Note 1.
Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include National Semiconductor Corporation and
its majority-owned subsidiaries ("National" or the "Company"). All
significant intercompany transactions are eliminated in consolidation. Nonmarketable
investments in which National has less than 20 percent ownership and in which t does not
have the ability to exercise significant influence over the investee are initially
recorded at cost, and periodically reviewed for impairment.
The Company’s fiscal year ends on the last Sunday of May. For the fiscal year
ended May 31, 1998, the Company had a 53-week year. Operating results for this additional
week are considered immaterial to the Company’s consolidated results of operations
for the year ended May 31, 1998. Fiscal 1997 and 1996 were 52-week years.
On November 17, 1997, pursuant to an Agreement and Plan of Merger, dated as of July 28,
1997, by and among the Company, Nova Acquisition Corp., a wholly owed subsidiary of the
Company ("Sub"), and Cyrix Corporation ("Cyrix"), the Company acquired
all outstanding shares of Cyrix common stock through the merger of Sub with and into
Cyrix, which thereby became a wholly owned subsidiary of the Company (See Note 4). The
merger was accounted for as a pooling of interests. Accordingly, the consolidated balance
sheets as of May 31, 1998 and May 25, 1997 and the consolidated statements of operations,
shareholders’ equity and cash flows for each of the years in the three-year period
ended May 31, 1998, include Cyrix. Since the fiscal years for National and Cyrix differ,
Cyrix changed its fiscal year-end to coincide with National’s beginning in fiscal
1998. Prior year financial statements have been restated to include Cyrix and combine
National’s fiscal years 1997 and 1996 with Cyrix’s calendar years 1996 and 1995,
respectively. The consolidated balance sheet as of May 25, 1997 combines National’s
consolidated balance sheet as of May 25, 1997 with Cyrix’s consolidated balance sheet
as of December 31, 1996. The consolidated statements of operations, shareholders’
equity and cash flows for the years ended May 25, 1997 and May 26, 1996 combine
National’s consolidated statements of operations, shareholders’ equity and cash
flows for the years ended May 25, 1997 and May 26, 1996 with Cyrix’s consolidated
statements of operations, shareholders’ equity and cash flows for the years ended
December 31, 1996 and 1995, respectively. The results of operations for the period January
1, 1997 through May 25, 1997 for Cyrix, which included net sales of $84.6 million, total
operating costs and expenses of $84.4 million, other expense, net of $1.1 million, income
tax benefit of $0.3 million, net loss of $0.6 million and an increase in capital from the
issuance of common stock of $1.3 million, have been recorded as an adjustment to
shareholders’ equity.
Revenue Recognition
Revenue from the sale of semiconductor products is recognized when shipped, with a
provision for estimated returns and allowances recorded at the time of shipment. Service
and other revenues are recognized ratably over the contractual period or as the services
are performed.
Inventories
Inventories are stated at the lower of standard cost, which approximates actual cost on
a first-in, first-out basis, or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. The Company uses the straight-line
method to depreciate machinery and equipment over its estimated useful life (3-5 years).
Assets other than machinery and equipment are depreciated using both straight-line and
declining-balance methods over the assets’ remaining estimated useful lives (3-5
years, except buildings and improvements, which are 3-50 years), or in the case of
property under capital lease and leasehold improvements, over the lesser of the estimated
useful life or lease term.
The Company capitalizes interest on borrowings during the construction period of major
capital projects. Capitalized interest is added to the cost of the underlying assets and
is amortized over the useful lives of the assets. For fiscal 1998, 1997 and 1996, the
Company capitalized $4.9 million, $13.8 million and $6.0 million of interest,
respectively, in connection with various capital expansion projects.
The Company reviews the carrying value of property, plant and equipment for impairment
whenever events and circumstances indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its use and
eventual disposition. In cases where undiscounted expected future cash flows are less than
the carrying value, an impairment loss is recognized equal to an amount by which the
carrying value exceeds the fair value of assets.
In connection with certain restructuring actions announced in fiscal 1998 and 1997 (See
Note 3), the Company recorded impairment losses related to certain fixed assets in its
wafer manufacturing facility in Arlington, Texas, of $20.3 million and $60.1 million in
fiscal 1998 and fiscal 1997, respectively. The fair value of these assets was determined
based on the present value of estimated expected future cash flows using a discount rate
commensurate with the risks involved.
Income Taxes
Deferred tax liabilities and assets at the end of each period are determined based on
the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases using
the tax rate expected to be in effect when the taxes are actually paid or recovered. The
measurement of deferred tax assets is reduced, if necessary, by a valuation allowance.
Earnings per Share
In fiscal 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 requires the
presentation of basic earnings per share and, for companies with potentially dilutive
securities, such as convertible debt, stock options and warrants, diluted earnings per
share.
Basic earnings per share are computed using the weighted-average number of common
shares outstanding. Diluted earnings per share are computed using the weighted-average
common shares outstanding after giving effect to potential common stock from stock options
based on the treasury stock method, plus other potentially dilutive securities
outstanding, such as convertible subordinated notes in all years presented and convertible
preferred stock in fiscal 1996. If the result of assumed conversions is dilutive, net
earnings are adjusted for the interest expense on the convertible subordinated notes,
while the average shares of common stock outstanding are increased. For all years
presented, the effect of the assumed conversion of the convertible subordinated notes was
antidilutive. In addition, the effect of potential common stock from stock options was
antidilutive for the year ended May 31, 1998. Earnings per share for all prior fiscal
years presented have been restated to conform with SFAS No. 128.
A reconciliation of the earnings and shares used in the computation for basic and
diluted earnings per share follows:
Years Ended
(In Millions) |
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 |
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| Net income (loss) |
$ |
|
$ |
|
$ |
|
Adjustment for
preferred dividends |
|
|
|
|
|
|
|
Net income (loss) used for
basic earnings per
share |
$ |
|
$ |
|
$ |
|
|
Net income (loss) used for
diluted earnings
per share |
$ |
|
$ |
|
$ |
|
|
Number of shares:
Weighted average common
shares outstanding
used for
basic earnings per
share |
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Effect of dilutive securities:
Stock options |
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| Convertible
preferred stock |
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Weighted average common and
potential common
shares
outstanding used
for
diluted earnings
per share |
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As of May 31, 1998, there were options outstanding to purchase 22.8 million shares of
the Company’s common stock with a weighted-average exercise price of $22.49, which
could potentially dilute basic earnings per share in the future, but which were not
included in diluted earnings per share as their effect was antidilutive. As of May 31,
1998, the Company also had outstanding $258.8 million of convertible subordinated notes,
which are convertible into approximately 6.0 million shares of common stock. These notes
were not assumed to be converted because they were antidilutive in all years presented.
Currencies
The Company’s functional currency for all operations worldwide is the U.S. dollar.
Accordingly, gains and losses from translation of foreign currency financial statements
into U.S. dollars are included in current results. Gains and losses resulting from foreign
currency transactions are also included in current results.
Financial Instruments
Cash and Cash Equivalents. Cash equivalents are highly liquid instruments with a
maturity of three months or less at the time of purchase. National maintains its cash
balances in various currencies and a variety of financial instruments. The Company has not
experienced any material losses relating to any short-term financial instruments.
Marketable Investments. The Company classifies its debt and marketable equity
securities into held-to-maturity or available-for-sale categories. Debt securities are
classified as held-to-maturity when the Company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are recorded as either
short-term or long-term on the balance sheet based upon contractual maturity date and are
stated at amortized cost. Debt and marketable equity securities not classified as
held-to-maturity are classified as available-for-sale and are carried at fair market
value, with the unrealized gains and losses, net of tax, reported in shareholders’
equity. Gains or losses on securities sold are based on the specific identification
method.
Off-Balance Sheet Financial Instruments. The Company utilizes various
off-balance sheet financial instruments to manage market risks associated with
fluctuations in certain interest rates and foreign currency exchange rates. It is the
Company’s policy to use derivative financial instruments to protect against market
risks arising in the normal course of business. Company policies prohibit the use of
derivative instruments for the sole purpose of trading for profit on price fluctuations or
to enter into contracts that intentionally increase the Company’s underlying
exposure. The criteria the Company uses for designating an instrument as a hedge include
the instrument’s effectiveness in risk reduction and direct matching of the financial
instrument to the underlying transaction. Gains and losses on currency forward and option
contracts that are intended to hedge an identifiable firm commitment are deferred and
included in the measurement of the underlying transaction. Gains and losses on hedges of
anticipated revenue transactions are deferred until such time as the underlying
transactions are recognized or recognized immediately if the transaction is terminated
earlier than initially anticipated. Gains and losses on any instruments not meeting the
above criteria are recognized in income in the current period. Subsequent gains or losses
on the related financial instrument are recognized in income in each period until the
instrument matures, is terminated or is sold. Income or expense on swaps is accrued as an
adjustment to the yield of the related investments or debt hedged by the instrument. Cash
flows associated with derivative transactions are reported as arising from operating
activities in the consolidated statements of cash flows.
Fair Values of Financial Instruments
Fair values of cash equivalents and short-term investments approximate cost, and the
fair value of short-term debt approximates carrying amount due to the short period of time
until maturity. Fair values of long-term investments, long-term debt, interest rate
derivatives, currency forward contracts and currency options are based on quoted market
prices or pricing models using prevailing financial market information as of May 31, 1998.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
Employee Stock Plans
The Company accounts for its stock option plans and its employee stock purchase plans
in accordance with provisions of the Accounting Principles Board’s Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees." In 1995, the
Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which provides an alternative accounting method to APB 25. As
permitted under SFAS No. 123, the Company continues to account for its employee stock
plans in accordance with the provisions of APB 25 and provides additional required
disclosures. (See Note 9.)
Reclassifications
Certain amounts in prior years’ financial statements and related notes have been
reclassified to conform to the fiscal 1998 presentation.
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