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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 30, 1999
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
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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 25, 1999, was approximately $4,193,112,881. 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 25, 1999, was 169,138,208.
DOCUMENTS INCORPORATED BY REFERENCE
Location
Document in Form 10-K
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Portions of the Proxy Statement for the Annual Meeting of Part III
Stockholders to be held on or about September 24, 1999.
Portions of the Company's Registration Statement on Form S-3, Part IV
Registration No. 33-48935, which became effective October 5, 1992.
Portions of the Company's Registration Statement on Form S-3, Part IV
Registration No. 33-52775, which became effective March 22, 1994.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 333-57029, which became effective June 17, 1998.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 33-55699, which became effective September 30, 1994.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 33-61381, which became effective July 28, 1995.
Portions of the Company's Registration Statement on Form S-3, Part IV
Registration No. 33-63649, which became effective November 6, 1995.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 333-36733, which became effective September 30, 1997.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 333-09957, which became effective August 12, 1996.
Portions of Cyrix Corporation's Registration Statement on Form S-3, Part IV
Registration No. 333-10669, which became effective August 22, 1996.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 333-77195, which became effective April 28, 1999.
Portions of the Proxy Statement for the Annual Meeting held Part IV
September 26, 1997
Portions of the Company's Post Effective Amendment No.1 on Form S-8 Part IV
to Form S-4 Registration No. 333-38033-01, which became effective
November 18, 1997.
The Index to Exhibits is located on pages 68-70.
PART I
ITEM 1. BUSINESS
General
National Semiconductor Corporation, including its subsidiaries ("National" or
the "Company"), intends to be a leader in the emerging market for information
appliances. National's strategy is to provide systems-on-a-chip solutions for
its key data highway strategic partners, exploiting its analog expertise as
a starting point for forward integration. The Company designs, develops,
manufactures and markets a wide array of semiconductor products, including
microprocessors for the personal computer industry, and a broad line of
analog, mixed-signal and other integrated circuits for applications in a
variety of markets, including the information appliances, personal systems,
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 fiscal 1998, the Company merged with Cyrix Corporation ("Cyrix").
The merger was accounted for as a pooling of interests. Cyrix designed,
developed and marketed x86 software-compatible microprocessors of original
design for the personal computer marketplace. It was intended that access to
Cyrix's x86 microprocessor cores and the combination of technologies
resulting from the merger would bring together many of the key enabling
technologies necessary to pursue the system-on-a-chip strategy.
Upon completion of the merger, the Company's focus shifted toward
the consumer segment of the PC market, specifically, the sub-$1,000 PC market
with its line of Cyrix M II microprocessors. In this market, which is
dominated by two major competitors, the Company experienced increasingly
competitive pricing trends and constant pressure to rapidly release new
microprocessors with higher operating speeds. As a result, in May 1999 the
Company announced its decision to exit the PC microprocessor business.
However, the Company will continue to use the Cyrix integrated x86
microprocessor cores to design and develop system-on-a-chip products aimed at
the emerging information appliances market.
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 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 wireless
communications, ethernet local area networks ("LAN") and personal systems.
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 LAN, wireless networking and wireless communications, as well as
products for personal systems and personal communications, such as "Super
I/O" offerings. Super I/O (input/output) 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.
Corporate Structure and Organization. The Company is organized by
various product line business units that are grouped to form four operating
segments that include the Analog Group, the Information Appliance Group, the
Consumer and Commercial Group and the Network Products Group described as
follows:
Analog Group: Analog products are used to maintain and control
continuously variable electrical signals in the real world. They are used in
equipment to provide a human interface such as sound, vision, images and to
provide communications interfaces and power management. Analog technology is
used to enrich the experience of humans when interacting with electronic
applications.
The Analog Group develops and manufactures a wide range of building
blocks such as high-performance operational amplifiers, power management
circuits, data acquisition circuits, interface circuits and circuits targeted
toward audio and CRT monitor systems. In addition, the Analog Group's wireless
curcuits perform the radio, baseband controller, power management and other
related functions primarily for handsets and base stations in the cellular and
cordless telephone markets.
With National's leadership in small package technology, the Group is
experiencing success in high growth markets that require portability, such as
cellular telephones and wireless information appliances. The Group is heavily
focused on using analog circuits as the starting point for forward integration
for systems on a chip aimed at the cellular, personal systems and information
appliances markets. Current examples include scanners on a chip, systems
health monitoring and integrated power management systems. The Group also
uses analog building blocks with its COP8 family of microcontrollers, targeted
to communications, automotive and industrial applications. The Analog Group
has a large and diverse global customer base, approaching 80,000 customers
worldwide. Approximately 45 percent of analog revenues are achieved through
authorized distributors.
Information Appliance ("IA") Group: The IA Group contains key
business units focused on providing component and system solutions to the
emerging IA market. It defines and develops system level hardware and
software solutions, based on National's recently announced GeodeTM technology
targeted for the emerging IA market. This technology integrates complex
functionality - processing, system logic, graphics, video and audio
compression - previously available only on multiple computer chips on to a
single chip. Built around National's series of integrated x86 Media GX
processors, the GeodeTM IA-on-a-chip family is the first commercially
available integrated circuit to offer a complete IA system-on-a-chip. By
leveraging the GeodeTM technology combined with analog and mixed-signal
communications capabilities, the Company is also developing complete solutions
that will allow users to get information and communicate (accessing the
internet) in a simpler, more intuitive and user-friendly fashion than is
typically experienced with PCs today. The IA group is focused on three key
market segments: Interactive TV set-top boxes (equipped with digital video),
thin clients (streamlined desktop computers that have minimal memory and
access software from a centralized server network) and personal information
access devices.
The Advanced I/O (input/output) business unit within the IA Group
provides I/O solutions to the PC motherboard and emerging IA markets.
Also included within the IA Group is the Cyrix business unit. The
Cyrix products primarily consist of a line of Cyrix M II microprocessors,
which are stand-alone central processing units that were targeted for the
sub-$1,000 PC market. As previously noted, the Company has decided to exit
this portion of the microprocessor business.
Communications and Consumer Group ("CCG"): CCG is comprised of three
business units that include MediamaticsTM, Custom Solutions and Enhanced
Solutions.
MediamaticsTM is responsible for providing key video processing
technology, including MPEG capability, required in executing National's
information appliance strategy. Target applications include digital versatile
disc (DVD) players, set top boxes, video servers and convergence appliances.
Its software DVD player (DVD ExpressTM) has already won designs with major
personal computer original equipment manufacturers. The PanteraTM DVD decoder
chip is being designed into several next-generation DVD players. The
PanteraTM architecture is also the building block for other video and audio
decoder products.
Custom Solutions manufactures customer-designed application-specific
integrated circuits, custom and standard automotive devices, standard
telecommunication products for analog and digital subscriber line cards and
application-specific 16-bit RISC microcontrollers.
Enhanced Solutions (formerly the Military/Aerospace business unit)
has been a supplier of semiconductors and contract services to the high
reliability market comprising avionics, defense, space and the federal
government, with a broad range of military and space grade products including
analog, logic, interface and networking devices.
Network Products Group (formerly LAN): The Network Products Group
("NPG") was previously within CCG. NPG primarily offers a line of relatively
mature 10Base/100Base-TX Mb physical layer and transceiver devices, designed
for easy implementation of 10/100Mbps ethernet LANs. With the acquisition of
Comcore Semiconductor's digital signal processing technology, NPG is
developing new network products, with advanced capabilities including a
MACPhyter, a fast ethernet 10/100Mb device, combined with a media access
controller (MAC) and gigabit-PHYter, offering expanded bandwidth
(100/1000Mbps), that addresses transmission over copper networks. NPG is also
developing products for both the wired and wireless home networking markets.
Aside from these operating groups, the Company's corporate structure
also includes centralized Worldwide Sales and Marketing, and a Central
Technology and Manufacturing Group ("CTMG"). Worldwide Sales and Marketing is
organized around the four major regions of the world in which the Company
operates: the Americas (North America and South America), Europe, Japan and
Asia Pacific, and is comprised of the Company's worldwide sales and marketing
organization. CTMG manages production, including all outsourced manufacturing
requirements, and technology operations. 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.
CTMG is also now responsible for the selection and usage of common support
tools, including integrated Computer Aided Design ("CAD"), for designing,
performing layout, simulating and testing the logical and physical
representation of new products before they are actually produced. CTMG is
also responsible for providing a range of process libraries, product cores and
software that is shared among National's product lines, to develop system
level solutions.
Segment Financial Information
For further financial information on the Company's segments, refer to the
information contained in Note 12, "Segment and Geographic Information," in the
Notes to the Consolidated Financial Statements included in Item 8.
Marketing and Sales
The Company markets its products throughout the world to original equipment
manufacturers ("OEMs") utilizing a direct sales force. Major OEMs include
Compaq Computer Corporation, Dell Computer Corporation, Hewlett-Packard
Company, International Business Machines Corporation ("IBM"), and Motorola,
Inc., as well as Robert Bosch GmbH, Telefonaktiebolaget L.M. Ericsson, Nokia
Group, Siemens AG and Samsung Group. In addition to its direct sales force,
National uses distributors in all four of its business regions, and
approximately 38 percent of the Company's worldwide revenues are channeled
through distributors. In line with industry practices, National generally
credits distributors for the effect of price reductions on their inventory of
National products and under specific conditions repurchases products that have
been discontinued by the Company.
Customer support is handled by comprehensive, central facilities in
the United States, Europe and Singapore. These Customer Support Centers
("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 customers'
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.
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
1999, 1998 and 1997.
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. The Company experienced this pattern in fiscal
1999 as business conditions for the semiconductor industry began to improve
in calendar 1999.
Manufacturing
The design of semiconductor and integrated circuit products is determined by
General market trends and customer needs and requirements. 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 of the packagein 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. Certain devices in the analog
portfolio are designed to be used without the need for traditional packaging.
The integrated circuit is coated with a protective material and mounted
directly onto the circuit board.
The Company's product design and development activities are conducted
predominantly in the United States. Wafer fabrication is concentrated in two
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, Israel, Southeast Asia and Japan. These arrangements include
manufacturing agreements with the Company's former Fairchild Group, which was
divested in March 1997 ("Fairchild"), under which the Company will purchase
goods and services from Fairchild through fiscal 2000, as well as various
subcontract vendors in Europe and Asia.
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 and its subcontractors' wafer fabrication facilities
are now required in many cases to manufacture integrated circuits with sub-
micron circuit pattern widths. Precision manufacturing in wafer fabrication
carries over to assembly and test operations where advanced packaging
technology and comprehensive testing are required to address ever increasing
performance and complexity embedded in current 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 then markets through its sales
channels. Both raw materials and semi-finished or finished products are
obtained from various sources, although the number of sources for any
particular material or product is relatively limited. Although 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. R&D expenses were $471.3 million
for fiscal 1999, $482.0 million for fiscal 1998 and $404.5 million for fiscal
1997 with all years experiencing increases in R&D in the Company's core
analog and mixed-signal products, as well as Cyrix microprocessor based
products and critical process development. These amounts exclude in-process
R&D charges of $102.9 million related to the acquisitions of ComCore
Semiconductor, Inc. ($95.2 million), Future Integrated Systems, Inc. ("FIS")
($2.5 million) and the digital audio technology business of Gulbransen ($5.2
million) in fiscal 1998 and $72.6 million related to the acquisitions of the
PicoPower business of Cirrus Logic, Inc. ($10.6 million) and Mediamatics
($62.0 million) in fiscal 1997, which have been separately presented in the
consolidated statements of operations as special items. For fiscal 1999, the
Company expended 33 percent of its R&D effort toward the development of
process technology and the remaining 67 percent for new product development.
This represents a decrease of 7 percent and 22 percent in fiscal 1999 from
fiscal 1998 in spending for process technology and product development,
respectively.
Patents
National owns numerous United States and non-U.S. patents and has many patent
applications pending. It considers the development of patents and the
maintenance of an active patent program advantageous to the conduct of its
business but believes that continued success will depend more on engineering,
production, marketing, financial and managerial skills than on its patent
program. The Company licenses certain of its patents to other manufacturers
and participates in a number of cross licensing arrangements and agreements
with other parties. Each license agreement has unique terms and conditions,
with variations as to length of term, royalties payable, permitted uses and
scope. The majority of the agreements are cross-licenses where the Company
grants broad licenses to its intellectual property in exchange for receiving
a license; none are exclusive. The amount of income from licensing agreements
has varied in the past and the amount and timing of future income from
licensing agreements cannot be precisely forecast. On an overall basis, 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 30, 1999, National employed approximately 11,600 people of whom
approximately 5,600 were employed in the United States, 1,600 in Europe,
4,200 in Southeast Asia and 200 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 1993 through 1997, but experienced substantial losses in
fiscal 1999 and 1998, as well as in fiscal 1989 through 1992.
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 IBM, Motorola, Inc., Koninklijke (Royal)
Philips Electronics N.V., 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. ("AMD"), LSI Logic Corporation, STMicroelectronics N.V., Intel
Corporation ("Intel") 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. The Company is currently faced with growing competition in the
networking market from both large companies such as Intel and Lucent
Technologies Inc., as well as smaller companies including Broadcom
Corporation. With the Cyrix 6x86 and M IITM products, the Company was also
faced with competition in the personal computer market for socket-seven
compatible microprocessor products where other large competitors such as Intel
and AMD significantly influence the price and availability of products.
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
markets.
International Operations
National conducts a substantial portion of its operations outside the United
States and its business is subject to risks associated with many factors
beyond its control. These factors include fluctuations in foreign currency
rates, instability of foreign economies 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.
Geographic Information
For information on the geographic areas in which the Company operates, refer
to the information contained in Note 12, "Segment and Georgraphic
Information," in the Notes to the Consolidated Financial Statements included
in Item 8. In addition, total assets by major countries within the Company's
four main geographic areas at May 25, 1997 were $2,397.7 million, $188.8
million, $63.4 million, $174.1 million and $389.5 million for the United
States, United Kingdom, Hong Kong, Singapore and Rest of World, respectively.
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 Atlanta, Georgia; Boxborough, Massachusetts; Calabasas,
California; Fort Collins, Colorado; Fremont, California; Grass Valley,
California; Longmont, Colorado; Mesa, Arizona; Newport Beach, California;
Redmond, Washington; Salem, New Hampshire; Salt Lake City, Utah; San Diego,
California; Tacoma, Washington; Tucson, Arizona; and overseas locations
including China, Germany, Indida, Israel, Japan, the Netherlands, Taiwan and
the United Kingdom.
The Company conducts manufacturing in its wafer fabrication
facilities located in Arlington, Texas; South Portland, Maine; and Greenock,
Scotland. In October 1998, the Company announced plans to consolidate the
wafer manufacturing operations in Greenock and to seek investors to acquire
and operate this facility as an independent foundry business. The Company is
also moving some of the Greenock capacity and related processes to its
manufacturing facility in Arlington. In May 1999, the Company announced its
intention to sell a majority interest in its wafer fabrication facility in
Maine. The Company's remaining captive manufacturing capacity and its third-
party subcontract manufacturing arrangements are expected to be adequate to
supply the Company's need. Assembly and test functions are performed
primarily in Southeast Asia. These facilities are located in Melaka,
Malaysia and Toa Payoh, Singapore. The regional headquarters for National's
Worldwide Sales and Marketing are located in Santa Clara, California; Munich,
Germany; Tokyo, Japan; and Kowloon, Hong Kong. National maintains local sales
offices 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. The Company's real estate in
Arlington, Texas is secured by two notes assumed as part of the repurchase by
the Company of the equity interest in the facility which had been sold and
leased back prior to 1990. Facilities of Cyrix in Richardson, Texas are
secured by a note assumed by the Company at the time of the merger
transaction. These notes total $16.0 million of the Company's long-term debt
as of May 30, 1999.
Wafer fabrication capacity utilization for fiscal 1999 was 57 percent
compared to 76 percent for fiscal 1998. This was primarily a result of
running the Company's manufacturing facilities (except those located in Maine)
at reduced capacity utilization rates during most of the year in order to
manage inventory levels and control costs. Capacity utilization in Maine
reached 92 percent in the third quarter of fiscal 1999, but was significantly
reduced in the fourth quarter, falling to 34 percent at the end of the fiscal
year, as a result of the decision to exit the PC microprocessor business.
ITEM 3. LEGAL PROCEEDINGS
In April 1995, the Internal Revenue Service ("IRS") issued a Notice of
Deficiency for fiscal years 1986 through 1989 seeking additional taxes of
approximately $11 million (exclusive of interest). A Subsequent Notice of
Deficiency issued in March 1998 reduced the amount of additional tax sought
to approximately $1.5 million (exclusive of interest). The issues giving rise
to the 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. In June 1998, the Company filed a
petition with the United States Tax Court contesting the Notice of
Deficiency. The IRS has completed its examination of the Company's tax
returns for fiscal 1990 through 1993 and the IRS has issued a notice of
proposed adjustment refunding approximately $0.7 million (exclusive of
interest) and relating to the same issues involved in the 1986 through 1989
fiscal years. In August 1998, the Company filed a protest contesting certain
proposed adjustments. The IRS is examining the Company's tax returns for
fiscal 1994 through 1996. The Company believes that adequate tax payments
have been made or accrued for all years.
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.
In July 1996 and December 1998, the Company received notices of
assessment from the Malaysian Inland Revenue Board relating to the Company's
manufacturing operations in Malaysia. The assessments totaled approximately
199.9 million Malaysian ringgits ($52.6 million). The issues giving rise to
the assessments relate primarily to intercompany transfer pricing for the
Company's manufacturing operations in Malaysia for fiscal year 1985 through
1993. In June 1999, the Company completed the settlement of all outstanding
assessments with the Malaysian Inland Revenue Board for 6.6 million ringgits
($1.7 million).
On April 22, 1988, the District Director of the United States Customs
Service, San Francisco, issued a Notice of Proposed Action and a Pre-penalty
Notice to the Company alleging underpayment of duties of approximately $19.5
million on merchandise imported from the Company's foreign subsidiaries
during the period from June 1, 1979 to March 1, 1985. The Company filed an
administrative appeal in September 1988. On May 23, 1991, the District
Director revised the Customs action and issued a Notice of Penalty Claim and
Demand for Restoration of Duties, reducing the alleged underpayment of duties
for the same period to approximately $6.9 million. The Company filed an
administrative petition for relief in October 1991 and the alleged
underpayment was subsequently reduced on April 22, 1994 to approximately $3.6
million. The revised alleged underpayment could be subject to penalties that
may be computed as a multiple of the underpayment. The Company filed a
supplemental petition for relief in October 1994. In March 1998, the
Assistant Commissioner of Customs for the Office of Regulations and Rulings
issued a decision on the petition which provided insignificant reductions to
the duty amount being sought. In June 1998, the Company filed an offer of
$1.0 million in compromise of all claims, which was rejected by U.S. Customs.
The Company intends to continue to contest the assessments through available
avenues for relief if it is not able to resolve the issues with U.S. Customs.
On July 1, 1988, the Customs Service liquidated various duty drawback claims
previously filed by the Company, denying the payment of drawback previously
paid to the Company and issued bills in the amount of $2.5 million seeking
repayment of the accelerated drawback. Timely protests of these liquidations
were filed in September 1988. These protests were denied in March 1996. The
Company is pursuing judicial review of the denial in the Court of
International Trade and has paid the denied duties and associated interest
totaling $5.2 million, which is a prerequisite to filing a summons with the
Court. The Company believes that resolution of these Customs matters will not
have a material impact on the Company's financial position.
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. The Company has also
been sued by AMD, which seeks recovery of cleanup costs incurred by AMD in
the Santa Clara, California area under the RWQCB remediation orders. AMD
alleges that certain contamination for which the RWQCB has found AMD
responsible was originally caused by the Company. As part of the litigation,
the Company is seeking to recover from AMD expenses relating to commingled
groundwater in an area offsite and downgradient of National's and AMD's
superfund sites. In addition to the Santa Clara site, the Company has been
designated as a potentially responsible party by federal and state agencies
with respect to certain sites with which the Company may have had direct or
indirect involvement. 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 Dynacraft, Inc. ("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.
In November 1997, a class action suit was filed in the California
Superior Court, Santa Clara County, by Goodman Epstein on behalf of himself
and other Cyrix shareholders. The complaint alleged breach of fiduciary duty
against the Company, Cyrix Corporation and certain officers of Cyrix, arising
out of the merger agreement adopted in July 1997 between the Company and
Cyrix. The Company demurred to the complaint and subsequent amended
complaints. The third amended complaint alleges that a former Cyrix officer
and director and a Company officer breached their fiduciary duty under state
law and allegedly prevented the putative class from receiving a fair and
adequate price for their Cyrix shares in the merger. It further charges all
defendants with liability under the federal securities laws for allegedly
false and misleading statements and omissions in disclosure documents issued
in connection with the merger. The relief requested includes rescissory
and/or compensatory damages in unspecific amounts. The Company intends to
contest this case vigorously.
In January 1999, a class action suit was filed against the Company in
the California Superior Court, Santa Clara County, by James Harris and other
former and present employees claiming damages for personal injury. An amended
complaint naming additional plaintiffs and defendants was filed in April 1999
and served on the Company in May 1999. The complaint alleges that cancer
and/or reproductive harm were caused to employees as a result of alleged
exposure to toxic chemicals while working at the Company. Plaintiffs claim to
have worked at the Company's facility in Santa Clara County and/or at
unidentified wholly-owned Company subsidiaries outside of Santa Clara County.
In addition, one plaintiff purports to represent a class of children of
Company employees who allegedly sustained developmental harm as a result of
alleged in utero exposure to toxic chemicals while their mothers worked at
the Company. Plaintiffs seek damages on behalf of the classes for personal
injuries, nervous shock, physical and mental pain, fear of future illness,
medical expenses, and loss of earnings and earnings capacity. No specific
amount of monetary damages is claimed. In June 1999, the Company filed a
demurrer to the amended complaint. The Company intends to defend this action
vigorously.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT *
Name Current Title Age
Kamal K. Aggarwal (1) Executive Vice President, Central 61
Technology and Manufacturing Group
Michael Bereziuk (2) Senior Vice President, Worldwide Marketing 46
and Sales
Jean-Louis Bories (3) Executive Vice President and General Manager, 44
Cyrix Group
Patrick J. Brockett (4) Executive Vice President and General Manager, 51
Analog Group
John M. Clark III (5) Senior Vice President, General Counsel 49
and Secretary
Brian L. Halla (6) Chairman of the Board, President and 53
Chief Executive Officer
Donald Macleod (7) Executive Vice President, Finance and 50
Chief Financial Officer
Gobi R. Padmanabhan (8) Senior Vice President and General Manager, 53
Network Products Group
Richard L. Sanquini (9) Senior Vice President and General Manager, 64
Consumer and Commercial Group
Richard A. Wilson (10) Vice President, Human Resources 56
* all information as of May 30, 1999
Business Experience During Last Five Years
(1) Mr. Aggarwal joined the Company in November 1996 as Executive Vice
President, Central Technology and Manufacturing Group. Prior to joining the
Company, Mr. Aggarwal held positions as Vice President, Worldwide Logistics
and Customer Service and Vice President, Assembly and Test at LSI Logic
Corporation.
(2) Mr. Bereziuk joined the Company in August 1984. Prior to becoming Senior
Vice President, Worldwide Marketing and Sales in October 1997, Mr. Bereziuk
held positions at the Company as Senior Vice President and General Manager of
the Personal Systems Group; Vice President and General Manager, Personal
Systems Group; Vice President and General Manager, Embedded Control Division;
and Vice President, Embedded Control Division.
(3) Mr. Bories joined the Company in October 1997. Prior to becoming
Executive Vice President and General Manger of the Cyrix Group in January
1999, he held the position of Senior Vice President, Core Technology Group.
Prior to joining the Company, he had held positions at LSI Logic Corporation
as Vice President and General Manager, ASIC Division; Vice President,
Engineering/CAD; Director, Advanced Methodology; and Director, 500K Program.
(4) Mr. Brockett joined the Company in September 1979. Prior to becoming
Executive Vice President and General Manager, Analog Group, in October 1997,
he held positions at the Company as Executive Vice President, Worldwide Sales
and Marketing; President, International Business Group; Corporate Vice
President, International Business Group; Vice President, North America
Business Center Vice President and Managing Director, European Operations; and
Vice President and Director of European Sales.
(5) Mr. Clark joined the Company in May 1978. Prior to becoming Senior Vice
President, General Counsel and Secretary in April 1992, he held the position
of Vice President, Associate General Counsel and Assistant Secretary.
(6) Mr. Halla joined the Company in May 1996 as Chairman of the Board,
President and Chief Executive Officer. Prior to joining the Company, Mr.
Halla held positions at LSI Logic Corporation as Executive Vice President,
LSI Logic Products; Senior Vice President and General Manager,
Microprocessor/DSP Products Group; and Vice President and General Manager,
Microprocessor Products Group.
(7) Mr. Macleod joined the Company in February 1978. Prior to becoming
Executive Vice President, Finance and Chief Financial Officer in June 1995,
he held positions as Senior Vice President, Finance and Chief Financial
Officer; Vice President, Finance and Chief Financial Officer; Vice President,
Financial Projects; Vice President and General Manager, Volume Products -
Europe; and Director of Finance and Management Services - Europe.
(8) Mr. Padmanabhan joined the Company in June 1996. Prior to becoming
Senior Vice President and General Manager, Network Products Group in April
1999, he held the position of Senior Vice President, Technology, Research and
Development. Prior to joining the Company, he had held positions at LSI Logic
Corporation as Senior Director, Research and Development; and Director,
Research and Development.
(9) Mr. 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 and General Manager of the Consumer and Commercial Group in January
1999, he held positions as Senior Vice President and Co-General Manager,
Cyrix Corporation; Senior Vice President, Strategic Business and Technology
Development; 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
Refer to the information provided in response to this item in the
Company's Form 10-K for the fiscal year ended May 25, 1997 filed August 6,
1997.
On May 27, 1998, the Company issued three convertible subordinated
promissory notes, each in the face amount of $5,000,000 to John Guidon, Doug
Easton, and Sreen Raghavan, three former stockholders of ComCore
Semiconductor, Inc. ("ComCore"). The notes were issued as partial payment to
Messrs. Guidon, Easton and Raghavan for their ComCore stock in connection
with the acquisition of ComCore and as incentive for them to remain employed
with National. The notes were issued pursuant to the private placement
exemption of Section 4(2) of the Securities Act. The notes are convertible
into the number of shares of common stock of the Company that results from
dividing the conversion price in effect at the time of the conversion into
the outstanding principal amount of the note. The initial conversion price is
$16.1875, but is subject to adjustment under certain circumstances as
provided by the terms of the note. The notes are due May 27, 2001, subject to
earlier payments in the event of the payee's termination of employment with
the Company under certain limited circumstances. As consideration for the
notes, National received the common stock owned by Messrs, Guidon, Easton and
Raghavan and their agreement to remain employed by National. No underwriters
were involved in the ComCore acquisition.
See information appearing in Notes 6, Debt; Note 8, Shareholders'
Equity; and Note 14, Financial Information by Quarter (Unaudited) in the
Notes to the Consolidated Financial Statements included in Item 8. The
Company's common stock is traded on the New York Stock Exchange and the
Pacific Exchange. Market price range data are based on the New York Stock
Exchange Composite Tape. Market price per share at the close of business on
July 23, 1999 was $25.31. At July 23, 1999, the number of record holders of
the Company's common stock was 10,455.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from audited
consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 and the consolidated financial
statements and related notes thereto in Item 8.
FIVE-YEAR SELECTED FINANCIAL DATA
Years Ended May 30, May 31, May 25, May 26, May 28,
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
In Millions, Except
Per Share Amounts
OPERATING RESULTS
Net sales $1,956.8 $2,536.7 $2,684.4 $2,833.4 $2,625.5
Operating costs and expenses 3,043.1 2,683.6 2,692.1 2,619.3 2,285.6
-------- ------- ------- ------- -------
Operating income (loss) (1,086.3) (146.9) (7.7) 214.1 339.9
Interest income (expense), net (2.2) 22.3 6.1 9.4 15.4
Other income, net 3.1 24.9 18.7 47.5 31.3
-------- ------- ------- ------- -------
Income (loss) before
income taxes (1,085.4) (99.7) 17.1 271.0 386.6
Income tax expense (benefit) (75.5) (1.1) 15.5 70.0 84.8
-------- ------- ------- ------- -------
Net income (loss) $(1,009.9) $(98.6) $1.6 $201.0 $301.8
Net income (loss) used in
basic earnings per share
calculation (reflecting
preferred dividends, if
applicable):
Net income (loss) $(1,009.9) $(98.6) $1.6 $195.4 $290.6
======== ======= ======= ======= =======
Net income (loss) used in
diluted earnings per share
calculation (reflecting
adjustment for interest on
convertible notes when
dilutive, if applicable):
Net income (loss) $(1,009.9) $(98.6) $1.6 $201.0 $301.8
======== ======= ======= ======= =======
Earnings (loss) per share:
Net income (loss):
Basic $(6.04) $(0.60) $0.01 $1.35 $2.13
======== ======= ======= ======= =======
Diluted $(6.04) $(0.60) $0.01 $1.30 $1.97
======== ======= ======= ======= =======
Weighted average common
and potential common
shares outstanding:
Basic 167.1 163.9 156.1 145.0 136.7
======== ======= ======= ======= =======
Diluted 167.1 163.9 159.1 154.3 153.5
======== ======= ======= ======= =======
FINANCIAL POSITION AT YEAR-END
Working capital $324.2 $514.6 $911.6 $647.7 $572.4
Total assets 2,044.3 $3,100.7 $3,210.8 $2,911.3 $2,427.2
Long-term debt $416.3 $390.7 $460.5 $412.8 $100.8
Total debt $465.6 $444.6 $475.9 $454.4 $128.9
Shareholders' equity $900.8 $1,858.9 $1,871.7 $1,723.2 $1,532.4
- -----------------------------------------------------------------------------
OTHER DATA
Research and development
Excluding in-process
R&D charge $471.3 $482.0 $404.5 $379.0 $306.4
Capital additions $303.3 $622.0 $605.6 $707.7 $500.8
Number of employees
(in thousands) 11.6 13.0 12.8 20.7 22.7
National has paid no cash dividends on its common stock in any of the years
presented above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto:
Results of Operations
The Company recorded net sales of $2.0 billion in fiscal 1999 compared to
$2.5 billion in fiscal 1998 and $2.7 billion in fiscal 1997. Lower sales in
fiscal 1999 were caused by significant price reductions in the Cyrix M II
line of products due to increased competition and availability of new,
higher-speed microprocessor products from competitors, combined with the lack
of successful new product introductions from the Company's Network Products
division. Lower sales were also heavily driven by a general slowdown in new
orders the Company experienced, particularly in the first half of the fiscal
year. Economic uncertainties in Japan and the Asia Pacific region that
prevailed during the first half of calendar 1998 partially contributed to the
slowdown in new orders. The decline in sales for fiscal 1998 from sales for
fiscal 1997 was primarily due to the absence of sales for the Fairchild
Semiconductor group ("Fairchild"), which the Company divested in late fiscal
1997.
The Company incurred a loss of $1.0 billion in fiscal 1999 compared
to a loss of $98.6 million in fiscal 1998 and net income of $1.6 million in
fiscal 1997. Of the total loss in fiscal 1999, $700.9 million was
attributable to special charges for restructuring of operations. The
remaining loss was primarily driven by lower sales and margin erosion mainly
due to lower factory utilization and price reductions, particularly in the
Cyrix microprocessor products. The restructuring charges in fiscal 1999
included $689.6 million related to the Company's decision in May 1999 to exit
the personal computer ("PC") microprocessor business and $23.0 million
related to its announcement in November 1998 to consolidate the wafer
manufacturing operations in Greenock, Scotland (See Restructuring of
Operations). These amounts were partially offset by an $11.7 million release
of excess reserves related to certain prior restructure actions that were
completed during the year. The timing of these actions was consistent with
the timetable previously announced. In addition to the restructure charges,
the fiscal 1999 operating results included $55.1 million in charges related
to the exit of the PC microprocessor business. The charge included $9.0
million against sales for product returns, $43.6 million included in cost of
sales for the write down of Cyrix microprocessor inventory and $2.5 million
included in selling, general and administrative ("SG&A") expenses for
accounts receivable allowances. A $48.6 million charge for costs associated
with the termination of a wafer manufacturing and marketing agreement between
Cyrix and IBM (See Note 11) was also included in cost of sales for fiscal
1999.
The decline in operating results in fiscal 1998 from results in
fiscal 1997 was primarily attributable to the absence of Fairchild sales
combined with special items of $196.7 million. The special items included a
net $63.8 million charge for restructuring of operations related to a
worldwide workforce reduction announced in April 1998, $30.0 million for
Cyrix merger costs and $102.9 million for in-process R&D charges related to
the acquisitions of ComCore Semiconductor, Inc. ($95.2 million), Future
Integrated Systems, Inc. ($2.5 million) and the digital audio technology
business of Gulbransen, Inc. ($5.2 million).
Sales
Price erosion that affected average selling prices in most of the Company's
product areas was the primary cause for the overall decline in sales for
fiscal 1999. Sales in fiscal 1999 for analog products declined by 13 percent
from fiscal 1998 sales. General weakness experienced by the Company in the PC
and communications products related markets contributed to the decline in
sales for the Company's analog products, particularly sales in the first half
of the year. Industry-wide excess capacity forced average analog selling
prices to decline over the year, which more than offset increased unit
shipments. Despite the overall decline in sales for analog products, sales
within analog for application-specific wireless communications products grew
by 8 percent over fiscal 1998 sales. This growth was driven by higher unit
volume with some modest price declines. Sales for network products in fiscal
1999 declined 59 percent from fiscal 1998 sales, as the Company continued to
experience declining shipments in its existing mature portfolio of ethernet
products. The Company's failure to introduce successful new network products
since the second half of fiscal 1998 was the primary cause of the sharp drop
in fiscal 1999 sales for Network Products. Cyrix microprocessor sales also
declined by 8 percent from fiscal 1998 sales. Significant price reductions in
the Cyrix M II products caused the decline in Cyrix sales, despite a unit
volume increase. Highly competitive pricing trends and higher-speed
microprocessor offerings by competitors negatively impacted average selling
prices of Cyrix microprocessors. Sales of integrated microprocessors and
certain other PC-related peripheral products declined 40 percent in fiscal
1999 from fiscal 1998 as a result of a decrease in both units and prices.
Although integrated microprocessors are now targeted at a variety of
information appliance applications, historically, the vast majority of sales
of integrated microprocessors through the end of fiscal 1999 have been
achieved through PC products, such as sub-$1,000 desktop PCs and lower-cost
notebook PCs. The decline in sales for information appliance products was
also driven by the general weakness in the PC and communications products
related markets experienced during the year.
Fiscal 1999 sales decreased in all geographic regions compared to
sales in fiscal 1998. The decreases were 33 percent for the Americas, 25
percent for Japan, 21 percent for Europe and 7 percent for the Asia Pacific
region. While the dollar value of foreign currency denominated sales had an
unfavorable effect on sales in Japan as the dollar strengthened against the
Japanese yen, it was offset by a generally favorable effect experienced in
Europe. As a result, foreign currency exchange rate fluctuation had minimal
effect on the overall decrease in sales. For fiscal 1999, sales as a
percentage of total sales increased to 31 percent for the Asia Pacific region
and declined to 38 percent for the Americas, while it remained constant at 24
percent for Europe and 7 percent for Japan.
Although sales in fiscal 1998 decreased overall by 6 percent from
sales in fiscal 1997, fiscal 1998 sales were 14 percent higher than fiscal
1997 sales of $2.2 billion without Fairchild. This increase occurred despite
lower sales in the second half of the year that were caused by the slowdown
in new orders affected by economic uncertainties in the Asia Pacific region
and difficulties the Company encountered in ramping up adequate volumes of
the Cyrix Media GX microprocessor product to the speed levels the market
demanded. The growth in sales was led by sales for Cyrix microprocessors and
sales for analog products, which grew over fiscal 1997 sales by 28 percent
and 24 percent, respectively. Contributing to this growth in sales, sales
within analog for application-specific wireless communication products grew
52 percent over fiscal 1997 sales. Sales for information appliance products
including integrated microprocessors and certain other PC -related peripheral
products grew by 4 percent over fiscal 1997 sales. However, sales for network
products declined by 7 percent from fiscal 1997 sales. This decline was
caused by a sharp drop in sales in the second half of the year due to the
Company's failure to introduce key new network products combined with
decreased unit shipments and price erosion in its mature ethernet product
line. Overall, sales increases were the result of increased unit shipments
despite some price declines.
Sales for fiscal 1998 for the Asia Pacific region and Europe
increased by 8 percent and 3 percent, respectively, while sales for the
Americas and Japan decreased 12 percent and 26 percent, respectively. In
addition to the effect from the general economic slowdown in Japan, the
dollar value of foreign currency denominated sales had an unfavorable impact
in both Japan and Europe as the dollar strengthened against the Japanese yen
and most major European currencies. Fluctuation in foreign currency exchange
rates contributed to approximately one-fourth of the overall decline in
sales. In fiscal 1998, sales in the Asia Pacific region and Europe increased
to 26 percent and 24 percent of total sales, respectively, while sales for
the Americas and Japan declined to 43 percent and 7 percent of total sales.
Gross Margin
Gross margin as a percentage of sales declined to 21 percent in fiscal 1999
from 35 percent in fiscal 1998 and 38 percent in fiscal 1997. Excluding the
effect of charges related to the IBM contract termination of $48.6 million
and the write down of Cyrix microprocessor inventory of $43.6 million related
to the exit of the PC microprocessor business, gross margin for fiscal 1999
was 26 percent. The primary factors contributing to the decline in gross
margin continued to be lower factory utilization combined with price erosion,
particularly in the Cyrix microprocessor products. Wafer fabrication capacity
utilization for fiscal 1999 was 57 percent compared to 76 percent for fiscal
1998. This was primarily a result of running the Company's manufacturing
facilities (except those located in Maine) at reduced capacity utilization
rates during most of the year in order to manage inventory levels and control
costs. Capacity utilization in Maine reached 92 percent in the third quarter
of fiscal 1999, as the IBM action enabled the Company to ramp up its own
microprocessor manufacturing and more fully utilize the capacity available in
its 0.35/0.25 micron wafer fabrication facility. However, capacity
utilization in Maine was significantly reduced in the fourth quarter of
fiscal 1999, falling to 34 percent at the end of the fiscal year, as a result
of the decision to exit the PC microprocessor business. During the year the
Company incurred expenses of approximately $35.6 million associated with
consolidating the Greenock capacity and transferring related processes, which
ultimately contributed to the decline in gross margin. Until the Company
completes the closure of its 4-inch wafer fabrication facility in Greenock
and moves this volume and related processes to its other manufacturing
facilities, gross margin will be unfavorably affected by additional costs
associated with this effort.
In fiscal 1998, gross margin as a percentage of sales declined to 35
percent from 38 percent in fiscal 1997. Gross margin percentage without
Fairchild declined from 39 percent in fiscal 1997 to 35 percent in fiscal
1998. The primary factor contributing to the decline was reduced factory
utilization. Although wafer fabrication capacity utilization for fiscal 1998
was 76 percent, compared to 73 percent in fiscal 1997, wafer fabrication
capacity utilization declined to 51 percent in the last month of fiscal 1998
due to the slowdown in new orders experienced in the second half of the year.
Economic uncertainties in the Asia Pacific region and unstable conditions in
the PC market affected the slowdown. Significant margin erosion in Cyrix
products combined with significant ramp-up costs associated with the new
wafer fabrication facility in Maine also contributed to the decline in gross
margin.
Research and Development
Research and Development ("R&D") expenses in fiscal 1999 were $471.3 million,
or 24 percent of sales, compared to $482.0 million in fiscal 1998, or 19
percent of sales, and $404.5 million in fiscal 1997, or 15 percent of sales.
Fiscal 1998 and 1997 comparative amounts exclude $102.9 million and $72.6
million, respectively, for in-process R&D charges related to acquisitions,
which have been separately presented as special items in the consolidated
statement of operations. R&D expenses for fiscal 1997 excluding Fairchild
were $389.4 million. While the Company was able to manage R&D expenses in
fiscal 1999 to more closely align spending with current business conditions,
a significant portion of these expenses were directed towards developing
Cyrix microprocessor-based products and developing advanced sub-micron
processes in manufacturing high-performance PC microprocessors. As described
in Note 3, the Company announced, in the fourth quarter of fiscal 1999, its
decision to exit the PC microprocessor business and its intention to sell a
majority interest in its wafer fabrication facility in South Portland, Maine.
The Company continued to invest resources in the development of new
microprocessor cores and in the integration of those cores with the Company's
other technological capabilities in order to develop system-on-a-chip
products aimed at the emerging information appliance market. The Company also
continues to invest resources in the development of new analog and mixed-
signal technology-based products for applications in the personal systems,
communications and consumer markets, as well as in the process technologies
needed to support those products. For fiscal 1999, the Company devoted
approximately 33 percent of its R&D effort towards the development of process
technology and 67 percent towards new product development. This represents a
decrease of 7 percent and 22 percent in spending for process technology and
product development, respectively.
Selling, General and Administrative
SG&A expenses in fiscal 1999 were $317.4 million, or 16 percent of sales,
compared to $353.2 million in fiscal 1998, or 14 percent of sales, and $448.9
million in fiscal 1997, or 17 percent. The decrease in fiscal 1999 reflects
the effect of certain actions taken by the Company in late fiscal 1998 to
reduce its overall cost structure in response to weakened business
conditions. The decrease in fiscal 1998 is attributable to the absence of
expenses for Fairchild and reflects the effect of centralization initiatives
implemented in connection with the Company's fiscal 1997 reorganization.
Restructuring of Operations
During the past three fiscal years, the Company has undertaken a number of
restructuring actions. See Note 3 of the Notes to Consolidated Financial
Statements for more complete information related to these actions.
Charge for Acquired In-Process Research and Development
In connection with the Company's acquisitions during fiscal 1998 of ComCore
Semiconductor, Inc. ("ComCore"), Future Integrated Systems, Inc. ("FIS") and
the digital audio technology business of Gulbransen, Inc., approximately
$95.2 million, $2.5 million and $5.2 million, respectively, of the total
purchase price was allocated to the value of in-process R&D. These amounts
were determined through established valuation techniques used in the high-
technology industry and were expensed upon acquisition because technological
feasibility had not been established and no alternative uses exist.
ComCore was a designer of integrated circuits for computer networking
and broadband communications that used powerful mathematical techniques
combined with advanced digital signal processing ("DSP") and customized
design methodologies to create high-performance communications integrated
circuits. This technology was acquired in order to add advanced design and
technology capabilities to the Company's existing analog, mixed-signal and
digital expertise. FIS supplied graphics hardware and software product for
the personal computer market. The Company acquired the FIS design expertise
to enhance its ability to integrate advanced graphics capabilities into
system-on-a-chip solutions for the personal computer market. The Gulbransen
audio compressor technology was acquired to provide digital audio building
blocks for system-on-a-chip solutions.
In each acquisition, the fair value of the in-process R&D was based
on discounted projected net cash flows expected to be derived after
successful completion of the R&D projects underway. Estimates of future cash
flows from revenues were based primarily on market growth assumptions, lives
of underlying technologies and the Company's expected share of market. Gross
profit projections were based on the Company's experience with products that
were similar in nature or products sold into markets with similar
characteristics. Estimated operating expenses, income taxes and capital
charges were deducted from gross profit to determine net operating income for
the in-process R&D projects. Operating expenses were estimated as a
percentage of revenue and included sales and market expenses and development
costs to maintain the technology once it has achieved technological
feasibility. The Company discounted the net cash flows of the in-process R&D
projects using a discount rate that approximates the overall rate of return
for each acquisition as a whole and reflects the inherent uncertainties
surrounding the successful development of the in-process R&D project.
Interest Income and Interest Expense
Net interest expense was $2.2 million for fiscal 1999 compared to net
interest income of $22.3 for fiscal 1998 and $6.1 million for fiscal 1997.
Net interest expense in fiscal 1999 was primarily attributable to less
interest earned due to slightly lower rates on lower average cash balances
while interest expense was relatively consistent, as average debt balances
remained unchanged. Net interest income was higher in fiscal 1998 than in
fiscal 1997 primarily due to the combination of increased interest earned on
higher average cash balances partially offset by less interest expense from
lower average debt balances. In addition, the Company capitalized $0.4
million of interest associated with capital expansion projects in fiscal 1999
compared to $4.9 million in fiscal 1998 and $13.8 million in fiscal 1997.
Other Income/Expense, Net
Other income, net was $3.1 million for fiscal 1999, compared to $24.9 million
for fiscal 1998 and $18.7 million for fiscal 1997. For fiscal 1999, other
income, net included $11.3 million of net intellectual property income
primarily related to a significant licensing agreement with a Korean firm and
a $0.3 million gain on the sale of technology. This was offset by a $7.0
million settlement of disputes involving intellectual property rights and a
$1.5 million net loss on equity investments. This compares to other income,
net for fiscal 1998, which included $15.7 million of net intellectual
property income related to a significant licensing agreement with another
Korean firm, as well as smaller ongoing royalty receipts and a $9.2 million
gain from investments primarily arising from the sale of stock from the
Company's investment holdings. Other income, net for fiscal 1997 included
$10.1 million of net intellectual property income, a $2.4 million net gain
related to the Company's equity investments, a $4.2 million gain from the
sale of a digital answering machine integrated circuit business and a $2.0
million receipt from the settlement of litigation. None of the license
agreements in fiscal 1997 were considered individually material.
Income Tax Provision/Benefit
The Company recorded an income tax benefit in fiscal 1999 and 1998 of $75.5
million and $1.1 million, respectively, resulting in an effective tax rate
benefit of approximately 7 percent and 1 percent, respectively. For fiscal
1997, the Company recorded income tax expense of $15.5 million for an
effective tax rate of approximately 91 percent. The tax rate benefit in
fiscal 1999 is less than the federal statutory rate primarily due to an
increase in the valuation allowance against the deferred tax assets for the
benefit of U.S. tax losses that may not be realized offset by a benefit
recorded as a result of the resolution during the year of certain outstanding
tax assessments. Realization of recognized net deferred tax assets ($117.9
million at May 30, 1999) is primarily dependent on the Company's ability to
generate future U.S. taxable income. Management believes that it is more
likely than not that forecasted U.S. taxable income will be sufficient to
utilize these tax assets. However, there can be no assurance that the Company
will meet these expectations.
Foreign Operations
The Company's foreign operations include manufacturing facilities in the Asia
Pacific region and Europe and sales offices throughout the Asia Pacific
region, Europe and Japan. A portion of the transactions at these facilities
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, hedged using purchased option contracts that have
an original maturity of one year or less.
Financial Market Risks
The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. To mitigate these risks,
the Company utilizes derivative financial instruments. The Company does not
use derivative financial instruments for speculative or trading purposes.
The fair value of the Company's investment portfolio or related
income would not be significantly impacted by either a 100 basis point
increase or decrease in interest rates due mainly to the short-term nature of
the major portion of the Company's investment portfolio. An increase in
interest rates would not significantly increase interest expense due to the
fixed rates of the Company's debt obligations. A decrease in interest rates
would favorably benefit the Company, but would not necessarily result in a
material decrease in interest expense, since the amount of the Company's
variable rate debt is not significant.
A substantial majority of the Company's revenue and capital spending
is transacted in U.S. dollars. However, the Company does enter into these
transactions in other currencies, primarily the Japanese yen and certain
other Asian and European currencies. To protect against reductions in value
and the volatility of future cash flows caused by changes in foreign exchange
rates, the Company has established revenue and balance sheet hedging
programs. The Company's hedging programs reduce, but do not always
eliminate, the impact of foreign currency exchange rate movements. Adverse
change (defined as 20 percent in certain Asian currencies and 10 percent in
all other currencies) in exchange rates would result in a decline in income
before taxes of less than $15 million. This calculation assumes that each
exchange rate would change in the same direction relative to the U.S. dollar.
In addition to the direct effects of changes in exchange rates, such changes
typically affect the volume of sales or the foreign currency sales price as
competitors' products become more or less attractive. The Company's
sensitivity analysis of the effects of changes in foreign currency exchange
rates does not factor in a potential change in sales levels or local currency
selling prices.
All of the potential changes noted above are based on sensitivity
analyses performed on the Company's balances as of May 30, 1999.
Financial Condition
As of May 30, 1999, cash and short-term investments decreased to a total of
$525.9 million from a total of $573.2 million at May 31, 1998. Cash
generated from operating activities was $222.6 million in fiscal 1999, down
from $280.8 million in fiscal 1998 and $513.1 million in fiscal 1997.
Operating cash was negatively affected by the losses incurred in fiscal 1999,
but was positively impacted by the Company's effort to manage working
capital. The primary contributor to this effort was a significant reduction
in inventories.
Cash used for investing activities was $313.7 million in fiscal 1999
compared to $753.6 million in fiscal 1998 and $181.0 million in fiscal 1997.
The decrease in cash utilization in fiscal 1999 was due to reduced capital
expenditures and no business acquisitions. Lower capital spending in fiscal
1999 was driven by significantly reduced expenditures for the Maine wafer
fabrication facility, which was essentially completed by the end of 1998, and
management's effort to control the overall level of capital expenditures in
response to weakened business conditions. Investing activities in fiscal
1997 included capital expenditures of $605.6 million, which were offset by
cash proceeds of $465.5 million related to the disposition of Fairchild.
The Company's financing activities provided cash of $49.0 million in
fiscal 1999 from the proceeds of a $67.5 million drawdown on new equipment
loans and $28.0 million from the issuance of common stock under employee
benefit plans. These amounts were partially offset by $56.6 million of
general debt repayment. In fiscal 1998, cash provided by financing
activities was from the proceeds of a $100.4 million drawdown on new and
existing equipment loans and $63.2 million from the issuance of common stock
under employee benefit plans. These amounts were offset by the $126.4
million redemption of substantially all of the Cyrix 5.5% convertible
subordinated notes in January 1998 and $19.0 million of other general debt
repayment. In fiscal 1997, cash provided by financing activities of $79.0
million was primarily from the proceeds of a $126.5 million issuance of the
Cyrix 5.5% convertible subordinated notes, $50.2 million for the drawdown on
a new equipment loan and $57.0 million from the issuance of common stock
under employee benefit plans. These amounts were offset by general debt
repayment of $165.9 million.
Management foresees substantial cash outlays for plant and equipment
throughout fiscal 2000. However, the fiscal 2000 capital expenditure level
is expected to be significantly lower than the fiscal 1999 level. Existing
cash and investment balances, together with existing lines of credit, are
expected to be sufficient to finance planned fiscal 2000 capital investments.
Recently Issued Financial Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. The Company is
presently analyzing this statement and has not yet determined its impact on
the Company's financial statements. The Company is required to adopt SFAS
No. 133 for fiscal year 2001.
Outlook
The statements contained in this Outlook and within certain sections of
Management's discussion and analysis are forward looking based on current
expectations and management's estimates. Actual results may differ materially
from those set forth in 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 are
required to support products and manufacturing processes. As a result of
these industry conditions, the Company may experience periodic fluctuations
in its operating results.
The Company's strategy is to provide system-on-a-chip solutions for
its key data highway strategic partners, exploiting its analog expertise as a
starting point for forward integration. As a result of this focus, the
Company expects to grow at or above market rates of growth in particular
segments of the analog, mixed-signal and information appliance markets.
While business conditions for the semiconductor industry and the
Company remained weak throughout most of fiscal 1999, the Company experienced
growth in new orders in the latter half of the fiscal year. This growth was
stimulated by an increase in orders for analog products. In particular, new
orders for application-specific wireless communications products showed
significant improvement as we saw strengthening in the cellular and wireless
markets during the spring quarter. This increase in order rates was also
evidenced by the sequential quarterly improvement of sales in fiscal 1999 for
analog products. The Company believes its business in these areas is strong
and growing and anticipates this improvement to continue into fiscal 2000.
However, the Company faces the risk that the current improvement in the
semiconductor industry may be of short duration. Unless the rate of new
orders continues to increase, the Company may be unable to attain the level
of revenue growth expected for fiscal 2000 and operating results will be
unfavorably affected. The Company anticipates the reduction in future sales
caused by its exit from the PC microprocessor business will be offset by
increased sales of its remaining products. The Company has also devoted
efforts to develop new network products since the spring of fiscal 1998 in
order to regain its market position. The Company anticipates the development
of new products based on digital signal processing technology acquired from
ComCore to begin generating sales late in the first quarter of fiscal 2000.
Unforeseen obstacles or schedule delays, as well as customer acceptance of
product, may affect the Company's sales and results of operations. The rate
of orders and product pricing may also be affected by continued and
increasing competition and by market growth rates in the personal computer,
communication and networking areas.
While business conditions and overall market pricing have a major
influence on gross margin, the Company's decision to exit the PC
microprocessor business, improvements in manufacturing efficiency and the
introduction of new products are expected to result in future gross margin
improvement. Future gross margin improvement is also predicated on increased
new order rates of higher-margin multimarket analog products. Future gross
margin is also affected by wafer fabrication capacity utilization. Although
management expects to more fully utilize wafer capacity, this expectation is
predicated on a continuing improvement trend of new orders, as well as
increasing sales volume. Failure to improve manufacturing capacity
utilization will negatively impact the Company's ability to achieve its
desired gross margin improvements.
In connection with the decision to exit the PC microprocessor
business, the Company significantly reduced its planned level of wafer starts
in its 8-inch wafer manufacturing facility in Maine and incurred an
impairment loss of approximately $470 million for that facility. In the
short term, the reduction in unutilized fixed costs of operating this
facility mitigates the impact of lower capacity utilization. However, if the
Company is unable to complete the sale of a majority interest in this
facility, future gross margin may continue to be affected by lower capacity
utilization. The Company also faces the risk that it may be unsuccessful in
seeking a satisfactory buyer for the facility. This may require the Company
to pursue other alternatives, such as offering the available capacity to
other companies in the form of wafer foundry services. Retention of this
manufacturing facility may have an unfavorable impact on future operating
results.
Recently, the Company announced the impending sale of its PC
microprocessor business to a Taiwanese company. While the Company is
currently negotiating the terms of this sale, it will continue to incur
expenses associated with maintaining this operation in the interim. The
Company faces the risk that this negotiation may ultimately be unsuccessful.
If it fails to reach an acceptable agreement, the Company will be forced to
complete the necessary actions to close its PC microprocessor business.
The Company also faces the risk that it may encounter unexpected
delays or problems in the execution of other actions announced in May, which
were taken to position the Company for future profitability. The actions,
which include its decision to close the 8-inch development wafer fabrication
facility in Santa Clara, are dependent on the successful and timely
completion of planned closure activities. Failure to successfully complete
these activities on a timely basis may have an unfavorable effect on the
Company's future operating results.
Future gross margin will also be affected by the ultimate disposition
of the wafer fabrication facility in Greenock. As previously discussed, the
Company announced plans to consolidate its wafer manufacturing operations in
Greenock, Scotland, and to seek investors to acquire and operate the facility
as an independent foundry business. If the Company encounters unexpected
delays or other problems related to these planned actions, future operating
results may be unfavorably affected. The Company may also be unsuccessful in
seeking investors to acquire the operations under terms acceptable to the
Company. Retention of the manufacturing operations may have an unfavorable
impact on the Company's future operating results. It is also difficult to
predict the final impact of the planned spinout on the Company's future
operating results, since the structure and timing have not yet been
determined. A final price lower than originally estimated will have an
unfavorable impact on the Company's future operating results.
The Company's focus is to continue to introduce new products,
particularly more highly integrated system-on-a-chip products and higher-
margin analog products. If the development of new products is delayed or
market acceptance is below expectations, future gross margin may also be
unfavorably affected.
The Company believes that continued focused investment in research
and development, especially on the timely development and market acceptance
of new products is a key factor to the Company's successful growth and its
ability to achieve strong financial performance. National's product
portfolio, particularly products in the personal systems and communications
area, have short product life cycles and both successfully developing and
introducing new products are critical to the Company's ability to maintain a
competitive position in the marketplace. Ongoing R&D spending for fiscal
2000 is expected to be lower than for fiscal 1999, primarily due to the
Company's planned closure of its development wafer fabrication facility in
Santa Clara and the substantially reduced product development associated with
PC microprocessors. The Company also expects overall SG&A expenses to be
lower for fiscal 2000 than for fiscal 1999 as the full benefit of the cost
reduction actions implemented or announced in fiscal 1999 takes effect.
Because of significant international sales, the Company benefits
overall from a weaker dollar and is adversely affected by a stronger dollar
relative to major currencies worldwide. As such, changes in exchange rates,
and in particular a strengthening of the U.S. dollar, may unfavorably affect
the Company's consolidated sales and net income. The Company attempts to
manage the short-term exposures to foreign currency fluctuations, but there
can be no assurance that the Company's risk management activities will fully
offset the adverse financial impact resulting from unfavorable movements in
foreign exchange rates.
In connection with the Fairchild transaction, Fairchild and the
Company have entered into a manufacturing agreement under which the Company
is obligated to purchase goods and services from Fairchild through June 2000.
Prior to March 1997, these goods and services had been provided by Fairchild
at cost. Under the agreement, the Company has committed to purchase
manufacturing services based on specified terms. The agreement also requires
the Company to purchase a minimum of $330 million in goods and services based
on declining annual minimum levels over the term of the agreement. Future
minimum purchases remaining under the agreement are $80.0 million for fiscal
2000. The Company is committed to these minimum levels whether or not the
minimum levels are required based on future demand. To the extent that the
minimum levels exceed future demand, the Company's gross margin and operating
results will be unfavorably affected. The Company also has a continuing
obligation to indemnify Fairchild in the event of certain environmental and
legal matters. There can be no assurance that the ultimate satisfaction of
these obligations will not have a material adverse impact on the Company's
future financial condition or results of operations.
From time to time, 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 tax litigation with the Internal
Revenue Service and its tax returns for certain years are under examination
in the U.S. There can be no assurance that the ultimate outcome of the tax
proceedings or tax examinations will not have a material adverse effect on
the Company's future financial condition or results of operations.
Year 2000 Readiness Program
The Company began year 2000 readiness projects as early as 1985, but
significantly accelerated its efforts in early 1998 to identify and correct
potential problems prior to encountering year 2000 dates. The Company
launched its comprehensive year 2000 project in January 1998 to identify and
correct potential problems associated with year 2000 dates in all of its
systems and operations worldwide. The objectives of this project are to
achieve zero impact on customers, eliminate product and delivery problems and
attain zero impact on the Company's financial performance. Although a
complete "zero defect" solution is probably unattainable, management expects
only minor problems that can be dealt with rapidly.
The Company set strict parameters for locations worldwide to adhere
to quarterly reviews of all projects, notify customers of known problems as
early as possible and address the readiness of suppliers as well as internal
operations. These readiness projects required employees to share knowledge,
raise awareness, and identify and correct the potential year 2000 impact on
manufacturing, shipment and delivery, as well as the financial impact of
potential loss of business or recovery costs, and potential problems with the
Company's products in the field.
A program management process was put in place as follows: year 2000
exposure was identified and broken into individual projects with leaders
assigned; projects were planned and are managed by assigned leaders who
provide quarterly status updates to a year 2000 review committee (the year
2000 review committee is a committee comprising members from business,
information technology, manufacturing, internal audit and external
consultants); all projects have target completion dates with sufficient
leeway to apply closer management if necessary; and overall status is
reported quarterly to the Audit Committee of the Board of Directors and
executive management. After thorough reviews, projects were initiated in the
following specific areas: business systems, manufacturing systems,
engineering systems, desktop computing, information technology
infrastructure, facilities, suppliers' products and readiness, and Company
products. A common approach was used to inventory equipment and systems
(including operating systems, application software and embedded firmware);
require that all future purchase orders and contracts with vendors include a
year 2000 compliance clause; obtain letters from suppliers requesting year
2000 compliance status and upgrade costs; test all systems whether a supplier
claims compliance or not; perform upgrades or replacements as dictated by
suppliers; and test upgrades and replacements.
Below are summaries of the project areas mentioned above:
Business Systems
All systems supported by the Company's corporate information services
group and all programs used in production have been inventoried as part of
the year 2000 readiness project using the Company's year 2000 inventory
methodology. Inventoried programs are reviewed systematically using a
software tool that identifies references to dates in any format. That process
then identifies for review any code that potentially requires changes. The
Company also used a tool to simulate the computer system date to any value
before or after the year 2000. The Company has used this tool to test the
rollover date from December 31, 1999 to January 1, 2000, as well as many
dates before and after those days.
Many of the Company's corporate business systems were deemed ready
for the year 2000 as early as January 1998, when year 2000 dates began to
appear in system data. Critical business systems remediation was completed
in April 1999. The Company has already moved to its fiscal 2000 accounting
calendar commencing on May 31, 1999 without incident. The Company expects to
have adequate time during the balance of calendar 1999 to complete
remediation of noncritical systems.
Manufacturing Systems
Manufacturing systems are being addressed through a coordinated
project involving the Company's manufacturing sites. The project interacts
with the Company's corporate information services group to maximize leverage
of activity across sites and with corporate efforts. The project is
approximately 98 percent complete with the remaining remediation efforts
scheduled to be completed by August 1999. Common approaches include formats
for project plans, inventory and status spreadsheets, test validation forms
and scorecards that are reviewed by senior management. All manufacturing
sites have been using year 2000 compliant shop floor control systems since
April 1999 and significant progress has been made in the remediation and
testing of manufacturing equipment. All test results for manufacturing
equipment have been documented on standardized forms to ensure thoroughness.
Engineering Systems
The project to address computer aided design hardware and software
for year 2000 readiness addresses the standard software products used by the
Company and the operating environments in which they run. All key suppliers
have provided assurance that their software is year 2000 ready. Internal
testing of software from key suppliers has been completed and no year 2000
problems were found. Critical computing platform and local area network
inventory, testing and remediation was completed in May 1999.
Desktop Computing
The desktop project addresses the year 2000 readiness of all desktops
in the Company through research, diagnostic tools, communication programs and
the broad implementation of centralized server applications. At the heart of
the desktop program is a database that communicates minimum BIOS levels for
major hardware suppliers and the release levels for standard and popular
shrink-wrap software. In addition to this information approach, diagnostic
software is available to aid in desktop discoveries and upgrades. The
database is in place today and is being augmented through continuing supplier
research and program benchmarking with other companies. Completion of desktop
evaluation and compliance will extend well into 1999. In May 1999, the
Company completed testing of every desktop system to ensure year 2000
compliance. The deployment of the centralized server strategy is also a key
element in desktop readiness, since moving to centralized servers immediately
enables noncompliant desktop systems to work without problems.
Information Technology Infrastructure
The Company's infrastructure group project ensures that all critical
information system infrastructure elements worldwide will either be year 2000
ready or eliminated from the network before the year 2000. This project
includes networks, mainframe operations and servers. Most network devices and
servers are year 2000 ready today. A major project to upgrade the Company's
mainframe computing environment was completed in December 1998. Actions
addressing critical voice and video components were upgraded in April 1999.
Infrastructure strategies of centralization, standardization and
simplification reduced the Company's year 2000 effort considerably as
nonstandard hardware, software, protocols and applications were removed from
the network and computing environments.
Facilities
The scope of the facilities project includes operations at the
Company's worldwide manufacturing sites, business centers, sales offices and
design centers. It encompasses facilities management systems (for example,
temperature, humidity, pressurization and cleanliness of clean rooms),
hazardous gas networks (for example, leak monitoring and auto shutdown of
hazardous gases), ultrapure water and wastewater treatment, automatic gas
cabinets, door access, fire protection, uninterrupted power systems, utility
services, chillers, boilers, bulk gas plants, lighting, elevators and
variable speed drives for fan and pump motors. The facilities project was
substantially complete in May 1999.
Suppliers' Products and Readiness
The Company's purchasing group established a year 2000 program to
ensure that products purchased operate correctly without year 2000 issues and
that year 2000 issues will not cause an interruption of service from the
Company's suppliers. The Company has incorporated product compliance
certification as standard in its conditions of purchase since September 1997.
Key suppliers are required to take the necessary steps to ensure their own
readiness and report to the Company on the status of their year 2000
programs.
The Company has contacted more than 2,800 suppliers about year 2000
readiness. More than 600 suppliers were designated key suppliers and have
been requested to certify their readiness. All of the designated key
suppliers have responded to our inquiries with 95 percent reporting as ready.
In May 1999, the Company evaluated plans and assigned a risk factor to the
readiness projects of suppliers who provide materials and services critical
to operations. These risk assessments are being used for contingency
planning.
Company Products
The Company considers its products to be year 2000 compliant if the
product, when used in accordance with associated documentation provided by
the Company, is capable of correctly storing, displaying, processing,
providing and/or receiving date data from, into, and between the years 1999
and 2000 and beyond (including leap year calculations), provided that all
other products used with the Company's product, such as hardware, software
and firmware, properly exchange accurate date data with it. Company products
that do not process date-related information are considered to be year 2000
compliant. The Company has made year 2000 compliance information for products
available to customers on the Company's web site.
The Company's products fall into the following categories for year
2000 compliance:
- - Products that have no date functions and therefore have no year 2000
compliance issues
- - Products that are year 2000 compliant, with possible customer
software/firmware issues. (Although the Company's products that are
certified year 2000 compliant are capable of accurately processing date-
related information into the next century, it is the customers'
responsibility to ensure that all other parts of their system or product are
also capable of an error-free transition into the year 2000. For instance,
customer firmware embedded onto microcontrollers or additional software
developed may independently create errors in date processing. Semiconductors
are only one of many building blocks in a product or system, and all
components working together must be capable of properly processing date data
after 1999 in order to be year 2000 ready)
- - Real-time clock products sold by the Company do not have century counters.
Their year registers count from 00 to 99 and then start over again, which is
documented in the applicable product datasheets. Accordingly, the software
in each system that the customer chooses to use in conjunction with the
Company's real-time clock products needs to be validated by the customer to
ensure year 2000 compliance
- - Custom products made by the Company for customers are based on customers'
design specifications. The Company generally has no knowledge of the
functions and/or features of those parts. When the Company manufactures custom
parts, it is incumbent on the customer to determine if those parts are year
2000 compliant
- - Obsolete products were not included in the Company's review of products
for year 2000 compliance (products announced as obsolete or discontinued by
the Company prior to September 1997). Questions regarding year 2000 readiness
on obsolete products are addressed upon request.
The Company continues to evaluate its exposure to contingencies related to
the year 2000 for products it has sold even though the Company believes that
its products do not directly contain century counters that provide calendar
year functions. The Company has not received notification from any of its
customers that a Company product performs noncompliant year 2000 functions.
However, customers may use the Company's products in conjunction with
customer-supplied software, over which the Company has no control, that may
perform noncompliant year 2000 date computations.
The Company's remediation efforts are substantially complete and the
focus is now being directed toward contingency planning. Management is
confident in the Company's ability to transition to the year 2000 without
incident but will establish contingency plans in the event of unforeseen
critical failures. The Company reasonably believes that its most likely
worst-case year 2000 impact would relate to problems with systems of
suppliers and customers rather than with the Company's internal systems or
products. The Company has less control over the year 2000 assessment and
remediation efforts of third parties and believes the risks are greatest with
infrastructure providers (power, water and communication services), logistics
elements (transportation and customs) and suppliers of materials and
services, especially where the Company is dependent on a limited number of
potential suppliers for those materials and services. In addition,
remediation of remaining manufacturing equipment elements is dependent on the
timely availability of hardware and/or software solutions from vendors.
Failures with the Company's infrastructure providers and failures of vendors
to successfully implement year 2000 modifications in manufacturing tools and
related systems could result in the inability to manufacture and deliver
products to customers. Contingency planning for supplier issues will include
identifying and qualifying second sources for critical components,
considering the need to increase the inventory levels of certain products
above normal stocking levels and evaluating the need to deploy strategic
inventory quantities geographically. Such efforts should be completed by
August 1999.
Since customers use the Company's products in conjunction with
customer-supplied software over which the Company has no control, there is
also a risk of litigation associated with the use of such products by
customers. Such risk includes all the uncertainties and costs associated with
litigation. Because of the unprecedented nature of the year 2000 issue, it is
impossible for the Company to predict the nature and extent of such
litigation, although it could be significant to the Company.
Regarding the Company's internal systems, some of the critical
contingency plans are extensions of existing business continuity programs and
have been in place since the start of the year 2000 readiness program. The
Company's business continuity program was successfully tested in May 1999.
The year 2000 project costs and resource consumption are estimated at
$20 million, of which approximately $17 million has been incurred to date.
Approximately 35 percent of costs are related to internal staff costs with
the remaining 65 percent for hardware and software upgrade costs that are
incremental to ongoing operating expenses. Testing will continue through the
remainder of 1999 and the beginning of 2000 to ensure the continued
compliance of all elements of the Company's year 2000 program.
The Company reviews and updates cost data on a quarterly basis. These
cost assessments are based on management estimates that were determined based
on future events, a portion of which are outside the Company's direct
control. As the Company continues its year 2000 readiness project, these cost
estimates may change. Management does not believe that changes in cost
estimates will have a material impact on future 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
ofthe semiconductor industry, competitive products and pricing, growth in the
PC and communications industries, the effects of legal and administrative
cases and proceedings, and such other risks and uncertainties as may be
detailed from time to time in the Company's SEC reports and filings.
Appendix to MD&A Graphs
(3 yrs)
1999 1998 1997
----- ---- ----
Net Sales per Employee $164.1 $197.1 $146.6
Net Operating Margin
as a Percent of Sales (55.5%) (5.8%) 0.3%)
Operating Costs and
Expenses (As a Percent of Sales):
Selling, General, and Administrative 16.2% 13.9% 16.7%
Research and Development 24.1% 19.0% 15.1%
Cost of Sales 79.4% 65.1% 62.3%
Net Property, Plant, and Equipment $916.0 $1,655.8 $1,349.0
Stock Price Ending $19.38 $16.25 $28.00
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See information/discussion appearing in subcaption "Financial Market Risks"
of Management's Discussion and Analysis of Financial Condition and Results of
Operation in Item 7 and in Note 1, "Summary of Significant Accounting
Policies," and Note 2, "Financial Instruments," in the Notes to the
Consolidated Financial Statements included in Item 8.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements: Page
- --------------------- ----
Consolidated Balance Sheets at May 30, 1999 and May 31, 1998 30
Consolidated Statements of Operations for each of the years
in the three-year period ended May 30, 1999 31
Consolidated Statements of Comprehensive Loss for each of
the years in the three-year period ended May 30, 1999 32
Consolidated Statements of Shareholders' Equity for each of
the years in the three-year period ended May 30, 1999 33
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended May 30, 1999 34
Notes to Consolidated Financial Statements 35-60
Independent Auditors' Report 61
Financial Statement Schedule:
- -----------------------------
For the three years ended May 30, 1999
Schedule II -- Valuation and Qualifying Accounts 65
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
May 30, May 31,
In Millions, Except Share Amounts 1999 1998
------- ------
ASSETS
Current assets:
Cash and cash equivalents $418.7 $460.8
Short-term marketable investments 107.2 112.4
Receivables, less allowances of $68.0 171.9 208.5
in 1999 and $50.3 in 1998
Inventories 141.3 283.9
Deferred tax assets 117.9 166.2
Other current assets 32.2 76.4
------- -------
Total current assets 989.2 1,308.2
Property, plant and equipment, net 916.0 1,655.8
Other assets 139.1 136.7
-------- -------
Total assets $2,044.3 $3,100.7
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $49.3 $53.9
Accounts payable 189.8 237.0
Accrued expenses 348.1 310.9
Income taxes payable 77.8 191.8
-------- -------
Total current liabilities 665.0 793.6
Long-term debt 416.3 390.7
Other noncurrent liabilities 62.2 57.5
-------- -------
Total liabilities $1,143.5 $1,241.8
Commitments and contingencies
Shareholders' equity:
Common stock of $0.50 par value.
Authorized 300,000,000 shares.
Issued and outstanding 169,053,112
in 1999; 165,461,245 in 1998 $84.5 $82.7
Additional paid-in capital 1,268.1 1,240.1
Retained earnings (deficit) (434.1) 575.8
Unearned compensation (15.0) (27.3)
Accumulated other comprehensive loss (2.7) (12.4)
------- -------
Total shareholders' equity $900.8 $1,858.9
------- -------
Total liabilities and shareholders' equity $2,044.3 $3,100.7
======== =======
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended May 30, May 31, May 25,
In Millions, Except Per Share Amounts 1999 1998 1997
------ ------ -------
Net sales $1,956.8 $2,536.7 $2,684.4
Operating costs and expenses:
Cost of sales 1,553.5 1,651.7 1,672.5
Research and development 471.3 482.0 404.5
Selling, general and administrative 317.4 353.2 448.9
Special items:
Merger costs - 30.0 -
Restructuring of operations 700.9 63.8 134.2
In-process R&D - 102.9 72.6
Gain on sale of Fairchild - - (40.6)
------ ------ -------
Total operating costs and expenses 3,043.1 2,683.6 2,692.1
------ ------ -------
Operating loss (1,086.3) (146.9) (7.7)
Interest income (expense), net (2.2) 22.3 6.1
Other income, net 3.1 24.9 18.7
------- ------- ------
Income (loss) before income taxes (1,085.4) (99.7) 17.1
Income tax expense (benefit) (75.5) (1.1) 15.5
------- ------- ------
Net income (loss) $(1,009.9) $(98.6) $1.6
======= ======= ======
Earnings (loss) per share:
Basic $(6.04) $(0.60) $0.01
Diluted $(6.04) $(0.60) $0.01
Weighted-average shares:
Basic 167.1 163.9 156.l
Diluted 167.1 163.9 159.1
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
In Millions May 30, May 31, May 25,
1999 1998 1997
------ ------ -------
Net income (loss) $(1,009.9) $ (98.6) $ 1.6
Other comprehensive income (loss),
net of tax:
Unrealized gain (loss) on
available-for-sale securities 22.2 2.1 (0.8)
Reclassification adjustment for
realized gain included in
net income (loss) - (6.3) (3.1)
Minimum pension liability (12.5) (12.5) -
------ ------ ------
Other comprehensive income (loss) 9.7 (16.7) (3.9)
------ ------ ------
Comprehensive loss $(1,000.2) $ (115.3) $ (2.3)
======= ======= ======
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other
Unearned Additional Retained Compre-
Common Compen- Paid-In Earnings hensive
Stock sation Capital (Deficit) Loss Total
------ -------- ---------- -------- ---------- -----
Balances at
May 26, 1996 $76.4 $(3.3) $968.5 $673.4 $8.2 $1,723.2
Net income - - - 1.6 - 1.6
Issuance of
common stock
under option,
purchase,
and profit
sharing plans
and tax benefit
of $18.6 2.7 - 78.4 - - 81.1
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
issuance of
restricted stock 0.2 (11.7) 11.5 - - -
Cancellation of
restricted stock - 0.8 (0.8) - - -
Amortization of
unearned
compensation - 4.9 - - - 4.9
Other
comprehensive
loss - - - - (3.9) (3.9)
------ -------- ---------- -------- ---------- -----
Balances at
May 25, 1997 80.6 (42.0) 1,153.8 675.0 4.3 1,871.7
Adjustment to
conform pooling
of interests
for shareholders'
equity - - 1.3 (0.6) - 0.7
Net loss - - - (98.6) - (98.6)
Issuance of
common stock
under option,
purchase,
and profit
sharing plans
and tax benefit
of $17.5 2.1 - 80.9 - - 83.0
Fair value
of stock
options
assumed in
ComCore
acquisition - - 4.3 - - 4.3
Unearned
compensation
charge
relating
to issuance
of restricted
stock - (0.7) 0.7 - - -
Cancellation
of restricted
stock - 0.9 (0.9) - - -
Amortization
of unearned
compensation - 14.5 - - - 14.5
Other
Comprehensive
loss - - - - (16.7) (16.7)
------ -------- ---------- -------- ---------- -----
Balances at
May 31, 1998 82.7 (27.3) 1,240.1 575.8 (12.4) 1,858.9
Net loss - - - (1,009.9) - (1,009.9)
Issuance of
common stock
under option,
purchase, and
profit sharing
plans 1.8 - 26.5 - - 28.3
Unearned
compensation
charge relating
to issuance
of restricted
stock - (3.5) 3.5 - - -
Cancellation
of restricted
stock - 2.0 (2.0) - - -
Amortization
of unearned
compensation - 13.8 - - - 13.8
Other
comprehensive
income - - - - 9.7 9.7
------ -------- ---------- -------- ---------- -----
Balances at
May 30, 1999 $84.5 $(15.0) $1,268.1 $(434.1) $(2.7) $900.8
====== ======= ======== ======== ====== ======
See accompanying Notes to Consolidated Financial Statement
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended May 30, May 31, May 25,
In Millions 1999 1998 1997
--------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,009.9) $(98.6) $1.6
Adjustments to reconcile net income (loss)
with net cash provided by operations:
Depreciation and amortization 405.6 306.7 263.0
Gain on disposition of Fairchild - - (40.6)
Loss (gain) on sale of investments 0.1 (10.3) (0.7)
Loss on disposal of equipment 50.5 9.7 8.2
Deferred tax provision 52.8 4.9 (83.8)
Tax benefit associated with stock options - 17.5 18.6
Merger costs - 30.0 -
Restructuring of operations 700.9 63.8 134.2
In-process research and development charge - 102.9 72.6
Other, net 0.7 (0.5) 1.2
Changes in certain assets and liabilities, net:
Receivables 36.6 55.7 30.0
Inventories 142.6 (60.6) 60.4
Other current assets 44.2 (2.9) (17.3)
Accounts payable and accrued expenses (80.6) (102.8) (6.5)
Income taxes (114.0) (47.0) 73.0
Other liabilities (3.4) 12.3 (0.8)
--------- -------- -------
Net cash provided by operating activities 226.1 280.8 513.1
--------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (303.3) (622.0) (605.6)
Sale and maturity of available-for-sale
securities 167.1 1,005.8 118.2
Maturity of held-to-maturity securities - 14.5 1,202.1
Purchase of available-for-sale securities 162.0) (1,051.5) (146.4)
Purchase of held-to-maturity securities - - (1,191.6)
Disposition of Fairchild - - 400.5
Sale of Fairchild note receivable - - 65.0
Sale of investments 0.1 16.2 5.1
Business acquisitions, net of cash acquired - (96.4) (13.7)
Purchase of investments and other, net (19.1) (20.2) (14.6)
------- -------- -------
Net cash used by investing activities (317.2) (753.6) (181.0)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of convertible subordinated notes,
less issuance costs - - 126.5
Redemption of convertible subordinated notes - (126.4) -
Issuance of debt 77.5 100.4 59.1
Repayment of debt (56.5) (19.0) (165.9)
Issuance of common stock, net 28.0 63.2 59.3
--------- -------- -------
Net cash provided by financing activitie 49.0 18.2 79.0
--------- -------- -------
Net change in cash and cash equivalents (42.1) (454.6) 411.1
Adjustment to conform pooling of interests
for cash and cash equivalents at beginning
of year - 17.6 -
Cash and cash equivalents at beginning of year 460.8 897.8 486.7
--------- -------- -------
Cash and cash equivalents at end of year $418.7 $460.8 $897.8
--------- -------- -------
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include National Semiconductor
Corporation and its majority-owned subsidiaries ("National" or the
"Company"). All significant intercompany transactions are eliminated in
consolidation. Nonmarketable investments in which National has less than 20
percent ownership and in which it does not have the ability to exercise
significant influence over the investee are initially recorded at cost and
periodically reviewed for impairment.
The Company's fiscal year ends on the last Sunday of May, and for the
fiscal year ended May 30, 1999, it had a 52-week year. For the fiscal year
ended May 31, 1998, the Company had a 53-week year. Operating results for
the additional week were considered immaterial to the Company's consolidated
results of operations for the year ended May 31, 1998. Fiscal 1997 was a 52-
week year.
In November 1997, the Company acquired all outstanding shares of
Cyrix Corporation ("Cyrix") common stock (See Note 4). The merger was
accounted for as a pooling of interests. Accordingly, the consolidated
financial statements include Cyrix. Since the fiscal years for National and
Cyrix differed, Cyrix changed its fiscal year-end to coincide with
National's, beginning in fiscal 1998. The consolidated statements of
operations, shareholders' equity and cash flows for fiscal 1997 combine
National's consolidated statements of operations, shareholders' equity and
cash flows for the year ended May 25, 1997 with Cyrix's consolidated
statements of operations, shareholders' equity and cash flows for the year
ended December 31, 1996. The results of operations for the period January 1,
1997 through May 25, 1997 for Cyrix, which included net sales of $84.6
million, total operating costs and expenses of $84.4 million, other expense
of $1.1 million, income tax benefit of $0.3 million, net loss of $0.6 million
and an increase in capital from the issuance of common stock of $1.3 million,
have been recorded as an adjustment to shareholders' equity.
Revenue Recognition
Revenue from the sale of semiconductor products is recognized when shipped,
with a provision for estimated returns and allowances recorded at the time of
shipment. Other revenues are 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. The Company uses the
straight-line method to depreciate machinery and equipment over their
estimated useful life (3-5 years). Buildings and improvements are
depreciated using both straight-line and declining-balance methods over the
assets' remaining estimated useful life (3-50 years), or, in the case of
leasehold improvements, over the lesser of the estimated useful life or lease
term.
The Company capitalizes interest on borrowings during the
construction period of major capital projects. Capitalized interest is added
to the cost of the underlying assets and is amortized over the useful life of
the assets. For fiscal 1999, 1998 and 1997, the Company capitalized $0.4
million, $4.9 million and $13.8 million of interest, respectively, in
connection with various capital expansion projects.
The Company reviews the carrying value of property, plant and
equipment for impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the estimated future
cash flows expected to result from its use and eventual disposition. In
cases where undiscounted expected future cash flows are less than the
carrying value, an impairment loss is recognized equal to an amount by which
the carrying value exceeds the fair value of assets.
In connection with certain restructuring actions, the Company
recorded impairment losses of $633.9 million and $80.4 million in fiscal 1999
and 1998, respectively (See Note 3). The fair value of the related assets
was determined based on the present value of estimated expected future cash
flows using a discount rate commensurate with the risks involved.
Income Taxes
Deferred tax liabilities and assets at the end of each period are determined
based on the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, using the tax rate expected to be in effect when
the taxes are actually paid or recovered. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance.
Earnings per Share
Basic earnings per share are computed using the weighted-average number of
common shares outstanding. Diluted earnings per share are computed using the
weighted-average common shares outstanding after giving effect to potential
common shares from stock options based on the treasury stock method, plus
other potentially dilutive securities outstanding, such as convertible
subordinated notes. For all years presented, the effect of the assumed
conversion of the convertible subordinated notes was antidilutive. In
addition, the effect of potential common stock from stock options was
antidilutive for fiscal 1999 and 1998.
For all years presented, the reported net income (loss) was used in
the computation of basic and diluted earnings per share. A reconciliation of
the shares used in the computation follows:
Years Ended
-------------------------------
(In Millions) May 30, May 31, May 25,
1999 1998 1997
------ ------- -------
Weighted-average common shares outstanding used
for basic earnings per share 167.1 163.9 156.1
Effect of dilutive securities:
Stock options - - 3.0
- -----------------------------------------------------------------------------
Weighted-average common and potential common
Shares outstanding used for diluted
earnings per share 167.1 163.9 159.1
====== ===== =====
As of May 30, 1999, there were options outstanding to purchase 36.2
million shares of the Company's common stock with a weighted-average exercise
price of $14.70, which could potentially dilute basic earnings per share in
the future, but which were not included in diluted earnings per share as
their effect was antidilutive. As of May 30, 1999, the Company also had
outstanding the $258.8 million convertible subordinated notes, which are
convertible into approximately 6.0 million shares of common stock.
Currencies
The Company's functional currency for all operations worldwide is the U.S.
dollar. Accordingly, gains and losses arising from translation of foreign
currency financial statement balances into U.S. dollars are included in
income. Gains and losses resulting from foreign currency transactions are
also included in income.
Financial Instruments
Cash and Cash Equivalents. Cash equivalents are highly liquid instruments
with a maturity of three months or less at the time of purchase. National
maintains its cash balances in various currencies and in a variety of
financial instruments. The Company has not experienced any material losses
related to any short-term financial instruments.
Marketable Investments. The Company classifies its debt and marketable
equity securities into held-to-maturity or available-for-sale categories.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-
maturity securities are recorded as either short-term or long-term on the
balance sheet based upon contractual maturity date and are stated at
amortized cost. Debt and marketable equity securities not classified as
held-to-maturity are classified as available-for-sale and are carried at fair
market value, with the unrealized gains and losses, net of tax, reported in
shareholders' equity as a component of accumulated other comprehensive loss.
Gains or losses on securities sold are based on the specific identification
method.
Off-Balance Sheet Financial Instruments. Gains and losses on currency forward
and option contracts that are intended to hedge an identifiable firm
commitment are deferred and included in the measurement of the underlying
transaction. Gains and losses on hedges of anticipated revenue transactions
are deferred until such time as the underlying transactions are recognized or
are recognized immediately if the transaction is terminated earlier than
initially anticipated. Gains and losses on contracts to hedge certain non-
U.S. dollar denominated assets and liabilities are recognized in income and
generally offset by the corresponding effect of currency movements on these
financial positions. Gains and losses on any instruments not meeting the
aforementioned criteria are recognized in income in the current period.
Subsequent gains or losses on the related financial instrument are recognized
in income in each period until the instrument matures, is terminated or is
sold. Income or expense on swaps is accrued as an adjustment to the yield of
the related investments or debt hedged by the instrument. Cash flows
associated with derivative transactions are reported as arising from
operating activities in the consolidated statements of cash flows.
Fair Values of Financial Instruments
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, interest rate derivatives, currency forward contracts and
currency options are based on quoted market prices or pricing models using
prevailing financial market information as of May 30, 1999.
Employee Stock Plans
The Company accounts for its stock option plans and its employee stock
purchase plans in accordance with the intrinsic method of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain amounts in prior years' financial statements and related notes have
been reclassified to conform to the fiscal 1999 presentation. Net operating
results have not been affected by these reclassifications.
Note 2. Financial Instruments
Marketable Investments
The Company's policy is to diversify its investment portfolio to reduce risk
to principal that could arise from credit, geographic and investment sector
risk. At May 30, 1999, investments were placed with a variety of different
financial institutions or other issuers. Investments with a maturity of less
than one year have a rating of A1/P1 or better. Investments with a maturity
of more than one year have a minimum rating of AA/Aa2. The Company's
investment portfolio generally matures within one year or less. No gross
realized gains or losses on available-for-sale securities were recorded in
fiscal 1999. Gross realized gains on available-for-sale securities
approximated $10.6 million and $4.1 million for fiscal 1998 and 1997,
respectively. Gross realized losses were not material for either fiscal 1998
or 1997.
Investments at fiscal year end comprise:
Gross
Amortized Unrealized Estimated
(In Millions) Cost Gains/(Losses) Fair Value
--------- -------------- ----------
1999
SHORT-TERM INVESTMENTS
Available-for-sale securities:
Certificates of deposit $ 9.0 $ - $ 9.0
Corporate bonds 74.8 (0.1) 74.7
Auction rate preferred stock 11.0 - 11.0
U.S. government and federal
agency debt securities 12.5 - 12.5
------- -------- -------
Total short-term investments $107.3 $ (0.1) $107.2
======= ======== =======
LONG-TERM INVESTMENTS
Available-for-sale securities:
Equity securities $ 2.0 $ 22.3 $ 24.3
------- -------- -------
Total long-term investments $ 2.0 $ 22.3 $ 24.3
======= ======== =======
1998
SHORT-TERM INVESTMENTS
Available-for-sale securities:
Certificates of deposit $ 23.0 $ - $ 23.0
Corporate bonds 50.4 0.1 50.5
U.S. government and federal agency
debt securities 37.9 - 37.9
Foreign government bonds 1.0 - 1.0
------- -------- -------
Total short-term investments $112.3 $ 0.1 $112.4
======= ======== =======
Gross unrealized losses were not material for fiscal 1999 and 1998.
At May 30, 1999, long-term investments of $24.3 million were included in
other assets.
At May 30, 1999, the Company held $0.3 million and $389.4 million of
available-for-sale and held-to-maturity securities, respectively, which are
classified as cash equivalents on the consolidated balance sheet. These cash
equivalents consist of the following (in millions): bank time deposits
($142.1), institutional money market funds ($8.6) and commercial paper
($239.0).
At May 31, 1998, the Company held $0.5 million and $429.6 million of
available-for-sale and held-to-maturity securities, respectively, which are
classified as cash equivalents on the consolidated balance sheet. These cash
equivalents consist of the following (in millions): bank time deposits
($158.9), institutional money market funds ($9.9) and commercial paper
($261.3).
The net unrealized gains on available-for-sale securities of $22.2
million at May 30, 1999 and $0.1 million at May 31, 1998 are included in
accumulated other comprehensive loss. The related tax effects are not
significant.
Off-Balance Sheet Financial Instruments
The Company utilizes various off-balance sheet financial instruments to
manage market risks associated with fluctuations in certain interest rates
and foreign currency exchange rates. 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 that intentionally increase the
Company's underlying exposure. The criteria the Company uses for designating
an instrument as a hedge include the instrument's effectiveness in risk
reduction and direct matching of the financial instrument to the underlying
transaction.
Foreign Currency Instruments
The objective of the 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. In addition, the Company uses forward and option contracts
to hedge certain non-U.S. dollar denominated asset and liability positions.
Gains and losses from foreign currency transactions were not significant for
fiscal 1999, 1998 and 1997.
Interest Rate Derivatives
The Company utilizes swap agreements to convert the variable interest rate of
certain long-term Japanese yen debt to a fixed Japanese yen interest rate
(1.23 percent at May 30, 1999). In fiscal 1998, the Company also utilized a
swap agreement to convert the interest rate of certain long-term U.S. dollar
debt to a variable rate. The swap agreement was terminated in fiscal 1999
and resulted in an immaterial gain.
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 30, 1999 and May 31, 1998. 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 30, 1999 and
May 31, 1998. 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 the then-current currency exchange rate or interest rate
at each respective date. Although the following table reflects the notional
principal, fair value and credit risk amounts of the off-balance sheet
instruments, it does not reflect the gains or losses associated with the
exposures and transactions that the off-balance sheet instruments are
intended to hedge. The amounts ultimately realized upon settlement of these
financial instruments, together with the gains and losses on the underlying
exposures, will depend on actual market conditions during the remaining life
of the instruments.
Transactions Qualifying for Hedge Accounting:
Carrying Notional Estimated Credit
(In Millions) Amount Principal Fair Value Risk
-------- --------- ---------- -------
1999
INTEREST RATE INSTRUMENTS
Swaps:
Variable to fixed $ - $ 20.1 $ (0.3) $ -
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts:
To sell dollars:
Pound sterling $ (0.2) $ 17.9 $ (0.2) $ -
Singapore dollar (0.1) 10.1 (0.2) -
-------- ------- --------- -------
Total $ (0.3) $ 28.0 $ (0.4) $ -
======== ======= ========= =======
Purchased options:
Pound sterling $ - $ 8.0 $ - $ -
Japanese yen (0.1) 7.0 0.1 0.1
Others - 5.0 - -
---------- ------- --------- -------
Total $ (0.1) $ 20.0 $ 0.1 $ 0.1
========== ======= ========= =======
1998
INTEREST RATE INSTRUMENTS
Swaps:
Fixed to variable $ - $175.0 $ 3.2 $ 3.2
Variable to fixed $ - $ 18.5 (0.1) $ -
Interest rate collars $ - $ 50.0 - $ -
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts:
To buy dollars:
Italian lira $ - $ 6.3 $ - $ -
Japanese yen - 2.6 0.1 0.2
French franc - 1.1 - -
-------- ------- --------- -------
Total $ - $ 10.0 $ 0.1 $ 0.2
======== ======= ========= =======
To sell dollars:
Pound sterling $ - $ 19.8 $ (0.3) $ 0.2
Singapore dollar 0.5 13.5 (0.1) -
-------- ------- --------- -------
Total $ 0.5 $ 33.3 $ (0.4) $ 0.2
======== ======= ========= =======
Purchased options:
Japanese yen $ (0.1) $ 12.0 $ 0.6 $ 0.6
German deutsche mark (0.1) 11.6 0.2 0.2
Pound sterling - 5.0 - -
-------- ------- --------- -------
Total $ (0.2) $ 28.6 $ 0.8 $ 0.8
======== ======= ========= =======
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 30, 1999
and May 31, 1998 are immaterial. All foreign currency option contracts
expire within one year. Premiums on purchased foreign exchange option
contracts are amortized over the life of the option. Unrealized gains and
losses on these option contracts are deferred until the occurrence of the
hedged transaction and recognized as a component of the hedged transaction.
Unrealized gains on such agreements at May 30, 1999 and May 31, 1998 are
immaterial.
Fair Value of Financial Instruments
At May 30, 1999, the estimated fair value of long-term debt was $391.6
million and the carrying values of receivables and accounts payable
approximate their estimated fair values.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk are primarily investments and trade receivables. The
Company's investment policy requires cash investments to be placed with high-
credit quality counterparties and limits the amount of credit from any one
financial institution or direct issuer. The Company sells its products to
distributors and original equipment manufacturers involved in a variety of
industries including computers and peripherals, wireless communications,
automotive and networking. National performs continuing credit evaluations
of its customers whenever 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
In fiscal 1999 the Company reported a net restructure charge of $700.9
million related to the following actions:
In May 1999, the Company announced its decision to exit the PC
microprocessor business and related support activities in order to sharpen
its focus on the emerging information appliance market and on its traditional
analog business. The related actions, which are expected to be completed by
the end of the calendar year, included the elimination of approximately 1,140
positions worldwide and closure of the Company's 8-inch development wafer
fabrication facility located in Santa Clara, California. In connection with
this action, operating results for fiscal 1999 included a restructure charge
of $689.6 million. The decision to exit the PC microprocessor business
resulted in significant impairment of capital assets in South Portland, Maine;
Richardson, Texas; and Toa Payoh, Singapore, which were substantially devoted
to supporting the PC microprocessor business. The Company also announced its
intention to sell a majority interest in its wafer fabrication facility in
Maine. As a result, the restructure charge included impairment losses of
$494.3 million relating to these assets. The Maine assets have been treated
as assets to be held and used, since they relate to a wafer fabrication
facility that cannot be removed immediately from operations and are being
depreciated over the new expected life. The planned exit from the development
wafer fabrication facility in Santa Clara, resulted in an additional $139.6
million impairment loss included in the restructure charge. The other
components of the restructure charge included $37.0 million for severance and
$18.7 million for other exit-related costs. Of the total charge, noncash
charges included the impairment losses and $3.2 million of other exit-related
costs. During fiscal 1999, the Company paid $5.4 million for severance to 263
terminated employees associated with these actions.
In October 1998, the Company announced plans to consolidate its wafer
manufacturing operations in Greenock, Scotland and to seek investors to
acquire and operate the facility in Greenock as an independent foundry
business. This action was prompted by a continued weakness in the
semiconductor market, which resulted in overall lower capacity utilization of
the Company's manufacturing facilities. The Company engaged the services of
an investment banker to assist in seeking a potential investor to acquire and
operate the Greenock facility. The Company is in the process of closing its
4-inch wafer fabrication facility ("Fab 1") in Greenock and consolidating Fab
1 manufacturing into its 6-inch wafer fabrication facility on the same site.
The Company is also moving some of the Greenock capacity and related
processes to its manufacturing facility in Arlington, Texas. This action
will cause a reduction in the Greenock workforce by approximately 600
employees and is expected to be completed by the third quarter of fiscal
2000. The Greenock assets have been treated as assets to be held and used
since they cannot be removed immediately from operations and are being
depreciated over the new expected life. In connection with the closure of Fab
1, the Company recorded a restructuring charge of $23.0 million in fiscal
1999. The charge included $12.6 million for severance, $3.9 million for costs
associated with the dismantling of Fab 1 and approximately $6.5 million for
other exit-related costs. Other than $5.5 million of other exit-related costs
for noncash items, the charge included primarily cash items.
The fiscal 1999 restructure charges were partially offset by an $11.7
million release of excess reserves related to certain prior restructure
actions. The release included $3.0 million of severance, $4.1 million of
asset write-offs and $4.6 million of other exit costs. The release of excess
reserves was prompted by the completion during fiscal 1999 of remaining
actions primarily associated with the closure of the Company's 5-inch and 6-
inch wafer fabrication facilities in Santa Clara, California and a worldwide
workforce reduction plan. The timing of these actions was consistent with
the timetable previously announced in April 1998.
In fiscal 1998 the Company reported a net restructure charge of $63.8
million related to the following actions:
Due to weakened business conditions experienced in the second half of
fiscal 1998, the Company implemented an overall cost reduction plan in April
1998. As part of the overall cost reduction plan, the Company announced a
worldwide workforce reduction. This action was completed during fiscal 1999
and resulted in a total reduction of 815 people. During fiscal 1999, the
Company paid $10.8 million of severance to a remaining 458 employees
associated with this action. In addition, the plan included modification of
certain previously announced actions related to the closure of the Santa
Clara 5- and 6-inch wafer manufacturing facilities, as well as additional
impairment loss related to the write down of certain assets in the 0.65-
micron wafer manufacturing facility in Arlington, Texas. As a result, the
Company recorded a $73.6 million restructuring charge in fiscal 1998. The
restructuring charge included approximately $32.5 million for severance and
lease termination costs, $10.6 million for the write-off of assets related to
discontinued product development programs and $10.2 million for the write-off
of assets related to discontinued process technology development. It also
included an additional $20.3 million impairment loss on certain assets in the
Arlington wafer manufacturing facility. The additional impairment loss was
caused by weakened business conditions that significantly reduced the demand
for wafers from the 0.65-micron wafer manufacturing facility. These charges
were partially offset by the release of $9.8 million of excess reserves,
primarily severance costs, related to actions that were competed during
fiscal 1998 associated with the fiscal 1997 reorganization of the Company's
operating structure and planned realignment of its manufacturing facilities.
In fiscal 1997 the Company reported a net restructure charge of
$134.2 million related to the following actions:
In connection with the Company's reorganization of its operating
structure announced in June 1996, the Company recorded a $49.7 million
restructuring charge for the write down of impaired 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 business.
The Company also recorded a restructuring charge of $84.5 million in
fiscal 1997 related to the Company's planned realignment of its manufacturing
facilities announced in May 1997. The charge included an impairment loss of
$60.1 million related to the write down of certain assets in its Arlington
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.
In addition to the impairment loss, the charge included $11.0 million
of exit costs primarily related to the closure of its 5- and 6-inch wafer
fabrication facilities in Santa Clara. The exit costs primarily related to
severance costs, the removal of production equipment and the dismantling of
the production facilities. The closure of the Santa Clara wafer fabrication
facilities was completed during fiscal 1999 and affected a total of 556
people who had been previously employed in these facilities. During fiscal
1999, the Company paid $10.2 million of severance to a remaining 502
employees associated with this action. The charge also included $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 related to the write-off of previously capitalized
construction in progress costs and other exit costs, including employee-
related costs. The remaining $3.1 million was related to severance and other
exit costs at other manufacturing facilities. As of May 30, 1999, all these
actions were substantially completed.
In connection with the restructure actions discussed in the preceding
paragraphs, accrued liabilities at May 30, 1999 include $79.5 million related
to severance and other exit costs for those actions that have not yet been
completed as of May 30, 1999.
Note 4. Acquisitions
As discussed in Note 1, the Company completed its merger with Cyrix in
November 1997. Under the terms of the agreement, each share of Cyrix common
stock was exchanged for 0.825 of a share of National common stock. A total
of 16.4 million shares of National common stock was issued to current holders
of Cyrix common stock. In addition, up to 2.7 million shares of National
common stock were reserved for issuance in the future upon exercise of Cyrix
employee or director stock options or pursuant to Cyrix employee benefit
plans and up to 2.6 million shares of National common stock were reserved for
issuance in the future upon conversion of Cyrix 5.5% convertible subordinated
notes due June 1, 2001. Under the terms of the Indenture for the Notes, the
merger with Cyrix constituted a change of control. As a result, each holder
of the Notes had the right to require the Company to repurchase all of the
outstanding Notes or any portion of the principal amount thereof that is
equal to $5,000 or any integral multiple of $1,000 in excess thereof on
January 12, 1998 at a purchase price to be paid in cash equal to 100 percent
of the principal amount of the Notes to be repurchased plus interest accrued
to the repurchase date. During January 1998, the Company paid $126.4 million
to repurchase substantially all of the outstanding Notes. As a result,
conversion of the remaining outstanding Notes will only require issuance of
up to 1,619 shares of National common stock.
The following table summarizes the results of operations previously
reported by the separate companies through November 23, 1997, which
represents the closest interim period to the date the merger was consummated:
Six Months Ended Year Ended
November 23, May 25,
(In Millions) 1997 1997
---------------- ----------
Net sales:
National $1,241.1 $2,507.3
Cyrix 135.6 177.1
-------- --------
Total sales $1,376.7 $2,684.4
======== ========
Net income (loss):
National $ 120.1 $ 27.5
Cyrix (28.6) (25.9)
-------- --------
Net income $ 91.5 $ 1.6
======== ========
There were no transactions between Cyrix and National prior to the
combination, and no adjustments were necessary to conform the accounting
policies of the combining companies. Certain amounts for Cyrix were
reclassified to conform with the financial statement presentation followed by
National.
In connection with the merger, the Company recorded a special charge
of $30.0 million related to certain merger and related expenses, which is
included in the statement of operations for the year ended May 31, 1998.
These expenses primarily included transaction fees for investment bankers,
attorneys and accountants ($18.3 million); financial printing costs ($2.0
million); and costs associated with the elimination of duplicate facilities
and operations ($9.7 million). The Company also expected to pay
approximately $10.1 million in retention bonuses to certain Cyrix employees.
These amounts were expensed to operations ratably over the employees' service
period, which were generally 18 months following the consummation of the
merger. Substantially all of the retention bonuses were paid to these
employees by May 30, 1999.
The Company also completed the acquisition of ComCore Semiconductor,
Inc. ("ComCore") in fiscal 1998. The acquisition was accounted for using
the purchase method with a purchase price of $104.8 million. ComCore, a
designer and manufacturer of integrated circuits for computer networking and
broadband communications, uses powerful mathematical techniques combined with
advanced digital signal processing ("DSP") and customized design
methodologies to create high-performance communications solutions. This
technology is expected to add advanced design and technology capabilities to
the Company's existing analog, mixed-signal and digital expertise. In
connection with the acquisition, the Company recorded a $95.2 million in-
process R&D charge, $5.3 million of net assets acquired, $4.3 million of
goodwill and $15.0 million of unearned compensation related to employee
retention arrangements, which is being charged to operations, primarily
research and development, over a three-year retention period that began in
May 1998. The in-process R&D had not reached technological feasibility and
had no alternative uses.
Pro forma results of operations for fiscal 1998 and 1997 for the
ComCore acquisition have not been presented, since ComCore was a development
stage company and results of operations for those years were insignificant.
In fiscal 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 method with a purchase price of $74.5 million. In connection with
the acquisition, the Company incurred a special charge to expense 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 is being charged to operating expenses,
primarily research and development, over a 30-month retention period that
began in May 1997.
Pro forma results of operations for fiscal 1997 for the Mediamatics
acquisition have not been presented, since Mediamatics was a development
stage company and results of operations for fiscal 1997 were insignificant.
Note 5. Consolidated Financial Statement Details
(In Millions) 1999 1998
---- ----
RECEIVABLE ALLOWANCES
Doubtful accounts $ 9.1 $ 8.9
Returns and allowances 58.9 41.4
------- --------
Total receivable allowances $ 68.0 $ 50.3
======== ========
INVENTORIES
Raw materials $ 13.0 $ 19.3
Work in process 81.0 176.0
Finished goods 47.3 88.6
------- --------
Total inventories $ 141.3 $ 283.9
======== ========
PROPERTY, PLANT AND EQUIPMENT
Land $ 17.0 $ 24.8
Buildings and improvements 531.3 761.0
Machinery and equipment 1,728.6 1,713.6
Construction in progress 42.2 440.3
------- --------
Total property, plant and equipment 2,319.1 2,939.7
Less accumulated depreciation and amortization 1,403.1 1,283.9
------- --------
Property, plant and equipment, net $ 916.0 $1,655.8
======== ========
ACCRUED EXPENSES
Payroll and employee related $ 131.0 $ 145.8
Restructuring of operations 79.5 45.7
Other 137.6 119.4
------- --------
Total accrued expenses $ 348.1 $ 310.9
======== ========
(In Millions) 1999 1998 1997
---- ---- ----
INTEREST INCOME (EXPENSE), NET
Interest income $ 26.9 $ 48.6 $ 31.0
Interest expense (29.1) (26.3) (24.9)
------- -------- --------
Interest income (expense), net $ (2.2) $ 22.3 $ 6.1
======= ======== ========
OTHER INCOME
Net intellectual property income $ 11.3 $ 15.7 $ 10.1
Gain on investments, net 0.1 9.2 0.8
Other (8.3) - 7.8
------- -------- --------
Total other income, net $ 3.1 $ 24.9 $ 18.7
======= ======== ========
Intellectual property income is net of commissions. For fiscal 1999, net
intellectual property income included $10.5 million related to a single
license arrangement with a Korean firm. Net intellectual property income for
fiscal 1998 included $11.2 million related to a single licensing arrangement
with another Korean firm. Aside from the single licensing agreements in
fiscal 1999 and 1998 with the Korean firms, none of the other license
agreements in fiscal 1999 or 1998 were considered individually material and
none of the license agreements in fiscal 1997 was considered individually
material.
Note 6. Debt
Debt at fiscal year-end consists of the following:
(In Millions) 1999 1998
---- ----
Convertible subordinated notes payable at 6.5%, net of
debt issuance costs $ 255.8 $ 255.1
Notes secured by real estate payable at 7.1% - 12.6% 16.0 20.1
Notes secured by equipment payable at 5.6% - 8.0% 157.1 132.6
Convertible subordinated promissory notes 15.0 15.0
Other debt 21.7 21.8
------- -------
Total debt 465.6 444.6
Less current portion of long-term debt 49.3 53.9
------- -------
Long-term debt $ 416.3 $ 390.7
======= =======
The Company's $258.8 million convertible subordinated notes mature in
October 2002. Interest is payable semi-annually at an annual rate of 6.5
percent. 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 include two notes assumed as part of the
repurchase of the equity interest in the Company's Arlington, Texas,
facility, which was sold and leased back prior to 1990. Interest on these
notes is due semi-annually, principal payments vary and maturities range from
March 1997 to March 2002. In connection with the Cyrix transaction, the
Company assumed two Cyrix notes payable that are collateralized by land and
buildings located in Richardson, Texas. One of these notes was paid off
during fiscal 1999. The other note matures in September 2006. Interest on
this note is due monthly and principal payments vary.
Notes secured by equipment include loans under four equipment
financing agreements, each with a separate group of banks. Borrowings are
collateralized by the underlying equipment. Under the terms of the
agreements, principal and interest are due monthly over various periods
ranging from three to five years. Maturities of loans under these agreements
range from November 2001 to November 2003. Borrowings bear interest at
varying fixed rates ranging from 6.8 percent to 8.0 percent or are based on
the one-month LIBOR rate plus a range of 70-90 basis points (5.6 percent-5.8
percent at May 30, 1999). These financing agreements contain certain
covenant and default provisions that require the Company to maintain a
certain level of tangible net worth and permit the lenders cross-acceleration
rights against certain other credit facilities.
The actions announced by the Company in May 1999 affect assets that
are collateralized under the terms of certain of the Company's long-term debt.
As a result, the Company may be required to accelerate the payment of
approximately $155 million of equipment loans and the Cyrix note payable.
In connection with a retention arrangement related to the acquisition
of ComCore in fiscal 1998, the Company issued convertible subordinated
promissory notes to each of the founding shareholders of ComCore for a total
of $15.0 million. The notes, which are noninterest-bearing, are due the
earlier of either the date of termination of the employee or May 2001. Each
note is convertible, in whole or in part, into shares of the Company's common
stock on the maturity date or within 30 days thereafter, based on an initial
conversion price of $16.1875.
For each of the next five fiscal years and thereafter, debt
obligations mature as follows:
Total Debt
(In Millions) (Principal Only)
----------------
2000 $ 49.3
2001 86.7
2002 45.3
2003 279.4
2004 0.1
Thereafter 4.8
-------
Total $ 465.6
=======
The Company's multicurrency and revolving financing agreements
provide for multicurrency loans, letters of credit and standby letters of
credit. The multicurrency loan agreement ($15 million, as amended in
November 1998) expires in October 1999. The Company anticipates the
multicurrency loan agreement will be renewed or replaced on or prior to
termination. The revolving credit agreement ($225 million), which includes
standby letters of credit, expires in October 2000. At May 30, 1999, $26.1
million of the combined total commitments under the multicurrency and
revolving financing agreements was utilized. These agreements contain
restrictive covenants, conditions and default provisions that, among other
terms, restrict payment of dividends and require the maintenance of financial
ratios and certain levels of tangible net worth. At May 30, 1999, the most
significant restriction on the payment of dividends was the lack of retained
earnings. If retained earnings had been available, under the most restrictive
covenant, $299.2 million of tangible net worth would have been unrestricted
and available for payment of dividends on the Company's common stock.
Note 7. Income Taxes
Worldwide pretax income (loss) from operations and income taxes consist of
the following:
In Millions) 1999 1998 1997
---- ---- ----
Income (loss) before income taxes:
U.S. $ (1,136.2) $ (168.7) $ (51.6)
Non-U.S. 50.8 69.0 68.7
----------- --------- ---------
$ (1,085.4) $ (99.7) $ 17.1
=========== ========= =========
Income tax expense (benefit):
Current:
U.S. federal $ (142.5) $ (45.6) $ 65.0
U.S. state and local - 0.4 -
Non-U.S. 14.2 21.7 15.7
----------- --------- ---------
(128.3) (23.5) 80.7
Deferred:
U.S. federal and state 57.2 9.4 (80.5)
Non-U.S. (4.4) (4.5) (3.3)
----------- --------- ---------
52.8 4.9 (83.8)
Charge in lieu of taxes attributable
to employee stock plans - 17.5 18.6
----------- --------- ---------
Income tax expense (benefit) $ (75.5) $ (1.1) $ 15.5
=========== ========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May 30,
1999 and May 31, 1998 are presented below:
(In Millions) 1999 1998
---- ----
DEFERRED TAX ASSETS
Reserves and accruals $ 432.1 $ 199.3
Loss carryovers and other allowances - foreign 48.4 47.3
Federal and state credit carryovers 183.3 122.2
Other 95.6 15.3
------- -------
Total gross deferred assets 759.4 384.1
Valuation allowance (536.7) (184.8)
------- -------
Net deferred assets 222.7 199.3
------- -------
DEFERRED TAX LIABILITIES
Capital allowance - foreign - (4.4)
Depreciation (69.3) (24.2)
Other liabilities (35.5) -
------- -------
Total gross deferred liabilities (104.8) (28.6)
------- -------
Net deferred tax assets $ 117.9 $ 170.7
======= =======
The Company has recorded a valuation allowance to reflect the
estimated amount of deferred tax assets that may not be realized due to the
expiration of net operating losses and tax credit carryovers. The increase
in the valuation allowance primarily relates to federal and state net
operating losses and credit carryovers, which may not be realized, offset by
the utilization of foreign net operating loss carryovers 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 that the deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize
the benefits of these deductible differences, net of valuation allowances as
of May 30, 1999.
The reconciliation between the income tax rate computed by applying
the U.S. federal statutory rate and the reported worldwide tax rate follows:
1999 1998 1997
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 (0.6) (7.9) 27.7)
U.S. state and local taxes net of federal
benefits - 0.4 0.4
Research and development credits - - (62.0)
Losses not benefited 32.4 - -
Change in estimate for tax contingencies (6.8) - -
Write-off of in-process R&D - 38.4 134.2
Other (3.0) 3.0 11.0
------ ----- -----
Effective tax rate (7.0)% (1.1)% 90.9%
====== ====== ======
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 for U.S. income taxes for the remaining undistributed
earnings of approximately $563.8 million at May 30, 1999, 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 $112.7 million would accrue after utilization of U.S. tax
credits.
At May 30, 1999, the Company had U.S. and state credit carryovers of
approximately $115.1 million and $68.2 million, respectively, for tax return
purposes, which primarily expire from 2003 through 2019. In addition, the
Company had combined U.S. and state operating loss carryovers of
approximately $1,091.1 million, which primarily expire from 2003 through
2019. The Company also had operating loss carryovers of $183.2 million from
certain non-U.S. jurisdictions.
The Company has filed a petition with the United States Tax Court
contesting a deficiency notice issued by the U.S. Internal Revenue Service
("IRS") seeking additional taxes of approximately $1.5 million (exclusive of
interest) for fiscal 1989. The IRS has completed its examination of the
Company's tax returns for fiscal 1990 through 1993 and has issued a notice of
proposed adjustment refunding taxes of approximately $0.7 million (exclusive
of interest). The IRS is examining the Company's returns for fiscal 1994
through 1996.
In fiscal 1997 and 1999, the Company received notices of assessment
from the Malaysian Inland Revenue Board totaling approximately 199.9
million Malaysian ringgits ($52.6 million). The issues giving rise to the
assessments relate primarily to intercompany transfer pricing for the
Company's manufacturing operations in Malaysia for fiscal year 1985 through
1993. In June 1999, the Company completed its settlement of all outstanding
assessments with the Malaysian Inland Revenue Board for 6.6 million ringgits
($1.7 million).
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 on August 8,
2006, unless redeemed earlier.
The Company has reserved for issuance 926,640 shares of common stock
issuable upon conversion of certain convertible subordinated promissory notes
issued to three individuals as partial consideration for the acquisition of
ComCore in fiscal 1998 (See Note 4).
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.
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 40,000,000 shares of the Company's common stock. Like the
terms in the stock option plan for officers and key employees, the terms in
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 and vesting is accelerated in certain circumstances.
In connection with National's merger with Cyrix in fiscal 1998 (See
Note 4), National assumed the outstanding obligations of Cyrix under the
Cyrix Corporation Employee Stock Purchase Plan, the Cyrix Corporation 1988
Incentive Stock Plan and the Cyrix Corporation Non-Discretionary Non-Employee
Directors Stock Plan. In connection therewith, each purchase right under the
Cyrix Corporation Employee Stock Purchase Plan and each option under the
other two plans were converted into the right or option to purchase 0.825
share of National common stock and the purchase price was adjusted
accordingly. These plans provide for issuance of common stock upon the
exercise of stock options and stock purchase rights at exercise prices not
less than the market price of stock on the date of grant. Vesting schedules
for Cyrix options vary but are generally over four years. The Cyrix
Corporation Employee Stock Purchase Plan and the Cyrix Corporation Non-
Discretionary Non-Employee Directors Stock Plan have now expired and no more
shares can be issued under them. Options under the Cyrix Corporation 1988
Incentive Stock Plan expire up to a maximum of ten years after grant, subject
to earlier expiration upon termination of employment and no more options will
be granted under the Cyrix Corporation 1988 Incentive Stock Plan.
In connection with the acquisition of ComCore in fiscal 1998,
National assumed the outstanding obligations of ComCore under the ComCore
Stock Option Plan and related stock option agreements for ComCore employees
and consultants. In connection therewith, ComCore optionees received an
option for 0.3268 share of the Company's common stock per share of ComCore
common stock underlying the ComCore options. The ComCore options expire up
to a maximum of ten years after grant, subject to earlier expiration upon
termination of employment. No more options will be granted under the ComCore
Stock Option Plan. At May 30, 1999, options to purchase 125,109 shares at
exercise prices ranging from $0.50-$0.77 were outstanding under the ComCore
plan with a weighted-average exercise price of $0.55 and weighted-average
remaining contractual life of 8.2 years.
In connection with National's acquisition of Mediamatics in fiscal
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 share of the Company's common stock per share
of Mediamatics common stock underlying the Mediamatics options. At the time
of the Mediamatics acquisition, the option price was adjusted by the exchange
rate. The Mediamatics options expire up to a maximum of ten years after
grant, subject to earlier expiration upon termination of employment. No more
options will be granted under the Mediamatics stock option plans. The
Mediamatics transaction resulted in a new measurement date for these options
and the Company recorded related unearned compensation in the amount of $9.2
million. Unearned compensation that is included as a separate component of
shareholders' equity is amortized to operations over the vesting period of
the respective options. Related compensation expense for fiscal 1999, 1998
and 1997 was $2.3 million, $2.3 million and $0.6 million, respectively. At
May 30, 1999, options to purchase 427,440 shares at exercise prices ranging
from $1.59-$3.19 were outstanding under the Mediamatics plans with a
weighted-average exercise price of $2.36 and weighted-average remaining
contractual life of 5.2 years.
National has a director stock option plan first approved in fiscal
1998 authorizing the grant of up to 1,000,000 shares of common stock to the
Company's eligible nonemployee directors. Options were granted automatically
upon approval of the plan by stockholders and are granted automatically to
eligible directors upon their appointment to the Board and subsequent
election to the Board by the stockholders. Director stock options vest in
full after six months. As of May 30, 1999, options to purchase 115,000
shares of common stock had been granted under the director stock option plan
with a weighted-average exercise price of $30.07 and weighted-average
remaining contractual life of 8.7 years.
In connection with his retirement in May 1995, a former chairman of
the Company was granted an option to purchase 300,000 shares of the Company's
common stock at $27.875 per share. The option was granted outside the
Company's stock option plans at the market price on the date of grant,
expires ten years and one day after grant and becomes exercisable ratably
over a four-year period.
National has an employee stock purchase plan that 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 the end of a
quarterly period. National also has an employee stock purchase plan
available to employees at international locations, which authorizes the
issuance of up to 5.0 million shares of common stock in quarterly offerings
to eligible employees 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 the 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 the option plans during fiscal
1999, 1998 and 1997 or otherwise (but excluding the ComCore, Mediamatics and
director options), were as follows:
Number of Shares Weighted-Average
(In Millions) Exercise Price
---------------- ----------------
Outstanding at May 26, 1996 14.3 $ 16.65
Granted 8.7 $ 17.45
Exercised (3.5) $ 29.04
Cancelled (2.5) $ 21.40
-----
Outstanding May 25, 1997 17.0 $ 17.67
Granted 9.9 $ 30.48
Exercised (2.5) $ 31.70
Cancelled (2.4) $ 25.48
-----
Outstanding May 31, 1998 22.0 $ 23.28
Granted 26.2 $ 13.17
Exercised (0.4) $ 14.65
Cancelled (12.1) $ 26.52
-----
Outstanding at May 30, 1999 35.7 $ 14.91
=====
Expiration dates for options outstanding at May 30, 1999 range from July 11,
1999 to May 3, 2009.
The following tables summarize information about options outstanding under
these plans (excluding the ComCore, Mediamatics and director options) at May
30, 1999:
Outstanding Options
----------------------------------------------
Weighted-
Average Weighted-
Number Remaining Average
of Shares Contractual Life Exercise
Range of Exercise Prices (In Millions) (In Years) Price
- ------------------------ ------------ ----------------- ----------
$0.50-$3.75 0.1 1.7 $ 2.64
$4.38-$6.50 1.0 1.5 $ 4.51
$7.00-$10.38 0.9 8.9 $ 9.47
$10.75-$16.13 28.1 8.8 $ 13.56
$16.25-$24.38 2.4 6.1 $ 18.77
$24.63-$47.88 3.2 6.6 $ 29.03
----
Total 35.7 8.2 $ 14.91
=============================================================================
Options Exercisable
--------------------------------------
Weighted-
Number Average
of Shares Exercise
Range of Exercise Prices (In Millions) Price
- ------------------------ ------------- ---------
$0.50-$3.75 0.1 $ 2.64
$4.38-$6.50 1.0 $ 4.51
$7.00-$10.38 0.1 $ 8.65
$10.75-$16.13 2.7 $ 15.02
$16.25-$24.38 2.2 $ 18.66
$24.63-$47.88 2.0 $ 28.45
----
Total 8.1 $ 17.73
====
Under the terms of the stock purchase plan and the global stock
purchase plan, the Company issued 2.7 million shares in fiscal 1999, 1.1
million shares in fiscal 1998 and 1.4 million shares in fiscal 1997 to
employees for $24.1 million, $23.4 million and $20.8 million, respectively.
Under the stock option plans, 0.7 million shares of common stock were
issued during fiscal 1999. As of May 30, 1999, 61.8 million shares were
reserved for issuance under all stock purchase and option plans and other
options granted by the Company, including shares available for future option
grants.
On June 29, 1998, the Stock Option and Compensation Committee of the
Board of Directors approved an option reissuance grant for employees. The
Company's President and Chief Executive Officer and Executive Staff members
were excluded from the reissuance grant. Under the reissuance grant, each
employee was able to exchange options outstanding as of June 29, 1998, which
were previously granted in plans that permit reissuance grants, for new
options to purchase the same number of shares of the Company's common stock
at $13.875 per share. Vesting on the reissuance grants restarted as of June
29, 1998. The options vest over a four-year period with one-fourth of the
shares vesting on June 29, 1999, and the remaining shares vesting ratably over
the next three years. The reissuance grant was made as a result of the
significant decrease in the market price of the Company's common stock in the
fourth quarter of fiscal 1998 and was intended to ensure that options
previously granted provide a meaningful incentive to employees. Options to
purchase approximately 8.4 million shares were cancelled in the reissuance
grant.
Other Stock Plans
National has a director stock plan that authorizes the issuance of up to
200,000 shares of the Company's common stock to eligible nonemployee
directors of the Company. The common stock is issued automatically to
eligible new directors upon their appointment to the Board and to all
eligible directors on their subsequent election to the Board by shareholders.
Directors may also elect to take their annual retainer fees for Board and
committee membership in stock that is issued under the director stock plan.
As of May 30, 1999, 58,966 shares had been issued under the director stock
plan and 141,034 shares were reserved for future issuances.
National's performance award plan, which covered performance cycles
of three to five years, was terminated and paid out in fiscal 1999. The
Company had discontinued new awards under the plan beginning in fiscal 1997.
Performance cycles begun in fiscal 1995 and 1996 were paid out based on
performance against the goals in July 1998. The plan authorized the issuance
of up to 1.0 million shares of the Company's common stock as full or partial
payment of awards to plan participants based on performance units and the
achievement of certain specific performance goals during a performance plan
cycle. Participants were limited to a small group of senior executives and
the last performance cycle started in fiscal 1996. No shares were issued
under the performance award plan during fiscal 1999 or 1998, and final
payouts were made in cash. The Company issued 81,666 shares in fiscal 1997
in the second payout under the plan. Expense recorded in fiscal 1997 under
the plan was not material.
The Company adopted a restricted stock plan in fiscal 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 1999, 1998 and 1997, 272,000, 21,000
and 657,500 shares, respectively, 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 $3.6 million, $0.7
million and $11.7 million of unearned compensation during fiscal 1999, 1998
and 1997, respectively, included as a separate component of shareholders'
equity to be amortized to operations ratably over the respective restriction
periods. As of May 30, 1999, 1,246,500 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 that 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 1999, 1998 and 1997 related to all shares of restricted
stock was $4.5 million, $4.9 million and $2.6 million, respectively. At May
30, 1999, the weighted-average grant date fair value for all outstanding
shares of restricted stock was $15.22.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. This information is required to be determined as
if the Company had accounted for its stock-based awards to employees under
the fair value method contained in SFAS No. 123. The weighted-average fair
value of stock options granted during fiscal 1999, 1998 and 1997 was $6.95,
$14.22 and $7.42 per share, respectively. The weighted-average fair value of
shares granted under the stock purchase plans was $5.10, $12.60 and $5.07 for
fiscal 1999, 1998 and 1997. 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 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Stock Option Plans
Expected life (in years) 4.6 4.4 4.4
Expected volatility 57% 50% 48%
Risk-free interest rate 5.7% 5.5% 6.2%
Stock Purchase Plans
Expected life (in years) 0.3 0.3 0.3
Expected volatility 78% 53% 53%
Risk-free interest rate 4.6% 5.4% 5.6%
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) 1999 1998 1997
---- ---- -----
Net income (loss) - as reported $(1,009.9) $ (98.6) $ 1.6
Net loss - pro forma $(1,069.1) $ (134.1) $(20.5)
Basic earnings (loss) per share - as reported $ (6.04) $ (0.60) $ 0.01
Basic loss per share - pro forma $ (6.40) $ (0.82) $(0.13)
Diluted earnings (loss) per share - as reported $ (6.04) $ (0.60) $ 0.01
Diluted loss per share - pro forma $ (6.40) $ (0.82) $(0.13)
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 2000.
Note 10. Retirement and Pension Plans
National's Retirement and Savings Program for U.S. employees consists of
three plans, as follows:
The Profit Sharing Plan requires 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 1999, 1998 and 1997 were 95,126
shares, 74,651 shares and 200,208 shares, respectively. As of May 30, 1999,
1.46 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
eleven 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 to defer greater percentages
of compensation than would otherwise be permitted under the salary deferral
401(k) plan and IRS regulations. The Benefit Restoration Plan is a
nonqualified 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) 1999 1998 1997
---- ---- ----
Profit sharing plan $ 3.7 $ 5.1 $ 9.9
Salary deferral 401(k) plan $ 9.1 $ 9.4 $ 10.6
Non-U.S. pension and retirement plans $ 11.2 $ 12.9 $ 7.6
The Company's defined benefit pension plans, which are primarily
maintained in the U.K. and Germany, cover all eligible employees within each
respective country. Pension plan benefits are based primarily on
participants' compensation and years of credited service as specified under
the terms of each country's plan. The Company's funding policy is consistent
with the local requirements of each country. The plans' assets consist
primarily of U.S. and foreign equity securities, bonds, property and cash.
Net annual periodic pension cost of the plans is presented in the following
table:
(In Millions) 1999 1998 1997
---- ---- ----
Service cost of benefits earned during the year $4.8 $3.9 $4.6
Interest cost on projected benefit obligation 5.3 3.6 4.3
Actual return on plan assets 0.2 (9.1) (2.6)
Net amortization and deferral (4.2) 7.3 (2.5)
---- ---- ----
Net periodic pension cost $6.1 $5.7 $3.8
==== ==== ====
Obligation and asset data of the plans at fiscal year-end is presented in the
following table:
(In Millions) 1999 1998
---- ----
Benefit obligation
Beginning balance $81.1 $53.7
Service cost 4.8 3.9
Interest cost 5.3 3.6
Plan participants' contribution 1.4 1.5
Benefits paid (1.7) (2.1)
Actuarial gain 7.8 21.0
Exchange rate adjustment (2.1) (0.5)
----- -----
Ending balance $96.6 $81.1
===== =====
Plan assets at fair value
Beginning balance $47.9 $33.1
Actual return on plan assets (0.2) 9.1
Company contributions 7.8 5.1
Plan participants' contributions 1.4 1.5
Benefits paid (1.6) (2.0)
Exchange rate adjustment (1.4) 1.1
----- -----
Ending balance $53.9 $47.9
===== =====
Reconciliation of funded status
Fund status - Benefit obligation in excess of plan
Assets $42.7 $33.2
Unrecognized net loss (26.3) (16.8)
Unrecognized net transition obligation 2.7 2.9
Adjustment to recognize minimum
pension liability 25.0 12.5
----- -----
Accrued pension cost $44.1 $31.8
===== =====
The projected benefit obligation was determined using the following
assumptions:
1999 1998
---- ----
Discount rate 6.0%-7.0% 6.5%-7.0%
Rate of increase in compensation levels 3.0%-4.5% 3.5%-4.5%
Expected long-term return on assets 9.0% 9.0%
For fiscal 1999 and 1998, the Company recorded adjustments for
minimum liability of $12.5 million and $12.5 million, respectively, related
to one of its defined benefit plans representing the excess of unfunded
accumulated benefit obligations over previously recorded pension cost
liabilities. The increase in unfunded accumulated benefit obligations was
primarily attributable to a reduction in the assumed discount rate combined
with the effect of fixed rate increases in benefits under the terms of the
plan in excess of current inflation rates. The corresponding offset was
recorded as a component of accumulated other comprehensive loss.
Note 11. Commitments and Contingencies
Commitments
The Company leases certain facilities and equipment under operating lease
arrangements. Rental expenses under operating leases were $34.9 million,
$36.9 million and $47.6 million in fiscal 1999, 1998 and 1997, respectively.
Future minimum commitments under noncancelable operating leases are as
follows:
(In Millions)
-------------
2000 $ 32.6
2001 24.8
2002 19.5
2003 14.4
2004 12.1
Thereafter 26.6
-----
Total $130.0
======
In connection with the Fairchild transaction in fiscal 1997,
Fairchild and the Company entered into a manufacturing agreement whereby the
Company committed to purchase a minimum of $330.0 million in goods and
services during the first 39 months after the transaction, based on specified
wafer prices, which the Company believes approximate market prices. Future
annual minimum purchases remaining under the agreement are $80.0 million for
fiscal 2000. An additional $60.0 million in purchases may be made at any time
over the 39-month period as agreed upon by the parties. During fiscal 1999,
1998 and 1997, the Company's total purchases under the agreement were $84.4
million, $155.0 million and $30.3 million, respectively. The Company also
has a continuing obligation to indemnify Fairchild in the event of certain
environmental and legal matters.
In September 1999, the Company reached agreement with International
Business Machines Corporation ("IBM") for termination of the wafer
manufacturing and marketing agreements that previously existed between Cyrix
and IBM. Under terms of the agreement, the Company's Cyrix subsidiary was
relieved of its obligations to purchase wafers from IBM and IBM ceased the
competitive sale of Cyrix-designed microprocessors to customers other than
National. In addition, Cyrix transferred to IBM ownership of certain assets
that physically resided at an IBM facility. Total purchases under the
previously existing agreements were $21.0 million, $130.7 million and $80.3
million during fiscal 1999, 1998 and 1997, respectively.
Contingencies -- Legal Proceedings
In April 1988, the Company received a notice from the District Director of
U.S. Customs in San Francisco alleging underpayment of duties of
approximately $19.5 million for the period June 1, 1979 to March 1, 1985 on
merchandise imported from the Company's non-U.S. subsidiaries. The Company
filed an administrative appeal in September 1988. On May 23, 1991, the
District Director revised the Customs action and issued a Notice of Penalty
Claim and Demand for Restoration of Duties, alleging underpayment of duties
of approximately $6.9 million for the same period. The Company filed an
administrative petition for relief in October 1991 and the alleged
underpayment was reduced in April 1994 to approximately $3.6 million. The
revised alleged underpayment could be subject to penalties that may be
computed as a multiple of the underpayment. The Company filed a supplemental
petition for relief in October 1994. The Assistant Commissioner of Customs
issued a decision in March 1998, which left the alleged underpayment at
approximately $3.6 million. Although the Company may consider an
administrative settlement of the matter, it intends to continue to contest
the assessment through all available means if a favorable settlement cannot
be achieved.
In July 1988, the Customs Service liquidated various duty drawback
claims previously filed by the Company and demanded repayment of accelerated
drawback previously paid to the Company plus accrued interest. In March
1996, the Customs Service approved in part and denied in part administrative
protests filed by the Company contesting the denied drawback claims. In
order to obtain judicial review, the Company paid the denied drawback and
associated interest totaling $5.2 million and filed summonses in the Court of
International Trade seeking a refund.
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. The Company has been sued by Advanced Micro Devices,
Inc. ("AMD"), which seeks recovery of cleanup costs AMD has incurred in the
Santa Clara area under the RWQCB orders for contamination AMD alleges was
originally caused by the Company.
In connection with the Company's disposition in fiscal 1996 of
Dynacraft, Inc. ("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 sites with which the Company may have had direct or
indirect involvement. Such designations are made regardless of the extent of
the Company's involvement. These claims are in various stages of
administrative or judicial proceedings and include demands for recovery of
past governmental costs and for future investigations and remedial actions.
In many cases, the dollar amounts of the claims have not been specified, and
with respect to a number of the PRP claims, have been asserted against a
number of other entities for the same cost recovery or other relief as was
asserted against the Company. The Company accrues costs associated with
environmental matters when they become probable and reasonably estimable.
The amount of all environmental charges to earnings, including charges
relating to the Santa Clara site remediation, which did not include potential
reimbursements from insurance coverage, were not material during fiscal 1999,
1998 and 1997.
The Company is engaged in tax litigation with the IRS and the
Company's tax returns for certain years are under examination in the U.S.
(See Note 7).
In November 1997, a class action suit was filed on behalf of Cyrix
shareholders alleging breach of fiduciary duty against the Company, Cyrix and
certain officers of Cyrix. This action arose from the merger agreement
adopted in July 1997 between the Company and Cyrix.
In January 1999, a class action suit was filed against the Company by
former and present employees claiming damages for personal injuries. The
complaint alleges that cancer and reproductive harm were caused to employees
exposed to chemicals in the workplace. The Company has filed a demurrer to
the complaint. In addition to the foregoing, National is a party to other
suits and claims that arise in the normal course of business.
With respect to 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. Segment and Geographic Information
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting operating segments and related disclosures about
products and services, geographic areas and major customers. Information for
prior years has been presented in accordance with SFAS No. 131.
The Company designs, develops, manufactures and markets a wide array
of semiconductor products for applications in a variety of markets. The
Company is organized by various product line business units that are grouped
to form four operating segments that include the Analog Group, the
Information Appliance ("IA") Group, the Consumer and Commercial Group ("CCG")
and the Network Products Group. Each operating segment has a vice president
who reports directly to the Chief Executive Officer ("CEO"), who is
considered the Company's chief operating decision maker under SFAS 131.
The Analog Group products include a wide range of building blocks
such as high-performance operational amplifiers, power management circuits,
data acquisition circuits, interface circuits and circuits targeted towards
audio and CRT monitor systems. In addition, the Analog Group's wireless
circuits perform the radio, baseband controller, power management and other
related functions primarily in the cellular and cordless telephone markets.
The Group is also heavily focused on using analog circuits as the starting
point for forward integration for systems on a chip aimed at the cellular,
desktop, notebook and information appliance markets. Current examples
include scanners on a chip, systems health monitoring and integrated power
management systems.
The IA Group contains all business units focused on providing
component and system solutions to the emerging IA market, where the Company
is strategically directed to provide next-generation solutions. These
products include application-specific integrated microprocessors, MPEG
software and hardware products; and diverse advanced input/output controllers.
The IA Group is focused on three key market segments: Interactive TV set-top
boxes (equipped with digital video), thin clients (streamlined desktop
computers that have minimal memory and access software from a centralized
server network) and personal information access devices. Included within the
IA Group is the Cyrix business unit. The Cyrix business unit products
primarily consist of a line of Cyrix M II microprocessors, which are
stand-alone central processing units that were targeted for the sub-$1,000 PC
market. In this market, which is currently dominated by two major
competitors, the Company continued to experience highly competitive pricing
trends and increased pressure to rapidly release new microprocessors with
higher operating speeds. As a result, in May 1999, the Company made a
decision to exit its PC microprocessor business (See Note 3).
CCG offers a range of application-specific, embedded processor
solution and logic chips designed for targeted customers in the
communications, computer and consumer electronics markets.
The Network Products Group primarily offers a line of relatively mature
10/100 Mb ethernet products. With the acquisition of ComCore's DSP technology,
the Company is developing new network products with higher bandwidth
applications, including gigabit.
Aside from these operating segments, the Company's corporate
structure also includes centralized Worldwide Sales and Marketing, the
Central Technology and Manufacturing Group, and the Corporate Group.
Expenses of these groups are allocated to the operating segments and are
included in their segment operating results.
With the exception of the allocation of certain expenses, the
significant accounting policies and practices used to prepare the Company's
consolidated financial statements as described in Note 1 are generally
followed in measuring the sales, segment income or loss and determination of
assets for each reportable segment. The Company allocates certain expenses
associated with centralized manufacturing, selling, marketing and general
administration to reporting segments based on either the percentage of net
trade sales for each operating segment to total net trade sales or headcount,
as appropriate. Certain R&D expenses primarily associated with process
development are allocated to operating segments based on the percentage of
dedicated R&D expenses for each operating segment to total dedicated R&D
expenses. For fiscal 1998 and 1997, interest income and interest expense
were allocated to operating segments based on the percentage of their net
trade sales to total net trade sales. No interest income or interest expense
was allocated to operating segments for fiscal 1999.
Based on the criteria under SFAS 131, only the Analog Group, IA Group
and Cyrix business unit are considered reportable segments. The following
table presents specified amounts included in the measure of segment results
or the determination of segment assets related to the Company's reportable
segments:
(In Millions)
Information Cyrix Total
Analog Appliance Business All Elimina- Consoli-
Group Group Unit Others tions dated
-------- ---------- -------- ------ ------- ---------
1999
Sales to
unaffiliated
customers $1,164.1 $203.4 $179.2 $410.1 $ - $ 1,956.8
Inter-segment
sales - 0.5 - - (0.5) -
--------- ------- ------- ------- ------ -------
Net sales $1,164.1 $ 203.9 $179.2 $410.1 $(0.5) $ 1,956.8
========= ======= ======= ======= ====== =========
Segment income
(loss) before
income taxes $ 35.9 $(190.7) $(161.9) $(768.7) $(1,085.4)
========= ======= ======= ======= =========
Depreciation
and amorti-
zation $ 13.0 $ 19.0 $ 11.9 $ 361.7 $ 405.6
Interest
income - - - $ 26.9 $ 26.9
Interest
expense - - - $ 29.1 $ 29.1
Segment
assets $ 98.4 $ 16.1 $ 10.9 $1,918.9 $ 2,044.3
========= ======= ======= ======== =========
1998
Sales to
unaffiliated
customers $1,333.6 $ 307.6 $226.0 $669.5 - $ 2,536.7
Inter-segment
sales - 0.9 - - $(0.9) -
-------- ------- ------- ------ ------ ---------
Net sales $1,333.6 $ 308.5 $226.0 $669.5 $(0.9) $ 2,536.7
======== ======= ====== ====== ====== =========
Segment income
(loss) before
income taxes $ 151.5 $ (90.6) $(108.4) $(51.8) $(99.7)
======== ======== ======== ======= =========
Depreciation
and amorti-
zation $ 9.8 $ 8.9 $ 14.4 $273.6 $306.7
Interest
income - - $ 2.7 $ 45.9 $ 48.6
Interest
expense $ 2.6 $ 0.8 $ 6.4 $ 16.5 $ 26.3
Segment
assets $ 149.4 $ 56.0 $ 30.1 $2,865.2 $3,100.7
======== ======= ======= ======= ========
1997
Sales to
unaffiliated
customers $1,119.5 $295.3 $177.1 $1,092.5 - $2,684.4
Inter-segment
Sales - $ 0.9 - - $(0.9) -
-------- ------- -------- ------ ------- ---------
Net sales $1,119.5 $296.2 $177.1 $1,092.5 $(0.9) $2,684.4
======== ======= ======== ====== ======= =========
Segment income
(loss) before
income taxes $ 52.7 $(94.9) $(40.2) $ 99.5 $ 17.1
======== ======= ======== ====== =========
Depreciation
and amorti-
zation $ 8.4 $ 7.6 $ 12.4 $234.6 $263.0
Interest
income - - $ 2.1 $ 28.9 $ 31.0
Interest
expense $ 3.9 $ 1.2 $ 11.1 $ 8.7 $ 24.9
Depreciation and amortization presented for each segment includes
only such charges on dedicated segment assets. The measurement of segment
profit and loss includes an allocation of depreciation expense for the
Company's shared manufacturing facilities contained in each segment's product
standard cost.
Segment profit or loss for fiscal 1999 of each reportable segment
included allocations of expenses associated with the Company's shared
manufacturing facility in Maine, expenses associated with activity of its
development wafer fabrication facility in Santa Clara and expenses incurred
at corporate headquarters. The outcome of the actions the Company announced
in May 1999 are expected to significantly reduce future allocations of these
expenses to operating segments.
The Company operates in three main geographic areas that include the
Americas, Europe and the Asia Pacific region including Japan. In the
information that follows, sales include local sales and exports made by
operations within each area. Total sales by geographic area include sales to
unaffiliated customers and intergeographic transfers, which are based on
standard cost. To control costs, a substantial portion of National's
products are transported between the Americas, Europe and the Asia Pacific
region in the process of being manufactured and sold. Sales to unaffiliated
customers have little correlation with the location of manufacture.
National is not dependent upon any single customer, the loss of which
would have a material effect on the Company. In addition, no one customer or
distributor accounted for 10 percent or more of total net sales in fiscal
1999, 1998 and 1997.
The following tables provides geographic sales and asset information
by major countries within the Company's three main geographic areas:
(In Millions)
United United Hong Singa- Rest of Elimin-
States Kingdom Kong pore World ations Total
------- ------- ----- ------- ----- ------- ------
1999
Sales to
unaffiliated
customers $ 738.3 $325.5 $386.4 $ 218.0 $288.6 $1,956.8
Transfers
between
geographic
areas 555.8 162.4 2.2 883.1 2.1 $(1,605.6) -
------- ------- ----- ------- ----- ------- -------
Net sales $1,294.1 $487.9 $388.6 $1,101.1 $290.7 $(1,605.6)$1,956.8
======= ======= ===== ======= ===== ======= =======
Total
assets $1,181.5 $104.3 $ 40.6 $ 372.2 $345.7 $2,044.3
======= ======= ===== ======= ===== ======= =======
1998
Sales to
unaffiliated
customers $1,101.1 $436.1 $435.9 $ 213.5 $350.1 $2,536.7
Transfers
between
geographic
areas 571.5 203.0 2.1 987.8 3.2 $(1,767.6) -
------- ------- ----- ------- ----- ------- -------
Net sales $1,672.6 $639.1 $438.0 $1,201.3 $353.3 $(1,767.6)$2,536.7
======= ======= ===== ======= ===== ======= =======
Total
assets $2,177.7 $155.2 $ 58.8 $ 329.5 $379.5 $3,100.7
======= ======= ===== ======= ===== ======= =======
1997
Sales to
unaffiliated
customers $1,250.0 $421.5 $412.9 $ 190.8 $409.2 $2,684.4
Transfers
between
geographic
areas 459.6 186.2 1.0 1,151.3 12.0 $(1,810.1) -
------- ------- ----- ------- ----- ------- -------
Net sales $1,709.6 $607.7 $413.9 $1,342.1 $421.2 $(1,810.1)$2,684.4
======= ======= ===== ======= ===== ======= =======
Note 13. Supplemental Disclosure of Cash Flow Information and Noncash
Investing and Financing Activities
(In Millions) 1999 1998 1997
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for:
Interest expense $ 26.1 $ 34.8 $ 34.7
Interest payment on tax settlements $ 2.8 $ 0.1 $ -
Income taxes (refund) $(17.0) $ 12.0 $ 4.1
(In Millions) 1999 1998 1997
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of stock for employee benefit plans $ 0.3 $ 2.5 $ 3.2
Tax benefit for employee stock option plans $ - $ 17.5 $ 18.6
Change in unrealized gain on available-for
-sale securities $ 22.2 $ 4.2 $ 3.9
Unearned compensation charge relating
to restricted stock issuance $ 3.5 $ 0.7 $ 11.7
Issuance of convertible subordinated
promissory notes in connection with
ComCore acquisition $ - $ 15.0 $ -
Fair value of stock options assumed in
ComCore acquisition $ - $ 4.3 $ -
Issuance of common stock in connection with
Mediamatics acquisition $ - $ - $ 97.5
Unearned compensation charge relating to
Mediamatics acquisition $ - $ - $ 32.7
Restricted stock cancellation $ 2.0 $ 0.9 $ 0.8
Promissory note from Fairchild in connection
with the disposition of the Fairchild
businesses $ - $ - $ 65.0
Minimum pension liability $ 12.5 $ 12.5 $ -
Note 14. Financial Information by Quarter (Unaudited)
The following table presents the quarterly information for fiscal 1999 and
1998:
(In Millions, Except First Second Third Fourth
Per Share Amounts) Quarter Quarter Quarter Quarter
1999
Net sales $ 469.6 $ 510.1 $ 500.1 $ 477.0
Gross margin $ 55.0 $ 93.0 $ 155.1 $ 100.2
Net loss $ (104.8) $ (94.4) $ (27.2) $ (783.5)
=============================================================================
Basic loss per share $ (0.63) $ (0.57) $ (0.16) $ (4.65)
=============================================================================
Weighted-average common shares outstanding
used in basic loss per share 165.8 166.6 167.5 168.5
============================================================================
Diluted loss per share $ (0.63) $ (0.57) $ (0.16) $ (4.65)
========================================================================= ===
Weighted-average common and potential
common shares outstanding used in
diluted loss per share 165.8 166.6 167.5 168.5
============================================================================
Common stock price - high $ 16.88 $ 15.75 $ 17.63 $ 22.75
Common stock price - low $ 9.63 $ 7.44 $ 10.25 $ 8.88
=============================================================================
1998
Net sales $ 656.7 $ 719.9 $ 650.1 $ 510.0
Gross margin $ 260.4 $ 283.5 $ 236.1 $ 105.0
Net income (loss) $ 62.6 $ 28.9 $ 22.3 $ (212.4)
=============================================================================
Basic earnings (loss) per share $ 0.39 $ 0.18 $ 0.14 $ (1.29)
=============================================================================
Weighted-average common shares
outstanding used in basic earnings
(loss) per share 162.3 163.7 164.5 165.2
============================================================================
Diluted earnings (loss) per share $ 0.38 $ 0.17 $ 0.13 $ (1.29)
=============================================================================
Weighted-average common and potential
common shares outstanding used in
diluted earnings (loss) per share 165.9 169.3 167.3 165.2
============================================================================
Common stock price - high $ 37.56 $ 42.88 $ 35.63 $ 24.56
Common stock price - low $ 26.13 $ 31.00 $ 21.50 $ 15.75
=============================================================================
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 30, 1999, there were approximately
10,450 holders of the Company's common stock.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
National Semiconductor Corporation:
We have audited the accompanying consolidated balance sheets of
National Semiconductor Corporation and subsidiaries (the Company) as of May
30, 1999 and May 31, 1998, and the related consolidated statements of
operations, comprehensive loss, shareholders' equity and cash flows for each
of the years in the three-year period ended May 30, 1999. 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 30, 1999 and
May 31, 1998, and the results of their operations and their cash flows for
each of the years in the three-year period ended May 30, 1999 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.
KPMG LLP
Mountain View, California
June 9, 1999
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 1999 annual meeting of shareholders to be held on or about
September 24, 1999 and which will be filed in definitive form pursuant to
Regulation 14a on or about August 19, 1999 (hereinafter "1999 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 1999 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 1999 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
1999 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 1999 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Pages in
(a)1. Financial Statements this document
- -------------------------- -------------
For the three years ended May 30, 1999- 29
refer to Index in Item 8
Independent Auditors' Report 61
(a)2. Financial Statement Schedules
- -------------------------------------
Schedule II - Valuation and Qualifying Accounts 65
All other schedules are omitted since the required information is
inapplicable or the information is presented in the consolidated financial
statements or notes thereto.
Separate financial statements of the registrant are omitted because
the registrant is primarily an operating company and all subsidiaries
included in the consolidated financial statements being filed, in the
aggregate, do not have minority equity interest or indebtedness to any person
other than the registrant in an amount which exceeds five percent of the
total assets as shown by the most recent year end consolidated balance sheet
filed herein.
(a)3. Exhibits
- ---------------
The exhibits listed in the accompanying Index to Exhibits on pages 68 to 70
of this report are filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K.
- ---------------------------
During the quarter ended May 30, 1999, no reports on Form 8-K were filed by
the registrant.
NATIONAL SEMICONDUCTOR CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In Millions)
Deducted from receivables
in the consolidated balance sheets
Doubtful Returns and
Description Accounts Allowances Total
Balances at May 26, 1996 $ 3.6 $ 35.8 $ 39.4
Additions charged against revenue 3.7 240.5 244.2
Deductions (3.2) (1) (239.0) (242.2)
------- ------- -------
Balances at May 25, 1997 4.1 37.3 41.4
Additions charged against revenue 5.4 214.0 219.4
Deductions (0.6) (1) (209.9) (210.5)
------- ------- -------
Balances at May 31, 1998 8.9 41.4 50.3
Additions charged against revenue 3.4 222.2 225.6
Deductions (3.2) (1) (204.7) (207.9)
------- ------- -------
Balances at May 30, 1999 $ 9.1 $ 58.9 $ 68.0
======= ======= =======
- -------------------------------------------------------
(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: July 28, 1999 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 28th day of July 1999.
Signature Title
/S/ BRIAN L. HALLA* Chairman of the Board,President
--------------- and Chief Executive Officer
Brian L. Halla (Principal Executive Officer)
/S/ DONALD MACLEOD Executive Vice President, Finance
-------------- and Chief Financial Officer
Donald Macleod (Principal Financial Officer)
/S/ LEWIS CHEW* Vice President and Controller
----------- (Principal Accounting Officer)
Lewis Chew
/S/ GARY P. ARNOLD* Director
---------------
Gary P. Arnold
/S/ ROBERT J. FRANKENBERG* Director
----------------------
Robert J. Frankenberg
/S/ E. FLOYD KVAMME* Director
----------------
E. Floyd Kvamme
/S/ MODESTO A. MAIDIQUE* Director
--------------------
Modesto A. Maidique
/S/ EDWARD R. McCRACKEN* Director
- -------------------------
Edward R. McCracken
/S/ DONALD E. WEEDEN* Director
-----------------
Donald E. Weeden
* By /S/ DONALD MACLEOD
--------------
Donald Macleod, Attorney-in-fact
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
National Semiconductor Corporation:
We consent to incorporation by reference in the Registration
Statements No. 33-48943, 33-54931, 33-55699, 33-55703, 33-55715, 33-61381,
333-09957, 333-23477, 333-36733, 333-53801, and 333-77195 on Form S-8, and
Post Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement
No. 333-38033-01 of National Semiconductor Corporation and subsidiaries of
our report dated June 9, 1999, relating to the consolidated balance sheets of
National Semiconductor Corporation and subsidiaries as of May 30, 1999 and
May 31, 1998, and the related consolidated statements of operations,
comprehensive loss, shareholders' equity, and cash flows for each of the
years in the three-year period ended May 30, 1999 and the related financial
statement schedule, which report appears on page 61 of the 1999 Annual Report
on Form 10-K of National Semiconductor Corporation.
KPMG LLP
Mountain View, California
July 28, 1999
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:
Designation 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 (incorporated by reference from the Exhibits to the Company's
Form 10-K for the fiscal year ended May 25, 1997 filed August 6, 1997)
3.1 Second Restated Certificate of Incorporation of the Company, as amended
incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-3 Registration No. 33-52775, which became effective
March 22, 1994); Certificate of Amendment of Certificate of Incorporation
dated September 30, 1994 (incorporated by reference from the Exhibits to
the Company's Registration Statement on Form S-8 Registration No. 333-09957
which became effective August 12, 1996).
3.2 By-Laws of the Company (incorporated by reference from the Exhibits to
the Company's Registration Statement on Form S-8 Registration No. 333-77195
which became effective April 28, 1999).
4.1 Form of Common Stock Certificate (incorporated by reference from the
Exhibits to the Company's Registration Statement on Form S-3 Registration
No. 33-48935, which became effective October 5, 1992).
4.2 Rights Agreement (incorporated by reference from the Exhibits to the
Company's Registration Statement on Form 8-A filed August 10, 1988).
First Amendment to the Rights Agreement dated as of October 31, 1995
(incorporated by reference from the Exhibits to the Company's Amendment
No.1 to the Registration Statement on Form 8-A filed December 11, 1995).
Second Amendment to the Rights Agreement dated as of December 17, 1996
(incorporated by reference from the Exhibits to the Company's Amendment
No. 2 to the Registration Statement on Form 8-A filed January 17, 1997).
4.3 Indenture dated as of September 15, 1995 (incorporated by reference from
the Exhibits to the Company's Registration Statement on Form S-3
Registration No. 33-63649, which became effective November 6, 1995).
4.4 Form of Note (incorporated by reference from the Exhibits to the
Company's Registration Statement on From S-3 Registration No. 33-63649,
which became effective November 6, 1995).
4.5 Indenture dated as of May 28, 1996 between Cyrix Corporation ("Cyrix")
and Bank of Montreal Trust Company as Trustee (incorporated by reference
from the Exhibits to Cyrix's Registration Statement on Form S-3
Registration No. 333-10669, which became effective August 22, 1996).
4.6 Registration Rights Agreement dated as of May 28, 1996 between Cyrix and
Goldman, Sachs & Co. (incorporated by reference from the Exhibits to
Cyrix's Registration Statement on Form S-3 Registration No. 333-10669,
which became effective August 22, 1996).
10.1 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 Stock Option Agreement between National Semiconductor Corporation and
Cyrix Corporation (incorporated by reference from the Exhibits to the
Company's 10-K for the fiscal year ended May 25, 1997 filed August 6,
1997).
10.3 Management Contract or Compensatory Plan or Arrangement: Executive
Officer Incentive Plan. 1999 Executive Officer Incentive Plan Agreement
(incorporated by reference from the Exhibits to the Company's 10-Q for
the quarter ended August 30, 1998 filed October 2, 1998).
10.4 Management Contract or Compensatory Plan Agreement: Stock Option Plan,
as amended through April 26, 1998 (incorporated by reference from the
Exhibits to the Company's Registration Statement on Form S-8 Registration
No. 333-57029, which became effective June 17, 1998).
10.5 Management Contract or Compensatory Plan or Arrangement: Benefit
Restoration Plan as amended on April 17, 1997 through September 1, 1996
(incorporated by reference from the Exhibits to the Company's Form 10-K for
the fiscal year ended May 25, 1997 filed August 6, 1997).
10.6 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).
10.7 Management Contract or Compensatory Plan or Arrangement: Director Stock
Plan as amended through June 26, 1997 (incorporated by reference from the
Exhibits to the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders held September 26, 1997 filed August 12, 1997).
10.8 Management Contract or Compensatory Plan or Arrangement: Director Stock
Option Plan (incorporated by reference from the Exhibits to the Company's
Registration Statement on Form S-8 Registration No. 333-36733, which became
effective September 30, 1997).
10.9 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).
10.10 Management Contract or Compensatory Plan or Arrangement: Board
Retirement Policy.
10.11 Management Contract or Compensatory Plan or Arrangement: Preferred
Life Insurance Program.
10.12 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).
10.13 Management Contract or Compensatory Plan or Arrangement: Terms of
Employment Offered Brian L. Halla (incorporated by reference from the
Exhibits to the Company's 10-K for the fiscal year ended May 26, 1996 filed
August 5, 1996).
10.14 Management Contract Compensatory Plan or Arrangement: Restricted Stock
Agreement with Brian L. Halla (incorporated by reference from the Exhibits to
the Company's Registration Statement No. 333-09957, which became effective
August 12, 1996).
10.15 Management Contract or Compensatory Plan or Agreement: Long Term
Disability Coverage Plan Summary, National Semiconductor Corporate Executive
Staff (incorporated by reference from the Exhibits to the Company's 10-Q for
the quarter ended August 24, 1997 filed October 6, 1997).
10.16 Management Contract or Compensatory Plan or Agreement: Long Term
Disability Plan Summary, National Semiconductor Executive Employees
(incorporated by reference from the Exhibits to the Company's 10-Q for the
quarter ended August 24, 1997 filed October 6, 1997).
10.17 Management Contract or Compensatory Plan or Agreement: Agreement with
Kevin C. McDonough (incorporated by reference from the Exhibits to the
Company's 10-Q for the quarter ended March 1, 1998 filed April 3, 1998).
Agreement with Kevin C. McDonough as amended July 23, 1998 (incorporated by
reference from the Exhibits to the Company's Form 10-Q for the quarter ended
August 30, 1998 filed October 2, 1998).
10.18 Management Contract or Compensatory Plan or Agreement: Form of Change
of Control Employment Agreement entered into with Executive Officers of the
Company (incorporated by reference from the Company's Form 10-K for fiscal
year ended May 31, 1998 filed August 3, 1998).
10.19 Management Contract or Compensatory Plan or Agreement: Cyrix
Corporation 1988 Incentive Stock Plan (incorporated by reference from the
exhibits to the Post Effective Amendment No. 1 on Form S-8 to Form S-4
Registration No. 333-38033-01, which became effective November 18, 1997).
10.20 Management Contract on Compensatory Plan or Agreement: Settlement
Agreement and General Release with Robert M. Penn dated February 9, 1999
(incorporated by reference from the Company's Form 10-Q for the quarter ended
February 28, 1999 filed April 9, 1999).
11.0 Calculation of Earnings 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 11.0
NATIONAL SEMICONDUCTOR CORPORATION
CALCULATION OF EARNINGS PER SHARE-ASSUMING FULL DILUTION (1)
(In Millions, Except Per Share Amounts)
Year ended
May 30, May 31, May 25,
1999 1998 1997
Net income (loss), as reported $(1,009.0) $ (98.6) $ 1.6
Adjustment for interest on convertible notes 12.7 16.1 9.2
--------- -------- -----
Net income (loss) $ (997.2) $ (82.5) $10.8
========= ======== =====
Number of shares:
Weighted-average common shares outstanding 167.1 163.9 156.1
Effect of dilutive securities:
Stock options 0.6 3.6 3.0
Shares issuable from assumed
conversion of convertible notes 6.0 7.7 7.6
----- ----- -----
Weighted-average common and potential common
shares assuming full dilution 173.7 175.2 166.7
===== ===== =====
Diluted earnings (loss) per share:
Net income $ (5.74)(1)$(0.47)(1)$ 0.06(1)
- -------------------------------------------
For fiscal 1999, 1998 and 1997, this calculation is submitted in
accordance with Regulation S-K Item 601 (b)(11) although it is contrary to
paragraph 13 of Statement of Financial Accounting Standards No. 128 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 30, 1999, all of which are included in
the consolidated financial statements of the Company:
Other Country Percent of
State or Other In Which Voting
Jurisdiction Subsidiary Securities Owned
Name of Incorporation is Registered by National
- ---- ---------------- ------------- ----------------
ComCore Semiconductor, Inc. California 100%
Cyrix Corporation Delaware 100%
Mediamatics, Inc. California 100%
National Semiconductor
International, Inc. Delaware 100%
National Semiconductor
Netsales, Inc. Delaware 100%
National Semiconductor
(Maine), Inc. Delaware Maine 100%
ASIC II Limited Hawaii 100%
National Semiconductor B.V.
Corporation Delaware 100%
National Semiconductor
France S.A.R.L. France 100%
National Semiconductor GmbH Germany Belgium 100%
National Semiconductor
(I.C.) Ltd. Israel 100%
National Semiconductor S.r.l. Italy 100%
National Semiconductor A.B. Sweden 100%
National Semiconductor
(U.K.) Ltd. Great Britain Denmark/Ireland 100%
Finland/Norway/Spain
National Semiconductor (U.K.)
Pension Trust Company Great Britain 100%
National Semiconductor
Benelux B.V. Netherlands 100%
National Semiconductor B.V. Netherlands 100%
National Semiconductor
International B.V. Netherlands 100%
National Semiconductor
International Finance S.A. Switzerland 100%
Natsem India Designs Pvt. Ltd. India 100%
National Semiconductor
(Australia) Pty.Ltd. Australia 100%
National Semiconductor
(Hong Kong) Limited Hong Kong 100%
National Semiconductor
(Far East) Limited Hong Kong Taiwan 100%
NSM International Limited Hong Kong 100%
National Semiconductor
Services Hong Kong Limited Hong Kong 100%
National Semiconductor
Japan Ltd. Japan 100%
N.S. Microelectronics Co., Ltd. Japan 49%
National Semiconductor
SDN. BHD. Malaysia 100%
National Semiconductor
Technology SDN.BHD. Malaysia 100%
National Semiconductor
Pte. Ltd. Singapore 100%
National Semiconductor
Asia Pacific Pte.Ltd. Singapore 100%
National Semiconductor
Singapore Manufacturer
Pte.Ltd. Singapore 100%
Shanghai National
Semiconductor People's Republic
Technology Limited of China 95%
National Semiconductor
Korea Limited Korea 100%
National Semiconductor
Canada Inc. Canada 100%
National Semiconductores
do Brazil Ltda. Brazil 100%
National Semicondutores da
America do Sul Brazil 100%
Electronica NSC de Mexico,
S.A. de C.V. Mexico 100%
ASIC Limited Bermuda 100%
National Semiconductor
(Barbados) Limited Barbados 100%
Cyrix Export Sales Corporation Barbados 100%
Exhibit 10.3
NATIONAL SEMICONDUCTOR CORPORATION
Executive Officer Incentive Plan
(as adopted effective May 29, 1994)
1. Objectives.
The National Semiconductor Corporation Executive Officer Incentive Plan (the
"Plan") is designed to retain executives and reward them for making major
contributions to the success and profitability of the Company. These
objectives are accomplished by making incentive Awards under the Plan and
providing participants with a proprietary interest in the growth and
performance of the Company.
2. Definitions.
(a) Award - The Award to a Plan participant pursuant to terms and
conditions of the Plan.
(b) Award Agreement - An agreement between the Company and a
participant that sets forth the terms, conditions and limitations applicable
to an Award.
(c) Board - The Board of Directors of National Semiconductor
Corporation.
(d) Code - The Internal Revenue Code of 1986, as amended from time to
time.
(e) Committee - The Stock Option and Compensation Committee of the
Board, or such other committee of the Board that is designated by the Board
to administer the Plan. The Committee shall be constituted to permit the
Plan to comply with the requirements of Section 162(m) of the Code and any
regulations issued thereunder and shall initially consist of not less than
three members of the Board.
(f) Company - National Semiconductor Corporation ("NSC") and any other
corporation in which NSC controls, directly or indirectly, fifty percent
(50%) or more of the combined voting power of all classes of voting
securities.
(g) Executive Officer - Any officer of the Company subject to the
reporting requirements of Section 16 of the Securities and Exchange Act of
1934 ("Exchange Act").
3. Eligibility.
Only Executive Officers are eligible for participation in the Plan.
4. Administration.
The Plan shall be administered by the Committee which shall have full power
and authority to construe, interpret and administer the Plan. Each decision
of the Committee shall be final, conclusive and binding upon all persons.
Prior to the beginning of each fiscal year, the committee shall:
(i) determine which Executive Officers are in positions in which they are
likely to make substantial long term contributions to the Company's success
and therefore participate in the Plan for the fiscal year; and (ii) to which
Award level each participant is assigned.
5. Performance Goals.
(a) The Committee shall establish performance goals applicable to a
particular fiscal year prior to its start, provided, however, that such goals
may be established after the start of the fiscal year but while the outcome
of the performance goal is substantially uncertain if such a method of
establishing performance goals is permitted under proposed or final
regulations issued under Code Section 162 (m).
(b) Each performance goal applicable to a fiscal year shall identify
one or more business criteria that is to be monitored during the fiscal year.
Such business criteria include any of the following:
Net income Cash flow
Earnings per share Stockholder return
Debt reduction Revenue
Return on investment Revenue growth
Return on net assets Manufacturing improvements and/or
Operating ratio efficiencies
Quality improvements Return on equity
Market share Cycle time reductions
Profit before tax Customer satisfaction
Size of equity improvements
Reduction in product Return on research and
returns development investment
Reduction in product Customer request date
Strategic positioning performance
programs Human resource excellence
Compensation/review programs
program improvements New product releases
Business/information
systems improvements
(c) The Committee shall determine the target level of performance
that must be achieved with respect to each criteria that is identified
in a performance goal in order for a performance goal to be treated
as attained.
(d) The Committee may base performance goals on one or more of the
foregoing business criteria. In the event performance goals are based on more
than one business criteria, the Committee may determine to make Awards upon
attainment of the performance goal relating to any one or more of such
criteria, provided the performance goals, when established, are stated as
alternatives to one another.
6. Awards.
(a) The Committee shall make Awards only in the event the Committee
certifies in writing prior to payment of the Award that the performance goal
or goals under which the Award is to be paid has or have been attained.
(b) The maximum Award payable under this Plan to any participant for
any fiscal year shall be the lesser of $2 million (two million dollars) or
200% of the participant's annualized base remuneration at the end of the
fiscal year.
(c) The Committee in its sole and absolute discretion may reduce but
not increase the amount of an Award otherwise payable to a participant upon
attainment of the performance goal or goals established for a fiscal year.
(d) A participant's performance must be satisfactory, regardless of
Company performance, before he or she may be paid an incentive Award.
(e) To the extent permitted under regulations issued under Code Section
162(m), in the event the performance goals for a fiscal year are attained,
the Committee, in its discretion, may grant all or such portion of an
incentive Award for the year as it deems advisable to a participant
(or his or her beneficiary in the case of his death) who is employed or
who is promoted to an Executive Officer position covered by this Plan
during the year, or whose employment is terminated during the fiscal year, or
who suffers a permanent disability.
7. Payment of Awards.
(a) Each participant shall be paid the Award solely in cash as soon as
practicable following grant of the Award by the Committee.
(b) Prior to the end of the fiscal year, each participant may elect to
have the payment of all or a portion of his or her incentive Award, if any,
for the year deferred until the earliest to occur of his or her
retirement, death, disability, resignation, termination of employment or
other date selected by the participant. The election shall be irrevocable
and shall be made on a form prescribed by the Committee. The election
shall apply only to that fiscal year. If a participant has not made
an election, any incentive Award for that year shall be paid pursuant
to Section 7(a).
(c) The Company shall establish and maintain book entry accounts for
each participant who has elected deferral. Interest shall accrue on the
deferred incentive Award to the date of distribution, and shall be credited
to the participant deferred accounts annually at the time Awards are paid
until payment is actually made. Interest will be set at the rate for long
term A-rated corporate bonds, as reported by the investment banking firm
of Salomon Brothers Inc. of New York City (or such other investment banking
firm as the Committee may specify during the first week of each calendar
year). The interest rate will be reset at the beginning of each calendar
year.
(d) The deferred incentive Awards are an unfunded obligation of the
Company.
(e) At the time of termination of employment by reason of retirement or
disability of a participant who has elected to defer an incentive Award, the
participant may irrevocably elect to have the balance of his or her deferred
Award plus accrued interest paid to him or her in periodic, annual
installments over a period of ten (10) years. Payments shall commence or be
made annually on a day that is within thirty (30) days of the anniversary
date following the participant's retirement or disability.
(f) The Committee, in its sole discretion, may accelerate the payment
of the unpaid balance of a participant's deferred Award upon its
determination that the participant has incurred a severe and unexpected
financial hardship. The Committee in making its determination may consider
such factors and require such information as it deems appropriate.
8. Tax Withholding.
The Company shall have the right to deduct applicable taxes from any Award
payment.
9. Amendment, Modification, Suspension
or Discontinuance of this Plan.
The Committee may amend, modify, suspend or terminate the Plan for the purpose
of meeting or addressing any changes in legal requirements or for any other
purpose permitted by law. The Committee will seek stockholder approval of an
amendment if determined to be required by or advisable under regulations of
the Securities and Exchange Commission or the Internal Revenue Service, the
rules of any stock exchange on which the Company's stock is listed or other
applicable law or regulation. No amendment, suspension, termination or
discontinuance may impair the right of a participant or his or her designated
beneficiary to receive any Award accrued prior to the later of the date of
adoption or the effective date of such amendment, suspension, termination or
discontinuance.
10. Termination of Employment.
If the employment of a participant terminates, other than pursuant to
paragraphs (a) and (b) of this Section 10, all unpaid Awards shall be
cancelled immediately, unless the Award Agreement provides otherwise.
(a) Retirement - When a participant's employment terminates as a result
of retirement, the Committee may permit Awards to continue in effect beyond
the date of retirement in accordance with the applicable Award Agreement and
the vesting of any Award may be accelerated.
(b) Death or Disability of a Participant.
(i) In the event of a participant's death, the participant's estate
or beneficiaries shall have a period up to the expiration date specified in
the Award Agreement within which to receive any outstanding Award held by the
participant under such terms as may be specified in the applicable Award
Agreement. Rights to any such outstanding Awards shall pass by will or the
laws of descent and distribution in the following order: (a) to beneficiaries
so designated by the participant; if none, then (b) to a legal representative
of the participant; if none, then (c) to the persons entitled thereto as
determined by a court of competent jurisdiction. Awards so passing shall be
made at such times and in such manner as if the participant were living.
(ii) In the event a participant is disabled, Awards and rights to any
such Awards may be paid to the participant.
(iii) After the death or disability of a participant, the Committee
may in its sole discretion at any time (a) terminate restrictions in Award
Agreements; (b) accelerate any or all installments and rights; and (c) instruct
the Company to pay the total of any accelerated payments in a lump sum to the
participant, the participant's estate, beneficiaries or representative.
(iv) In the event of uncertainty as to interpretation of or
controversies concerning this paragraph (b) of Section 10, the Committee's
determinations shall be binding and conclusive.
11. Cancellation and Rescission of Awards.
Unless the Award Agreement specifies otherwise, the Committee may cancel any
unpaid Awards at any time if the participant is not in compliance with all
other applicable provisions of the Award Agreement and the Plan. Awards may
also be cancelled if the Committee determines that the participant has at any
time engaged in activity harmful to the interest of or in competition with
the Company.
12. Nonassignability.
No Award or any other benefit under the Plan shall be assignable or
transferable by the participant during the participant's lifetime.
13. Unfunded Plan.
The Plan shall be unfunded. Although bookkeeping accounts may be established
with respect to participants, any such accounts shall be used merely as a
bookkeeping convenience. The Company shall not be required to segregate any
assets that may at any time be represented by cash, nor shall the Plan be
construed as providing for such segregation, nor shall the Company nor the
Board nor the Committee be deemed to be a trustee of any Award under the
Plan. Any liability of the Company to any participant with respect to an
Award under the Plan shall be based solely upon any contractual obligations
that may be created by the Plan and any Award Agreement; no such obligation
of the Company shall be deemed to be secured by any pledge or other
encumbrance on any property of the Company. Neither the Company nor the
Board nor the Committee shall be required to give any security or bond for
the performance of any obligation that may be created by the Plan.
14. No Right to Continued Employment.
Nothing in this Plan shall confer upon any employee any right to continue in
the employ of the Company or shall interfere with or restrict in any way the
right of the Company to discharge an employee at any time for any reason
whatsoever, with or without good cause.
15. Effective Date.
The Plan shall become effective on May 29, 1994. The Committee may terminate
or suspend the Plan at any time. No awards may be made while the Plan is
suspended or after it is terminated.
Exhibit 10.10
Retirement Policy - Board of Directors
Any person who was a non-employee director of the Company on June 26,
1997 with six or more years service as a director who retires from his
directorship is compensated for a term of fifty percent of the years served
by such director (but for not more than twelve years) through an annual
payment equal to the base annual retainer fee paid to the Company's directors
for the retiring director's last year of service.
There is no minimum age for retirement of directors, but any retiring
director must have served a minimum of three years to be eligible for
retirement benefits.
The mandatory retirement age for directors is 70.
The Company maintains and pays for a medical policy for its former
chairman who retired in 1995 after thirty years of service. No other
directors are entitled to medical coverage or insurance upon retirement
from the board.
Exhibit 10.11
PREFERRED LIFE INSURANCE PROGRAM
THE PLAN
The Preferred Life Insurance program is an executive bonus benefit where
each executive owns a permanent life insurance policy on his life. The
program has been designed so that cost (in most cases) to both National
Semiconductor and each executive is equivalent to the current group life
insurance plan in force. The preferred insurance plan provides executives
the following benefits:
o Enhanced life insurance at cost comparable to term life insurance
o Enhanced flexibility for planning purposes (for details, see enclosed
brochures)
o Policy can be continued upon retirement or termination (i.e., complete
portability)
o Can have a paid-for policy at retirement (additional premium required)
o The ability to have third-party ownership (i.e., Irrevocable Life
Insurance Trust)
THE PRODUCT
UltraSpanPrime, an innovative product blending the best features of term
insurance and universal life insurance designed to provide you with
exceptional value at a low cost.
THE COMPANY
Chubb Life Insurance Company of America is a member of the Chubb Group of
Insurance Companies, one of the largest diversified financial organizations
in North America.
Admitted Assets: 1.65 Billion
Standard & Poors Rating: AAA (Superior)
A.M. Best Ratings: A+ (Superior)
Weiss Research: A- (Recommended)
Capital & Surplus is equal to 19.4% of assets, one of the highest in the
industry.
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 1999 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
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//s// BRIAN L. HALLA June 24, 1999
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Brian L. Halla
//s// GARY P. ARNOLD July 12, 1999
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Gary P. Arnold
//s// ROBERT J. FRANKENBERG June 24, 1999
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Robert J. Frankenberg
//s// E. FLOYD KVAMME June 24, 1999
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E. Floyd Kvamme
//s// MODESTO A. MAIDIQUE June 24, 1999
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Modesto A. Maidique
//s// EDWARD R. McCRACKEN June 24, 1999
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Edward R. McCracken
//s// DONALD E. WEEDEN June 24, 1999
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Donald E. Weeden
//s// DONALD MACLEOD June 24, 1999
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Donald Macleod
//s// LEWIS CHEW July 7, 1999
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Lewis Chew