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 31, 1998
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. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of June 28, 1998, was approximately $2,196,761,084.
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 28, 1998, was 165,453,237.
DOCUMENTS INCORPORATED BY REFERENCE
Document Location 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 25, 1998.
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 Proxy Statement for the Annual Meeting of Part IV
Stockholders held 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 Part IV
Form S-3, Registration No. 333-10669, which became
effective August 22, 1996.
Portions of the Proxy Statement for the Annual Meeting Part IV
held September 26, 1997.
Portions of the Company's Post Effective Amendment No. 1 on Part IV
Form S-8 to Form S-4 Registration No. 333-38033-01,
which became effective November 18, 1997.
The Index to Exhibits is located on pages 66-68.
PART I
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ITEM 1. BUSINESS
General
National Semiconductor Corporation, including its subsidiaries
("National" or the "Company"), designs, develops, manufactures and
markets a wide variety 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 personal computing, wireless
communications, flat panel and CRT display, power management, local and
wide area networks, automotive, consumer and military aerospace markets.
National's strategic focus is to develop systems-on-a-chip in the form
of highly integrated application specific semiconductor products for the
personal systems, communications and consumer markets. National was
incorporated under the laws of the state of Delaware in 1959.
In November 1997, Nova Acquisition Corp., a subsidiary of the
Company, merged with Cyrix Corporation ("Cyrix") and Cyrix became a
wholly owned subsidiary of the Company. Cyrix designs, develops and
markets X86 software-compatible microprocessors of original design for
the personal computer marketplace. The Company believes that access to
Cyrix's X86 microprocessor cores and the combination of technologies
resulting from the merger bring together many of the key enabling
technologies necessary to achieve its system-on-a-chip strategy. The
merger was accounted for as a pooling of interests.
During fiscal 1998, the Company also completed the acquisitions of
Future Integrated Systems, Inc. ("FIS"), a supplier of graphics hardware
and software products for the personal computer market, and certain
assets and liabilities of Gulbransen, Inc. related to its digital audio
technology business. The Company believes FIS design expertise will
expand its ability to integrate advanced graphics capabilities into
system-on-a-chip solutions for the personal computer market and the
Gulbransen audio compressor technology will expand its ability to
provide digital audio building blocks for system-on-a-chip solutions.
The Company also completed the acquisition of ComCore
Semiconductor, Inc. ("ComCore") in late fiscal 1998. ComCore, a
designer 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 integrated
circuits. This technology is expected to add advanced design and
technology capabilities to the Company's existing analog, mixed-signal
and digital expertise. The Company believes that this technology will
help position it as a leader in the application of advanced DSP
technology for communications solutions.
The Company operates in one industry segment. For information with
respect to sales and identifiable assets for National's geographic
segments, refer to the information contained in Note 12 of the Financial
Statements in Part 8 of this Report under the caption "Industry and
Geographic Segment Information."
Products
Semiconductors are integrated circuits (in which a number of transistors
and other elements are combined to form a more complicated circuit) or
discrete devices (such as individual transistors). In an integrated
circuit, various elements are fabricated in a small area or "chip" of
silicon, which is then encapsulated in plastic, ceramic or other
advanced forms of packaging and connected to a circuit board or
substrate.
National manufactures a broad variety of analog intensive, mixed-
signal and digital products. National's products are used in numerous
commercial applications, including personal systems, telecommunications
and communications products, data processing, automotive, local and wide
area networking and other industrial applications as well as consumer
applications.
The Company is a leading supplier of analog and mixed-signal
products, serving both broad based markets such as the industrial and
consumer market, and more narrowly defined markets such as ethernet
local area networks, wireless communications and automotive. While no
precise industry standard for analog and mixed-signal exists, the
Company considers products which process analog information, convert
analog to digital or convert digital to analog as analog and mixed-
signal products. Analog and mixed-signal products include amplifiers
and regulators, power monitors and line drivers, products optimized for
audio, video, automotive or display applications and data acquisition
products. Other Company products with significant digital to analog or
analog to digital capacity include products for local area networks
("LAN"), wireless networking and wireless communications, as well as
products for personal systems and personal communications such as its
office automation and "Super I/O" offerings. Super I/O (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
into three business groups that include the Analog Group, the
Communications and Consumer Group, and the Cyrix 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.
With its pool of talented analog designers, the Analog Group develops
and manufactures a wide range of building blocks such as high
performance operational amplifiers, power management circuits, data
acquisition circuits and interface circuits. In addition, the Analog
Group produces the COP8 family of microcontrollers, used in a wide
variety of automotive and industrial applications. The Group is heavily
focused on using analog circuits as the beginning point for forward
integration for systems-on-a-chip aimed at the desktop, notebook,
cellular telephone and information appliance markets. Current examples
include scanners on a chip, systems health monitoring and integrated
power management systems. The Analog Group has a large and diverse
global customer base, approaching 80,000 worldwide. Approximately 50
percent of the analog business is done through authorized distributors.
Communications and Consumer Group ("CCG"): Communication is the
enabler of the Internet. National through CCG is a leading
communications integrated circuit supplier, focusing in two major market
segments, wireless communications and LAN.
The Group's wireless circuits perform the radio, baseband
controller, power management and other related functions primarily in
the cellular and cordless telephone markets. Key market segments
include Global System for Mobile Communication (GSM), Digital Enhanced
Cordless Telephone (DECT), Code Division Multiple Access (CDMA) as well
as other fast growing wireless markets.
In the past, National's efforts in LAN have enabled CCG to enjoy a
significant market position in the current 10/100 Mb Ethernet market.
The acquisition of ComCore is intended to expand National's LAN products
into the Gigabit Ethernet market.
Cyrix Group: The Cyrix Group, which was formerly known as the
Personal Systems Group, utilizes National's mixed-signal expertise and
high speed digital technologies for the development of integrated and
stand alone central processing units, system logic chip set solutions
for Cyrix based microprocessors, information access and multimedia
appliances, and a portfolio of peripheral product solutions. The Cyrix
Group is a supplier of X86 microprocessors, Super I/O products and
system logic for desktop and notebook personal computers. The Cyrix
Group also includes Cyrix and Mediamatics, Inc. ("Mediamatics").
Cyrix supplies high-performance microprocessors to the personal
computer industry with the MediaGXTM and MIITM products. The
proprietary MediaGXTM microprocessor is a total system solution which
integrates the graphics and audio functions, the personal computer
interface and the memory controller into one integrated circuit. This
enables extremely cost effective system solutions. The MIITM utilizes
advanced design techniques to deliver comparable performance to Intel's
Pentium-II class microprocessor products at a significantly lower cost.
The MIITM microprocessor is compatible with MMX technology and features
a quadrupled (64-Kbyte) internal cache, enhanced memory management and
other architectural and performance features. These enhancements enable
the MIITM microprocessor to deliver richer colors, high-resolution video
and 3-D graphics at greater speeds. Additionally, the MIITM
microprocessor is able to support new business communications
technologies such as video conferencing and voice recognition software.
Within the Cyrix Group, Mediamatics is also responsible for
providing technology required in executing National's information
appliance strategy. This includes applications such as digital
versatile disc ("DVD") players, set-top-box, video servers and
convergence appliances. Using its balanced hardware/software system
approach and its expertise in video and audio technology, Mediamatics is
providing cost-effective solutions required to meet the needs of this
emerging marketplace. Its software DVD player (DVD ExpressTM) has
already won designs with major personal computer original equipment
manufacturers and is optimized for the Cyrix MIITM processor. The
Pantera-DVD decoder chip, National's first system-on-a-chip product, is
being designed into several DVD players which will become available in
the market later this year. The Pantera architecture is also the
building block for other video and audio decoder products.
Aside from these operating groups, the Company's corporate
structure also includes centralized Worldwide Sales and Marketing, the
Central Technology and Manufacturing Group and the Core Technology
Group. Worldwide Sales and Marketing is organized around the four major
regions of the world in which the Company operates: the Americas,
Europe, Japan and Asia Pacific region and is comprised of the Company's
worldwide sales and marketing organization. Central Technology and
Manufacturing manages production and technology operations. The group
is responsible for two of the Company's strategic imperatives, state-of-
the-art process technology and world-class manufacturing, that have been
established as the delivery vehicles to enable the Company to develop
products constituting systems-on-a-chip. The technology operations
include process technology, the central research arm of the Company,
which provides pure research, process development and initial product
prototyping necessary for many of the Company's core production
processes and leading edge products. The Core Technology Group includes
development technology, which selects and implements integrated Computer
Aided Design ("CAD") tools for designing, performing layout, simulating
and testing the logical and physical representation of new products
before they are actually produced. The group is also responsible for
providing the range of process cores and support tools and software
required by all of National's product lines, to service the range of
platforms and operating system environments for markets for information
appliances.
Marketing and Sales
The Company markets its products throughout the world to original
equipment manufacutrers ("OEMs") by way of a direct sales force. Major
OEMs include International Business Machines Corporation ("IBM"),
Hewlett-Packard Company, Compaq Computer Corporation, 3COM Corporation,
Motorola, Inc. and Dell Computer Corporation as well as Robert Bosch
GmbH, Siemens AV, Samsung Group, Telefonaktiebolaget L.M. Ericsson and
others. In addition to its direct sales force, National uses
distributors in all four of its business regions, and as noted above,
approximately 50 percent of the analog business is done through
distributors.
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 customer's application. These engineers also help identify emerging
markets for new products and are supported by Company design centers in
the field or at manufacturing sites.
In line with industry practices, National generally credits
distributors for the effect of price reductions on their inventory of
National products and under specific conditions repurchases products
that have been discontinued by the Company.
Customers
National is not dependent upon any single customer, the loss of which
would have a material effect on the Company. In addition, no one
customer or distributor accounted for 10 percent or more of total net
sales in fiscal 1998, 1997 and 1996.
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. However, the
Company did not experience the typical seasonal peak in revenue in the
fourth quarter of fiscal 1998, as business conditions for the
semiconductor industry and the Company significantly weakened in the
second half of fiscal 1998, in part due to the recent economic downturn
in the Asia Pacific region.
Manufacturing
The design of semiconductor and integrated circuit products is
determined by customer requirements and general market trends and needs.
These designs are compiled and digitized by state of the art design
equipment and then transferred to silicon wafers in a series of complex
precision processes which include oxidation, lithography, chemical
etching, diffusion, deposition, implantation and metallization.
Production of integrated circuits continues with wafer sort, where the
wafers are tested and separated into individual circuit devices;
assembly, where tiny wires are used to connect the electronic circuits
on the device to the stronger metal leads or "prongs" of the package in
which the device is encapsulated for protection; and final test, where
the devices are subjected to a series of vigorous tests using
computerized circuit testers and for certain applications, environmental
testers such as burn-in ovens, centrifuges, temperature cycle testers,
moisture resistance testers, salt atmosphere testers and thermal shock
testers.
The Company's product design and development activities are
conducted predominantly in the United States. Wafer fabrication is
concentrated in three facilities in the United States and in a facility
in Scotland. Nearly all product assembly and final test operations are
performed in facilities in Southeast Asia. For capacity utilization and
other economic reasons, National employs subcontractors to perform
certain manufacturing functions in the United States, Southeast Asia and
Japan. These arrangements include manufacturing agreements with 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 and the Cyrix manufacturing agreement
with IBM which provides for IBM's Microelectronics division to
manufacture wafers of Cyrix-designed products for sale to Cyrix through
December 1999, 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 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 for increasingly powerful integrated circuits.
Raw Materials
National's manufacturing processes make use of certain key raw materials
critical to its products. These include silicon wafers, certain
chemicals and gases, ceramic and plastic packaging materials and various
precious metals. The Company also is increasingly relying on
subcontractors to supply finished or semi-finished products which the
Company 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. Process capability is developed and prototyped at the Company's
8-inch pilot wafer fabrication facility located in Santa Clara,
California, and product design is done by the operating divisions. R&D
expenses were $482.0 million for fiscal 1998, $404.5 million for fiscal
1997 and $379.0 million for fiscal 1996 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 ($95.2 million), FIS
($2.5 million) and the Gulbransen digital audio technology business
($5.2 million) in fiscal 1998, $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, and $11.4 million related to
the acquisition of Sitel Sierra, B.V. in fiscal 1996, which have been
separately presented in the consolidated statements of operations as
special items. For fiscal 1998, the Company expended 29 percent of its
R&D effort toward the development of process technology and the
remaining 71 percent for new product development. This represents an
increase of 33 percent and 21 percent in fiscal 1998 over fiscal 1997 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 31, 1998, National employed approximately 13,000 people of whom
approximately 6,500 were employed in the United States, 1,700 in Europe,
4,600 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 1998 and 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., Philips Electronics NV, NEC Corporation and Toshiba Corporation.
National also competes with a large number of companies that target
particular markets such as Linear Technology Corporation, Analog
Devices, Inc., Advanced Micro Devices, Inc. ("AMD"), LSI Logic
Corporation, SGS-Thompson Microelectronics SA, Intel Corporation
("Intel"), Cirrus Logic, Inc. and Texas Instruments Incorporated.
Competition is based on design and quality of the products, product
performance, price and service, with the relative importance of such
factors varying among products and markets. The Company is currently
faced with growing competition in the LAN market from both large
companies such as Intel and Lucent Technologies Inc. as well as other
smaller companies including Broadcom Corporation, Galileo Technology
Ltd. and Level One Communications, Inc. With the Cyrix 6x86 and MIITM
products, the Company is also faced with competition in the personal
computer market for socket-seven compatible microprocessor products
where other large competitors such as Intel, AMD and IBM significantly
influence the price and availability of products. The microprocessor
business is characterized by short product cycles, intense price
competition and rapid advances in product design and process technology
resulting in rapidly occurring product obsolescence. There can be no
assurance that the Company will be able to compete successfully in the
future against existing or new competitors or that the Company's
operating results will not be adversely affected by increased price
competition. The Company is also faced with competition from several of
its customers, particularly customers in the networking and personal
systems industries.
International Operations
National conducts a substantial portion of its operations outside the
United States and its business is subject to risks associated with many
factors beyond its control. These factors include fluctuations in
foreign currency rates, instability of foreign economies or their
emerging infrastructures to support demanding manufacturing
requirements, government changes and U.S. and foreign laws and policies
affecting trade and investment. Although the Company has not
experienced any materially adverse effects with respect to its foreign
operations arising from such factors, the Company has been impacted in
the past by one or more of these factors and could be impacted in the
future by such factors. In addition, although the Company seeks to
hedge its exposure to currency exchange rate fluctuations, the Company's
competitive position relative to non-U.S. suppliers can be affected by
the exchange rate of the U.S. dollar against other currencies,
particularly the Japanese yen.
Environmental Regulations
National believes that compliance with federal, state and local laws or
regulations which have been enacted or adopted to regulate the
environment has not had, nor will have, a material effect upon the
Company's capital expenditures, earnings, competitive or financial
position. (Also see Item 3, Legal Proceedings.)In addition to the risks
discussed above, further discussion of other risks and uncertainties
that may affect the Company's business is included in the Outlook
section of "Management's Discussion and Analysis" appearing in Item 7.
ITEM 2. PROPERTIES
National's principal administrative and research facilities are located
in Santa Clara, California. The major concentrations of wafer
fabrication and product research and development capability are located
at the Company's plants in South Portland, Maine; Arlington, Texas; and
Greenock, Scotland. The Company also operates small design facilities
in various locations in the U.S. including Atlanta, George; Calabasas,
California; Fort Collins, Colorado; Fremont, California; Grass Valley,
California; Longmont, Colorado; Mesa, Arizona; Newport Beach,
California; Redmond, Washington; Richardson, Texas; Salem, New
Hampshire; Salt Lake City, Utah; San Diego, California; Tacoma,
Washington; Tucson, Arizona; and overseas locations including the United
Kingdom, Israel, Germany and the Netherlands.
The Company conducts significant manufacturing offshore. One of
National's largest wafer fabrication facilities is in Greenock,
Scotland. Assembly and test functions are performed primarily in
Southeast Asia. These facilities are located in Melaka, Malaysia and
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 certain
notes assumed by the Company in the Cyrix transaction.
Although the Company has brought on new manufacturing capacity in
fiscal 1998 with the completion of its new wafer manufacturing facility
in Maine, the Company experienced a significant decline in wafer
fabrication capacity utilization by the end of fiscal 1998 due to the
slowdown in new orders experienced in the second half of fiscal 1998,
which was affected by economic uncertainties in the Asia Pacific region
and unstable conditions in the personal computer market. Wafer
fabrication capacity utilization for fiscal 1998 was 76 percent compared
to 73 percent in fiscal 1997; however, wafer fabrication capacity
utilization declined to 51 percent in the last month of fiscal 1998.
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. 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.
On July 9, 1996, the Company received notices of assessment from
the Malaysian Inland Revenue Department relating to the Company's
manufacturing operations in Malaysia. The assessments total
approximately $146.9 million Malaysian ringgits ($39.2 million)
(exclusive of interest). The issues giving rise to the assessments
relate to intercompany transfer pricing, primarily for fiscal 1993. The
Company believes the assessments are without merit and has been
contesting them administratively. The Company believes it has adequate
tax reserves to satisfy the ultimate resolution of the assessments.
On April 22, 1988, the District Director of the United States
Customs Service, San Francisco, issued a Notice of Proposed Action and a
Pre-penalty Notice to the Company alleging underpayment of duties of
approximately $19.5 million on merchandise imported from the Company's
foreign subsidiaries during the period from June 1, 1979 to March 1,
1985. The Company filed an administrative appeal in September 1988. On
May 23, 1991, the District Director revised the Customs action and
issued a Notice of Penalty Claim and Demand for Restoration of Duties,
reducing the alleged underpayment of duties for the same period to
approximately $6.9 million; the alleged underpayment was subsequently
reduced on April 22, 1994 to approximately $3.6 million. The revised
alleged underpayment could be subject to penalties that may be computed
as a multiple of the underpayment. The Company filed an administrative
petition for relief in October 1991 and a supplemental petition for
relief in October 1994. 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. 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.
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.
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.
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 60
Technology and Manufacturing Group
Michael Bereziuk (2) Senior Vice President, Worldwide 45
Marketing and Sales
Jean-Louis Bories (3) Senior Vice President, Core 43
Technology Group
Patrick J. Brockett (4) Executive Vice President and 50
General Manager, Analog Group
John M. Clark III (5) Senior Vice President, General 48
Counsel and Secretary
Brian L. Halla (6) Chairman of the Board, President 51
and Chief Executive Officer
Donald Macleod (7) Executive Vice President, Finance 49
and Chief Financial Officer
Kevin C. McDonough (8) Senior Vice President, Cyrix 48
Corporation and Co-General Manager,
Cyrix Group
Gobi R. Padmanabhan (9) Senior Vice President, Technology, 52
Research and Development
Robert M. Penn (10) Senior Vice President and General 61
Manager, Communications and Consumer
Group
Richard L. Sanquini (11) Senior Vice President and Co-General 63
Manager, Cyrix Group
Richard A. Wilson (12) Vice President, Human Resources 55
* all information as of May 31, 1998
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 as 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, 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. McDonough joined the Company as Senior Vice President,
Cyrix Corporation and Co-General Manager, Cyrix Group at the time of the
Company's completion of the merger with Cyrix Corporation in November
1997 and held the position of Senior Vice President of Engineering and
Member of the Office of President of Cyrix Corporation at that time.
Mr. McDonough originally joined Cyrix Corporation in 1989 as Vice
President of Engineering.
(9) Mr. Padmanabhan joined the Company as Senior Vice President,
Technology, Research and Development in June 1996 and was made an
Executive Officer of the Company in September 1997. Prior to joining
the Company, he had held positions at LSI Logic Corporation as Senior
Director, Research and Development; and Director, Research and
Development.
(10) Mr. Penn joined the Company in December 1993. Prior to
becoming Senior Vice President and General Manager of the Communications
and Consumer Group in October 1997, he held the position of Senior Vice
President and General Manager of the Analog Group; and Vice President
and General Manager of the WAN Division. Prior to joining the Company,
Mr. Penn served as an executive level consultant with EMS Consulting and
held senior management positions at Gould Inc.'s Semiconductor Division
and American Microsystems, Inc.
(11) 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 of the Cyrix Group in October 1997 and
Senior Vice President and Co-General Manager, Cyrix Corporation upon
completion of the Company's merger with Cyrix Corporation in November
1997, he held positions at the Company as 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.
(12) Mr. Wilson joined the Company in February 1996 as Vice
President, Human Resources. Prior to joining the Company, he held the
position of Vice President, Human Resources at MCI Network Services for
5 1/2 years.
Executive officers serve at the pleasure of the Company's Board of
Directors. There is no family relationship among any of the Company's
directors and executive officers.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
During fiscal 1998, the Company did not sell any securities that
were not registered under the Securities Act.
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 17, 1998 was $14.06. At July 17, 1998, the number of
record holders of the Company's common stock was 12,120.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from
audited consolidated financial statements and has been restated to
combine Cyrix for all periods presented. 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
In Millions,Except May 31, May 25, May 26, May 28, May 29,
Per Share Amounts 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
OPERATING RESULTS
Net sales $2,536.7 $2,684.4 $2,833.4 $2,625.5 $2,413.8
Operating costs
and expenses 2,683.6 2,692.1 2,619.3 2,285.6 2,098.0
-------------------------------------------------
Operating income (loss) (146.9) (7.7) 214.1 339.9 315.8
Interest income, net 22.3 6.1 9.4 15.4 11.4
Other income, net 24.9 18.7 47.5 31.3 6.7
-------------------------------------------------
Income (loss) before
income taxes and
cumulative effect of
accounting change (99.7) 17.1 271.0 386.6 333.9
Income tax expense
(benefit) (1.1) 15.5 70.0 84.8 55.2
-------------------------------------------------
Income (loss) from
continuing operations
before cumulative effect
of accounting change $(98.6) $1.6 $201.0 $301.8 $278.7
=================================================
Net income (loss) $(98.6) $1.6 $201.0 $301.8 $283.6
=================================================
Net income (loss) used
in basic earnings per
share calculation
(reflection preferred
dividends, if applicable):
Income (loss) from
continuing operations
before cumulative effect
of accounting change $(98.6) $1.6 $195.4 $290.6 $260.0
Net income (loss) $(98.6) $1.6 $195.4 $290.6 $264.9
Net income (loss) used in
diluted earnings per share
calculation (reflecting
adjustment for interest on
convertible notes when
dilutive, if applicable):
Income (loss) from
continuing operations
before cumulative effect
of accounting change $(98.6) $1.6 $201.0 $301.8 $278.7
=================================================
Net income (loss) $(98.6) $1.6 $201.0 $301.8 $283.6
=================================================
Earnings (loss) per share:
From continuing operations
before cumulative effect
of accounting change:
Basic $(0.60) $0.01 $1.35 $2.13 $2.13
=================================================
Diluted $(0.60) $0.01 $1.30 $1.97 $1.79
=================================================
Net income (loss):
Basic $(0.60) $0.01 $1.35 $2.13 $2.17
=================================================
Diluted $(0.60) $0.01 $1.30 $1.97 $1.82
=================================================
Weighted average common
and potential common
shares outstanding:
Basic 163.9 156.1 145.0 136.7 121.9
=================================================
Diluted 163.9 159.1 154.3 153.5 156.1
=================================================
- -------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR-END
Working capital $ 514.6 $ 911.6 $ 647.7 $ 572.4 $ 508.1
Total assets $3,100.7 $3,210.8 $2,911.3 $2,427.2 $1,859.7
Long-term debt $ 390.7 $ 460.5 $ 412.8 $ 100.8 $ 21.3
Total debt $ 444.6 $ 475.9 $ 454.4 $ 128.9 $ 37.9
Shareholders' equity $1,858.9 $1,871.7 $1,723.2 $1,532.4 $1,189.7
- -------------------------------------------------------------------------
OTHER DATA
Research and development
excluding in-process R&D
charge $ 482.0 $ 404.5 $ 379.0 $ 306.4 $ 273.5
Capital additions $ 622.0 $ 605.6 $ 707.7 $ 500.8 $ 285.5
Number of employees
(in thousands) 13.0 12.8 20.7 22.7 22.5
- -------------------------------------------------------------------------
National has paid no cash dividends on its common stock in any of the
years presented above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto:
Overview
For the year ended May 31, 1998, National Semiconductor Corporation
("National" or the "Company") had a 53-week year. Operating results
for this additional week are considered immaterial to the Company's
consolidated results of operations for the year ended May 31, 1998.
Fiscal 1997 and 1996 were each 52-week years.
In November 1997, Nova Acquisition Corp., a subsidiary of the
Company, merged with Cyrix Corporation ("Cyrix") and Cyrix became a
wholly owned subsidiary of the Company. Cyrix designs, develops and
markets X86 software-compatible microprocessors of original design for
the personal computer marketplace. The Company believes that access to
Cyrix's X86 microprocessor cores and the combination of technologies
resulting from the merger bring together many of the key enabling
technologies necessary to achieve its system-on-a-chip strategy to
develop certain highly integrated, application specific semiconductor
products for the personal systems, communications and consumer markets.
The merger was accounted for as a pooling of interests. Accordingly,
the Company's consolidated financial statements have been restated to
include Cyrix for all periods presented and management's discussion and
analysis of financial condition and results of operations includes
results for Cyrix.
During fiscal 1998, the Company also completed the acquisitions of
Future Integrated Systems, Inc. ("FIS"), a supplier of graphics
hardware and software products for the personal computer market, and
certain assets and liabilities of Gulbransen, Inc. related to its
digital audio technology business. The Company believes FIS design
expertise will expand its ability to integrate advanced graphics
capabilities into system-on-a-chip solutions for the personal computer
market and the Gulbransen audio compressor technology will expand its
ability to provide digital audio building blocks for system-on-a-chip
solutions.
The Company also completed the acquisition of ComCore
Semiconductor ("ComCore") in late fiscal 1998. ComCore, a designer 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 integrated
circuits. This technology is expected to add advanced design and
technology capabilities to the Company's existing analog, mixed-signal
and digital expertise. The Company believes that this technology will
help position it as a leader in the application of advanced DSP
technology for communications solutions.
Results of Operations
The Company recorded net sales of $2.5 billion in fiscal 1998 compared
to $2.7 billion in fiscal 1997 and $2.8 billion in fiscal 1996. The
decline in sales through fiscal 1998 is primarily due to the absence of
sales in fiscal 1998 and lower sales in fiscal 1997 than in fiscal 1996
for the Fairchild Semiconductor group ("Fairchild"), which the Company
divested in late fiscal 1997.
The Company incurred a loss for fiscal 1998 of $98.6 million
compared to net income of $1.6 million in fiscal 1997 and $201.0
million in fiscal 1996. The decline in operating results in fiscal
1998 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 ($95.2 million), FIS
($2.5 million) and the Gulbransen digital audio technology business
($5.2 million). In connection with the acquisition of ComCore, the
Company also recorded $15.0 million of unearned compensation related to
employee retention arrangements, which will be charged to operations,
primarily research and development, over the next three years.
The decrease in net income for fiscal 1997 from fiscal 1996 was
attributable to a combination of lower sales from Fairchild and special
items of $166.2 million. The special items comprised $134.2 million
for restructuring of operations that included $49.7 million related to
the Company's reorganization of its operating structure and $84.5
million related to the planned realignment of its manufacturing
facilities, plus $72.6 million for in-process research and development
charges related to the acquisitions of the PicoPower Division of Cirrus
Logic Inc. ("PicoPower") ($10.6 million) and Mediamatics, Inc.
("Mediamatics") ($62.0 million), offset by a $40.6 million gain from
the disposition of Fairchild.
The Company's current operating structure is organized into three
business groups that include the Analog Group, the Communications and
Consumer Group and the Cyrix Group (formerly known as the Personal
Systems Group), which for purposes of this discussion represent the
Company's core business. The Company has presented management's
discussion and analysis of financial condition and results of
operations to include separate comparison of the Company's core
business. As a result, financial information for fiscal 1997 and 1996
excludes Fairchild and Dynacraft, Inc. ("DCI"), which was sold in the
third quarter of fiscal 1996. The following table summarizes selected
financial information for the National core business excluding the
effect of special items and certain other nonrecurring operating items.
The Company believes the exclusion of these items provides a more
consistent basis for comparison of the Company's results of operations.
Special items included $196.7 million in fiscal 1998 and $166.2 million
in fiscal 1997, as previously described, and $11.4 million in fiscal
1996 for an in-process R&D charge related to the acquisition of Sitel
Sierra, B.V. ("Sitel"). Other non-recurring operating items included
$5.6 million related to the write-down of Fairchild inventory and other
cost reduction activities, offset by a $4.2 million gain on the sale of
a digital answering machine integrated circuit business in fiscal 1997
and $19.3 million associated with various cost reduction programs taken
to align costs with market conditions in fiscal 1996.
Years Ended: May 31, May 25, May 26,
(In Millions) 1998 1997 1996
---- ---- ----
Net sales $2,536.7 $2,231.5 $2,081.9
Gross profit $885.0 $874.6 $929.7
Gross margin 34.9% 39.2% 44.7%
Net income $72.7 $96.2 $177.5
Diluted earnings
per share $0.43 $0.60 $1.15
The presentation of these separate National core business earnings
per share ("EPS") amounts is not in accordance with generally accepted
accounting principles. The Company believes, however, that for
analytical purposes, these EPS amounts represent the contributions of
the National core business and are an appropriate basis for comparison
with future financial results from the National core business.
Sales
While sales in fiscal 1998 decreased overall by 6 percent from sales in
fiscal 1997, sales for National's core business of $2.5 billion in
fiscal 1998 increased 14 percent over sales of $2.2 billion in fiscal
1997. 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, as well as
difficulties the Company encountered in ramping up adequate volumes of
the Cyrix Media GX processor product to speed levels the market was
demanding. This growth is led by sales for analog products, which grew
24.3 percent over fiscal 1997 sales and also reflects the continued
growth in sales for wide area network ("WAN") products (including
application specific wireless communication products), which grew 29.6
percent over fiscal 1997 sales. Although the Company experienced a
decline in new orders from personal computer manufacturers in the
second half of the year, sales for personal computer products also grew
slightly for the year by 2.6 percent. However, sales for local area
network ("LAN") products declined by 7.0 percent from fiscal 1997,
since the Company did not successfully transition its LAN products to a
more integrated node adapter card solution. This decline was caused by
a sharp drop in sales that occurred in the second half of the year due
to the Company's failure to introduce key new LAN products combined
with decreased unit shipments and price erosion in its mature 10/100
megabit LAN Ethernet products. 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.
In fiscal 1997, sales decreased overall by 5 percent from sales in
fiscal 1996, while sales for National's core business of $2.2 billion
in fiscal 1997 increased 7 percent over sales of $2.1 billion in fiscal
1996. This growth in sales was driven by the Company's focus on analog
and mixed-signal market opportunities and reflected continued growth in
sales for LAN products and WAN products, including application specific
wireless communication products, each of which grew with increases of
44.4 percent and 6.3 percent, respectively, over fiscal 1996. In
addition, sales strengthened for personal computer products, which grew
32.9 percent over fiscal 1996. Sales increases for all of these
product areas were the result of increased unit shipments. Overall,
increased unit shipments for the National core business resulted in
increased sales for the year despite some modest price declines.
Fiscal 1997 sales decreased in all geographic regions from sales
in fiscal 1996. The decreases were 5 percent for the Americas, 9
percent for Europe, 3 percent for Japan and 4 percent for the Asia
Pacific region. Although the dollar value of foreign currency
denominated sales had an unfavorable impact in Japan as the dollar
strengthened against the Japanese yen, it was offset by a generally
favorable impact experienced in Europe. Foreign currency exchange rate
fluctuation contributed to approximately one-third of the overall
decrease in sales. In fiscal 1997, sales in the Americas were 47
percent of total sales, sales for Japan were 9 percent of total sales
and sales for both Europe and the Asia Pacific region were each 22
percent of total sales. In fiscal 1996, the Americas, Europe, the Asia
Pacific region and Japan accounted for 46, 23, 22 and 9 percent of
total sales, respectively. The disposition of Fairchild had an
immaterial effect on the foregoing percentages.
Gross Margin
Gross margin as a percentage of sales declined to 35 percent in fiscal
1998 from 38 percent in fiscal 1997 and 40 percent in fiscal 1996. 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, which was affected by economic
uncertainties in the Asia Pacific region and unstable conditions in the
personal computer market. 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. For the Company's core business, gross margin of 35 percent
for fiscal 1998 declined compared to 39 percent in fiscal 1997. The
results for the Company's core business for fiscal 1997 exclude the
effect of Fairchild and certain nonrecurring operating items included
in cost of sales that consisted of $5.6 million for the write-down of
Fairchild inventory to net realizable value and other cost reduction
activities.
In fiscal 1997, gross margin as a percentage of sales declined to
38 percent from 40 percent in fiscal 1996. The primary factor
contributing to the decline was reduced factory utilization,
particularly in the first half of fiscal 1997, when factory utilization
was down due to the slowdown in new orders as customers and
distributors reduced inventories. Wafer fabrication capacity
utilization declined to 67 percent for the first half of fiscal 1997
resulting in gross margin of 34 percent for the first half of the year.
Although gross margin for fiscal 1997 was lower than that for fiscal
1996, it improved over the fiscal year as factory utilization reached
80 percent in the second half of fiscal 1997. This resulted in gross
margin of 41 percent for the second half of the year as new order rates
that began improving in August 1996 strengthened through the remainder
of the fiscal year. Gross margin for fiscal 1997 also reflects the
positive effect of ceasing depreciation expense on the property and
equipment of the Fairchild businesses held for disposition. Had the
Company continued to record depreciation expense on those assets during
the year, gross margin for the year would have been 36 percent. For
the Company's core business, gross margin of 39 percent for fiscal 1997
declined compared to 45 percent in fiscal 1996.
Research and Development
Research and development ("R&D") expenses were $482.0 million for
fiscal 1998, or 19 percent of sales, compared to $404.5 million in
fiscal 1997, or 15 percent of sales, and $379.0 million in fiscal 1996,
or 13 percent of sales. For the Company's core business, R&D expenses
were $482.0 million in fiscal 1998, $389.4 million in fiscal 1997 and
$352.1 million in fiscal 1996. These amounts exclude in-process R&D
charges of $102.9 million related to the acquisitions of ComCore ($92.5
million), FIS ($2.5 million) and the Gulbransen digital audio
technology business ($5.2 million) in fiscal 1998, $72.6 million
related to the acquisitions of PicoPower ($10.6 million) and
Mediamatics ($62.0 million) in fiscal 1997 and $11.4 million related to
the acquisition of Sitel in fiscal 1996, which have been separately
presented in the consolidated statements of operations as special
items. Overall, the increase in R&D expenses reflects the Company's
accelerated investment in advanced submicron CMOS process technology,
which is part of the Company's focus on state-of-the-art process
technology and has been set as one of the Company's strategic
imperatives. The increase also reflects continued investment 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 expanded development of Cyrix microprocessor based
products. For fiscal 1998, the Company expended 29 percent of its R&D
effort toward the development of process technology and the remaining
71 percent for new product development. This represents an increase of
33 percent and 21 percent in fiscal 1998 over fiscal 1997 in spending
for process technology and product development, respectively.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses decreased to
$353.2 million, or 14 percent of sales, in fiscal 1998 from $448.9
million, or 17 percent of sales, in fiscal 1997 and $525.9 million, or
19 percent of sales, in fiscal 1996. For the Company's core business,
SG&A expenses were $353.2 million in fiscal 1998, $386.0 million in
fiscal 1997 and $395.7 million in fiscal 1996. The decreases reflect
the effect of centralization initiatives implemented in connection with
the Company's fiscal 1997 reorganization that have reduced the
Company's infrastructure and certain cost reduction actions taken in
the second half of fiscal 1998 to reduce the Company's overall cost
structure in response to current business conditions.
Restructuring of Operations
In April 1998, the Company implemented an overall cost reduction plan
due to weakened business conditions experienced in the second half of
fiscal 1998. As part of the overall cost reduction plan, the Company
announced a worldwide workforce reduction of approximately 1,400
people, primarily in its Santa Clara, California, headquarters and
other front-end wafer manufacturing operations. This included
approximately 500 employees affected by the previously announced
closure of the Company's 5- and 6-inch wafer manufacturing facilities
in Santa Clara. In addition to new cost reduction actions, the plan
includes 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 net $63.8
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 $6.8 million of excess reserves for severance
and other exit costs related to the Company's reorganization of its
operating structure announced in the first quarter of fiscal 1997 and
the release of $3.0 million of excess reserves for other exit costs
related to the Company's planned realignment of its manufacturing
facilities announced in the fourth quarter of fiscal 1997.
In connection with the Company's reorganization of its operating
structure announced in June 1996, the Company recorded a $55.3 million
net special charge for fiscal 1997 that included a $49.7 million
restructuring charge for the write-down of fixed assets to estimated
fair value, as well as costs associated with staffing reductions and
other exit costs necessary to reduce the Company's infrastructure in
both Fairchild and the remaining National core business. The remaining
components of the $55.3 million special charge were recorded in cost of
sales and consisted of $2.0 million for the write-down of certain
Fairchild inventory to net realizable value and $3.6 million for other
cost reduction activities.
In connection with the Company's planned realignment of its
manufacturing facilities announced in May 1997, the Company also
recorded a restructuring charge of $84.5 million in fiscal 1997 that
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. The Company's acceleration of investment in its 8-inch
wafer fabrication facility in Maine, which has resulted in availability
of 0.35-micron capacity sooner than previously expected, has
significantly reduced the Company's requirements for 0.65-micron
capacity.
In addition to the impairment loss, the Company also recorded
$11.0 million of exit costs primarily related to the closure of its 5-
and 6-inch wafer fabrication facilities in Santa Clara. The closure
process, which began in May 1997, is expected to be completed within
the next 6 months, during which time the Company will transfer
remaining production activities to other existing manufacturing lines.
The exit costs primarily related to severance costs, the removal of
production equipment and the dismantling of the production facilities.
Approximately 500 employees were employed in these two wafer
fabrication facilities and the Company does not expect to place the
majority of the affected employees elsewhere in the organization. The
Company also recorded $10.3 million of exit costs associated with the
Company's decision to halt expansion of its 6-inch wafer fabrication
line in Greenock, Scotland. These costs primarily 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 is related to severance and other exit costs at other
manufacturing facilities.
At May 31, 1998, approximately $45.7 million was included in
accrued liabilities for cash restructuring charges, primarily comprised
of severance for those actions that have not yet been completed. All
actions are expected to be substantially completed by the end of
calendar 1998.
Interest Income and Interest Expense
Net interest income was $22.3 million for fiscal 1998 compared to $6.1
million in fiscal 1997 and $9.4 0million in fiscal 1996. The increase
in fiscal 1998 was attributable to the combination of increased
interest earned on higher average cash balances offset by less interest
expense from lower debt balances. Higher average cash balances in
fiscal 1998 were the result of the proceeds received from the
disposition of Fairchild in late fiscal 1997. Lower debt balances in
fiscal 1998 primarily resulted from the redemption of the large
majority of Cyrix convertible subordinated notes in January 1998, in
addition to other general debt repayment. In addition, the Company
capitalized $4.9 million of interest associated with capital expansion
projects in fiscal 1998 compared to $13.8 million in fiscal 1997. Net
interest income was lower in fiscal 1997 than in fiscal 1996 primarily
due to higher interest expense while interest income remained constant.
Interest expense in fiscal 1997 was higher due to additional interest
related to the $126.5 million Cyrix 5.5% convertible subordinated
notes.
Other Income, Net
Other income, net was $24.9 million for fiscal 1998 compared to $18.7
million and $47.5 million for fiscal 1997 and fiscal 1996,
respectively. For fiscal 1998, other income, net included $15.7
million of net intellectual property income, of which $11.2 million
related to a significant licensing agreement with a Korean firm and a
$10.2 million gain from investments primarily arising from the sale of
stock from the Company's investment holdings. This compares to $10.1
million of net intellectual property income, plus a $3.8 million net
gain from the sale of stock from the Company's investment holdings, a
$4.2 million gain from the sale of a digital answering machine
integrated circuit business, a $2.0 million receipt from the settlement
of litigation and $1.6 million of dividend income from an investment
holding, offset by $3.0 million for the write-down of a nonmarketable
equity investment to net realizable value during fiscal 1997. Other
income, net for fiscal 1996 included net intellectual property income
of $31.7 million, a $10.0 million receipt from the settlement of
litigation, a $7.2 million net gain from the sale of investment
holdings and a $1.5 million gain from the sale of DCI, offset by $2.9
million for the write-down of certain investments to net realizable
value. Intellectual property income declined in fiscal 1997, because
several large license arrangements expired in fiscal 1996. Aside from
the one licensing agreement in fiscal 1998 with the Korean firm, none
of the other license agreements in fiscal 1998 were considered
individually material and none of the license arrangements in either
fiscal 1997 or fiscal 1996 was considered individually material.
Income Tax Expense
The Company had an income tax benefit of $1.1 million in fiscal 1998
compared to income tax expense of $15.5 million in fiscal 1997 and
$70.0 million in fiscal 1996. The effective tax rate in fiscal 1998
was 1.1 percent as compared to approximately 91 percent and 26 percent
in fiscal 1997 and 1996, respectively. Excluding the special charge
for in-process research and development primarily related to the
acquisition of ComCore, which is not tax deductible, the Company's
effective tax rate for fiscal 1998 was 25 percent.
Foreign Operations
The Company's foreign operations include manufacturing facilities in
Southeast Asia and Europe and sales offices throughout Southeast Asia,
Europe and Japan. A portion of the transactions at these facilities
are denominated in local currency, which exposes the Company to risk
from exchange rate fluctuations. The Company's risk exposure from
expenses at foreign manufacturing facilities is concentrated in pound
sterling, Singapore dollar and Malaysian ringgit. Net non-U.S. dollar
denominated asset and liability positions are hedged, where practical,
using forward exchange and purchased option contracts. The Company's
risk exposure from foreign revenue is limited to the Japanese yen and
major European currencies, primarily German deutsche marks, French
francs and Italian lira. The Company hedges up to 100 percent of the
notional value of outstanding customer orders denominated in foreign
currency using forward exchange contracts and over-the-counter foreign
currency options. A portion of anticipated foreign sales commitments
is, at times, 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. The
Company's fixed rate debt obligations and related interest rate swap
agreements are subject to interest rate risk with minimal impact. An
increase in interest rates would not significantly increase interest
expense due to the fixed nature 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
as the Company's obligation under the interest rate swap agreements is
based on U.S. dollar LIBOR rates.
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 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. An 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 $10 million. The 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 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 31, 1998.
Financial Condition
As of May 31, 1998, cash and short-term investments decreased to a
total of $573.2 million from a total of $977.4 million at May 25, 1997.
Cash generated from operating activities was $280.8 million in fiscal
1998, down from $513.1 million in fiscal 1997 and $377.8 million in
fiscal 1996, primarily due to a reduction in working capital as a
result of an increase in inventories and a decrease in income taxes
payable.
Cash used for investing activities was $753.6 million in fiscal
1998 compared to $181.0 million in fiscal 1997 and $656.5 million in
fiscal 1996. For fiscal 1998, the Company's investing activities were
primarily represented by capital expenditures of $622.0 million and
business acquisitions of $96.4 million. For fiscal 1997, capital
expenditures of $605.6 million were offset by cash proceeds of $400.5
million from the disposition of Fairchild and $65.0 million from the
sale of the Fairchild note receivable, which resulted in less cash used
for investing activities compared to fiscal 1998 and also fiscal 1996.
Capital expenditures for fiscal 1998 were at slightly higher levels
than fiscal 1997 as the Company continued to invest in property, plant
and equipment to expand its manufacturing capabilities. Capital
expenditures in fiscal 1998 primarily included construction of the 8-
inch, 0.35/0.25-micron wafer fabrication facility in South Portland,
Maine.
The Company's financing activities provided cash of $18.2 million
in fiscal 1998 from the proceeds of a $100.4 million draw-down 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 draw-down 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. In fiscal 1996, cash provided by financing activities of
$302.1 million was primarily due to the proceeds of $253.3 million, net
of issuance costs, from the private placement of the Company's 6.5%
convertible subordinated notes and $42.4 million from the issuance of
common stock under employee benefit plans, which were offset by the
repurchase of 2,450,000 shares of common stock on the open market for
$63.0 million.
Management foresees substantial cash outlays for plant and
equipment throughout fiscal 1999 with primary focus on capacity
expansion in the Maine 8-inch wafer fabrication facility, next
generation process capability and implementation and expansion of in-
house assembly and test capacity for Cyrix microprocessors. However,
the fiscal 1999 capital expenditure level is expected to be
significantly lower than the fiscal 1998 level in response to current
business conditions. Existing cash and investment balances, together
with existing lines of credit, are expected to be sufficient to finance
planned fiscal 1999 capital investments.
Recently Issued Financial Accounting Standards
In 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits" and SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 132 revises the required disclosures for
employee benefit plans and standardizes the disclosures for pensions
and other postretirement benefits to the extent practicable. It does
not change the measurement or recognition of those plans. SFAS No. 132
is effective for fiscal years beginning after December 15, 1997, with
earlier adoption encouraged. 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. SFAS No. 133 is effective for fiscal years beginning after June
15, 1999, with earlier adoption encouraged.
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components, and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which
establishes standards for the way that public business enterprises
report information about operating segments in annual and interim
financial statements. Both SFAS No. 130 and No. 131 are effective for
financial statements for fiscal years beginning after December 15,
1997.
The Company is presently analyzing all of these statements and has
not yet determined their impact on the Company's financial statements.
Outlook
The statements contained in this Outlook and in the Financial Condition
section of Management's Discussion and Analysis are forward looking
based on current expectations and management's estimates. Actual
results may differ materially from those set forth in such forward
looking statements.
The semiconductor industry is characterized by rapid technological
change and frequent introduction of new technology leading to more
complex and more integrated products. The result is a cyclical
environment with short product life, price erosion and high sensitivity
to the overall business cycle. In addition, substantial capital and
R&D investment is required to support products and manufacturing
processes. As a result of 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
microprocessor markets.
Business conditions for the semiconductor industry and the Company
significantly weakened in the second half of fiscal 1998, in part due
to the recent economic downturn in the Asia Pacific region. The
Company experienced a slowdown in order rates, particularly with
certain personal computer manufacturers where new orders that were
seasonally down after the Christmas holidays remained down through the
end of the year as customers continued to reduce inventory levels of
their end product. Although the Company has seen some signs that new
orders in its analog and wireless businesses have stabilized in the
fourth quarter of fiscal 1998, the level of new orders has been lower
than historically experienced and unless the rate of orders improves,
the Company will be unable to attain the level of revenues experienced
in fiscal 1998. Additionally, the rate of orders and product pricing
may be affected by continued and increasing competition and by growth
rates in the personal computer and networking industries. Further,
while the Company develops its DSP based physical layer LAN products,
revenue for LAN products is expected to decline as a result of
decreasing revenue from previous generation LAN products that are
approaching the end of their product lives. Although the Company
expects the DSP based physical layer solutions to be successful, until
the product transition is completed and new products have received
customer acceptance, revenue for LAN products will remain below the
levels experienced in the first half of fiscal 1998. Continued delay
in the introduction of new LAN products will result in both reduced LAN
revenue and a significant unfavorable effect on the Company's operating
performance. The Company also believes the direction in the personal
computer industry to accelerate product migration toward sub $1,000
personal computers may, in the short run, unfavorably impact revenues
for the Company's other products in the area of chipsets, Super I/O
products and temperature sensors. The Company remains very cautious
about its future outlook, particularly with respect to the personal
computer business. As a result, the Company expects overall revenues,
particularly for the first half of fiscal 1999, to be down from the
level of revenues recorded in the second half of fiscal 1998, resulting
in a significant net loss for the first half of fiscal 1999.
While business conditions and overall market pricing have a major
influence on gross margin, the Company's accelerated investment in
advanced CMOS process technology, improvements in manufacturing
efficiency, realignment of wafer fabrication facilities and
introduction of new products are expected to result in future gross
margin improvement. Future gross margin improvement is also predicated
on increased new order rates, particularly in the higher margin multi-
market analog products. Future gross margin is also affected by wafer
fabrication capacity utilization. Although the Company has brought on
new manufacturing capacity in fiscal 1998 with the completion of its
new wafer manufacturing facility in Maine, the Company has also
experienced a significant decline in wafer fabrication capacity
utilization due to the current slowdown in new orders. While
management expects to more fully utilize wafer capacity, unless new
orders improve significantly, the Company will continue to run its
manufacturing facilities at reduced capacity utilization rates in order
to manage inventories and reduce cost. There is no certainty that the
level of demand will be sufficient to fully utilize the additional new
capacity. Failure to improve manufacturing capacity utilization will
lead to decreased gross margin for fiscal 1999. The Company's focus is
to continue to introduce new products, particularly more highly
integrated system-on-a-chip products. If the development of new
products is delayed or market acceptance is below expectations, future
gross margin may also be unfavorably affected. In connection with the
Company's planned comprehensive realignment of its manufacturing
facilities, the Company faces the risk that the transfer of product
manufacturing from existing facilities that are to be closed or where
capacity levels are to be reduced may extend beyond the estimated
transition period and that the transition process may not occur
smoothly, resulting in an unfavorable impact on future gross margin and
operating results.
The Company believes that continued focused investment in research
and development, especially on the development of new manufacturing
processes and 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. Ongoing research and
development spending for fiscal 1999 is expected to be slightly lower
than fiscal 1998 levels as management continues to adjust its strategic
research and development programs to align its spending with current
business conditions. National's product portfolio, particularly
products in the personal systems and communications area, have short
product life cycles and successfully developing and introducing new
products are critical to the Company's ability to maintain a
competitive position in the marketplace. The Company also expects
overall SG&A expenses to be lower for fiscal 1999 than for fiscal 1998
as the full benefit of the cost reduction actions implemented in fiscal
1998 takes effect.
In November 1997, the Company completed the merger of its
subsidiary with Cyrix. The Company believes the technologies and
capabilities of Cyrix and National are complementary. However, in the
second half of fiscal 1998 the Company experienced lower volume and
price erosion with the Cyrix 6X86 products and difficulties with
ramping up production of the Cyrix Media GX product. The integration
of the two companies' operations may have a further unfavorable impact
on operating results if the Company encounters additional unforeseen
obstacles or is unable to successfully complete its integration plan.
Other factors related to the Cyrix business that may affect the
Company's results of operations include the following: Cyrix is a
small competitor in the personal computer market for socket-seven
compatible microprocessor products where other large competitors such
as Intel Corporation, Advanced Micro Devices, Inc. and International
Business Machines Corporation significantly influence the price and
availability of products. There is also the risk that the Company will
not be able to sell existing levels of Cyrix product at a profit due to
the current trend in product migration in the personal computer
industry toward shorter product life cycles and more rapid price
erosion for microprocessors. The shorter product life cycles and rapid
decline in prices of microprocessors may also result in excess
inventory of Cyrix products, which may result in decreased future gross
margin and operating results. In addition, severe price declines in
the socket-seven compatible microprocessor market may reduce the
competitive position of the Company's proprietary Media GX family of
integrated microprocessors. This could also result in excess inventory
of Cyrix products, as well as reduced future gross margin and operating
results. Cyrix is heavily dependent on "quarterly turns orders," which
are orders that book and bill in the same quarter. The Company is also
currently dependent on a third-party wafer foundry to manufacture Cyrix
products and this can result in lack of control over the yield
distribution of acceptable speed levels on Cyrix microprocessor
products that may unfavorably impact product availability. The Company
expects to commence the manufacturing of Cyrix product in-house to
utilize the Company's 0.25-micron process capacity in its 8-inch wafer
fabrication facility in Maine. As a result, the Company faces the risk
of encountering difficulties in its effort to bring up the
manufacturing capability for Cyrix products, which may unfavorably
affect the Company's future operating results.
National continues to pursue opportunities to leverage its
intellectual property. However, the timing and amount of future
licensing income over time cannot be forecast with certainty. In
addition, the Company expects to continue to pursue opportunities to
acquire key technology to augment its technical capability or to
achieve faster time to market as alternatives to internally developing
such technology. In addition to the Company's regular involvement in
licensing arrangements and joint venture relationships, these
opportunities are expected to include business acquisitions. With such
acquisitions, there is a risk that future operating performance may be
unfavorably affected due to acquisition related costs, such as but not
limited to, in-process R&D charges, added R&D expenses, lower gross
margins from acquired product portfolios and restructure costs
associated with duplicate facilities.
Because of significant international operations, the Company
benefits overall from a weaker dollar and is adversely affected by a
stronger dollar relative to major currencies worldwide. As such,
changes in exchange rates, and in particular a strengthening of the
U.S. dollar, may unfavorably affect the Company's consolidated sales
and net income. The Company attempts to manage the short-term
exposures to foreign currency fluctuations, but there can be no
assurance that the Company's risk management activities will offset the
adverse financial impact resulting from unfavorable movements in
foreign exchange.
In connection with the Fairchild transaction, Fairchild and the
Company have entered into a manufacturing agreement under which the
Company will purchase goods and services from Fairchild 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. The Company is committed to these
minimum levels whether or not the minimum levels are required based on
future demand. To the extent the minimum levels exceed future demand,
the Company's gross margin and operating results will be unfavorably
affected. The Company also has certain continuing obligations arising
from the Fairchild transaction that include providing certain
transition services to Fairchild and indemnification of certain
environmental and legal matters. There can be no assurance that the
ultimate satisfaction of these obligations would not have a material
adverse impact on the Company's future financial condition or results
of operations.
In addition to the agreement with Fairchild, the Company has
agreements with certain other wafer fabrication suppliers whereby it
has made prepayments to purchase products and has been required to
purchase capital equipment for one supplier. In the event the Company
is unable to consume sufficient volumes of product necessary to reduce
the existing prepaid balances, the Company's future operating results
would be unfavorably impacted.
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 IRS and
the Company's tax returns for certain years are under examination in
the U.S. and Malaysia. There can be no assurance that the ultimate
outcome of the tax proceedings or tax examinations would not have a
material adverse effect on the Company's future financial condition or
results of operations.
As part of a company-wide program to address year 2000 issues,
National has implemented a number of remediation projects. Business
applications and computer systems that support its day-to-day
operations are currently being tested to ensure that they will be year
2000 compliant. The Company utilizes many third party software
packages that have already been rendered year 2000 compliant. To a
large extent, in-house systems developed since 1985 have been
programmed to properly deal with year 2000 issues. As a result,
efforts required to modify the Company's business systems have been
minimized. The Company is examining and taking steps to ensure that
its manufacturing processes will not be interrupted and that its
facilities infrastructure will not experience any failures or
difficulties as a result of year 2000 issues. The Company is also
reviewing its current product portfolio to identify any year 2000
issues and, where appropriate, will be communicating with its major
customers. While there can be no assurance that unforeseen problems
will not be encountered, the Company expects that all projects will be
completed in a timely manner. In connection with its year 2000
program, the Company expects to incur staff costs as well as consulting
and other expenses incremental to current spending levels. The Company
estimates that the total cost associated with year 2000 related
projects will range between $15 million to $20 million of which
approximately 20 percent has been expended to date. The portion of
these costs that are incremental to ongoing operating expenses is
estimated to be $5 million to $10 million.
The forward looking statements discussed or incorporated by
reference in this outlook section involve a number of risks and
uncertainties. Other risks and uncertainties include, but are not
limited to, the general economy, regulatory and international economic
conditions, the changing environment of the semiconductor industry,
competitive products and pricing, growth in the personal computer and
communications industries, the effects of legal and administrative
cases and proceedings, and such other risks and uncertainties as may be
detailed from time to time in the Company's SEC reports and filings.
Appendix to MD&A Graphs
(3 yrs)
1998 1997 1996
---- ---- ----
Net Sales per Employee 197.1 146.6 127.9
Net Operating Margin
as a Percent of Sales (5.8%) (0.3%) 7.6%
Operating Costs and
Expenses (As a Percent
of Sales):
Selling, General, and
Administrative 13.9% 16.7% 18.6%
Research and Development 19.0% 15.1% 13.4%
Cost of Sales 65.1% 62.3% 60.1%
Net Property, Plant,
and Equipment $1,655.8 $1,349.0 $1,406.4
Stock Price Ending $16.25 $28.00 $16.25
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements Page
- -------------------- ----
Consolidated Balance Sheets at May 31, 1998 and May 25, 1997 30
Consolidated Statements of Operations for each of the years
in the three-year period ended May 31, 1998 31
Consolidated Statements of Shareholders' Equity for each of
the years in the three-year period ended May 31, 1998 32
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended May 31, 1998 33
Notes to Consolidated Financial Statements 34-58
Independent Auditors' Report 59
Financial Statement Schedule:
For the three years ended May 31, 1998
Schedule II -- Valuation and Qualifying Accounts 63
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
May 31, May 25,
In Millions, Except Share Amounts 1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 460.8 $ 897.8
Short-term marketable investments 112.4 79.6
Receivables, less allowances of $50.3
in 1998 and $41.4 in 1997 208.5 281.0
Inventories 283.9 205.8
Deferred tax assets 166.2 173.3
Other current assets 76.4 99.9
-------- --------
Total current assets 1,308.2 1,737.4
Property, plant and equipment, net 1,655.8 1,349.0
Other assets 136.7 124.4
-------- --------
Total assets $3,100.7 $3,210.8
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 53.9 $ 15.4
Accounts payable 237.0 265.5
Accrued expenses 310.9 306.8
Income taxes payable 191.8 238.1
-------- --------
Total current liabilities 793.6 825.8
Long-term debt 390.7 460.5
Deferred income taxes 4.4 12.1
Other noncurrent liabilities 53.1 40.7
-------- --------
Total liabilities $1,241.8 $1,339.1
Commitments and contingencies
Shareholders' equity:
Common stock of $0.50 par value.
Authorized 300,000,000 shares.
Issued and outstanding 165,461,245
in 1998; 161,277,063 in 1997 $ 82.7 $ 80.6
Additional paid-in capital 1,240.1 1,153.8
Retained earnings 575.9 679.3
Minimum pension liability (12.5) -
Unearned compensation (27.3) (42.0)
-------- --------
Total shareholders' equity $1,858.9 $1,871.7
-------- --------
Total liabilities and shareholders' equity $3,100.7 $3,210.8
======== ========
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended May 31, May 25, May 26,
In Millions, Except Per Share Amounts 1998 1997 1996
-------- -------- --------
Net sales $2,536.7 $2,684.4 $2,833.4
Operating costs and expenses:
Cost of sales 1,651.7 1,672.5 1,703.0
Research and development 482.0 404.5 379.0
Selling, general and
administrative 353.2 448.9 525.9
Special items:
Merger costs 30.0 - -
Restructuring of operations 63.8 134.2 -
In-process R&D 102.9 72.6 11.4
Gain on sale of Fairchild - (40.6) -
-------- -------- --------
Total operating costs and expenses 2,683.6 2,692.1 2,619.3
-------- -------- --------
Operating income (loss) (146.9) (7.7) 214.1
Interest income, net 22.3 6.1 9.4
Other income, net 24.9 18.7 47.5
-------- -------- --------
Income (loss) before income taxes (99.7) 17.1 271.0
Income tax expense (benefit) (1.1) 15.5 70.0
-------- -------- --------
Net income (loss) $(98.6) $1.6 $201.0
======== ======== ========
Earnings (loss) per share:
Basic $(0.60) $0.01 $1.35
Diluted $(0.60) $0.01 $1.30
Weighted average shares:
Basic 163.9 156.1 145.0
Diluted 163.9 159.1 154.3
Net income (loss) used in basic earnings
per share calculation (reflecting
preferred dividends in fiscal 1996) $(98.6) $1.6 $195.4
Net income (loss) used in diluted
earnings per share calculation $(98.6) $1.6 $201.0
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Mini-
In Con- mum
Millions, vert- Un- Pen-
Except ible earned Addi- sion
Per Pre- Com- Com- Trea- tional Lia-
Share ferred mon pensa- sury Paid-in bil- Retained
Amounts Stock Stock tion Stock Capital ity Earnings Total
------ ----- ------ ------ ------- ------ ------- --------
Balances at
May 28,
1995 $0.2 $70.7 $ - $(59.9) $1,026.3 $ - $495.1 $1,532.4
Net income - - - - - - 201.0 201.0
Conversion of
convertible
preferred
shares (0.2) 6.1 - - (5.9) - - -
Convertible
preferred
dividends of
$32.50 per
share - - - - - - (5.6) (5.6)
Acquisition
of treasury
stock - - - (63.0) - - - (63.0)
Retirement
of treasury
stock - (2.8) - 118.6 (115.8) - - -
Issuance of
common stock
under option,
purchase,
and profit
sharing plans
and tax
benefit
of $17.6 - 2.4 - 4.3 60.6 - - 67.3
Unearned
compensation
charge
relating to
issuance of
restricted
stock - - (3.3) - 3.3 - - -
Change in
unrealized
gain on
available-
for-sale
securities
(net of tax) - - - - - - (8.9) (8.9)
------ ----- ------ ------ ------- ------ ------- --------
Balances at
May 26,
1996 - 76.4 (3.3) - 968.5 - 681.6 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 com-
pensation - - 4.9 - - - - 4.9
Change in
unrealized
gain on
available-
for-sale
securities
(net of tax) - - - - - - (3.9) (3.9)
------ ----- ------ ------ ------- ------ ------- --------
Balances at
May 25,
1997 - 80.6 (42.0) - 1,153.8 - 679.3 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 ac-
quisition - - - - 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 com-
pensation - - 14.5 - - - - 14.5
Minimum
pension
liability - - - - - (12.5) - (12.5)
Change in
unrealized
gain on
available-
for-sale
securities
(net of tax) - - - - - - (4.2) (4.2)
------ ----- ------ ------ ------- ------ ------- --------
Balances at
May 31,
1998 $ - $82.7 $(27.3) $ - $1,240.1 $(12.5) $575.9 $1,858.9
====== ===== ====== ====== ======= ====== ======= ========
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended May 31, May 25, May 26,
In Millions 1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (98.6) $ 1.6 $201.0
Adjustments to reconcile net income
(loss) with net cash provided by
operations:
Depreciation and amortization 292.4 258.1 252.0
Gain on disposition of Fairchild - (40.6) -
Gain on sale of investments (10.3) (0.7) (4.3)
Loss on disposal of equipment 9.7 8.2 4.8
Deferred tax provision 4.9 (83.8) (0.3)
Tax benefit associated with stock
options 17.5 18.6 17.6
In-process research and development
charge 102.9 72.6 11.4
Merger costs 30.0 - -
Restructuring of operations 63.8 134.2 -
Other, net 13.8 6.1 (0.5)
Changes in certain assets and
liabilities, net:
Receivables 55.7 30.0 32.3
Inventories (60.6) 60.4 (71.0)
Other current assets (2.9) (17.3) (46.3)
Accounts payable and
accrued expenses (102.8) (6.5) (21.8)
Income taxes (47.0) 73.0 3.1
Other liabilities 12.3 (0.8) (0.2)
------ ------ ------
Net cash provided by operating
activities 280.8 513.1 377.8
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and
equipment (622.0) (605.6) (707.7)
Sale of equipment - - 24.6
Sale and maturity of available-
for-sale securities 1,005.8 118.2 132.9
Maturity of held-to-maturity
securities 14.5 1,202.1 820.2
Purchase of available-for-sale
securities (1,051.5) (146.4) (132.2)
Purchase of held-to-maturity
securities - (1,191.6) (819.8)
Disposition of Fairchild in 1997
and Dynacraft in 1996 - 400.5 70.0
Sale of Fairchild note receivable - 65.0 -
Sale of investments 16.2 5.1 7.8
Business acquisitions, net of
cash acquired (96.4) (13.7) (19.2)
Purchase of investments and other, net (20.2) (14.6) (33.2)
------ ------ ------
Net cash used by investing activities (753.6) (181.0) (656.6)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of convertible subordinated
notes, less issuance costs - 126.5 253.3
Redemption of convertible subordinated
notes (126.4) - -
Issuance of debt 100.4 59.1 114.5
Repayment of debt (19.0) (165.9) (42.4)
Issuance of common stock, net 63.2 59.3 45.3
Purchase of treasury stock - - (63.0)
Payment of preferred dividends - - (5.6)
------ ------ ------
Net cash provided by financing activities 18.2 79.0 302.1
------ ------ ------
Net change in cash and cash equivalents (454.6) 411.1 23.3
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 897.8 486.7 463.4
------ ------ ------
Cash and cash equivalents at end
of year $460.8 $897.8 $486.7
====== ====== ======
See accompanying 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. For the
fiscal year ended May 31, 1998, the Company had a 53-week year.Operating
results for this additional week are considered immaterial to the
Company's consolidated results of operations for the year ended May 31,
1998. Fiscal 1997 and 1996 were 52-week years.
On November 17, 1997, pursuant to an Agreement and Plan of Merger,
dated as of July 28, 1997, by and among the Company, Nova Acquisition
Corp., a wholly owed subsidiary of the Company ("Sub"), and Cyrix
Corporation ("Cyrix"), the Company acquired all outstanding shares of
Cyrix common stock through the merger of Sub with and into Cyrix, which
thereby became a wholly owned subsidiary of the Company (See Note 4).
The merger was accounted for as a pooling of interests. Accordingly,
the consolidated balance sheets as of May 31, 1998 and May 25, 1997 and
the consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended May 31, 1998,
include Cyrix. Since the fiscal years for National and Cyrix differ,
Cyrix changed its fiscal year-end to coincide with National's beginning
in fiscal 1998. Prior year financial statements have been restated to
include Cyrix and combine National's fiscal years 1997 and 1996 with
Cyrix's calendar years 1996 and 1995, respectively. The consolidated
balance sheet as of May 25, 1997 combines National's consolidated
balance sheet as of May 25, 1997 with Cyrix's consolidated balance sheet
as of December 31, 1996. The consolidated statements of operations,
shareholders' equity and cash flows for the years ended May 25, 1997 and
May 26, 1996 combine National's consolidated statements of operations,
shareholders' equity and cash flows for the years ended May 25, 1997 and
May 26, 1996 with Cyrix's consolidated statements of operations,
shareholders' equity and cash flows for the years ended December 31,
1996 and 1995, respectively. 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, net 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. Service and other revenues are recognized
ratably over the contractual period or as the services are performed.
Inventories
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. The Company uses
the straight-line method to depreciate machinery and equipment over its
estimated useful life (3-5 years). Assets other than machinery and
equipment are depreciated using both straight-line and declining-balance
methods over the assets' remaining estimated useful lives (3-5 years,
except buildings and improvements, which are 3-50 years), or in the case
of property under capital lease and leasehold improvements, over the
lesser of the estimated useful life or lease term.
The Company capitalizes interest on borrowings during the
construction period of major capital projects. Capitalized interest is
added to the cost of the underlying assets and is amortized over the
useful lives of the assets. For fiscal 1998, 1997 and 1996, the Company
capitalized $4.9 million, $13.8 million and $6.0 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 announced in
fiscal 1998 and 1997 (See Note 3), the Company recorded impairment
losses related to certain fixed assets in its wafer manufacturing
facility in Arlington, Texas, of $20.3 million and $60.1 million in
fiscal 1998 and fiscal 1997, respectively. The fair value of these
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
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 requires
the presentation of basic earnings per share and, for companies with
potentially dilutive securities, such as convertible debt, stock options
and warrants, diluted 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 stock from stock options based on the
treasury stock method, plus other potentially dilutive securities
outstanding, such as convertible subordinated notes in all years
presented and convertible preferred stock in fiscal 1996. If the result
of assumed conversions is dilutive, net earnings are adjusted for the
interest expense on the convertible subordinated notes, while the
average shares of common stock outstanding are increased. 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 the year
ended May 31, 1998. Earnings per share for all prior fiscal years
presented have been restated to conform with SFAS No. 128.
A reconciliation of the earnings and shares used in the computation for
basic and diluted earnings per share follows:
Years Ended
-------------------------------
(In Millions) May 31, May 25, May 26,
1998 1997 1996
---- ---- ----
Net income (loss) $ (98.6) $ 1.6 $ 201.0
Adjustment for preferred dividends - - 5.6
-------- ------- -------
Net income (loss), used for basic
earnings per share $ (98.6) $ 1.6 $ 195.4
======== ======= =======
Net income (loss) used for diluted
earnings per share $ (98.6) $ 1.6 $ 201.0
======== ====== =======
Number of shares:
Weighted average common shares outstanding
used for basic earnings per share 163.9 156.1 145.0
Effect of dilutive securities:
Stock options - 3.0 3.2
Convertible preferred stock - - 6.1
-------- ------ -------
Weighted average common and potential
common shares outstanding used for
diluted earnings per share 163.9 159.1 154.3
======= ====== =======
As of May 31, 1998, there were options outstanding to purchase 22.8
million shares of the Company's common stock with a weighted-average
exercise price of $22.49, 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 31, 1998, the
Company also had outstanding $258.8 million of convertible subordinated
notes, which are convertible into approximately 6.0 million shares of
common stock. These notes were not assumed to be converted because they
were antidilutive in all years presented.
Currencies
The Company's functional currency for all operations worldwide is the
U.S. dollar. Accordingly, gains and losses from translation of foreign
currency financial statements into U.S. dollars are included in current
results. Gains and losses resulting from foreign currency transactions
are also included in current results.
Financial Instruments
Cash and Cash Equivalents. Cash equivalents are highly liquid
instruments with a maturity of three months or less at the time of
purchase. National maintains its cash balances in various currencies
and a variety of financial instruments. The Company has not experienced
any material losses relating to any short-term financial instruments.
Marketable Investments. The Company classifies its debt and marketable
equity securities into held-to-maturity or available-for-sale
categories. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are recorded as either short-term
or long-term on the balance sheet based upon contractual maturity date
and are stated at amortized cost. Debt and marketable equity securities
not classified as held-to-maturity are classified as available-for-sale
and are carried at fair market value, with the unrealized gains and
losses, net of tax, reported in shareholders' equity. Gains or losses on
securities sold are based on the specific identification method.
Off-Balance Sheet Financial Instruments. The Company utilizes various
off-balance sheet financial instruments to manage market risks
associated with fluctuations in certain interest rates and foreign
currency exchange rates. It is the Company's policy to use derivative
financial instruments to protect against market risks arising in the
normal course of business. Company policies prohibit the use of
derivative instruments for the sole purpose of trading for profit on
price fluctuations or to enter into contracts 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. 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 recognized immediately if the transaction
is terminated earlier than initially anticipated. Gains and losses on
any instruments not meeting the above 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 31, 1998.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Employee Stock Plans
The Company accounts for its stock option plans and its employee stock
purchase plans in accordance with provisions of the Accounting
Principles Board's Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." In 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based Compensation," which
provides an alternative accounting method to APB 25. As permitted under
SFAS No. 123, the Company continues to account for its employee stock
plans in accordance with the provisions of APB 25 and provides
additional required disclosures. (See Note 9.)
Reclassifications
Certain amounts in prior years' financial statements and related notes
have been reclassified to conform to the fiscal 1998 presentation.
Note 2. Financial Instruments
Marketable Investments
The Company's policy is to diversify its investment portfolio to reduce
risk to principal that could arise from credit, geographic and
investment sector risk. At May 31, 1998, 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. Gross realized gains on available-for-
sale securities approximated $10.6 million, $4.1 million and $7.2
million for the years ended May 31, 1998, May 25, 1997 and May 26, 1996,
respectively. Gross realized losses were not material for fiscal 1998,
1997 or 1996.
Investments at fiscal year end comprise:
Gross
Amortized Unrealized Estimated
(In Millions) Cost Gains Fair Value
---- ----- ----------
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
====== ====== ======
1997
SHORT-TERM INVESTMENTS
Available-for-sale securities:
Certificates of deposit $ 5.0 $ - $ 5.0
Bankers acceptances 15.0 - 15.0
Corporate bonds 7.1 - 7.1
Auction rate preferred stock 29.0 - 29.0
U.S. government and federal
agency debt securities 9.0 - 9.0
Held-to-maturity securities:
Auction rate preferred stock 14.5 - 14.5
------ ------ ------
Total short-term investments $ 79.6 $ - $ 79.6
====== ====== ======
LONG-TERM INVESTMENTS
Available-for-sale securities:
Equity securities $ 2.1 $ 4.3 $ 6.4
------ ------ ------
Total long-term investments $ 2.1 $ 4.3 $ 6.4
====== ====== ======
Gross unrealized losses were not material for either fiscal 1998 or
1997. At May 25, 1997, long-term investments of $6.4 million were
included in other assets.
At May 31, 1998, the Company held $0.5 million and $429.6 million
of available-for-sale and held-to-maturity securities, respectively,
that are classified as cash equivalents on the consolidated balance
sheet. These cash equivalents consist of the following (in millions):
bank time deposits ($158.9), institutional money market funds ($9.9) and
commercial paper ($261.3).
At May 25, 1997, the Company held $95.3 million and $771.7 million
of available-for-sale and held-to-maturity securities, respectively,
that are classified as cash equivalents on the consolidated balance
sheet. These cash equivalents consist of the following (in millions):
bank time deposits ($466.8), institutional money market funds ($129.2),
certificates of deposit ($15.0), commercial paper ($184.8), bankers
acceptances ($26.2) and demand notes ($45.0).
The net unrealized gains on available-for-sale securities of $0.1
million at May 31, 1998 and $4.3 million at May 25, 1997 are included in
retained earnings.
Off-Balance Sheet Financial Instruments
Foreign Currency Instruments
The objective of the Company's foreign exchange risk management policy
is to preserve the U.S. dollar value of after-tax cash flow in relation
to non-U.S. dollar currency movements. The Company uses forward and
option contracts to hedge firm commitments and anticipatory exposures.
These exposures primarily comprise sales of the Company's products in
currencies other than the U.S. dollar, a majority of which are made
through the Company's subsidiaries in Europe and Japan. Gains and
losses on financial instruments that are intended to hedge an
identifiable firm commitment are deferred and included in the
measurement of the underlying transaction. Gains and losses on hedges
of anticipated transactions are deferred until such time as the
underlying transactions are recognized or immediately when the
transaction is no longer expected to occur. In addition, the Company
uses forward and option contracts to hedge certain non-U.S. dollar
denominated asset and liability positions. Gains and losses on these
contracts are matched with the corresponding effect of currency
movements on these financial positions. Gains and losses from foreign
currency transactions were not significant for fiscal 1998, 1997 and
1996.
Interest Rate Derivatives
The Company utilizes swap agreements to exchange the fixed interest rate
of certain long-term U.S. dollar debt for a variable U.S. dollar
interest rate and to exchange the variable interest rate of certain
long-term Japanese yen debt for a fixed Japanese yen interest rate (1.7
percent at May 31, 1998). The variable rates on swaps (6.2 percent to
6.8 percent at May 31, 1998) are based primarily on U.S. dollar LIBOR
and reset on a monthly, quarterly or semi-annual basis. These
agreements that have maturities of up to five years involve the exchange
of fixed rate interest payments for variable rate interest payments
without exchange of the underlying principal amounts. The differential
between fixed and variable rates to be paid or received is accrued as
interest rates change in accordance with the agreements and is included
in current interest expense.
The Company utilizes interest rate collars to limit the Company's
exposure to fluctuation in short-term returns on certain investments in
its portfolio by locking in a range of interest rates. An interest rate
collar is a no-cost structure that consists of a purchased option and a
sold option, which are entered into simultaneously with the same
counterparty. The Company receives a payment when the three-month LIBOR
falls below predetermined levels and makes a payment when the three-
month LIBOR rises above predetermined levels. These payments are
recorded as adjustments to interest income. All interest rate option
contracts outstanding at May 31, 1998 expire within one year.
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 31, 1998 and May 25,
1997. 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 31, 1998 and May 25, 1997. The credit risk amount
shown in the table represents the Company's gross exposure to potential
accounting loss on these transactions if all counterparties failed to
perform according to the terms of the contract, based on then-current
currency exchange rate or interest rate at each respective date.
Although the following table reflects the notional principal, fair value
and credit risk amounts of the off-balance sheet instruments, it does
not reflect the gains or losses associated with the exposures and
transactions that the off-balance sheet instruments are intended to
hedge. The amounts ultimately realized upon settlement of these
financial instruments, together with the gains and losses on the
underlying exposures, will depend on actual market conditions during the
remaining life of the instruments.
Transactions Qualifying for Hedge Accounting:
Notional Estimated Credit
(In Millions) Principal Fair Value Risk
--------- ---------- ----
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 $ 10.0 $ 0.1 $ 0.2
To sell dollars $ 33.3 $ (0.4) $ 0.2
Purchased options $ 28.6 $ 0.8 $ 0.8
1997
INTEREST RATE INSTRUMENTS
Swaps:
Fixed to variable $ 175.0 $ 0.4 $ 0.4
Variable to fixed $ 19.4 $ (0.4) $ -
Interest rate collars $ 50.0 $ - $ -
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts:
To buy dollars $ 20.4 $ - $ 0.5
To sell dollars $ 45.1 $ - $ 0.2
Purchased options $ 36.5 $ 0.2 $ 0.2
The Company has outstanding currency exchange contracts predominantly to
buy Singapore dollars and pound sterling and to sell U.S. dollars in the
future. The Company also has outstanding currency exchange contracts to
sell Italian lira and Japanese yen and to purchase U.S. dollars in the
future. All foreign exchange forward contracts expire within one year.
Unrealized gains and losses on foreign exchange forward contracts are
deferred and recognized in income in the same period as the hedged
transactions. Unrealized gains and losses on such agreements at May 31,
1998 and May 25, 1997 are immaterial. The Company has purchased foreign
currency options denominated in Japanese yen and German deutsche mark.
All foreign currency option contracts expire within one year. Premiums
on purchased foreign exchange option contracts are amortized over the
life of the option. Deferred gains on these option contracts are
deferred until the occurrence of the hedged transaction and recognized
as a component of the hedged transaction. Deferred gains on such
agreements at May 31, 1998 and May 25, 1997 are immaterial.
Fair Value of Financial Instruments
A summary table of estimated fair values of financial instruments at
fiscal year-end follows:
1998 1997
------------------- -------------------
Carrying Estimated Carrying Estimated
(In Millions) Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Long-term investments $ - $ - $ 6.4 $ 6.4
Long-term debt $(390.7) $(373.4) $(460.5) $(467.4)
Currency forward contracts:
To buy dollars $ - $ 0.1 $ 0.7 $ -
To sell dollars $ 0.5 $ (0.4) $ (0.5) $ -
Currency options $ (0.2) $ 0.8 $ 0.3 $ 0.2
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily investments and trade
receivables. The Company's investment policy requires cash investments
to be placed with high-credit quality counterparties and to limit the
amount of credit from any one financial institution or direct issuer.
The Company sells its products to distributors and original equipment
manufacturers involved in a variety of industries including computers
and peripherals, automotive and telecommunications. National performs
continuing credit evaluations of its customers whenever deemed necessary
and generally does not require collateral. Historically, the Company
has not experienced significant losses related to receivables from
individual customers or groups of customers in any particular industry
or geographic area.
Note 3. Restructuring of Operations
Fiscal 1998 Cost Reduction Action
As part of an overall cost reduction plan implemented in April 1998, the
Company announced a worldwide workforce reduction of approximately 1,400
people, primarily in its Santa Clara, California, headquarters and other
front-end wafer manufacturing operations. This included approximately
500 employees affected by the previously announced closure of the
Company's 5- and 6-inch wafer manufacturing facilities in Santa Clara.
In addition to new cost reduction actions, the plan includes
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 net $63.8 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.
Of these charges, $32.5 million represent cash charges. These charges
were partially offset by the release of $6.8 million of excess reserves
for severance and other exit costs related to the Company's
reorganization of its operating structure in the first quarter of fiscal
1997 and the release of $3.0 million of excess reserves for other exit
costs related to the Company's planned realignment of its manufacturing
facilities announced in the fourth quarter of fiscal 1997.
In connection with these cost reduction actions, the Company paid
$9.6 million of severance to approximately 357 terminated employees.
Included in accrued liabilities at May 31, 1998 is $25.0 million related
to severance and other exit costs for those actions that have not yet
been completed as of May 31, 1998. The Company expects these actions to
be completed by the end of calendar 1998.
Fairchild Semiconductor
In June 1996, the Company reorganized its operating structure into four
business groups that comprised the Analog Group, the Communications and
Consumer Group, the Personal Systems Group and the Fairchild
Semiconductor ("Fairchild") Group. The purpose of the reorganization
was to enhance the focus and support of the Company's strength in analog
and mixed-signal technology. In connection with this reorganization,
Fairchild was formed as a separate organization consisting of the
Company's family logic, memory and discrete product lines, which the
Company announced it intended to divest. As a result, the Company
recorded a $55.3 million special charge that included a restructuring
charge of $49.7 million for the write-down of fixed assets to estimated
fair value, as well as costs associated with staffing reductions and
other exit costs necessary to reduce the Company's infrastructure in
both Fairchild and the remaining National core business. Of the $49.7
million restructuring charge, $39.7 million represented cash charges and
$10.0 million represented fixed asset write-downs and other noncash
items. The remaining components of the $55.3 million special charge were
recorded in cost of sales and consisted of $2.0 million to write-down
certain Fairchild inventory to net realizable value and $3.6 million for
other cost reduction activities.
As a result of these work force reductions, the Company paid $6.9
million of severance to approximately 87 terminated employees and $3.3
million for other exit costs. Included in accrued liabilities at May
31, 1998 was $5.1 million related to remaining severance and other costs
of restructuring activities from the realignment of the Company's
selling, general and administrative expenses. These costs are expected
to be paid over the next 6 months. In fiscal 1997, the Company also
paid approximately $5.2 million in retention bonuses to certain
Fairchild employees, which were expensed to operations.
The Company's reorganization included plans to divest the Fairchild
businesses, including related assets, by the end of fiscal 1997. The
Fairchild fixed assets held for disposition included land, buildings and
building improvements, and equipment associated with the 4-inch, 5-inch
and 6-inch wafer fabrication operations in South Portland, Maine, the 6-
inch wafer fabrication operation in West Jordan, Utah, and the assembly
and test operations in Penang, Malaysia, and Cebu, Philippines. The
carrying value of the Fairchild fixed assets held for disposition was
$318.5 million. The Company originally recorded a $192.0 million
charge, as part of the restructuring charge, primarily to write-down
Fairchild assets to estimated fair value. This charge was fully
reversed in the third quarter of fiscal 1997 when the disposition of the
Fairchild businesses and related assets became imminent and it was
apparent that the reserves were no longer required. In March 1997, the
Company completed the disposition of Fairchild under a recapitalization
transaction with Sterling, LLC, a Citicorp Venture Capital, Ltd.
investment portfolio company in related businesses, and Fairchild's
management. The recapitalization was valued at $550 million. In
addition to retaining a 15 percent equity interest in Fairchild, for
which the Company invested $12.9 million, the Company received cash of
$401 million and a promissory note with a face value of $77 million, and
certain liabilities were assumed by Fairchild. The Company recorded a
gain of $40.6 million from the disposition.
Realignment of Manufacturing Facilities
In May 1997, the Company announced that it planned a comprehensive
realignment of its manufacturing facilities designed to accelerate its
production transition to manufacturing 8-inch wafers with 0.35-micron
circuit geometries, reduce costs and rationalize production flows. In
connection with this plan, the Company recorded a restructuring charge
of $84.5 million that included an impairment loss of $60.1 million
related to the write-down of certain assets in its Arlington wafer
manufacturing facility. This impairment arose from the Company's
cancellation of further investment in its 6-inch, 0.65-micron wafer
fabrication expansion that began in 1995. The Company's acceleration of
investment in its 8-inch wafer fabrication facility in Maine, which has
resulted in the availability of 0.35-micron capacity sooner than
previously expected, has significantly reduced the Company's
requirements for 0.65-micron capacity.
In addition to the impairment loss, the Company also recorded $11.0
million of exit costs related to the closure of the 5- and 6-inch wafer
fabrication facilities in Santa Clara. The closure process is expected
to be completed within the next 6 months, during which time the Company
will transfer remaining production activities to other existing
manufacturing lines. The exit costs primarily related to severance
costs, the removal of production equipment and the dismantling of the
production facilities. Approximately 500 employees are currently
employed in these two wafer fabrication facilities and the Company does
not expect to place the majority of the affected employees elsewhere in
the organization. The Company expects to pay approximately $7.2 million
in retention bonuses to certain Santa Clara, California, employees as a
result of the previously announced closure of the Santa Clara 5- and 6-
inch wafer fabrication facilities, which is expected to be completed by
the end of calendar 1998. These amounts are being expensed to
operations ratably over the employees' service period up through the
close of the facilities. The Company also recorded $10.3 million of
exit costs associated with the Company's decision to halt expansion of
its 6-inch wafer fabrication line in Greenock, Scotland. These costs
primarily 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 related to severance and
other exit costs at other manufacturing facilities. Of these
restructuring charges, $20.2 million represented cash charges.
During fiscal 1998, the Company paid $1.5 million of severance to
approximately 54 terminated employees and $0.8 million for other exit
costs related to these restructuring actions. Included in accrued
liabilities at May 31, 1998 is $15.6 million related to severance and
other exit costs for those actions that have not yet been completed as
of May 31, 1998.
Other Restructuring Actions
During fiscal year 1996, the Company utilized $6.8 million of
restructuring reserves primarily attributable to severance and fixed
asset disposals related to the completion of the consolidation of two
California locations into one location of the Company's wholly owned
subsidiary, Dynacraft, Inc. ("DCI"), which was sold in fiscal 1996, and
the transfer of the remaining military assembly operations in South
Portland, Maine, to Singapore.
Note 4. Acquisitions
As discussed in Note 1, the Company completed its merger with Cyrix in
November 1997. Cyrix designs, develops and markets X86 software-
compatible microprocessors of original design for the personal computer
marketplace. 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. Since the Company repurchased substantially all of the
outstanding Cyrix 5.5% convertible subordinated notes during January
1998 (See Note 6), 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 Years Ended
November 23, May 25, May 26,
(In Millions) 1997 1997 1996
---------------- ---- ----
Net sales:
National $1,241.1 $2,507.3 $2,623.1
Cyrix 135.6 177.1 210.3
-------- -------- --------
Total sales $1,376.7 $2,684.4 $2,833.4
======== ======== ========
Net income (loss):
National $ 120.1 $ 27.5 $ 185.4
Cyrix (28.6) (25.9) 15.6
-------- -------- --------
Net income $ 91.5 $ 1.6 $ 201.0
======== ======== ========
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 have
been 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 include 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 expects to pay approximately $10.1 million in retention
bonuses to certain Cyrix employees. These amounts are being expensed to
operations ratably over the employees' service period. The service
period varies by employee, but is generally 18 months following the
consummation of the merger.
The Company also completed the acquisition of ComCore
Semiconductor, Inc. ("ComCore") in late 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. The Company
believes that this technology will help position it as a leader in the
application of advanced DSP technology to communications. In connection
with the acquisition, the Company recorded in the fourth quarter of
fiscal 1998, 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 will be
charged to operations, primarily research and development, over the next
three years. The in-process R&D had not reached technological
feasibility and had no alternative uses.
Pro forma results of operations for the ComCore acquisition have
not been presented, since ComCore is a development stage company and
results of operations to date have been 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 will be charged to operating expenses, primarily
research and development, over the next 30 months.
Pro forma results of operations for the Mediamatics acquisition
have not been presented, since Mediamatics is a development stage
company and results of operations to date have been insignificant.
Note 5. Consolidated Financial Statements Details
(In Millions) 1998 1997
---- ----
RECEIVABLE ALLOWANCES
Doubtful accounts $ 8.9 $ 4.1
Returns and allowances 41.4 37.3
-------- --------
Total receivable allowances $ 50.3 $ 41.4
======== ========
INVENTORIES
Raw materials $ 19.3 $ 25.0
Work in process 176.0 133.0
Finished goods 88.6 47.8
-------- --------
Total inventories $ 283.9 $ 205.8
======== ========
PROPERTY, PLANT AND EQUIPMENT
Land $ 24.8 $ 24.1
Buildings and improvements 761.0 471.8
Machinery and equipment 1,713.6 1,453.7
Construction in progress 440.3 470.8
-------- --------
Total property, plant and equipment 2,939.7 2,420.4
Less accumulated depreciation and amortization 1,283.9 1,071.4
-------- --------
Property, plant and equipment, net $1,655.8 $1,349.0
======== ========
ACCRUED EXPENSES
Payroll and employee related $ 145.8 $ 162.2
Restructuring of operations 45.7 39.9
Other 119.4 104.7
-------- --------
Total accrued expenses $ 310.9 $ 306.8
======== ========
(In Millions) 1998 1997 1996
---- ---- ----
OTHER INCOME
Net intellectual property income $ 15.7 $ 10.1 $ 31.7
Gain on sale of investments, net 9.2 0.8 4.3
Other - 7.8 11.5
------ ------ ------
Total other income, net $ 24.9 $ 18.7 $ 47.5
====== ====== ======
INTEREST INCOME, NET
Interest income $ 48.6 $ 31.0 $ 32.1
Interest expense (26.3) (24.9) (22.7)
------- ------- -------
Interest income, net $ 22.3 $ 6.1 $ 9.4
====== ====== ======
Intellectual property income is net of commissions. For fiscal 1998,
net intellectual property income included $11.2 million related to a
significant licensing arrangement with a Korean firm. Intellectual
property income declined in fiscal 1998, because several license
arrangements expired at the end of fiscal 1996. Aside from the one
licensing agreement in fiscal 1998 with the Korean firm, none of the
other license agreements in fiscal 1998 were considered individually
material and none of the license arrangements in either fiscal 1997 or
fiscal 1996 was considered individually material.
Note 6. Debt
Debt at fiscal year-end consists of the following:
(In Millions) 1998 1997
---- ----
Convertible subordinated notes payable at 6.5%,
net of debt issuance costs $ 255.1 $ 254.3
Cyrix convertible subordinated notes payable at 5.5% 0.1 126.5
Notes secured by real estate payable at 7.1% - 12.6% 20.1 22.7
Notes secured by equipment payable at 6.4% - 6.6% 132.6 48.3
Unsecured loan payable at 6.2% 1.9 1.9
Convertible subordinated promissory notes 15.0 -
Other debt 18.5 19.4
Obligations under capital leases 1.3 2.8
------- -------
Total debt 444.6 475.9
Less current portion of long-term debt 53.9 15.4
------- -------
Long-term debt $ 390.7 $ 460.5
======= =======
In connection with a retention arrangement related to the
acquisition of ComCore in May 1998, the Company issued convertible
subordinated promissory notes to each of the founding shareholders of
ComCore for a total $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.
In February 1998, the Company entered into a second equipment
financing agreement with a group of banks providing up to $100 million
over a one-year period under which it made an initial draw of $50.0
million. Terms under the agreement are similar to the terms of an
earlier equipment financing agreement the Company entered into in
November 1996, except that borrowings under the second agreement bear
interest at the one-month LIBOR rate plus 70 basis points (6.36 percent
at May 31, 1998). Principal and interest are due monthly over a five-
year period. Also in February 1998, the Company made a final draw of
$49.8 million under the equipment financing agreement entered into in
November 1996.
In November 1996, the Company entered into an equipment financing
agreement with a group of banks, which provides the Company borrowings
in stated amounts up to $100 million over a one-year period. Borrowings
are collateralized by the underlying equipment. An initial loan draw of
$50.2 million was made in November 1996. Under the terms of the
agreement, the amounts financed bear interest at the one-month LIBOR
rate plus 90 basis points (6.56 percent at May 31, 1998) with principal
and interest due monthly over a five-year period.
Both equipment 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 Cyrix 5.5% convertible subordinated notes due June 1, 2001
("Notes") in a total amount of $126.5 million were issued in fiscal
1997. The Notes are convertible into shares of the Company's common
stock at the conversion rate of 20.7547 shares per $1,000 principal
amount of notes (equivalent to a conversion price of $48.18 per share).
The Notes are subordinated to present and future senior indebtedness of
the Company and are redeemable at the option of the Company, in whole or
in part, on or after June 1, 1999. 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.
In September 1995, the Company completed a private placement of
convertible subordinated notes in the total amount of $258.8 million to
certain qualified investors. Interest is payable semi-annually at an
annual rate of 6.5 percent. The notes, which mature in 2002, are not
redeemable by the Company prior to October 3, 1998. Thereafter, the
notes are redeemable at the option of the Company, initially at 103.714
percent of face value and at decreasing prices thereafter to 100 percent
of face value at maturity, plus accrued interest. The notes are
convertible at any time into shares of the Company's common stock at a
conversion price of $42.78 per share and are subordinated to senior
indebtedness of the Company. The notes have not been and will not be
registered under the Securities Act of 1933 and may not be offered or
sold within the United States absent registration or exemption from such
registration requirements.
Notes secured by real estate 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 has assumed two Cyrix notes payable that are
collateralized by land and buildings located in Richardson, Texas.
Interest on these notes is due either monthly or quarterly and principal
payments vary. The maturities range from November 1998 through
September 2006. The unsecured 6.2 percent note is due in semi-annual
installments through May 2007.
For each of the next five years and thereafter, debt and capital
lease obligations mature as follows:
Total Debt
(In Millions) (Principal Only)
----------------
1999 53.9
2000 34.0
2001 49.3
2002 30.5
2003 271.9
Thereafter 5.0
------
Total $444.6
======
The Company's multicurrency and revolving financing agreements provide
for multicurrency loans, letters of credit and standby letters of
credit. The multicurrency loan agreement ($30 million) expires in
October 1998. 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 31, 1998, $33.4 million of the
combined total commitments 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
31, 1998, under the most restrictive covenant, $299.2 million of the
Company's retained earnings was 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 consists
of the following:
(In Millions) 1998 1997 1996
---- ---- ----
Income (loss) before income taxes:
U.S. $(168.7) $ (51.6) $192.3
Non-U.S. 69.0 68.7 78.7
-------- -------- ------
$ (99.7) $ 17.1 $271.0
======== ======= ======
Income tax expense (benefit):
Current:
U.S. federal $ (45.6) $ 65.0 $ 25.7
U.S. state and local 0.4 - 1.4
Non-U.S. 21.7 15.7 25.6
-------- -------- ------
(23.5) 80.7 52.7
Deferred:
U.S. federal and state 9.4 (80.5) 7.7
Non-U.S. (4.5) (3.3) (8.0)
-------- -------- -------
4.9 (83.8) (0.3)
Charge in lieu of taxes attributable
to employee stock plans 17.5 18.6 17.6
-------- ------- -------
Income tax expense (benefit) $ (1.1) $ 15.5 $ 70.0
======== ======= ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May
31, 1998 and May 25, 1997 are presented below:
(In Millions) 1998 1997
---- ----
DEFERRED TAX ASSETS
Reserves and accruals $ 199.3 $ 205.6
Loss carryovers and other allowances - foreign 47.3 55.8
Federal and state credit carryovers 122.2 56.7
Other 15.3 6.5
-------- --------
Total gross deferred assets 384.1 324.6
-------- --------
Valuation allowance (184.8) (119.0)
-------- --------
Net deferred assets 199.3 205.6
-------- --------
DEFERRED TAX LIABILITIES
Capital allowance - foreign (4.4) (8.9)
Other liabilities (24.2) (26.2)
-------- --------
Total gross deferred liabilities (28.6) (35.1)
-------- --------
Net deferred tax assets $ 170.7 $ 170.5
======== ========
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 credits, which may not be realized, offset by utilization of
foreign net operating loss carryforwards 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 31, 1998.
The reconciliation between the income tax rate computed by applying
the U.S. federal statutory rate and the reported worldwide tax rate
follows:
1998 1997 1996
---- ---- ----
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 (7.9) (27.7) (3.6)
U.S. state and local taxes net
of federal benefits 0.4 0.4 0.3
Research and development credits - (62.0) (9.0)
Change in beginning of year valuation allowance - - (1.0)
Write-off of in-process R&D 38.4 134.2 -
Other 3.0 11.0 4.1
------ ------ ------
Effective tax rate (1.1)% 90.9% 25.8%
====== ====== ======
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 $452.5 million at May 31, 1998,
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 $117.4 million would
accrue after utilization of U.S. tax credits.
At May 31, 1998, the Company had U.S. credit carryovers of
approximately $84.5 million for tax return purposes, which primarily
expire from 1999 through 2014. In addition, the Company had state
credit carryovers of approximately $37.7 million, which primarily expire
from 2004 through 2011. The Company also had operating loss carryovers
of $177.2 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 July 1996, the Company received invoices of assessment from the
Malaysian Inland Revenue Department relating to the Company's Malaysian
manufacturing operations totaling approximately 146.9 million Malaysian
ringgits ($39.2 million) (exclusive of interest). The issues giving
rise to the assessments relate to intercompany transfer pricing,
primarily for fiscal 1993. The Company believes the assessments are
without merit and has been contesting them administratively. The
Company believes that adequate tax payments have been made and accruals
recorded for all tax matters for the years in question.
Note 8. Shareholders' Equity
Each outstanding share of the Company's common stock carries a stock
purchase right ("Right") issued pursuant to a dividend distribution
declared on August 5, 1988. When exercisable, each Right entitles the
registered holder to purchase one one-thousandth of a share of the
Company's Series A Junior Participating Preferred Stock at a price of
$60.00 per one-thousandth share, subject to adjustment. The Rights are
attached to all outstanding shares of common stock and no separate
Rights certificates have been distributed.
The Rights will become exercisable and will detach from the common
stock in the event any individual or group acquires 20 percent or more
of the Company's common stock, or announces a tender or exchange offer
which, if consummated, would result in that person or group owning at
least 20 percent of the Company's common stock. If such person or group
actually acquires 20 percent or more of the Company's common stock
(except pursuant to certain cash tender offers for all of the Company's
common stock), each Right will entitle the holder to purchase, at the
Right's then-current exercise prices, the Company's common stock in an
amount having a market value equal to twice the exercise price.
Similarly, if after the Rights become exercisable, the Company merges or
consolidates with or sells 50 percent or more of its assets or earning
power to another person, each Right will then entitle the holder to
purchase, at the Right's then-current exercise price, the stock of the
acquiring company in an amount having a market value equal to twice the
exercise price.
The Company may redeem the Rights at $0.01 per Right at any time
prior to acquisition by a person or group of 20 percent or more of the
Company's outstanding common stock. The Rights will expire on August 8,
2006, unless earlier redeemed. In November 1997, the Company
completed the merger of its subsidiary with Cyrix Corporation (See Note
4). Under the terms of the merger, each share of Cyrix common stock was
exchanged for 0.825 of a share of National common stock and a total of
16,440,667 shares of National common stock was issued to current holders
of Cyrix common stock.
In November 1995, National called for redemption in December 1995
of all of the shares of the $32.50 Convertible Preferred Shares, $0.50
par value (the "Convertible Preferred Shares"). All of the Convertible
Preferred Shares were redeemed for the number of shares of common stock
that were issuable at a conversion rate of 35.273 shares of common stock
for each Convertible Preferred Share, resulting in a total of 12,169,185
additional shares of common stock being issued.
In connection with the private placement of convertible
subordinated notes completed in September 1995 (See Note 6), the Company
has reserved for issuance a total of 6,048,387 shares of common stock
issuable upon conversion of the outstanding 6.5 percent convertible
subordinated notes due 2002. The Company also has reserved for issuance
1,619 shares of common stock issuable upon conversion of the Cyrix
Corporation 5.5% convertible subordinated notes (See Note 4).
During fiscal 1996, National purchased 2,450,000 shares on the open
market at a cost of $63.0 million. Of these repurchased shares the
Company used 160,427 shares for issuance of stock under its various
benefit plans in fiscal 1996. All of the remaining repurchased shares
were retired at the end of fiscal 1996. No shares have been repurchased
since calendar year 1995.
National has paid no cash dividends on its common stock and intends
to continue its practice of reinvesting all earnings.
Note 9. Stock-Based Compensation Plans
Stock Option and Purchase Plans
National has a stock option plan under which officers and key employees
may be granted nonqualified or incentive stock options to purchase up to
39,354,929 shares of the Company's common stock. Generally, the terms of
this plan provide that options are granted at the market price on the
date of grant and expire up to a maximum of ten years and one day after
grant or three months after termination of employment (up to five years
after termination due to death, disability or retirement), whichever
occurs first. Options can vest after a six-month period, but most vest
ratably over a four-year period. Vesting of options is accelerated in
certain circumstances. Vesting on options that had been held for a
minimum of six months by employees transferring to Fairchild was
accelerated in connection with the Fairchild disposition.
National also has a stock option plan (the "employees stock option
plan") under which employees who are not executive officers of the
Company (as defined in the plan) may be granted nonqualified stock
options to purchase up to 20,000,000 shares of the Company's common
stock. Like the stock option plan for officers and key employees, the
terms of this plan provide that options are granted at the market price
on the date of grant and expire up to a maximum of ten years and one day
after grant or three months after termination of employment (up to five
years after termination due to death, disability or retirement),
whichever occurs first. Options can vest after a six-month period, but
most vest ratably over a four-year period and vesting is accelerated in
certain circumstances.
In connection with National's merger with Cyrix in November 1997
(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 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. A total of 2,876,444 shares of
the Company's common stock can be issued under the three Cyrix plans.
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
Employee Stock Purchase Plan and the Cyrix Non-Discretionary Non-
Employee Directors Stock Plan have now expired and no more shares can be
issued under them. Options under the Cyrix 1988 Incentive Stock Plan
expire up to a maximum of ten years after grant, subject to earlier
expiration upon termination of employment and no more options will be
granted under the Cyrix 1988 Incentive Stock Plan.
In connection with the acquisition of ComCore in May 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. Vesting under the
ComCore option plan typically begins one year after grant date and in
monthly increments thereafter. The prices of the options granted under
the original option grant were set by the ComCore plan's administrator
but were adjusted at the time of the acquisition by the exchange rate,
with a minimum price of $0.50 per share. 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 31, 1998, options to purchase
258,695 shares at exercise prices ranging $0.50-$0.77 were outstanding
under the ComCore plan with a weighted average exercise price of $0.53
and weighted-average remaining contractual life of 9.1 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. Vesting under the Mediamatics stock option plans can begin as
early as the grant date, although most options granted under the plans
vest beginning after one year and in quarterly increments thereafter.
The price for the options granted under the original option grant was
set by the Mediamatics plans' administrator. At the time of the
Mediamatics acquisition, the option price was adjusted by the exchange
rate. The Mediamatics options expire up to 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 unearned compensation in the amount of
$9.2 million, which represents the difference between the fair market
value at the new measurement date and the exercise price of the options.
Unearned compensation which is included as a separate component of
shareholders' equity is amortized to operations over the vesting period
of the respective options. Related compensation expense for fiscal 1998
and 1997 was $2.3 million and $0.6 million, respectively. At May 31,
1998, options to purchase 578,399 shares at exercise prices ranging
$1.59-$3.19 were outstanding under the Mediamatics plans with a
weighted-average exercise price of $2.27 and weighted-average remaining
contractual life of 6.5 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 31, 1998,
options to purchase 80,000 shares of common stock had been granted under
the director stock plan with a weighted-average exercise price of $39.02
and weighted-average remaining contractual life of 9.4 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 which authorizes the
issuance of up to 19,950,000 shares of common stock in quarterly
offerings to eligible employees at a price which is equal to 85 percent
of the lower of the common stock's fair market value at the beginning
and end of a quarterly period. 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 end of a quarterly period.
Unlike stock purchased under the U.S. stock purchase plan, the stock
purchased under the global stock purchase plan for the account of an
employee can be held by a fiduciary in an offshore trust, which allows
employees located in countries that do not permit direct stock ownership
to participate in a Company stock plan. In addition, the participant's
employing company is responsible for paying the difference between the
purchase price set by the terms of the plan and the fair market value at
the time of the purchase.
Changes in options outstanding under options granted by the Company
during fiscal 1998, 1997 and 1996, whether under the option or purchase
plan or otherwise (but excluding the ComCore and Mediamatics options),
were as follows:
Number of Shares Weighted Average
(In Millions) Exercise Price
------------- --------------
Outstanding May 28, 1995 13.9 $ 11.53
Granted 4.8 $ 27.44
Exercised (3.1) $ 6.66
Cancelled (1.3) $ 24.22
-----
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 at May 31, 1998 22.0 $ 23.28
=====
Expiration dates for options outstanding at May 31, 1998 range from July
19, 1998 to April 27, 2008.
The following tables summarize information about options outstanding
under these plans (excluding the ComCore and Mediamatics options) at May
31, 1998:
Outstanding Options
------------------------------------------
Weighted
Average Weighted
Number Remaining Average
of Shares Contractual Life Exercise
Range of Exercise Prices (In Millions) (In Years) Price
- ------------------------ ------------- ---------- -----
$0.50-$2.81 0.1 2.8 $ 1.52
$2.87-$3.75 0.1 2.7 $ 3.42
$4.38-$6.50 1.3 2.6 $ 4.49
$7.00-$9.39 0.1 3.1 $ 8.56
$11.38-$17.00 6.1 7.4 $15.38
$17.13-$25.69 3.7 8.0 $22.18
$25.81-$37.58 10.3 8.7 $30.58
$39.39-$54.39 0.3 8.0 $44.12
Total 22.0 7.8 $23.28
Options Exercisable
--------------------------
Weighted
Number Average
of Shares Exercise
Range of Exercise Prices (In Millions) Price
- ------------------------ ------------- -------
$0.50-$2.81 0.1 $ 1.52
$2.87-$3.75 0.1 $ 3.42
$4.38-$6.50 1.3 $ 4.49
$7.00-$9.39 0.1 $ 8.56
$11.38-$17.00 2.8 $15.25
$17.13-$25.69 1.4 $21.40
$25.81-$37.58 1.4 $28.41
$39.39-$54.39 0.1 $46.99
Total 7.3 $17.09
Under the terms of the stock purchase plan and the global stock purchase
plan, the Company issued 1.1 million shares in fiscal 1998, 1.4 million
shares in fiscal 1997 and 1.5 million shares in fiscal 1996 to employees
for $23.4 million, $20.8 million and $24.2 million, respectively.
Under the stock option and purchase plans, 3.8 million shares of
common stock were issued during fiscal 1998. As of May 31, 1998, 44.9
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.
As a consequence of the significant decrease in the market price of
the Company's common stock in the fourth quarter of fiscal 1998, the
Stock Option and Compensation Committee of the Board of Directors
approved an option reissuance grant for employees on June 29, 1998. The
Company's President and Chief Executive Officer and Executive Staff
members were excluded from the reissuance grant. Under the reissuance
grant, each employee is able to exchange those 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 will restart as of June 29, 1998. The options vest
over a four-year period with the first vesting on June 29, 1999 and
thereafter, ratably over the remaining three years. The Company
believes that this action ensures that options previously granted
provide a meaningful incentive to its employees. Options to purchase
approximately 9.1 million shares are subject to reissuance, most of
which were granted in fiscal 1998. The effect of this reissuance grant
is not reflected in the foregoing tables.
Other Stock Plans
National has a director stock plan which authorizes the issuance of up
to 200,000 shares of the Company's common stock to eligible nonemployee
directors of the Company. The common stock 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 which is issued under
the director stock plan. As of May 31, 1998, 46,086 shares had been
issued under the director stock plan and 153,914 shares were reserved
for future issuances.
National also has a performance award plan covering performance
cycles of three to five years. Although the Company has discontinued
new awards under the plan beginning in fiscal 1997, performance cycles
begun in fiscal 1995 and 1996 are not yet completed. The plan
authorizes the issuance of up to 1.0 million shares of the Company's
common stock as full or partial payment of awards to plan participants
based on performance units and the achievement of certain specific
performance goals during a performance plan cycle. Performance plan
cycles are three to five years depending on specific performance
measurements, and the earliest a payout can occur is the third year of a
performance plan cycle. Participants are 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
1998. The Company issued 81,666 shares in fiscal 1997 in the second
payout under the plan and issued 111,990 shares in fiscal 1996 in the
first payout under the plan. As of May 31, 1998, 806,344 shares were
reserved for future issuances. Expense recorded in fiscal 1997 and 1996
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 1998 and 1997,
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 $0.7 million and $11.7 million of unearned compensation
during fiscal 1998 and 1997, respectively, included as a separate
component of shareholders' equity to be amortized to operations ratably
over the respective restriction periods. No shares were issued under
the restricted stock plan in fiscal 1996. As of May 31, 1998, 1,428,500
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 1998 and 1997 related
to all shares of restricted stock was $14.5 million and $4.9 million,
respectively. Compensation expense was immaterial for fiscal 1996. At
May 31, 1998, the weighted-average grant date fair value and weighted-
average contractual life for outstanding shares of restricted stock was
$18.03 and 8.2 years, respectively.
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 1998,
1997 and 1996 was $14.22, $7.42 and $10.45 per share, respectively. The
weighted-average fair value of shares granted under the stock purchase
plans was $12.60, $5.07 and $4.88 for fiscal 1998, 1997 and 1996. 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 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Stock Option Plans
Expected life (in years) 4.4 4.4 4.4
Expected volatility 50% 48% 48%
Risk free interest rate 5.5% 6.2% 6.2%
Stock Purchase Plans
Expected life (in years) 0.3 0.3 0.3-1.1
Expected volatility 53% 53% 53%
Risk free interest rate 5.4% 5.6% 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) 1998 1997 1996
---- ---- ----
Net income (loss) - as reported $ (98.6) $ 1.6 $ 201.0
Net income (loss) - pro forma $(134.1) $ (20.5) $ 190.9
Basic earnings (loss) per share -
as reported $ (0.60) $ 0.01 $ 1.35
Basic earnings (loss) per share -
pro forma $ (0.82) $ (0.13) $ 1.32
Diluted earnings (loss) per share -
as reported $ (0.60) $ 0.01 $ 1.30
Diluted earnings (loss) per share -
pro forma $ (0.82) $ (0.13) $ 1.24
The effects on pro forma disclosures of applying SFAS No. 123 are
not likely to be representative of the effects on pro forma disclosures
of future years. Because SFAS No. 123 is applicable only to options
granted subsequent to May 28, 1995, the pro forma effects will not be
fully reflected until approximately fiscal 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 1998 were
74,651. As of May 31, 1998, 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 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) 1998 1997 1996
---- ---- ----
Profit sharing plan $ 5.1 $ 9.9 $13.0
Salary deferral "401(k)" plan $ 9.4 $10.6 $11.3
Non-U.S. pension and retirement plans $12.9 $ 7.6 $ 7.0
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) 1998 1997 1996
---- ---- ----
Service cost of benefits earned
during the year $3.9 $4.6 $4.3
Interest cost on projected benefit
obligation 3.6 4.3 3.7
Actual return on plan assets (9.1) (2.6) (3.9)
Net amortization and deferral 7.3 (2.5) (0.4)
----- ----- -----
Net periodic pension cost $5.7 $3.8 $3.7
===== ===== =====
The funded status of the plans at fiscal year-end is presented in the
following table:
(In Millions) 1998 1997
---- ----
Actuarial present value of benefit
obligations:
Vested benefit obligation $75.5 $44.0
===== =====
Accumulated benefit obligation $77.1 $46.2
===== =====
Projected benefit obligation $81.1 $53.7
Plan assets at fair value 47.9 33.1
----- -----
Projected benefit obligation in excess of
plan assets 33.2 20.6
Unrecognized net loss (16.8) (7.0)
Unrecognized net transition obligation 2.9 3.0
Adjustment to recognize minimum liability 12.5 -
----- -----
Accrued pension cost $31.8 $16.6
===== =====
The projected benefit obligation was determined using the following
assumptions:
1998 1997
---- ----
Discount rate 6.5%-7.0% 6.5%-8.0%
Rate of increase in compensation levels 3.5%-4.5% 3.5%-6.0%
Expected long-term return on assets 9.0% 9.0%
At May 31, 1998, the Company recorded an additional minimum liability of
$12.5 million 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 reduction to
shareholder's equity.
Note 11. Commitments and Contingencies
Commitments
The Company leases certain facilities and equipment under operating
lease arrangements that expire at various times through the year 2025.
Rental expenses under operating leases were $36.9 million, $47.6 million
and $42.1 million in fiscal 1998, 1997 and 1996, respectively.
Future minimum commitments under noncancelable operating leases are as
follows:
(In Millions)
-----------
1999 32.0
2000 26.9
2001 19.6
2002 14.8
2003 11.1
Thereafter 34.1
------
Total $138.5
======
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 $90.0 million and $80.0 million for fiscal 1999 and 2000,
respectively. 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 1998 and 1997, the Company's total purchases under the agreement
were $155.0 million and $30.3 million, respectively. The Company also
has certain continuing obligations arising from the Fairchild
transaction that include providing certain transition services to
Fairchild and indemnification for certain environmental and legal
matters. The Company believes it has adequately provided for these
obligations and it currently believes that the ultimate impact of these
obligations will not have a material adverse impact on the Company's
consolidated financial position or consolidated results of operations.
Cyrix has manufacturing agreements with International Business
Machines Corporation ("IBM"), which provide for IBM's Microelectronics
division to manufacture wafers of Cyrix-designed products for sale to
Cyrix through December 1999 at defined prices. Under the terms of one
of the agreements, Cyrix is responsible for the production costs of a
minimum quantity of products regardless of the number of products
actually ordered by the Company. Future annual minimum purchases
remaining under the agreement are $70.0 million in fiscal 1999 and $40.8
million in fiscal 2000. Total purchases under the agreements were
$130.7 million, $80.3 million and $33.8 million during fiscal 1998, 1997
and 1996, 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
and the alleged underpayment was reduced in a similar action in April
1994 to approximately $3.6 million. The revised alleged underpayment
could be subject to penalties that may be computed as a multiple of the
underpayment. The Company filed an administrative petition for relief
in October 1991 and 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 the
DCI assets and business, the Company retained responsibility for
environmental claims connected with DCI's Santa Clara, California,
operations and for environmental claims arising from National's conduct
of the DCI business prior to the disposition. With respect to
environmental matters involved in the Fairchild disposition, the Company
agreed to retain liability for current remediation projects and
environmental matters arising from National's prior operation of
Fairchild's plants in South Portland, Maine; West Jordan, Utah; Cebu,
Philippines; and Penang, Malaysia; and Fairchild agreed to arrange for
and perform the remediation and cleanup. The Company prepaid to
Fairchild the estimated costs of the remediation and cleanup and remains
responsible for costs and expenses incurred by Fairchild in excess of
the prepaid amounts.
In addition to the Santa Clara site, the Company has been
designated as a potentially responsible party ("PRP") by federal and
state agencies with respect to certain 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
1998, 1997 and 1996.
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. and Malaysia (See Note 7). 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. Industry and Geographic Segment Information
The Company operates in one industry segment and is engaged in the
design, development, manufacture and marketing of a wide variety of
semiconductor products, including analog integrated circuits, digital
integrated circuits, mixed analog and digital circuits, microprocessors,
microcontrollers, hybrid circuits, subsystems, electronic packaging and
miscellaneous services and supplies for the semiconductor industry and
original equipment manufacturers. National operates in three main
geographic areas. In the information that follows, sales include local
sales and exports made by operations within each area. Total sales by
geographic area include sales to unaffiliated customers and
intergeographic transfers, which are based on standard cost. To control
costs, a substantial portion of National's products are transported
between the Americas, Europe and the Asia Pacific region (including
Japan) in the process of being manufactured and sold. Sales to
unaffiliated customers have little correlation with the location of
manufacture. It is, therefore, not meaningful to present operating
profit by geographic area.
National conducts a substantial portion of its operations outside
of the U.S. and is subject to risks associated with non-U.S. operations,
such as political risks, currency controls and fluctuations, tariffs,
import controls and air transportation.
Asia
Pacific Elim & Consol-
(In Millions) Americas Europe Region Corporate idated
-------- ------ ------ --------- ------
1998
Sales to unaffiliated
customers $1,101.1 $ 604.5 $ 831.1 $ - $2,536.7
Transfers between
geographic areas 783.7 119.0 446.0 (1,348.7) -
-------- ------- -------- ---------- --------
Total sales $1,884.8 $ 723.5 $1,277.1 $(1,348.7) $2,536.7
======== ======= ======== ========== ========
Total assets $1,786.7 $ 201.9 $ 654.5 $ 457.6 $3,100.7
======== ======= ======== ========== ========
1997
Sales to unaffiliated
customers $1,250.0 $ 586.8 $ 847.6 $ - $2,684.4
Transfers between
geographic areas 459.6 98.0 797.2 (1,354.8) -
-------- ------- -------- ---------- --------
Total sales $1,709.6 $ 684.8 $1,644.8 $(1,354.8) $2,684.4
======== ======= ======== ========== ========
Total assets $1,672.0 $ 235.3 $ 580.5 $ 723.0 $3,210.8
======== ======= ======== ========== ========
1996
Sales to unaffiliated
customers $1,308.9 $ 641.3 $ 883.2 $ - $2,833.4
Transfers between
geographic areas 522.2 119.6 755.2 (1,397.0) -
-------- ------- -------- ---------- --------
Total sales $1,831.1 $ 760.9 $1,638.4 $(1,397.0) $2,833.4
======== ======= ======== ========== ========
Total assets $1,526.2 $ 249.7 $ 704.9 $ 430.5 $2,911.3
======== ======= ======== ========== ========
Note 13. Supplemental Disclosure of Cash Flow Information and Noncash
Investing and Financing Activities
(In Millions) 1998 1997 1996
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for:
Interest expense $34.8 $34.7 $25.7
Interest payment on tax settlements $ 0.1 $ - $18.3
Income taxes $12.0 $ 4.1 $34.3
(In Millions) 1998 1997 1996
---- ---- ----
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of stock for employee benefit plans $ 2.5 $ 3.2 $ 4.3
Tax benefit for employee stock option plans $ 17.5 $ 18.6 $ 17.6
Retirement of treasury stock $ - $ - $118.6
Change in unrealized gain on available-for-sale
securities $ 4.2 $ 3.9 $ 8.9
Unearned compensation charge relating
to restricted stock issuance $ 0.7 $ 11.7 $ 3.3
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 $ -
Amortization of unearned compensation $ 14.5 $ 4.9 $ -
Restricted stock cancellation $ 0.9 $ 0.8 $ -
Promissory note from Fairchild in connection with
the disposition of the Fairchild businesses $ - $ 65.0 $ -
Minimum pension liability $ 12.5 $ - $ -
Note 14. Financial Information by Quarter (Unaudited)
The following table presents the quarterly information for fiscal 1998
and 1997:
(In Millions, First Second Third Fourth
Except Per Share Amounts) Quarter Quarter Quarter Quarter
------- ------- ------- -------
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 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 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
========================================================================
1997
Net sales $ 615.3 $ 686.6 $ 712.0 $ 670.5
Gross margin $ 195.1 $ 246.8 $ 292.1 $ 277.9
Net income (loss) $(205.7) $ 26.1 $ 200.2 $ (19.0)
========================================================================
Basic earnings (loss)
per share $ (1.34) $ 0.17 $ 1.28 $ (0.12)
========================================================================
Weighted average common shares
outstanding used in basic
earnings per share 153.6 155.0 156.2 159.5
========================================================================
Diluted earnings (loss)
per share $ (1.34) $ 0.17 $ 1.20 $ (0.12)
========================================================================
Weighted average common and
potential common shares
outstanding used in diluted
earnings
per share 153.6 157.5 168.6 159.5
========================================================================
Common stock price - high $16.75 $23.88 $27.75 $32.25
Common stock price - low $13.00 $15.25 $22.75 $21.63
========================================================================
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 31, 1998, there were
approximately 11,878 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 31, 1998 and May 25, 1997, and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the years
in the three-year period ended May 31, 1998. 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 31,
1998 and May 25, 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended May 31,
1998 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 PEAT MARWICK LLP
Mountain View, California
June 10, 1998
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 1998 annual meeting of shareholders to be held
on or about September 25, 1998 and which will be filed in definitive
form pursuant to Regulation 14a on or about August 20, 1998 (hereinafter
"1998 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 1998 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 1998 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 1998 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 1998 Proxy Statement is incorporated herein by
reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Pages in
(a)1. Financial Statement this document
- -------------------------- -------------
For the three years ended May 31, 1998- 29
refer to Index in item 8
Independent Auditors' Report 59
(a) 2. Financial Statement Schedules
- -------------------------------------
Schedule II - Valuation and Qualifying Accounts 63
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 67 to
70 of this report are filed or incorporated by reference as part of this
report.
NATIONAL SEMICONDUCTOR CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In Millions)
Deducted from receivables
in the consolidated balance sheets
Doubtful Returns and
Description Accounts Allowances Total
Balances at May 28, 1995 $ 3.5 $ 33.7 $ 37.2
Additions charged against revenue 0.1 234.5 234.6
Additions (Deductions) - (232.4) (232.4)
------ -------- --------
Balances at May 26, 1996 3.6 35.8 39.4
Additions charged against revenue 3.7 240.5 244.2
Additions (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
Additions (Deductions) (0.6)(1) (209.9) (210.5)
------ -------- --------
Balances at May 31, 1998 $ 8.9 $ 41.4 $ 50.3
====== ======== ========
- -----------------------------------------
(1) Doubtful accounts written off, less recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL SEMICONDUCTOR CORPORATION
Date: August 3, 1998 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 3rd day of August
1998.
Signature Title
/S/ BRIAN L. HALLA* Chairman of the Board, President
---------------
Brian L. Halla and Chief Executive Officer
(Principal Executive Officer)
/S/ DONALD MACLEOD Executive Vice President, Finance
--------------
Donald Macleod and Chief Financial Officer
(Principal Financial Officer)
/S/ RICHARD D. CROWLEY, JR. * Vice President and Controller
-------------------------
Richard D. Crowley, Jr. (Principal Accounting Officer)
/S/ GARY P. ARNOLD * Director
----------------
Gary P. Arnold
/S/ ROBERT BESHAR * Director
---------------
Robert Beshar
/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/ J. TRACY O'ROURKE * Director
-------------------
J. Tracy O'Rourke
/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 333-57029 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 10, 1998, relating
to the consolidated balance sheets of National Semiconductor Corporation
and subsidiaries as of May 31, 1998, and May 25, 1997, and the related
consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended May 31, 1998
and the related financial statement schedule, which report appears on
page 59 of the 1998 Annual Report on Form 10-K of National Semiconductor
Corporation.
KPMG PEAT MARWICK LLP
Mountain View, California
August 3, 1998
INDEX TO EXHIBITS
Item 14(a) (3)
The following documents are filed as part of this report:
1. Financial Statements: reference is made to the Financial Statements
described under Part IV, Item 14(a) (1).
2. Other Exhibits:
Desig-
nation Description of Exhibit
2.1 Agreement and Plan of Recapitalization between Sterling Holding
Company, LLC and National Semiconductor Corporation(incorporated
by reference from the Exhibits to the Company's Form 8-K dated
March 11, 1997 filed March 26,1997).
2.2 Agreement and Plan of Merger by and among National Semiconductor
Corporation, Nova Acquisition Corporation and Cyrix Corporation
dated as of July 28, 1997 (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. 333-57029 which became effective June 17,
1998).
4.1 Form of Common Stock Certificate (incorporated by reference from
the Exhibits to the Company's Registration Statement on Form S-3
Registration No. 33-48935, which became effective October 5,
1992).
4.2 Rights Agreement (incorporated by reference from the Exhibits to
the Company's Registration Statement on Form 8-A filed August
10, 1988). First Amendment to the Rights Agreement dated as of
October 31, 1995 (incorporated by reference from the Exhibits to
the Company's Amendment No. 1 to the Registration Statement on
Form 8-A filed December 11, 1995). Second Amendment to the
Rights Agreement dated as of December 17, 1996 (incorporated by
reference from the Exhibits to the Company's Amendment No. 2 to
the Registration Statement on Form 8-A filed January 17, 1997).
4.3 Indenture dated as of September 15, 1995 (incorporated by
reference from the Exhibits to the Company's Registration
Statement on Form S-3 Registration No. 33-63649, which became
effective November 6, 1995).
4.4 Registration Rights Agreement dated as of September 21, 1995
(incorporated by reference from the Exhibits to the Company's
Registration Statement on Form S-3 Registration No. 33-63649,
which became effective November 6, 1995).
4.5 Form of Note (incorporated by reference from the Exhibits to the
Company's Registration Statement on From S-3 Registration
No.33-63649, which became effective November 6, 1995).
4.6 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).
4.7 Registration Rights Agreement dated as of May 28, 1996 between
Cyrix and Goldman, Sacks & 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 (incorporated by reference
from the Exhibits to the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders held September 30, 1994
filed on August 10, 1994). 1998 Executive Officer Incentive
Plan Agreement (incorporated by reference from the Exhibits to
the Company's 10-Q for the quarter ended August 24, 1997 filed
October 6, 1997).
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:
Consulting Agreement with Harry H. Wetzel (incorporated by
reference from the Exhibits to the Company's 10-K for the
fiscal year ended May 29, 1994 filed July 28, 1994).
10.11 Management Contract or Compensatory Plan or Arrangement:
Preferred Life Insurance Program (incorporated by reference
from the Exhibits to the Company's 10-K for the fiscal year
ended May 29, 1994 filed July 28, 1994).
10.12 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).
10.18 Management Contract or Compensatory Plan or Agreement: Form
of Change of Control Employment Agreement entered into with
Executive Officers of the Company.
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).
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 10.18
CHANGE OF CONTROL
EMPLOYMENT AGREEMENT
AGREEMENT by and between National Semiconductor Corporation, a
Delaware corporation (the "Company") and ________________ (the
"Executive"), dated as of the 24th day of April, 1998.
The Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its stockholders to
assure that the Company will have the continued dedication of the
Executive, notwithstanding the possibility, threat or occurrence of a
Change of Control (as defined below) of the Company. The Board believes
it is imperative to diminish the inevitable distraction of the Executive
by virtue of the personal uncertainties and risks created by a pending
or threatened Change of Control and to encourage the Executive's full
attention and dedication to the Company currently and in the event of
any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of
Control which ensure that the compensation and benefits expectations of
the Executive will be satisfied and which are competitive with those of
other corporations. Therefore, in order to accomplish these objectives
the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the
first date during the Change of Control Period (as defined in Section
l(b)) on which a Change of Control (as defined in Section 2) occurs.
Anything in this Agreement to the contrary notwithstanding, if a Change
of Control occurs and if the Executive's employment with the Company is
terminated prior to the date on which the Change of Control occurs, and
if it is reasonably demonstrated by the Executive that such termination
of employment (i) was at the request of a third party who has taken
steps reasonably calculated to effect a Change of Control or (ii)
otherwise arose in connection with or anticipation of a Change of
Control, then for all purposes of this Agreement the "Effective Date"
shall mean the date immediately prior to the date of such termination of
employment.
(b) The "Change of Control Period" shall mean the period
commencing on the date hereof and ending on the third anniversary of the
date hereof; provided, however, that commencing on the date one year
after the date hereof, and on each annual anniversary of such date (such
date and each annual anniversary thereof shall be hereinafter referred
to as the "Renewal Date"), unless previously terminated, the Change of
Control Period shall be automatically extended so as to terminate three
years from such Renewal Date, unless at least 60 days prior to the
Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change
of Control" shall mean:
(a) The acquisition by any individual, entity or group (within
the meaning of Section 13 (d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then outstanding shares
of common stock of the Company (the "Outstanding Company Common Stock")
or (ii) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided,
however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the
Company, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company or (iv) any acquisition by any corporation
pursuant to a transaction which complies with clauses (i), (ii) and
(iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by a
vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets
of the Company or the acquisition of assets of another corporation (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or
all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination, of
the Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding any.
corporation resulting from such Business Combination or any employee
benefit plan (or related trust) of the Company or any corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of
common stock of the corporation resulting from such Business Combination
or .the combined voting power of the then outstanding voting securities
of such corporation except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a majority of the
members of the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the time of
the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in
the employ of the Company subject to the terms and conditions of this
Agreement, for the period commencing on the Effective Date and ending on
the third anniversary of such date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements),
authority, duties and responsibilities shall be at least commensurate in
all material respects with the most significant of those held, exercised
and assigned to the Executive at any time during the 120-day period
immediately preceding the Effective Date and (B) the Executive's
services shall be performed at the location where the Executive was
employed immediately preceding the Effective Date or any office or
location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods
of vacation and sick leave to which the Executive is entitled, the
Executive agrees to devote reasonable attention and time during normal
business hours to the business and affairs of the Company and, to the
extent necessary to discharge the.responsibilities assigned to the
Executive hereunder, to use the Executive's reasonable best efforts to
perform faithfully and efficiently such responsibilities. During the
Employment Period it shall not be a violation of this Agreement for the
Executive to (A) serve on corporate, civic or charitable boards or
committees, (B) deliver lectures, fulfill speaking engagements or teach
at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance
of the Executive's responsibilities as an employee of the Company in
accordance with this Agreement. It is expressly understood and agreed
that to the extent that any such activities have been conducted by the
Executive prior to the Effective Date, the continued conduct of such
activities (or the conduct of activities similar in nature and scope
thereto) subsequent to the Effective Date shall not thereafter be deemed
to interfere with the performance of the Executive's responsibilities to
the Company.
(b) Compensation. (i) Base Salary. During the Employment
Period, the Executive shall receive an annual base salary ("Annual Base
Salary"), which shall be paid at a monthly rate, at least equal to
twelve times the highest monthly base salary paid or payable, including
any base salary which has been earned but deferred, to the Executive by
the Company and its affiliated companies in respect of the twelve-month
period immediately preceding the month in which the Effective Date
occurs. During the Employment Period, the Annual Base Salary shall be
reviewed no more than 12 months after the last salary increase awarded
to the Executive prior to the Effective Date and thereafter at least
annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement.
Annual Base Salary shall not be reduced after any such increase and the
term Annual Base Salary as utilized in this Agreement shall refer to
Annual Base Salary as so increased. As used in this Agreement, the term
"affiliated companies" shall include any company controlled by,
controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the
Executive shall be awarded, for each fiscal year ending during the
Employment Period, an annual bonus (the "Annual Bonus") in cash at least
equal to the Executive's highest bonus under the Company's Executive
Office Incentive Plan or any.comparable bonus under any predecessor or
successor plan, for the last three full fiscal years prior to the
Effective Date (annualized in the event that the Executive was not
employed by the Company for the whole of such fiscal year) (the "Recent
Annual Bonus"). Each such Annual Bonus shall be paid no later than the
end of the third month of the fiscal year next following the fiscal year
for which the Annual Bonus is awarded, unless the Executive shall elect
to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the
Employment Period, the Executive shall be entitled to participate in all
incentive, stock option, savings and retirement plans, practices,
policies and programs applicable generally to other peer executives of
the Company and its affiliated companies, but in no event shall such
plans, practices, policies and programs provide the Executive with
incentive opportunities (measured with respect to both regular and
special incentive opportunities, to the extent, if any, that such
distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the
most favorable of those provided by the Company and its affiliated
companies for the Executive under such plans, practices, policies and
programs as in effect at any time during the 120-day period immediately
preceding the Effective Date or if more favorable to the Executive,
those provided generally at any time after the Effective Date to other
peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be
eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs provided by the
Company and its affiliated companies (including, without limitation,
medical, prescription, dental, disability, salary continuance, employee
life, group life, accidental death and travel accident insurance plans
and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in no event
shall such plans, practices, policies and programs provide the Executive
with benefits which are less favorable, in the aggregate, than the most
favorable of such plans, practices, policies and programs in effect for
the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive,
those provided generally at any time after the Effective Date to other
peer executives of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in accordance with the most favorable
policies, practices and procedures of the Company and its affiliated
companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to
the Executive, as in effect generally at any time thereafter with
respect to other peer executives of the Company and its affiliated
companies.
(vi) Fringe Benefits. During the Employment Period, the
Executive shall be entitled to fringe benefits, including, without
limitation, tax and financial planning services and, if applicable, use
of an automobile and payment of related expenses, in accordance with the
most favorable plans, practices, programs and policies of the Company
and its affiliated companies in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or,
if more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies.
(vii) Office and Support Staff. During the Employment Period,
the Executive shall be entitled to an office or offices of a size and
with furnishings and other appointments, and to exclusive personal
secretarial and other assistance, at least equal to the most favorable
of the foregoing provided to the Executive by the Company and its
affiliated companies at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as
provided generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacations in accordance with the most
favorable plans, policies, programs and practices of the Company and its
affiliated companies as in effect for the Executive at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies.
5. Termination of Employment. (a) Death or Disability. The
Executive's employment shall terminate automatically upon the
Executive's death during the Employment Period. If the Company
determines in good faith that Disability of the Executive has occurred
during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in
accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's
employment with the Company shall terminate effective on the 30th day
after receipt of such notice by the Executive (the "Disability Effective
Date"), provided that, within the 30 days after such receipt, the
Executive shall not have returned to full-time performance of the
Executive's duties. For purposes of this Agreement, "Disability" shall
mean the absence of the Executive from the Executive's duties with the
Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is
determined to be total and permanent by a physician selected by the
Company or its insurers and reasonably acceptable to the Executive or
the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's
employment during the Employment Period for Cause. For purposes of this
Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Executive to
perform substantially the Executive's duties with the Company or one of
its affiliates (other than any such failure resulting from incapacity
due to physical or mental illness), after a written demand for
substantial performance is delivered to the Executive by the Board or
the Chief Executive Officer of the Company which specifically identifies
the manner in which the Board or Chief Executive Officer believes that
the Executive has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct
or gross misconduct which is materially and demonstrably injurious to
the Company.
For purposes of this provision, no act or failure to act, on the part of
the Executive, shall be considered "willful" unless it is done, or
omitted to be done, by the Executive in bad faith or without reasonable
belief that the Executive's action or omission was in the best interests
of the Company. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or upon the
instructions of the Chief Executive Officer or a senior officer of the
Company or based upon the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The
cessation of employment of the Executive shall not be deemed to be for
Cause unless and until there shall have been delivered to the Executive
a copy of a resolution duly adopted by the affirmative vote of not less
than three-quarters of the entire membership of the Board at a meeting
of the Board called and held for such purpose (after reasonable notice
is provided to the Executive and the Executive is given an opportunity,
together with counsel, to be heard before the Board), finding that, in
the good faith opinion of the Board, the Executive is guilty of the
conduct described in subparagraph (i) or (ii) above, and specifying the
particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated
by the Executive for Good Reason. For purposes of this Agreement, "Good
Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status, offices,
titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this Agreement, or
any other action by the Company which results in a diminution in such
position, authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt of
notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and
which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location other than as provided in Section 4(a)(i)(B) hereof
or the Company's requiring the Executive to travel on Company business
to a substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this
Agreement; or
(v) any failure by the Company to comply with and satisfy
Section 11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive. Anything in this
Agreement to the contrary notwithstanding, a termination by the
Executive for any reason during the 30-day period immediately following
the first anniversary of the Effective Date shall be deemed to be a
termination for Good Reason for all purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for
cause, or by the Executive for Good Reason, shall be communicated by
Notice of Termination to the other party hereto given in accordance with
Section 12(b) of this Agreement. For purposes of this Agreement, a
"Notice of Termination" means a written notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) to
the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt
of such notice, specifies the termination date (which date shall be not
more than thirty days after the giving of such notice). The failure by
the Executive or the Company to set forth in the Notice of Termination
any fact or circumstance which contributes to a showing of Good Reason
or Cause shall not waive any right of the Executive or the Company,
respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if
the Executive's employment is terminated by the Company for Cause, or by
the Executive for Good Reason, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company other
than for Cause or Disability, the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the date of death of the
Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination. (a) Good Reason;
Other Than for Cause, Death or Disability. If, during the Employment
Period, the Company shall terminate the Executive's employment other
than for Cause, Death or Disability or the Executive shall terminate
employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the
following amounts:
A. the sum of (1) the Executive's Annual Base Salary
through the Date of Termination to the extent not theretofore paid, (2)
the product of (x) the higher of (I) the Recent Annual Bonus and (II)
the Annual Bonus paid or payable, including any bonus or portion thereof
which has been earned but deferred (and annualized for any fiscal year
consisting of less than twelve full months or during which the Executive
was employed for less than twelve full months), for the most recently
completed fiscal year during the Employment Period, if any (such higher
amount being referred to as the "Highest Annual Bonus") and (y) a
fraction, the numerator of which is the number of days in the current
fiscal year through the Date of Termination, and the denominator of
which is 365 and (3) any compensation previously deferred by the
Executive (together with any accrued interest or earnings thereon) and
any accrued vacation pay, in each case to the extent not theretofore
paid (the sum of the amounts described in clauses (1), (2), and (3)
shall be hereinafter referred to as the "Accrued Obligations"); and
B. the amount equal to the product of (1) two and
ninety-nine one-hundredths (2.99) and (2) the sum of (x) the Executive's
Annual Base Salary and (y) the Highest Annual Bonus; and
C. an amount equal to the difference between (a) the
aggregate benefit under the Company's qualified defined benefit
retirement plans (collectively, the "Retirement Plan") and any excess or
supplemental defined benefit retirement plans in which the Executive
participates (collectively, the "SERP") which the Executive would have
accrued (whether or not vested) if the Executive's employment had
continued for three years after the Date of Termination and (b) the
actual vested benefit, if any, of the Executive under the Retirement
Plan and the SERP, determined as of the Date of Termination (with the
foregoing amounts to be computed on an actuarial present value basis,
based on the assumption that the Executive's compensation in each of the
three years following such termination would have been that required by
Section 4(b) (i) and Section 4(b) (ii), and using actuarial assumptions
no less favorable to the Executive than the most favorable of those in
effect for purposes of computing benefit entitlements under the
Retirement Plan and the SERP at any time from the day before the
Effective Date) through the Date of Termination;
(ii) for three years after the Executive's Date of
Termination, or such longer period as may be provided by the terms of
the appropriate plan, program, practice or policy, the Company shall
continue benefits to the Executive and/or the Executive's family at
least equal to those which would have been provided to them in
accordance with the plans, programs, practices and policies described in
Section 4(b) (iv) of this Agreement if the Executive's employment had
not been terminated or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives
of the Company and its affiliated companies and their families,
provided, however, that if the Executive becomes reemployed with another
employer and is eligible to receive medical or other welfare benefits
under another employer-provided plan, the medical and other welfare
benefits described herein shall be secondary to those provided under
such other plan during such applicable period of eligibility, and for
purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to
have remained employed until three years after the Date of Termination
and to have retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred,
provide the Executive with outplacement services, the scope and provider
of which shall be selected by the Executive in the Executive's sole
discretion; and
(iv) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to the Executive any other amounts
or benefits required to be paid or provided or which the Executive is
eligible to receive under any plan, program, policy or practice or
contract or agreement of the Company and its affiliated companies (such
other amounts and benefits shall be hereinafter referred to as the
"Other Benefits").
(b) Death. If the Executive's employment is terminated by
reason of the Executive's death during the Employment Period, this
Agreement shall terminate without further obligation to the Executive's
legal representatives under this Agreement, other than for payment of
Accrued Obligations and the timely payment or provision of Other
Benefits. Accrued Obligations shall be paid to the Executive's estate
or beneficiary, as applicable, in a lump sum in cash within 30 days of
the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or
beneficiaries shall be entitled to receive, benefits at least equal to
the most favorable benefits provided by the Company and affiliated
companies to the estates and beneficiaries of peer executives of the
Company and such affiliated companies under such plans, programs,
practices and policies relating to death benefits, if any, as in effect
with respect to other peer executives and their beneficiaries at any
time during the 120-day period immediately preceding the Effective Date
or, if more favorable to the Executive's estate and/or the Executive's
beneficiaries, as in effect on the date of the Executive's death with
respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated
by reason of the Executive's Disability during the Employment Period,
this Agreement shall terminate without further obligation to the
Executive, other than for payment of Accrued Obligations and the timely
payment or provision of Other Benefits. Accrued Obligations shall be
paid to the Executive in a lump sum in cash within 30 days of the Date
of Termination. With respect to the provision of Other Benefits, the
term Other Benefits as utilized in this Section 6(c) shall include, and
the Executive shall be entitled after the Disability Effective Date to
receive, disability and other benefits at least equal to the most
favorable of those generally provided by the Company and its affiliated
companies to disabled executives and/or their families in accordance
with such plans, programs, practices and policies relating to
disability, if any, as in effect generally with respect to other peer
executives and their families at any time during the 120-day period
immediately preceding the Effective Date or, if more favorable to the
Executive and/or the Executive's family, as in effect at any time
thereafter generally with respect to other peer executives of the
Company and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's
employment shall be terminated for Cause during the Employment Period,
this Agreement shall terminate without further obligation to the
Executive other than the obligation to pay to the Executive (x) the
Annual Base Salary through the Date of Termination, (y) the amount of
any compensation previously deferred by the Executive, and (z) Other
Benefits, in each case to the extent theretofore unpaid. If the
Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall
terminate without further obligation to the Executive, other than for
Accrued Obligations and the timely payment or provision of Other
Benefits. In such case, all Accrued Obligations shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of
Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in
any plan, program, policy or practice (other than any severance pay
plan) provided by the Company or any of its affiliated companies and for
which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive
may have under any contract or agreement with the Company or any of its
affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company or
any of its affiliated companies at or subsequent to the Date of
Termination shall be payable in accordance with such plan, policy,
practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. Full Settlement; Legal Fees. The Company's obligation to make
the payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any set-off,
counterclaim, recoupment, defense or other claim, right or action which
the Company may have against the Executive or others. In no event shall
the Executive be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to the Executive
under any of the provisions of this Agreement and except as specifically
provided in Section 6(a) (ii), such amounts shall not be reduced whether
or not the Executive obtains other employment. The Company agrees to pay
as incurred, to the full extent permitted by law, all legal fees and
expense which the Executive may reasonably incur as a result of any
contest (regardless of the outcome thereof) by the Company, the
Executive or others of the validity or enforceability of, or liability
under, any provision of this Agreement or any guarantee of performance
thereof (whether such contest is between the Company and the Executive
or between either of them and any third party, and including as a result
of any contest by the Executive about the amount of any payment pursuant
to this Agreement), plus in each case interest on any delayed payment at
the applicable Federal rate provided for in Section 7872(f) (2) (A) of
the Internal Revenue Code of 1986, as amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution by the Company to or for the benefit of the Executive
(whether paid or payable or distributed or distributable pursuant to the
terms of this Agreement or otherwise, but determined without regard to
any additional payments required under this Section 9) (a "Payment")
would be subject to the excise tax imposed by Section 4999 of the Code
or any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise
Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by
the Executive of all taxes (including any interest or penalties imposed
with respect to such taxes), including, without limitation, any income
taxes (and any interest and penalties imposed with respect thereto) and
Excise Tax imposed upon the Gross-Up Payment, the Executive retains an
amount of the Gross-Up Payment equal to the Excise Tax imposed upon the
Payments. Notwithstanding the foregoing provisions of this Section
9(a), if it shall be determined that the Executive is entitled to a
Gross-Up Payment, but that the present value as of the date of the
Change of Control, determined in accordance with Sections 280G(b)(2)(ii)
and 280G(d)(4) of the Code (the "Present Value"), of the Payments does
not exceed 110% of the greatest Present Value of Payments (the "Safe
Harbor Cap") that could be paid to the Executive such thatthe receipt
thereof would not give rise to any Excise Tax, then no Gross-Up Payment
shall be made to the Executive and the amounts payable to Executive
under this Agreement shall be reduced to the maximum amount that could
be paid to the Executive such that the Present Value of the Payments
does not exceed the Safe Harbor Cap. The reduction of the amounts
payable hereunder, if applicable, shall be made by reducing the payments
as elected by the Executive. For purposes of reducing the Payments to
the Safe Harbor Cap, only amounts payable under this Agreement (and no
other Payments) shall be reduced. If the reduction of the amounts
payable hereunder would not result in a reduction of the Present Value
of the Payments to the Safe Harbor Cap, no amounts payable under this
Agreement shall be reduced pursuant to this provision.
(b) Subject to the provisions of Section 9(c), all
determinations required to be made under this Section 9, including
whether and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by a nationally recognized certified public
accounting firm designated by the Executive (the "Accounting Firm"),
which shall provide detailed supporting calculations both to the Company
and the Executive within 15 business days of the receipt of notice from
the Executive that there has been a Payment, or such earlier time as is
requested by the Company. In the event that the Accounting Firm is
serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another
nationally recognized accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as
the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 9, shall be paid by the Company to
the Executive within five days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in
the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should
have been made ("Underpayment"), consistent with the calculations
required to be made hereunder. In the event that the Company exhausts
its remedies pursuant to Section 9(c) and the Executive thereafter is
required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit
of the Executive.
(c) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require
the payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten business
days after the Executive is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which
such claim is requested to be paid. The Executive shall not pay such
claim prior to the expiration of the 30-day period following the date on
which it gives such notice to the Company (or such shorter period ending
on the date that any payment of taxes with respect to such claim is
due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the
Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto)
imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this Section
9(c), the Company shall control all proceedings taken in connection with
such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and the Executive agrees
to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however,
that if the Company directs the Executive to pay such claim and sue for
a refund, the Company shall advance the amount of such payment to the
Executive, on an interest-free basis and shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax or income
tax (including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance, and further provided that any extension of the
statute of limitations relating to payment of taxes for the taxable year
of the Executive with respect to which such contested amount is claimed
to be due is limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues with respect
to which a Gross-Up Payment would be payable hereunder and the Executive
shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), the Executive becomes
entitled to receive any refund with respect to such claim, the Executive
shall (subject to the Company's complying with the requirements of
Section 9(c)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 9(c), a determination
is made that the Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior to the
expiration of 30 days after such determination, then such advance shall
be forgiven and shall not be required to be repaid and the amount of
such advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
10. Confidential Information. The Executive shall hold in a
fiduciary capacity for the benefit of the Company all secret or
confidential information, knowledge or data relating to the Company or
any of its affiliated companies, and their respective businesses, which
shall have been obtained by the Executive during the Executive's
employment by the Company or any of its affiliated companies and which
shall not be or become public knowledge (other than by acts by the
Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the
Company, the Executive shall not, without the prior written consent of
the Company or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone
other than the Company and those designated by it. In no event shall an
asserted violation of the provisions of this Section 10 constitute a
basis for deferring or withholding any amounts otherwise payable to the
Executive under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive
and without the prior written consent of the Company shall not be
assignable by the Executive otherwise than by will or the laws of
descent and distribution. This Agreement shall inure to the benefit of
and be enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no
such succession had taken place. As used in this Agreement, "Company"
shall mean the Company as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees to perform
this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of California without
reference to principles of conflict of laws. The captions of this
Agreement are not part of the provisions hereof and shall have no force
or effect. This Agreement may not be amended or modified otherwise than
by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
_______________________________________
_______________________________________
If to the Company: National Semiconductor Corporation
2900 Semiconductor Drive, M/S: 16-135
Santa Clara, California 95052
Attn: General Counsel
or to such other address as either party shall have furnished to the
other in writing in accordance herewith. Notice and communications shall
be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement.
(d) The Company may withhold from any amounts payable under
this Agreement such Federal, state, local or foreign taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon
strict compliance with any provision hereof or any other provision of
this Agreement or the failure to assert any right the Executive or the
Company may have hereunder, including, without limitation, the right of
the Executive to terminate employment for Good Reason pursuant to
Section 5(c) (i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of
this Agreement.
(f) The Executive and the Company acknowledge that, except as
may otherwise be provided under any other written agreement between the
Executive and the Company, the employment of the Executive by the
Company is "at will" and, prior to the Effective Date, the Executive's
employment may be terminated by either the Executive or the Company at
any time prior to the Effective Date, in which case the Executive shall
have no further rights under this Agreement. From and after the
Effective Date this Agreement shall supersede any other agreement
between the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the
Company has caused this Agreement to be executed in its name on its
behalf, all as of the day and year first above written.
____________________________________________
(Executive)
NATIONAL SEMICONDUCTOR CORPORATION
By:
Its:
Exhibit 11.0
NATIONAL SEMICONDUCTOR CORPORATION
CALCULATION OF EARNINGS PER SHARE-ASSUMING FULL DILUTION (1)
(In Millions, Except Per Share Amounts)
Year ended
--------------------------------
May 31, May 25, May 26,
1998 1997 1996
------- ------- -------
Net income (loss) , as reported $ (98.6) $ 1.6 $ 201.0
Adjustment for interest on
convertible notes 16.1 9.2 5.8
------- ------- -------
Net income (loss) $ (82.5) $ 10.8 $ 206.8
======= ======= =======
Number of shares:
Weighted average common shares
outstanding 163.9 156.1 145.0
Effect of dilutive securities:
Stock options 3.6 3.0 3.2
------- ------- -------
Shares issuable from assumed
conversion of convertible notes 7.7 7.6 10.1
------- ------- -------
Weighted average common and
potential common shares assuming
full dilution 175.2 166.7 158.3
======= ======= =======
Diluted earnings (loss) per share:
Net income $ (0.47)(1) $ 0.06(1) $ 1.31(1)
======= ======= =======
- ---------------------------------------
(1) For fiscal 1998, 1997 and 1996, 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
subsidiaries of the Company as of May 31, 1998, all of which are
included in the consolidated financial statements of the Company:
State or Percent of
Other Other Country Voting
Jurisdiction In Which Securities
of Subsidiary is Owned by
Name Incorporation Registered National
- ---- ------------- ---------- --------
ComCore Semiconductor,
Inc. California 100%
Future Integrated Systems,
Inc. California 100%
Cyrix Corporation Delaware 100%
Cyrix Manufacturing, Inc. Delaware 100%
Cyrix International, Inc. Delaware 100%
Mediamatics, Inc. California 100%
Dyna-Craft, Inc. California 100%
National Semiconductor Delaware 100%
International, Inc.
DTS Caribe, Inc. Delaware 100%
National Semiconductor Delaware 100%
Netsales, Inc.
National Semiconductor Delaware Maine 100%
(Maine), Inc.
Comlinear Corporation Delaware 100%
ASIC II Limited Hawaii 100%
National Semiconductor Delaware 100%
B.V. Corporation
National Semiconductor France 100%
France S.A.R.L.
National Semiconductor Germany Belgium 100%
GmbH
National Semiconductor Israel 100%
(I.C.) Ltd.
National Semiconductor Italy 100%
S.r.l.
National Semiconductor Sweden 100%
A.B.
National Semiconductor Great Britain Denmark/Ireland 100%
(U.K.) Ltd. Finland/Norway/
Spain
National Semiconductor Great Britain 100%
(U.K.)Pension Trust Company
Cyrix International Great Britain 100%
Limited
National Semiconductor Netherlands 100%
Benelux B.V.
National Semiconductor B.V. Netherlands 100%
National Semiconductor Switzerland 100%
International
Finance S.A.
Natsem India Designs India 100%
Pvt. Ltd.
National Semiconductor Australia 100%
(Australia) Pty.Ltd.
National Semiconductor Hong Kong 100%
(Hong Kong) Limited
National Semiconductor Hong Kong Taiwan 100%
(Far East) Hong Kong Limited
NSM International Limited Hong Kong 51%
National Semiconductor Hong Kong 100%
Sunrise Hong Kong Limited
National Semiconductor Japan 100%
Japan Ltd.
Cyrix K.K. Japan 100%
National Semiconductor Malaysia 100%
SDN. BHD.
National Semiconductor Malaysia 100%
Technology SDN. BHD.
DynaCraft SDN. BHD. Malaysia 100%
DynaCraft Asia Pacific Malaysia 100%
SDN. BHD.
National Semiconductor Pte Singapore 100%
Ltd.
National Semiconductor Singapore 100%
Asia Pacific Pte. Ltd.
National Semiconductor Singapore 100%
Singapore Manufacturer
Pte. Ltd.
Shanghai National People's
Semiconductor Technology Republic of
Limited China 95%
National Semiconductor Korea 100%
Korea Limited
National Semiconductor Canada 100%
Canada Inc.
National Semiconductores Brazil 100%
do Brazil Ltda.
National Semicondutores da Brazil 100%
America do Sul
Electronica NSC de Mexico, Mexico 100%
S.A. de C.V.
ASIC Limited Bermuda 100%
National Semiconductor Barbados 100%
(Barbados) Limited
Cyrix Export Sales Barbados 100%
Corporation
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 1998 fiscal year, and any and all amendments to said Annual
Report on Form 10-K, and generally to do and perform all things and acts
necessary or advisable in connection therewith, and each of the
undersigned hereby ratifies and confirms all that each of said
attorneys-in-fact may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto executed
this Power of Attorney as of the date set forth opposite his signature.
SIGNATURE DATE
//S// BRIAN L. HALLA July 28, 1998
--------------------
Brian L. Halla
//S// GARY P. ARNOLD July 28, 1998
--------------------
Gary P. Arnold
//S// ROBERT BESHAR July 28, 1998
-------------------
Robert Beshar
//S// E. FLOYD KVAMME July 28, 1998
---------------------
E. Floyd Kvamme
//S// MODESTO A. MAIDIQUE July 28, 1998
-------------------------
Modesto A. Maidique
//S// EDWARD R. McCRACKEN July 28, 1998
-------------------------
Edward R. McCracken
//S// J. TRACY O'ROURKE July 28, 1998
-----------------------
J. Tracy O'Rourke
//S// DONALD E. WEEDEN July 28, 1998
----------------------
Donald E. Weeden
//S// DONALD MACLEOD July 28, 1998
--------------------
Donald Macleod
//S// RICHARD D. CROWLEY, JR. July 23, 1998
-----------------------------
Richard D. Crowley, Jr.
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