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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the fiscal year ended May 27, 2001
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 1-6453
NATIONAL SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2095071
(State of incorporation) (I.R.S. Employer Identification Number)
2900 SEMICONDUCTOR DRIVE, P.O. BOX 58090
SANTA CLARA, CALIFORNIA 95052-8090
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 721-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Common stock, par value New York Stock Exchange
$0.50 per share Pacific Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
--Continued on next page--
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of National as
of June 22, 2001, was approximately $4,504,970,322. 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 outstanding of the registrant's common stock, $0.50 par
value, as of June 22, 2001, was 174,645,429.
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 21, 2001.
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. 33-61381, 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. 333-09957, which became effective August 12, 1996.
Portions of Cyrix Corporation's Registration Statement on Form S-3, Part IV
Registration No. 333-10669, which became effective August 22, 1996.
Portions of the Company's Registration Statement on Form S-8, Part IV
Registration No. 333-48424, which became effective October 23, 2000.
Portions of the Proxy Statement for the Annual Meeting held Part IV
September 26, 1997
The Index to Exhibits is located on pages 67-69.
PART I
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ITEM 1. BUSINESS
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The statements contained in this report that are forward-looking are based on
current expectations and management's estimates. Actual results may differ
materially from those set forth in these forward-looking statements. The
forward-looking statements discussed or incorporated by reference in this report
involve a number of risks and uncertainties. These 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 wireless, personal
computer and communications infrastructure 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 our other reports and filings with the SEC.
General
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Our strategy is to provide systems on a chip for our key trendsetting data
highway partners, using our analog expertise as a starting point for forward
integration. We design, develop, manufacture and market a wide array of
semiconductor products, including a broad line of analog, mixed-signal and other
integrated circuits. These products address a variety of markets and
applications, including:
o information appliances;
o personal systems;
o wireless communications;
o flat panel and CRT displays;
o power management;
o local and wide area networks;
o automotive; and
o consumer and military aerospace.
National was originally incorporated in the state of Delaware in 1959 and
our headquarters have been in Santa Clara, California since 1967.
Recent Acquisitions
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In fiscal 2001, we acquired innoCOMM Wireless and Vivid Semiconductor.
InnoCOMM was a developer of chipsets for wireless networking applications. We
expect InnoCOMM's expertise, which ranges from short-range wireless
technologies, such as Bluetooth and HomeRF, to full wireless local area
networking based on the IEEE 802.11 standard, to complement our existing base of
design and product expertise. We expect the addition of Vivid's technologies and
analog engineering resources to expand our strength in creating silicon
solutions for the flat-panel display market.
In fiscal 2000, we acquired Algorex, a provider of high performance digital
signal processing products, architecture and software technologies for the
wireless communication market. These technologies are expected to enhance our
future capabilities to provide complete chipset solutions for the cellular phone
and wireless information appliance markets.
These three acquisitions were accounted for using the purchase method of
accounting.
Products
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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
components 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.
We manufacture an extensive range of analog intensive, mixed-signal and
digital products, which are used in numerous commercial sectors. While no
precise industry standard exists for analog and mixed-signal devices, we
consider products which process analog information, convert analog to digital or
digital to analog, as analog and mixed-signal devices.
We are a leading supplier of analog and mixed-signal products, serving both
broad based markets such as the industrial and consumer market, and more
narrowly defined markets such as wireless handsets; displays, imaging and human
interface; information infrastructure and information appliances. Our analog and
mixed-signal devices include:
o amplifiers and regulators;
o power monitors and line drivers;
o audio;
o video;
o automotive;
o display and data acquisition.
Other company products with significant digital to analog or analog to
digital capability include products for local area and wireless networking and
wireless communications, as well as products for personal systems and personal
communications, such as input/output offerings. We use the brand name "Super
I/O" to describe our integrated circuits that handle system peripheral and
input/output functions on the personal computer motherboard.
Corporate Organization; Product Line Business Units
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We are organized by various product line business units. For fiscal 2001, these
business units were grouped to form three organizational units: the Analog
Group, the Information Appliance Group and the Network Products Group.
Analog Group:
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Analog products are the vital technology link that connects the physical world
with the digital system. They are used to enrich the experience of sight and
sound of many electronic applications. In addition to the real world interfaces,
analog products are used extensively in power management and signal conditioning
applications. The Analog Group develops and manufactures numerous building block
products, such as:
o high-performance operational amplifiers;
o power management circuits;
o data acquisition circuits;
o interface circuits; and
o circuits targeted toward leading-edge monitor applications, such as
ultra-thin flat panel displays.
Our wireless circuits perform the radio, baseband controller, power
management and related functions primarily for handsets and base stations in the
cellular and cordless telephone markets.
With our leadership in small and innovative packages and process
technology, we are focusing on high growth markets that require portability,
such as cellular telephones and wireless information appliances. We are using
our analog expertise as the initial point to integrate systems on a chip aimed
at the cellular, personal systems and information appliance markets. Current
offerings include audio subsystems, a complete GSM chip-set solution for
wireless product applications, flat panel display column drivers, and integrated
receivers and timing controllers. We are increasing our penetration into the top
tier original equipment manufacturer (OEM) customer base in the wireless and
telecommunications sectors and now derive 37 percent of our revenues from this
area. We generate approximately 51 percent of analog revenues through authorized
distributors worldwide.
The Enhanced Solutions business unit, which is part of the Analog Group,
supplies integrated circuits and contract services to the high reliability
market, consisting of avionics, defense, space and the federal government. This
business unit offers a broad range of military and space grade products
including analog, logic, interface and networking devices.
Information Appliance Group:
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The Information Appliance Group consists of our Information Appliance, Advanced
I/O, MediamaticsTM and Custom Solutions business units. The group delivers
component and system solutions targeted heavily towards the emerging information
appliance market. We develop system level hardware and software solutions, based
on our GeodeTM technology. This technology merges complex functionality -
processing, system logic, graphics, audio and video decompression - on to one
highly integrated device. Built around our series of x86 microprocessor cores,
the GeodeTM Information Appliance system-on-a-chip family is the first
commercially available integrated circuit to offer a complete information
appliance system on a chip. By leveraging the GeodeTM technology with our analog
and mixed-signal communications capabilities, we have developed a complete
system solution that will allow users to get information and communicate (by
accessing the internet) in a simpler, more intuitive and user-friendly fashion
than is typically experienced with personal computers today.
The Information Appliance business unit concentrates on three major market
segments that include interactive TV set-top boxes (equipped with digital
video), enterprise thin clients (computer systems with low power consumption and
minimal memory that leverage application software from a centralized server
network) and personal information access devices (for the consumer Internet
access market) such as the WebPADTM product.
The Advanced I/O business unit provides input/output solutions to the
personal computer motherboard and emerging information appliance markets. We are
also directing the integration of analog and advanced technologies, such as
security features, for future generations of customers.
The MediamaticsTM business unit furnishes key video and audio processing
technologies, including MPEG capability, required to execute our information
appliance strategy. Target applications include personal computers, digital
versatile disc (DVD) players, set top boxes, video servers and convergence
appliances. The PanteraTM DVD architecture is the building block for other video
and audio decoder products.
The Custom Solutions business unit supplies a range of application-specific
and standard integrated circuits for targeted customers in the
telecommunications, automotive and consumer electronics markets.
Network Products Group:
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The Network Products Group offers a line of ethernet products that address a
range of applications. We derived the majority of our network product sales for
fiscal 2001 from relatively mature 10/100 megabyte (Mb) products. Using the
digital signal processing technology that was initially obtained through the
ComCore acquisition, we have now developed new network products with higher
bandwidth applications. These products include:
o MACPHYTERTM, a fast Ethernet 10/100Mb device combined with a media access
controller;
o GIGPHYTERTM and GigMAC, offering a complete gigabit network interface card
solution with expanded bandwidth (10/100/1000 megabits per second (Mbps))
that addresses transmission over copper networks; and
o DSPHYTERTM, a single 10/100Mbps Ethernet transceiver device.
Our current new product development efforts focus on the copper ethernet
market.
Beginning in fiscal 2002, we regrouped or established as standalone
operating units our product line business units into the following five groups:
o Analog Products Group;
o Wireless/Information Appliances Division;
o Displays and Monitors Division;
o Wired Communications Division; and
o Custom Solutions Division.
We do not expect this change to have a material impact on the way we report
information related to our operating segments under SFAS No. 131.
Worldwide Marketing and Sales and Central Technology and Manufacturing Group.
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Separately from these operating groups, our corporate structure includes
centralized Worldwide Marketing and Sales and a Central Technology and
Manufacturing Group (CTMG).
Worldwide Marketing and Sales is structured around the four major regions
of the world where we operate -- the Americas (North and South Americas),
Europe, Japan and Asia Pacific -- and unites our worldwide sales and marketing
organization.
CTMG manages all production, including outsourced manufacturing
requirements, and technology operations. The technology operations include
process technology, which provides pure research and process development
necessary for many of our core production processes, and initial product
prototyping for leading-edge products. CTMG provides a range of process
libraries, product cores and software that is shared among our product lines to
develop system level solutions. It is also responsible for the selection and
usage of common support tools, including integrated computer-aided design for
design, layout, simulation and initial test of the logical and physical
representations for new products.
Segment Financial Information and Geographic Information.
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For segment reporting purposes, each of our product line business units
represents an operating segment as defined under Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. Business units that have similarities, including economic
characteristics, underlying technology, markets, and customers, are aggregated
into segments. Under the criteria in SFAS No. 131, only the Analog segment and
the Information Appliance segment are considered reportable segments. All other
segments are included in the caption "All Others." For further financial
information on these segments, refer to the information contained in Note 12,
"Segment and Geographic Information," in the Notes to the Consolidated Financial
Statements included in Item 8.
Marketing and Sales
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We market our products globally to original equipment manufacturers through a
direct sales force. Major OEMs include:
o Alcatel;
o Dell Computer;
o Hewlett-Packard;
o LG Electronics;
o Motorola;
o Nokia;
o Robert Bosch;
o Samsung;
o Siemens;
o Sony; and
o L.M. Ericsson.
In addition to our direct sales force, we use distributors in our four business
regions, and approximately 45 percent of our worldwide revenues are channeled
through distributors. The technology industry has seen an increasing trend where
OEMs are using contract manufacturers to build their end products. As a result,
design wins we achieve with major OEMs, particularly in the personal computer
and cellular phone markets, can ultimately result in sales to a contract
manufacturer. Sales to distributors include an increasing portion of sales in
which a distributor acts as the logistics partner for our OEM customers and
their contract manufacturers. In line with industry practices, we generally
credit distributors for the effect of price reductions on their inventory of our
products and, under specific conditions, we repurchase products that we have
discontinued.
Our comprehensive central facilities in the United States, Europe and
Singapore handle customer support. These customer support centers respond to
inquiries on product pricing and availability, customer technical support
requests, order entry and scheduling.
We augment our sales effort with application engineers based in the field.
These engineers are specialists in our product portfolio and work with customers
to identify and design our integrated circuits into customers' products and
applications. These engineers also help identify emerging markets for new
products and are supported by our design centers in the field or at
manufacturing sites.
Customers
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We are not dependent upon any single customer, the loss of which would have a
material effect on our operating results. No one customer or distributor
accounted for 10 percent or more of total net sales in fiscal 2001, 2000 and
1999.
Backlog
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In accordance with industry practice, we frequently revise semiconductor backlog
quantities and shipment schedules under outstanding purchase orders to reflect
changes in customer needs. We rarely formally enforce binding agreements for the
sale of specific quantities at specific prices that are contractually subject to
price or quantity revisions, consistent with industry practice. For these
reasons, we do not believe that the amount of backlog at any particular date is
meaningful.
Seasonality
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Generally, we are affected by the seasonal trends of the semiconductor and
related industries. As a result of these trends, we typically experience lower
revenue in the third fiscal quarter, primarily due to customer holiday demand
adjustments. Revenue usually reaches a seasonal peak in our fourth fiscal
quarter. During fiscal 2001, this typical trend did not occur. Instead, business
conditions for the semiconductor industry weakened in the second half of the
fiscal year, and we experienced sequential revenue decline in each of our fiscal
quarters.
Manufacturing
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The design of semiconductor and integrated circuit products is shaped by general
market needs and customer requirements. Following product design and
development, we produce integrated circuits in the following steps:
o Wafer Fabrication. Product 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 that include oxidation, lithography,
chemical etching, diffusion, deposition, implantation and metallization.
o Wafer Sort. The silicon wafers are tested and separated into individual
circuit devices.
o Product Assembly. Tiny wires are used to connect the electronic circuits on
the device to the stronger metal leads of the package in which the device
is encapsulated for protection.
o Final Test. 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 or moisture
resistance testers, salt atmosphere testers and thermal shock testers.
o Coating. Certain devices in the analog portfolio are designed to be used
without traditional packaging. In this case, the integrated circuit is
coated with a protective material and mounted directly onto the circuit
board.
We conduct product design and development work predominantly in the United
States. Wafer fabrication is concentrated in two facilities in the United States
and one in Scotland. Nearly all product assembly and final test operations are
performed in facilities in Southeast Asia. For capacity utilization and other
economic reasons, we employ subcontractors to perform certain manufacturing
functions in the United States, Europe, Israel, Southeast Asia and Japan.
Our wafer manufacturing processes span Bipolar, Metal Oxide Silicon,
Complementary Metal Oxide Silicon and Bipolar Complementary Metal Oxide Silicon
technologies. We are focusing our wafer fabrication processes to emphasize
integration of analog and digital capabilities to support our strategy to
develop system-on-a-chip products. Bipolar processes primarily support our
standard products. The width of the individual transistors on a chip is measured
in microns; one micron equals one millionth of a meter. As products decrease in
size and increase in functionality, wafer fabrication facilities must be able to
manufacture integrated circuits with sub-micron circuit pattern widths. This
precision fabrication carries over to assembly and test operations, where
advanced packaging technology and comprehensive testing are required to address
the ever increasing performance and complexity embedded in current integrated
circuits.
During fiscal 2001, we entered into a long-term licensing agreement with
Taiwan Semiconductor Manufacturing Company (TSMC). This licensing agreement will
allow us to gain access to a variety of TSMC's advanced sub-micron processes for
use in our wafer fabrication facility in Maine as desired, if and when those
processes are developed by TSMC. Our arrangement with TSMC will enable us to
gain access ultimately to TSMC's 0.10-micron process technology. We expect these
advanced process technologies to accelerate the development of high performance
digital and mixed-signal products that support our target markets.
Raw Materials
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Our manufacturing processes use certain key raw materials critical to our
products. These include silicon wafers, certain chemicals and gases, ceramic and
plastic packaging materials and various precious metals. We also rely on
subcontractors to supply finished or semi-finished products that we then market
through our sales channels. We obtain raw materials and semi-finished or
finished products from various sources, although the number of sources for any
particular material or product is relatively limited. We feel our current supply
of essential materials is adequate. However, shortages have occurred from time
to time and could occur again. Significant increases in demand, rapid product
mix changes or natural disasters could affect our ability to procure materials
or goods.
Research and Development
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Our research and development efforts consist of pure research in metallurgical,
electro-mechanical and solid-state sciences, manufacturing process development
and product design. Research functions and development of most process
technologies are done by Central Technology and Manufacturing's process
technology group. Total company R&D expenses were $435.6 million for fiscal
2001, or 21 percent of sales, compared to $386.1 million for fiscal 2000, or 18
percent of sales, and $471.3 million for fiscal 1999, or 24 percent of sales.
These amounts exclude in-process R&D charges of $16.2 million related to the
acquisitions of innoComm Wireless and Vivid Semiconductor in fiscal 2001 and
$4.2 million related to the acquisition of Algorex in fiscal 2000. These
in-process R&D charges are included as a component of special items in our
consolidated statements of operations. For fiscal 2001, we expended 78 percent
of our R&D spending toward new product development and 22 percent toward the
development of process technology. This represents an increase in spending of 14
percent and 21 percent, respectively, over fiscal 2000.
Patents
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We own numerous United States and non-U.S. patents and have many patent
applications pending. We consider the development of patents and the maintenance
of an active patent program advantageous to the conduct of our business.
However, we believe that continued success will depend more on engineering,
production, marketing, financial and managerial skills than on our patent
program. We license certain of our patents to other manufacturers and
participate 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 these agreements are cross-licenses in which we grant broad
licenses to our intellectual property in exchange for receiving a license; none
are exclusive. The amount of income we have received from licensing agreements
has varied in the past, and we cannot precisely forecast the amount and timing
of future income from licensing agreements. On an overall basis, we believe that
none of the license agreements is material to us, either in terms of royalty
payments due or payable or intellectual property rights granted or received.
Employees
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At May 27, 2001, National employed approximately 10,300 people of whom
approximately 4,800 were employed in the United States, 1,200 in Europe, 4,100
in Southeast Asia and 200 in other areas. We believe that our future success
depends fundamentally on our ability to recruit and retain skilled technical and
professional personnel. Our employees in the United States are not covered by
collective bargaining agreements. We consider our employee relations worldwide
to be favorable.
Competition and Risks
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In addition to the risks discussed below and elsewhere in this "Business"
section, see the "Outlook" section included in Item 7, "Management's Discussion
and Analysis," for further discussion of other risks and uncertainties that may
affect our business.
Conditions inherent in the semiconductor industry cause periodic
fluctuations in our operating results. Rapid technological change and frequent
introduction of new technology leading to more complex and more integrated
products characterize the semiconductor industry. The result is a cyclical
environment with short product life, price erosion, seasonal trends and high
sensitivity to the overall business cycle. Substantial capital and R&D
investment are also required to support products and manufacturing processes. As
a result of these industry conditions, we have experienced in the past and will
experience in the future periodic fluctuations in our operating results. Shifts
in product mix toward, or away from, higher margin products can also have a
significant impact on our operating results. As a result of these and other
factors, our financial results can fluctuate significantly from period to
period. As an example, we generated net income in fiscal 2001 and 2000, but
experienced substantial losses in fiscal 1999 and 1998. We also generated net
income in fiscal 1993 through 1997, while we incurred losses in fiscal 1989
through 1992.
Our business will be harmed if we are unable to compete successfully in our
markets. Competition in the semiconductor industry is intense. We compete with a
number of major corporations in the high-volume segment of the industry. These
include several multinational companies whose semiconductor business may be only
part of their overall operations, such as IBM, Motorola, Koninklijke (Royal)
Philips Electronics, NEC and Toshiba. We also compete with a large number of
corporations that target particular markets such as Linear Technology, Analog
Devices, Advanced Micro Devices, LSI Logic, Maxim, ST Microelectronics, Intel
and Texas Instruments. Competition is based on design and quality of products,
product performance, price and service, with the relative importance of these
factors varying among products and markets. We currently face escalating
competition in the networking market from both large established companies such
as Intel and Lucent, as well as newer companies such as Broadcom and Marvell
Technology.
We cannot assure you that we will be able to compete successfully in the
future against existing or new competitors or that our operating results will
not be adversely affected by increased price competition. We may also compete
with several of our customers, particularly customers in the networking and
personal systems markets.
We face risks from our international operations, many of which are beyond
our control. We conduct a substantial portion of our operations outside the
United States, and our business is subject to risks associated with many factors
beyond our control. These factors include:
o fluctuations in foreign currency rates;
o instability of foreign economies;
o emerging infrastructures in foreign markets;
o support required abroad for demanding manufacturing requirements;
o government changes; and
o U.S. and foreign laws and policies affecting trade and investment.
Although we have not experienced any materially adverse effects from our
foreign operations as a result of these factors, we have been impacted in the
past by one or more of these factors and can be impacted in the future. In
addition, although we seek to hedge our exposure to currency exchange rate
fluctuations, our competitive position relative to non-U.S. suppliers can be
affected by the exchange rate of the U.S. dollar against other currencies,
particularly the Japanese yen.
Environmental Regulations
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To date, our compliance with federal, state and local laws or regulations that
have been enacted to regulate the environment has not had a material adverse
effect on our capital expenditures, earnings, competitive or financial position.
For more information, see Item 3, "Legal Proceedings" and Note 11, "Commitments
and Contingencies" in the Consolidated Financial Statements in Item 8. However,
we could be subject to fines, suspension of production, alteration of our
manufacturing processes or cessation of our operations if we fail to comply with
present or future government regulations related to the use, storage, handling,
discharge or disposal of toxic, volatile or otherwise hazardous chemicals used
in our manufacturing processes.
ITEM 2. PROPERTIES
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We conduct manufacturing, as well as process research and product development,
in our wafer fabrication facilities located in Arlington, Texas; South Portland,
Maine; and Greenock, Scotland. In connection with the consolidation of our wafer
manufacturing operations in Greenock, Scotland, we closed our 4-inch wafer
fabrication facility in October 2000. The manufacturing processes from our
4-inch wafer fabrication facility were transferred to our 6-inch wafer
fabrication facility at the same site, as well as to our manufacturing facility
in Arlington, Texas. Wafer fabrication capacity utilization for fiscal 2001 was
69 percent compared to 75 percent for fiscal 2000. Capacity utilization for
fiscal 2001 reflects the significant reduction in manufacturing activity as
business conditions quickly weakened in the second half of our fiscal year. We
expect our captive manufacturing capacity and our third-party subcontract
manufacturing arrangements to be adequate to supply our needs in the foreseeable
future.
Our assembly and test functions are performed primarily in Southeast Asia.
These facilities are located in Melaka, Malaysia and Toa Payoh, Singapore.
Our principal administrative and research facilities are located in Santa
Clara, California. Our regional headquarters for Worldwide Sales and Marketing
are located in Santa Clara, California; Munich, Germany; Tokyo, Japan; and
Kowloon, Hong Kong. We maintain local sales offices and sales service centers in
various locations and countries throughout our four business regions. We also
operate small design facilities in various locations in the U.S., including:
Austin, Texas
Calabasas, California
Chandler, Arizona
Draper, Utah
East Brunswick, New Jersey
Federal Way, Washington
Fort Collins, Colorado
Fremont,California
Grass Valley, California
Irvine, California
Longmont, Colorado
Nashua, New Hampshire
Norcross, Georgia
Salem, New Hampshire
San Diego,California
Santa Clara, California
South Portland, Maine
Tucson, Arizona
and overseas locations including China, Germany, India, Israel, Japan, the
Netherlands and the United Kingdom.
In general, we own our manufacturing facilities and lease most of our sales
and administrative offices. In 1995, we assumed a note secured by real estate as
part of the repurchase of the equity interest in our Arlington, Texas facility,
which was sold and leased back prior to 1990. Interest on the note, which
matures in March 2002, is due semi-annually, and principal payments vary. The
note totaled $4.6 million of the current portion of our long-term debt as of the
end of fiscal 2001.
ITEM 3. LEGAL PROCEEDINGS
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Tax Matters
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We have settled with the IRS outstanding issues relating to our federal tax
liability for the 1986 - 1996 fiscal years. After taking into account
overpayments and deficiencies, the tax deficiency for these years totals
approximately $3.4 million. We have paid this amount to the IRS. We are working
with the IRS on calculating the interest due on the deficiency but these
calculations are time consuming and may take some time to resolve. The IRS has
begun examination of tax returns for fiscal years 1997 through 2000. We believe
adequate tax payments have been made or accrued for all applicable years.
Customs Proceedings
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1. In April 1988, we received a notice from the U.S. Customs Service in San
Francisco alleging that we had underpaid duties of approximately $19.5
million on goods that we had imported from our foreign subsidiaries from
June 1, 1979 to March 1, 1985. We have been contesting the notice in
various proceedings since 1988. The amount of the alleged underpayment was
reduced to approximately $3.6 million by the Assistant Commissioner of
Customs in March 1998. The underpayment could be subject to penalties that
are computed as a multiple of the underpayment. National and the Customs
Service are pursuing settlement negotiations. We intend to continue to
contest the assessment through all available means if a settlement cannot
be reached.
2. In July 1988, the Customs Service liquidated various duty drawback claims
filed by us, denied payment of the drawback, and billed us $2.5 million to
seek recovery of the accelerated drawback. We contested the liquidations
and sought review in the Court of International Trade after we had paid the
denied duties and related interest that totaled $5.2 million. During fiscal
2001, National and the Customs Service settled the duty drawback claims,
with National receiving refunds totaling approximately $1.7 million. The
matter is now concluded.
Environmental Matters
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1. We have been named to the National Priorities List (Superfund) for our
Santa Clara, California site and have completed a remedial
investigation/feasibility study with the Regional Water Quality Control
Board, which is acting as agent for the EPA. A site remediation plan has
been agreed to in principle with the RWQCB. We were sued by AMD, which
sought recovery of AMD's cleanup costs in the Santa Clara, California area
under the RWQCB remediation orders. AMD alleged that certain contamination
for which the RWQCB had found AMD responsible was originally caused by us.
A settlement, which has not been completely finalized, has been agreed to
in principle with AMD. In addition to the Santa Clara site, we have been
designated as a potentially responsible party by federal and state agencies
for certain other environmental sites where we may have had direct or
indirect involvement. These designations are made regardless of the extent
of our involvement. These claims are in various stages of administrative or
judicial proceedings and include demands for recovery of past governmental
costs and for future investigations and remedial actions. In many cases,
the dollar amounts of the claims have not been specified and have been
asserted against a number of other entities for the same cost recovery or
other relief as was asserted against us. We have also retained liability
for environmental matters arising from our former operations of Dynacraft
and the Fairchild business but are not currently involved in any legal
proceedings relating to those obligations. We accrue 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, have not been material
during the last three fiscal years. We believe that the potential
liability, if any, in excess of amounts already accrued will not have a
material effect on our financial position and results of operations.
2. In March 2001, the U.S. Environmental Protection Agency served us with an
administrative complaint, compliance order and notice of opportunity for
hearing. The complaint alleges that the EPA found certain violations of the
Resource Conservation and Recovery Act in an inspection conducted in August
1999 at the Maine facility. The compliance order requires that we institute
and perform certain procedures and training in connection with our handling
of hazardous wastes at the facility. The order also seeks payment of a
penalty of $302,990. We are evaluating a response to be presented in the
administrative proceedings but believe that any deficiencies found in the
1999 audit were corrected at or soon after the time of the inspection.
Other
- -----
1. An action was filed in the U.S. District Court for Delaware in November
2000 by Mark Levy, a shareholder of Fairchild Semiconductor International,
Inc. The defendants are National Semiconductor Corporation, Fairchild and
Sterling Holding Company, LLC. The action is brought under section 16(b) of
the Securities Exchange Act of 1934 and the rules issued under that Act by
the Securities and Exchange Commission. Plaintiffs seek disgorgement of
alleged short-swing insider trading profits. We originally acquired
Fairchild common and preferred stock in March 1997 at the time we disposed
of the Fairchild business. At the time of Fairchild's initial public
offering in August 1999, we received Fairchild common stock in exchange for
the Fairchild preferred stock previously held by us. The exchange was done
automatically pursuant to Fairchild's Certificate of Incorporation.
Plaintiff alleges that this acquisition of common stock through the
exchange constitutes an acquisition that should be matched for the purpose
of computing short-swing trading profits against our sale in January 2000
of Fairchild common stock. The action seeks to recover from us on behalf of
Fairchild recoverable profits of approximately $14 million. We believe that
there is no basis for plaintiff's allegations and are vigorously contesting
the action.
2. In November 1997, a federal securities class action suit was filed in
California Superior Court by Goodman Epstein on behalf of himself and other
Cyrix shareholders. Trial in that case began in June 2000 and on July 11,
2000 a jury returned a verdict in favor of National and our board of
directors. The case arose out of the 1997 merger with Cyrix. The plaintiffs
represented a class of approximately 25,000 former Cyrix shareholders who
exchanged their Cyrix stock for National stock as part of the merger.
Plaintiffs claimed that our proxy and prospectus misrepresented material
information about our ability to manufacture Cyrix microprocessors.
Plaintiffs dropped their appeal in exchange for our agreement not to seek
recovery of our costs and the matter is now concluded.
3. In January 1999, a class action suit was filed against National and a
number of our suppliers in California Superior Court by James Harris and
other former and present employees claiming damages for personal injury.
The complaint alleged that cancer and/or reproductive harm were caused to
employees as a result of alleged exposure to toxic chemicals while working
at National. Plaintiffs claim to have worked at our manufacturing facility
in Santa Clara and/or in Greenock, Scotland. In addition, one plaintiff
purports to represent a class of children of employees who allegedly
sustained developmental harm as a result of alleged in utero exposure to
toxic chemicals while their mothers worked at the company. Although no
specific amount of monetary damages is claimed, plaintiffs seek damages on
behalf of the classes for personal injuries, nervous shock, physical and
mental pain, fear of future illness, medical expenses, and loss of earnings
and earnings capacity. At the present time, the court has required the
Scottish employees to seek their remedies in Scottish courts. Although most
of the claims have been dismissed against National, many of the claims
remain against the co-defendant suppliers. Discovery in the case is
proceeding and we intend to defend this action vigorously.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT *
Name Current Title Age
Kamal K. Aggarwal (1) Executive Vice President, Central 63
Technology and Manufacturing Group
Roland Andersson (2) Senior Vice President and General Manager, 49
Worldwide Marketing and Sales
Jean-Louis Bories (3) Executive Vice President and General Manager, 46
Information Appliance Group
Lewis Chew (4) Vice President, Controller and Acting Chief 38
Financial Officer
John M. Clark III (5) Senior Vice President, General Counsel 51
and Secretary
Brian L. Halla (6) Chairman of the Board, President and 54
Chief Executive Officer
Donald Macleod (7) Executive Vice President and Chief 52
Operating Officer
Suneil V. Parulekar (8) Senior Vice President, Analog Products 53
Group
Ulrich Seif (9) Senior Vice President and Chief 43
Information Officer
Richard A. Wilson (10) Senior Vice President, Human Resources 58
* all information as of May 27, 2001, fiscal year end
Business Experience During Last Five Years
- ------------------------------------------
(1) Mr. Aggarwal joined National in November 1996 as the Executive Vice
President of Central Technology and Manufacturing Group. Prior to joining
National, Mr. Aggarwal had held positions at LSI Logic as Vice President,
Worldwide Logistics and Customer Service and Vice President, Assembly and
Test.
(2) Mr. Andersson joined National in October 1983. Prior to becoming Senior
Vice President and General Manager, Worldwide Marketing and Sales in
January 2000, Mr. Andersson held positions at National as Vice President
and General Manager, Europe; Director of Business Development: Europe; and
Director of Sales, Europe. Mr. Andersson left National in June 2001 after
the end of the 2001 fiscal year.
(3) Mr. Bories joined National in October 1997. Prior to becoming Executive
Vice President and General Manager, of the Information Appliance Group in
September 1999, he held positions as Executive Vice President and General
Manager of the Cyrix Group and as Senior Vice President, Core Technology
Group. Prior to joining National, he had held positions at LSI Logic as
Vice President and General Manager, ASIC Division; Vice President,
Engineering/CAD; Director, Advanced Methodology; and Director, 500K
Program.
(4) Mr. Chew joined National in May 1997 as Director of Internal Audit and was
made Vice President and Controller in December 1998 and Acting Chief
Financial Officer in April 2001. Prior to joining National, Mr. Chew had
been a partner at KPMG LLP. Mr. Chew was named Senior Vice President and
Chief Financial Officer in June 2001 after the end of the 2001 fiscal year.
(5) Mr. Clark joined National 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 National in May 1996 as Chairman of the Board, President
and Chief Executive Officer. Prior to that, Mr. Halla held positions at LSI
Logic 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 National in February 1978 and was named Executive Vice
President and Chief Operating Officer in April 2001. Prior to that, he had
been Executive Vice President, Finance and Chief Financial Officer since
June 1995 and had previously 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. Parulekar joined National in January 1989. Prior to becoming Senior
Vice President, Analog Products Group in April 2001, he held positions as
Vice President, Amplifier/Audio Products; Product Line Director,
Amplifier/Audio Products; Director of Marketing, Mediamatics; Director of
Strategy, Communications and Consumer Group; and Director of Marketing,
Power Management Group.
(9) Mr. Seif first joined National in January 1980 and had held a number of
positions in MIS related operations when he left the company in 1996 to
become the Chief Information Officer and Vice President of Information
Services at Cirrus Logic. He returned to National in May 1997 as the Chief
Information Officer and Vice President of Information Services and was made
Senior Vice President and Chief Information Officer in April 2001.
(10) Mr. Wilson joined National in February 1996 as Vice President, Human
Resources and was named Senior Vice President, Human resources in April
2001. Prior to joining National, 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 our Board of Directors. There
is no family relationship among any of our directors and executive officers.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------------------
When National acquired ComCore Semiconductor in fiscal 1998, we issued as
part of retention arrangements convertible subordinated promissory notes to the
founders of ComCore for a total of $15.0 million. During fiscal 2000, we issued
approximately 247,000 shares of common stock when one of the promissory notes
was converted at the time one of the founders terminated his employment with
National. The remaining notes for a total of $10.0 million were
noninterest-bearing. After the end of our 2001 fiscal year, the notes became due
and were converted into a total of 617,760 shares of National common stock. The
notes (and underlying shares issued upon conversion of the notes to the
noteholders) were issued under the private placement exemption of section 4(2)
of the Securities Act. No underwriters were involved in the ComCore acquisition.
For information pertaining to dividends and National's market prices see Note 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.
Our 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 20, 2001
was $27.78. At July 20, 2001, the number of record holders of our common stock
was 8,417.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The following selected financial information has been derived from audited
consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 and the consolidated financial statements
and related notes thereto in Item 8.
FIVE-YEAR SELECTED FINANCIAL DATA
Years Ended May 27, May 28, May 30, May 31, May 25,
In Millions, Except Per Share Amounts 2001 2000 1999 1998 1997
----------- ----------- ------------ ----------- ----------
OPERATING RESULTS
Net sales $2,112.6 $2,139.9 $1,956.8 $2,536.7 $2,684.4
Operating costs and expenses 1,891.1 1,798.0 3,043.1 2,683.6 2,692.1
----------- ----------- ------------ ----------- ----------
Operating income (loss) 221.5 341.9 (1,086.3) (146.9) (7.7)
Interest income (expense), net 52.0 15.3 (2.2) 22.3 6.1
Other income, net 33.6 285.3 3.1 24.9 18.7
----------- ----------- ------------ ----------- ----------
Income (loss) before income taxes and
extraordinary item 307.1 642.5 (1,085.4) (99.7) 17.1
Income tax expense (benefit) 61.4 14.9 (75.5) (1.1) 15.5
----------- ----------- ------------ ----------- ----------
Income (loss) before extraordinary item $245.7 $627.6 $(1,009.9) $(98.6) $1.6
=========== =========== ============ =========== ==========
Net income (loss) $245.7 $620.8 $(1,009.9) $(98.6) $1.6
=========== =========== ============ =========== ==========
Earnings (loss) per share: Income (loss) before extraordinary item:
Basic $1.40 $3.62 $(6.04) $(0.60) $0.01
=========== =========== ============ =========== ==========
Diluted $1.30 $3.27 $(6.04) $(0.60) $0.01
=========== =========== ============ =========== ==========
Net income (loss):
Basic $1.40 $3.58 $(6.04) $(0.60) $0.01
=========== =========== ============ =========== ==========
Diluted $1.30 $3.24 $(6.04) $(0.60) $0.01
=========== =========== ============ =========== ==========
Weighted-average common and potential common shares outstanding:
Basic 175.9 173.6 167.1 163.9 156.1
=========== =========== ============ =========== ==========
Diluted 188.4 191.7 167.1 163.9 159.1
=========== =========== ============ =========== ==========
FINANCIAL POSITION AT YEAR-END
Working capital $ 803.2 $ 791.1 $ 324.2 $ 514.6 $ 911.6
Total assets $ 2,362.3 $ 2,382.2 $ 2,044.3 $ 3,100.7 $ 3,210.8
Long-term debt $ 26.2 $ 48.6 $ 416.3 $ 390.7 $ 460.5
Total debt $ 55.6 $ 80.0 $ 465.6 $ 444.6 $ 475.9
Shareholders' equity $ 1,767.9 $ 1,643.3 $ 900.8 $ 1,858.9 $ 1,871.7
- -------------------------------------------------------- ----------- ------------ ------------ ----------- ----------
OTHER DATA
Research and development $ 435.6 $ 386.1 $ 471.3 $ 482.0 $ 404.5
Capital additions $ 227.6 $ 169.9 $ 303.3 $ 622.0 $ 605.6
Number of employees (in thousands) 10.3 10.5 11.6 13.0 12.8
- -------------------------------------------------------- ----------- ------------ ------------ ----------- ----------
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 statements contained in the outlook section and within certain sections of
management's discussion and analysis are forward-looking based on current
expectations and management's estimates. Actual results may differ materially
from those set forth in these forward-looking statements. The forward-looking
statements discussed or incorporated by reference in this 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 wireless, PC and communications
infrastructure 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 our reports and filings with the SEC.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto:
Results of Operations
- ---------------------
We recorded net sales of $2.1 billion in fiscal 2001. This compares to $2.1
billion in fiscal 2000 and $2.0 billion in fiscal 1999. We experienced strong
sales in the first half of fiscal 2001 as market conditions in the semiconductor
industry remained strong. Sales of $1.2 billion for the first half of fiscal
2001 grew 24 percent over sales for the first half of fiscal 2000. As we entered
into the second half of fiscal 2001, market conditions quickly weakened, causing
sales to decline sharply to $0.9 billion for the second half of the fiscal year.
This represented a 23 percent decline from the second half of fiscal 2000 and a
29 percent decline from the first half of fiscal 2001.
The growth in sales for fiscal 2000 over sales for fiscal 1999 was
primarily attributable to improvement in market conditions that began near the
end of calendar 1999 and lasted through most of calendar 2000.
In fiscal 2001, we recorded net income of $245.7 million compared to net
income of $620.8 million in fiscal 2000 and a net loss of $1.0 billion in fiscal
1999. Net income for fiscal 2001 included special items of $51.9 million. The
special items included $16.2 million for in-process R&D charges related to the
acquisitions of innoComm Wireless and Vivid Semiconductor (See Note 4) and a
$35.7 million net charge for restructuring of operations (See Note 3).
For fiscal 2000, net income included special items of $55.3 million. The
special items included a $26.8 million gain from the sale of assets of the Cyrix
PC microprocessor business (See Note 3) and a $4.2 million in-process research
and development charge related to the acquisition of Algorex (See Note 4).
Special items also included credits of $14.7 million related to restructuring of
operations (See Note 3) and $18.0 million related to an indemnity agreement with
Fairchild Semiconductor that expired in March 2000 (See Note 5). In addition to
these special items, fiscal 2000 net income included a $270.7 million gain from
our sale of shares of Fairchild stock and an extraordinary loss of $6.8 million
(net of taxes of $0.4 million). We sold the shares of Fairchild stock as part of
an initial public offering and a secondary offering that Fairchild completed in
August 1999 and February 2000, respectively. We recorded the extraordinary loss
in connection with the early redemption of our 6.5 percent convertible
subordinated notes due 2002 (See Note 6).
Sales
- -----
For the first half of fiscal 2001, we experienced growing sales as a result of
higher volumes while average selling prices were relatively flat. Our sales
declined significantly in the second half of the fiscal year as market
conditions for the semiconductor industry quickly weakened. The decline was the
result of reduced shipments as average selling prices remained relatively stable
for most of our products.
Fiscal 2001 sales for the Analog segment, which represented 72 percent of
our total sales, were flat compared to sales in fiscal 2000. Sales of analog
products led the growth in sales for the first half of fiscal 2001 with an
increase of 25 percent over sales for the comparable first half of fiscal 2000.
This growth was attributable to higher unit volume combined with slightly higher
average selling prices. Significant decline in sales for analog products in the
second half of fiscal 2001 essentially offset the growth experienced in the
first half of the fiscal year. Analog product sales in the second half of fiscal
2001 declined 21 percent compared to sales in the comparable second half of
fiscal 2000, mainly due to a sharp drop in unit volume while average selling
prices remained fairly stable. Sales of application-specific wireless products,
including radio frequency building blocks, grew 3 percent in fiscal 2001 over
fiscal 2000. This was driven by sales growth of 24 percent in the first half of
fiscal 2001 over the comparable first half of fiscal 2000 followed by a decline
of 16 percent in sales for the second half of fiscal 2001. Sales of amplifiers,
interface and power management products also grew in fiscal 2001 by 7 percent, 5
percent and 2 percent, respectively, over sales in fiscal 2000. This was driven
by sales growth in the first half of fiscal 2001 of 39 percent, 42 percent and
31 percent, respectively, over the comparable first half of fiscal 2000.
Declines in the second half of the fiscal year of 20 percent, 23 percent and 22
percent, respectively, from the comparable second half of fiscal 2000, partially
offset the growth in the first half of the fiscal year.
Sales in fiscal 2001 for the Information Appliance segment declined by 5
percent from sales in fiscal 2000 due to decreases in both unit shipments and
average selling prices. While the Information Appliance segment experienced an
18 percent growth in sales for the first half of fiscal 2001 over the comparable
first half of fiscal 2000, it was more than offset by a 25 percent decline in
sales for the second half of fiscal 2001 from the comparable second half of
fiscal 2000. The slowdown in demand for personal computers and PC-related
products contributed to the decline in sales for the Information Appliance
segment since a large part of the portfolio of information appliance products is
still consumed in the PC marketplace. Lack of growth was also impacted by slower
than expected adoption of emerging information appliances that are not PCs. The
fiscal 2000 comparison excludes sales from the Cyrix PC microprocessor unit,
which we sold in September 1999. Network product sales declined 24 percent in
fiscal 2001 from sales in fiscal 2000. Although we have introduced network
products employing new digital signal processing technology primarily focused on
higher bandwidth gigabit applications, low shipment of these products plus
decreasing demand for mature ethernet products continued to contribute to the
decline in sales. Unit volume and average selling prices were both lower for
network products compared to fiscal 2000.
Compared to sales in fiscal 2000, fiscal 2001 sales in Japan and the Asia
Pacific region increased by 11 percent and 2 percent, respectively, while sales
in the Americas and Europe decreased by 8 percent and 1 percent, respectively.
As the Japanese yen and most European currencies weakened against the dollar,
foreign currency exchange rate fluctuation had an unfavorable impact on foreign
currency-denominated sales for fiscal 2001. However, this impact was minimal
since less than a quarter of our total sales was denominated in foreign
currency. Sales for fiscal 2001 as a percentage of total sales increased to 32
percent and 10 percent in the Asia Pacific region and Japan, respectively, while
declining to 33 percent in the Americas and remaining flat at 25 percent in
Europe.
The overall increase in sales in fiscal 2000 over sales in fiscal 1999 was
primarily attributable to improvement in market conditions that began near the
end of calendar 1999 and lasted through most of calendar 2000. Sales for the
Analog segment drove the growth in sales. In fiscal 2000, analog product sales
grew 30 percent over sales for fiscal 1999. This growth was driven by
significantly higher unit volume, but was partially offset by lower average
selling prices from price erosion and a changing mix of products. Sales were
particularly strong in the wireless cellular markets, led by
application-specific wireless communications products, amplifiers and power
management products, which all grew more than 62 percent over sales for fiscal
1999. Sales in fiscal 2000 for the Information Appliance segment, excluding the
Cyrix PC microprocessor unit, grew by 18 percent over sales for fiscal 1999 due
to higher volume, offset partially by lower average selling prices. Selling
prices were impacted by strong competition and efforts to gain market share, as
the group focused on information appliance partners in the set-top box, webpad
and thin client markets. Network product sales declined in fiscal 2000 by 22
percent from sales for fiscal 1999. Although we introduced new products
employing new digital signal processing technology in the second half of the
fiscal year, minimal shipments of these new products and decreasing demand for
mature ethernet products contributed to the sales decline. The decrease in unit
shipments more than offset marginal increases in average selling prices for
network products.
Fiscal 2000 sales increased in all geographic regions compared to sales in
fiscal 1999, which included Cyrix PC microprocessor product sales. The increases
were 40 percent for Japan, 12 percent for Europe, 8 percent for the Asia Pacific
region and 3 percent for the Americas. Foreign currency exchange rate
fluctuation had minimal impact on sales since the favorable effect from the
Japanese yen was offset by the unfavorable effect experienced as the dollar
strengthened against most European currencies. Sales for fiscal 2000 as a
percentage of total sales increased to 25 percent and 9 percent for Europe and
Japan, respectively, while declining to 36 percent for the Americas and 30
percent for the Asia Pacific region.
Gross Margin
- ------------
Gross margin as a percentage of sales increased to 49 percent in fiscal 2001
from 46 percent in fiscal 2000 and 21 percent in fiscal 1999. The increase in
gross margin for fiscal 2001 was primarily driven by improved product mix, as we
shipped more high contribution analog and wireless products, combined with
improved manufacturing efficiency and higher factory utilization during the
first half of fiscal 2001. Wafer fabrication capacity utilization in the first
half of fiscal 2001 ran at 88 percent. In the second half of the fiscal year,
business conditions in the semiconductor industry had weakened significantly and
production activity was reduced considerably causing wafer fabrication capacity
utilization to drop to 53 percent for the second half of fiscal 2001. For the
year as a whole, wafer fabrication capacity utilization was 69 percent compared
to 75 percent in fiscal 2000. The increase in gross margin for fiscal 2000 over
fiscal 1999 was driven primarily by improved product mix, as Cyrix PC
microprocessor sales were replaced by higher-margin analog product sales, and by
increased factory utilization, particularly at the Arlington and Greenock
manufacturing facilities. Wafer fabrication capacity utilization for fiscal 2000
was 75 percent compared to 57 percent for fiscal 1999. This reflects lower
activity in Maine, particularly during the first half of the fiscal year, as a
result of our decision to exit the Cyrix PC microprocessor business. Excluding
the effect of Maine, wafer fabrication capacity utilization for fiscal 2000 was
85 percent. As production activity in Maine began to ramp back up in the second
half of fiscal 2000, factory utilization reached 94 percent by the end of the
fiscal year. The reduction in depreciation expense associated with the
impairment losses recorded in May 1999 on capital assets in Maine also
contributed to the overall improvement in gross margin. Gross margin for fiscal
1999 included the effect of charges related to an IBM contract termination of
$48.6 million and the write-down of Cyrix microprocessor inventory of $43.6
million related to the exit from the Cyrix PC microprocessor business.
Research and Development
- ------------------------
Research and development expenses in fiscal 2001 were $435.6 million, or 21
percent of sales, compared to $386.1 million in fiscal 2000, or 18 percent of
sales, and $471.3 million in fiscal 1999, or 24 percent of sales. The fiscal
2001 and 2000 amounts exclude $16.2 million and $4.2 million, respectively, for
in-process R&D charges related to acquisitions (See Note 4). The in-process R&D
charges are included as a component of special items in the consolidated
statements of operations. Higher R&D expenses for fiscal 2001 reflect increased
investment in the development of new analog and mixed-signal technology-based
products for applications in the wireless handsets, displays, information
infrastructure and information appliances markets, as well as in the process
technologies needed to support these products. R&D expenses also reflect
increased resource investment to develop new cores and integrate those cores
with other technological capabilities to create system-on-a-chip products.
Beginning in fiscal 2001, we also began recording expense associated with a
license agreement with Taiwan Semiconductor Manufacturing Company, which
contributed to the increase in R&D for fiscal 2001. The agreement allows us to
gain access to a variety of TSMC's advanced sub-micron processes for use in our
Maine facility as desired, if and when those processes are developed by TSMC.
The advanced process technologies are expected to accelerate the development of
high performance digital and mixed-signal products for the wireless handsets,
displays, information infrastructure and information appliances markets. During
fiscal 2001, we devoted approximately 78 percent of our R&D effort towards new
product development and 22 percent toward the development of process technology.
Compared to fiscal 2000, this represents a 14 percent increase in spending for
new product development and a 21 percent increase in spending for process
technology.
The decline in R&D expenses in fiscal 2000 from fiscal 1999 was the result
of our decision to exit the Cyrix PC microprocessor business in late fiscal
1999. This allowed us to reduce fiscal 2000 R&D spending for product
development, as well as spending for the underlying advanced complementary metal
oxide silicon process development.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses in fiscal 2001 were $328.5 million,
or 16 percent of sales, compared to $312.3 million in fiscal 2000, or 15 percent
of sales, and $317.4 million in fiscal 1999, or 16 percent of sales. Included in
fiscal 2001 SG&A expenses is an expense of $20.5 million associated with the
charitable donation of equity securities that were part of our investment
portfolio. We donated these securities to establish the National Semiconductor
Foundation. Excluding this expense, SG&A expenses in fiscal 2001 declined by one
percent from SG&A expenses in fiscal 2000. Actions that we implemented to reduce
spending in the second half of the fiscal year in response to the recent
weakness in business conditions contributed to the decline in these expenses for
fiscal 2001. The effect of these cost reduction actions was largely offset by
higher pay rates in fiscal 2001 over fiscal 2000.
The reduction in SG&A expenses in fiscal 2000 compared to fiscal 1999
reflected the benefits achieved from the cost reduction actions announced in May
1999, partially offset by an increase in fiscal 2000 of payroll and employee
benefit expenses.
Restructuring of Operations and Cost Reduction Programs
- -------------------------------------------------------
During fiscal 2001, we recorded a net charge of $33.4 million related to a
cost-reduction program implemented in the second half due to continued weakness
in the semiconductor industry. We also recorded a $2.3 million restructure
charge in connection with the consolidation of our wafer manufacturing
operations in Greenock, Scotland. See Note 3 of the Notes to the Consolidated
Financial Statements for a complete discussion on these charges, as well as
other activity during fiscal 2001 related to previously announced restructuring
actions.
Charge for Acquired In-Process Research and Development
- -------------------------------------------------------
In connection with our acquisitions during fiscal 2001 of innoComm Wireless and
Vivid Semiconductor, $12.1 million and $4.1 million of the total purchase price
for each acquisition, respectively, were allocated to the value of in-process
R&D. In connection with the acquisition of Algorex in fiscal 2000, we allocated
$4.2 million of the total purchase price to the value of in-process R&D. These
amounts were expensed upon acquisition because technological feasibility had not
been established and no alternative uses existed for the technologies.
InnoComm is a developer of chipsets for wireless networking applications.
Its expertise, which ranges from short-range wireless technologies such as
Bluetooth and HomeRF, to full wireless local area networking based on the IEEE
802.11 standard, is expected to complement our existing base of design and
product expertise. We expect the addition of Vivid's technologies and analog
engineering resources to increase our strength in creating silicon solutions for
the flat-panel display market. Algorex was a provider of high performance
digital signal processing products, architecture and software technologies for
the wireless communication markets. We expect these technologies to enhance our
future capability to provide complete chipset solutions for the cellular phone
and wireless information appliance markets.
In each acquisition, the fair value of the in-process R&D was based on
discounted projected net cash flows expected to be derived after successful
completion of the R&D projects underway. Estimates of future cash flows from
revenues were based primarily on market growth assumptions, lives of underlying
technologies and our expected share of market. Gross profit projections were
based on our experience with products that were similar in nature or products
sold into markets with similar characteristics. Estimated operating expenses,
income taxes and capital charges were deducted from gross profit to determine
net operating income for the in-process R&D projects. Operating expenses were
estimated as a percentage of revenue and included sales and marketing expenses
and development costs to maintain the technology once it has achieved
technological feasibility. We discounted the net cash flows of the in-process
R&D projects using probability adjusted discount rates that approximated the
overall rate of return for each acquisition as a whole and reflected the
inherent uncertainties surrounding the development of in-process R&D projects.
Interest Income and Interest Expense
- ------------------------------------
For fiscal 2001, we earned net interest income of $52.0 million, compared to
$15.3 million in fiscal 2000 and net interest expense of $2.2 million for fiscal
1999. Both higher average cash balances and slightly higher interest rates in
fiscal 2001 contributed to an increase in interest income. In addition, interest
expense in fiscal 2001 was significantly lower than in fiscal 2000 due to lower
debt, since we repaid our $258.8 million convertible subordinated notes in
November 1999. The increase in net interest income in fiscal 2000 over fiscal
1999 was also the result of both higher cash balances and higher interest rates,
combined with a decrease in interest expense from the lower debt balance.
Other Income, Net
- -----------------
Other income, net was $33.6 million for fiscal 2001, compared to $285.3 million
for fiscal 2000 and $3.1 million for fiscal 1999. For fiscal 2001, this included
a net gain from equity investments of $27.3 million and net intellectual
property income of $6.3 million. Net intellectual property income for fiscal
2001 included $2.4 million from a single significant licensing agreement with a
Korean company and the remainder from a number of individually small agreements.
This compares to fiscal 2000, which included a net gain of $272.5 million from
equity investments, $11.5 million of net intellectual property income and other
miscellaneous income of $1.3 million. Net intellectual property income for
fiscal 2000 related primarily to two significant licensing agreements. For
fiscal 1999, other income, net included $11.3 million of net intellectual
property income related primarily to a single significant licensing agreement
offset by a $0.1 million net loss from equity investments, a $7.0 million
settlement of disputes involving intellectual property rights and other
miscellaneous expenses of $1.1 million.
Income Tax Expense/Benefit
- --------------------------
We recorded income tax expense of $61.4 million in fiscal 2001, compared to
income tax expense of $14.9 million in fiscal 2000 and income tax benefit in
fiscal 1999 of $75.5 million. Our tax expense was a combination of U.S.
alternative minimum tax and foreign tax expense and resulted in an effective tax
rate of 20 percent for fiscal 2001. This compares to effective tax rates of 2
percent and 7 percent for fiscal 2000 and 1999, respectively. The tax rate in
fiscal 2001 is less than the federal statutory rate due primarily to the
reduction in U.S. taxable income from the utilization of net operating loss
carryovers. Realization of net deferred tax assets ($102.4 million at May 27,
2001) is primarily dependent on our ability to generate future U.S. taxable
income. We believe that it is more likely than not that forecasted U.S. taxable
income will be sufficient to utilize these tax assets, but we cannot assure that
these expectations of future U.S. taxable income will be met.
Foreign Operations
- ------------------
Our foreign operations include manufacturing facilities in the Asia Pacific
region and Europe and sales offices throughout the Asia Pacific region, Europe
and Japan. A portion of the transactions at these facilities is denominated in
local currency, which exposes us to risk from exchange rate fluctuations. Our
exposure from expenses at foreign manufacturing facilities is concentrated in
pound sterling, Singapore dollar and Malaysian ringgit. Where practical, we
hedge net non-U.S. dollar denominated asset and liability positions using
forward exchange and purchased option contracts. Our exposure from foreign
revenue is limited to the Japanese yen and the euro. We hedge 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
- ----------------------
We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange rates. To mitigate these risks, we use derivative
financial instruments. We do not use derivative financial instruments for
speculative or trading purposes.
Due to the short-term nature of the major portion of our investment
portfolio, a series of severe cuts in interest rates, such as those recently
experienced, does have a significant impact on the amount of interest income we
can earn from our investment portfolio. An increase in interest rates benefits
us due to our large net cash position. An increase in interest rates would not
necessarily increase interest expense due to the fixed rates of our existing
debt obligations.
A substantial majority of our revenue and capital spending is transacted in
U.S. dollars. However, we enter into these transactions in other currencies,
primarily the Japanese yen, euro and certain other Asian currencies. To protect
against reductions in value and the volatility of future cash flows caused by
changes in foreign exchange rates, we have established revenue and balance sheet
hedging programs. Our hedging programs reduce, but do not always eliminate, the
impact of foreign currency exchange rate movements. Adverse change (defined as
15 percent in all currencies) in exchange rates would result in a decline in
income before taxes of less than $10 million. This calculation assumes that each
exchange rate would change in the same direction relative to the U.S. dollar. In
addition to the direct effects of changes in exchange rates, such changes
typically affect the volume of sales or the foreign currency sales price as
competitors' products become more or less attractive. Our 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 our balances as of May 27, 2001.
Financial Condition
- -------------------
As of May 27, 2001, cash and cash investments increased to $869.4 million from
$849.9 million at May 28, 2000. The primary factors contributing to these
amounts are described below.
In fiscal 2001, cash generated from operating activities was $488.2
million, compared to $399.7 million in fiscal 2000 and $226.1 million in fiscal
1999. The increase in net income adjusted for noncash items contributed to the
improvement. Working capital items negatively affected operating cash for fiscal
2001. However, the net impact was softened as the decreases in accounts payable
and income taxes payable were substantially offset by a decrease in receivables.
Decreases in receivables and payables were largely due to the sales decline and
spending reductions experienced in the second half of fiscal 2001. For fiscal
2000, net income adjusted for noncash items was negatively affected by changes
in working capital due to increases in receivables and inventories. For fiscal
1999, the impact from changes in working capital was minimal since decreases in
receivables and inventories were offset by decreases in accounts payable and
income taxes payable.
Our investing activities used cash of $298.6 million in fiscal 2001, while
generating cash of $207.5 million in fiscal 2000. In fiscal 1999 investing
activities used cash of $317.2 million. Use of cash during fiscal 2001 primarily
related to the our investment in property, plant and equipment of $227.6 million
and the acquisitions of innoCOMM and Vivid for a total of $99.1 million, net of
cash acquired (See Note 4). In comparison, proceeds of $283.6 million from the
sale of Fairchild Semiconductor stock and $75.0 million from the sale of the
Cyrix PC microprocessor business were the main contributors to cash generated
from investing activities in fiscal 2000. This was partially offset by our
investment in property, plant and equipment of $169.9 million in fiscal 2000.
Cash used in investing activities in fiscal 1999 was primarily for capital
expenditures of $303.3 million.
Financing activities used cash of $150.6 million in fiscal 2001, compared
to $247.1 million in fiscal 2000. In fiscal 1999 financing activities provided
cash of $49.0 million. The primary use of cash in fiscal 2001 was for our
repurchase of 8.3 million shares of common stock on the open market for $194.4
million. All of these shares were retired during fiscal 2001. The cash outlay
was partially offset by proceeds of $68.2 million from the issuance of common
stock under employee benefit plans. For fiscal 2000 the primary use of cash was
for the payment of $265.8 million to redeem our 6.5 percent convertible
subordinated notes. Other debt repayment of $114.7 million was offset by
proceeds of $133.4 million from the issuance of common stock under employee
benefit plans. In fiscal 1999, the contributors to cash generated by financing
activities included the proceeds of a $67.5 million draw down on new equipment
loans and $28.0 million from the issuance of common stock under employee benefit
plans. Those amounts were partially offset by $56.5 million of general debt
repayment.
Management foresees substantial cash outlays for plant and equipment
throughout fiscal 2002, with primary focus on new capabilities that support our
target growth markets, as well as improvements to provide better manufacturing
efficiency and productivity. Based on current economic conditions, the fiscal
2002 capital expenditure level is expected to be slightly higher than the fiscal
2001 level. We expect existing cash and investment balances, together with
existing lines of credit, to be sufficient to finance planned fiscal 2002
capital investments.
Recently Issued Financial Accounting Standards
- ----------------------------------------------
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." The staff
accounting bulletin summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue. The company adopted SAB 101 in the
fourth quarter of fiscal 2001, effective as of the beginning of the year. The
impact of the adoption was not material to the company's consolidated financial
statements.
We plan to adopt Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended, at
the beginning of fiscal 2002. 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
will be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. The initial adoption of this statement will
not have a material effect on our financial position or results of operations.
On June 29, 2001, the Financial Accounting Standards Board approved the
issuance in July 2001 of SFAS No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 will provide guidance
on the accounting for a business combination at the date a business combination
is completed. The statement requires the use of the purchase method of
accounting for all business combinations initiated after June 30, 2001, thereby
eliminating use of the pooling-of-interests method. SFAS No. 142 will provide
guidance on how to account for goodwill and intangible assets after an
acquisition is completed. The most substantive change is that goodwill will no
longer be amortized but instead will be tested for impairment periodically. This
statement will apply to existing goodwill and intangible assets, beginning with
fiscal years starting after December 15, 2001. Early adoption of this statement
will be permitted for companies with fiscal years beginning after March 15,
2001, for which first quarter financial statements have not been issued. We
expect to adopt this statement at the beginning of fiscal 2002.
Outlook
- -------
Rapid technological change and frequent introduction of new technology leading
to more complex and more integrated products characterize the semiconductor
industry. The result is a cyclical environment with short product life, price
erosion and high sensitivity to the overall business cycle. Substantial capital
and R&D investment are also required to support products and manufacturing
processes. As a result of these industry conditions, we have experienced in the
past and may experience in the future periodic fluctuations in our operating
results.
Our strategy is to provide systems on a chip solutions for our key
trendsetting data highway partners, using our analog expertise as a starting
point for forward integration. As a result of this focus, we expect to grow at
or above market rates of growth in particular segments of the analog,
mixed-signal and information appliance markets. The overall U.S. economy,
particularly the technology sector, is in the midst of a sharp slowdown that
began in late calendar 2000. We experienced a very significant decline in new
orders as market conditions in the semiconductor industry quickly weakened. New
orders from the distribution channel fell substantially as distributors reduced
inventory levels in response to resale rates that were much lower than
previously anticipated. Continued inventory corrections by major customers in
the wireless handset market and slower than expected unit growth for wireless
handsets also contributed to the order slowdown. Lower than expected demand in
the PC market further added to the slowdown in new orders. Contract
manufacturers faced with excess inventories were also reducing inventory levels,
which negatively affected us. We expect new order rates to improve when
customers work through inventory corrections and when end-user demand improves.
However, there has been little evidence that this point has yet been reached and
therefore the low level of new orders may be prolonged. Fill orders, which are
orders received and shippable in the same period, were unusually low in the
second half of the fiscal year compared to typical experience rates and there
has been little evidence of improvement to date. Combining this trend with the
overall weakness in the U.S. economy, we anticipate a decline in sales for the
first quarter of fiscal 2002 from the sales level achieved in the recent fourth
quarter of fiscal 2001. The level of sales for the first quarter of fiscal 2002
is very dependent upon the amount of fill orders received. If we do not receive
a sufficient level of fill orders, the expected level of sales for the first
quarter of fiscal 2002 will further decline. We cannot assure that market
conditions will improve in the near future. The severity and duration of the
current slowdown may have a significant impact on our sales and results of
operations for fiscal 2002.
In the short term, reduced volume and overall market pricing will have a
negative effect on gross margin percentages. Future gross margin improvement
will be predicated on increased new order rates of higher-margin multi-market
analog products, as well as increased wafer fabrication capacity utilization. We
face a risk that declining order rates will continue to reduce wafer fabrication
capacity utilization and negatively impact future gross margin and future
operating results. In May 2001, we implemented a cost-reduction program in
response to current economic conditions. In the event that business conditions
do not improve, we may have to re-evalute the need for further actions that can
mitigate future decline in financial performance.
In June 2000, we entered into a licensing agreement with Taiwan
Semiconductor Manufacturing Company to gain access to a variety of TSMC's
advanced sub-micron processes for use in the wafer fabrication facility in Maine
as desired, if and when those processes are developed by TSMC. We are currently
utilizing our own process technology in Maine. This arrangement will enable us
to gain access ultimately to TSMC's 0.10-micron process technology. These
advanced process technologies are expected to accelerate the development of high
performance digital and mixed-signal products for the wireless handsets,
displays, information infrastructure and information appliances markets. There
can be no assurance that TSMC will successfully develop all of the processes it
has committed to provide. If there is not adequate process technology there will
be an adverse impact on the long-term capability of the Maine facility.
Our focus is to continue to introduce new products, particularly more
highly integrated system-on-a-chip products and higher-margin analog products
that are targeted towards wireless handsets, displays, information
infrastructure and information appliances. If the development of new products is
delayed or market acceptance is below expectations, future gross margin may be
unfavorably affected.
The wireless handset market continues to be important to our future growth
plans. New integrated chipsets are being developed to provide added dollar
content in targeted entry-level handsets. Due to high levels of competition, as
well as complex technological requirements, there is no assurance that we will
ultimately be successful in this targeted market. Although end market unit
growth for wireless handsets was very high for calendar 2000 as a whole,
near-term growth expectations are highly uncertain. Delayed introduction of
next-generation wireless base stations also negatively impacts potential growth
in the wireless handset market. There is also uncertainty related to the
standards that ultimately will be adopted for the next-generation wireless base
stations. As a result, we remain cautious on near-term trends in our
wireless-related business.
We continue to hold numerous design wins in the information appliance
market, but end user adoption has been slower than anticipated. A design win is
when a customer has chosen our semiconductor product and designed it into their
future product. It is not yet clear which form factors, specific customers'
products or customers' business models will ultimately be successful in this
emerging market. Revenue for our information appliance products is dependent on
the outcome and the timing of product acceptance trends.
We believe that continued focused investment in research and development,
especially the timely development and market acceptance of new products, is a
key factor to our successful growth and our ability to achieve strong financial
performance. Our product portfolio, particularly products in the personal
systems and communications area, have short product life cycles. Successful
development and introduction of new products are critical to our ability to
maintain a competitive position in the marketplace. We will continue to invest
resources to develop new cores and integrate those cores with our other
technological capabilities to create system-on-a-chip products aimed at the
emerging information appliance market. We will also continue to invest in the
development of new analog and mixed-signal technology-based products for
applications in the wireless handsets, displays, information infrastructure and
information appliances markets, as well as in process technologies needed to
support those products. Given the uncertainty over the current economic
conditions, it is difficult to predict our financial performance beyond the
first quarter of fiscal 2002. Assuming no significant improvement in the
economy, we anticipate R&D spending for fiscal 2002 to be flat to slightly
higher than the fiscal 2001 level. Overall SG&A expense is expected to be flat
or slightly lower than the fiscal 2001 level as we continue to align our cost
structure with current business conditions.
We have made and may continue to make strategic business acquisitions or
investments in order to gain access to key technologies that would augment our
existing technical capability or enable us to achieve faster time to market.
These can involve risks and uncertainties that may unfavorably impact our future
financial performance. We cannot assure you that we will be able to integrate
and develop acquired technologies as expected. If the technology is not
developed in a timely manner, we may be unsuccessful in penetrating target
markets. With acquisition activity, there are risks that future operating
results may be unfavorably affected by certain acquisition related costs, such
as but not limited to, in-process R&D charges and incremental R&D spending.
Because of significant international sales, we benefit overall from a
weaker dollar and are adversely affected by a stronger dollar relative to major
currencies worldwide. Changes in exchange rates, and in particular a
strengthening of the U.S. dollar, may unfavorably affect our consolidated sales
and net income. Although we attempt to manage short-term exposures to foreign
currency fluctuations, we cannot assure you that our risk management activities
will fully offset the adverse financial impact resulting from unfavorable
movements in foreign exchange rates.
From time to time, we have received notices of tax assessments from certain
governments of countries in which we operate. We cannot assure you that these
governments or other government entities will not serve future notices of
assessments on us, or that the amounts of such assessments and our failure to
favorably resolve such assessments would not have a material adverse effect on
our financial condition or results of operations. In addition, our tax returns
for certain years are under examination in the U.S. While we believe we have
sufficiently provided for all tax obligations, we cannot assure you that the
ultimate outcome of the tax examinations will not have a material adverse effect
on our future financial condition or results of operations.
Appendix to MD&A Graphs
(3 yrs)
2001 2000 1999
------------- ------------- -------------
Net Sales per Employee $201.2 $198.0 $164.1
Net Operating Margin
as a Percent of Sales 10.5% 16.0% (55.5%)
Operating Costs and Expenses
(As a Percent of Sales):
Selling, General, and
Administrative 15.5% 14.6% 16.2%
Research and Development 20.6% 18.0% 24.1%
Cost of Sales 50.9% 54.0% 79.4%
Net Property, Plant,
and Equipment $815.7 $803.7 $916.0
Stock Price Ending $ 28.12 $ 49.63 $ 19.38
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
Operations in Item 7 and in Note 1, "Summary of Significant Accounting
Policies," and Note 2, "Financial Instruments," in the Notes to the Consolidated
Financial Statements included in Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements: Page
- --------------------- ----
Consolidated Balance Sheets at May 27, 2001 and May 28, 2000 27
Consolidated Statements of Operations for each of the years in the
three-year period ended May 27, 2001 28
Consolidated Statements of Comprehensive Income (Loss) for each of
the years in the three-year period ended May 27, 2001 29
Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended May 27, 2001 30
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended May 27, 2001 31
Notes to Consolidated Financial Statements 32-59
Independent Auditors' Report 60
Financial Statement Schedule:
- -----------------------------
For the three years ended May 27, 2001
Schedule II -- Valuation and Qualifying Accounts 64
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
May 27, May 28,
In Millions, Except Share Amounts 2001 2000
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 817.8 $ 778.8
Short-term marketable investments 5.0 22.3
Receivables, less allowances of $45.1 in 2001 and $58.6 in 2000 123.4 258.6
Inventories 195.5 192.9
Deferred tax assets 97.2 125.7
Other current assets 36.1 40.5
------------- --------------
Total current assets 1,275.0 1,418.8
Property, plant and equipment, net 815.7 803.7
Long-term marketable debt securities 46.6 48.8
Long-term marketable equity securities 18.5 12.7
Goodwill, net 136.2 22.8
Other assets 70.3 75.4
------------- --------------
Total assets $2,362.3 $2,382.2
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 29.4 $ 31.4
Accounts payable 126.4 194.5
Accrued expenses 262.9 315.1
Income taxes payable 53.1 86.7
------------- --------------
Total current liabilities 471.8 627.7
Long-term debt 26.2 48.6
Other noncurrent liabilities 96.4 62.6
------------- --------------
Total liabilities $594.4 $ 738.9
Commitments and contingencies
Shareholders' equity:
Common stock of $0.50 par value. Authorized 850,000,000 shares.
Issued and outstanding 173,806,633 in 2001 and 177,561,617 in 2000 $ 86.9 $ 88.8
Additional paid-in capital 1,294.7 1,407.9
Retained earnings 432.4 186.7
Unearned compensation (13.9) (12.6)
Accumulated other comprehensive loss (32.2) (27.5)
------------- --------------
Total shareholders' equity 1,767.9 $1,643.3
------------- --------------
Total liabilities and shareholders' equity $2,362.3 $2,382.2
============= ==============
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended May 27, May 28, May 30,
In Millions, Except Per Share Amounts 2001 2000 1999
----------- ----------- --------------
Net sales $2,112.6 $2,139.9 $1,956.8
Operating costs and expenses:
Cost of sales 1,075.1 1,154.9 1,553.5
Research and development 435.6 386.1 471.3
Selling, general and administrative 328.5 312.3 317.4
Special items 51.9 (55.3) 700.9
----------- ----------- --------------
Total operating costs and expenses 1,891.1 1,798.0 3,043.1
----------- ----------- --------------
Operating income (loss) 221.5 341.9 (1,086.3)
Interest income (expense), net 52.0 15.3 (2.2)
Other income, net 33.6 285.3 3.1
----------- ----------- --------------
Income (loss) before income taxes and extraordinary item 307.1 642.5 (1,085.4)
Income tax expense (benefit) 61.4 14.9 (75.5)
----------- ----------- --------------
Income (loss) before extraordinary item 245.7 627.6 (1,009.9)
Extraordinary loss on early extinguishment of debt,
net of taxes of $0.4 million - 6.8 -
----------- ----------- --------------
Net income (loss) $ 245.7 $ 620.8 $(1,009.9)
=========== =========== ==============
Earnings (loss) per share: Income (loss) before extraordinary item:
Basic $1.40 $3.62 $(6.04)
Diluted $1.30 $3.27 $(6.04)
Net income (loss):
Basic $1.40 $3.58 $(6.04)
Diluted $1.30 $3.24 $(6.04)
Weighted-average common and potential common shares outstanding:
Basic 175.9 173.6 167.1
Diluted 188.4 191.7 167.1
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended May 27, May 28, May 30,
In millions 2001 2000 1999
------------- ------------- ------------
Net income (loss) $245.7 $620.8 $(1,009.9)
Other comprehensive income (loss), net of tax:
Unrealized gain on available-for-sale securities 31.5 177.0 22.2
Reclassification adjustment for realized gain included in
net income (loss) (20.2) (195.6) -
Minimum pension liability (16.0) (6.2) (12.5)
------------- ------------- ------------
Other comprehensive income (loss) (4.7) (24.8) 9.7
------------- ------------- ------------
Comprehensive income (loss) $241.0 $596.0 $(1,000.2)
============= ============= ============
The tax effects of other comprehensive income (loss) components included in each
of the years presented above were not significant.
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Additional Retained Other
Common Paid-In Earnings Unearned Comprehensive
In Millions Stock Capital (Deficit) Compensation Loss Total
------------- ------------ ------------- -------------- ---------------- -------------
Balances at May 31, 1998 $82.7 $1,240.1 $575.8 $(27.3) $(12.4) $1,858.9
Net loss - - (1,009.9) - - (1,009.9)
Issuance of common stock under option,
purchase, and profit sharing plans 1.8 26.5 - - - 28.3
Unearned compensation relating to
issuance of restricted stock - 3.5 - (3.5) - -
Cancellation of restricted stock - (2.0) - 2.0 - -
Amortization of unearned compensation - - - 13.8 - 13.8
Other comprehensive income - - - - 9.7 9.7
- ------------------------------------------- ------------- ------------ ------------- -------------- ---------------- -------------
Balances at May 30, 1999 84.5 1,268.1 (434.1) (15.0) (2.7) 900.8
Net income - - 620.8 - - 620.8
Issuance of common stock under option,
purchase, and profit sharing plans 4.1 130.6 - - - 134.7
Unearned compensation relating to
issuance of restricted stock 0.1 8.2 - (8.3) - -
Cancellation of restricted stock - (6.0) - 2.7 - (3.3)
Amortization of unearned compensation - - - 8.0 - 8.0
Issuance of common stock upon conversion
of a convertible subordinated
promissory note 0.1 7.0 - - - 7.1
Other comprehensive loss - - - - (24.8) (24.8)
- ------------------------------------------- ------------- ------------ ------------- -------------- ---------------- -------------
Balances at May 28, 2000 88.8 1,407.9 186.7 (12.6) (27.5) 1,643.3
Net income - - 245.7 - - 245.7
Issuance of common stock under option,
purchase, and profit sharing plans 2.2 70.0 - - - 72.2
Unearned compensation relating to
issuance of restricted stock 0.1 7.4 - (7.5) - -
Cancellation of restricted stock - (2.8) - 2.0 - (0.8)
Amortization of unearned compensation - - - 4.2 - 4.2
Proceeds from sale of put warrants - 0.4 - - - 0.4
Stock compensation charge - 2.0 - - - 2.0
Purchase and retirement of treasury stock (4.2) (190.2) - - - (194.4)
Other comprehensive loss - - - - (4.7) (4.7)
- ------------------------------------------- ------------- ------------ ------------- -------------- ---------------- -------------
Balances at May 27, 2001 $86.9 $1,294.7 $432.4 $(13.9) $(32.2) $1,767.9
=========================================== ============= ============ ============= ============== ================ =============
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended May 27, May 28, May 30,
In Millions 2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $245.7 $620.8 $(1,009.9)
Adjustments to reconcile net income (loss)
with net cash provided by operations:
Depreciation and amortization 243.3 263.8 405.6
Loss (gain) on investments (30.6) (272.5) 0.1
Loss on disposal of equipment 3.1 11.9 50.5
Donation of equity securities 20.5 - -
Deferred tax provision 27.6 (12.1) 52.8
Noncash special items 51.9 (55.3) 700.9
Other, net 0.3 1.6 0.7
Changes in certain assets and liabilities, net:
Receivables 135.2 (86.7) 36.6
Inventories (2.6) (57.0) 142.6
Other current assets 0.8 (8.3) 44.2
Accounts payable and accrued expenses (168.9) (9.7) (80.6)
Income taxes payable (33.7) 9.0 (114.0)
Other liabilities (4.4) (5.8) (3.4)
------------ ------------ ------------
Net cash provided by operating activities 488.2 399.7 226.1
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (227.6) (169.9) (303.3)
Sale of equipment - 8.6 -
Sale and maturity of available-for-sale securities 48.2 151.2 167.1
Purchase of available-for-sale securities (28.0) (115.1) (162.0)
Disposition of Cyrix PC microprocessor business - 75.0 -
Sale of investments 34.8 286.0 0.1
Business acquisitions, net of cash acquired (99.1) (22.2) -
Purchase of nonmarketable investments, net (11.9) (11.6) (1.7)
Other, net (15.0) 5.5 (17.4)
------------ ------------ ------------
Net cash provided by (used by) investing activities (298.6) 207.5 (317.2)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of convertible subordinated notes - (265.8) -
Issuance of debt - - 77.5
Repayment of debt (24.4) (114.7) (56.5)
Issuance of common stock, net 68.2 133.4 28.0
Purchase and retirement of treasury stock (194.4) - -
------------ ------------ ------------
Net cash provided by (used by) financing activities (150.6) (247.1) 49.0
Net change in cash and cash equivalents 39.0 360.1 (42.1)
Cash and cash equivalents at beginning of year 778.8 418.7 460.8
------------ ------------ ------------
Cash and cash equivalents at end of year $817.8 $778.8 $ 418.7
============ ============ ============
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
- ---------------------------------------------------
Basis of Presentation
- ---------------------
The consolidated financial statements include National Semiconductor Corporation
and its majority-owned subsidiaries. National Semiconductor Corporation and its
majority-owned subsidiaries may be referred to as National or the company in
these notes to the consolidated financial statements. All significant
intercompany transactions are eliminated in consolidation.
The company's fiscal year ends on the last Sunday of May. The fiscal years
ended May 27, 2001, May 28, 2000 and May 30, 1999 were all 52-week years.
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 revenues are recognized as the services are provided or as
milestones are achieved depending on the terms of the arrangement. Intellectual
property income is recognized when the license is delivered and no further
obligations to the customer exist. No revenue is recognized unless there is
persuasive evidence of an arrangement, the fee is fixed or determinable and
collectibility is reasonably assured.
Inventories
- -----------
Inventories are stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out basis, or market.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are recorded at cost. The company uses the
straight-line method to depreciate machinery and equipment over their estimated
useful life (3-5 years). Buildings and improvements are depreciated using both
straight-line and declining-balance methods over the assets' remaining estimated
useful life (3-50 years), or, in the case of leasehold improvements, over the
lesser of the estimated useful life or lease term.
The company capitalizes interest on borrowings during the construction
period of major capital projects. Capitalized interest is added to the cost of
the underlying assets and is amortized over the useful life of the assets. In
connection with various capital expansion projects, the company capitalized $0.4
million of interest in fiscal 1999. No interest was capitalized in either fiscal
2001 or 2000.
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 during fiscal 1999, the
company recorded an impairment loss of $633.9 million (See Note 3). The fair
value of the related assets was determined based on the present value of
estimated expected future cash flows using a discount rate commensurate with the
risks involved.
Goodwill, net
- -------------
Goodwill represents the excess of the purchase price over the fair market value
of acquired companies and is amortized on a straight-line basis over 3-7 years.
Beginning in fiscal 2002, the company will no longer amortize goodwill due to
the issuance of SFAS No. 142, "Goodwill and Other Intangible Assets," which was
approved for release in July 2001 by the Financial Accounting Standards Board.
In accordance with this statement, the company will also evaluate goodwill for
recoverability periodically or whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable from its estimated
future cash flows.
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 recognition of deferred tax assets is
reduced by a valuation allowance if it is more likely than not that the tax
benefits will not be realized.
Earnings per Share
- ------------------
Basic earnings per share are computed using the weighted-average number of
common shares outstanding. Diluted earnings per share are computed using the
weighted-average common shares outstanding after giving effect to potential
common shares from stock options based on the treasury stock method, plus other
potentially dilutive securities outstanding, such as convertible subordinated
notes. For all years presented, the reported net income (loss) was used in the
computation of basic and diluted earnings per share. A reconciliation of the
shares used in the computation follows:
Years Ended May 27, May 28, May 30,
(In Millions) 2001 2000 1999
--------------- ---------------- ---------------
Weighted-average common shares outstanding used
for basic earnings per share 175.9 173.6 167.1
Effect of dilutive securities:
Stock options 12.5 18.1 -
--------------- ---------------- ---------------
Weighted-average common and potential common shares
outstanding used for diluted earnings per share 188.4 191.7 167.1
=============== ================ ===============
As of May 27, 2001, the company had options outstanding to purchase 10.0
million shares of common stock with a weighted-average exercise price of $53.58,
which were excluded from the fiscal 2001 computation of diluted earnings per
share because their effect was antidilutive. These options could potentially
dilute the computation of earnings per share in the future. As of May 28, 2000,
the company had options outstanding to purchase 8.4 million shares of common
stock with a weighted-average exercise price of $59.49, which were excluded from
the fiscal 2000 computation of diluted earnings per share because their effect
was antidilutive. For fiscal 1999, the effect of stock options was antidilutive.
Therefore, stock options to purchase 36.2 million shares of common stock with a
weighted-average exercise price of $14.70 were not included in diluted earnings
per share at May 30, 1999.
Currencies
- ----------
The functional currency for all operations worldwide is the U.S. dollar. Gains
and losses arising from translation of foreign currency financial statement
balances into U.S. dollars are included in income. Gains and losses resulting
from foreign currency transactions are also included in income.
Financial Instruments
- ---------------------
Cash and Cash Equivalents. Cash equivalents are highly liquid instruments with a
remaining maturity of three months or less at the time of purchase. Cash
balances are maintained in various currencies and in a variety of financial
instruments. The company has not experienced any material losses related to any
short-term financial instruments.
Marketable Investments. Debt and marketable equity securities are classified
into held-to-maturity or available-for-sale categories. Debt securities are
classified as held-to-maturity when the company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
recorded as either short-term or long-term on the balance sheet based upon
contractual maturity date and are stated at amortized cost. Debt and marketable
equity securities not classified as held-to-maturity are classified as
available-for-sale and are carried at fair market value, with the unrealized
gains and losses, net of tax, reported in shareholders' equity as a component of
accumulated other comprehensive loss. Gains or losses on securities sold are
based on the specific identification method.
Nonmarketable investments. National has investments in nonpublicly traded
companies as a result of various strategic business ventures. These
nonmarketable investments are included on the balance sheet in other assets.
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. Nonmarketable investments in which National has greater than 20
percent but less than controlling ownership and in which it has significant
influence are accounted for using the equity method. Under the equity method the
company records its proportionate share of income or loss from these investments
in current operating results.
Off-Balance Sheet Financial Instruments. Gains and losses on currency forward
and option contracts that are intended to hedge an identifiable firm commitment
are deferred and included in the measurement of the underlying transaction.
Gains and losses on hedges of anticipated revenue transactions are deferred
until the underlying transactions are recognized or are recognized immediately
if the transaction is terminated earlier than initially anticipated. Gains and
losses on contracts to hedge certain non-U.S. dollar denominated assets and
liabilities are recognized in income and generally offset by the corresponding
effect of currency movements on these financial positions. Gains and losses on
any instruments not meeting the aforementioned criteria are recognized in income
in the current period. Subsequent gains or losses on the related financial
instrument are recognized in income in each period until the instrument matures,
is terminated or is sold. Income or expense on swaps is accrued as an adjustment
to the yield of the related investments or debt hedged by the instrument. Cash
flows associated with derivative transactions are reported as arising from
operating activities in the consolidated statements of cash flows.
Fair Values of Financial Instruments
- ------------------------------------
The carrying amounts for cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued expenses approximate their
fair values due to the short period of time until their 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 27, 2001.
The estimated fair value of debt was $62.4 million at May 27, 2001.
Employee Stock Plans
- --------------------
The company accounts for its stock option plans and its employee stock purchase
plans in accordance with the intrinsic method of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees."
Use of Estimates in Preparation of Financial Statements
- -------------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain amounts in prior years' consolidated financial statements and notes to
consolidated financial statements have been reclassified to conform to the
fiscal 2001 presentation. Net operating results have not been affected by these
reclassifications.
Note 2. Financial Instruments
- ------------------------------
Marketable Investments
The company's policy is to diversify its investment portfolio to reduce risk to
principal that could arise from credit, geographic and investment sector risk.
At May 27, 2001, 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.
Marketable investments at fiscal year-end comprised:
Gross Unrealized Estimated
(In Millions) Amortized Cost Gains/(Losses) Fair Value
------------------- ---------------- ---------------
2001
SHORT-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Certificates of deposit $ 5.0 $ - $ 5.0
------------------- ---------------- ---------------
Total short-term marketable investments $ 5.0 $ - $ 5.0
=================== ================ ===============
LONG-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Debt securities:
Government securities $ 14.0 $ 0.1 $ 14.1
Corporate notes 32.0 0.5 32.5
------------------- ---------------- ---------------
46.0 0.6 46.6
------------------- ---------------- ---------------
Equity securities 4.1 14.4 18.5
------------------- ---------------- ---------------
Total long-term marketable investments $ 50.1 $ 15.0 $ 65.1
=================== ================ ===============
2000
SHORT-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Certificates of deposit $ 15.0 $ - $ 15.0
Corporate bonds 7.4 (0.1) 7.3
------------------- ---------------- ---------------
Total short-term marketable investments $ 22.4 $ (0.1) $ 22.3
=================== ================ ===============
LONG-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Debt securities
Government securities $ 21.3 $ - $ 21.3
Corporate notes 27.5 - 27.5
------------------- ---------------- ---------------
48.8 - 48.8
------------------- ---------------- ---------------
Equities securities 8.9 3.8 12.7
------------------- ---------------- ---------------
Total long-term marketable investments $ 57.7 $ 3.8 $ 61.5
=================== ================ ===============
Scheduled maturities of investments in debt securities were:
(In Millions)
----------------
2002 $ 33.3
2003 18.3
----------------
Total $ 51.6
================
At May 27, 2001, the company held $48.7 million and $723.2 million of
available-for-sale and held-to-maturity securities, respectively, which are
classified as cash equivalents on the consolidated balance sheet. These cash
equivalents consist of the following (in millions): bank time deposits ($193.3),
institutional money market funds ($105.1) and commercial paper ($473.5).
At May 28, 2000, the company held $31.8 million and $694.7 million of
available-for-sale and held-to-maturity securities, respectively, which are
classified as cash equivalents on the consolidated balance sheet. These cash
equivalents consisted of the following (in millions): bank time deposits
($226.5), institutional money market funds ($16.2), commercial paper ($459.1)
and auction rate preferred stock ($24.7).
Gross realized gains on available-for-sale securities were $25.5 million
and $224.6 million for fiscal 2001 and 2000. No gross realized gains on
available-for-sale securities were recognized for fiscal 1999. In fiscal 2001,
the company realized an impairment loss of $4.2 million on an available-for-sale
security. Gross realized losses on available-for-sale securities were not
material for fiscal 2000 and 1999. The company recognized gross realized gains
from nonmarketable investments of $22.4 million and $48.4 million in fiscal 2001
and 2000, respectively, primarily arising from the sale of shares in connection
with initial public offerings and acquisitions by third parties. There was no
gross realized gain in fiscal 1999. In fiscal 2001 the company also recognized
$12.7 million of gross impairment losses on nonmarketable investments. No such
losses were recognized in fiscal 2000 and 1999.
Net unrealized gains on available-for-sale securities of $15.0 million at
May 27, 2001 and $3.7 million at May 28, 2000 are included in accumulated other
comprehensive loss. The related tax effects are not significant.
Off-Balance Sheet Financial Instruments
- ---------------------------------------
The company utilizes various off-balance sheet financial instruments to manage
market risks associated with fluctuations in certain interest rates and foreign
currency exchange rates. Company policy allows the use of derivative financial
instruments to protect against market risks arising in the normal course of
business. Company policy prohibits 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 underlying exposure. The criteria used
for designating an instrument as a hedge include the instrument's effectiveness
in risk reduction and direct matching of the financial instrument to the
underlying transaction.
Foreign Currency Instruments
- ----------------------------
The objective of the 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 consist of
product sales in currencies other than the U.S. dollar, a majority of which are
made through the company's subsidiaries in Europe and Japan. In addition, the
company uses forward and option contracts to hedge certain non-U.S. dollar
denominated asset and liability positions. Gains and losses from foreign
currency transactions were not significant for fiscal 2001, 2000 and 1999.
Interest Rate Derivatives
- -------------------------
The company uses swap agreements to convert the variable interest rate of
certain long-term Japanese yen debt to a fixed Japanese yen interest rate (1.63
percent at May 27, 2001).
Fair Value and Notional Principal of Off-Balance Sheet Financial Instruments
- ----------------------------------------------------------------------------
The table below shows the fair value and notional principal of off-balance sheet
instruments as of May 27, 2001 and May 28, 2000. 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 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 27, 2001 and May 28, 2000. The fair value of interest rate swap agreements
represents the estimated amount the company would receive or pay to terminate
the agreements taking into consideration current interest rates. The fair value
of forward foreign currency exchange contracts represents the difference between
the stated forward contract rate and the current market rate upon settlement.
The fair value of foreign currency option contracts represents the estimated net
amount the company would receive at maturity. The credit risk amount shown in
the table represents the gross exposure to potential accounting loss on these
transactions if all counterparties failed to perform according to the terms of
the contract, based on the then-current currency exchange rate or interest rate
at each respective date. Although the following table reflects the notional
principal, fair value and credit risk amounts of the off-balance sheet
instruments, it does not reflect the gains or losses associated with the
exposures and transactions that the off-balance sheet instruments are intended
to hedge. The amounts ultimately realized upon settlement of these financial
instruments, together with the gains and losses on the underlying exposures,
will depend on actual market conditions during the remaining life of the
instruments.
Transactions qualifying for hedge accounting:
Carrying Notional Estimated Credit
(In Millions) Amount Principal Fair Value Risk
-------------- ----------- ------------- -------------
2001
INTEREST RATE INSTRUMENTS
Swaps:
Variable to fixed $ - $ 19.4 $ - $ -
============== =========== ============= =============
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts:
To buy dollars:
Japanese yen $ - $ 3.1 $ - $ -
============== =========== ============= =============
To sell dollars:
Pound sterling $ (0.3) $ 16.0 $ (0.4) $ -
Singapore dollar (0.2) 9.7 (0.2) -
-------------- ----------- ------------- -------------
Total $ (0.5) $ 25.7 $ (0.6) $ -
============== =========== ============= =============
Purchased options:
Japanese yen $ 0.1 $ 18.0 $ 0.2 $ 0.2
Other - 4.5 - -
-------------- ----------- ------------- -------------
Total $ 0.1 $ 22.5 $ 0.2 $ 0.2
============== =========== ============= =============
Carrying Notional Estimated Credit
(In Millions) Amount Principal Fair Value Risk
-------------- ----------- ------------- -------------
2000
INTEREST RATE INSTRUMENTS
Swaps:
Variable to fixed $ - $22.5 $ (0.2) $ -
============== =========== ============= =============
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts:
To buy dollars:
Japanese yen $ - $ 7.4 $ 0.1 $ -
============== =========== ============= =============
To sell dollars:
Pound sterling $ - $25.4 $ (1.5) $ -
Singapore dollar - 10.1 (0.2) -
-------------- ----------- ------------- -------------
Total $ - $35.5 $ (1.7) $ -
============== =========== ============= =============
Purchased options:
Pound sterling $ 0.1 $14.2 $ - $ -
Japanese yen - 3.0 - -
Other - 2.8 - -
-------------- ----------- ------------- -------------
Total $ 0.1 $20.0 $ - $ -
============== =========== ============= =============
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 27, 2001 and May 28, 2000 are
immaterial. All foreign currency option contracts expire within one year.
Premiums on purchased foreign exchange option contracts are amortized over the
life of the option. Unrealized gains and losses on these option contracts are
deferred until the occurrence of the hedged transaction and recognized as a
component of the hedged transaction. Unrealized gains on such agreements at May
27, 2001 and May 28, 2000 were immaterial.
Concentrations of Credit Risk
- -----------------------------
Financial instruments that potentially subject the company to concentrations of
credit risk are primarily investments and trade receivables. The company's
investment policy requires cash investments to be placed with high-credit
quality counterparties and limits the amount of credit from any one financial
institution or direct issuer. The company sells its products to distributors and
original equipment manufacturers involved in a variety of industries including
computers and peripherals, wireless communications, automotive and networking.
The company performs continuing credit evaluations of its customers whenever
necessary and generally does not require collateral. Historically, it 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 AND COST REDUCTION PROGRAMs
- ----------------------------------------------------------------
Fiscal 2001
- -----------
In fiscal 2001 the company reported a net charge of $35.7 million comprised of
the items described below:
In May 2001, the company announced a cost-reduction program that included
the elimination of approximately 790 positions worldwide. This action was taken
due to continued weakness in the semiconductor industry experienced during the
second half of fiscal 2001. As a result, the company recorded a net charge of
$33.4 million. The charge included $25.5 million for severance, $4.2 million for
other exit related costs and $4.8 million for the write-off of equipment related
to activity that was eliminated as part of the cost-reduction program. The
charge was partially offset by a credit of $1.1 million of residual restructure
reserves for activities that were completed in fiscal 2001. The noncash portion
totaled $6.8 million, consisting of the equipment write off and $2.0 million of
noncash severance relating to stock options. In connection with this cost
reduction program, the company paid severance of $6.7 million to 340 employees
during fiscal 2001.
In August 2000, the company recorded a $2.3 million restructure charge in
connection with the consolidation of the wafer manufacturing operations in
Greenock, Scotland. This charge represented additional severance costs
associated with the termination of certain remaining employees who were
originally scheduled to depart the company upon final closure of the 4-inch
wafer fabrication facility. During the first quarter of fiscal 2001, the
terminating employees earned higher than expected salaries because of
unanticipated overtime hours. The actual salaries earned directly impacted the
amount of severance these employees had a right to receive at termination. The
closure of the 4-inch wafer fabrication facility and the transfer of products
and processes to the 6-inch wafer fabrication facility on the same site were
substantially completed by the end of September 2000. During fiscal 2001 the
company paid severance of $4.8 million to 105 of these employees in connection
with the Greenock restructuring.
National also paid $6.2 million for other exit-related costs that were
primarily related to restructuring actions originally announced in May 1999.
Included in accrued liabilities at May 27, 2001, is $30.3 million related to
costs for actions that were not yet completed as of May 27, 2001. Of this
amount, $21.0 million represents costs related to the recently announced cost
reduction program. The remaining amount represents facility dismantling costs
for the closure of the Greenock 4-inch wafer fabrication facility and lease
obligations related to other restructuring actions.
Fiscal 2000
- -----------
In fiscal 2000 the company reported a $14.7 million credit from restructuring of
operations related to the actions described below:
For all activities related to the company's restructuring actions announced
in May 1999 that were substantially completed during fiscal 2000, the company
recorded a credit of $9.0 million for severance and other exit-related costs
reserves no longer required. The May 1999 actions included the company's
decision to exit the Cyrix PC microprocessor business, the elimination of
approximately 1,126 positions worldwide and closure of the 8-inch development
wafer fabrication facility in Santa Clara, California. In connection with the
closure of the Santa Clara wafer fabrication facility, the company also recorded
a credit of $2.6 million from the final disposition of related equipment.
In September 1999, the company completed the sale of the assets of the
Cyrix PC microprocessor business to VIA Technologies. The sale included the M II
x86 compatible microprocessor and successor products. National retained the
integrated Media GX microprocessor, which forms the core of the GeodeTM family
of solutions for the information appliance market. Assets sold included
inventories, land, buildings and equipment, primarily located in Richardson,
Texas; Arlington, Texas; Mesa, Arizona; and Santa Clara, California. Some PC
microprocessor-related manufacturing assets in Toa Payoh, Singapore were also
included. Proceeds from this transaction were $75.0 million, of which $8.2
million represented reimbursement to National for certain employee retention
costs incurred solely as a result of completing the sale. The remaining $66.8
million represented payment for the assets sold. The company recorded a gain of
$26.8 million on the sale.
In September 1999, the company also announced it would retain full
ownership of its semiconductor manufacturing facility in Greenock and ceased its
efforts originally announced in October 1998 to seek an investor to acquire and
operate that facility as an independent foundry business. As a result, the
company recorded a credit of $3.1 million from the reduction of the restructure
reserve related to a penalty that would no longer be incurred. As originally
planned the company continued to consolidate its manufacturing lines in Greenock
by closing the 4-inch wafer fabrication facility and transferring products and
processes to the 6-inch wafer fabrication facility on the same site, as well as
to other National facilities. These activities were substantially completed by
the end of September 2000.
Fiscal 1999
- -----------
In fiscal 1999, the company reported a net restructure charge of $700.9 million
related to the actions described below:
In May 1999, the company announced its decision to exit the Cyrix PC
microprocessor business and related support activities in order to sharpen its
focus on the emerging information appliance market and on its traditional analog
business. Other related actions included the elimination of approximately 1,126
positions worldwide and closure of the 8-inch development wafer fabrication
facility in Santa Clara, California. All of these actions were substantially
completed during fiscal 2000. In connection with these actions, operating
results for fiscal 1999 included a restructure charge of $689.6 million. The
decision to exit the Cyrix PC microprocessor business resulted in significant
impairment of capital assets in South Portland, Maine; Richardson, Texas; and
Toa Payoh, Singapore, which were substantially devoted to supporting the Cyrix
PC microprocessor business. Although the company has now decided to retain the
wafer fabrication facility in Maine, it had originally planned to seek a
third-party to partner with National in owning and operating this facility. As a
result, the restructure charge included impairment losses of $494.3 million
relating to these assets. The Maine assets were treated as assets to be held and
used, since they related to a wafer fabrication facility that could not be
removed immediately from operations and was depreciated over the new expected
life. The planned exit from the 8-inch development wafer fabrication facility in
Santa Clara resulted in an additional $139.6 million impairment loss included in
the restructure charge. The other components of the restructure charge included
$37.0 million for severance and $18.7 million for other exit-related costs. Of
the total charge, noncash charges included the impairment losses and $3.2
million of other exit-related costs.
In October 1998, the company announced plans to consolidate its wafer
manufacturing operations in Greenock and to seek investors to acquire and
operate the facility in Greenock as an independent foundry business. The
Greenock assets were treated as assets to be held and used since they could not
be removed immediately from operations and were depreciated over the new
expected life. In connection with the closure of the 4-inch wafer fabrication
facility, the company recorded a restructuring charge of $23.0 million in fiscal
1999. The charge included $12.6 million for severance, $3.9 million for costs
associated with the dismantling of the 4-inch wafer fabrication facility and
approximately $6.5 million for other exit-related costs. Other than $5.5 million
of other exit-related costs for noncash items, the charge included primarily
cash items.
The fiscal 1999 restructure charges were partially offset by a credit of
$11.7 million related to certain prior restructure actions. The credit included
$3.0 million for severance, $4.1 million from the disposition of assets and $4.6
million for other exit costs. The credit was prompted by the completion during
fiscal 1999 of actions primarily associated with the closure of the 5-inch and
6-inch wafer fabrication facilities in Santa Clara, California and a worldwide
workforce reduction plan. The timing of these actions was consistent with the
timetable previously announced in fiscal 1998.
Note 4. Acquisitions
- ---------------------
In February 2001, the company acquired innoComm Wireless, a developer of
chipsets for wireless networking applications based in San Diego, California.
InnoComm's expertise ranges from short-range wireless technologies, such as
Bluetooth and HomeRF, to full wireless local area networking based on the IEEE
802.11 standard, which allows interoperability for wireless LANs similar to how
ethernet allows interoperability of wired LANs. The acquisition is expected to
complement National's existing base of design and product expertise. The
acquisition was accounted for using the purchase method with a purchase price of
$118.8 million. Of the total purchase price, $74.3 million was paid in cash upon
the closing of the transaction. A liability of $44.5 million was recorded,
primarily representing two installments to be paid twelve and twenty-four months
after the closing date. In connection with the acquisition, the company recorded
a $12.1 million in-process research and development charge, which is included as
a component of special items in the consolidated statement of operations for
fiscal 2001. The remainder of the purchase price was allocated to net assets of
$0.2 million and intangible assets of $106.5 million based on fair values. The
intangible assets primarily consist of goodwill, which were to be amortized over
a useful life of 7 years. Beginning in fiscal 2002, the company will no longer
amortize goodwill due to new provisions under SFAS No. 142, "Goodwill and Other
Intangible Assets," which was approved for issuance in July 2001 by the
Financial Accounting Standards Board. Under terms of employee retention
arrangements, the company also expects to pay a total of approximately $18.3
million to innoComm employees upon the completion of their first and second year
service anniversaries. These amounts will be charged ratably to operations over
the related service periods.
In July 2000, the company acquired the business and assets of Vivid
Semiconductor, a semiconductor company based in Chandler, Arizona. The addition
of Vivid's technologies and analog engineering resources are expected to expand
National's strengths in creating silicon solutions for the flat-panel display
market. The acquisition was accounted for using the purchase method with a
purchase price of $25.1 million in cash. In connection with the acquisition, the
company recorded a $4.1 million in-process research and development charge,
which is included as a component of special items in the consolidated statement
of operations for fiscal 2001. The remainder of the purchase price was allocated
to net assets of $1.3 million and intangible assets of $19.7 million based on
fair values. The intangible assets primarily consist of goodwill, which were to
be amortized over a useful life of 5 years.
In December 1999, the company acquired Algorex, a provider of high
performance digital signal processing products, architecture and software
technologies for the wireless communication markets. These technologies are
expected to enhance National's future capability to provide complete chipset
solutions for the cellular phone and wireless information appliance markets. The
acquisition was accounted for using the purchase method with a purchase price of
$21.5 million. In connection with the acquisition, the company recorded a $4.2
million in-process research and development charge, which is included as a
component of special items in the consolidated statement of operations. The
remainder of the purchase price was allocated primarily to goodwill.
The amount allocated to the in-process research and development charge in
each of these acquisitions was determined through an established valuation
technique used in the high technology industry. The research and development
charge was expensed upon acquisition because technological feasibility had not
been established and no alternative uses exist. The costs of research and
development to bring the products to technological feasibility are not expected
to have a material impact on future operating results.
Pro forma results of operations related to these acquisitions have not been
presented, since results of their operations were insignificant for fiscal years
prior to acquisition.
Note 5. Consolidated Financial Statement Details
- -------------------------------------------------
(In Millions) 2001 2000
-------------- ---------------
RECEIVABLE ALLOWANCES
Doubtful accounts $ 7.3 $ 7.4
Returns and allowances 37.8 51.2
-------------- ---------------
Total receivable allowances $ 45.1 $ 58.6
============== ===============
(In Millions) 2001 2000
-------------- ---------------
INVENTORIES
Raw materials $ 8.1 $ 16.6
Work in process 113.8 112.0
Finished goods 73.6 64.3
-------------- ---------------
Total inventories $ 195.5 $ 192.9
============== ===============
PROPERTY, PLANT AND EQUIPMENT
Land $ 21.7 $ 20.5
Buildings and improvements 520.6 514.3
Machinery and equipment 1,778.1 1,693.8
Construction in progress 98.7 74.5
-------------- ---------------
Total property, plant and equipment 2,419.1 2,303.1
Less accumulated depreciation and amortization 1,603.4 1,499.4
-------------- ---------------
Property, plant and equipment, net $ 815.7 $ 803.7
============== ===============
GOODWILL
Goodwill $ 167.8 $ 40.8
Less accumulated amortization 31.6 18.0
-------------- ---------------
Goodwill, net $ 136.2 $ 22.8
============== ===============
ACCRUED EXPENSES
Payroll and employee related $ 123.7 $ 182.4
Restructuring of operations 30.2 19.1
Other 109.0 113.6
-------------- ---------------
Total accrued expenses $ 262.9 $ 315.1
============== ===============
(In Millions) 2001 2000 1999
------------- ------------- --------------
SPECIAL ITEMS - Income (expense)
Restructuring of operations $ (35.7) $ 14.7 $(700.9)
Gain on disposition of Cyrix PC microprocessor business - 26.8 -
In-process research and development charge (16.2) (4.2) -
Other - 18.0 -
------------- ------------- --------------
$ (51.9) $ 55.3 $(700.9)
============= ============= ==============
For fiscal 2000 special items, a credit of $18.0 million to reduce the
excess portion of a contingent liability related to an indemnity agreement with
Fairchild Semiconductor that expired in March 2000 is included in other. The
agreement was connected with the disposition of Fairchild in fiscal 1997.
(In Millions) 2001 2000 1999
------------- ------------- --------------
INTEREST INCOME (EXPENSE), NET
Interest income $ 57.3 $ 33.2 $ 26.9
Interest expense (5.3) (17.9) (29.1)
------------- ------------- --------------
Interest income (expense), net $ 52.0 $ 15.3 $ (2.2)
============= ============= ==============
(In Millions) 2001 2000 1999
------------- ------------- --------------
OTHER INCOME, NET
Net intellectual property income $ 6.3 $ 11.5 $ 11.3
Gain (loss) on investments, net 27.3 272.5 (0.1)
Other - 1.3 (8.1)
------------- ------------- --------------
Total other income, net $ 33.6 $ 285.3 $ 3.1
============= ============= ==============
Note 6. Debt
- -------------
Debt at fiscal year-end consisted of the following:
(In Millions) 2001 2000
------------- ------------
Notes secured by real estate payable at 12.5% - 12.6% $ 4.6 $ 8.8
Notes secured by equipment payable at 7.0% - 8.0% 21.5 38.6
Convertible subordinated promissory notes 10.0 10.0
Other debt 19.5 22.6
------------- ------------
Total debt 55.6 80.0
Less current portion of long-term debt 29.4 31.4
------------- ------------
Long-term debt $ 26.2 $ 48.6
============= ============
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 and principal payments vary. One of the notes, which matured in
March 2001, was fully repaid. The remaining outstanding note matures in March
2002.
Notes secured by equipment are collateralized by the underlying equipment.
Under the terms of the agreements, principal and interest are due monthly over
various original maturity periods ranging from three to five years. Maturities
of loans under these agreements range from November 2001 to November 2003. These
financing agreements contain certain covenant and default provisions that
require the company to maintain a certain level of tangible net worth and permit
the lenders cross-acceleration rights against certain other credit facilities.
The convertible subordinated promissory notes were issued in connection
with a retention arrangement related to the acquisition of ComCore Semiconductor
in fiscal 1998. They were issued to each of the founding shareholders of ComCore
for a total of $15.0 million. As a result of the termination of one ComCore
founding shareholder during fiscal 2000, the company issued 247,104 shares of
common stock upon the conversion of one of the promissory notes. The remaining
notes for a total of $10.0 million were noninterest-bearing and were due the
earlier of either the date of termination of the employee or May 2001. Each note
was convertible, in whole or in part, into shares of common stock on the
maturity date or within 30 days thereafter, based on an initial conversion price
of $16.1875. Subsequent to the end of fiscal 2001, the company issued 617,760
shares of common stock to the two remaining ComCore founding shareholders upon
conversion of their promissory notes on May 29, 2001.
In fiscal 2000, the company recorded a $6.8 million extraordinary loss, net
of income taxes of $0.4 million, from the early redemption of its $258.8
million, 6.5 percent convertible subordinated notes due 2002. Pursuant to the
terms of the Note Indenture, the notes were redeemed at a price of 102.786
percent of the principal amount. Holders of the notes also received accrued
interest through November 11, 1999.
For each of the next five fiscal years and thereafter, debt obligations mature
as follows:
Total Debt
(In Millions) (Principal Only)
------------
2002 $ 29.4
2003 24.1
2004 2.1
2005 and thereafter -
------------
Total $ 55.6
============
The company's multicurrency agreement provides for multicurrency loans,
letters of credit and standby letters of credit. The multicurrency loan
agreement, which includes standby letters of credit for a combined $35 million,
expires in October 2001. The company anticipates this agreement will be renewed
or replaced on or prior to expiration. At May 27, 2001, $21.4 million of the
combined total commitments under the multicurrency financing agreement was
utilized. This agreement contains 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 27, 2001, under the most restrictive covenant, $265.2 million of tangible
net worth 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 consist of the
following:
(In Millions) 2001 2000 1999
------------- ------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM
U.S. $ 231.0 $589.3 $(1,136.2)
Non-U.S. 76.1 53.2 50.8
------------- ------------ ------------
$ 307.1 $642.5 $(1,085.4)
============= ============ =============
INCOME TAX EXPENSE (BENEFIT)
Current:
U.S. federal $ 20.2 $ - $ (142.5)
U.S. state and local 0.4 - -
Non-U.S. 13.2 27.0 14.2
------------ ------------ -------------
33.8 27.0 (128.3)
Deferred:
U.S. federal and state 22.3 - 57.2
Non-U.S. 5.3 (12.1) (4.4)
------------ ------------ -------------
27.6 (12.1) 52.8
------------ ------------ -------------
Income tax expense (benefit) $ 61.4 $ 14.9 $ (75.5)
============ ============ =============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May 27, 2001
and May 28, 2000 are presented below:
(In Millions) 2001 2000
-------------- --------------
DEFERRED TAX ASSETS
Reserves and accruals $170.9 $269.1
Non-U.S. loss carryovers and other allowance 24.9 36.6
Federal and state credit carryovers 249.2 251.0
Other 10.6 59.4
-------------- --------------
Total gross deferred assets 455.6 616.1
Valuation allowance (342.9) (451.2)
-------------- --------------
Net deferred assets 112.7 164.9
-------------- --------------
DEFERRED TAX LIABILITIES
Other liabilities (10.3) (34.9)
-------------- --------------
Total gross deferred liabilities (10.3) (34.9)
-------------- --------------
Net deferred tax assets $102.4 $130.0
============== ==============
The company records a valuation allowance to reflect the estimated amount
of deferred tax assets that may not be realized mainly due to the expiration of
net operating losses and tax credit carryovers. The valuation allowance for
deferred tax assets as of May 27, 2001 includes $100.2 million attributable to
stock option deductions. The benefit of the deductions will be credited to
equity when realized.
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 27, 2001.
The reconciliation between the income tax rate computed by applying the
U.S. federal statutory rate and the reported worldwide tax rate follows:
2001 2000 1999
--------------- -------------- --------------
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 (4.4) (1.0) (0.6)
U.S. state and local taxes net of federal benefits 0.1 - -
Utilization of net operating loss carryovers and tax credits (6.5) (19.3) -
Changes in valuation allowances (7.8) (12.7) 32.4
Change in estimate for tax contingencies - - (6.8)
Other 3.6 0.3 3.0
--------------- -------------- --------------
Effective tax rate 20.0% 2.3% (7.0)%
=============== ============== ==============
U.S. income taxes were provided for deferred taxes on undistributed
earnings of non-U.S. subsidiaries that are not expected to be permanently
reinvested in such companies. There has been no provision for U.S. income taxes
for the remaining undistributed earnings of approximately $478.9 million at May
27, 2001, 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 $132.8 million would accrue after
utilization of U.S. tax credits.
At May 27, 2001, the company had U.S. and state credit carryovers of
approximately $155.4 million and $93.9 million, respectively, for tax return
purposes, which primarily expire from 2002 through 2021. The company also had
capital and investment allowance carryovers of approximately $83.2 million from
certain non-U.S. jurisdictions.
National and the IRS have settled all issues and finalized the Federal
income tax computations related to the IRS's examination of tax returns for
fiscal years 1986 through 1996. Taking into consideration net operating loss and
credit carryovers, the tax deficiency was approximately $3.4 million. The
interest associated with the final deficiency amount has not been finalized. The
IRS has begun examination of the company's tax returns for fiscal 1997 through
2000. The company believes that adequate tax payments have been made or accrued
for all years.
Note 8. Shareholders' Equity
- -----------------------------
Each outstanding share of common stock carries with it a stock purchase right.
The rights were issued pursuant to a dividend distribution that was initially
declared on August 5, 1988. If and when the rights become exercisable, each
right entitles the registered holder to purchase one one-thousandth of a share
of 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.
If any individual or group acquires 20 percent or more of common stock, or
announces a tender or exchange offer which, if completed, would result in that
person or group owning at least 20 percent of the company's common stock, the
rights become exercisable and will detach from the common stock. If the person
or group actually acquires 20 percent or more of the common stock (except in
certain cash tender offers for all of the common stock), each right will entitle
the holder to purchase, at the right's then-current exercise price, the 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 or entity, 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 the
acquisition by a person or group of 20 percent or more of the outstanding common
stock. Unless they are redeemed earlier, the rights will expire on August 8,
2006.
During fiscal 1998, the company reserved for issuance 926,640 shares of
common stock that are issuable upon conversion of convertible subordinated
promissory notes issued to three individuals as partial consideration for the
acquisition of ComCore Semiconductor. During fiscal 2000, 247,104 shares were
issued to one of these individuals (See Note 6), leaving a balance in the
reserve of 679,536 shares. Subsequent to the end of fiscal 2001, 617,760 shares
were issued to the remaining two individuals as final payment on the notes. The
reserve for the remaining 61,776 shares will be cancelled.
In connection with the company's merger with Cyrix, 16.4 million shares of
common stock were issued to the holders of Cyrix common stock. In addition, up
to 2.7 million shares of 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 common stock were
reserved for issuance in the future upon conversion of Cyrix 5.5 percent
convertible subordinated notes due June 1, 2001. National repurchased
substantially all of the outstanding convertible subordinated notes in fiscal
1998 and at May 27, 2001 conversion of the remaining outstanding subordinated
notes would only have required issuance of up to 892 shares of common stock.
Subsequent to the end of fiscal 2001, the notes were repaid and this reserve
will be cancelled.
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 three stock option plans under which employees and officers may be
granted stock options to purchase shares of common stock. One plan, which has
been in effect since 1977, authorizes the grant of up to 39,354,929 nonqualified
or incentive stock options to officers and key employees. Another plan
authorizes the grant of up to 70,000,000 nonqualified stock options to employees
who are not executive officers of the company. There is also an executive
officer stock option plan, which authorizes the grant of 6,000,000 nonqualified
options only to the company's executive officers. The terms of these plans
generally 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.
In connection with National's merger with Cyrix in fiscal 1998, National
assumed Cyrix's outstanding obligations under its 1988 incentive stock plan.
Each option under the Cyrix plan converted into the right or option to purchase
0.825 share of National common stock. The purchase price was also adjusted
accordingly. 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. No more options will be granted under the Cyrix 1988 incentive
stock plan.
In connection with the acquisitions of ComCore Semiconductor in fiscal 1998
and Mediamatics in fiscal 1997, National assumed ComCore's and Mediamatics'
outstanding obligations under their respective stock option plans and stock
option agreements for their employees and consultants. ComCore and Mediamatics
optionees received an option for equivalent shares of National common stock
based on an exchange rate determined under the applicable acquisition
agreements. The 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 either of these stock option plans. The Mediamatics transaction
resulted in a new measurement date for these options and National recorded
related unearned compensation in the amount of $9.2 million. Amortization of
this unearned compensation, which was recorded ratably over the vesting period
of these options, was fully expensed by February 2001. This compensation expense
was $1.2 million, $2.8 million and $2.3 million in fiscal 2001, 2000 and 1999,
respectively.
The following table summarizes information about options outstanding under these
plans at May 27, 2001:
Outstanding Options
------------------------------------------------------------------------------------------
Weighted- Average
Remaining
Range of Exercise Number of Shares Contractual Life Weighted- Average
Prices (In Thousands) (In Years) Exercise Price
--------------------- ---------------------- ---------------------- ----------------------
ComCore option plan $0.50-$0.77 18.4 6.4 $0.66
Mediamatics option plan $1.59-$2.85 39.7 4.6 $2.60
National has a director stock option plan that was first approved in fiscal
1998 which authorizes the grant of up to 1,000,000 shares of common stock to the
company's eligible non-employee 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. Options to purchase 215,000 shares of common stock with a
weighted-average exercise price of $33.17 and weighted-average remaining
contractual life of 7.7 years were outstanding as of May 27, 2001.
Upon his retirement in May 1995, the former chairman of the company was
granted an option to purchase 300,000 shares of 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
became exercisable ratably over a four-year period. As of May 27, 2001, options
to purchase 140,000 shares of common stock were outstanding under this option
grant.
Changes in options outstanding under the option plans during fiscal 2001,
2000 and 1999 or otherwise (but excluding the ComCore, Mediamatics and director
options), were as follows:
Weighted Average
(In Million) Number of Shares Exercise Price
------------------------------ ------------------------------
Outstanding May 31, 1998 22.0 $23.28
Granted 26.2 $13.17
Exercised (0.4) $14.65
Cancelled (12.1) $26.52
------------------------------ ------------------------------
Outstanding May 30, 1999 35.7 $14.91
Granted 9.4 $56.96
Exercised (6.7) $15.92
Cancelled (5.2) $14.81
------------------------------ ------------------------------
Outstanding at May 28, 2000 33.2 $26.56
Granted 11.5 $27.15
Exercised (3.0) $13.29
Cancelled (3.0) $31.69
------------------------------ ------------------------------
Outstanding May 27, 2001 38.7 $27.35
============================== ==============================
Expiration dates for options outstanding at May 27, 2001 range from September
16, 2001 to May 21, 2011.
The following tables summarize information about options outstanding under
these plans (excluding the ComCore, Mediamatics and director options) at May 27,
2001:
Outstanding Options
-------------------------------------------------------------------------
Weighted-Average
Remaining Contractual
Number of Shares Life Weighted-Average
Range of Exercise Prices (In Millions) (In Years) Exercise Price
------------------------ ------------------------ -----------------------
$4.63-$12.75 5.2 7.6 $12.34
$12.88-$13.00 5.0 7.2 $13.00
$13.06-$15.50 6.0 6.5 $14.40
$15.75-$24.13 4.0 3.9 $21.56
$24.38-$25.95 7.6 9.9 $25.94
$26.00-$59.75 3.8 7.4 $35.28
$59.88-$83.50 7.1 8.9 $60.19
------------------------ ------------------------ -----------------------
Total 38.7 7.6 $27.35
======================== ======================== =======================
Options Exercisable
-----------------------------------------------
Number of Shares (In Weighted-Average
Range of Exercise Prices Millions) Exercise Price
---------------------- ------------------------
$4.63-$12.75 2.5 $12.19
$12.88-$13.00 2.1 $13.00
$13.06-$15.50 3.4 $14.74
$15.75-$24.13 1.5 $18.24
$26.00-$59.75 1.7 $31.49
$59.88-$83.50 1.7 $60.03
---------------------- ------------------------
Total 12.9 $22.73
====================== ========================
National has an employee stock purchase plan that authorizes the issuance
of up to 24,950,000 shares of common stock in quarterly offerings to eligible
employees at a price that is equal to 85 percent of the lower of the common
stock's fair market value at the beginning or the end of a quarterly period.
National also has an employee stock purchase plan available to employees at
international locations, which authorizes the issuance of up to 5.0 million
shares of common stock in quarterly offerings to eligible employees at a price
equal to 85 percent of the lower of its fair market value at the beginning or
the end of a quarterly period. Both purchase plans use a captive broker and the
company deposits shares purchased by the employee with the captive broker. In
addition, for the international purchase plan, the participant's local operation
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.
Under the terms of the stock purchase plan and the global stock purchase
plan, the company issued 1.1 million shares in fiscal 2001, 1.3 million shares
in fiscal 2000 and 2.7 million shares in fiscal 1999 to employees for $27.3
million, $26.3 million and $24.1 million, respectively.
Under all stock option plans, 3.2 million shares of common stock were
issued during fiscal 2001. As of May 27, 2001, 97.1 million shares were reserved
for issuance under all stock purchase and option plans and other options granted
by the company, including shares available for future option grants.
On June 29, 1998, the stock option and compensation committee of the board
of directors approved an option reissuance grant for employees. The company's
president and chief executive officer and executive staff members were excluded
from this reissuance grant. Each employee was able to exchange options
outstanding as of June 29, 1998, which had been previously granted in plans that
permit reissuance grants, for new options to purchase the same number of shares
of common stock at $13.875 per share. Vesting requirements on the reissuance
grants restarted as of June 29, 1998. The options vest over a four-year period
with one-fourth of the shares vesting on June 29, 1999, and the remaining shares
vesting ratably over the next three years. The reissuance grant was made as a
result of the significant decrease in the market price of common stock in the
fourth quarter of fiscal 1998 and was intended to ensure that previously granted
options provide a meaningful incentive to employees. Options to purchase
approximately 8.4 million shares were cancelled in the reissuance grant.
On October 24, 2000, the stock option and compensation committee of the
board of directors approved a special option grant to all employees, excluding
the president and chief executive officer and executive staff members. This
special grant was made because of the significant decline in the company's
market price during the first half of fiscal 2001. Shares under the option grant
vest 100 percent one year from the date of grant and expire 15 months from the
date of grant. Options to purchase a total 1.9 million shares of common stock at
$24.125 per share were granted in the special option grant.
Other Stock Plans
- -----------------
National has a director stock plan that authorizes the issuance of up to 200,000
shares of common stock to eligible non-employee 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 under the plan.
As of May 27, 2001, 75,132 shares had been issued under the director stock plan
and 124,868 shares were reserved for future issuances.
The company has a restricted stock plan, which authorizes the issuance of
up to 2.0 million shares of common stock to non-officer 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 2001,
2000 and 1999, 240,000, 166,500 and 272,000 shares, respectively, were issued
under the restricted stock plan. Restrictions expire over time, ranging from two
to six years after issuance. Based upon the market value on the dates of
issuance, the company recorded $7.5 million, $8.3 million and $3.5 million of
unearned compensation during fiscal 2001, 2000 and 1999, respectively. This
unearned compensation is included as a separate component of shareholders'
equity and is amortized to operations ratably over the applicable restriction
periods. As of May 27, 2001, 1,144,750 shares were reserved for future
issuances.
In May 1996, the company issued 200,000 shares of restricted stock to Brian
L. Halla, then newly hired president and chief executive officer. These shares
were not issued under the restricted stock plan and had restrictions that
expired 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 and were amortized to operations over the
vesting period.
Compensation expense for fiscal 2001, 2000 and 1999 related to all shares
of restricted stock was $3.0 million, $2.0 million and $4.5 million,
respectively. At May 27, 2001, the weighted-average grant date fair value for
all outstanding shares of restricted stock was $28.81.
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
National had accounted for its stock-based awards to employees under the fair
value method specified by SFAS No. 123. The weighted-average fair value of stock
options granted during fiscal 2001, 2000 and 1999 was $15.88, $36.36 and $6.95
per share, respectively. The weighted-average fair value of rights granted under
the stock purchase plans was $9.73, $7.38 and $5.10 for fiscal 2001, 2000 and
1999. The fair value of the stock-based awards to employees was estimated using
a Black-Scholes option pricing model, assuming no expected dividends and the
following weighted-average assumptions for fiscal 2001, 2000 and 1999:
2001 2000 1999
------------------ ----------------- ------------------
Stock Option Plans
Expected life (in years) 5.7 5.8 4.6
Expected volatility 73% 64% 57%
Risk-free interest rate 5.0% 6.6% 5.7%
Stock Purchase Plans
Expected life (in years) 0.3 0.3 0.3
Expected volatility 95% 100% 78%
Risk-free interest rate 3.7% 5.8% 4.6%
For pro forma purposes, the estimated fair value of 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 pro forma information follows:
(In Millions, Except Per Share Amounts) 2001 2000 1999
-------------- -------------- ----------------
Net income (loss) - as reported $245.7 $620.8 $(1,009.9)
Net income (loss) - pro forma $132.9 $550.3 $(1,069.1)
Basic earnings (loss) per share - as reported $1.40 $3.58 $(6.04)
Basic earnings (loss) per share - pro forma $0.76 $3.17 $(6.40)
Diluted earnings (loss) per share - as reported $1.30 $3.24 $(6.04)
Diluted earnings (loss) per share - pro forma $0.71 $2.87 $(6.40)
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 contributions of the greater of 5 percent
of consolidated net earnings before income taxes (subject to a limit of 5% of
payroll) or 1 percent of payroll (as defined by the plan). Contributions are
made 25 percent in common stock and 75 percent in cash. Total shares contributed
under the profit sharing plan during fiscal 2001, 2000 and 1999 were 104,151
shares, 34,025 shares and 95,126 shares, respectively. As of May 27, 2001, 1.23
million shares of common stock were reserved for future 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 thirteen
investment funds at the discretion of the employee. One of the investment funds
is a stock fund in which contributions are invested in National common stock.
Although 5.0 million shares of common stock are reserved for issuance to the
stock fund, shares purchased to date with contributions have been purchased on
the open market and the company has not issued any stock directly to the stock
fund.
The benefit restoration plan allows certain highly compensated employees to
receive a higher profit sharing plan allocation than would otherwise be
permitted under IRS regulations and to defer greater percentages of compensation
than would otherwise be permitted under the salary deferral 401(k) plan and IRS
regulations. The benefit restoration plan is a nonqualified plan of deferred
compensation maintained in a rabbi trust. Participants can direct the investment
of their benefit restoration plan accounts in the same investment funds offered
by the 401(k) plan (with the exception of the company stock fund, which is not
available for the nonqualified plan).
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) 2001 2000 1999
------------- ------------ ------------
Profit sharing plan $ 19.9 $ 15.5 $ 3.7
Salary deferral 401(k) plan $ 10.6 $ 10.8 $ 9.1
Non-U.S. pension and retirement plans $ 7.8 $ 10.7 $ 11.2
The defined benefit pension plans, which are maintained in the U.K.,
Germany and Japan, cover all eligible employees within each respective country.
Pension plan benefits are based primarily on participants' compensation and
years of service credited 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) 2001 2000 1999
----------------- ----------------- -----------------
Service cost of benefits earned during the year $ 4.1 $ 5.5 $ 6.9
Plan participant's contribution (0.7) (1.3) (1.4)
Interest cost on projected benefit obligation 7.0 6.5 5.5
Expected return on plan assets (5.6) (5.2) -
Net amortization and deferral 0.2 0.9 (4.2)
----------------- ----------------- -----------------
Net periodic pension cost $ 5.0 $ 6.4 $ 6.8
================= ================= =================
Benefit obligation and asset data of the plans at fiscal year-end and
details of their changes during the year are presented in the following tables:
(In Millions) 2001 2000
----------------- -----------------
BENEFIT OBILGATION
Beginning balance $120.0 $102.2
Service cost 4.1 5.5
Interest cost 7.0 6.5
Benefits paid (2.6) (4.4)
Actuarial loss 6.6 11.4
Exchange rate adjustment (12.2) (1.2)
----------------- -----------------
Ending balance $122.9 $120.0
================= =================
(In Millions) 2001 2000
----------------- -----------------
PLAN ASSETS AT FAIR VALUE
Beginning balance $82.3 $ 59.9
Actual return on plan assets (7.9) 10.4
Company contributions 12.2 14.3
Plan participants contributions 0.7 1.3
Benefits paid (2.5) (4.3)
Exchange rate adjustment (9.1) 0.7
----------------- -----------------
Ending balance $75.7 $ 82.3
================= =================
RECONCILIATION OF FUNDED STATUS
Fund status - Benefit obligation in excess of plan
assets $ 47.2 $37.7
Unrecognized net loss (47.1) (31.3)
Unrecognized net transition obligation 2.1 3.2
Adjustment to recognize minimum liability 47.2 31.2
----------------- -----------------
Accrued pension cost $ 49.4 $40.8
================= =================
The projected benefit obligations and net periodic pension cost were determined
using the following assumptions:
2001 2000 1999
----------------- ----------------- -----------------
Discount rate 3.0%-6.5% 3.0%-6.5% 3.0%-7.0%
Rate of increase in compensation levels 3.0%-4.3% 3.0%-4.5% 3.0%-4.5%
Expected long-term return on assets 4.0%-7.5% 4.0%-8.0% 4.0%-9.0%
For fiscal 2001 and 2000, the company recorded adjustments for minimum
liability of $16.0 million and $6.2 million, respectively. This was related to
one of its defined benefit plans representing an 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. This was combined with the effect
of fixed rate increases in benefits under the terms of the plan in excess of
current inflation rates. The corresponding offset was recorded as a component of
accumulated other comprehensive loss.
Note 11. Commitments and Contingencies
- ---------------------------------------
Commitments
- -----------
The company leases certain facilities and equipment under operating lease
arrangements. Rental expenses under operating leases were $26.3 million, $28.1
million and $34.9 million in fiscal 2001, 2000 and 1999, respectively.
Future minimum commitments under noncancellable operating leases are as follows:
(In Millions)
------------------------------
2002 $20.5
2003 13.6
2004 11.8
2005 9.9
2006 6.5
Thereafter 8.8
------------------------------
Total $71.1
==============================
In connection with the Fairchild transaction in fiscal 1997, Fairchild and
the company entered into a manufacturing agreement where National 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. The agreement expired in June 2000. During
fiscal 2000 and 1999, the company's total purchases under the agreement were
$87.5 million and $84.4 million, respectively. In June 2000, the company and
Fairchild extended the manufacturing arrangement under a one-year agreement
providing similar terms. As a result, total purchases from Fairchild in fiscal
2001 were $55.4 million, most of which related to the one-year agreement. Prior
to the end of fiscal 2001, National and Fairchild entered into a two-year
extension agreement under similar terms where National has committed to purchase
a minimum of $30 million and $20 million of product from Fairchild in fiscal
2002 and 2003, respectively.
In June 2000, the company entered into a ten-year licensing agreement with
Taiwan Semiconductor Manufacturing Company to gain access to a variety of TSMC's
advanced sub-micron processes for use in the wafer fabrication facility in Maine
as desired, if and when those processes are developed by TSMC. Prior to this
agreement, National was only utilizing its own process technology in Maine. This
arrangement will enable National to ultimately gain access down to TSMC's
0.10-micron process technology. Total license fees of $187.0 million are to be
paid quarterly through April 2006. During fiscal 2001, the company paid license
fees of $35.0 million. In connection with the agreement, National is also
required to pay a royalty of 5 percent on wafers it manufactures utilizing the
TSMC process technology that are in excess of a pre-determined minimum level in
any calendar quarter. No royalties have been paid during fiscal 2001 under this
agreement.
Contingencies -- Legal Proceedings
- ----------------------------------
In April 1988, National received a notice from the district director of U.S.
Customs in San Francisco alleging that the company had underpaid duties of
approximately $19.5 million for the period from June 1, 1979 to March 1, 1985 on
merchandise imported from the company's non-U.S. subsidiaries. The company has
been contesting the notice in various proceedings since then. The amount of the
alleged underpayment was reduced to approximately $3.6 million by the Assistant
Commissioner of Customs in March 1998. The underpayment could be subject to
penalties computed as a multiple of the underpayment. Although the company may
consider an administrative settlement of the matter, and settlement negotiations
are ongoing, 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 the 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. During fiscal 2001, National settled the matter with the
Customs Service, receiving refunds of $1.7 million, and the matter is now
concluded.
The company has been named to the National Priorities List for its Santa
Clara, California, site and has completed a remedial investigation/feasibility
study with the Regional Water Quality Control Board, acting as an agent for the
Federal Environmental Protection Agency. The company has agreed in principle
with the RWQCB to a site remediation plan. National was sued by AMD, which
sought recovery of cleanup costs AMD has incurred in the Santa Clara area under
the RWQCB orders for contamination that AMD alleged were originally caused by
the company. A settlement that has not been completely finalized has been agreed
to in principle with AMD.
In addition to the Santa Clara site, the company has been designated as a
potentially responsible party by federal and state agencies for certain
environmental sites with which the company may have had direct or indirect
involvement. These 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 sought from National. National accrues
costs associated with environmental matters when they become probable and
reasonably estimable. The amount of all environmental charges to earnings,
including charges for the Santa Clara site remediation, (excluding potential
reimbursements from insurance coverage), were not material during fiscal 2001,
2000 and 1999.
As part of the disposition in fiscal 1996 of the Dynacraft assets and
business, National retained responsibility for environmental claims connected
with Dynacraft's Santa Clara, California, operations and for other environmental
claims arising from National's conduct of the Dynacraft business prior to the
disposition. As part of the Fairchild disposition in fiscal 1997, National also
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.
National 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.
The company's tax returns for certain years are under examination in the
U.S. by the IRS (See Note 7).
In January 1999, a class action suit was filed against the company by
former and present employees claiming damages for personal injuries. The
complaint alleges that cancer and reproductive harm were caused to employees
exposed to chemicals in the workplace. At the present time, most of the claims
against National have been dismissed, but the case will go forward against
certain of National's chemical suppliers, which will require National's
continued involvement in the case. Discovery in the case is proceeding.
In November, 2000, a derivative action was brought against National and
other defendants by a shareholder of Fairchild Semiconductor International, Inc.
Plaintiff seeks recovery of alleged "short-swing" profits under section 16(b) of
the Securities Exchange Act of 1934 from the sale by the defendants in January
2000 of Fairchild common stock. The complaint alleges that Fairchild's
conversion of preferred stock held by the defendants at the time of Fairchild's
initial public offering in August 1999 constitutes a "purchase" that must be
matched with the January 2000 sale for purposes of computing the "short-swing"
profits. Plaintiff seeks from National alleged recoverable profits of
approximately $14.1 million. National believes it has substantial meritorious
defenses to the lawsuit and intends to contest it vigorously.
In addition to the foregoing, National is a party to other suits and claims
that arise in the normal course of business.
Based on current information, National does not believe that it is probable
that losses associated with the proceedings discussed above that exceed amounts
already recognized will be incurred in amounts that would be material to the
company's financial position or results of operations.
Note 12. Segment and Geographic Information
- --------------------------------------------
National designs, develops, manufactures and markets a wide array of
semiconductor products for applications in a variety of markets. It is organized
by various product line business units. For segment reporting purposes, each of
the company's product line business units represents an operating segment as
defined under SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," and the company's chief executive officer is considered
the chief operating decision-maker. Business units that have similarities,
including economic characteristics, underlying technology, markets and
customers, are aggregated into segments. Under the criteria in SFAS No. 131,
only the Analog segment and the Information Appliance segment are considered
reportable segments. All other segments are included in the caption "All
Others." Prior to fiscal 2000, the former Cyrix business unit was also
considered a separate reportable operating segment.
The Analog segment includes a wide range of building block products such as
high-performance operational amplifiers, power management circuits, data
acquisition circuits, interface circuits and circuits targeted towards
leading-edge monitor applications such as ultra-thin flat panel displays. The
Analog segment's wireless circuits perform the radio, baseband controller, power
management and other related functions primarily for handsets and base stations
in the cellular and cordless telephone markets. The segment is heavily focused
on using its analog expertise as the initial point to integrate systems on a
chip aimed at the cellular, personal systems and information appliance markets.
Current offerings include a complete GSM chipset solution, audio subsystems and
flat panel display column drivers, integrated receivers and timing controllers.
The Information Appliance segment contains all business units focused on
providing component and system solutions to the emerging information appliance
market, which the company is strategically focusing on to provide
next-generation solutions. These products include application-specific
integrated microprocessors based on National's GeodeTM technology, MPEG software
and hardware products and diverse advanced input/output controllers. The
Information Appliance segment is focused on three key market segments that
include interactive TV set-top boxes (equipped with digital video), enterprise
thin clients (computers that have minimal memory and access software from a
centralized server network) and personal information access devices, such as
WebPADTM.
The former Cyrix business unit primarily offered a line of Cyrix M II
microprocessors, which were stand-alone central processing units that were
targeted toward the sub-$1,000 PC market. In this market, which is currently
dominated by two major competitors, the company experienced highly competitive
pricing trends and constant pressure to rapidly release new microprocessors with
higher operating speeds. As a result, the company decided to exit the Cyrix PC
microprocessor business in May 1999 and completed the sale of the assets of this
business to VIA Technologies in September 1999 (See Note 3).
Aside from these operating segments, the company's corporate structure also
includes centralized Worldwide Marketing and Sales, the Central Technology and
Manufacturing Group, and the Corporate Group. Certain expenses of these groups
are allocated to the operating segments and are included in their segment
operating results.
With the exception of the allocation of certain expenses, the significant
accounting policies and practices used to prepare the consolidated financial
statements as described in Note 1 are generally followed in measuring the sales,
segment income or loss and determination of assets for each reportable segment.
The company allocates certain expenses associated with centralized
manufacturing, selling, marketing and general administration to reporting
segments based on either the percentage of net trade sales for each operating
segment to total net trade sales or headcount, as appropriate. Certain R&D
expenses primarily associated with centralized activities such as process
development are allocated to operating segments based on the percentage of
dedicated R&D expenses for each operating segment to total dedicated R&D
expenses. A portion of interest income and interest expense is indirectly
allocated to operating segments.
The following table presents specified amounts included in the measure of
segment results or the determination of segment assets:
Information Cyrix
(In Millions) Analog Appliance Business All Others Eliminations Total
Segment Segment Unit Consolidated
----------- --------------- ----------- ------------- --------------- ---------------
2001
Sales to unaffiliated customers $1,516.8 $ 227.0 $ - $ 368.8 $ - $2,112.6
Inter-segment sales - 0.1 - - (0.1) -
----------- --------------- ----------- ------------- --------------- ---------------
Net sales $1,516.8 $ 227.1 $ - $ 368.8 $ (0.1) $2,112.6
=========== =============== =========== ============= =============== ===============
Segment income (loss) before
income taxes $ 364.1 $ (106.5) $ - $ 49.5 $ 307.1
=========== =============== =========== ============= =============== ===============
Depreciation and amortization $ 24.9 $ 9.7 $ - $ 208.7 $ 243.3
Interest income $ - $ - $ - $ (57.3) $ (57.3)
Interest expense $ - $ - $ - $ 5.3 $ 5.3
Segment assets $ 145.7 $ 28.1 $ - $2,188.5 $2,362.3
2000
Sales to unaffiliated customers $1,514.1 $ 239.1 $ 18.6 $ 368.1 $ - $2,139.9
Inter-segment sales - 0.3 - - (0.3) -
----------- --------------- ----------- ------------- --------------- ---------------
Net sales $1,514.1 $ 239.4 $ 18.6 $ 368.1 $ (0.3) $2,139.9
=========== =============== =========== ============= =============== ===============
Segment income (loss) before
income taxes and extraordinary item
$ 454.1 $ (99.8) $ (22.6) $ 310.8 $ 642.5
=========== =============== =========== ============= =============== ===============
Depreciation and amortization $ 13.8 $ 13.9 $ 3.3 $ 232.8 $ 263.8
Interest income $ - $ - $ - $ 33.2 $ 33.2
Interest expense $ - $ - $ - $ 17.9 $ 17.9
Segment assets $ 133.0 $ 30.8 $ - $2,218.4 $2,382.2
Information Cyrix
(In Millions) Analog Appliance Business All Others Eliminations Total
Segment Segment Unit Consolidated
----------- --------------- ----------- ------------- --------------- ---------------
1999
Sales to unaffiliated customers $1,164.1 $ 203.4 $ 179.2 $ 410.1 $ - $ 1,956.8
Inter-segment sales - 0.5 - - (0.5) -
----------- --------------- ----------- ------------- --------------- ---------------
Net sales $1,164.1 $ 203.9 $ 179.2 $ 410.1 $ (0.5) $ 1,956.8
=========== =============== =========== ============= =============== ===============
Segment income (loss) before
income taxes $ 35.9 $ (190.7) $ (161.9) $ (768.7) $(1,085.4)
=========== =============== =========== ============= =============== ===============
Depreciation and amortization $ 13.8 $ 19.0 $ 11.2 $ 361.6 $ 405.6
Interest income $ - $ - $ - $ 26.9 $ 26.9
Interest expense $ - $ - $ - $ 29.1 $ 29.1
Segment assets $ 98.4 $ 16.1 $ 10.9 $1,918.9 $ 2,044.3
Depreciation and amortization presented for each segment include only such
charges on dedicated segment assets. The measurement of segment profit and loss
includes an allocation of depreciation expense for shared manufacturing
facilities contained in each segment's product standard cost.
Segment profit or loss for fiscal 1999 of each reportable segment included
allocations of expenses associated with the shared manufacturing facility in
Maine, expenses associated with activity of the development wafer fabrication
facility in Santa Clara and expenses incurred at corporate headquarters. The
outcome of the actions announced in May 1999 significantly reduced allocations
of these expenses to operating segments for fiscal 2001 and 2000.
The company operates in three main geographic areas that include the
Americas, Europe and the Asia Pacific region including Japan. In the information
that follows, sales include local sales and exports made by operations within
each area. Total sales by geographic area include sales to unaffiliated
customers and inter-geographic transfers, which are based on standard cost. To
control costs, a substantial portion of National's products are transported
between the Americas, Europe and the Asia Pacific region in the process of being
manufactured and sold. Sales to unaffiliated customers have little correlation
with the location of manufacture.
National is not dependent upon any single customer, the loss of which would
have a material effect on the company. In addition, no one customer or
distributor accounted for 10 percent or more of total net sales in fiscal 2001,
2000 and 1999.
The following tables provides geographic sales and asset information by major
countries within the main geographic areas (Japan is included with the rest of
the world):
(In Millions)
United United Hong Kong Singapore Rest of Eliminations Total
States Kingdom World Consolidated
------------ ------------ ------------ ------------ ------------ -------------- ------------
2001
Sales to unaffiliated customers $ 702.3 $ 313.5 $ 445.8 $ 221.5 $ 429.5 $2,112.6
Transfers between geographic areas 470.2 181.1 0.7 747.4 1.0 $(1,400.4) -
------------ ------------ ------------ ------------ ------------ -------------- -----------
Net sales $1,172.5 $ 494.6 $ 446.5 $ 968.9 $ 430.5 $(1,400.4) $2,112.6
============ ============ ============ ============ ============ ============== ===========
Total assets $1,625.8 $ 75.9 $ 35.7 $ 286.0 $ 338.9 $2,362.3
============ ============ ============ ============ ============ ============== ===========
2000
Sales to unaffiliated customers $ 761.7 $ 348.8 $ 439.1 $ 214.6 $ 375.7 $2,139.9
Transfers between geographic areas 544.2 192.1 0.1 875.8 0.7 $(1,612.9) -
------------ ------------ ------------ ------------ ------------ -------------- ----------
Net sales $1,305.9 $ 540.9 $ 439.2 $ 1,090.4 $ 376.4 $(1,612.9) $2,139.9
============ ============ ============ ============ ============ ============== ==========
Total assets $1,557.7 $ 111.2 $ 52.9 $ 297.7 $ 362.7 $2,382.2
============ ============ ============ ============ ============ ============== ==========
1999
Sales to unaffiliated customers $ 738.3 $ 325.5 $ 386.4 $ 218.0 $ 288.6 $1,956.8
Transfers between geographic areas 555.8 162.4 2.2 883.1 2.1 $(1,605.6) -
------------ ------------ ------------ ------------ ---------- -------------- ----------
Net sales $1,294.1 $ 487.9 $ 388.6 $ 1,101.1 $ 290.7 $(1,605.6) $1,956.8
============ ============ ============ ============ ============ ============== ==========
Total assets $1,181.5 $ 104.3 $ 40.6 $ 372.2 $ 345.7 $2,044.3
============ ============ ============ ============ ============ ============== ==========
Note 13. Supplemental Disclosure of Cash Flow Information and Noncash Investing
and Financing Activities
- ------------------------
(In Millions) 2001 2000 1999
--------------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION Cash paid (refunded) for:
Interest expense $ 5.6 $ 21.5 $ 26.1
Interest payment on tax settlements $ - $ - $ 2.8
Income taxes (refund) $ 38.1 $ 18.1 $ (17.0)
(In Millions) 2001 2000 1999
--------------- -------------- --------------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of stock for employee benefit plans $ 4.1 $ 0.9 $ 0.3
Issuance of stock for director stock plan $ 0.3 $ 0.4 $ -
Change in unrealized gain on available-for-sale securities $ 11.3 $ 18.6 $ 22.2
Unearned compensation relating to restricted stock issuance $ 7.5 $ 8.3 $ 3.5
Issuance of common stock upon conversion of convertible
subordinated promissory notes $ - $ 7.1 $ -
Restricted stock cancellation $ 2.8 $ 6.0 $ 2.0
Minimum pension liability $ 16.0 $ 6.2 $ 12.5
Note 14. Financial Information by Quarter (Unaudited)
- ------------------------------------------------------
The following table presents the quarterly information for fiscal 2001 and 2000:
Fourth Third Second First
(In Millions, Except Per Share Amounts) Quarter Quarter Quarter Quarter
-------------- --------------- --------------- ---------------
2001
Net sales $ 401.2 $ 475.6 $ 595.0 $ 640.8
Gross margin $ 164.4 $ 233.0 $ 300.7 $ 339.4
Net income (loss) $ (44.4) $ 39.2 $ 106.7 $ 144.2
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Basic earnings (loss) per share:
Net income (loss) $ (0.26) $ 0.23 $ 0.60 $ 0.81
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Weighted-average common shares outstanding
used in basic earnings per share 173.6 174.0 178.1 178.1
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Diluted earnings (loss) per share:
Net income (loss) $ (0.26) $ 0.21 $ 0.56 $ 0.74
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Weighted-average common and potential
common shares outstanding used in diluted
earnings per share 173.6 183.0 191.9 195.8
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Common stock price - high $ 30.97 $ 29.41 $ 47.94 $ 73.88
Common stock price - low $ 19.71 $ 17.13 $ 19.69 $ 31.25
- --------------------------------------------------- -------------- --------------- --------------- ---------------
2000
Net sales $ 595.3 $ 548.9 $ 513.9 $ 481.8
Gross margin $ 303.8 $ 263.7 $ 232.4 $ 185.1
Income before extraordinary item $ 153.9 $ 327.8 $ 98.8 $ 47.1
Net income $ 153.9 $ 327.8 $ 92.0 $ 47.1
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Basic earnings per share:
Income before extraordinary item $ 0.87 $ 1.88 $ 0.57 $ 0.28
Net income $ 0.87 $ 1.88 $ 0.53 $ 0.28
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Weighted-average common shares outstanding
used in basic earnings per share 177.1 174.7 172.2 170.3
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Diluted earnings per share:
Income before extraordinary item $ 0.78 $ 1.68 $ 0.52 $ 0.25
Net income $ 0.78 $ 1.68 $ 0.49 $ 0.25
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Weighted-average common and potential
common shares outstanding used in diluted
earnings per share 197.0 194.8 189.5 185.4
- --------------------------------------------------- -------------- --------------- --------------- ---------------
Common stock price - high $ 85.94 $ 74.00 $ 42.69 $ 31.13
Common stock price - low $ 43.75 $ 40.56 $ 23.50 $ 17.69
- --------------------------------------------------- -------------- --------------- --------------- ---------------
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 27, 2001, there were approximately 8,460 holders
of 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 as of May 27, 2001 and May 28, 2000,
and the related consolidated statements of operations, comprehensive income
(loss), shareholders' equity and cash flows for each of the years in the
three-year period ended May 27, 2001. 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 auditing standards generally
accepted in the United States of America. 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 27, 2001 and May 28, 2000,
and the results of their operations and their cash flows for each of the years
in the three-year period ended May 27, 2001 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Mountain View, California
June 6, 2001
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 concerning directors and executive officers appearing under the
caption "Election of Directors" (including subcaptions thereof) and "Section
16(a) Beneficial Ownership Reporting Compliance" in National's Proxy Statement
for the 2001 annual meeting of shareholders to be held on or about September 21,
2001 and which will be filed in definitive form pursuant to Regulation 14A on or
about August 10, 2001 (hereinafter "2001 Proxy Statement"), is incorporated
herein by reference. Information concerning executive officers is set forth in
Part I of the Form 10-K 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 2001 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
our outstanding common stock "Outstanding Capital Stock, Quorum and Voting" in
the 2001 Proxy Statement, is incorporated herein by reference. The information
concerning the ownership of our equity securities by directors, certain
executive officers and directors and officers as a group, appearing under the
caption "Security Ownership of Management" in the 2001 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" in the 2001 Proxy Statement is incorporated herein by
reference.
PART IV
- -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
Pages in
(a) 1. Financial Statements this document
- ---------------------------- -------------
For the three years ended May 27, 2001- 26
refer to Index in Item 8
(a) 2. Financial Statement Schedules
- -------------------------------------
Schedule II - Valuation and Qualifying Accounts 64
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 National are omitted because National 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 National 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 69 of
this report are filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K
- -----------------------
During the quarter ended May 27, 2001, National filed no reports on Form 8-K.
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 31, 1998 $ 8.9 $ 41.4 $ 50.3
Additions charged against revenue - 222.2 222.2
Additions charged against
costs and expenses 3.4 - 3.4
Deductions (3.2) (1) (204.7) (207.9)
---------- --------- --------
Balances at May 30, 1999 9.1 58.9 68.0
Additions charged against revenue - 223.9 223.9
Additions charged against
costs and expenses 0.3 - 0.3
Deductions (2.0) (1) (231.6) (233.6)
---------- ---------- ---------
Balances at May 28, 2000 7.4 51.2 58.6
Additions charged against revenue - 243.9 243.9
Additions charged against
costs and expenses 2.0 - 2.0
Deductions (2.1) (1) (257.3) (259.4)
---------- ---------- ---------
Balances at May 27, 2001 $ 7.3 $ 37.8 $ 45.1
======== ========= =========
- ------------------------------------------------
(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, 2001 /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 1st day of August 2001.
Signature Title
/S/ BRIAN L. HALLA* Chairman of the Board, President
--------------- and Chief Executive Officer
Brian L. Halla (Principal Executive Officer)
/S/ LEWIS CHEW* Senior Vice President, Finance
----------- and Chief Financial Officer
Lewis Chew (Principal Financial Officer)
/S/ ROBERT E. DEBARR * Controller
---------------- (Principal Accounting Officer)
Robert E. DeBarr.
/S/ GARY P. ARNOLD * Director
--------------
Gary P. Arnold
/S/ RICHARD J. DANZIG * Director
-----------------
Richard J. Danzig
/S/ ROBERT J. FRANKENBERG * Director
---------------------
Robert J. Frankenberg
/S/ E. FLOYD KVAMME* Director
---------------
E. Floyd Kvamme
/S/ MODESTO A. MAIDIQUE * Director
-------------------
Modesto A. Maidique
/S/ EDWARD R. McCRACKEN * Director
-------------------
Edward R. McCracken
* By /S/ LEWIS CHEW
------------
Lewis Chew, 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.
33-48935, 33-54931, 33-55699, 33-55703, 33-61381, 333-09957, 333-23477,
333-36733, 333-53801, 333-63614, 333-88269, and 333-48424 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 6, 2001, relating to the consolidated balance sheets of
National Semiconductor Corporation and subsidiaries as of May 27, 2001 and May
28, 2000, and the related consolidated statements of operations, comprehensive
income (loss), shareholders' equity, and cash flows for each of the years in the
three-year period ended May 27, 2001 and the related financial statement
schedule, which report appears on page 64 of the 2001 Annual Report on Form 10-K
of National Semiconductor Corporation.
KPMG LLP
Mountain View, California
August 1, 2001
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:
3.1 Second Restated Certificate of Incorporation of the Company, as amended
(incorporated by reference from the Exhibits to our Registration Statement
on Form S-3 Registration No. 33-52775, which became effective March 22,
1994); Certificate of Amendment of Certificate of Incorporation dated
September 30, 1994 (incorporated by reference from the Exhibits to our
Registration Statement on Form S-8 Registration No. 333-09957 which became
effective August 12, 1996); Certificate of Amendment of Certificate of
Incorporation dated September 22, 2000 (incorporated by reference from the
Exhibits to our Registration Statement on Form S-8 Registration No.
333-48424, which became effective October 23, 2000).
3.2 By-Laws of the Company (incorporated by reference from the Exhibits to our
Form 10-Q for the quarter ended February 25, 2001 filed April 11, 2001).
4.1 Form of Common Stock Certificate (incorporated by reference from the
Exhibits to our Registration Statement on Form S-3 Registration No.
33-48935, which became effective October 5, 1992).
4.2 Rights Agreement (incorporated by reference from the Exhibits to our
Registration Statement on Form 8-A filed August 10, 1988). First Amendment
to the Rights Agreement dated as of October 31, 1995 (incorporated by
reference from the Exhibits to our Amendment No. 1 to the Registration
Statement on Form 8-A filed December 11, 1995). Second Amendment to the
Rights Agreement dated as of December 17, 1996 (incorporated by reference
from the Exhibits to our Amendment No. 2 to the Registration Statement on
Form 8-A filed January 17, 1997).
4.3 Indenture dated as of September 15, 1995 (incorporated by reference from
the Exhibits to our Registration Statement on Form S-3 Registration No.
33-63649, which became effective November 6, 1995).
4.4 Form of Note (incorporated by reference from the Exhibits to our
Registration Statement on From S-3 Registration No. 33-63649, which became
effective November 6, 1995).
4.5 Indenture dated as of May 28, 1996 between Cyrix Corporation ("Cyrix") and
Bank of Montreal Trust Company as Trustee (incorporated by reference from
the Exhibits to Cyrix's Registration Statement on Form S-3 Registration No.
333-10669, which became effective August 22, 1996).
4.6 Registration Rights Agreement dated as of May 28, 1996 between Cyrix and
Goldman, Sachs & Co. (incorporated by reference from the Exhibits to
Cyrix's Registration Statement on Form S-3 Registration No. 333-10669,
which became effective August 22, 1996).
10.1 Management Contract or Compensatory Plan or Arrangement: Executive Officer
Incentive Plan (incorporated by reference from the Exhibits to our Form
10-K for the fiscal year ended May 30, 1999 filed July 29, 1999). Fiscal
Year 2001 Executive Officer Incentive Plan Agreement (incorporated by
reference from the Exhibits to our Form 10-Q for the quarter ended August
22, 2000 filed October 11, 2000).
10.2 Management Contract or Compensatory Plan or Agreement: Stock Option Plan,
as amended through April 26, 1998 (incorporated by reference from the
Exhibits to our Registration Statement on Form S-8 Registration No.
333-57029, which became effective June 17, 1998).
10.3 Management Contract or Compensatory Plan or Agreement: Executive Officer
Stock Option Plan (incorporated by reference from the Exhibits to our
Registration Statement on Form S-8 Registration No. 333-48424, which became
effective October 23, 2000).
10.4 Management Contract or Compensatory Plan or Arrangement: Benefit
Restoration Plan as amended through January 1, 2000 (incorporated by
reference from the Exhibits to our Form 10-Q for the quarter ended November
28, 1999 filed January 12, 2000).
10.5 Management Contract or Compensatory Plan or Arrangement: Agreement with
Peter J. Sprague dated May 17, 1995 (incorporated by reference from the
Exhibits to our Form 10-K for fiscal year ended May 27, 2000 filed August
3, 2000). Non Qualified Stock Option Agreement with Peter J. Sprague dated
May 18, 1995 (incorporated by reference from the Exhibits to our
Registration Statement on Form S-8 Registration No. 33-61381 which became
effective July 28, 1995).
10.6 Management Contract or Compensatory Plan or Arrangement: Director Stock
Plan as amended through June 26, 1997 (incorporated by reference from the
Exhibits to our definitive Proxy Statement for the Annual Meeting of
Stockholders held September 26, 1997 filed August 12, 1997).
10.7 Management Contract or Compensatory Plan or Arrangement: Director Stock
Option Plan (incorporated by reference from the Exhibits to our Form 10-Q
for the quarter ended August 29, 1999 filed October 12, 1999).
10.8 Management Contract or Compensatory Plan or Arrangement: Director Deferral
Plan (incorporated by reference from the Exhibits to our Form 10-Q for the
quarter ended August 29, 1999 filed October 12, 1999).
10.9 Management Contract or Compensatory Plan or Arrangement: Board Retirement
Policy (incorporated by reference from the Exhibits to our Form 10-K for
the fiscal year ended May 30, 1999 filed July 29, 1999).
10.10Management Contract or Compensatory Plan or Arrangement: Preferred Life
Insurance Program (incorporated by reference from the Exhibits to our Form
10-K for the fiscal year ended May 30, 1999 filed July 29, 1999).
10.11Management Contract or Compensatory Plan or Arrangement: Retired Officers
and Directors Health Plan (incorporated by reference from the Exhibits to
our Form 10-K for the fiscal year ended May 28, 2000 filed August 3, 2000).
10.12Management Contract Compensatory Plan or Arrangement: Restricted Stock
Agreement with Brian L. Halla (incorporated by reference from the Exhibits
to our Registration Statement No. 333-09957, which became effective August
12, 1996).
10.13Management Contract or Compensatory Plan or Agreement: National
Semiconductor Corporation Long Term Disability Coverage Plan Summary,
National Semiconductor Corporate Executive Staff as amended January 1, 2000
(incorporated by reference from the Exhibits to our Form 10-Q for the
quarter ended February 27, 2000 filed April 11, 2000).
10.14Management Contract or Compensatory Plan or Agreement: Long Term
Disability Plan Summary, National Semiconductor Executive Employees
(incorporated by reference from the Exhibits to our Form 10-Q for the
quarter ended February 27, 2000 filed April 11, 2000).
10.15Management Contract or Compensatory Plan or Agreement: Form of Change of
Control Employment Agreement entered into with Executive Officers of the
Company (incorporated by reference from our Form 10-K for fiscal year ended
May 31, 1998 filed August 3, 1998).
10.16Management Contract or Compensatory Plan or Agreement: National
Semiconductor Corporation Deferred Compensation Plan.
10.17Management Contract or Compensatory Plan or Arrangement: Relocation
Package made available to Roland Andersson.
21.0 List of Subsidiaries.
23.0 Consent of Independent Auditors (included in Part IV).
24.1 Power of Attorney.
Exhibit 21.0
NATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
The following table shows certain information with respect to the active
subsidiaries of the Company as of May 27, 2001, all of which are included in the
consolidated financial statements of the Company:
State or Other Other Country In Percent of Voting
Jurisdiction Which Subsidiary Securities Owned
Name of Incorporation is Registered by National
- -------------------- ---------------- ----------------- ----------------
Algorex Inc. California 100%
InnoComm WIRELESS California 100%
National Semiconductor (Texas), Inc. Delaware 100%
Mediamatics, Inc. California 100%
National Semiconductor Delaware 100%
International, Inc.
National Semiconductor Netsales, Inc. Delaware 100%
National Semiconductor (Maine), Inc. Delaware 100%
ASIC II Limited Hawaii 100%
National Semiconductor B.V. Corporation Delaware 100%
National Semiconductor France S.A.R.L. France 100%
National Semiconductor GmbH Germany Belgium 100%
National Semiconductor (I.C.) Ltd. Israel 100%
National Semiconductor S.r.l. Italy 100%
National Semiconductor Aktiebolog (A.B). Sweden 100%
National Semiconductor (U.K.) Ltd. Great Britain Denmark/Ireland 100%
Finland/Norway/Spain
National Semiconductor (U.K.) Great Britain 100%
Pension Trust Company Ltd.
National Semiconductor Benelux B.V. Netherlands 100%
National Semiconductor B.V. Netherlands 100%
National Semiconductor International B.V. Netherlands 100%
Natsem India Designs Pvt. Ltd. India 100%
National Semiconductor (Australia) Australia 100%
Pty.Ltd.
National Semiconductor (Hong Kong) Hong Kong 100%
Limited
National Semiconductor Hong Kong Hong Kong 100%
Sales Limited
National Semiconductor (Far East) Hong Kong Taiwan 100%
Limited
National Semiconductor Services Hong Kong 100%
Limited
National Semiconductor Japan 100%
Japan Ltd.
National Semiconductor SDN. BHD. Malaysia 100%
National Semiconductor Technology Malaysia 100%
SDN. BHD.
State or Other Other Country In Percent of Voting
Jurisdiction Which Subsidiary Securities Owned
Name of Incorporation is Registered by National
- ---- ---------------- ---------------- -----------------
National Semiconductor Services Malaysia 100%
Malaysia SDN.BHD.
National Semiconductor Pte. Ltd. Singapore 100%
National Semiconductor Asia Pacific Singapore 100%
Pte. Ltd.
National Semiconductor Manufacturer Singapore 100%
Singapore Pte. Ltd.
Shanghai National Semiconductor People's Republic of China 95%
Technology Limited
National Semiconductor Korea Limited Korea 100%
National Semiconductor Canada Inc. Canada 100%
National Semiconductores Brazil 100%
do Brazil Ltda.
Electronica NSC de Mexico, S.A. Mexico 100%
National Semiconductor (Barbados) Barbados 100%
Limited