Preferred Stock at a price of
$60.00 per one-thousandth share, subject to adjustment. The Rights are
attached to all outstanding shares of common stock and no separate
Rights certificates have been distributed.
The Rights will become exercisable and will detach from the common
stock in the event any individual or group acquires 20 percent or more
of the Company's common stock, or announces a tender or exchange offer
which, if consummated, would result in that person or group owning at
least 20 percent of the Company's common stock. If such person or group
actually acquires 20 percent or more of the Company's common stock
(except pursuant to certain cash tender offers for all of the Company's
common stock), each Right will entitle the holder to purchase, at the
Right's then current exercise prices, the Company's common stock in an
amount having a market value equal to twice the exercise price.
Similarly, if after the Rights become exercisable, the Company merges or
consolidates with or sells 50 percent or more of its assets or earning
power to another person, each Right will then entitle the holder to
purchase, at the Right's then current exercise price, the stock of the
acquiring company in an amount having a market value equal to twice the
exercise price.
The Company may redeem the Rights at $0.01 per Right at any time
prior to acquisition by a person or group of 20 percent or more of the
Company's outstanding common stock. The Rights will expire August 8,
2006, unless earlier redeemed.
In November 1995, National called for redemption in December 1995
of all of the shares of the $32.50 Convertible Preferred Shares, $0.50
par value (the "Convertible Preferred Shares"). All of the Convertible
Preferred Shares were redeemed for the number of shares of common stock
that were issuable at a conversion rate of 35.273 shares of common stock
for each Convertible Preferred Share, resulting in a total of 12,169,185
additional shares of common stock being issued.
In connection with the private placement of convertible
subordinated notes completed in September 1995 (see Note 6), the Company
has reserved for issuance a total of 6,048,387 shares of common stock
issuable upon conversion of the outstanding 6.5 percent convertible
subordinated notes due 2002.
The Company was authorized by the Board of Directors to repurchase
up to 3.5 million shares of the Company's common stock at current market
prices prior to the end of calendar 1994. In April 1995, the Board of
Directors authorized repurchase of up to an additional 3.5 million
shares at current market prices prior to the end of calendar 1995.
During fiscal years 1996 and 1995, National purchased 2,450,000 shares
on the open market at a cost of $63.0 million and 3,115,600 shares on
the open market at a cost of $54.4 million, respectively. Of these
repurchased shares the Company used 160,427 shares and 211,565 shares
for issuance of stock under its various benefit plans in fiscal years
1996 and 1995, respectively. All of the remaining repurchased shares
were retired at the end of fiscal year 1996. No shares have been
repurchased since calendar year 1995.
National has paid no cash dividends on its common stock and
intends to continue its practice of reinvesting all earnings.
Note 9. Stock-Based Compensation Plans
Stock Option and Purchase Plans
National has a stock option plan under which officers and key employees
may be granted nonqualified or incentive stock options to purchase up to
39,354,929 shares of the Company's common stock. Generally, the terms of
this plan provide that options are granted at the market price on the
date of grant and expire up to a maximum of ten years and one day after
grant or three months after termination of employment (up to five years
after termination due to death, disability or retirement), whichever
occurs first. Options can vest after a six-month period, but most vest
ratably over a four-year period. Vesting of options can be accelerated
in certain circumstances. Vesting on options that had been held for a
minimum of six-months by employees transferring to the Fairchild
operation was accelerated in connection with the Fairchild disposition.
National also has a stock option plan (the "employees stock option
plan") under which employees who are not executive officers of the
Company (as defined in the plan) may be granted nonqualified stock
options to purchase up to 10,000,000 shares of the Company's common
stock. Like the stock option plan for officers and key employees, the
terms of this plan provide that options are granted at the market price
on the date of grant and expire up to a maximum of ten years and one day
after grant or three months after termination of employment (up to five
years after termination due to death, disability or retirement),
whichever occurs first. Options can vest after a six-month period, but
it is intended that most options granted under this plan will vest
ratably over a four-year period. The employees stock option plan was
adopted in April 1997 and as of May 25, 1997, no options have been
granted under it.
In connection with National's acquisition of Mediamatics in March
1997, National assumed the outstanding obligations of Mediamatics under
the Mediamatics stock option plans and related stock option agreements
for the Mediamatics employees. In connection therewith, Mediamatics
optionees received an option for 0.175702 shares of the Company's common
stock per share of Mediamatics common stock underlying the Mediamatics
options. A total of 759,907 shares of the Company's common stock can be
issued to the Mediamatics optionees. Vesting under the Mediamatics
stock option plans can begin as early as the grant date, although most
options granted under the plans vest beginning after one year and in
quarterly increments thereafter. The options granted under the original
option grant prices were set by the Mediamatics plans' administrator.
At the time of the Mediamatics acquisition, the option price was
adjusted by the exchange rate. The Mediamatics options expire up to
maximum of ten years after grant, subject to earlier expiration upon
termination of employment. No more options will be granted under the
Mediamatics stock option plans. The Mediamatics transaction resulted in
a new measurement date for these options and the Company recorded
unearned compensation in the amount of $9.2 million, which represents
the difference between the fair market value at the new measurement date
and the exercise price of the options. Unearned compensation which is
included as a separate component of shareholders' equity is amortized to
operations over the vesting period of the respective options. Related
compensation expense for fiscal year 1997 was $2.9 million. At May 25,
1997, options to purchase 696,073 shares were outstanding under the
Mediamatics plans with a weighted-average exercise price of $2.29 and
weighted-average remaining contractual life of 9.2 years.
On May 18, 1995, the Company granted to its former chairman, in
connection with his retirement, an option to purchase 300,000 shares of
the Company's common stock. The option was granted outside the
Company's stock option plans at the market price on the date of grant,
expires ten years and one day after grant and becomes exercisable
ratably over a four-year period.
National has an employee stock purchase plan which authorizes the
issuance of up to 19,950,000 shares of common stock in quarterly
offerings to eligible employees at a price which is equal to 85 percent
of the lower of the common stock's fair market value at the beginning
and end of a quarterly period. Prior to January 1995, the employee
stock purchase plan granted options which became exercisable after 13
months and expired after 27 months. The option price was determined by
the Stock Option and Compensation Committee of the Board of Directors
but could not be less than 100 percent of the market value on the date
of grant or 85 percent of the market value on the date of exercise,
whichever was lower. The last options granted under the prior terms of
the plan expired in March 1996.
National also has an employee stock purchase plan available to
employees at international locations which was approved in September
1994 and first made available to employees in January 1995. The global
plan authorizes the issuance of up to 5.0 million shares of common stock
in quarterly offerings to eligible employees in amounts related to their
basic annual compensation at a price equal to 85 percent of the lower of
its fair market value at the beginning and end of a quarterly period.
Unlike stock purchased under the U.S. stock purchase plan, the stock
purchased under the global stock purchase plan for the account of an
employee can be held by a fiduciary in an offshore trust, which allows
employees located in countries that do not permit direct stock ownership
to participate in a Company stock plan. In addition, the participant's
employing company is responsible for paying the difference between the
purchase price set by the terms of the plan and the fair market value
at the time of the purchase.
Changes in options outstanding under options granted by the
Company during fiscal years 1997, 1996 and 1995, whether under the
option or purchase plan or otherwise (but excluding the Mediamatics
options), were as follows:
Number of Shares Weighted Average
(In Millions) Exercise Price
---------------- ----------------
Outstanding May 29, 1994 13.2 $9.37
Granted 2.7 $ 17.40
Exercised (3.1) $8.05
Cancelled (0.5) $13.62
Outstanding May 28, 1995 12.3 $ 11.05
Granted 3.9 $25.79
Exercised (2.7) $6.84
Cancelled (0.9) $19.77
-------
Outstanding at May 26, 1996 12.6 $ 15.83
Granted 7.4 $ 16.46
Exercised (3.4) $29.71
Cancelled (2.0) $19.85
-------
Outstanding at May 25, 1997 14.6 $ 16.79
=======
Options exercisable at:
May 28, 1995 6.9 $ 6.86
May 26, 1996 6.0 $ 8.82
May 25, 1997 6.4 $13.94
Expiration dates of options outstanding at May 25, 1997 range from July
17, 1997 to May 14, 2007.
The following tables summarize information about options outstanding
under these plans (excluding the Mediamatics options) at May 25, 1997:
Outstanding Options
-----------------------------------------
Weighted
Average Weighted
Number Remaining Average
of Shares Contractual Life Exercise
Range of Exercise Prices (In Millions) (In Years) Price
- ------------------------ ----------- ---------------- --------
$3.75 - $9.13 2.2 3.6 $ 4.74
$10.88 - $19.75 8.3 8.5 $ 15.51
$20.00 - $32.50 4.1 7.9 $ 25.90
-----
Total 14.6 7.6 $ 16.79
=====
Options Exercisable
-----------------------
Weighted
Number Average
of Shares Exercise
Range of Exercise Prices (In Millions) Price
- ------------------------ ----------- ---------
$3.75 - $9.13 2.2 $ 4.74
$10.88 - $19.75 2.6 $ 15.21
$20.00 - $32.50 1.6 $ 24.66
-----
Total 6.4 $ 13.94
=====
Shares issued under the new terms of the stock purchase plan and the
global stock purchase plan from January 1, 1995 through the end of
fiscal year 1997 were as follows:
Number of Shares Price
(In Millions) per Share
---------------- ---------
Issued:
1995 0.3 $14.34
1996 1.3 $11.79 to $23.91
1997 1.4 $11.90 to $20.93
Under the stock option and purchase plans, 4.8 million shares of common
stock were issued during fiscal year 1997. As of May 25, 1997, 39.2
million shares were reserved for issuance under all stock purchase and
option plans and other options granted by the Company, including shares
available for future option grants.
Other Stock Plans
National has a director stock plan which authorizes the issuance of up
to 200,000 shares of the Company's common stock to eligible nonemployee
directors of the Company. The common stock was issued automatically to
eligible directors upon approval of the director stock plan by the
shareholders and is issued automatically thereafter to eligible new
directors upon their appointment to the Board and to all eligible
directors on their subsequent election to the Board by shareholders. As
of May 25, 1997, 37,000 shares had been issued under the director stock
plan and 163,000 shares were reserved for future issuances.
National has a performance award plan which authorizes the
issuance of up to 1.0 million shares of the Company's common stock as
full or partial payment of awards to plan participants based on
performance units and the achievement of certain specific performance
goals during a performance plan cycle. Performance plan cycles are
three to five years depending on specific performance measurements, and
the earliest a payout can occur is the third year of a performance plan
cycle. Plan participants currently consist of a limited group of senior
executives. In fiscal year 1997, the Company issued 81,666 shares in
the second payout under the plan and the Company issued 111,990 shares
in fiscal year 1996 in the first payout under the plan. No shares were
issued under the performance award plan during fiscal year 1995. As of
May 25, 1997, 806,344 shares were reserved for future issuances.
Expense recorded in fiscal years 1997, 1996 and 1995 under the plan was
not material.
The Company adopted a restricted stock plan in fiscal year 1996,
which authorizes the issuance of up to 2.0 million shares of the
Company's common stock to nonofficer employees of the Company. The plan
has been made available to a limited group of employees with technical
expertise considered important to the Company. During fiscal year 1997,
602,500 shares were issued under the restricted stock plan, with
restrictions expiring for 50 percent of the shares issued to each
participant three years after issuance and restrictions expiring for the
remainder of the shares six years after issuance. Based upon the market
value on the dates of issuance, the Company recorded $10.9 million of
unearned compensation included as a separate component of shareholders'
equity to be amortized to operations ratably over the respective
restriction periods. No shares were issued under the restricted stock
plan in fiscal year 1996. As of May 25, 1997, 1,397,500 shares were
reserved for future issuances.
In May 1996, the Company issued 200,000 shares of restricted stock
to Brian L. Halla, the Company's newly hired President and Chief
Executive Officer. These shares were not issued under the restricted
stock plan and have restrictions which expire annually over a four-year
period. The shares were recorded at the market value on the date of
issuance as unearned compensation included as a separate component of
shareholders' equity to be amortized to operations over the respective
vesting period. Compensation expense for fiscal year 1997 related to
all shares of restricted stock was $2.0 million. Compensation expense
was immaterial for fiscal year 1996. At May 25, 1997, the weighted
average grant date fair value and weighted average contractual life for
outstanding shares of restricted stock was $17.69 and 9.2 years,
respectively.
As permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has elected to follow APB No. 25, "Accounting
for Stock Issued to Employees" and related Interpretations, in
accounting for stock-based awards to employees. Under APB 25, the
Company generally recognizes no compensation expense with respect to
such awards.
Pro forma information regarding net income and earnings per share
is required by SFAS No. 123. This information is required to be
determined as if the Company had accounted for its stock-based awards to
employees under the fair value method contained in SFAS No. 123. The
fair value of the Company's stock-based awards to employees was
estimated using a Black-Scholes option pricing model. The fair value of
the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions for
fiscal years 1997 and 1996: expected lives of 4.4 years (Stock Option
Plans) and 0.3-1.1 years (Stock Purchase Plans); expected volatility of
48 percent (Stock Option Plans) and 53 percent (Stock Purchase Plans);
and risk free interest rates of 6.2 percent (Stock Options Plans) and
5.6 percent (Stock Purchase Plans).
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting
period (for options) and the three-month purchase period (for stock
purchases) under the stock purchase plans. The Company's pro forma
information follows:
(In Millions, Except Per Share Amounts) 1997 1996
------ ------
Net income - as reported $ 27.5 $185.4
Net income - pro forma $ 4.2 $175.5
Primary earnings per share - as reported $ 0.19 $1.36
Primary earnings per share - pro forma $ 0.03 $1.31
Fully diluted earnings per share - as reported $ 0.19 $1.34
Fully diluted earnings per share - pro forma $ 0.03 $1.30
The effects on pro forma disclosures of applying SFAS No. 123 are not
likely to be representative of the effects on pro forma disclosures of
future years. Because SFAS No. 123 is applicable only to options
granted subsequent to May 28, 1995, the pro forma effects will not be
fully reflected until approximately fiscal year 2000.
Note 10. Retirement and Pension Plans
National's Retirement and Savings Program for U.S. employees consists of
two plans as follows:
The Profit Sharing Plan requires Company contributions of the
greater of 5 percent of consolidated net earnings before income taxes or
1 percent of payroll (as defined by the plan). Contributions are made
25 percent in National's common stock and 75 percent in cash. Total
shares contributed under the Profit Sharing Plan during fiscal year 1997
were 200,208. As of May 25, 1997, 1.5 million shares of common stock
were reserved for future Company contributions.
The salary deferral "401(k)" plan allows employees to defer up to
15 percent of their salaries, subject to certain limitations, with
partially matching Company contributions. Contributions are invested in
one or more of nine investment funds at the discretion of the employee.
One of the investment funds is a Company stock fund in which
contributions are invested in Company common stock. Although 5.0
million shares of common stock are reserved for issuance to the stock
fund, shares purchased to date with contributions have been purchased on
the open market and the Company has not issued any stock directly to the
stock fund.
The Benefit Restoration Plan allows certain highly compensated
employees to receive a higher profit sharing plan allocation than would
otherwise be permitted under IRS regulations and defer greater
percentages of compensation than would otherwise be permitted under the
salary deferral "401(k)" plan and IRS regulations. The Benefit
Restoration Plan is a nonqualified and unfunded plan of deferred
compensation and the Company credits accounts maintained under it with
interest earnings each quarter.
Certain non-U.S. subsidiaries have varying types of defined
benefit pension and retirement plans that are consistent with local
statutes and practices. The annual expense for all plans was as
follows:
(In Millions) 1997 1996 1995
------ ------ ------
Profit sharing plan $ 9.9 $13.0 $17.3
Salary deferral "401(k)" plan $10.0 $10.8 $ 9.8
Non-U.S. pension and retirement plans$ $ 7.6 $ 7.0 $ 6.3
Note 11. Commitments and Contingencies
Commitments
The Company leases certain facilities and equipment under operating
lease arrangements which expire at various times through the year 2025.
Rental expenses under operating leases were $43.8 million, $40.1 million
and $37.4 million in fiscal years 1997, 1996 and 1995, respectively.
Future minimum commitments under noncancelable operating leases are as
follows:
(In Millions)
-------------
1998 $ 31.5
1999 24.7
2000 20.8
2001 16.0
2002 12.8
Thereafter 45.0
-------
Total $ 150.8
=======
During 1995, the Company purchased the equity interest in two of its
facilities, which previously had been subject to sale and leaseback
transactions. This significantly reduced the operating lease
commitments. The Company has commitments to purchase fabricated wafers
from a joint venture in which it is a minority interest holder. As of
May 25, 1997, these commitments total $21.8 million for fiscal year
1998, based on prices and minimum contractual volumes negotiated in
March 1996.
.....In connection with the Fairchild transaction, Fairchild and the
Company have entered into a manufacturing agreement whereby the Company
has committed to purchase a minimum of $330.0 million in goods and
services during the first 39 months after the transaction based on
specified wafer prices, which the Company believes approximate market
prices. Annual minimum purchases are $100.0 million, $90.0 million and
$80.0 million for fiscal years 1998, 1999, and 2000, respectively. The
remaining $60.0 million in purchases may be made at any time over the
39-month period as agreed upon by the parties. The Company also has
certain continuing obligations arising from the Fairchild transaction
that include providing certain transition services to Fairchild and
indemnification for certain environmental and legal matters. The
Company believes it has adequately provided for these obligations and it
currently believes that the ultimate impact of these obligations will
not have a material adverse impact on the Company's consolidated
financial position or consolidated results of operations.
Contingencies -- Legal Proceedings
In April 1988, the Company received a notice from the District Director
of U.S. Customs in San Francisco alleging underpayment of duties of
approximately $19.5 million for the period June 1, 1979 to March 1, 1985
on merchandise imported from the Company's non-U.S. subsidiaries. The
Company filed an administrative appeal in September 1988. On May 23,
1991, the District Director revised the Customs action and issued a
Notice of Penalty Claim and Demand for Restoration of Duties, alleging
underpayment of duties of approximately $6.9 million for the same period
and the alleged underpayment was reduced in a similar action in April
1994 to approximately $3.6 million. The revised alleged underpayment
could be subject to penalties that may be computed as a multiple of such
underpayment. The Company filed an administrative petition for relief
in October 1991 and a supplemental petition for relief in October 1994
and the Company is continuing to contest the Penalty Notice in
administrative proceedings. In July 1988, the Customs Service
liquidated various duty drawback claims previously filed by the Company
and demanded repayment of accelerated drawback previously paid to the
Company plus accrued interest. In March 1996, the Customs Service
approved in part and denied in part administrative protests filed by the
Company contesting the denied drawback claims. The Company has paid the
denied drawback and associated interest totaling $5.2 million and has
filed summonses in the Court of International Trade seeking a refund.
.....The Company has been named to the National Priorities List
("Superfund") for its Santa Clara, California, site and has completed a
Remedial Investigation/Feasibility Study with the Regional Water Quality
Control Board ("RWQCB"), acting as an agent for the Federal
Environmental Protection Agency. The Company has agreed in principle
with the RWQCB to a site remediation plan.
.....In connection with the Company's disposition in fiscal year 1996
of the DCI assets and business, the Company retained responsibility for
environmental claims connected with DCI's Santa Clara, California,
operations and for environmental claims arising from National's conduct
of the DCI business prior to the disposition. With respect to
environmental matters involved in the Fairchild disposition, the Company
agreed to retain liability for current remediation projects and
environmental matters arising from National's prior operation of
Fairchild's plants in South Portland, Maine; West Jordan, Utah; Cebu,
Philippines; and Penang, Malaysia; and Fairchild agreed to arrange for
and perform the remediation and cleanup. The Company prepaid to
Fairchild the estimated costs of the remediation and cleanup and remains
responsible for costs and expenses incurred by Fairchild in excess of
the prepaid amounts.
.....In addition to the Santa Clara site, the Company has been
designated as a potentially responsible party ("PRP") by federal and
state agencies with respect to certain waste sites with which the
Company may have had direct or indirect involvement. Such designations
are made regardless of the extent of the Company's involvement. The
Company has also been cited for alleged failure to comply with federal
categorical pretreatment standards. 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 the PRP claims, have been
asserted against a number of other entities for the same cost recovery
or other relief as was asserted against the Company. The Company
accrues costs associated with environmental matters when they become
probable and reasonably estimable. The amount of all environmental
charges to earnings, including charges relating to the Santa Clara site
remediation, which did not include potential reimbursements from
insurance coverage, were not material during fiscal years 1997, 1996 and
1995.
.....The Company is engaged in administrative tax appeals with the IRS
and the Company's tax returns for certain years are under examination in
the U.S. and Malaysia (see Note 7). In addition to the foregoing,
National is a party to other suits and claims which arise in the normal
course of business.
.....With respect to the proceedings noted above, based on current
expectations, the Company does not believe that there is a reasonable
possibility that losses associated with the proceedings exceeding
amounts already recognized will be incurred in an amount that would be
material to the Company's consolidated financial position or
consolidated results of operations.
Note 12. Industry and Geographic Segment Information
The Company operates in one industry segment and is engaged in the
design, development, manufacture and marketing of a wide variety of
semiconductor products, including analog integrated circuits, digital
integrated circuits, mixed analog and digital circuits,
microcontrollers, hybrid circuits, subsystems, electronic packaging and
miscellaneous services and supplies for the semiconductor industry and
original equipment manufacturers. National operates in three main
geographic areas. In the information that follows, sales include local
sales and exports made by operations within each area. Total sales by
geographic area include sales to unaffiliated customers and
intergeographic transfers, which are based on standard cost. To control
costs, a substantial portion of National's products are transported
between the Americas, Asia and Europe in the process of being
manufactured and sold. Sales to unaffiliated customers have little
correlation with the location of manufacture. It is, therefore, not
meaningful to present operating profit by geographic area.
.....National conducts a substantial portion of its operations outside
of the U.S. and is subject to risks associated with non-U.S. operations,
such as political risks, currency controls and fluctuations, tariffs,
import controls and air transportation.
Elim & Consoli-
(In Millions) Americas Europe Asia Corporate dated
-------- ------- -------- --------- --------
1997
Sales to
unaffiliated
customers $1,072.9 $ 586.8 $ 847.6 $ - $2,507.3
Transfers between
geographic areas 459.6 98.0 797.2 (1,354.8) -
-------- ------- -------- --------- --------
Total sales $1,532.5 $ 684.8 $1,644.8 $(1,354.8) $2,507.3
======== ======= ======== ========= ========
Total assets $1,377.9 $ 233.5 $ 579.7 $ 723.0 $2,914.1
======== ======= ======== ========= ========
1996
Sales to
unaffiliated
customers $1,098.6 $ 641.3 $ 883.2 $ - $2,623.1
Transfers between
geographic areas 522.2 119.6 755.2 (1,397.0) -
-------- ------- -------- --------- --------
Total sales $1,620.8 $ 760.9 $1,638.4 $(1,397.0) $2,623.1
======== ======= ======== ========= ========
Total assets $1,277.3 $ 248.3 $ 701.9 $ 430.5 $2,658.0
======== ======= ======== ========= ========
1995
Sales to
unaffiliated
customers $1,015.9 $ 562.7 $ 800.8 $ - $2,379.4
Transfers between
geographic areas 459.7 114.3 680.3 (1,254.3) -
-------- ------- -------- --------- --------
Total sales $1,475.6 $ 677.0 $1,481.1 $(1,254.3) $2,379.4
======== ======= ======== ========= ========
Total assets $1,016.7 $ 252.8 $ 623.2 $ 343.0 $2,235.7
======== ======= ======== ========= ========
Note 13. Supplemental Disclosure of Cash Flow Information and Noncash
Investing and Financing Activities
(In Millions 1997 1996 1995
------ ------ ------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for:
Interest expense $27.7 $19.2 $ 6.4
Interest payment on tax settlements $ - $18.3 $ 30.2
Income taxes $10.5 $20.3 $ 43.2
(In Millions) 1997 1996 1995
------ ------ ------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of stock for employee
benefit plans $ 3.2 $ 4.3 $ 4.0
Tax benefit for employee stock
option plans $18.1 $ 15.9 $ 51.9
Retirement of treasury stock $ - $118.6 $ -
Unrealized gain (loss) on
available-for-sale securities $(3.9) $ (8.9) $ 17.1
Unearned compensation charge
relating to restricted stock
issuance $10.9 $ 3.3 $ -
Issuance of common stock
in connection with
Mediamatics acquisition $97.5 $ - $ -
Unearned compensation charge
relating to Mediamatics
acquisition $32.7 $ - $ -
Amortization of unearned compensation $ 4.9 $ - $ -
Promissory note from Fairchild
in connection with the disposition
of the Fairchild businesses $65.0 $ - $ -
Note 14. Financial Information by Quarter (Unaudited)
The following table presents the quarterly information for fiscal years
1997 and 1996:
First Second Third Fourth
(In Millions, Except Quarter Quarter Quarter Quarter
Per Share Amounts ------- ------- ------- -------
1997
Net sales $ 566.1 $ 661.5 $ 680.5 $ 599.2
Gross margin $ 172.2 $ 248.1 $ 282.4 $ 263.5
Net income $(207.6) $ 42.5 $ 207.1 $ (14.5)
========================================================================
Primary earnings
per common share $ (1.51) $ 0.30 $ 1.44 $ (0.10)
========================================================================
Weighted average common and common
equivalent shares outstanding 137.7 141.6 143.8 143.4
========================================================================
Fully diluted earnings per
common share $ (1.51) $ 0.30 $ 1.39 $(0.10)
========================================================================
Weighted average fully
diluted shares 137.7 142.6 150.0 143.4
========================================================================
Common stock price - high $16.75 $23.88 $27.75 $32.25
Common stock price - low $13.00 $15.25 $22.75 $21.63
========================================================================
1996
Net sales $698.8 $711.6 $600.3 $612.4
Gross margin $301.1 $313.0 $231.6 $216.5
Net income $ 73.5 $ 79.8 $ 23.0 $ 9.1
========================================================================
Primary earnings per common share $ 0.56 $ 0.61 $0.17 $0.07
========================================================================
Weighted average common and common
equivalent shares outstanding 127.4 126.9 137.8 137.8
========================================================================
Fully diluted earnings
per common share $0.53 $0.57 $0.17 $0.07
========================================================================
Weighted average fully
diluted shares 139.6 143.1 137.8 137.8
========================================================================
Common stock price - high $31.25 $33.63 $24.00 $17.25
Common stock price - low $23.88 $20.63 $14.88 $13.50
========================================================================
Preferred dividends are reflected as adjustments to reported earnings in
the calculation of primary earnings per share.
The Company's common stock is traded on the New York Stock
Exchange and the Pacific Exchange. The quoted market prices are as
reported on the New York Stock Exchange Composite Tape. At May 25,
1997, there were approximately 11,523 holders of the Company's common
stock.
Note 15. Subsequent Event
On July 28, 1997, the Company announced that it had entered into a definitive
merger agreement with Cyrix Corporation ("Cyrix"). Cyrix designs,
manufactures and markets innovative microprocessors and is a supplier of
high-performance microprocessors to the personal computer industry.
Under the terms of the agreement, each share of Cyrix common stock will be
exchanged for 0.825 of a share of National common stock. According to Cyrix,
as of June 29, 1997, Cyrix had approximately 19.7 million shares of common
stock outstanding, exclusive of approximately 0.5 million treasury shares.
Accordingly, it is expected that approximately 16.2 million shares of
National common stock will be issued in the merger.
The merger requires the approval of Cyrix's stockholders and is subject to
regulatory approvals and other customary conditions. It is expected that the
transaction will be completed in November 1997. The Company expects to
recognize a special charge related to certain acquisition and related
expenses in its November quarter, when the transaction is expected to close.
The transaction is intended to be accounted for as a pooling of interests
and to qualify as a tax-free reorganization.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
National Semiconductor Corporation:
We have audited the accompanying consolidated balance sheets of
National Semiconductor Corporation and subsidiaries as of May 25, 1997
and May 26, 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-
year period ended May 25, 1997. In connection with our audits of the
consolidated financial statements, we also have audited the related
financial statement Schedule II, "Valuation and Qualifying Accounts."
These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of National Semiconductor Corporation and subsidiaries as of May 25,
1997 and May 26, 1996, and the results of their operations and their
cash flows for each of the years in the three-year period ended May 25,
1997 in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements,
in fiscal 1996, the Company changed its method of accounting for
depreciation.
KPMG PEAT MARWICK LLP
San Jose, California
June 4, 1997, except as to Note 15,
which is as of July 28, 1997
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors, appearing under the caption
"Election of Directors" including subcaptions thereof, and "Section
16(a) Beneficial Ownership Reporting Compliance" in the registrant's
Proxy Statement for the 1997 annual meeting of shareholders to be held
on or about September 26, 1997 and which will be filed in definitive
form pursuant to Regulation 14a on or about August 20, 1997 (hereinafter
"1997 Proxy Statement"), is incorporated herein by reference.
Information concerning executive officers is set forth in Part I hereof
under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the captions "Director Compensation",
"Compensation Committee Interlocks and Insider Participation", and
"Executive Compensation" (including all related sub captions thereof) in
the 1997 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information concerning the only known ownership of more than 5
percent of the Company's outstanding Common Stock "Outstanding Capital
Stock, Quorum and Voting" in the 1997 Proxy Statement, is incorporated
herein by reference. The information concerning the ownership of the
Company's equity securities by directors, certain executive officers and
directors and officers as a group, appearing under the caption "Security
Ownership of Management" in the 1997 Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions and
Relations" in the 1997 Proxy Statement is incorporated herein by
reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Pages in
(a)1. Financial Statement Schedule this document
- ----------------------------------- -------------
For the three years ended May 25, 1997:
Independent Auditors' Report 53
Schedule II -- Valuation and Qualifying Accounts 57
All other schedules are omitted since the required information is
inapplicable or the information is presented in the consolidated
financial statements or notes thereto.
Separate financial statements of the registrant are omitted
because the registrant is primarily an operating company and all
subsidiaries included in the consolidated financial statements being
filed, in the aggregate, do not have minority equity interest or
indebtedness to any person other than the registrant in an amount which
exceeds five percent of the total assets as shown by the most recent
year end consolidated balance sheet filed herein.
(a)2. Exhibits
- ---------------
The exhibits listed in the accompanying Index to Exhibits on pages 60 to
62 of this report are filed or incorporated by reference as part of this
report.
(b) Reports on Form 8-K
- ------------------------
The following reports on Form 8-K were filed during the fourth quarter
of fiscal year 1997:
1. A Form 8-K was filed March 26, 1997 reporting the Company's
disposition of the logic, memory and discrete business units
(collectively, "Fairchild Semiconductor"). The date of the report
was March 11, 1997. The following pro forma financial statements
were included in the report:
a) Pro Forma Condensed Consolidated Balance Sheets as of
11/24/96
b) Pro Forma Condensed consolidated Statements of Operations as
of 11/24/96
2. A Form 8-K was filed May 14, 1997 reporting (i) the Company's
decision to cancel further investment in one wafer fabrication
facility in Arlington, Texas and the related charge of approximately
$60 million to write-down the assets deemed impaired by the
cancellation; (ii) the Company's decision to close two wafer
fabrication facilities in Santa Clara, California and the related
charge of between $9 million and $11 million; (iii) the Company's
decision to halt investment in expansion of analog facilities in
Greenock, Scotland and the related charge of between $3 million to $4
million. The date of the report was May 13, 1997. No financial
statements were filed with the report.
NATIONAL SEMICONDUCTOR CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Deducted from receivables
in the consolidated balance sheets
Doubtful Returns and
Description Accounts Allowances Total
- ----------- -------- ----------- -------
Balances at May 29, 1994 $ 3.0 $ 30.8 $ 33.8
Additions charged against
revenue - 214.1 214.1
Deductions (0.6) (1) (213.6) (214.2)
-------- ----------- -------
Balances at May 28, 1995 2.4 31.3 33.7
Additions charged against
revenue - 225.3 225.3
Additions (Deductions) 0.1 (1) (224.1) (224.0)
-------- ----------- -------
Balances at May 26, 1996 2.5 32.5 35.0
Additions charged against
revenue - 228.0 228.0
Deductions - (225.8) (225.8)
-------- ----------- -------
Balances at May 25, 1997 $ 2.5 $ 34.7 $ 37.2
======== =========== =======
- --------------------------------------------------------
(1) Doubtful accounts written off, less recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL SEMICONDUCTOR CORPORATION
Date: August 5, 1997 By: /S/ BRIAN L. HALLA *
----------------
Brian L. Halla
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities stated and on the 5th day of August
1997.
Signature Title
/S/ BRIAN L. HALLA * Chairman of the Board, President
---------------- and Chief Executive Officer
Brian L. Halla (Principal Ececutive Officer)
/S/ DONALD MACLEOD Executive Vice President, Finance
-------------- and Chief Financial Officer
Donald Macleod (Principal Financial Officer)
/S/ RICHARD D. CROWLEY, JR. * Vice President and Controller
------------------------- (Principal Accounting Officer)
Richard D. Crowley
/S/ GARY P. ARNOLD * Director
----------------
Gary P. Arnold
/S/ ROBERT BESHAR * Director
---------------
Robert Beshar
/S/ MODESTO A. MAIDIQUE * Director
---------------------
Modesto A. Maidique
/S/ EDWARD R. McCRACKEN * Director
---------------------
Edward R. McCracken
/S/ J. TRACY O'ROURKE * Director
-------------------
J. Tracy O'Rourke
/S/ CHARLES E. SPORCK * Director
-------------------
Charles E. Sporck
/S/ DONALD E. WEEDEN * Director
------------------
Donald E. Weeden
* By /S/ DONALD MACLEOD
--------------
Donald Macleod, Attorney-in-fact
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
National Semiconductor Corporation:
We consent to incorporation by reference in the Registration
Statements No. 33-48943, 33-54931, 33-55699, 33-55703, 33-55715, 33-
61381, 333-09957, 333-23477, and 333-26625 on Form S-8 and Registration
Statement No. 333-24113 on Form S-3 of National Semiconductor
Corporation and subsidiaries of our report dated June 4, 1997, except as
to Note 15, which is as of July 28, 1997, relating to the consolidated
balance sheets of National Semiconductor Corporation and subsidiaries as
of May 25, 1997, and May 26, 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each
of the years in the three-year period ended May 25, 1997 and the related
financial statement schedule, which report appears on page 53 of the
1997 Annual Report on Form 10-K of National Semiconductor Corporation.
Our report refers to a change in the method of accounting for
depreciation in fiscal 1996.
KPMG PEAT MARWICK LLP
San Jose, California
August 5, 1997
INDEX TO EXHIBITS
Item 14(a) (3)
The following documents are filed as part of this report:
1. Financial Statements: reference is made to the Financial
Statements described under Part IV, Item 14(a) (1).
2. Other Exhibits:
Desig-
nation Description of Exhibit
- ------ ----------------------
2.1 Agreement and Plan of Recapitalization between Sterling
Holding Company, LLC and National Semiconductor Corporation
(incorporated by reference from the Exhibits to the Company's
Form 8-K dated March 11, 1997 filed March 26,1997).
2.2 Agreement and Plan of Merger by and among National Semiconductor
Corporation, Nova Acquisition Corporation and Cyrix Corporation
dated as of July 28, 1997 (Exhibits and Schedules to be filed
upon request).
3.1 Second Restated Certificate of Incorporation of the Company,
as amended (incorporated by reference from the Exhibits to the
Company's Registration Statement on Form S-3 Registration No.
33-52775, which became effective March 22, 1994); Certificate
of Amendment of Certificate of Incorporation dated September
30, 1994 (incorporated by reference from the Exhibits to the
Company's 10-K for the fiscal year ended May 28, 1995 filed
July 27,1995).
3.2 By-Laws of the Company (incorporated by reference from the
Exhibits to the Company's 10-Q for the quarter ended November
24, 1996, filed December 20, 1996).
4.1 Form of Common Stock Certificate (incorporated by reference
from the Exhibits to the Company's Registration Statement on
Form S-3 Registration No. 33-48935, which became effective
October 5, 1992).
4.2 Rights Agreement (incorporated by reference from the Exhibits
to the Company's Registration Statement on Form 8-A filed
August 10, 1988). First Amendment to the Rights Agreement
dated as of October 31, 1995 (incorporated by reference from
the Exhibits to the Company's Amendment No. 1 to the
Registration Statement on Form 8-A filed December 11, 1995).
Second Amendment to the Rights Agreement dated as of December
17, 1996 (incorporated by reference from the Exhibits to the
Company's Amendment No. 2 to the Registration Statement on
Form 8-A filed January 17, 1997).
4.3 Indenture dated as of September 15, 1995 (incorporated by
reference from the Exhibits to the Company's Registration
Statement on Form S-3 Registration No. 33-63649, which became
effective November 6, 1995).
4.4 Registration Rights Agreement dated as of September 21, 1995
(incorporated by reference from the Exhibits to the Company's
Registration Statement on Form S-3 Registration No. 33-63649,
which became effective November 6, 1995).
4.5 Form of Note (incorporated by reference from the Exhibits to
the Company's Registration Statement on From S-3 Registration
No. 33-63649, which became effective November 6, 1995).
10.1 Agreements related to the Fairchild Semiconductor disposition
entered into between National Semiconductor Corporation and
Fairchild Semiconductor Corporation: Asset Purchase Agreement,
Transition Services Agreement, Fairchild Assembly Services
Agreement, National Assembly Services Agreement, Fairchild
Foundry Services Agreement, National Foundry Services
Agreement, Mil Aero Wafer and Services Agreement. (each
Agreement incorporated by reference from the Exhibits to the
Company's 10-Q for the quarter ending February 23, 1997 filed
April 9, 1997).
10.2 Management Contract or Compensatory Plan or Arrangement:
Executive Officer Incentive Plan (incorporated by reference
from the Exhibits to the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders held September 30, 1994
filed on August 10, 1994). 1997 Executive Officer Incentive
Plan Agreement (incorporated by reference from the Exhibits to
the Company's 10-Q for the quarter ended August 25, 1996 filed
October 4, 1996).
10.3 Management Contract or Compensatory Plan Agreement: Stock
Option Plan, as amended through July 9, 1996 (incorporated by
reference from the Exhibits to the Company's Registration
Statement on From S-8 Registration No. 333-26625, which became
effective May 7, 1997).
10.4 Management Contract or Compensatory Plan or Arrangement:
Benefit Restoration Plan as amended on April 17, 1997 through
September 1, 1996.
10.5 Management Contract or Compensatory Plan or Arrangement:
Agreement with Peter J. Sprague dated May 17, 1995
(incorporated by reference from the Exhibits to the Company's
10-K for the fiscal year ended May 28, 1995 filed July 27,
1995). Non Qualified Stock Option Agreement with Peter J.
Sprague dated May 18, 1995 (incorporated by reference from the
Exhibits to the Company's Registration Statement on Form S-8
Registration No. 33-61381 which became effective July 28,
1995).
10.6 Management Contract or Compensatory Plan or Arrangement:
Director Stock Plan (incorporated by reference from the
Exhibits to the Company's Registration Statement on Form S-8
Registration No. 33-54931 which became effective August 5,
1994).
10.7 Management Contract or Compensatory Plan or Arrangement:
Performance Award Plan (incorporated by reference from the
Exhibits to the Company's Registration Statement on Form S-8
Registration No. 33-55699 which became effective September 30,
1994).
10.8 Management Contract or Compensatory Plan or Arrangement:
Consulting Agreement with Harry H. Wetzel (incorporated by
reference from the Exhibits to the Company's 10-K for the
fiscal year ended May 29, 1994 filed July 28, 1994).
10.9 Management Contract or Compensatory Plan or Arrangement:
Preferred Life Insurance Program (incorporated by reference
from the Exhibits to the Company's 10-K for the fiscal year
ended May 29, 1994 filed July 28, 1994).
10.10 Management Contract or Compensatory Plan or Arrangement:
Retired Officers and Directors Health Plan (incorporated by
reference from the Exhibits to the Company's 10-K filed for
the fiscal year ended May 28, 1995 filed July 27, 1995).
10.11 Management Contract or Compensatory Plan or Arrangement:
Terms of Employment Offered Brian L. Halla (incorporated by
reference from the Exhibits to the 10-K for the fiscal year
ended May 26, 1996 filed August 5, 1996).
10.12 Management Contract Compensatory Plan or Arrangement:
Restricted Stock Agreement with Brian L. Halla (incorporated
by reference from the Exhibits to the Registration Statement
No. 333-09957, which became effective August 12, 1996).
10.13 Management Contract or Compensatory Plan or Arrangement:
Settlement Agreement and General Release with Ellen M. Hancock
(incorporated by reference from the Exhibits to the 10-K for
the fiscal year ended May 26, 1996 filed August 5, 1996).
10.14 Management Contract or Compensatory Plan or Arrangement:
Settlement Agreement and General Release with Richard M. Beyer
(incorporated by reference from the Exhibits to the 10-K for
the fiscal year ended May 26, 1996 filed August 5, 1996).
10.15 Management Contract or Compensatory Plan or Arrangement:
Retention Agreement with Kirk P. Pond (incorporated by
reference from the Exhibits to the 10-K for the fiscal year
ended May 26, 1996 filed August 5, 1996). Amendments to the
Retention Agreement with Kirk P. Pond (incorporated by
reference from the Exhibits to the 10-Q for the fiscal quarter
ended February 23, 1997, filed April 9, 1997).
10.16 Management Contract or Compensatory Plan or Arrangement:
Settlement Agreement and General Release with Charles P.
Carinalli (incorporated by reference from the Exhibits to the
10-Q for the quarter ended August 25, 1996 filed October 4,
1996).
10.17 Stock Option Agreement between National Semiconductor Corporation and
Cyrix Corporation.
11.0 Computation of Earnings (Loss) per share assuming full
dilution.
21.0 List of Subsidiaries.
23.0 Consent of Independent Auditors (included in Part IV).
24.0 Power of Attorney.
27.0 Financial Data Schedule.
Exhibit 2.2
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
NATIONAL SEMICONDUCTOR CORPORATION,
NOVA ACQUISITION CORP.
AND
CYRIX CORPORATION
DATED AS OF JULY 28, 1997
TABLE OF CONTENTS
ARTICLE I
THE MERGER
Section 1.1 The Merger......................................2
Section 1.2 Effective Date of the Merger....................2
Section 1.3 Effects of the Merger...........................2
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation....................2
Section 2.2 By-laws.........................................3
Section 2.3 Board of Directors; Officers....................3
ARTICLE III
CONVERSION OF SECURITIES
Section 3.1 Exchange Ratio..................................3
Section 3.2 Parent to Make Certificates Available...........5
Section 3.3 Dividends; Transfer Taxes.......................5
Section 3.4 No Fractional Shares............................5
Section 3.5 Company Shareholders' Meeting...................6
Section 3.6 Closing of the Company's Transfer Books.........6
Section 3.7 Assistance in Consummation of the Merger........6
Section 3.8 Closing.........................................6
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Section 4.1 Organization and Qualification...................7
Section 4.2 Capitalization...................................7
Section 4.3 Subsidiaries.....................................8
Section 4.4 Authority Relative to This Merger Agreement......8
Section 4.5 Reports and Financial Statements.......... ......9
Section 4.6 Absence of Certain Changes or Events............10
Section 4.7 Litigation......................................10
Section 4.8 Information in Disclosure Documents,
Registration Statements, Etc .................11
Section 4.9 Parent Action...................................11
Section 4.10 Compliance With Applicable Laws.................11
Section 4.11 Tax and Accounting Matters......................12
Section 4.12 Intel License...................................12
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 5.1 Organization and Qualification..................12
Section 5.2 Capitalization..................................13
Section 5.3 Subsidiaries....................................13
Section 5.4 Authority Relative to This Merger
Agreement.....................................14
Section 5.5 Reports and Financial Statements................15
Section 5.6 Absence of Certain Changes or Events............16
Section 5.7 Litigation......................................16
Section 5.8 Information in Disclosure Documents.............17
Section 5.9 Labor Matters...................................17
Section 5.10 Employee Benefit Plans; ERISA...................17
Section 5.11 Takeover Provisions Inapplicable................19
Section 5.12 Company Action..................................20
Section 5.13 Fairness Opinion................................20
Section 5.14 Financial Advisor...............................20
Section 5.15 Compliance With Applicable Laws.................21
Section 5.16 Liabilities.....................................21
Section 5.17 Taxes...........................................21
Section 5.18 Certain Agreements..............................22
Section 5.19 Inventory.......................................23
Section 5.20 Patents, Trademarks, Etc........................23
Section 5.21 Product Liability...............................25
Section 5.22 Environment.....................................25
Section 5.23 Tax and Accounting Matters......................26
Section 5.24 Authorized Stock................................26
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Conduct of Business by the Company
Pending the Merger............................26
Section 6.2 Conduct of Business by Parent and Sub
Pending the Merger............................29
Section 6.3 Notice of Breach................................29
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Access and Information..........................30
Section 7.2 Registration Statement/Proxy Statement..........30
Section 7.3 Affiliates; Publication of Combined
Financial Results.............................31
Section 7.4 Stock Exchange Listing..........................32
Section 7.5 Employment Arrangements.........................32
Section 7.6 Indemnification.................................33
Section 7.7 HSR Act.........................................33
Section 7.8 Additional Agreements...........................34
Section 7.9 No Solicitation.................................34
Section 7.10 Employee Agreements.............................37
Section 7.11 Company Stock Plans.............................37
Section 7.12 Independent Auditors............................37
.........................ARTICLE VIII
CONDITIONS PRECEDENT
Section 8.1 Conditions to Each Party's Obligation to
Effect the Merger.............................38
Section 8.2 Conditions to Obligation of the Company
to Effect.the Merger..........................39
Section 8.3 Conditions to Obligations of Parent
and Sub to Effect the Merger...................39
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination.....................................40
Section 9.2 Effect of Termination; Fees.....................41
Section 9.3 Amendment.......................................42
Section 9.4 Waiver..........................................43
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Non-Survival of Representations,
Warranties and Agreements.....................43
Section 10.2 Notices.........................................43
Section 10.3 Expenses........................................44
Section 10.4 Publicity.......................................44
Section 10.5 Specific Performance............................44
Section 10.6 Interpretation..................................45
Section 10.7 Miscellaneous...................................45
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Merger Agree-
ment"), dated as of July 28, 1997, by and among National Semicon-
ductor Corporation, a Delaware corporation ("Parent"), Nova Ac-
quisition Corp., a Delaware corporation and a wholly owned sub-
sidiary of Parent ("Sub"), and Cyrix Corporation, a Delaware
corporation (the "Company"):
W I T N E S S E T H:
WHEREAS, the Board of Directors of Parent has determined
that a combination with the Company is in the long-term strategic
best interests of its stockholders;
WHEREAS, the Board of Directors of the Company has de-
termined that the Merger Agreement is consistent with and in
furtherance of the long-term business strategy of the Company,
and the Company desires to combine its business of designing,
developing and marketing microprocessors for the personal com-
puter industry with the semiconductor operations of Parent and
for the Company's stockholders to have a continuing equity in-
terest in the combined businesses;
WHEREAS, the Boards of Directors of Parent, Sub and the
Company have approved the merger of Sub into the Company (the
"Merger"), upon the terms and subject to the conditions set forth
herein;
WHEREAS, concurrently with the execution and delivery of
this Merger Agreement, as a condition and inducement to Parent's
willingness to enter into this Merger Agreement, Parent and the
Company have entered into a Stock Option Agreement dated as of
the date hereof in the form of Exhibit A (the "Stock Option
Agreement"), pursuant to which the Company has granted to Parent
an option (the "Option") to purchase shares of Company Common
Stock (as defined below);
WHEREAS, immediately prior to the execution and delivery
of this Merger Agreement, as a condition and inducement to
Parent's willingness to enter into this Merger Agreement, certain
stockholders of the Company have executed and delivered to Parent
a Support Agreement dated as of the date hereof in the form of
Exhibit B (the "Support Agreement"), pursuant to which such
stockholders have agreed to vote in favor of the Merger;
WHEREAS, for federal income tax purposes, it is intended
that the Merger shall qualify as a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code of 1986,
as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that
the Merger shall be accounted for as a "pooling of interests";
NOW, THEREFORE, in consideration of the foregoing pre-
mises and the representations, warranties and agreements con-
tained herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to
the conditions hereof, on the Effective Date (as defined below in
Section 1.2), Sub shall be merged into the Company and the sepa-
rate existence of Sub shall thereupon cease, and the name of the
Company, as the surviving corporation in the Merger (the "Surviv-
ing Corporation"), shall by virtue of the Merger remain "Cyrix
Corporation."
Section 1.2 Effective Date of the Merger. The Merger
shall become effective when a properly executed Certificate of
Merger is duly filed with the Secretary of State of the State of
Delaware, or at such later date and time as may be specified
therein, which filing shall be made as soon as practicable after
the closing of the transactions contemplated by this Merger
Agreement in accordance with Section 3.8. When used in this
Merger Agreement, the term "Effective Date" shall mean the date
and time at which such filing shall have been made or such later
date and time as may be specified in such filing.
Section 1.3 Effects of the Merger. The Merger shall
have the effects set forth in the applicable provisions of the
Delaware General Corporation Law (the "DGCL"). Without limiting
the generality of the foregoing, and subject thereto, at the
Effective Date, except as otherwise provided herein, all of the
property, rights, privileges, powers and franchises of Sub and
the Company shall vest in the Surviving Corporation, and all
debts, liabilities and duties of Sub and the Company shall become
the debts, liabilities and duties of the Surviving Corporation.
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation. The Cer-
tificate of Incorporation of Sub as in effect immediately
prior to the Effective Date shall be the Certificate of Incor-
poration of the Surviving Corporation after the Effective Date
except that Article I thereof shall be amended to read "The
name of the corporation is Cyrix Corporation," and subject to
Section 7.6(c), thereafter may be amended in accordance with
its terms and as provided by law and this Merger Agreement.
Section 2.1 By-laws. The By-laws of Sub as in ef-
fect on the Effective Date shall be the By-laws of the Surviv-
ing Corporation.
Section 2.3 Board of Directors; Officers. The di-
rectors of Sub immediately prior to the Effective Date shall
be the directors of the Surviving Corporation and the officers
of the Company immediately prior to the Effective Date shall
be the officers of the Surviving Corporation, in each case
until their respective successors are duly elected and quali-
fied.
ARTICLE III
CONVERSION OF SECURITIES
Section 3.1 Exchange Ratio. As of the Effective
Date, by virtue of the Merger and without any action on the
part of any holder of any capital stock of the Company:
Section 3.1(a) All shares of capital stock of the
Company which are held by the Company or any subsidiary of the
Company as treasury stock, and any shares of capital stock of
the Company owned by Parent, Sub or any other subsidiary of
Parent, shall be cancelled.
Section 3.1(b) Subject to Section 3.4, each remain-
ing outstanding share of common stock, $.004 par value, of the
Company ("Company Common Stock") issued and outstanding imme-
diately prior to the Effective Date shall be converted into
0.825 (the "Exchange Ratio") fully paid and nonassessable
shares of the common stock, $.50 par value, of Parent ("Parent
Common Stock"). One preferred share purchase right issuable
pursuant to the Rights Agreement dated as of August 8, 1988
between Parent and The First National Bank of Boston, as
amended, or any other purchase right issued in substitution
thereof (the "Parent Rights"), shall be issued together with
and shall attach to each share of Parent Common Stock issued
pursuant to this Section 3.1(b), unless the Parent Rights have
been redeemed prior to the Effective Date.
Section 3.1(c) In the event of any stock dividend,
stock split, reclassification, recapitalization, combination
or exchange of shares with respect to, or rights issued in
respect of, Parent Common Stock prior to the Effective Date,
the Exchange Ratio shall be adjusted accordingly.
Section 3.1(d) Each issued and outstanding share of
capital stock of Sub shall be converted into and become one
fully paid and nonassessable share of common stock, $.01 par
value, of the Surviving Corporation.
Section 3.1(e) Each option to purchase Company Com-
mon Stock ("Company Stock Options") granted under the Company
Plans (as defined herein) which is outstanding and unexercised
immediately prior to the Effective Date shall cease to repre-
sent a right to acquire shares of Company Common Stock and
shall be converted into an option to purchase shares of Parent
Common Stock in an amount and at an exercise price determined
as follows: (i) the number of shares of Parent Common Stock
to be subject to the new option shall be equal to the product
of the number of shares of Company Common Stock subject to the
original option multiplied by the Exchange Ratio and rounded
to the nearest whole share; and (ii) the exercise price per
share of Parent Common Stock under the new option shall be
equal to the quotient of the exercise price per share of Com-
pany Common Stock under the original option divided by the Ex-
change Ratio and rounded to the nearest whole cent. The terms
and conditions of the new option, including vesting provi-
sions, shall be the same as the original option except that
all references to the Company shall be deemed to be references
to Parent. The adjustment provided herein with respect to any
Company Stock Options which are "incentive stock options" (as
defined in Section 422 of the Code) shall be and is intended
to be effected in a manner which is consistent with Section
424(a) of the Code. Prior to the Effective Date, Parent and
the Company shall take all action necessary to permit the
adjustments set forth in this Section 3.1(e). Parent shall
reserve for issuance a sufficient number of shares of Parent
Common Stock for delivery with respect to the converted Compa-
ny Stock Options. As soon as practicable after the Effective
Date, Parent shall file a registration statement on Form S-8
(or any successor or other appropriate form) with respect to
the shares of Parent Common Stock subject to such options.
Section 3.1(f) The Company's 5-1/2% Convertible Sub-
ordinated Notes due June 1, 2001 (the "Company Notes") out-
standing immediately prior to the Effective Date shall be
assumed by Parent and remain outstanding thereafter as an
obligation of Parent and the Surviving Corporation as co-
obligors, and, from and after the Effective Date, the holders
of the Company Notes shall have the right to convert such
Company Notes into the number of shares of Parent Common Stock
receivable in the Merger by a holder of the number of shares
of Company Common Stock into which such Company Notes could
have been converted immediately prior to the Merger. Parent
shall enter into a supplemental indenture with respect to such
obligations in accordance with the terms of the indenture
pursuant to which the Company Notes were issued.
Section 3.2 Parent to Make Certificates Available.
Prior to the Effective Date, Parent shall select Boston Equis-
erve or such other person or persons reasonably satisfactory
to the Company to act as exchange agent for the Merger (the
"Exchange Agent"). As soon as practicable after the Effective
Date, Parent shall make available, and each holder of Company
Common Stock to be converted pursuant to Section 3.1 (each, a
"Company Holder") will be entitled to receive, upon surrender
to the Exchange Agent of one or more certificates representing
such stock ("Certificates") for cancellation, certificates
representing the number of shares of Parent Common Stock into
which such shares are converted in the Merger and cash in con-
sideration of fractional shares as provided in Section 3.4.
Such shares of Parent Common Stock issued in the Merger shall
each be deemed to have been issued at the Effective Date.
Section 3.3 Dividends; Transfer Taxes. No dividends
or other distributions that are declared or made on Parent
Common Stock will be paid to persons entitled to receive cer-
tificates representing Parent Common Stock pursuant to this
Merger Agreement until such persons surrender their Certifi-
cates representing Company Common Stock. Upon such surrender,
there shall be paid to the person in whose name the certifi-
cates representing such Parent Common Stock shall be issued
any dividends or other distributions which shall have become
payable with respect to such Parent Common Stock in respect of
a record date after the Effective Date. In no event shall the
person entitled to receive such dividends be entitled to re-
ceive interest on such dividends. In the event that any cer-
tificates for any shares of Parent Common Stock are to be
issued in a name other than that in which the Certificates
representing shares of Company Common Stock surrendered in
exchange therefor are registered, it shall be a condition of
such exchange that the person requesting such exchange shall
pay to the Exchange Agent any transfer or other taxes required
by reason of the issuance of certificates for such shares of
Parent Common Stock in a name other than that of the regis-
tered holder of the Certificate surrendered, or shall estab-
lish to the satisfaction of the Exchange Agent that such tax
has been paid or is not applicable. Notwithstanding the fore-
going, neither the Exchange Agent nor any party hereto shall
be liable to a Company Holder for any shares of Parent Common
Stock or dividends thereon delivered to a public official
pursuant to any applicable escheat laws.
Section 3.4 No Fractional Shares. No certificates
or scrip representing less than one full share of Parent Com-
mon Stock shall be issued upon the surrender for exchange of
Certificates representing Company Common Stock pursuant to
Section 3.1(b). In lieu of any such fractional share, each
Company Holder who would otherwise have been entitled to a
fraction of a share of Parent Common Stock upon surrender of
Certificates for exchange pursuant to Section 3.1(b) shall be
paid upon such surrender cash (without interest) in an amount
equal to the product of the closing price of Parent Common
Stock on the New York Stock Exchange ("NYSE") Composite Tape
on the Effective Date multiplied by the fractional interest
such Company Holder would otherwise be entitled to receive.
For purposes of paying such cash in lieu of fractional shares,
all Certificates surrendered for exchange on the same letter
of transmittal shall be aggregated, with the holder thereof
receiving the aggregate whole number of shares of Parent Com-
mon Stock, and no Company Holder shall receive cash in lieu of
fractional shares in an amount equal to or greater than the
value of one full share of Parent Common Stock with respect to
such surrendered Certificates.
Section 3.5 Company Shareholders' Meeting. Unless
this Merger Agreement has been terminated pursuant to Section
9.1, the Company shall take all action necessary, in accor-
dance with applicable law and its Restated Certificate of
Incorporation and By-laws, to convene a special meeting of the
holders of capital stock of the Company entitled to vote
thereat (the "Company Meeting") as promptly as practicable for
the purpose of considering and taking action upon this Merger
Agreement. Subject to Section 7.9(c), the Board of Directors
of the Company will recommend that holders of any capital
stock of the Company entitled to vote thereon vote in favor of
and approve the Merger and the adoption of this Merger Agree-
ment at the Company Meeting. At the Company Meeting, all of
the shares of Company Common Stock then owned by Parent, Sub,
or any other subsidiary of Parent, or with respect to which
Parent, Sub, or any other subsidiary of Parent holds the power
to direct the voting, will be voted in favor of approval of
the Merger and adoption of this Merger Agreement.
Section 3.6 Closing of the Company's Transfer Books.
At the close of business on the Effective Date, the stock
transfer books of the Company shall be closed and no transfer
of any shares of capital stock of the Company shall be made
thereafter. In the event that, after the Effective Date, Cer-
tificates are presented to the Surviving Corporation, they
shall be cancelled and exchanged for Parent Common Stock
and/or cash as provided in Sections 3.1(b) and 3.4.
Section 3.7 Assistance in Consummation of the Merg-
er. Each of Parent, Sub and the Company shall provide all
reasonable assistance to, and shall cooperate with, each other
to bring about the consummation of the Merger as soon as pos-
sible in accordance with the terms and conditions of this
Merger Agreement. Parent shall cause Sub to perform all of
its obligations in connection with this Merger Agreement.
Section 3.8 Closing. The closing of the transac-
tions contemplated by this Merger Agreement shall take place
(i) at the offices of Wachtell, Lipton, Rosen & Katz, 51 West
52nd Street, New York, New York 10019, at 10:00 A.M. local
time as soon as practicable (but in any event within three
business days) after the day on which the last of the condi-
tions set forth in Article VIII is fulfilled or waived or (ii)
at such other time and place as Parent and the Company shall
agree in writing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
Section 4.1 Organization and Qualification. Each of
Parent and Sub is a corporation duly organized, validly exist-
ing and in good standing under the laws of the State of Dela-
ware and has the corporate power to carry on its business as
it is now being conducted or currently proposed to be conduct-
ed. Parent is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or
the nature of its activities make such qualification neces-
sary, except where the failure to be so qualified will not,
individually or in the aggregate, have a Parent Material Ad-
verse Effect. As used in this Merger Agreement, "Parent Mate-
rial Adverse Effect" shall mean a material adverse effect on
the business, assets, liabilities, financial condition or
results of operations of Parent and its subsidiaries taken as
a whole, but excluding any such effect resulting directly and
primarily from (i) general economic or financial market condi-
tions or (ii) the announcement or consummation of the Merger.
Section 4.2 Capitalization. (a) Parent. The au-
thorized capital stock of Parent consists of 300,000,000
shares of Parent Common Stock and 1,000,000 shares of pre-
ferred stock, $.50 par value. As of June 22, 1997,
145,674,568 shares of Parent Common Stock were validly issued
and outstanding, fully paid and nonassessable and no shares of
Parent Common Stock were held in treasury. As of May 25,
1997, Parent had reserved (x) 6,048,387 shares of Parent Com-
mon Stock for future issuance upon conversion of Parent's
6.50% Convertible Subordinated Notes and (y) 48,105,495 shares
of Parent Common Stock for issuance under Parent's stock op-
tion, benefit and stock purchase plans, of which options rep-
resenting the right to purchase an aggregate of 15,327,741
shares of Parent Common Stock were outstanding and 20,931,318
shares were issued (pursuant to option plans). As of June 22,
1997, there were no bonds, debentures, notes or other indebt-
edness having the right to vote on any matters on which the
Parent's shareholders may vote issued or outstanding. As of
May 25, 1997, except for the aforementioned and the Parent
Rights, there are no options, warrants, calls or other rights,
agreements or commitments presently outstanding obligating
Parent to issue, deliver or sell shares of its capital stock
or debt securities, or obligating Parent to grant, extend or
enter into any such option, warrant, call or other such right,
agreement or commitment. All of the shares of Parent Common
Stock issuable in accordance with this Merger Agreement in
exchange for Company Common Stock at the Effective Date in
accordance with this Merger Agreement will be, when so issued,
duly authorized, validly issued, fully paid and nonassessable.
(b) Sub. The authorized capital stock of Sub con-
sists of 100 shares of common stock, par value $0.01 per
share, all of which are validly issued and outstanding, fully
paid and nonassessable and are owned by Parent free and clear
of all liens, claims and encumbrances.
Section 4.3 Subsidiaries. The only "Significant Sub-
sidiaries" (as such term is defined in Rule 1-02 of Regulation
S-X of the Securities and Exchange Commission (the "Commis-
sion")) ("Significant Subsidiaries") of Parent are those named
in the Parent SEC Reports (as defined herein) filed prior to
the date of this Merger Agreement. Each Significant Subsid-
iary is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorpora-
tion and has the corporate power to carry on its business as
it is now being conducted or currently proposed to be conduct-
ed. Each Significant Subsidiary is duly qualified as a for-
eign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned
or held under lease or the nature of its activities makes such
qualification necessary except where the failure to be so
qualified will not have a Parent Material Adverse Effect. All
the outstanding shares of capital stock of each Significant
Subsidiary are validly issued, fully paid and nonassessable
and are owned by Parent or by a Significant Subsidiary of
Parent free and clear of any liens, claims or encumbrances.
There are no existing options, warrants, calls or other
rights, agreements or commitments of any character relating to
the issued or unissued capital stock or other securities of
any Significant Subsidiaries of Parent.
Section 4.4 Authority Relative to This Merger Agree-
ment. Parent and Sub have the corporate power to enter into
this Merger Agreement and to carry out their respective obli-
gations hereunder. The execution and delivery of this Merger
Agreement and the consummation of the transactions contemplat-
ed hereby have been duly authorized by the Board of Directors
of Parent and Sub. This Merger Agreement constitutes a valid
and binding obligation of Parent and Sub enforceable against
such parties in accordance with its terms. No other corporate
proceedings on the part of Parent or Sub are necessary to
authorize this Merger Agreement and the transactions contem-
plated hereby. Parent and Sub are not subject to or obligated
under (i) any charter or by-law provision or (ii) any con-
tract, license, indenture or other loan document, franchise,
permit, order, decree, concession, lease, instrument, judg-
ment, statute, law, ordinance, rule or regulation applicable
to Parent or Sub or any of their respective subsidiaries or
their respective properties or assets, which would be breached
or violated, or under which there would be a default (with or
without notice or lapse of time, or both), or under which
there would arise a right of termination, cancellation or
acceleration of any obligation or the loss of a material ben-
efit, by its executing and carrying out this Merger Agreement
other than, in the case of clause (ii) only, (A) any breaches,
violations, defaults, terminations, cancellations, accelera-
tions or losses which, either individually or in the aggre-
gate, will not have a Parent Material Adverse Effect or pre-
vent the consummation of the transactions contemplated hereby
and (B) the laws and regulations referred to in the next sen-
tence. Except as referred to herein or in connection, or in
compliance, with the provisions of the Hart-Scott-Rodino Anti-
trust Improvements Act of 1976, as amended (the "HSR Act"),
the Securities Act of 1933, as amended (the "Securities Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and other governmental approvals required under the
applicable laws of any foreign jurisdiction ("Foreign Laws")
and the environmental, corporation, securities or blue sky
laws or regulations of the various states, no filing or regis-
tration with, or authorization, consent or approval of, any
public body or authority is necessary for the consummation by
Parent and Sub of the Merger or the other transactions contem-
plated by this Merger Agreement, other than filings, registra-
tions, authorizations, consents or approvals the failure of
which to make or obtain would not have a Parent Material Ad-
verse Effect or prevent the consummation of the transactions
contemplated hereby.
Section 4.5 Reports and Financial Statements. Par-
ent has previously furnished the Company with true and com-
plete copies of (i) its Annual Report on Form 10-K for the
fiscal year ended May 26, 1996, as filed with the Commission,
(ii) its Quarterly Reports on Form 10-Q for the quarters ended
August 25, 1996, November 24, 1996 and February 23, 1997, as
filed with the Commission, (iii) its proxy statements related
to all meetings of its stockholders (whether annual or spe-
cial) since December 31, 1995, and (iv) all other reports or
registration statements filed by Parent with the Commission
since December 31, 1995, except registration statements on
Form S-8 relating to employee benefit plans, which are all the
documents (other than preliminary material) that Parent was
required to file with the Commission since that date (clauses
(i) through (iv) being referred to herein collectively as the
"Parent SEC Reports"). As of their respective dates, the
Parent SEC Reports complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the
case may be, and the rules and regulations of the Commission
thereunder applicable to such Parent SEC Reports. As of their
respective dates, the Parent SEC Reports did not contain any
untrue statement of a material fact or omit to state a materi-
al fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading. The audited consolidated
financial statements and unaudited interim financial state-
ments of Parent included in the Parent SEC Reports comply as
to form in all material respects with applicable accounting
requirements and with the published rules and regulations of
the Commission with respect thereto, and the financial state-
ments included in the Parent SEC Reports have been prepared in
accordance with United States generally accepted accounting
principles ("GAAP") applied on a consistent basis (except as
may be indicated therein or in the notes thereto) and fairly
present the financial position of Parent and its subsidiaries
as at the dates thereof and the results of their operations
and changes in financial position for the periods then ended,
subject, in the case of the unaudited interim financial state-
ments, to normal year-end audit adjustments and any other
adjustments described therein. The financial information set
forth in the earnings release promulgated by Parent on June 5,
1997, will not be materially different from the corresponding
financial information contained in the audited consolidated
financial statements of Parent included in its Annual Report
on Form 10-K for the fiscal year ended May 25, 1997, as filed
with the Commission.
Section 4.6 Absence of Certain Changes or Events.
Except as disclosed in the Parent SEC Reports filed prior to
the date hereof, since December 31, 1996, there has not been
(i) any transaction, commitment, dispute or other event or
condition (financial or otherwise) of any character (whether
or not in the ordinary course of business), individually or in
the aggregate, having a Parent Material Adverse Effect; or
(ii) any damage, destruction or loss, whether or not covered
by insurance, which, insofar as reasonably can be foreseen, in
the future would be likely to have a Parent Material Adverse
Effect.
Section 4.7 Litigation. Except as disclosed in the
Parent SEC Reports filed prior to the date hereof, there is no
suit, action or proceeding pending or, to the knowledge of
Parent, threatened against or affecting Parent or any of its
subsidiaries which, alone or in the aggregate, is likely to
have a Parent Material Adverse Effect, nor is there any judg-
ment, decree, injunction, rule or order of any court, govern-
mental department, commission, agency, instrumentality or
arbitrator outstanding against Parent or any of its subsidiar-
ies having, or which in the future is likely to have, either
alone or in the aggregate, any Parent Material Adverse Effect.
Section 4.8 Information in Disclosure Documents,
Registration Statements, Etc. None of the information sup-
plied or to be supplied by Parent or Sub for inclusion or
incorporation by reference in (i) the Registration Statement
to be filed with the Commission by Parent on Form S-4 under
the Securities Act for the purpose of registering the shares
of Parent Common Stock to be issued in the Merger (the "Regis-
tration Statement") and (ii) the proxy statement of the Compa-
ny (the "Proxy Statement") required to be mailed to the share-
holders of the Company in connection with the Merger will, in
the case of the Proxy Statement or any amendments or supple-
ments thereto, at the time of the mailing of the Proxy State-
ment and any amendments or supplements thereto, and at the
time of the Company Meeting to be held in connection with the
Merger, or, in the case of the Registration Statement, at the
time it becomes effective and at the Effective Date, contain
any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circum-
stances under which they are made, not misleading. The Regis-
tration Statement will comply as to form in all material
respects with the provisions of the Securities Act, and the
rules and regulations promulgated thereunder.
Section 4.9 Parent Action. The Board of Directors
of Parent (at a meeting duly called and held) has by the req-
uisite vote of directors (a) approved the Merger in accordance
with the DGCL, (b) taken any necessary steps to render Section
203 of the DGCL and the Parent Rights inapplicable to the
Merger and the transactions contemplated by this Merger Agree-
ment, and (c) adopted any necessary resolution having the ef-
fect of causing Parent not to be subject, to the extent per-
mitted by applicable law, to any state takeover law that may
purport to be applicable to the Merger and the transactions
contemplated by this Merger Agreement.
Section 4.10 Compliance With Applicable Laws. Par-
ent and its subsidiaries hold all permits, licenses, varianc-
es, exemptions, orders and approvals of all courts, adminis-
trative agencies or commissions or other governmental authori-
ties or instrumentalities, domestic or foreign (each, a "Gov-
ernmental Entity"), except for such permits, licenses, vari-
ances, exemptions, orders and approvals the failure of which,
individually or in the aggregate, to hold would not have a
Parent Material Adverse Effect (the "Parent Permits"). Parent
and its subsidiaries are in compliance with the terms of the
Parent Permits, except for such failures to comply which,
singly or in the aggregate, would not have a Parent Material
Adverse Effect. Except as disclosed in the Parent SEC Reports
filed prior to the date of this Merger Agreement, the busi-
nesses of Parent and its subsidiaries are not being conducted
in violation of any law, ordinance or regulation of any Gov-
ernmental Entity, except for possible violations which, indi-
vidually or in the aggregate, do not and would not have a
Parent Material Adverse Effect. Except as disclosed in the
Parent SEC Reports, no investigation or review by any Govern-
mental Entity with respect to Parent or any of its subsidiar-
ies is pending or threatened, nor has any Governmental Entity
indicated an intention to conduct the same, other than those
the outcome of which would not have a Parent Material Adverse
Effect.
Section 4.11 Tax and Accounting Matters. Neither
Parent nor, to its best knowledge, any of its affiliates, has
through the date hereof, taken or agreed to take any action,
nor are they aware of any circumstances relating to Parent or
its affiliates which currently exist, that would (i) prevent
Parent from accounting for the business combination to be ef-
fected by the Merger as a "pooling of interests" or (ii) pre-
vent the Merger from constituting a reorganization within the
meaning of Section 368(a) of the Code.
Section 4.12 Intel License. To the knowledge of
Parent, as of the date of this Merger Agreement, the License
Agreement dated June 1, 1976 between Intel Corporation ("In-
tel") and Parent, as amended on January 1, 1983, constitutes a
valid and binding agreement, remains in full force and effect
and does not conflict in any material respect with, or violate
in any material respect, the terms of this Merger Agreement or
the transactions contemplated hereby.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent, except
as set forth in a disclosure schedule delivered by the Company
concurrently herewith (the "Company Disclosure Schedule"), as
follows:
Section 5.1 Organization and Qualification. The
Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and
has the corporate power to carry on its business as it is now
being conducted or currently proposed to be conducted. The
Company is duly qualified as a foreign corporation to do busi-
ness, and is in good standing, in each jurisdiction where the
character of its properties owned or held under lease or the
nature of its activities makes such qualification necessary,
except where the failure to be so qualified will not, individ-
ually or in the aggregate, have a Company Material Adverse Ef-
fect. As used in this Merger Agreement, "Company Material Ad-
verse Effect" shall mean a material adverse effect on the
business, assets, liabilities, financial condition, or results
of operations of the Company and its subsidiaries, taken as a
whole, but excluding any such effect resulting directly and
primarily from (i) general economic or financial market condi-
tions, (ii) the announcement or consummation of the Merger,
including any effect therefrom on the Company's silicon wafer
manufacturing agreements, or (iii) adverse developments in the
pending litigation between the Company and Intel or between
the Company and Creative Labs, Inc. or new litigation between
the Company and Intel or between the Company and Creative
Labs, Inc. Complete and correct copies as of the date hereof
of the Restated Certificate of Incorporation and Bylaws of the
Company and each of its Significant Subsidiaries have, to the
extent requested, been delivered to Parent as part of the Com-
pany Disclosure Schedule.
Section 5.2 Capitalization. The authorized capital
stock of the Company consists of 60,000,000 shares of Company
Common Stock, and 20,000,000 shares of preferred stock, par
value $.004 per share ("Company Preferred Stock"). As of June
29, 1997, 19,681,940 shares of Company Common Stock were val-
idly issued and outstanding, fully paid and nonassessable, no
shares of Company Preferred Stock were outstanding, and
545,938 shares of Company Common Stock were held in treasury.
There have been no material changes in such numbers of shares
through the date hereof. As of the date hereof, there are no
bonds, debentures, notes or other indebtedness having the
right to vote on any matters on which the Company's sharehold-
ers may vote issued or outstanding. As of June 29, 1997,
except for (i) employee and director stock options to acquire
3,483,104 shares of Company Common Stock pursuant to the Cyrix
Corporation 1988 Incentive Stock Plan, the Cyrix Corporation
Employee Stock Purchase Plan, and the Cyrix Corporation Non-
Employee Directors Stock Plan and (ii) 3,182,386 shares of
Company Common Stock issuable upon conversion of the Company's
5-1/2% Convertible Subordinated Notes due June 1, 2001 (issued
pursuant to an Indenture dated May 28, 1996), there are no op-
tions, warrants, calls or other rights, agreements or commit-
ments presently outstanding obligating the Company to issue,
deliver or sell shares of its capital stock or debt securi-
ties, or obligating the Company to grant, extend or enter into
any such option, warrant, call or other such right, agreement
or commitment, and there have been no material changes in such
numbers through the date hereof. No options will accelerate
as a result of the execution of this Merger Agreement or con-
summation of the transactions contemplated hereby.
Section 5.3 Subsidiaries. The only direct or indi-
rect subsidiaries of the Company are those set forth in Sched-
ule 5.3 of the Company Disclosure Schedule. Each such subsid-
iary is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorpora-
tion and has the corporate power to carry on its business as
it is now being conducted or currently proposed to be conduct-
ed. Each such subsidiary is duly qualified as a foreign cor-
poration to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such
qualification necessary except where the failure to be so
qualified will not have a Company Material Adverse Effect.
All the outstanding shares of capital stock of each such sub-
sidiary are validly issued, fully paid and nonassessable and
are owned by the Company or by a subsidiary of the Company
free and clear of any liens, claims or encumbrances. There
are no existing options, warrants, calls or other rights,
agreements or commitments of any character relating to the
issued or unissued capital stock or other securities of any of
the subsidiaries of the Company. Except as set forth in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 29, 1996, the Company does not directly or
indirectly own any securities of or any other interest in any
other corporation, partnership, joint venture or other busi-
ness association or entity.
Section 5.4 Authority Relative to This Merger Agree-
ment. The Company has the corporate power to enter into this
Merger Agreement, subject to the requisite approval of this
Merger Agreement by the holders of a majority of the Company
Common Stock, and to enter into the Stock Option Agreement and
to carry out its obligations hereunder and thereunder. The
execution and delivery of this Merger Agreement and the Stock
Option Agreement and the consummation of the transactions con-
templated hereby and thereby have been duly authorized by the
Board of Directors of the Company. Each of this Merger Agree-
ment and the Stock Option Agreement constitutes a valid and
binding obligation of the Company enforceable against the Com-
pany in accordance with its terms. Except for the requisite
approval by the holders of Company Common Stock, no other cor-
porate proceedings on the part of the Company are necessary to
authorize this Merger Agreement and the transactions contem-
plated hereby. No other corporate proceedings are necessary
to authorize the Stock Option Agreement and the transactions
contemplated thereby. The Company is not subject to or obli-
gated under (i) any charter or by-law provision or (ii) except
as set forth in Schedule 5.4 of the Company Disclosure Sched-
ule, any indenture or other loan document, contract, license,
franchise, permit, order, decree, concession, lease, instru-
ment, judgment, statute, law, ordinance, rule or regulation
applicable to the Company or any of its subsidiaries or their
respective properties or assets which would be breached or
violated, or under which there would be a default (with or
without notice or lapse of time, or both), or under which
there would arise a right of termination, cancellation or
acceleration of any obligation or the loss of a material bene-
fit, by its executing and carrying out this Merger Agreement
or the Stock Option Agreement, other than, in the case of
clause (ii) only, (A) any breaches, violations, defaults,
terminations, cancellations, accelerations or losses which,
either individually or in the aggregate, will not have a Com-
pany Material Adverse Effect or prevent the consummation of
the transactions contemplated hereby or thereby and (B) the
laws and regulations referred to in the next sentence. Except
as referred to herein or, with respect to the Merger or the
transactions contemplated thereby, in connection, or in com-
pliance, with the provisions of the HSR Act, the Securities
Act, the Exchange Act, the Foreign Laws and the environmental,
corporation, securities or blue sky laws or regulations of the
various states, no filing or registration with, or authori-
zation, consent or approval of, any public body or authority
is necessary for the consummation by the Company of the Merger
or the other transactions contemplated by this Merger Agree-
ment or by the Stock Option Agreement, other than filings,
registrations, authorizations, consents or approvals the fail-
ure of which to make or obtain would not have a Company Mate-
rial Adverse Effect or prevent the consummation of the trans-
actions contemplated hereby or thereby.
Section 5.5 Reports and Financial Statements. The
Company has previously furnished Parent with true and complete
copies of (i) its Annual Report on Form 10-K for the year
ended December 29, 1996, as filed with the Commission, (ii)
its Quarterly Report on Form 10-Q for the quarter ended March
30, 1997, as filed with the Commission, (iii) its proxy state-
ments related to all meetings of its stockholders (whether
annual or special) since December 31, 1995, and (iv) all other
reports or registration statements filed by the Company with
the Commission since December 31, 1995, except registration
statements on Form S-8 relating to employee benefit plans,
which are all the documents (other than preliminary material)
that the Company was required to file with the Commission
since that date (the documents listed in clauses (i) through
(iv) being referred to herein collectively as the "Company SEC
Reports"). As of their respective dates, the Company SEC
Reports complied in all material respects with the require-
ments of the Securities Act or the Exchange Act, as the case
may be, and the rules and regulations of the Commission there-
under applicable to such Company SEC Reports. As of their
respective dates, the Company SEC Reports did not contain any
untrue statement of a material fact or omit to state a materi-
al fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading. The audited consolidated fi-
nancial statements and unaudited interim financial statements
of the Company included in the Company SEC Reports comply as
to form in all material respects with applicable accounting
requirements and with the published rules and regulations of
the Commission with respect thereto, and the financial state-
ments included in the Company SEC Reports have been prepared
in accordance with GAAP applied on a consistent basis (except
as may be indicated therein or in the notes thereto) and fair-
ly present the financial position of the Company and its sub-
sidiaries as at the dates thereof and the results of their
operations and changes in financial position for the periods
then ended, subject, in the case of the unaudited interim
financial statements, to normal year-end audit adjustments and
any other adjustments described therein.
Section 5.6 Absence of Certain Changes or Events.
Except as disclosed in the Company SEC Reports filed prior to
the date hereof or in Schedule 5.6 of the Company Disclosure
Schedule, since December 31, 1996, there has not been (i) any
transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in
the ordinary course of business), individually or in the ag-
gregate, having a Company Material Adverse Effect; (ii) any
damage, destruction or loss, whether or not covered by insur-
ance, which, insofar as reasonably can be foreseen, in the fu-
ture would be likely to have a Company Material Adverse Ef-
fect; (iii) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or
property) with respect to the capital stock of the Company;
(iv) any material increase in the benefits under, or the es-
tablishment or amendment of, any bonus, insurance, severance,
deferred compensation, pension, retirement, profit sharing,
performance awards (including, without limitation, the grant-
ing of stock appreciation rights or restricted stock awards),
stock purchase or other employee benefit plan, or any increase
in the compensation payable or to become payable to any of the
directors or officers of the Company or the employees of the
Company or its subsidiaries as a group, except for (A) in-
creases in salaries or wages payable or to become payable in
the ordinary course of business and consistent with past prac-
tice or (B) the granting of stock options in the ordinary
course of business to employees of the Company or its subsid-
iaries who are not directors or executive officers of the
Company; (v) any change by the Company or its subsidiaries in
their significant accounting policies; or (vi) any entry into
any commitment or transaction material to the Company and its
subsidiaries taken as a whole (including, without limitation,
any borrowing or sale of assets) except in the ordinary course
of business consistent with past practice.
Section 5.7 Litigation. Except as disclosed in the
Company's SEC Reports filed prior to the date hereof or in
Schedule 5.7 of the Company Disclosure Schedule, there is no
suit, action or proceeding pending or, to the knowledge of the
Company, threatened against or affecting the Company or any of
its subsidiaries which, either alone or in the aggregate, is
likely to have a Company Material Adverse Effect, nor is there
any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality
or arbitrator outstanding against the Company or any of its
subsidiaries having, or which, in the future is likely to
have, either alone or in the aggregate, any Company Material
Adverse Effect.
Section 5.8 Information in Disclosure Documents.
None of the information supplied or to be supplied by the Com-
pany or its subsidiaries for inclusion or incorporation by
reference in the Proxy Statement or the Registration Statement
will, in the case of the Proxy Statement or any amendments or
supplements thereto, at the time of the mailing of the Proxy
Statement and any amendments or supplements thereto, and at
the time of the Company Meeting to be held in connection with
the Merger, or, in the case of the Registration Statement, at
the time it becomes effective and at the Effective Date, con-
tain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the cir-
cumstances under which they are made, not misleading. The
Proxy Statement will comply as to form in all material re-
spects with the provisions of the Exchange Act and the rules
and regulations thereunder.
Section 5.9 Labor Matters. No labor organization or
group of employees of the Company or any of its subsidiaries
has made a pending demand for recognition or certification,
and there are no representation or certification proceedings
or petitions seeking a representation proceeding presently
pending or threatened to be brought or filed, with the Nation-
al Labor Relations Board or any other labor relations tribunal
or authority. There are no organizing activities, strikes,
work stoppages, slowdowns, lockouts, material arbitrations or
material grievances, or other material labor disputes pending
or threatened against or involving the Company or any of its
subsidiaries which, individually or in the aggregate, have had
or would have a Company Material Adverse Effect.
Section 5.10 Employee Benefit Plans; ERISA. Section
4.10(a) Schedule 5.10 of the Company Disclosure Schedule lists
all employee benefit plans, programs, policies, practices, and
other arrangements providing benefits to any employee or for-
mer employee, or director or former director (or beneficiary
or dependent thereof) sponsored or maintained by the Company
or any of its subsidiaries to which the Company or any of its
subsidiaries contributes or is obligated to contribute ("Com-
pany Plans"). Without limiting the generality of the forego-
ing, the term "Company Plans" includes all employee welfare
benefit plans within the meaning of Section 3(1) of the Em-
ployee Retirement Income Security Act of 1974, as amended
("ERISA"), and all employee pension benefit plans within the
meaning of Section 3(2) of ERISA.
Section 5.10(b) With respect to each Company Plan,
the Company has delivered to Parent a true, correct and com-
plete copy of: (i) each writing constituting a part of such
Company Plan, including without limitation all plan documents,
benefit schedules, trust agreements, and insurance contracts
and other funding vehicles; (ii) the most recent Annual Report
(Form 5500 Series) and accompanying schedule, if any; (iii)
the current summary plan description, if any; (iv) the most
recent annual financial report, if any; (v) the most recent
actuarial report, if any; and (vi) the most recent determina-
tion letter from the Internal Revenue Service ("IRS"), if any.
Except as specifically provided in the foregoing documents
delivered to Parent, there are no amendments to any Company
Plan that have been adopted or approved nor has the Company or
any of its subsidiaries undertaken to make any such amend-
ments.
Section 5.10(c) The IRS has issued a favorable de-
termination letter with respect to each Company Plan that is
intended to be a "qualified plan" within the meaning of Sec-
tion 401(a) of the Code (a "Qualified Company Plan") that has
not been revoked, and there are no existing circumstances nor
any events that have occurred that could adversely affect the
qualified status of any Qualified Company Plan or the related
trust. No Company Plan is intended to meet the requirements
of Code Section 501(c)(9).
Section 5.10(d) All contributions required to be
made to any Company Plan by applicable law or regulation or by
any plan document or other contractual undertaking, and all
premiums due or payable with respect to insurance policies
funding any Company Plan, for any period through the date
hereof have been timely made or paid in full or, to the extent
not required to be made or paid on or before the date hereof,
have been fully reflected on the Company's Annual Report on
Form 10-K for the year ended December 29, 1996, as filed with
the Commission.
Section 5.10(e) The Company and each of its subsid-
iaries has complied, and is now in compliance, in all material
respects with all provisions of ERISA, the Code and all laws
and regulations applicable to the Company Plans, other than
any noncompliance which does not have, or which in the future
would not be likely to have, either alone or in the aggregate,
a Company Material Adverse Effect. There is not now, nor do
any circumstances exist that could give rise to, any require-
ment for the posting of security with respect to a Company
Plan or the imposition of any lien on the assets of the Compa-
ny or any of its subsidiaries under ERISA or the Code. No
prohibited transaction has occurred with respect to any Compa-
ny Plan.
Section 5.10(f) No Company Plan is subject to Title
IV or Section 302 of ERISA or Section 412 or 4971 of the Code.
Section 5.10(g) No Company Plan is a "multiemployer
plan" within the meaning of Section 4001(a)(3) of ERISA (a
"Multiemployer Plan") or a plan that has two or more contrib-
uting sponsors at least two of whom are not under common con-
trol, within the meaning of Section 4063 of ERISA (a "Multiple
Employer Plan"), nor has the Company or any Company ERISA
Affiliate (as defined below), at any time since September 2,
1974, contributed to or been obligated to contribute to any
Multiemployer Plan or Multiple Employer Plan.
Section 5.10(h) There does not now exist, nor do any
circumstances exist that could result in, any Controlled Group
Liability (as defined below) that would be a liability of
Parent or any of its subsidiaries following the Effective
Date, having, or which in the future would be likely to have,
either alone or in the aggregate, a Company Material Adverse
Effect.
Section 5.10(i) Neither the Company nor any of its
subsidiaries has any liability for life, health, medical or
other welfare benefits to former employees or beneficiaries or
dependents thereof, except for health continuation coverage as
required by Section 4980B of the Code or Part 6 of Title I of
ERISA.
Section 5.11(j) Neither the execution and delivery
of this Merger Agreement nor the consummation of the transac-
tions contemplated hereby will (either alone or in conjunction
with any other event) result in, cause the accelerated vesting
or delivery of, or increase the amount or value of, any pay-
ment or benefit to any employee of the Company or any of its
subsidiaries. Without limiting the generality of the forego-
ing, no amount paid or payable by the Company or any of its
subsidiaries in connection with the transactions contemplated
hereby (either solely as a result thereof or as a result of
such transactions in conjunction with any other event) will be
an "excess parachute payment" within the meaning of Section
280G of the Code.
Section 5.11(k) There are no pending or threatened
claims (other than claims for benefits in the ordinary
course), lawsuits or arbitrations which have been asserted or
instituted against the Company Plans, any fiduciaries thereof
with respect to their duties to the Company Plans or the as-
sets of any of the trusts under any of the Company Plans which
could reasonably be expected to result in any liability of the
Company or any of its subsidiaries, to the Pension Benefit
Guaranty Corporation, the Department of Treasury, the Depart-
ment of Labor or any Multiemployer Plan, having, or which in
the future would be likely to have, either alone or in the
aggregate, a Company Material Adverse Effect.
Section 5.10(l) For purposes of this Section 5.10,
the following terms shall have the following meanings: "Con-
trolled Group Liability" means any and all liabilities under
(i) Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sec-
tions 412 and 4971 of the Code, (iv) the continuation coverage
requirements of Section 601 et seq. of ERISA and Section 4980B
of the Code, and (v) corresponding or similar provisions of
foreign laws or regulations, other than such liabilities that
arise solely out of, or relate solely to, the Company Plans;
"Company ERISA Affiliate" means any entity, trade or business
that is a member of a group described in Section 414(b), (c),
(m) or (o) of the Code or Section 4001(b)(1) of ERISA that
includes the Company or any of its subsidiaries or that is a
member of the same "controlled group" as the Company or any of
its subsidiaries, pursuant to Section 4001(a)(14) of ERISA;
and "employee" means any employee or officer of the Company or
any of its subsidiaries, and any individual providing services
as an independent contractor to the Company or any of its
subsidiaries.
Section 5.11 Takeover Provisions Inapplicable. As
of the date hereof and at all times on or prior to the Effec-
tive Date, Section 203 of the DGCL is and shall be inapplica-
ble to the Merger and the transactions contemplated by this
Merger Agreement and the Stock Option Agreement.
Section 5.12 Company Action. The Board of Directors
of the Company (at a meeting duly called and held) has by the
requisite vote of directors (i) determined that the Merger is
advisable and fair and in the best interests of the Company
and its shareholders, (ii) approved the Merger in accordance
with the provisions of Section 251 of the DGCL, (iii) recom-
mended the approval of this Merger Agreement and the Merger by
the holders of the Company Common Stock and directed that the
Merger be submitted for consideration by the Company's share-
holders entitled to vote thereon at the Company Meeting and
(iv) adopted any necessary resolution having the effect of
causing the Company not to be subject, to the extent permitted
by applicable law, to any state takeover law that may purport
to be applicable to the Merger and the transactions contem-
plated by this Merger Agreement and the Stock Option Agree-
ment.
Section 5.13 Fairness Opinion. The Company has re-
ceived the opinion of Goldman, Sachs & Co., financial advisors
to the Company, dated the date hereof, to the effect that the
consideration to be received by the Company's shareholders in
the Merger is fair to the shareholders of the Company.
Section 5.14 Financial Advisor. Except for Goldman,
Sachs & Co., no broker, finder or investment banker is enti-
tled to any brokerage, finder's or other fee or commission in
connection with the Merger or the transactions contemplated by
this Merger Agreement based upon arrangements made by or on
behalf of the Company, and the fees and commissions payable to
Goldman, Sachs & Co. as contemplated by this Section 5.14 will
be the amount set forth in that certain letter, dated Septem-
ber 13, 1996, from Goldman, Sachs & Co. to the Company, a
copy of which has been delivered to Parent.
Section 5.15 Compliance With Applicable Laws. The
Company and its subsidiaries hold all permits, licenses, vari-
ances, exemptions, orders and approvals of all Governmental
Entities, except for such permits, licenses, variances, exemp-
tions, orders and approvals the failure of which, individually
or in the aggregate, to hold would not have a Company Material
Adverse Effect (the "Company Permits"). The Company and its
subsidiaries are in compliance with the terms of the Company
Permits, except for such failures to comply which, singly or
in the aggregate, would not have a Company Material Adverse
Effect. Except as disclosed in the Company SEC Reports filed
prior to the date of this Merger Agreement, the businesses of
the Company and its subsidiaries are not being, and have not
been, conducted in violation of any law, ordinance or regula-
tion of any Governmental Entity, except for possible viola-
tions which, individually or in the aggregate, do not and
would not have a Company Material Adverse Effect. No investi-
gation or review by any Governmental Entity with respect to
the Company or any of its subsidiaries is pending or threat-
ened, nor has any Governmental Entity indicated an intention
to conduct the same, other than those the outcome of which
would not have a Company Material Adverse Effect.
Section 5.16 Liabilities. As of June 29, 1997, nei-
ther the Company nor any of its subsidiaries had any liability
or obligation (absolute, accrued, contingent or otherwise, in
contract, tort or otherwise and whether or not required by
GAAP to be reflected in such Person's balance sheet or other
books and records) (a "Liability"), except as and to the ex-
tent disclosed or provided for in the most recent Company SEC
Reports filed prior to the date of this Merger Agreement or as
set forth in Schedule 5.6 of the Company Disclosure Schedule,
other than such Liabilities which, individually or in the
aggregate, would not have a Company Material Adverse Effect.
From and after June 29, 1997, neither the Company nor any of
its subsidiaries has incurred, suffered, permitted to exist or
otherwise become subject to any Liability, other than Liabili-
ties incurred in the ordinary course of business in accordance
with past practice which, individually or in the aggregate,
would not have a Company Material Adverse Effect.
Section 5.17 Taxes. Each of the Company and its
subsidiaries has filed all material tax returns, declarations
and reports required to be filed by any of them (taking into
account all valid extensions of filing dates) and has paid (or
the Company has paid on its behalf), or has set up an adequate
liability reserve in accordance with GAAP for the payment of,
all material taxes required to be paid in respect of the peri-
ods covered by such returns, declarations and reports. The
information contained in such tax returns, declarations and
reports is true, complete and accurate in all material re-
spects. Neither the Company nor any subsidiary of the Company
is delinquent in the payment of any tax, assessment or govern-
mental charge, except where such delinquency has not had or
would not reasonably be expected to have, a Company Material
Adverse Effect. No material deficiencies for any taxes have
been proposed, asserted or assessed against the Company or any
of its subsidiaries that have not been finally settled or paid
in full and no requests for waivers of the time to assess any
such tax are pending. No material tax return, declaration or
report is currently under audit by any taxing authority, and
as of the date hereof no written notice of any such audit has
been received. For the purposes of this Merger Agreement, the
term "tax" shall include all federal, state, local and foreign
income, profits, franchise, gross receipts, payroll, sales,
employment, use, property, withholding, excise and other tax-
es, duties and assessments of any nature whatsoever together
with all interest, penalties and additions imposed with re-
spect to such amounts.
Section 5.18 Certain Agreements. Except as dis-
closed in Schedule 5.18 of the Company Disclosure Schedule or
in the Company SEC Reports filed prior to the date of this
Merger Agreement, neither the Company nor any of its subsid-
iaries is a party or subject to any oral or written (i) agree-
ment, contract, indenture or other instrument relating to
Indebtedness (as defined below) in an amount exceeding
$1,000,000; (ii) joint venture agreement or arrangement or any
other agreement which has involved or is expected to involve a
sharing of revenues of $1,000,000 per annum or more with other
persons; (iii) lease for real or personal property in which
the amounts of payments which the Company or any subsidiary is
required to make on an annual basis exceeds $250,000; (iv)
agreement, contract, policy, license, document, instrument,
arrangement or commitment that limits in any material respect
the freedom of the Company or any subsidiary of the Company to
compete in any line of business or with any person or in any
geographical area or which would so limit the freedom of the
Company or any subsidiary of the Company after the Effective
Date; (v) agreement, contract, policy, license, document,
instrument, arrangement or commitment which, after giving
effect to the transactions contemplated by this Merger Agree-
ment, purports to restrict or bind Parent or any of its sub-
sidiaries other than the Surviving Corporation and its sub-
sidiaries in any respect; (vi) employment, consulting, sever-
ance, termination, or indemnification agreement, contract or
arrangement providing for future payments with any current or
former officer, consultant, director or employee which (A)
exceeds $100,000 per annum or (B) requires aggregate annual
payments or total payments over the life of such agreement,
contract or arrangement to such current or former officer,
consultant, director or employee in excess of $100,000 or
$250,000, respectively, and is not terminable before and after
the Merger by it or its subsidiary on 30 days' notice or less
without penalty or obligation to make payments related to such
termination; or (vii) other agreement, contract, policy, li-
cense, document, instrument, arrangement or commitment not
made in the ordinary course of business which is material to
the Company and its subsidiaries taken as a whole. "Indebted-
ness" means any liability in respect of (A) borrowed money,
(B) capitalized lease obligations, (C) the deferred purchase
price of property or services (other than trade payables in
the ordinary course of business) and (D) guarantees of any of
the foregoing. Neither the Company nor any of its subsidiar-
ies is in default (or would be in default with notice or lapse
of time, or both) under any indenture, note, credit agreement,
loan document, lease, contract, policy, license, document,
instrument, arrangement or commitment (a "Contract"), includ-
ing, but not limited to, any Company Plan, whether or not such
default has been waived, which default, alone or in the aggre-
gate with other such defaults, would have a Company Material
Adverse Effect. Neither the Company nor any of its subsidiar-
ies is a party to or bound by any Contract which upon execu-
tion of this Merger Agreement or consummation of the transac-
tions contemplated hereby will (either alone or upon the oc-
currence of additional acts or events) result in the loss of
any material benefit, the termination thereof or any payment
becoming accelerated or due from the Company or Parent or any
of their subsidiaries which loss, termination or acceleration
would have a Company Material Adverse Effect.
Section 5.19 Inventory. The inventories of the Com-
pany and its subsidiaries as reflected in the most recent fi-
nancial statements contained in the Company SEC Reports, and
the inventories reflected on the books of the Company and its
subsidiaries as of the date hereof, except for normal year-end
adjustments made in accordance with GAAP applied consistently
with prior periods, (i) are carried as provided in the Company
SEC Reports not in excess of the lower of cost or net realiz-
able value and (ii) do not include any inventory which, as of
the date of such financial statements, is obsolete, surplus or
not usable or saleable in the lawful and ordinary course of
business of the Company and its subsidiaries as heretofore
conducted, in each case net of reserves provided therefor,
except for such discrepancies which, individually or in the
aggregate, would not have a Company Material Adverse Effect.
Section 5.20 Patents, Trademarks, Etc. Section
4.20(a) The Company and its subsidiaries exclusively own, or
are licensed or otherwise have the right to use, all patents,
trademarks, trade names, service marks, copyrights and any
applications therefor, maskworks, net lists, schematics, in-
ventories, technology, trade secrets, source codes, know-how,
computer software programs or applications and tangible or
intangible proprietary information or material that in any
material respect are used or proposed by the Company to be
used in the business of the Company and any of its subsidiar-
ies as currently conducted or proposed by the Company to be
conducted (the "Company Intellectual Property Rights"), the
lack of which, individually or in the aggregate, would have a
Company Material Adverse Effect. Schedule 5.20 of the Company
Disclosure Schedule lists, as of the date hereof, all materi-
al: (A) patents, trademarks, trade names, service marks,
registered and unregistered copyrights included in the Company
Intellectual Property Rights, the Company's currently marketed
software products and a list of which, if any, of such prod-
ucts have been registered for copyright protection with the
United States Copyright Office and any foreign offices; and
(B) licenses and other agreements to which the Company or any
of its subsidiaries is a party and pursuant to which the Com-
pany or any of its subsidiaries is authorized to use any Com-
pany Intellectual Property Right. Neither the Company nor any
of its subsidiaries is, or as a result of the execution, de-
livery or performance of the Company's obligations hereunder
will be, in violation of, or lose any rights pursuant to, any
material license or agreement described in Schedule 5.20 of
the Company Disclosure Schedule, except for such violations or
losses which, individually or in the aggregate, would not have
a Company Material Adverse Effect. The Company has previously
provided Parent with a list of any applications for patents,
trademarks, trade names, service marks and registered and
unregistered copyrights.
Section 5.20(b) As of the date hereof, except as set
forth in Schedule 5.20(b) of the Company Disclosure Schedule,
no claims with respect to the Company Intellectual Property
Rights have been asserted or, to the knowledge of the Company,
are threatened by any person, nor does the Company or any
subsidiary of the Company know of any valid grounds for any
bona fide claims against the use by the Company or any subsid-
iary of the Company of any Company Intellectual Property
Rights which, insofar as reasonably can be foreseen, could,
individually or in the aggregate, have a Company Material
Adverse Effect. All granted and issued patents and all regis-
tered trademarks and service marks listed in Schedule 5.20 of
the Company Disclosure Schedule and all copyrights held by the
Company or any of its subsidiaries are valid, enforceable and
subsisting, other than those the invalidity of which, indi-
vidually or in the aggregate, would not have a Company Materi-
al Adverse Effect. To the Company's knowledge, as of the date
hereof, there has not been and there is not any material unau-
thorized use, infringement or misappropriation of any of the
Company Intellectual Property Rights by any third party, em-
ployee or former employee which, individually or in the aggre-
gate, would result in a Company Material Adverse Effect.
Section 5.20(c) No Company Intellectual Property
Right is subject to any outstanding order, judgment, decree,
stipulation or agreement restricting in any manner the licens-
ing thereof by the Company or any of its subsidiaries, except
for such orders, judgments, decrees, stipulations or agree-
ments which, individually or in the aggregate, would not have
a Company Material Adverse Effect. Except as set forth in
Schedule 5.20(c) of the Company Disclosure Schedule, neither
the Company nor any of its subsidiaries has entered into any
agreement to indemnify any other person against any charge of
infringement of any Company Intellectual Property Right, ex-
cept infringement indemnities agreed to in the ordinary course
included as part of the Company's license agreements or terms
of sale. Neither the Company nor any of its subsidiaries has
entered into any agreement granting any third party the right
to bring infringement actions with respect to, or otherwise to
enforce rights with respect to, any Company Intellectual Prop-
erty Rights owned by the Company. The Company and its subsid-
iaries have the exclusive right to file, prosecute and main-
tain all applications and registrations with respect to the
Company Intellectual Property Rights owned by the Company.
Section 5.21 Product Liability. The Company is not
aware of any claim, or the basis of any claim, against the
Company or any of its subsidiaries for injury to person or
property of employees or any third parties suffered as a re-
sult of the sale of any product or performance of any service
by the Company or any of its subsidiaries, including claims
arising out of the defective or unsafe nature of its products
or services, which could, individually or in the aggregate,
have a Company Material Adverse Effect. The Company and its
subsidiaries have, and on the Effective Date will have, full
and adequate insurance coverage for potential product liabili-
ty claims against it.
Section 5.22 Environment. 1. As used herein, the
term "Environmental Laws" means all federal, state, local or
Foreign Laws relating to pollution or protection of human
health or the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or sub-
surface strata), including, without limitation, laws relating
to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, or industrial, toxic or
hazardous substances or wastes into the environment, or other-
wise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of
chemicals, pollutants, contaminants, or industrial, toxic or
hazardous substances or wastes, as well as all authorizations,
codes, decrees, demands or demand letters, injunctions, judg-
ments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved
thereunder.
Section 5.229(b) To the knowledge of the Company,
there are, except as disclosed in the Company SEC Reports,
with respect to the Company or any of its subsidiaries, no
past or present violations of Environmental Laws, releases of
any material into the environment, actions, activities, cir-
cumstances, conditions, events, incidents, or contractual
obligations which may give rise to any common law liability or
any liability under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA") or similar
state or local laws, which liabilities, either individually or
in the aggregate, would have a Company Material Adverse Ef-
fect.
Section 5.23 Tax and Accounting Matters. Neither
the Company nor, to its best knowledge, any of its affiliates,
has through the date hereof, taken or agreed to take any ac-
tion, nor are they aware of any circumstances relating to the
Company or its affiliates which currently exist, that would
(i) prevent Parent from accounting for the business combina-
tion to be effected by the Merger as a "pooling of interests"
or (ii) prevent the Merger from constituting a reorganization
within the meaning of Section 368(a) of the Code.
Section 5.24 Authorized Stock. The Company has tak-
en all necessary corporate and other action to authorize and
reserve and to permit it to issue, and, at all times from the
date hereof until the obligation to deliver Company Common
Stock upon the exercise of the Option terminates, will have
reserved for issuance, upon exercise of the Option, shares of
Company Common Stock necessary for Parent to exercise in full
the Option, and the Company will take all necessary corporate
action to authorize and reserve for issuance all additional
shares of Company Common Stock or other securities which may
be issued pursuant to the Stock Option Agreement upon exercise
of the Option. The shares of Company Common Stock to be is-
sued upon due exercise of the Option, including all additional
shares of Company Common Stock or other securities which may
be issuable pursuant to the Stock Option Agreement, upon issu-
ance pursuant thereto, shall be duly and validly issued,
fully paid and nonassessable, and shall be delivered free and
clear of all liens, claims, charges and encumbrances of any
kind or nature whatsoever, including any preemptive rights of
any stockholder of the Company.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Conduct of Business by the Company Pend-
ing the Merger. Prior to the Effective Date, unless Parent
shall otherwise agree in writing:
(i) the Company shall, and shall cause its sub-
sidiaries to, carry on their respective businesses
in the usual, regular and ordinary course in sub-
stantially the same manner as heretofore conducted,
and shall, and shall cause its subsidiaries to, use
their diligent efforts to preserve intact their
present business organizations, keep available the
services of their present officers and employees and
preserve their relationships with customers, suppli-
ers and others having business dealings with them to
the end that their goodwill and ongoing businesses
shall be unimpaired at the Effective Date. The
Company shall, and shall cause its subsidiaries to,
(A) maintain insurance coverages and its books,
accounts and records in the usual manner consistent
with prior practices; (B) comply in all material
respects with all laws, ordinances and regulations
of Governmental Entities applicable to the Company
and its subsidiaries; (C) maintain and keep its
properties and equipment in good repair, working
order and condition, ordinary wear and tear except-
ed; and (D) perform in all material respects its
obligations under all contracts and commitments to
which it is a party or by which it is bound, in each
case other than where the failure to so maintain,
comply or perform, either individually or in the
aggregate, would not result in a Company Material
Adverse Effect;
(ii) except as required by this Merger Agree-
ment, the Company shall not and shall not propose to
(A) sell or pledge or agree to sell or pledge any
capital stock owned by it in any of its subsidiar-
ies; (B) amend its Restated Certificate of Incorpo-
ration or Bylaws; (C) split, combine or reclassify
its outstanding capital stock or issue or authorize
or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares
of capital stock of the Company, or declare, set
aside or pay any dividend or other distribution
payable in cash, stock or property; or (D) directly
or indirectly redeem, purchase or otherwise acquire
or agree to redeem, purchase or otherwise acquire
any shares of Company capital stock;
(iii) the Company shall not, nor shall it per-
mit any of its subsidiaries to, (A) except as con-
templated by this Merger Agreement, issue, deliver
or sell or agree to issue, deliver or sell any addi-
tional shares of, or rights of any kind to acquire
any shares of, its capital stock of any class, any
Indebtedness or any options, rights or warrants to
acquire, or securities convertible into, shares of
capital stock other than issuances of Company Common
Stock pursuant to the exercise of Company Stock
Options or the conversion of Company Notes outstand-
ing on the date hereof (other than as set forth in
Schedule 6.1 of the Company Disclosure Schedule);
(B) acquire, lease or dispose of, or agree to ac-
quire, lease or dispose of, any capital assets or
any other assets other than in the ordinary course
of business; (C) incur additional Indebtedness or
encumber or grant a security interest in any asset
or enter into any other material transaction other
than in each case in the ordinary course of business
(other than as set forth in Schedule 6.1 of the
Company Disclosure Schedule); (D) acquire or agree
to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in, or by
any other manner, any business or any corporation,
partnership, association or other business organiza-
tion or division thereof, in each case in this
clause (D) which are material, individually or in
the aggregate, to the Company and its subsidiaries
taken as a whole; or (E) enter into any contract,
agreement, commitment or arrangement with respect to
any of the foregoing;
(iv) the Company shall not, nor shall it per-
mit any of its subsidiaries to, except as required
to comply with applicable law and except as provided
in Section 7.5 and Section 7.11, (A) adopt, enter
into, terminate or amend any bonus, profit sharing,
compensation, severance, termination, stock option,
pension, retirement, deferred compensation, employ-
ment or other Company Plan, agreement, trust, fund
or other arrangement for the benefit or welfare of
any current or former director, officer, employee or
independent contractor; (B) increase in any manner
the compensation or fringe benefit of any director,
officer, employee or independent contractor (other
than in the ordinary course of business consistent
with past practice but in no event in excess of 3%);
(C) other than as set forth in Schedule 6.1 of the
Company Disclosure Schedule, pay any benefit not
provided under any existing plan or arrangement;
(D) other than as set forth in Schedule 6.1 of the
Company Disclosure Schedule, grant any awards under
any bonus, incentive, performance or other compensa-
tion plan or arrangement or Company Plan (including,
without limitation, the grant of stock options,
stock appreciation rights, stock based or stock
related awards, performance units or restricted
stock, or the removal of existing restrictions or
the acceleration of exercisability in any Company
Plan or agreements or awards made thereunder) (other
than payments of bonuses in the ordinary course of
business pursuant to the Company's Management-By-
Objective (MBO) bonus plan or arrangement); (E) take
any action to fund or in any other way secure the
payment of compensation or benefits under any em-
ployee plan, agreement, contract or arrangement or
Company Plan; or (F) adopt, enter into, amend or
terminate any contract, agreement, commitment or ar-
rangement to do any of the foregoing;
(v) the Company shall not, nor shall it permit
any of its subsidiaries to, make any investments in
non-investment grade securities, provided, however,
that the Company will be permitted to create new
wholly owned subsidiaries in the ordinary course of
business;
(vi) the Company shall not, nor shall it per-
mit any of its subsidiaries to, take or cause to be
taken any action, whether before or after the Effec-
tive Date, which would disqualify the Merger as a
"pooling of interests" for accounting purposes or as
a "reorganization" within the meaning of Section
368(a) of the Code; and
(vii) the Company shall not, nor shall it per-
mit any of its subsidiaries to, except as required
by law or GAAP, change any of its significant ac-
counting policies or make or rescind any express or
deemed election relating to taxes, settle or compro-
mise any claim, action, suit, litigation, proceed-
ing, arbitration, investigation, audit or controver-
sy relating to taxes, or change any of its methods
of reporting income or deductions for federal income
tax purposes from those employed in the preparation
of the federal income tax returns for the last tax-
able year.
Section 6.2 Conduct of Business by Parent and Sub
Pending the Merger. 2. Parent. Prior to the Effective Date,
unless the Company shall otherwise agree in writing or except
as otherwise required by this Merger Agreement: (i) Parent
shall, and shall cause its subsidiaries to, carry on their re-
spective businesses in the usual, regular and ordinary course
in substantially the same manner as heretofore conducted, and
shall, and shall cause its Significant Subsidiaries to, use
their diligent efforts to preserve intact their present busi-
ness organizations, keep available the services of their pres-
ent officers and employees and preserve their relationships
with customers, suppliers and others having business dealings
with them to the end that their goodwill and ongoing business-
es shall be unimpaired at the Effective Date, provided, howev-
er, that nothing contained herein shall prevent Parent from
creating new wholly owned subsidiaries in the ordinary course
of business as long as the creation of such subsidiaries (ei-
ther alone or in the aggregate) will not have a Parent Materi-
al Adverse Effect; and (ii) the Parent shall not, nor shall it
permit any of its subsidiaries to, take or cause to be taken
any action, whether before or after the Effective Date, which
would disqualify the Merger as a "pooling of interests" for
accounting purposes or as a "reorganization" within the mean-
ing of Section 368(a) of the Code.
Section 6.2(b) Sub. During the period from the date
of this Merger Agreement to the Effective Date, Sub shall not
engage in any activities of any nature except as provided in
or contemplated by this Merger Agreement.
Section 6.3 Notice of Breach. Each party shall
promptly give written notice to the other party upon becoming
aware of the occurrence or, to its knowledge, impending or
threatened occurrence, of any event which would cause or con-
stitute a breach of any of its representations, warranties or
covenants contained or referenced in this Merger Agreement and
will use its best efforts to prevent or promptly remedy the
same. Any such notification shall not be deemed an amendment
of the Company Disclosure Schedule.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Access and Information. Subject to the
limitations imposed by third party confidentiality agreements,
each of the Company and Parent and their respective subsidiar-
ies shall afford to the other and to the other's accountants,
counsel and other representatives full access during normal
business hours (and at such other times as the parties may mu-
tually agree) throughout the period prior to the Effective
Date to all of its properties, books, contracts, commitments,
records and personnel and, during such period, each shall fur-
nish promptly to the other (i) a copy of each report, schedule
and other document filed or received by it pursuant to the re-
quirements of federal or state securities laws, and (ii) all
other information concerning its business, properties and per-
sonnel as the other may reasonably request. Each of the Com-
pany and Parent shall hold, and shall cause their respective
employees and agents to hold, in confidence all such informa-
tion in accordance with the terms of the Confidentiality
Agreement, dated April 29, 1997, between Parent and the Compa-
ny (the "Confidentiality Agreement").
Section 7.2 Registration Statement/Proxy Statement.
Section 6.2(a) As promptly as practicable after the execution
of this Merger Agreement, the Company and Parent shall prepare
and the Company shall file with the Commission preliminary
proxy materials which shall constitute the preliminary Proxy
Statement and a preliminary prospectus with respect to the
Parent Common Stock to be issued in connection with the Merg-
er. As promptly as practicable after comments are received
from the Commission with respect to the preliminary proxy
materials and after the furnishing by the Company and Parent
of all information required to be contained therein, the Com-
pany shall file with the Commission the definitive Proxy
Statement and Parent shall file with the Commission the Regis-
tration Statement and Parent and the Company shall use all
reasonable efforts to cause the Registration Statement to
become effective as soon thereafter as practicable.
Section 7.2(b) Parent and the Company shall make all
necessary filings with respect to the Merger under the Securi-
ties Act and the Exchange Act and the rules and regulations
thereunder and under applicable blue sky or similar securities
laws and shall use all reasonable efforts to obtain required
approvals and clearances with respect thereto.
Section 7.3 Affiliates; Publication of Combined Fi-
nancial Results. 1. Prior to the Effective Date the Company
shall cause to be delivered to Parent an opinion (satisfactory
to counsel for Parent) of the general counsel of the Company
or such law firm as may be reasonably satisfactory to Parent,
identifying all persons who were, in his or its opinion, at
the time of the Company Meeting convened in accordance with
Section 3.5, "affiliates" of the Company as that term is used
in paragraphs (c) and (d) of Rule 145 under the Securities Act
(the "Affiliates").
Section 7.3(b) The Company shall use its best ef-
forts to obtain a written agreement in the form set forth as
Exhibit C to this Merger Agreement from each person who is
identified as a possible Affiliate in the opinion referred to
in clause (a) above, providing that such Affiliate will not
(i) offer to sell, sell or otherwise dispose of any of the
capital stock of Parent issued to such Affiliate pursuant to
the Merger, except in compliance with Rule 145 or another
exemption from the registration requirements of the Securities
Act and (ii) except to the extent and under the conditions
permitted therein, during the period commencing 30 days prior
to the Merger and ending at the time of publication of finan-
cial results (including combined sales and net income) cover-
ing at least 30 days of post-merger operations, sell or in any
other way reduce such Affiliate's risk relative to any Parent
Common Stock received in the Merger (within the meaning of the
Commission's Financial Reporting Release No. 1, "Codification
of Financing Reporting Policies," section 201.01 (47 F.R. 21030)
(April 15, 1982)). The Company shall deliver such written
agreements to Parent on or prior to the earlier of (i) the
mailing of the Proxy Statement or (ii) the thirtieth day prior
to the Effective Date.
Section 7.3(c) If the Effective Date is less than 30
days prior to the end of Parent's fiscal quarter, Parent shall
use reasonable efforts to prepare and publicly release as soon
as practicable following the end of the first month ending at
least 30 days after the Effective Date, a report filed with
the Commission on Form 8-K or any other public filing, state-
ment or announcement which includes the combined financial
results (including combined sales and net income) of Parent
and the Company for a period of at least 30 days of combined
operations of Parent and the Company following the Effective
Date; provided that Parent need not prepare and release such
results if, in its good faith judgment, it determines that
such release would not be in the best interests of Parent.
Section 7.4 Stock Exchange Listing. Parent shall
use its best efforts to list on the NYSE, upon official notice
of issuance, the shares of Parent Common Stock to be issued
pursuant to the Merger.
Section 7.5 Employment Arrangements. 1. After the
Effective Date, Parent shall, or shall cause the Surviving
Corporation to, honor in accordance with their terms, all
employment, severance, consulting and other compensation con-
tracts between the Company or any of its subsidiaries and any
current or former director, officer or employee thereof, and
all provisions for vested benefits or other vested amounts
earned or accrued through the Effective Date under any Company
Plan, each as of the date hereof except for changes thereto
which are permitted by this Merger Agreement or otherwise
agreed to by the parties thereto.
Section 7.5(b) For a period of 12 months after the
Effective Date, Parent shall provide, or shall cause the Sur-
viving Corporation to provide, generally to the officers and
employees of the Surviving Corporation and its subsidiaries
employee benefits, including, without limitation, pension
benefits, health and welfare benefits, and severance arrange-
ments, on terms and conditions in the aggregate that are no
less favorable than those provided under the Company Plans as
of the date hereof. Parent shall, or shall cause the Surviv-
ing Corporation to, credit officers and employees of the Com-
pany and its subsidiaries, with their service with the Company
and its subsidiaries for purposes of eligibility to partici-
pate and vesting with respect to employee benefit plans of
Parent and the Surviving Corporation. Individual eligibility
for participation in the medical plans of Parent or the Sur-
viving Corporation shall not be subject to any exclusions for
preexisting conditions other than any such exclusions provided
in the medical plans of the Company or its subsidiaries.
Amounts paid before the Effective Date by directors, officers
and employees under medical plans of the Company and its sub-
sidiaries shall be taken into account after the Effective Date
in applying deductible and out-of-pocket limits applicable
under the medical plans of Parent and the Surviving Corpora-
tion to the same extent as if such amounts had been paid under
the medical plans of Parent and the Surviving Corporation.
Section 7.5(c) It is the intent of Parent, after the
Effective Date, to permit employees of the Company and its
subsidiaries to participate in the incentive and compensation
plans of Parent on a basis equivalent to similarly situated
employees of Parent.
Section 7.6 Indemnification. 2. From and after the
Effective Date, Parent shall indemnify, defend and hold harm-
less the officers, directors and employees of the Company (the
"Indemnified Parties") against all losses, expenses, claims,
damages or liabilities arising out of the transactions contem-
plated by this Merger Agreement to the fullest extent permit-
ted or required under applicable law. Parent agrees that all
rights to indemnification existing in favor of the current or
former directors, officers or employees of the Company or any
of its subsidiaries as provided in the Company's Restated
Certificate of Incorporation or By-laws, as in effect as of
the date hereof, with respect to matters occurring through the
Effective Date, shall survive the Merger and shall continue in
full force and effect for a period of not less than six years
from the Effective Date. Parent agrees to maintain or cause
the Surviving Corporation to maintain in effect for not less
than six years after the Effective Date policies of directors'
and officers' liability insurance equivalent to those main-
tained by the Company with respect to matters occurring on or
prior to the Effective Date; provided, however, that the Sur-
viving Corporation shall not be required to pay an aggregate
premium for such insurance in excess of $1.2 million, but in
such case shall purchase as much coverage as possible for such
amount.
Section 7.6(b) In the event that any action, suit,
proceeding or investigation relating hereto or to the transac-
tions contemplated by this Merger Agreement is commenced,
whether before or after the Effective Date, the parties hereto
agree to cooperate and use their respective reasonable efforts
to vigorously defend against and respond thereto.
Section 7.6(c) The provisions of the Certificate of
Incorporation and By-laws of the Surviving Corporation per-
taining to indemnification of current and former directors,
officers and employees shall not be amended, repealed or oth-
erwise modified for a period of six years after the Effective
Date (or, in the case of matters which are pending but which
have not been resolved prior to the sixth anniversary of the
Effective Date, until such matters are finally resolved), in
any manner that would adversely affect the rights thereunder
of individuals who at any time on or prior to the Effective
Date were directors, officers or employees of the Company in
respect of actions or omissions occurring on or prior to the
Effective Date (including, without limitation, the transac-
tions contemplated by this Merger Agreement).
Section 7.6(d) The provisions of this Section 7.6
are intended for the benefit of, and shall be enforceable by,
the respective Indemnified Parties.
Section 7.7 HSR Act. The Company and Parent shall
use their best efforts to file as soon as practicable notifi-
cations under the HSR Act in connection with the Merger and
the transactions contemplated hereby, including, but not lim-
ited to, the Stock Option Agreement and the transactions con-
templated thereby, and to respond as promptly as practicable
to any inquiries received from the Federal Trade Commission
(the "FTC") and the Antitrust Division of the Department of
Justice (the "Antitrust Division") for additional information
or documentation and to respond as promptly as practicable to
all inquiries and requests received from any State Attorney
General or other governmental authority in connection with
antitrust matters.
Section 7.8 Additional Agreements. 3. Subject to
the terms and conditions herein provided, each of the parties
hereto agrees to use all reasonable efforts to take, or cause
to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws
and regulations to consummate and make effective the transac-
tions contemplated by this Merger Agreement, including using
all reasonable efforts to obtain all necessary waivers, con-
sents and approvals, to effect all necessary registrations and
filings (including, but not limited to, filings with all ap-
plicable Governmental Entities) and to lift any injunction or
other legal bar to the Merger or the Stock Option Agreement,
subject to the appropriate vote of the shareholders of the
Company. Notwithstanding the foregoing, neither Parent nor
any of its subsidiaries shall be required to take any action,
and without Parent's prior written consent neither the Company
nor any of its subsidiaries shall agree to take any action,
that would in any way restrict or limit the conduct of busi-
ness from and after the Effective Date by Parent, the Company
or any subsidiary of either (including, without limitation,
any divestiture of any business, product line or asset).
Section 7.8(b) In case at any time after the Effec-
tive Date any further action is necessary or desirable to
carry out the purposes of this Merger Agreement, the proper
officers and/or directors of Parent, the Company and the Sur-
viving Corporation shall take all such necessary action.
Section 7.8(b) Following the Effective Date, Parent
shall use its best efforts to conduct the business, and shall
cause the Surviving Corporation to use its best efforts to
conduct its business, except as otherwise contemplated by this
Merger Agreement, in a manner which would not jeopardize the
characterization of the Merger as a reorganization within the
meaning of Section 368(a) of the Code.
Section 7.9 No Solicitation. 4. As used herein,
the term "Acquisition Proposal" means any proposed (i) merger,
consolidation or similar transaction involving the Company,
(ii) sale, lease or other disposition directly or indirectly
by merger, consolidation, share exchange or otherwise of as-
sets of the Company or its subsidiaries representing 30% or
more of the consolidated assets of the Company and its subsid-
iaries in one transaction or a series of transactions, (iii)
issue, sale, or other acquisition or disposition of (including
by way of merger, consolidation, share exchange or any similar
transaction) securities (or options, rights or warrants to
purchase, or securities convertible into, such securities)
representing 20% or more of the voting power of the Company or
(iv) transaction in which any person shall or would acquire
beneficial ownership (as such term is defined in Rule 13d-3
under the Exchange Act), or the right to acquire beneficial
ownership, or any "group" (as such term is defined under the
Exchange Act) shall have been formed which beneficially owns
or would own or has or would have the right to acquire ben-
eficial ownership of 20% or more of the outstanding Company
Common Stock, other than transactions contemplated by this
Merger Agreement or the Stock Option Agreement.
Section 7.9(b) Neither the Company nor any of its
subsidiaries shall, nor shall the Company authorize or permit
its subsidiaries, officers, directors, employees, representa-
tives, investment bankers, attorneys, accountants or other
agents or affiliates to, take any action to (i) solicit, ini-
tiate or encourage (including by way of furnishing informa-
tion) the submission of any Acquisition Proposal or (ii) par-
ticipate in any discussions or negotiations with, or furnish
any information to, any person in connection with, or take any
other action to facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to
lead to, any Acquisition Proposal; provided, however, that if,
at any time prior to the obtaining of Company stockholder
approval of the Merger, the Board of Directors of the Company
determines in good faith by a majority vote, based on the
advice of outside counsel, that it is necessary to do so to
avoid a breach of its fiduciary duties to stockholders under
applicable law, the Company may, in response to a written Ac-
quisition Proposal which the Board of Directors of the Company
determines in good faith by a majority vote, based on the
opinion of a financial advisor of nationally recognized repu-
tation, to be more favorable from a financial point of view to
the Company's stockholders than this Merger Agreement, the
Merger and the transactions contemplated hereby, and which
proposal was not solicited by the Company or otherwise result
from a breach of this Section 7.9(b), and subject to the
Company's compliance with Section 7.9(d), (A) furnish infor-
mation with respect to it and its subsidiaries to any person
pursuant to a customary confidentiality agreement containing
terms at least as favorable to the Company as those contained
in the confidentiality agreements in place between the Company
and Parent and (B) participate in discussions or negotiations
with respect to such Acquisition Proposal.
Section 7.9(c) Except as expressly permitted by this
Section 7.9, neither the Board of Directors of the Company,
nor any committee thereof, shall (i) withdraw or modify, or
propose publicly to withdraw or modify, in a manner adverse to
Parent, the approval or recommendation by such Board of Direc-
tors or such committee of the adoption and approval of the
matters to be considered at the Company Meeting, (ii) approve
or recommend, or propose publicly to approve or recommend, any
Acquisition Proposal, or (iii) cause the Company to enter into
any letter of intent, agreement in principle, acquisition
agreement or other similar agreement or understanding (writ-
ten or otherwise) related to any Acquisition Proposal (each,
an "Acquisition Agreement"). Notwithstanding the foregoing,
in the event that prior to the obtaining of Company stockhold-
er approval of the Merger, there exists a Superior Proposal
(as defined herein), the Board of Directors of the Company
may, if it determines in good faith by a majority vote, based
on the advice of outside counsel, that it is necessary to do
so to avoid a breach of its fiduciary duties to stockholders
under applicable law, approve or recommend such Superior Pro-
posal and terminate this Merger Agreement, provided (i) the
Company shall have given Parent written notice (a "Superior
Proposal Notice") at least five business days prior to such
termination advising Parent that the Board of Directors of the
Company has received a Superior Proposal which the Board of
Directors has authorized and intends to effect, specifying the
material terms and conditions of such Superior Proposal and
identifying the person making such Superior Proposal, (ii) the
Company shall otherwise be in compliance with its obligations
under this Merger Agreement and the Stock Option Agreement and
(iii) the Company pays, or causes to be paid, to Parent the
amounts contemplated by Section 9.2(b) prior to terminating
this Merger Agreement. For purposes of this Merger Agreement,
a "Superior Proposal" means any written proposal made by a
third party to acquire, directly or indirectly, more than 50%
of the equity securities of the Company entitled to vote gen-
erally in the election of directors or all or substantially
all of the assets of the Company, and otherwise on terms which
the Board of Directors of the Company determines in its good
faith judgment, based on the opinion of a financial advisor of
nationally recognized reputation, to be more favorable from a
financial point of view to the Company's stockholders than
this Merger Agreement, the Merger and the transactions contem-
plated hereby and for which financing, to the extent required,
is then committed.
Section 7.9(d) In addition to the obligations set
forth in paragraphs (b) and (c) of this Section 7.9, the Com-
pany will promptly communicate to Parent in writing any solic-
itation received, directly or indirectly, by the Company and
will furnish to Parent a copy of any such solicitation or
proposal, if it is in writing, or a written summary of the
terms of such proposal or inquiry if it is not in writing,
including the identity of the person and its affiliates making
the same, that it may receive in respect of any such transac-
tion, or of any such information requested from it or of any
such negotiations or discussions being sought to be initiated
with it. The Company shall promptly advise Parent of any
development relating to such proposal, including the results
of any discussions or negotiations with respect thereto.
Section 7.9(e) Nothing contained in this Section 7.9
shall prohibit the Company from taking and disclosing to its
stockholders a position contemplated by Rule 14e-2(a) promul-
gated under the Exchange Act or from making any disclosure to
its stockholders if, in the good faith judgment of its Board
of Directors, based on the advice of outside counsel, failure
so to disclose would result in a violation of applicable law;
provided, however, that neither the Company nor its Board of
Directors nor any committee thereof shall withdraw or modify,
or propose publicly to withdraw or modify, its position with
respect to the matters to be considered at the Company Meeting
or approve or recommend, or propose publicly to approve or
recommend, an Acquisition Proposal, except as provided in
Section 7.9(c).
Section 7.10 Employee Agreements. The Company shall
use all reasonable efforts to cause the individuals listed on
Annex A hereto (and such additional persons as Parent and the
Company shall agree upon) to execute, at or prior to the Ef-
fective Date, the agreements set forth next to their respec-
tive names on such Annex A.
Section 7.11 Company Stock Plans. If the Effective
Date occurs subsequent to December 31, 1997, the Company shall
terminate the Company Employee Stock Purchase Plan ("Company
Purchase Plan") by having its Board of Directors amend the
Company Purchase Plan to terminate at the earlier of (i) the
end of the current stock offering period under the Company
Purchase Plan or (ii) immediately prior to the Effective Date.
If the Effective Date occurs on or prior to December 31, 1997,
the current stock offering period shall continue through De-
cember 31, 1997, and any options issued under the Company
Purchase Plan which are outstanding and unexercised immediate-
ly prior to the Effective Date shall be converted into options
to purchase a number of shares of Parent Common Stock pursuant
to Section 3.1(e).
Section 7.12 Independent Auditors. The Company
shall provide to Parent a letter from Ernst & Young LLP, the
Company's independent auditors, dated a date within two busi-
ness days before the date on which the Registration Statement
shall become effective and addressed to Parent, in form and
substance reasonably satisfactory to Parent and customary in
scope and substance for letters delivered by independent pub-
lic accountants in connection with registration statements
similar to the Registration Statement.
ARTICLE VIII
CONDITIONS PRECEDENT
Section 8.1 Conditions to Each Party's Obligation to
Effect the Merger. The respective obligations of each party
to effect the Merger shall be subject to the fulfillment at or
prior to the Effective Date of the following conditions:
Section 8.1(a) This Merger Agreement and the trans-
actions contemplated hereby shall have been approved and
adopted by the requisite vote of the holders of the Company
Common Stock.
Section 8.1(b) The Parent Common Stock issuable in
the Merger shall have been authorized for listing on the NYSE
upon official notice of issuance.
Section 8.1(c) The waiting period applicable to the
consummation of the Merger under the HSR Act shall have ex-
pired or been terminated.
Section 8.1(d) The Registration Statement shall have
become effective in accordance with the provisions of the
Securities Act. No stop order suspending the effectiveness of
the Registration Statement shall have been issued by the Com-
mission and remain in effect.
Section 8.1(e) No temporary restraining order, pre-
liminary or permanent injunction or other order by any court
or other judicial or administrative body of competent juris-
diction (each, an "Injunction") which prohibits or prevents
the consummation of the Merger shall have been issued and
remain in effect (each party agreeing to use its best efforts
to have any such Injunction lifted), and there shall not be
any action taken, or any statute, rule, regulation or order
(whether temporary, preliminary or permanent) enacted, entered
or enforced which makes the consummation of the Merger illegal
or prevents or prohibits the Merger.
Section 8.1(f) The Company shall have received from
Ernst & Young LLP, independent auditors for the Company, a
letter addressed to the Company dated within two days prior to
the Effective Date, in substance reasonably satisfactory to
Parent and the Company, to the effect that Ernst & Young LLP
concurs with Company management conclusions that no conditions
exist related to the Company that would preclude Parent from
accounting for the Merger as a pooling of interests and Parent
shall have received from KPMG Peat Marwick LLP, independent
auditors for Parent, a letter addressed to Parent dated within
two days prior to the Effective Date, in substance reasonably
satisfactory to Parent and the Company, to the effect that
KPMG Peat Marwick LLP concurs with Parent management conclu-
sions that no conditions exist that would preclude Parent from
accounting for the Merger as a pooling of interests.
Section 8.2 Conditions to Obligation of the Company
to Effect the Merger. The obligation of the Company to effect
the Merger shall be subject to the fulfillment at or prior to
the Effective Date of the additional following conditions, un-
less waived by the Company:
Section 8.2(a) Parent and Sub shall have performed
in all material respects their agreements contained in this
Merger Agreement required to be performed on or prior to the
Effective Date and the representations and warranties of Par-
ent and Sub contained in this Merger Agreement shall be true
in all material respects (except for any such representations
or warranties which are qualified as to Parent Material Ad-
verse Effect, which shall be true and correct in all respects)
when made and on and as of the Effective Date as if made on
and as of such date, except for representations and warranties
which are by their express provisions made as of a specific
date or dates, which were or will be true in all material
respects (except for any such representations or warranties
which are qualified as to Parent Material Adverse Effect,
which were or will be true and correct in all respects) at
such time or times as stated therein, and the Company shall
have received a certificate of the President or Chief Execu-
tive Officer or a Vice President of Parent to that effect.
Section 8.2(b) The Company shall have received a
favorable opinion of Vinson & Elkins L.L.P., based upon cer-
tain factual representations of the Company, Parent and Sub
reasonably requested by such counsel, dated the Effective
Date, to the effect that the Merger will constitute a "reorga-
nization" for federal income tax purposes within the meaning
of Section 368(a) of the Code.
Section 8.3 Conditions to Obligations of Parent and
Sub to Effect the Merger. The obligations of Parent and Sub
to effect the Merger shall be subject to the fulfillment at or
prior to the Effective Date of the additional following condi-
tions, unless waived by Parent:
Section 8.3(a) The Company shall have performed in
all material respects its agreements contained in this Merger
Agreement required to be performed on or prior to the Effec-
tive Date and the representations and warranties of the Compa-
ny contained in this Merger Agreement shall be true in all
material respects (except for any such representations or
warranties which are qualified as to Company Material Adverse
Effect, which shall be true and correct in all respects) when
made and on and as of the Effective Date as if made on and as
of such date, except for representations and warranties which
are by their express provisions made as of a specific date or
dates which were or will be true in all material respects
(except for any such representations or warranties which are
qualified as to Company Material Adverse Effect, which were or
will be true and correct in all respects) at such date or
dates, and Parent and Sub shall have received a certificate of
the President or Chief Executive Officer or a Vice President
of the Company to that effect.
Section 8.3(b) Parent shall have received a favor-
able opinion of Wachtell, Lipton, Rosen & Katz, based upon
certain factual representations of the Company, Parent and Sub
reasonably requested by such counsel, to the effect that the
Merger will be treated for federal income tax purposes as a
"reorganization" within the meaning of Section 368(a) of the
Code.
Section 8.3(c) The Company shall have obtained all
consents, appeals, releases or authorizations from, and shall
have made all filings and registrations to or with, any per-
son, including but not limited to any Governmental Entity,
necessary to be obtained or made in order to consummate the
transactions contemplated by this Merger Agreement.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination. This Merger Agreement may
be terminated at any time prior to the Effective Date, whether
before or after approval by the shareholders of the Company:
Section 9.1(a) by mutual consent of the Board of
Directors of Parent and the Board of Directors of the Company;
Section 9.1(b) by either Parent or the Company, if
the Merger shall not have been consummated on or before April
30, 1998; provided that the right to terminate this Agreement
pursuant to this Section 9.1(b) shall not be available to any
party whose failure to perform in any material respect any
covenant under this Merger Agreement has been the cause of or
resulted in whole or in part in the failure of the Merger to
be consummated before such date;
Section 9.1(c) by either Parent or the Company, if
there shall be any Order which is final and nonappealable
preventing the consummation of the Merger;
Section 9.1(d) by either Parent or the Company, if
this Merger Agreement and the transactions contemplated hereby
shall fail to receive the requisite vote for approval and
adoption by the stockholders of the Company at the Company
Meeting, or by Parent if this Merger Agreement and the trans-
actions contemplated hereby shall not have received the requi-
site vote for approval and adoption by the stockholders of the
Company at the Company Meeting prior to February 28, 1998;
Section 9.1(e) by Parent, if the Board of Directors
of the Company withdraws, modifies in a manner adverse to
Parent, or refrains from making its recommendation concerning
the Merger referred to in Section 3.5, or, other than in con-
nection with the Company's delivery of a Superior Proposal
Notice, discloses its intention to change such recommendation,
or the Board of Directors of the Company shall have recommend-
ed to the stockholders of the Company any Acquisition Proposal
or the Company shall have entered into an Acquisition Agree-
ment, or, other than in connection with the Company's delivery
of a Superior Proposal Notice, the Board of Directors of the
Company shall have resolved to do any of the foregoing; or
Section 9.1(f) by the Company, if, pursuant to Sec-
tion 7.9(c), (A) the Board of Directors of the Company has
delivered to Parent a Superior Proposal Notice, (B) the Com-
pany has paid the Termination Fee and Expenses (as defined in
Section 9.2), (C) the Company shall otherwise be in compliance
with its obligations under this Merger Agreement and the Stock
Option Agreement and (D) five business days have passed since
Parent received the Superior Proposal Notice.
Section 9.2 Effect of Termination; Fees. Section
8.2(a) In the event of termination of this Merger Agreement by
either Parent or the Company, as provided above, this Merger
Agreement shall forthwith become void and (except for the
willful breach of this Merger Agreement by any party hereto)
there shall be no liability on the part of either the Company,
Parent or Sub or their respective officers or directors; pro-
vided that Article V insofar as such representations and war-
ranties relate to the Stock Option Agreement, the last sen-
tence of Section 7.1, Section 7.7 (with respect to the Stock
Option Agreement and the transactions contemplated thereby)
and Section 7.8 (with respect to the Stock Option Agreement
and the transactions contemplated thereby) and Sections 9.2,
10.3 and 10.7 shall survive the termination.
Section 9.2(b) The Company shall pay to Parent (by
wire transfer to an account designated by Parent) a Termina-
tion Fee (as defined below) and, notwithstanding Section 10.3,
the out-of-pocket expenses (including, without limitation, all
fees and expenses of counsel, accountants, printing and mail-
ing, investment bankers, experts and consultants) incurred in
connection with this Merger Agreement and the transactions
contemplated hereby ("Expenses") of Parent and Sub up to $2
million, if: (i) Parent terminates this Merger Agreement pur-
suant to Section 9.1(e); (ii) the Company terminates this
Merger Agreement pursuant to Section 9.1(f); or (iii) (A) the
Company or Parent terminates this Agreement pursuant to Sec-
tion 9.1(d), and (B) within twelve months after such termina-
tion (1) the Company enters into an Acquisition Agreement or
(2) any Acquisition Proposal is consummated with respect to
the Company.
Section 9.2(c) The Termination Fee shall be equal to $25 million,
less the Aggregate Spread (as defined in the Stock Option Agreement)
(if greater than zero) on the date of issuance of shares of Company
Common Stock theretofore issued to Parent pursuant to the Stock Option
Agreement; provided, however, that the Termination Fee shall not be
reduced by the Aggregate Spread if Parent has theretofore exercised its
right under Section 7(a) of the Stock Option Agreement to put all of the
Company Shares (as defined in the Stock Option Agreement) to
the Company in exchange for a payment equal only to the aggre-
gate Exercise Price (as defined in the Stock Option Agree-
ment). The Termination Fee shall be paid as promptly as prac-
ticable and in no event later than i) in the event of termina-
tion by the Company as described in clause (ii) of Section
9.2(b), immediately prior to such termination (and no such
termination shall be effective until such payment is made); a)
in the event of termination by Parent as described in clause
(i) of Section 9.2(b), two business days after such termina-
tion; or a. in the event of the circumstances described in
clause (iii) of Section 9.2(b), immediately prior to the ear-
lier of the entry into an Acquisition Agreement or the consum-
mation of any Acquisition Proposal. In the event that Expens-
es are payable pursuant to this Section 9.2, such Expenses
shall be reimbursed within two business days following receipt
by the Company from Parent of a statement of the amount there-
of.
Section 9.3 Amendment. This Merger Agreement may be
amended by the parties hereto, by or pursuant to action taken
by their respective Boards of Directors, at any time before or
after approval hereof by the shareholders of the Company, but,
after such approval, no amendment shall be made which changes
the ratio at which Company Common Stock is converted into Par-
ent Common Stock as provided in Section 3.1 or which in any
way materially adversely affects the rights of such stockhold-
ers, without the further approval of such stockholders. This
Merger Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
Section 9.4 Waiver. At any time prior to the Effec-
tive Date, the parties hereto, by or pursuant to action taken
by their respective Boards of Directors, may (i) extend the
time for the performance of any of the obligations or other
acts of the other parties hereto, (ii) waive any inaccuracies
in the representations and warranties contained herein or in
any documents delivered pursuant hereto, and (iii) waive com-
pliance with any of the agreements or conditions contained
herein; provided, however, that no such waiver shall material-
ly adversely affect the rights of stockholders of the Company
and Parent. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Non-Survival of Representations, War-
ranties and Agreements. No representations, warranties or
agreements in this Merger Agreement shall survive the Merger,
except for the agreements contained in Sections 3.1, 3.2, 3.3,
3.4 and 3.6 and the agreements referred to in Sections 7.3(b),
7.3(c), 7.5, 7.6, 7.8, 10.1, 10.3 and 10.7.
Section 10.2 Notices. All notices or other communi-
cations under this Merger Agreement shall be in writing and
shall be given (and shall be deemed to have been duly given
upon receipt) by delivery in person, by cable, telegram, tel-
ex, telecopy or other standard form of telecommunications, or
by registered or certified mail, postage prepaid, return re-
ceipt requested, addressed as follows:
If to the Company:
Cyrix Corporation
2703 North Central Expressway
Richardson, Texas 75080
Attention: James W. Swent, III
Telecopy No.: (972) 234-4443
With a copy to:
Vinson & Elkins L.L.P.
2001 Ross Avenue
Dallas, Texas 75201
Attention: Derek R. McClain, Esq.
Telecopy No.: (214) 220-7716
If to Parent or Sub:
National Semiconductor Corporation
2900 Semiconductor Drive
P.O. Box 58090
Santa Clara, California 95052
Attention: John M. Clark III, Esq.
Telecopy No.: (408) 733-0293
With a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Barry A. Bryer, Esq.
Telecopy No.: (212) 403-2000
or to such other address as any party may have furnished to
the other parties in writing in accordance with this Section
10.2.
Section 10.3 Expenses. Except as provided in Sec-
tion 9.2(b) and (c), all costs and expenses incurred in con-
nection with this Merger Agreement and the transactions con-
templated hereby (regardless of whether the Merger is consum-
mated) shall be paid by the party incurring such expenses,
except that the Parent and Company agree to each pay 50% of
all printing expenses incurred by the parties hereto.
Section 10.4 Publicity. So long as this Merger
Agreement is in effect, Parent, Sub and the Company agree to
consult with each other in issuing any press release or other-
wise making any public statement with respect to the transac-
tions contemplated by this Merger Agreement, and none of them
shall issue any press release or make any public statement
prior to such consultation, except as may be required by law
or by obligations pursuant to any listing agreement with any
national securities exchange. The commencement of litigation
relating to this Merger Agreement or the transactions contem-
plated hereby or any proceedings in connection therewith shall
not be deemed a violation of this Section 10.4.
Section 10.5 Specific Performance. The parties
hereto agree that irreparable damage would occur in the event
that any of the provisions of this Merger Agreement were not
performed in accordance with their specific terms or were oth-
erwise breached. It is accordingly agreed that the parties
shall be entitled to an injunction or injunctions to prevent
breaches of this Merger Agreement and to enforce specifically
the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addi-
tion to any other remedy to which they are entitled at law or
in equity.
Section 10.6 Interpretation. When a reference is
made in this Merger Agreement to subsidiaries of Parent or the
Company, the word "subsidiaries" means corporations more than
50% of whose outstanding voting securities are directly or in-
directly owned by Parent or the Company, as the case may be.
The headings contained in this Merger Agreement are for refer-
ence purposes only and shall not affect in any way the meaning
or interpretation of this Merger Agreement.
Section 10.7 Miscellaneous. This Merger Agreement
and the Stock Option Agreement (including the documents and
instruments referred to herein and therein) (a) constitute the
entire agreement and supersede all other prior agreements and
understandings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof (other
than as provided in the Confidentiality Agreement, as the same
may be amended, provided, that the provisions set forth in the
ninth paragraph of the Confidentiality Agreement shall have no
further force and effect); (b) except as provided in Section
7.6 of this Merger Agreement, are not intended to confer upon
any other person any rights or remedies hereunder; (c) shall
not be assigned by operation of law or otherwise, except that
Sub shall have the right to assign to Parent or any direct
wholly owned subsidiary of Parent any and all rights and obli-
gations of Sub under this Merger Agreement; and (d) shall be
governed in all respects, including validity, interpretation
and effect, by the laws of the State of Delaware (without giv-
ing effect to the provisions thereof relating to conflicts of
law). This Merger Agreement may be executed in two or more
counterparts which together shall constitute a single agree-
ment.
IN WITNESS WHEREOF, the parties hereto have caused
this Merger Agreement to be signed by their respective offi-
cers thereunder duly authorized all as of the date first writ-
ten above.
NATIONAL SEMICONDUCTOR CORPORATION
By /s/ Brian L. Halla
Name: Brian L. Halla
Title: Chairman, President, CEO
NOVA ACQUISITION CORP.
By /s/ Donald Macleod
------------------
Name: Donald Macleod
Title: CFO/VP
CYRIX CORPORATION
By /s/ James W. Swent III
----------------------
Name: James W. Swent III
Title: Sr. V.P.
Annex A
-------
James Swent - retention agreement
Kevin McDonough - retention agreement
Nancy Dechaud - retention agreement
Mark Bluhm - retention agreement
Robert Maher - retention agreement
Stan Swearingen - retention agreement
Exhibit 10.4
BENEFIT RESTORATION PLAN - PLAN DOCUMENT
As Amended through September 1, 1996
THIS BENEFIT RESTORATION PLAN ("Plan") originally adopted by
National Semiconductor Corporation, a corporation organized and
existing under the laws of the State of Delaware, (hereinafter
referred to as the "Employer") effective as of June 1, 1992, as
hereby amended effective as of September 1, 1996:
WITNESSETH:
WHEREAS, the Employer desires to establish a benefit restoration
income plan for the exclusive benefit of certain participants in
the National Semiconductor Corporation Retirement and Savings
Program ("RASP") so as to reward them for their loyal and
faithful service to the Employer and to aid them in increasing
their economic security by providing additional funds at
retirement with respect to those benefits that are reduced
because of the limitations of sections 401(a)(17), 402(g)(1),
401(k) and 415 of the Internal Revenue Code of 1986; and
WHEREAS, the Employer has been authorized by its Board of
Directors to adopt this Plan in order to provide for the benefits
specified;
NOW, THEREFORE, in consideration of the premises herein
contained, it is hereby declared as follows:
ARTICLE 1
Definitions
When used herein, the words and phrases defined hereinafter shall
have the following meaning unless a different meaning is clearly
required by the context.
1.01 "Account" shall mean the Accounts and subaccounts established pursuant to
Section 3.05 of the Plan.
1.02 "Annual Matching Restoration Amount" shall mean the amount
determined in accordance with Section 3.04 of the Plan.
1.03 "Annual Profit Sharing Restoration Amount" shall mean the
amount determined in accordance with Section 3.02 of the
Plan.
1.04 "Annual Savings Restoration Amount" shall mean the amount
determined in accordance with Section 3.03 of the Plan.
1.05 "Beneficiary" shall mean the person or persons last
designated by a Participant, by written notice filed with
the Committee, to receive a Plan benefit upon his or her
death. In the event a Participant fails to designate a
person or persons as provided above or if no Beneficiary so
designated survives the Participant, then for all purposes
of this Plan, the Beneficiary shall be the person(s)
designated as the beneficiaries by the Participant under the
RASP, and, if none, the Participant's estate.
1.06 "Board" shall mean the Board of Directors of National
Semiconductor Corporation.
1.07 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.08 "Committee" shall mean The Retirement and Savings Program
Administrative Committee, as determined by the Board.
1.09 " Compensation" shall mean Compensation as defined in the
RASP without giving any effect to the limitations imposed by
Section 401(a)(17) of the Code, as now or hereafter in
effect.
1.10 "Elected Contribution" shall mean the amount the Participant
agrees to defer under this Plan pursuant to procedures
established by the Committee up to the maximum permitted
deferral pursuant to Section 3.03 of the Plan.
1.11 "Employer" shall mean National Semiconductor Corporation.
1.12 "Interest" shall mean the rate for long-term A-rated
corporate bonds, reported by the investment banking firm of
Salomon Brothers of New York City (or such other investment
banking firm as the Committee may specify) during the first
week of each Plan Year. The interest rate will be reset at
the beginning of each Plan Year.
1.13 "Participant" shall mean an employee of the Employer
participating in the RASP, who satisfies the eligibility
requirements of Section 2.01 of the Plan and such other
conditions that are established from time to time by the
Committee, including a condition relating to the amount of
the employee's basic compensation or regular rate of
compensation for the Plan Year.
1.14 "Plan" shall mean the National Semiconductor Corporation
Benefit Restoration Plan, as amended from time to time.
1.15 "Plan Year" shall mean the twelve consecutive month period
ending on the last day of May.
1.16 "RASP" shall mean the National Semiconductor Corporation
Retirement and Savings Program.
1.17 Capitalized Terms not defined herein shall have the meaning
attributed to them in the RASP.
ARTICLE II
Eligibility
2.01 Eligibility
A Participant or Beneficiary shall be eligible to receive an
Annual Profit Sharing Restoration Amount in any Plan Year in
which he qualifies for an allocation of the Employer's Annual
Profit Sharing Contribution under the RASP but the amount of the
benefit to which he is entitled is reduced by reason of the
application of the limitations set forth in Sections 401(a)(17)
or 415(c)(1)(A) of the Code. A Participant or Beneficiary shall
be eligible to receive an Annual Savings Restoration Amount in
any Plan Year in which he makes the maximum permitted deferral
under the RASP, as determined by the Committee, and his
Compensation is in excess of an amount determined by the
Committee for such Plan Year. A Participant or Beneficiary shall
be eligible to receive an Annual Matching Restoration Amount in
any Plan Year in which his Compensation exceeds the limitations
set forth in Section 401(a)(17) of the Code and he elects to
defer at least 6% of his Compensation under Section 5.02 A. of
the RASP.
2.02 Enrollment
An eligible individual is automatically enrolled in the Annual
Profit Sharing Restoration Amount portion of this Plan. Eligible
Participants may enroll in the Plan for purposes of the Annual
Savings Restoration Amount by November 30 or other date prior to
the end of the calendar year that is specified by the Committee
("enrollment date") of any year, effective as of January 1 of the
next succeeding calendar year, by submitting an enrollment form
on which is stated the amount of elective deferrals elected under
the RASP. An employee who becomes eligible after an enrollment
date will be required to wait until the next enrollment date to
participate in the Annual Savings Restoration Amount portion of
the Plan. Eligible Participants must enroll or re-enroll
annually each calendar year.
ARTICLE III
Benefits
3.01 Benefits.
The maximum benefits under this Plan to which an eligible
Participant or Beneficiary shall be entitled shall be equal to
the sum of the vested Annual Profit Sharing Restoration Amount,
the Annual Savings Restoration Amount, and the Annual Matching
Restoration Amount, plus Interest on such sum.
3.02 Annual Profit Sharing Restoration Amount.
The Annual Profit Sharing Restoration Amount to which an eligible
Participant or Beneficiary shall be entitled shall be an amount
equal to the difference, if any, between (a) and (b) below:
(a) The amount of the Employer's Annual Profit Sharing
Contribution which would have been allocated to a
Participant or Beneficiary under the RASP if the Annual
Profit Sharing Contribution were determined pursuant to
Section 5.01 B.3. of the RASP and the allocation were
determined pursuant to Section 6.03 A. of the RASP
without giving any effect to the limitations imposed by
Sections 401(a)(17) and 415 of the Code, as now or
hereafter in effect; less
(b) The amount of the Employer's Annual Profit Sharing
Contribution allocated to the Participant or
Beneficiary under the RASP.
3.03 Annual Savings Restoration Amount.
The maximum Annual Savings Restoration Amount from which an
eligible Participant or Beneficiary may make an Elected
Contribution shall be equal to the difference, if any, between
(a) and (b) below:
(a) The amount that the Participant could defer if the
maximum percentage deferral determined by the Committee
under Section 5.02A of the RASP were applied to the
Participant's Compensation, and the Participant's
Elected Contribution under the RASP were not subject to
Sections 401(k), 402(g)(1) or 415 of the Code, as now
or hereafter in effect; less
(b) The amount of the Participant's Elected Contribution
under the RASP.
The Participant's Annual Savings Restoration Amount shall be
equal to the Participant's Elected Contribution.
3.04 Annual Matching Restoration Amount.
The Annual Matching Restoration Amount to which an eligible
Participant or Beneficiary shall be entitled shall be an amount
equal to the difference, if any, between (a) and (b) below:
(a) The lesser of (1) 6% of the Participant's Compensation,
without giving any effect to the limitations imposed by
Section 401(a)(17) of the Code, as now or hereafter in
effect, or (2) the limit imposed by Section 402(g) of
the Code; and
(b) 6% of the Participant's Compensation as limited by
Section 401(a)(17) of the Code,
multiplied by 50%, or any other percentage as the Board may
determine for a given Plan Year under Section 5.03 A. of the
RASP. Notwithstanding the foregoing, to the extent that the
matching contribution that would otherwise be made on behalf of a
Participant under Section 5.03 of the RASP is reduced in
accordance with the requirements of Section 401(m) of the Code,
such Participant's Annual Matching Restoration Amount shall be
likewise limited in accordance with rules established by the
Committee.
3.05 Participant's Account.
The Employer shall create and maintain adequate records to
reflect the interest of each Participant in the Plan. Such
records shall be in the form of individual Accounts. When
appropriate, a Participant's Account shall consist of a profit
sharing restoration subaccount, a savings restoration subaccount,
and a matching restoration subaccount. Such Accounts shall be
kept for recordkeeping purposes only and shall not be construed
as providing for assets to be held in trust or escrow or any
other form of asset segregation for the Participant or
Beneficiary to whom benefits are to be paid pursuant to the terms
of the Plan.
3.06 Allocation to Participant Account and Interest.
The Participant's Annual Savings Restoration Amount shall be
credited to the Participant's Account as of the date such amount
would have been paid to such Participant as remuneration for
services, and the Participant's Annual Profit Sharing Restoration
Amount and Annual Matching Restoration Amount shall be credited
to the Participant's Account as of the last day of a Plan Year.
The Participant's balance in his Account shall be credited with
Interest at such times and in such manner as determined in the
sole discretion of the Committee.
3.07 Vested Percentage.
Notwithstanding anything herein to the contrary, a Participant
shall be 100% vested at all times in the amounts credited to his
savings restoration subaccount and his matching restoration
subaccount. A Participant shall be vested in the amount credited
to his profit sharing restoration subaccount to the same extent
as the Participant is vested in his Profit Sharing Accounts, in
accordance with Article VIII of the RASP; provided, however, that
forfeited amounts shall not be reallocated among Plan
Participants but shall be restored to the forfeiting Participant
upon reemployment, in accordance with the procedures set forth in
Article VIII of the RASP.
ARTICLE IV
Distribution of Benefit
4.01 Separation from Service.
Except in the case of the disposition of substantially all of the
assets of a line of business or the disposition of the Employer's
interest in a subsidiary, the benefits attributable to the Annual
Profit Sharing Restoration Amount plus Interest thereon shall be
distributed upon termination of employment for any reason
(including retirement, disability or death), and the benefits
attributable to the Annual Savings Restoration Amount plus
Interest shall be distributed upon the earlier of termination of
employment for any reason (including retirement, disability or
death), or a date preselected by the Participant either upon
eligibility to participate under the Plan or upon such date or
dates as may be determined by the Committee. A Participant whose
employment will terminate with the Employer due to the
disposition of substantially all of the assets of a line of
business or the disposition of the Employer's interest in a
subsidiary, will no longer remain an active Participant under the
Plan; provided, however, such Participant may elect, prior to the
disposition of assets or subsidiary, to continue the deferral of
benefits under the Plan as if employment with the new employer
were employment with the Employer and benefits under the Plan
shall be distributed upon the Participant's termination of
employment with the new employer or, if earlier, a date selected
by the Participant at the time of the continued deferral.
Benefits shall be distributed in a lump sum unless the
Participant elects to receive part or all of the benefits in
installments pursuant to this Section. An election to receive
installment payments under the Plan must be filed with the
Committee at least ninety (90) days (hereinafter referred to as
the "Election Date") prior to the date of the Participant's
termination of employment or, if earlier, the date preselected by
the Participant to receive benefits attributable to the Annual
Savings Restoration Amount plus Interest. Such election shall be
irrevocable at the time it is filed or if later, on the Election
Date. If the benefits are payable in installments, such
installments will be paid annually over a period selected by the
Participant on the Election Date but shall not exceed ten (10)
years. The installment payments shall be made within thirty (30)
days of each anniversary date of the initial installment. To the
extent benefits are not paid in installments, the account balance
will be paid in a lump sum in the month following the event
giving rise to the distribution.
In the event a Participant entitled to installment payments dies
before receiving all benefits under the Plan, the unpaid balance
will be paid in a lump sum to such Participant's Beneficiary in
the month following the Participant's death.
4.02..Hardship.
Payment of part or all of the benefits under this Plan may be
accelerated in the case of severe hardship, which shall mean an
emergency or unexpected situation in the Participant's financial
affairs, including, but not limited to, illness or accident
involving the Participant or any of the Participant's dependents.
All payments in case of hardship must be approved by the
Committee.
ARTICLE V
Administration; Amendments and Termination; Rights Against the
Company
5.01 Administration.
The Committee shall administer this Plan. With respect to the
Plan, the Committee shall have, and shall exercise and perform,
all the powers, rights, authorities and duties set forth in the
RASP with the same effect as if set forth in full herein with
respect to this Plan. Except as expressly set forth herein, any
determination or decision by the Committee shall be conclusive
and binding on all persons who at any time have or claim to have
any interest whatever under this Plan.
5.02 Amendment and Termination Prior to a Change in Control.
The Employer, solely, and without the approval of the Committee
or any Participant or Beneficiary, shall have the right to amend
this Plan at any time and from time to time, by resolution
adopted by it. Any such amendment shall become effective upon
the date stated therein. Notwithstanding the foregoing, no
amendment shall adversely affect the rights of any Participant or
Beneficiary who was previously receiving benefits under this Plan
to continue to receive such benefits or of all other Participants
and Beneficiaries to receive the benefits promised under the Plan
immediately prior to the later of the effective date or the date
of adoption of the amendment.
The Employer has established this Plan with the bonafide
intention and expectation that from year to year it will deem it
advisable to continue it in effect. However, circumstances not
now foreseen or circumstances beyond the Employer's control may
make it impossible or inadvisable to continue the Plan.
Therefore, the Employer, in its sole discretion, reserves the
right to terminate the Plan in its entirety at any time;
provided, however, that in such event any Participant or
Beneficiary who was receiving benefits under this Plan as of the
termination date, shall continue to receive such benefits, and
all other Participants and Beneficiaries shall remain entitled to
receive the benefits promised under the Plan immediately prior to
the termination of the Plan.
5.03..Rights Against the Employer.
The establishment of this Plan shall not be construed as giving
to any Participant, Beneficiary, employee or any person
whomsoever, any legal, equitable or other rights against the
Employer, or its officers, directors, agents or shareholders,
except as specifically provided for herein, or its giving to any
Participant any equity or other interest in the assets, business
or shares of the Employer or giving any employee the right to be
retained in the employment of the Employer. All employees and
Participants shall be subject to discharge to the same extent
that they would have been if this Plan had never been adopted.
Subject to the rights of the Employer to terminate this Plan or
any benefit hereunder, the rights of a Participant hereunder
shall be solely those of an unsecured creditor of the Employer.
ARTICLE VI
General and Miscellaneous
6.01 Spendthrift Clause.
No right, title or interest of any kind in the Plan shall be
transferable or assignable by any Participant or Beneficiary or
any other person or be subject to alienation, anticipation,
encumbrance, garnishment, attachment, execution or levy of any
kind, whether voluntary or involuntary. Any attempt to alienate,
sell, transfer, assign, pledge, garnish, attach or otherwise
encumber or dispose of any interest in the Plan shall be void.
6.02 Severability.
In the event that any provision of this Plan shall be declared
illegal or invalid for any reason, said illegality or invalidity
shall not affect the remaining provisions of this Plan but shall
be fully severable, and this Plan shall be construed and enforced
as if said illegal or invalid provision had never been inserted
herein.
6.03 Construction of Plan.
The article and section headings and numbers are included only
for convenience of reference and are not to be taken as limiting
or extending the meaning of any of the terms and provisions of
this Plan. Whenever appropriate, words used in the singular
shall include the plural or the plural may be read as the
singular.
6.04 Gender.
The personal pronoun of the masculine gender shall be understood
to apply to women as well as men except where specific reference
is made to one or the other.
6.05 Governing Law.
THE VALIDITY AND EFFECT OF THIS PLAN AND THE RIGHTS AND
OBLIGATIONS OF ALL PERSONS AFFECTED HEREBY SHALL BE CONSTRUED AND
DETERMINED IN ACCORDANCE WITH THE LAWS OF THE UNITED STATES AND
THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO ITS
OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS.
6.06 Unfunded Top Hat Plan.
It is the Employer's intention that this Plan be a Top Hat Plan,
defined as an unfunded plan maintained primarily for the purpose
of providing deferred compensation for a select group of
management or highly compensated employees, as provided in
Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee
Retirement Income Security Act of 1974, as amended from time to
time. The Employer may establish and fund one or more trusts for
the purpose of paying some or all of the benefits promised to
Participants and Beneficiaries under the Plan; provided, however,
that (i) any such trust(s) shall at all times be subject to the
claims of the Employer's general creditors in the event of the
insolvency or bankruptcy of the Employer, and
(ii) notwithstanding the creation or funding of any such
trust(s), the Employer shall remain primarily liable for any
obligation hereunder. Notwithstanding the establishment of any
such trust(s), the Participants and Beneficiaries shall have no
preferred claim on, or any beneficial ownership interest in, any
assets of any such trust or of the Employer.
6.07 Divestment for Cause.
Notwithstanding any other provisions of this Plan to the
contrary, the right of any Participant, former Participant or
Beneficiary of either to receive or to have paid to any other
person, or the right of any such other person to receive any
benefits attributable to the Annual Profit Sharing Restoration
Amount plus Interest hereunder or the Annual Matching Restoration
Amount plus Interest hereunder, shall be forfeited, if such
Participant's employment with the Employer is terminated because
of or the Participant is discovered to have engaged in fraud,
embezzlement, dishonesty against the Employer, obtaining funds or
property under false pretenses, assisting a competitor without
permission, or interfering with the relationship of the Employer
or any subsidiary or affiliate thereof with a customer. A
Participant's or Beneficiary's benefits shall be forfeited for
any of the above reasons regardless of whether such act is
discovered prior to or subsequent to the Participant's
termination from the Employer or the payment of benefits under
the Plan. If payment has been made, such payment shall be
restored to the Employer by the Participant or Beneficiary.
ERISA Rights
This Plan is intended to provide benefits for a select group of
highly-compensated employees within the meaning of the Employee
Retirement Income Security Act of 1974 (ERISA). However, it is
not subject to most of the requirements of ERISA nor is the Plan
eligible for insurance under Title IV of ERISA. Furthermore, the
Plan is considered to be an unfunded, non-qualified plan for
purposes of complying with the Internal Revenue Code.
If you believe your benefit under the Plan has been denied, in
whole or in part, you should file a claim with the Retirement and
Savings Program Administrative Committee. Your claim will be
reviewed using the same procedures as those described in the
Summary Plan Description for the RASP.
The following information identifies the benefit plan described
in this booklet and gives other important administrative data.
Plan Name:
The Benefit Restoration Plan
Plan Sponsor: Employer I.D. Number
(EIN):
National Semiconductor Corporation EIN: 95-2095071
2900 Semiconductor Drive
P.O.Box 58090
Santa Clara, CA 95052-8090
(408) 721-2383
Plan Number:
005
Plan Year:
The twelve consecutive month period ending on May 31. Plan
records are maintained on the basis of this Plan Year.
Plan Administrator:
Retirement and Savings Program Administrative Committee
c/o Retirement Plans Administration
National Semiconductor Corporation
2900 Semiconductor Drive
P. O. Box 58090
Santa Clara, CA 95052-8090
(408) 721-2383
Type of Plan:
The Plan is a non-qualified deferred compensation plan for
selected key employees of National Semiconductor.
Agent for Service of Legal Process:
Legal process should be served on the company's Corporate
Secretary or the Plan Administrator in care of the Retirement
Plans Administration Office at the company's address.
Funding Medium:
The Plan is unfunded and benefits are paid from the Plan
sponsor's general assets.
Exhibit 10.17
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Stock Option Agree-
ment"), dated as of July 28, 1997, by and between National Semi-
conductor Corporation, a Delaware corporation ("Parent"), and
Cyrix Corporation, a Delaware corporation (the "Company").
WHEREAS, concurrently with the execution and delivery of
this Stock Option Agreement, Parent, the Company, and Nova Acqui-
sition Corp. ("Sub") are entering into an Agreement and Plan of
Merger, dated as of the date hereof (the "Merger Agreement"),
which provides, among other things, upon the terms and subject to
the conditions thereof, for the merger of Sub into the Company
(the "Merger"); and
WHEREAS, as a condition to Parent's willingness to enter
into the Merger Agreement, Parent has requested that the Company
agree, and the Company has so agreed, to grant to Parent an op-
tion with respect to certain shares of the Company's common
stock, on the terms and subject to the conditions set forth here-
in;
NOW, THEREFORE, to induce Parent to enter into the Merg-
er Agreement, and in consideration of the mutual covenants and
agreements set forth herein and in the Merger Agreement, the
parties hereto agree as follows:
1. Grant of Option. The Company hereby grants Parent
an irrevocable option (the "Option") to purchase from the Company
upon original issue up to a number of shares of common stock,
$.004 par value, of the Company ("Company Common Stock") equal to
19.9% of the number of shares of Company Common Stock outstanding
on the date of this Stock Option Agreement, subject to adjustment
as provided in Section 11 (such shares being referred to herein
as the "Company Shares"), in the manner set forth below at an
exercise price of $27.59 in cash or 0.825 shares of common stock,
$.50 par value, of Parent ("Parent Common Stock") per Company
Share, subject to adjustment as provided in Section 2(b) (the
"Exercise Price"), payable in cash or Parent Common Stock at
Parent's option in accordance with Section 4 hereof. Notwith-
standing the foregoing, in no event shall the number of shares
for which the Option is exercisable exceed 19.9% of the number of
issued and outstanding shares of Company Common Stock. Capital-
ized terms used herein but not defined herein shall have the
meanings set forth in the Merger Agreement.
2. Exercise of Option. (a) The Option may be exercised
by Parent, in whole or in part, at any time or from time to time
after the earliest of: (i) the Merger Agreement becoming termi-
nable by Parent under Section 9.1(e) of the Merger Agreement,
(ii) an Acquisition Proposal becoming publicly announced or dis-
closed prior to the approval of the Merger by the stockholders
of the Company at the Company Meeting or (iii) the receipt by
Parent of a Superior Proposal Notice pursuant to Section 7.9(c)
of the Merger Agreement, any such event(s) being referred to
herein as a "Trigger Event." The Company shall notify Parent
promptly in writing of the occurrence of any Trigger Event, it
being understood that the giving of such notice by the Company
shall not be a condition to the right of Parent to exercise the
Option. If Parent wishes to exercise the Option, in whole or in
part, Parent shall deliver to the Company a written notice (an
"Exercise Notice") specifying the total number of Company Shares
it wishes to purchase (the "Designated Number"), the Exercise
Price per Company Share (subject to Section 2(b)) and whether the
consideration payable by Parent will be in cash or shares of
Parent Common Stock. Each closing of a purchase of Company
Shares (a "Closing") shall occur at a place, on a date and at a
time designated by Parent in an Exercise Notice delivered at
least two business days prior to the date of the Closing. The
Option shall terminate, unless Parent has theretofore delivered
an Exercise Notice, upon the earlier of (i) the Effective Date or
(ii) termination of the Merger Agreement in accordance with its
terms. Notwithstanding the foregoing, the Option may not be
exercised if Parent is in material breach of any of its material
representations or warranties, or in material breach of any of
its material covenants or agreements, contained in this Stock
Option Agreement or in the Merger Agreement. Upon the giving by
Parent to the Company of the Exercise Notice and the tender of
the applicable aggregate Exercise Price in either cash or Parent
Common Stock, Parent shall be deemed to be the holder of record
of the Company Shares issuable upon such exercise, notwithstand-
ing that the stock transfer books of the Company shall then be
closed or that certificates representing such Company Shares
shall not then be actually delivered to Parent.
(b) Notwithstanding anything to the contrary in this
Stock Option Agreement, the Aggregate Spread (as defined below)
shall not exceed $27 million less any amount theretofore paid to
Parent with respect to the Termination Fee and Expenses in accor-
dance with Section 9.2 of the Merger Agreement (the "Maximum
Value"). The sum of (i) the Aggregate Spread relating to Company
Shares issued to Parent with respect to which Parent has not
theretofore exercised its put right under Section 7(a) and (ii)
any Termination Fee and Expenses paid to Parent pursuant to Sec-
tion 9.2 of the Merger Agreement shall not exceed an aggregate of
$27 million. If any exercise of the Option would result in an
Aggregate Spread (including the Aggregate Spread in connection
with any prior exercises of the Option) in excess of the Maximum
Value, the Exercise Price shall be increased such that the Ag-
gregate Spread (including the Aggregate Spread in connection with
any prior exercises of the Option) shall equal the Maximum Value.
As used in this Stock Option Agreement, the "Fair Market Value"
of any share shall be the daily closing sales price for such
share on the NYSE Composite Tape or the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ"),
as the case may be, on the trading day immediately prior to the
date such price is to be determined (unless the Exercise Notice
is delivered on the date an Acquisition Proposal is first pub-
licly announced, in which event the closing sales price on the
date such Exercise Notice is delivered shall be used to determine
"Fair Market Value") and (ii) the "Aggregate Spread" is defined
as the product of (i) the difference between (A) the Fair Market
Value of a share of Company Common Stock on the date Parent de-
livers the Exercise Notice and (B) $27.59 (or if the Exercise
Price is increased pursuant to this Section 2(b), such Exercise
Price) multiplied by (ii) the Designated Number with respect to
such exercise.
3. Conditions to Closing; Best Efforts. a) The obli-
gation of the Company to issue the Company Shares to Parent here-
under is subject to the following conditions: (i) all waiting
periods, if any, under the HSR Act, applicable to the issuance of
the Company Shares hereunder shall have expired or been terminat-
ed; and (ii) no preliminary or permanent injunction or other or-
der by any court of competent jurisdiction prohibiting or other-
wise restraining such issuance shall be in effect.
(b) Each of Parent and the Company shall use its best
efforts: (i) to make all filings and registrations with, and to
obtain all consents, approvals, orders or authorizations of, any
Governmental Entity, if any, required in connection with the is-
suance of the Company Shares hereunder, and (ii) to make applica-
tion to list the Company Shares on the National Market of NASDAQ
upon official notice of issuance.
4. Closing. At any Closing, (i) the Company will de-
liver to Parent or its designee a single certificate in defini-
tive form representing the Designated Number of Company Shares,
such certificate to be registered in the name of Parent and to
bear the legend set forth in Section 12(a), and (ii) Parent will
deliver to the Company the aggregate price for the Company Shares
so designated and being purchased by, at Parent's option, either
(x) wire transfer of immediately available funds or certified
check or bank check in an amount equal to the Exercise Price
multiplied by the Designated Number or (y) a certificate regis-
tered in the name of the Company and bearing the legend set forth
in Section 12(b) representing the number of whole shares of Par-
ent Common Stock equal to the product of (A) a fraction equal to
the Exercise Price divided by $27.59 (which fraction shall equal
1 unless the Exercise Price is increased pursuant to Section
2(b)), multiplied by (B) the Designated Number multiplied by (C)
the Exchange Ratio, and rounded to the nearest whole number of
shares. The Company shall pay all expenses and any and all Unit-
ed States federal, state and local taxes and other charges that
may be payable in connection with the preparation, issue and
delivery of stock certificates in the name of Parent or its
designee under this Section 4. Parent shall pay all expenses and
any and all United States federal, state and local taxes and
other charges that may be payable in connection with the prepara-
tion, issue and delivery of stock certificates in the name of the
Company or its designee under this Section 4.
5. Representations and Warranties of the Company. The
Company represents and warrants to Parent as follows:
(a) The Company has taken all necessary corporate action
to authorize and reserve for issuance and to permit it to issue,
upon exercise of the Option, and at all times from the date here-
of through the expiration of the Option will have reserved, a
number of authorized and unissued Company Shares equal to 19.9%
of the number of Company Shares issued and outstanding on the
date hereof, such amount being subject to adjustment as provided
in Section 11, all of which, upon their issuance and delivery in
accordance with the terms of this Stock Option Agreement, will be
validly issued, fully paid and nonassessable.
(b) Upon delivery of the Company Shares to Parent upon
the exercise of the Option, Parent will acquire the Company
Shares free and clear of all claims, liens, charges, encumbrances
and security interests of any nature whatsoever.
(c) Neither the Company, nor any of its affiliates or
anyone acting on its or their behalf, has issued, sold or offered
any security of the Company to any person under circumstances, or
taken any other action, that would cause the issuance and sale of
the Company Shares, as contemplated by this Stock Option Agree-
ment, to be subject to the registration requirements of the Secu-
rities Act as in effect on the date hereof and, assuming the rep-
resentations of Parent contained in Section 6 are true and cor-
rect, the issuance, sale and delivery of the Company Shares here-
under upon exercise of the Option will be exempt from the regis-
tration and prospectus delivery requirements of the Securities
Act, as in effect on the date hereof.
(d) Upon delivery by the Company of any shares of Parent
Common Stock to Parent in connection with the exercise of
Parent's rights under Section 7(a), and assuming the representa-
tions of Parent contained in Section 6 are true and correct, the
Company will represent that it owns the shares of Parent Common
Stock and Parent will acquire the shares of Parent Common Stock
free and clear of all claims, liens, charges, encumbrances and
security interests of any nature whatsoever.
(e) Any shares of Parent Common Stock acquired by the
Company upon Parent's exercise of the Option will be acquired for
the Company's own account, and will not be acquired by the Com-
pany with a view to the distribution thereof in violation of any
applicable provision of the Securities Act. The Company has re-
ceived copies of all reports filed by Parent pursuant to Section
12, 13 or 14 of the Exchange Act in the preceding twelve months
and had an opportunity to ask questions concerning the shares of
Parent Common Stock that may be acquired by the Company upon
Parent's exercise of the Option and concerning the business and
financial affairs of Parent, and to receive answers concerning
the same, from representatives of Parent. The Company has such
knowledge and experience in business and financial matters as to
be capable of utilizing the information which is available to it
to evaluate the merits and risks of an investment by the Company
in the shares of Parent Common Stock and the Company is able to
bear the economic risks of any investment in the shares of Parent
Common Stock which the Company may acquire upon Parent's exercise
of the Option.
6. Representations and Warranties of Parent. Parent
represents and warrants to the Company as follows:
(a) All shares of Parent Common Stock issued to the Com-
pany in connection with the exercise by Parent of the Option, if
any, upon their issuance and delivery in accordance with the
terms of this Stock Option Agreement, will be validly issued,
fully paid and nonassessable.
(b) Upon delivery of any shares of Parent Common Stock
to the Company upon Parent's exercise of the Option, the Company
will acquire the shares of Parent Common Stock free and clear of
all claims, liens, charges, encumbrances and security interests
of any nature whatsoever.
(c) Neither Parent, nor any of its affiliates or anyone
acting on its or their behalf, has issued, sold or offered any
security of Parent to any person under circumstances, or taken
any other action, that would cause the issuance and sale of the
shares of Parent Common Stock in connection with Parent's exer-
cise of the Option, as contemplated by this Stock Option Agree-
ment, to be subject to the registration requirements of the Secu-
rities Act as in effect on the date hereof and, assuming the rep-
resentations of the Company contained in Section 5 are true and
correct, the issuance, sale and delivery of the shares of Parent
Common Stock hereunder upon Parent's exercise of the Option will
be exempt from the registration and prospectus delivery require-
ments of the Securities Act, as in effect on the date hereof.
(d) Upon delivery by Parent of the Company Shares to the
Company in connection with the exercise of Parent's rights under
Section 7(a), and assuming the representations of the Company
contained in Section 5 are true and correct, Parent shall repre-
sent that it owns the Company Shares and the Company will acquire
the Company Shares free and clear of all claims, liens, charges,
encumbrances and security interests of any nature whatsoever.
(e) Parent represents and warrants to the Company that
any Company Shares acquired upon exercise of the Option will be
acquired for Parent's own account, and will not be, and the Op-
tion is not being, acquired by Parent with a view to the distri-
bution thereof in violation of any applicable provision of the
Securities Act. Parent has received copies of all reports filed
by the Company pursuant to Section 12, 13 or 14 of the Exchange
Act in the preceding twelve months and had an opportunity to ask
questions concerning the Company Shares acquired upon exercise of
the Option and concerning the business and financial affairs of
the Company, and to receive answers concerning the same, from
representatives of the Company. Parent has such knowledge and
experience in business and financial matters as to be capable of
utilizing the information which is available to it to evaluate
the merits and risks of an investment by Parent in the Company
Shares and Parent is able to bear the economic risks of any in-
vestment in the Company Shares which Parent may acquire upon
exercise of the Option.
7. Certain Repurchases.
(a) Parent Put. At the request of Parent by written no-
tice to the Company (the "Repurchase Notice") at any time after
the exercise of the Option and prior to the one-year anniversary
of the first Closing of the Option (the "Repurchase Period"), the
Company (or any successor entity thereof) shall repurchase from
Parent all or any portion of the Company Shares purchased by Par-
ent pursuant to the Option, at the price equal to the sum of (A)
the aggregate Exercise Price paid by Parent for all Company
Shares acquired pursuant to the Option (payable by delivery of
the kind (i.e. cash or shares of Parent Common Stock) and amount
of consideration paid by Parent to exercise the Option) plus, if
any of the events described in clauses 9.2(b)(i), (ii), or (iii)
of the Merger Agreement shall have occurred, (B) the Aggregate
Spread at the time of the exercises of the Option.
(b) Payment and Redelivery of Shares. If Parent exer-
cises its rights under this Section 7, the Company shall, within
three business days thereafter, pay the required amount to Parent
in immediately available funds (and/or deliver the shares of Par-
ent Common Stock, as the case may be) and Parent shall surrender
to the Company the certificates evidencing the Company Shares
purchased by Parent pursuant thereto.
(c) Prohibition of Repurchase. After delivery by Parent
of a Repurchase Notice, to the extent that the Company is prohib-
ited under any applicable law or regulation from repurchasing the
Company Shares in full in accordance with this Section 7, the
Company shall immediately so notify Parent and, thereafter, shall
deliver to Parent from time to time, promptly and in any event
within five business days following the lapse of any such prohi-
bition, the repurchase price for that portion of the Company
Shares determined pursuant to Section 7(a), with respect to which
Parent has delivered such Repurchase Notice (the "Repurchase
Price") that it is no longer prohibited from delivering; provid-
ed, however, that if the Company at any time after delivery by
Parent of a Repurchase Notice pursuant to Section 7(a) is prohib-
ited under applicable law or regulation from delivering to Parent
the Repurchase Price in full (and the Company hereby undertakes
to use all reasonable efforts to obtain all required regulatory
and legal approvals and to file any required notices as promptly
as practicable in order to accomplish such repurchase), then Par-
ent may to that extent revoke its Repurchase Notice, whereupon
the Company, in addition to paying such portion of the Repurchase
Price as it is permitted to pay, shall promptly deliver to Par-
ent, to the extent theretofore surrendered by Parent pursuant to
Section 7(b), a certificate for the Company Shares that the Com-
pany is then so prohibited from repurchasing.
8. Voting of Shares. Following the date hereof and
prior to the fifth anniversary of the date hereof (the "Expira-
tion Date"), Parent shall vote any shares of capital stock of the
Company acquired by Parent pursuant to this Stock Option Agree-
ment ("Restricted Shares") or otherwise beneficially owned (with-
in the meaning of Rule 13d-3 promulgated under the Exchange Act)
by Parent on each matter submitted to a vote of stockholders of
the Company for and against such matter in the same proportion as
the votes of all other stockholders of the Company are voted
(whether by proxy or otherwise) for and against such matter;
provided, that Parent may vote in its sole discretion any shares
of capital stock of the Company with respect to transactions
contemplated by the Merger Agreement or any matters described in
Item 14 of Schedule 14A adopted by the Commission under the Ex-
change Act.
9. Transfer.
(a) Restrictions on Transfer. Prior to the Expiration
Date, Parent shall not, directly or indirectly, by operation of
law or otherwise, sell, assign, pledge or otherwise dispose of or
transfer any Restricted Shares beneficially owned by Parent, oth-
er than pursuant to Section 7, Section 9(b) or Section 10(a).
Prior to the expiration of the Repurchase Period, the Company
shall not, directly or indirectly, by operation of law or other-
wise, sell, assign, pledge or otherwise dispose of or transfer
any shares of Parent Common Stock received by the Company upon
exercise of the Option other than pursuant to Section 7, Section
9 or Section 10(b).
(b) Permitted Sales. Following the termination of the
Merger Agreement, Parent shall be permitted to sell any Restrict-
ed Shares beneficially owned by it if such sale is made pursuant
to a tender or exchange offer that has been approved or recom-
mended, or otherwise determined to be fair to and in the best
interests of the stockholders of the Company, by a majority of
the members of the Board of Directors of the Company, which ma-
jority shall include a majority of directors who were directors
prior to the announcement of such tender or exchange offer, or in
any merger, consolidation or other business combination involving
the Company. Following the termination of the Merger Agreement,
the Company shall be permitted to sell any shares of Parent Com-
mon Stock beneficially owned by it if such sale is made pursuant
to a tender or exchange offer that has been approved or recom-
mended, or otherwise determined to be fair to and in the best
interests of the stockholders of Parent, by a majority of the
members of the Board of Directors of Parent, which majority shall
include a majority of directors who were directors prior to the
announcement of such tender or exchange offer, or in any merger,
consolidation or other business combination involving Parent.
10. Registration Rights.
(a) Parent. Following the termination of the Merger
Agreement, Parent may by written notice (the "Registration No-
tice") to the Company request the Company to register under the
Securities Act all or any part of the Restricted Shares benefi-
cially owned by Parent (the "Registrable Securities") pursuant to
a bona fide firm commitment underwritten public offering in which
Parent and the underwriters shall effect as wide a distribution
of such Registrable Securities as is reasonably practicable and
shall use all reasonable efforts to prevent any person (including
any group) and its affiliates from purchasing through such offer-
ing Restricted Shares representing more than 1% of the outstand-
ing shares of common stock of the Company on a fully diluted ba-
sis (a "Permitted Offering"). The Registration Notice shall in-
clude a certificate executed by Parent and its proposed managing
underwriter, which underwriter shall be an investment banking
firm of nationally recognized standing (the "Manager"), stating
that (i) they have a good faith intention to commence promptly a
Permitted Offering and (ii) the Manager in good faith believes
that, based on the then prevailing market conditions, it will be
able to sell the Registrable Securities at a per share price
equal to at least 80% of the then Fair Market Value of such
shares. The Company (and/or any person designated by the Compa-
ny) shall thereupon have the option, exercisable by written no-
tice delivered to Parent within ten business days after the re-
ceipt of the Registration Notice, irrevocably to agree to pur-
chase all or any part of the Registrable Securities for cash at a
price (the "Option Price") equal to the product of (i) the number
of Registrable Securities and (ii) the then Fair Market Value of
such shares. Any such purchase of Registrable Securities by the
Company (or its designee) hereunder shall take place at a closing
to be held at the principal executive offices of the Company or
at the offices of its counsel at any reasonable date and time
designated by the Company and/or such designee in such notice
within 20 business days after delivery of such notice. Any pay-
ment for the shares to be purchased shall be made by delivery at
the time of such closing of the Option Price in immediately
available funds.
If the Company does not elect to exercise its option
pursuant to this Section 10(a) with respect to all Registrable
Securities, it shall use all reasonable efforts to effect, as
promptly as practicable, the registration under the Securities
Act of the unpurchased Registrable Securities; provided, however,
that (i) Parent shall be entitled to no more than an aggregate of
two effective registration statements hereunder and (ii) the
Company will not be required to file any such registration state-
ment during any period of time (not to exceed 90 days after such
request) when (A) the Company is in possession of material non-
public information which it reasonably believes would be detri-
mental to be disclosed at such time, and, in the opinion of coun-
sel to the Company, such information would have to be disclosed
if a registration statement were filed at that time; (B) the
Company is required under the Securities Act to include audited
financial statements for any period in which such registration
statement is to be filed and such financial statements are not
yet available for inclusion in such registration statement; or
(C) the Company determines, in its reasonable judgment, that such
registration would interfere with any financing, acquisition or
other material transaction involving the Company or any of its
affiliates. The Company shall use reasonable efforts to cause
any Registrable Securities registered pursuant to this Section
10(a) to be qualified for sale under the securities or Blue Sky
laws of such jurisdictions as Parent may reasonably request and
shall continue such registration or qualification in effect in
such jurisdiction; provided, however, that the Company shall not
be required to qualify to do business in, or consent to general
service of process in, any jurisdiction by reason of this pro-
vision.
The registration rights set forth in this Section 10(a)
are subject to the condition that Parent shall provide the Com-
pany with such information with respect to such holder's Regis-
trable Securities, the plans for the distribution thereof, and
such other information with respect to such holder as, in the
reasonable judgment of counsel for the Company, is necessary to
enable the Company to include in such registration statement all
material facts required to be disclosed with respect to a regis-
tration thereunder.
A registration effected under this Section 10(a) shall
be effected at the Company's expense, except for underwriting
discounts and commissions and the fees and the expenses of coun-
sel to Parent, and the Company shall provide to the underwriters
such documentation (including certificates, opinions of counsel
and "comfort" letters from auditors) as are customary in connec-
tion with underwritten public offerings as such underwriters may
reasonably require. In connection with any such registration,
the parties agree (i) to indemnify each other and the underwrit-
ers in the customary manner, (ii) to enter into an underwriting
agreement in form and substance customary for transactions of
such type with the Manager and the other underwriters participat-
ing in such offering, and (iii) to take all further actions which
shall be reasonably necessary to effect such registration and
sale (including, if the Manager deems it necessary, participating
in road-show presentations).
The Company shall be entitled to include (at its ex-
pense) additional shares of its common stock in a registration
effected pursuant to this Section 10(a) only if and to the extent
the Manager determines that such inclusion will not adversely
affect the prospects for success of such offering.
(b) Company. At any time after the earlier of the Re-
purchase Period or such time following the first Closing as Par-
ent owns less than 50% of the Restricted Shares paid for with
shares of Parent Common Stock (provided that the Company shall
retain during the entire Repurchase Period a sufficient number of
shares of Parent Common Stock to satisfy any exercise of Parent's
rights under Section 7(a)), unless all of the shares of Parent
Common Stock could be freely sold without registration under the
Securities Act, the Company may by written notice (the "Company
Registration Notice") to Parent request Parent to register under
the Securities Act all or any part of the shares of Parent Common
Stock issued to the Company upon Parent's exercise of the Option
and beneficially owned by the Company (the "Registrable Parent
Securities") pursuant to a bona fide firm commitment underwritten
public offering in which the Company and the underwriters shall
effect as wide a distribution of such Registrable Parent Securi-
ties as is reasonably practicable and shall use all reasonable
efforts to prevent any person (including any group) and its af-
filiates from purchasing through such offering Registrable Parent
Securities representing more than 1% of the outstanding shares of
common stock of Parent on a fully diluted basis (a "Permitted
Parent Offering"). The Company Registration Notice shall include
a certificate executed by the Company and its proposed managing
underwriter, which underwriter shall be an investment banking
firm of nationally recognized standing (the "Company Manager"),
stating that (i) they have a good faith intention to commence
promptly a Permitted Parent Offering and (ii) the Company Manager
in good faith believes that, based on the then prevailing market
conditions, it will be able to sell the Registrable Parent Secu-
rities at a per share price equal to at least 80% of the then
Fair Market Value of such shares. Parent (and/or any person des-
ignated by Parent) shall thereupon have the option, exercisable
by written notice delivered to the Company within ten business
days after the receipt of the Company Registration Notice, irre-
vocably to agree to purchase all or any part of the Registrable
Parent Securities for cash at a price (the "Parent Option Price")
equal to the product of (i) the number of Registrable Parent Se-
curities and (ii) the then Fair Market Value of such shares.
Any such purchase of Registrable Parent Securities by Parent (or
its designee) hereunder shall take place at a closing to be held
at the principal executive offices of Parent or at the offices of
its counsel at any reasonable date and time designated by Parent
and/or such designee in such notice within 20 business days after
delivery of such notice. Any payment for the shares to be pur-
chased shall be made by delivery at the time of such closing of
the Parent Option Price in immediately available funds.
If Parent does not elect to exercise its option pursuant
to this Section 10(b) with respect to all Registrable Parent
Securities, it shall use all reasonable efforts to effect, as
promptly as practicable, the registration under the Securities
Act of the unpurchased Registrable Parent Securities; provided,
however, that (i) the Company shall be entitled to no more than
an aggregate of two effective registration statements hereunder
and (ii) Parent will not be required to file any such registra-
tion statement during any period of time (not to exceed 90 days
after such request) when (A) Parent is in possession of material
non-public information which it reasonably believes would be
detrimental to be disclosed at such time, and, in the opinion of
counsel to Parent, such information would have to be disclosed if
a registration statement were filed at that time; (B) Parent is
required under the Securities Act to include audited financial
statements for any period in which such registration statement is
to be filed and such financial statements are not yet available
for inclusion in such registration statement; or (C) Parent de-
termines, in its reasonable judgment, that such registration
would interfere with any financing, acquisition or other material
transaction involving Parent or any of its affiliates. Parent
shall use reasonable efforts to cause any Registrable Parent
Securities registered pursuant to this Section 10(b) to be quali-
fied for sale under the securities or Blue Sky laws of such ju-
risdictions as the Company may reasonably request and shall con-
tinue such registration or qualification in effect in such ju-
risdiction; provided, however, that Parent shall not be required
to qualify to do business in, or consent to general service of
process in, any jurisdiction by reason of this provision.
The registration rights set forth in this Section 10(b)
are subject to the condition that the Company shall provide Par-
ent with such information with respect to such holder's Regis-
trable Parent Securities, the plans for the distribution thereof,
and such other information with respect to such holder as, in the
reasonable judgment of counsel for Parent, is necessary to enable
Parent to include in such registration statement all material
facts required to be disclosed with respect to a registration
thereunder.
A registration effected under this Section 10(b) shall
be effected at Parent's expense, except for underwriting dis-
counts and commissions and the fees and the expenses of counsel
to the Company, and Parent shall provide to the underwriters such
documentation (including certificates, opinions of counsel and
"comfort" letters from auditors) as are customary in connection
with underwritten public offerings as such underwriters may rea-
sonably require. In connection with any such registration, the
parties agree (i) to indemnify each other and the underwriters in
the customary manner, (ii) to enter into an underwriting agree-
ment in form and substance customary for transactions of such
type with the Company Manager and the other underwriters partici-
pating in such offering, and (iii) to take all further actions
which shall be reasonably necessary to effect such registration
and sale (including, if the Company Manager deems it necessary,
participating in road-show presentations).
Parent shall be entitled to include (at its expense)
additional shares of its common stock in a registration effected
pursuant to this Section 10(b) only if and to the extent the
Company Manager determines that such inclusion will not adversely
affect the prospects for success of such offering.
11. Adjustment Upon Changes in Capitalization. Without
limiting any restriction on the Company contained in this Stock
Option Agreement or in the Merger Agreement, in the event of any
change in Company Common Stock by reason of stock dividends,
split-ups, mergers (other than the Merger), recapitalizations,
combinations, exchanges of shares or the like, the type and num-
ber of shares or securities subject to the Option, and the pur-
chase price per share provided in Section 1, shall be adjusted
appropriately to restore to Parent its rights hereunder, includ-
ing the right to purchase from the Company (or its successors)
shares of Company Common Stock representing 19.9% of the out-
standing Company Common Stock for the aggregate Exercise Price
calculated as of the date of this Stock Option Agreement as pro-
vided in Section 1, subject to adjustment as provided in Section
2(b).
12. Restrictive Legends. (a) Each certificate repre-
senting shares of Company Common Stock issued to Parent hereunder
shall include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY BE REOFFERED OR SOLD ONLY IF SO REGIS-
TERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDI-
TIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN THE
STOCK OPTION AGREEMENT, DATED AS OF JULY 28, 1997, A
COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER UPON RE-
QUEST.
(b) Each certificate representing shares of Parent Com-
mon Stock issued to the Company hereunder shall include a legend
in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION
FROM SUCH REGISTRATION IS AVAILABLE. SUCH SECURITIES ARE ALSO
SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN
THE STOCK OPTION AGREEMENT, DATED AS OF JULY 28, 1997, A COPY OF
WHICH MAY BE OBTAINED FROM THE ISSUER UPON REQUEST.
(c) It is understood and agreed that: (i) the referenc-
es to the resale restrictions of the Securities Act in the above
legends shall be removed by delivery of substitute certificate(s)
without such reference if the holder shall have delivered to the
issuer a copy of a letter from the staff of the Securities and
Exchange Commission, or an opinion of counsel, in form and sub-
stance satisfactory to the issuer, to the effect that such legend
is not required for purposes of the Securities Act; (ii) the
reference to the provisions to this Stock Option Agreement in the
above legends shall be removed by delivery of substitute certifi-
cate(s) without such reference if the shares have been sold or
transferred in compliance with the provisions of this Stock Op-
tion Agreement and under circumstances that do not require the
retention of such reference; and (iii) the legend shall be re-
moved in its entirety if the conditions in the preceding clauses
(i) and (ii) are both satisfied. In addition, such certificates
shall bear any other legend as may be required by law. Certifi-
cates representing shares sold in a registered public offering
pursuant to Section 10 shall not be required to bear the legends
set forth in this Section 12.
13. Binding Effect; No Assignment; No Third-Party Bene-
ficiaries. This Stock Option Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective
successors and permitted assigns. Except as expressly provided
for in this Stock Option Agreement, neither this Stock Option
Agreement nor the rights or the obligations of either party here-
to are assignable, except by operation of law, or with the writ-
ten consent of the other party. Nothing contained in this Stock
Option Agreement, express or implied, is intended to confer upon
any person other than the parties hereto and their respective
permitted assigns any rights or remedies of any nature whatsoever
by reason of this Stock Option Agreement. Any Restricted Shares
or shares of Parent Common Stock sold by a party in compliance
with the provisions of Section 10 shall, upon consummation of
such sale, be free of the restrictions imposed with respect to
such shares by this Stock Option Agreement, unless and until such
party shall repurchase or otherwise become the beneficial owner
of such shares, and any transferee of such shares shall not be
entitled to the registration rights of such party.
14. Specific Performance. The parties hereby acknowl-
edge and agree that the failure of the Company to perform its
agreement and covenants hereunder will cause irreparable injury
to Parent for which damages, even if available, will not be an
adequate remedy. Accordingly, the Company hereby consents to the
issuance of injunctive relief by any court of competent jurisdic-
tion to compel performance of the Company's obligations and to
the granting by any such court of the remedy of specific perfor-
mance of its obligations hereunder.
15. Entire Agreement. This Stock Option Agreement and
the Merger Agreement (including the exhibits and schedules there-
to) constitute the entire agreement of the parties and supersede
all prior agreements and undertakings, both written and oral,
among the parties, with respect to the subject matter hereof.
16. Further Assurances. Each party will execute and
deliver all such further documents and instruments and take all
such further action as may be necessary in order to consummate
the transactions contemplated hereby.
17. Validity. The invalidity or unenforceability of any
provision of this Stock Option Agreement shall not affect the
validity or enforceability of the other provisions of this Stock
Option Agreement or the provisions of the Merger Agreement, which
shall remain in full force and effect. If any court or other
Governmental Entity holds any provisions of this Stock Option
Agreement to be null, void or unenforceable, the parties hereto
shall negotiate in good faith the execution and delivery of an
amendment to this Stock Option Agreement in order, as nearly as
possible, to effectuate, to the extent permitted by law, the
intent of the parties hereto with respect to such provision and
the economic effects thereof. If for any reason any such court
or other Governmental Entity determines that Parent is not per-
mitted to acquire, or the Company is not permitted to repurchase
pursuant to Section 7, the full number of shares of Company Com-
mon Stock provided in Section 1 hereof (as the same may be ad-
justed), it is the express intention of the Company to allow
Parent to acquire or to require the Company to repurchase such
lesser number of shares as may be permissible, without any amend-
ment or modification hereof. Each party agrees that, should any
court or other Governmental Entity hold any provision of this
Stock Option Agreement or part hereof to be null, void or unen-
forceable, or order any party to take any action inconsistent
herewith, or not take any action required herein, the other party
shall not be entitled to specific performance of such provision
or part hereof or to any other remedy, including, without limita-
tion, money damages, for breach hereof or of any other provision
of this Stock Option Agreement or part hereof as the result of
such holding or order.
18. Notices. All notices and other communications here-
under shall be in writing and shall be deemed given in the manner
provided in the Merger Agreement.
19. Governing Law. This Stock Option Agreement shall be
governed by, and construed in accordance with, the laws of the
State of Delaware (without giving effect to the provisions there-
of relating to conflicts of law).
20. Headings. The headings contained in this Stock Op-
tion Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Stock
Option Agreement.
21. Counterparts. This Stock Option Agreement may be
executed in multiple counterparts, and by the different parties
hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
22. Expenses. Except as otherwise expressly provided
herein or in the Merger Agreement, all costs and expenses in-
curred in connection with the transactions contemplated by this
Stock Option Agreement shall be paid by the party incurring such
expenses.
23. Amendments; Waiver. This Stock Option Agreement may
be amended by the parties hereto, and the terms and conditions
hereof may be waived, only by an instrument in writing signed on
behalf of each of the parties hereto or, in the case of a waiver,
by an instrument signed on behalf of the party waiving compli-
ance.
24. Extension of Time Periods. The time periods for
exercise of certain rights under Sections 2, 7 and 10 shall be
extended (i) to the extent necessary to obtain all regulatory
approvals for the exercise of such rights and for the expiration
of all statutory waiting periods and (ii) to the extent necessary
to avoid any liability under Section 16(b) of the Exchange Act by
reason of such exercise.
25. Replacement of Option. Upon receipt by the Company
of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Stock Option Agreement, and (in
the case of loss, theft or destruction) of reasonably satisfacto-
ry indemnification, and upon surrender and cancellation of this
Stock Option Agreement, if mutilated, the Company will execute
and deliver a new agreement of like tenor and date.
IN WITNESS WHEREOF, the parties hereto have caused this
Stock Option Agreement to be executed by their respective duly
authorized officers as of the date first above written.
NATIONAL SEMICONDUCTOR CORPORATION
By /s/ Donald Macleod
Name Donald Macleod
Title CFO
CYRIX CORPORATION
By /s/ James W. Swent III
Name James W. Swent III
Title Sr. V.P.
Exhibit 11.0
NATIONAL SEMICONDUCTOR CORPORATION
CALCULATION OF EARNINGS PER SHARE-ASSUMING FULL DILUTION (1)
(in millions, except per share amounts)
Year ended
-----------------------------
May 25, May 26, May 28,
1997 1996 1995
------ ------ ------
Net income, as reported $27.5 $185.4 $264.2
Adjustment for interest on
convertible notes 6.2 5.8 -
------ ------ ------
Net income $ 33.7 $191.2 $264.2
Number of shares:
Weighted average common shares
outstanding 140.1 129.3 121.4
Weighted average common equivalent
shares, net of tax benefit 2.5 3.2 3.8
------ ------ ------
Weighted average common and common
equivalent shares 142.6 132.5 125.2
Additional weighted average common
equivalent shares assuming
full dilution 0.3 - 0.1
Shares issuable from assumed
conversion of preferred shares - 6.1 12.2
Shares issuable from assumed
conversion of convertible notes 6.0 4.0 -
------ ------ ------
Weighted average common and common
equivalent shares assuming
full dilution 148.9 (1) 142.6 (1) 137.5
====== ====== ======
Earnings per share:
Net income $ 0.23 $ 1.34 $ 1.92
====== ====== ======
- -------------------------------------------
(1) For fiscal 1997 and 1996, this calculation is submitted in
accordance with Regulation S-K Item 601 (b)(11) although it is contrary
to paragraph 40 of APB Opinion No. 15 because it produces an anti-
dilutive result.
Exhibit 21.0
NATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
The following table shows certain information with respect to the active
subsidiaries of the Company as of May 25, 1997, all of which are
included in the consolidated financial statements of the registrant:
State or Percent of
other Other country voting
jurisdiction in which securities
of subsidiary is owned by
Name incorporation registered National
- ---- ------------- ------------- ----------
National Semiconductor
International, Inc. Delaware 100%
Mediamatics, Inc. California 100%
National Semiconductor Delaware 100%
International, Inc.
National Semiconductor
Netsales, Inc. Delaware 100%
National Semiconductor
(Maine), Inc. Delaware 100%
Comlinear Corporation Delaware 100%
ASIC II Limited Hawaii 100%
National Semiconductor
B.V. Corporation Delaware 100%
National Semiconductor France 100%
France S.A.R.L.
National Semiconductor GmbH Germany 100%
National Semiconductor Israel 100%
(I.C.) Ltd.
National Semiconductor Sp.A. Italy 100%
National Semiconductor A.B. Sweden 100%
National Semiconductor Great Britain Denmark/ 100%
Ireland/
Finland/
Norway
National Semiconductor Netherlands 100%
Benelux B.V.
National Semiconductor B.V. Netherlands 100%
National Semiconductor Switzerland 100%
International
Finance S.A.
Natsem India Designs Pvt. India 100%
National Semiconductor Australia 100%
(Australia) Pty. Ltd.
National Semiconductor Hong Kong 100%
(Hong Kong) Limited
National Semiconductor Hong Kong Taiwan 100%
(Far East) Limited
NSM International Limited Hong Kong 50%
National Semiconductor Hong Kong 51%
Sunrise Hong Kong Limited
National Semiconductor Japan 100%
Japan Ltd.
National Semiconductor Malaysia 100%
SDN. BHD.
Exhibit 21.0
NATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
State or Percent of
other Other country voting
jurisdiction in which securities
Name of subsidiary is owned by
- ---- ------------ ------------- ----------
National Semiconductor Malaysia 100%
Technology SDN. BHD.
National Semiconductor Pte. Singapore 100%
Ltd.
National Semiconductor Singapore 100%
Asia Pacific Pte. Ltd.
National Semiconductor Singapore 100%
Manufacturer Singapore
Pte. Ltd.
National Semiconductor People's
Sunrise of Shanghai Republic
Limited of China 51%
National Semiconductor Canada 100%
Canada Inc.
National Semicondutores Brazil 100%
do Brasil Ltda.
Electronica NSC de Mexico, Mexico 100%
S.A.
ASIC Limited Bermuda 100%
Exhibit 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the
undersigned persons hereby constitutes and appoints Brian L. Halla,
Donald Macleod, and John M. Clark III, and each of them singly, his true
and lawful attorney-in-fact and in his name, place, and stead, and in
any and all of his offices and capacities with National Semiconductor
Corporation (the "Company"), to sign the Annual Report on Form 10-K for
the Company's 1997 fiscal year, and any and all amendments to said
Annual Report on Form 10-K, and generally to do and perform all things
and acts necessary or advisable in connection therewith, and each of the
undersigned hereby ratifies and confirms all that each of said
attorneys-in-fact may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto
executed this Power of Attorney as of the date set forth opposite his
signature.
SIGNATURE DATE
--------- ----
//S// BRIAN L. HALLA June 26, 1997
--------------------
Brian L. Halla
//S// GARY P. ARNOLD June 26, 1997
--------------------
Gary P. Arnold
//S// ROBERT BESHAR June 26, 1997
-------------------
Robert Beshar
//S// MODESTO A. MAIDIQUE June 26, 1997
-------------------------
Modesto A. Maidique
//S// EDWARD R. McCRACKEN June 26, 1997
-------------------------
Edward R. McCracken
//S// J. TRACY O'ROURKE June 26, 1997
-----------------------
J. Tracy O'Rourke
//S// CHARLES E. SPORCK June 26, 1997
-----------------------
Charles E. Sporck
//S// DONALD E. WEEDEN June 26, 1997
----------------------
Donald E. Weeden
//S// DONALD MACLEOD July 14, 1997
--------------------
Donald Macleod
//S// RICHARD D. CROWLEY, JR. July 7, 1997
-----------------------------
Richard D. Crowley, Jr.