<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 23, 1997
[ ] 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: 333-26897
FSC SEMICONDUCTOR CORPORATION
----------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3363001
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
333 Western Avenue, Mail Stop 01-00
South Portland, Maine 04106
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (207) 775-8100
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 / /.
The number of shares outstanding of the issuer's classes of common stock as of
the close of business on December 18, 1997:
Title of Each Class Number of Shares
------------------------------------- ----------------
Class A Common Stock; $0.01 par value 7,205,220
Class B Common Stock; $0.01 par value 8,408,880
<PAGE>
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
-----
Item 1 Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
for the Three and Six Months Ended November 23, 1997 and
November 24, 1996........................................... 3
Condensed Consolidated Balance Sheets as of November 23, 1997
(Unaudited) and May 25, 1997................................ 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three and Six Months Ended November 23, 1997........ 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
PART II. OTHER INFORMATION
Item 1 Legal Proceedings............................................. 15
Item 6 Exhibits and Reports on Form 8-K.............................. 15
Signature................................................................ 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions) (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- --------------------------------
NOVEMBER 23, NOVEMBER 24, NOVEMBER 23, NOVEMBER 24,
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue:
Net sales--trade..................................... $ 155.3 $ 154.0 $ 314.0 $ 286.9
Contract manufacturing -- National Semiconductor..... 40.5 24.0 81.3 50.1
------ ------ ------ ------
Total revenue...................................... 195.8 178.0 395.3 337.0
Direct costs and allocated expenses:
Cost of sales--trade................................. 105.4 117.5 213.4 220.4
Cost of contract manufacturing -- National
Semiconductor...................................... 31.3 24.0 61.4 50.1
Research and development............................. 7.8 4.3 14.9 8.5
Selling, general and administrative.................. 21.0 23.2 42.0 41.9
Restructuring of operations.......................... -- -- -- 5.3
------ ------ ------ ------
Total operating costs and expenses............... 165.5 169.0 331.7 326.2
------ ------
Operating income....................................... 30.3 63.6
Interest, net.......................................... 13.1 -- 26.4 --
Other expense.......................................... -- 0.5 -- 0.9
------ ------ ------ ------
Income before income taxes............................. 17.2 37.2
Revenues less direct and allocated expenses before
income taxes......................................... $ 8.5 $ 9.9
====== ======
Income taxes........................................... 6.1 13.1
------ ------
Net income............................................. $ 11.1 $ 24.1
====== ======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
NOVEMBER 23, MAY 25,
1997 1997
------------- -----------
ASSETS
Current assets:
Cash.............................................. $ 79.1 $ 40.7
Receivables, net.................................. 80.9 79.6
Inventories....................................... 78.2 73.1
Prepaid expenses and other current assets......... 11.7 16.6
Deferred income taxes............................. 2.1 2.1
------ ------
Total current assets.......................... 252.0 212.1
Property, plant and equipment, net................ 285.0 295.0
Deferred income taxes............................. 15.5 18.5
Other assets...................................... 28.9 29.4
------ ------
Total assets.................................. $ 581.4 $ 555.0
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................. $ 11.0 $ 11.0
Accounts payable.................................. 60.0 77.1
Accrued expenses and other current liabilities.... 57.9 42.0
------ ------
Total current liabilities..................... 128.9 130.1
Long-term debt, less current portion................ 487.1 486.0
Other liabilities................................... 0.4 0.4
------ ------
Total liabilities............................. 616.4 616.5
Redeemable preferred stock.......................... 75.8 71.8
Stockholders' Equity:
Class A common stock.............................. 0.1 0.1
Class B common stock.............................. 0.1 0.1
Additional paid-in capital........................ 7.6 7.6
Accumulated deficit............................... (118.6) (141.1)
------ ------
Total stockholders' equity.................... (110.8) (133.3)
------ ------
Total liabilities and stockholders' equity.... $ 581.4 $ 555.0
====== ======
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
THREE MONTHS SIX MONTHS
ENDED ENDED
NOVEMBER 23, NOVEMBER 23,
1997 1997
----------- -----------
Operating activities:
Net income....................................... $ 11.1 $ 24.1
Addback non-cash adjustments to net income:
Depreciation and amortization.................. 20.3 40.3
Loss on disposal of fixed assets............... 0.3 0.5
Non-cash interest expense...................... 6.6 6.6
Deferred income taxes.......................... (1.4) 3.0
Changes in certain assets and liabilities, net:
Accounts receivable............................ 16.9 1.2
Inventories.................................... (6.6) (5.1)
Prepaid expenses and other current assets...... 2.6 4.9
Other assets................................... 0.2 0.1
Current liabilities............................ (9.4) (1.3)
----- -----
Cash provided by operating activities........ 40.6 74.3
Investing activities:
Capital expenditures............................. (15.7) (27.5)
Purchase of molds and tooling.................... (1.7) (2.9)
----- -----
Cash used by investing activities............ (17.4) (30.4)
Financing activities:
Repayment of long-term debt...................... (2.8) (5.5)
----- -----
Cash used by financing activities............ (2.8) (5.5)
Net change in cash and cash equivalents............ 20.4 38.4
Cash and cash equivalents at beginning of period... 58.7 40.7
----- -----
Cash and cash equivalents at end of period......... $ 79.1 $ 79.1
===== =====
Cash paid for interest and taxes was $18.7 million and $3.0 million respectively
for the three-month period ended November 23, 1997, and $22.6 million and $3.3
million respectively for the six-month period ended November 23, 1997.
For the three and six-month periods ended November 23, 1997 the Company
accumulated dividends on the redeemable preferred stock of approximately $2.1
million and $4.0 million, respectively. The accumulated dividends were recorded
as an increase to the carrying value of the redeemable preferred stock and
accumulated deficit.
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1--BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheets of FSC Semiconductor Corporation
(the "Company") as of November 23, 1997 and May 25, 1997 and the Condensed
Consolidated Statements of Operations and Cash Flows for the three- and
six-month periods ended November 23, 1997 were prepared by the Company. The
Combined Condensed Statements of Operations of the Fairchild Semiconductor
Business (the "Business") for the three- and six-month periods ending November
24, 1996 include all revenues and costs attributable to the Business as it was
operated within National Semiconductor Corporation ("National"), including
allocations for shared facilities and overhead. In addition, National performed
cash management on a centralized basis. As a result, receivables, liabilities
and cash receipts and payments were not identifiable on a business specific
basis. Given these constraints, certain supplemental cash flow information is
presented in lieu of statements of cash flows (Note 3). In the opinion of
management, the accompanying condensed consolidated financial statements as of
and for the three- and six-month periods ended November 23, 1997 contain all
adjustments (consisting of only normal recurring items) necessary to present
fairly the financial position and results of operations of the Company. The
allocations and estimates in the Combined Condensed Statements of Operations as
of and for the three- and six-month periods ended November 24, 1996 were based
on assumptions that management believes were reasonable under the circumstances.
Interim results of operations are not necessarily indicative of the results to
be expected for the full year. This report should be read in conjunction with
the financial statements and notes thereto included in the special financial
report on Form 10-K for the fiscal year ended May 25, 1997 and the Company's
Registration Statement filed on Form S-4 dated July 9, 1997.
NOTE 2--INVENTORIES
The components of inventories are as follows:
NOVEMBER 23, MAY 25,
1997 1997
--------------- -----------
(In millions)
Raw materials........................ $ 9.9 $ 8.8
Work in process...................... 49.3 43.4
Finished goods....................... 19.0 20.9
----- -----
Total inventories................ $ 78.2 $ 73.1
===== =====
NOTE 3--SUPPLEMENTAL CASH FLOW INFORMATION
As described in Note 1, National's cash management system was not designed
to trace centralized cash and related financing transactions to the specific
cash requirements of the Business. In addition, National's corporate transaction
systems were not designed to track receivables and certain liabilities and cash
receipts and payments on a business specific basis. Given these constraints, the
following unaudited data are presented to facilitate analysis of key components
of cash flow activity:
6
<PAGE>
THREE MONTHS SIX MONTHS
ENDED ENDED
NOVEMBER 24, NOVEMBER 24,
1996 1996
-------------- --------------
(In millions)
Operating activities:
Revenues less expenses....................... $ 8.5 $ 9.9
Depreciation and amortization................ 19.5 37.6
Loss (gain) on disposal of fixed assets...... (0.2) 0.2
Decrease in inventories...................... 14.8 19.9
Increase in prepaid expenses and other
current assets............................. (4.8) (0.8)
Decrease in other assets..................... 1.5 0.7
Increase (decrease) in accounts payable...... 1.4 (16.3)
Increase (decrease) in accrued expenses and
other liabilities.......................... (1.7) 9.1
----- -----
Cash provided by operating activities.... 39.0 60.3
Investing activities:
Capital expenditures......................... (9.9) (30.6)
Purchase of molds and tooling................ (1.6) (2.8)
----- -----
Cash used by investing activities........ (11.5) (33.4)
----- -----
Net financing provided to National
Semiconductor *............................ $ 27.5 $ 26.9
===== =====
- ------------------------
* Net financing provided to National Semiconductor does not necessarily
represent the cash flows of the Business, or the timing of such cash flows,
had it operated on a stand-alone basis.
NOTE 4 -- LONG-TERM DEBT
On November 18, 1997, Fairchild Semiconductor Corporation ("Fairchild"), a
wholly-owned subsidiary, amended certain provisions of its Senior Credit
Facilities Agreement with a syndicate of financial institutions. Specifically,
the amount available under the Revolving Credit Facility was increased from $75
million to $130 million. In addition, certain restrictive covenants were amended
in order to permit the acquisition of Raytheon Semiconductor, Inc. (Note 5). As
of November 23, 1997, no amounts were outstanding under the Revolving Credit
Facility.
NOTE 5 -- SUBSEQUENT EVENT
On November 25, 1997, Fairchild signed an agreement to acquire all of the
outstanding common stock of Raytheon Semiconductor, Inc., a California-based
supplier of analog and mixed signal integrated circuits, for approximately $120
million in cash. Fairchild intends to finance the acquisition through a
combination of borrowings under its existing Revolving Credit Facility (Note 4),
borrowings under a new Tranche C term loan within its existing Senior Term
Facility, and existing cash. In conjunction with the acquisition, Fairchild
intends to refinance its existing Tranche B term loan with proceeds from the new
Tranche C term loan. The new Tranche C term loan will mature on March 11, 2003
and will bear interest based on either the bank's base rate or the Eurodollar
rate at the option of Fairchild. The transaction, which is presently expected to
be completed by December 31, 1997, will be accounted for as a purchase.
7
<PAGE>
NOTE 6--RECLASSIFICATIONS
Certain amounts in the unaudited financial statements for the three- and
six-month periods ended November 24, 1996 have been reclassified to conform to
the presentation in the unaudited financial statements for the three and
six-month periods ended November 23, 1997.
In addition, certain non-cash adjustments were recorded in the second
quarter to increase accounts receivable ($2.5 million) and current liabilities
($0.1 million), with an offset to accumulated deficit. The purpose of these
adjustments was to properly state business equity assumed as part of the
Recapitalization.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
FSC Semiconductor Corporation, through its wholly-owned subsidiary Fairchild
Semiconductor Corporation (collectively the "Company"), is a leading designer,
manufacturer and supplier of high-performance logic, non-volatile memory and
discrete power and signal technology semiconductors, serving the
telecommunications, consumer, industrial, personal systems and automotive
markets. The results of operations for the second quarter and first half of
fiscal 1997 (three- and six-month periods ended November 24, 1996) reflect the
operating results of the Fairchild Semiconductor Business (the "Business") of
National Semiconductor Corporation ("National"), and are not necessarily
indicative of the results that would have been obtained as a stand-alone
company. This is due in part to the fact that National allocated to the Business
certain corporate and other overhead costs at levels higher than those
experienced as a stand-alone company. In addition, the Business, prior to the
establishment of the Company, provided manufacturing services to National at
cost and now provides such services at higher prices.
RESULTS OF OPERATIONS
Net income was $11.1 million and $24.1 million for the second quarter and
first half of fiscal 1998, respectively. As a stand-alone operation in fiscal
1998, the Company incurred interest expense and income tax expense of $13.1
million and $6.1 million, respectively, in the second quarter of fiscal 1998 and
$26.4 million and $13.1 million, respectively, in the first half of fiscal 1998,
that the Business did not incur in the comparable periods of fiscal 1997.
Operating income was $30.3 million and $63.6 million in the second quarter and
first half of fiscal 1998, respectively, compared to revenues less direct and
allocated expenses before income taxes of $8.5 million and $9.9 million in the
comparable periods of fiscal 1997. This increase is primarily attributable to
higher trade revenues, particularly in the first quarter of fiscal 1998, as a
result of improved market conditions, higher trade gross profit due to improved
factory utilization and improved pricing, along with a one-time restructuring
charge of $5.3 million for workforce reductions in first half of fiscal 1997
which did not recur in the first half of fiscal 1998. In addition, the Company
generated $9.2 million and $19.9 million of gross profit on contract
manufacturing services in the second quarter and first half of fiscal 1998,
respectively, under manufacturing agreements with National. In the comparable
periods of fiscal 1997, these revenues were recorded at cost. Excluding
depreciation and amortization of $20.3 million and $40.3 million in the second
quarter and first half of fiscal 1998, respectively, and $19.5 million and $37.6
million in the comparable periods of fiscal 1997, and other expense of $0.5
million and $0.9 million in the second quarter and first half of fiscal 1997,
respectively, earnings before interest, taxes and depreciation and amortization
("EBITDA") were $50.6 million and $103.9 million in the second quarter and first
half of fiscal 1998, respectively, compared to $28.5 million and $48.4 million
in the comparable periods of fiscal 1997. EBITDA is presented because the
Company believes that it is a widely accepted financial indicator of an entity's
ability to incur and service debt. EBITDA should not be considered as an
alternative to net income, operating income, or other consolidated operations
and cash flow data prepared in accordance with generally accepted accounting
principles, as an indicator of the operating performance of the Company, or as
an alternative to cash flows as a measure of liquidity.
9
<PAGE>
REVENUES
The Company's revenues consist of trade sales to unaffiliated customers
(79.3% and 79.4% of total revenues in the second quarter and first half of
fiscal 1998, respectively, and 86.5% and 85.1% in the comparable periods of
fiscal 1997) and revenues from contract manufacturing services provided to
National (20.7% and 20.6% of total revenues in the second quarter and first half
of fiscal 1998, respectively, and 13.5% and 14.9% in the comparable periods of
fiscal 1997).
Trade sales increased 1.0% to $155.3 million in the second quarter of fiscal
1998 compared to $154.0 million in the second quarter of fiscal 1997. On a
year-to-date basis, trade sales increased 9.4% to $314.0 million compared to
$286.9 million for the comparable period of fiscal 1997.
Logic trade sales increased 7.0% and 12.3% in the second quarter and first
half of fiscal 1998, respectively, over the comparable periods of fiscal 1997.
The increase was driven by a significant increase in unit volume, reflecting
strong market demand, which offset a slight decrease in average selling prices.
In the second quarter of fiscal 1998, CMOS trade sales increased 14.6% over the
second quarter of fiscal 1997, offsetting a decrease of 1.0% in Bipolar trade
sales, reflective of the general market trend favoring CMOS. On a year-to-date
basis, CMOS and Bipolar trade sales increased 15.5% and 8.9%, respectively, over
the comparable periods of fiscal 1997.
Discrete trade sales increased 18.6% and 26.1% in the second quarter and
first half of fiscal 1998, respectively, over the comparable periods of fiscal
1997. The increase was due almost entirely to higher average selling prices,
driven by new product introductions and a favorable sales mix, as unit volume
was down slightly. Small Signal trade sales increased 39.4%, offsetting a
decrease of 5.2% in Power DMOS trade sales in the second quarter of fiscal 1998
over the second quarter of fiscal 1997. Power DMOS trade sales in the second
quarter of fiscal 1998 were impacted by manufacturing problems at the Company's
facility in Cebu, Philippines, which have been rectified. On a year-to-date
basis, Small Signal and Power DMOS trade sales increased 39.4% and 9.1%,
respectively, over the comparable period of fiscal 1997.
Memory trade sales decreased 28.4% and 13.9% in the second quarter and first
half of fiscal 1998, respectively, over the comparable periods of fiscal 1997.
The decrease was driven by lower prices impacting all product lines due to
competitive pressures, partially offset by higher volume, particularly in
E2PROM. E2PROM trade sales decreased 0.7% in the second quarter of fiscal 1998
over the second quarter of fiscal 1997, but have increased 16.4% in the first
half of fiscal 1998 over the first half of fiscal 1997. EPROM trade sales
decreased 56.5% and 44.0% in the second quarter and first half of fiscal 1998,
respectively, over the comparable periods of fiscal 1997.
Geographically, 38%, 22% and 40% of trade sales were derived in North
America, Europe and Asia/ Pacific, respectively, in the second quarter of fiscal
1998, compared to 38%, 19% and 43% in the second quarter of fiscal 1997. Trade
sales in Europe increased 15.7% over a year ago due to strength in the
telecommunications market, which offset a decrease of 5.2% in Asia/Pacific, due
in part to the delayed transition to a dedicated sales force in Japan and price
pressures, particularly in Memory, in Southeast Asia. North America trade sales
were flat year over year. On a year-to-date basis, 37%, 20% and 43% of trade
sales were derived in North America, Europe and Asia/Pacific, respectively,
compared to 39%, 19% and 42% in the first half of fiscal 1997. Trade sales in
all regions were higher in the first half of fiscal 1998 compared to a year ago.
Trade sales increased 4.0%, 14.9% and 12.2% in North America, Europe and
Asia/Pacific, respectively, the result of improved market conditions.
Contract manufacturing revenues increased 68.8% to $40.5 million in the
second quarter of fiscal 1998 compared to $24.0 million in the second quarter of
fiscal 1997. On a year-to-date basis, contract manufacturing revenues increased
62.3% to $81.3 million, compared to $50.1 million for the comparable period in
fiscal 1997. This increase reflects greater demand from National.
10
<PAGE>
GROSS PROFIT
Gross profit increased 61.9% to $59.1 million in the second quarter of
fiscal 1998, compared to $36.5 million in the second quarter of fiscal 1997. On
a year-to-date basis, gross profit increased 81.2% to $120.5 million from $66.5
million for the comparable period of fiscal 1997. Included in gross profit in
the second quarter and first half of fiscal 1998 is $9.2 million and $19.9
million, respectively, attributable to contract manufacturing services provided
to National. In the comparable periods of fiscal 1997, these revenues were
recorded at cost. Gross trade profit (excluding contract manufacturing)
increased 36.7% and 51.3% in the second quarter and first half of fiscal 1998,
respectively, over the comparable periods of fiscal 1997. As a percentage of
trade sales, gross trade profits were 32.1% and 32.0% in the second quarter and
first half of fiscal 1998, respectively, compared to 23.7% and 23.2% in the
comparable periods of fiscal 1997. The increase in gross trade profit as a
percentage of trade sales was due to higher average selling prices, increased
factory utilization due to improved market conditions and the favorable effects
of currency devaluations in Southeast Asia on the Company's manufacturing costs.
RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $7.8 million, or 5.0% of
trade sales in the second quarter of fiscal 1998, compared to $4.3 million, or
2.8% of trade sales in the second quarter of fiscal 1997. On a year-to-date
basis, R&D was $14.9 million, or 4.7% of trade sales, compared to $8.5 million,
or 3.0% of trade sales, for the comparable period of fiscal 1997. The increase
in R&D is driven by higher spending to support new product development,
reflecting renewed emphasis on R&D efforts as a stand-alone company. R&D efforts
are focused on the Company's growth products: CMOS Logic, Power DMOS, and
E2PROM. In the second quarter and first half of fiscal 1998, R&D expenditures
were 8.8% and 8.3% of trade sales, respectively, for these growth products, and
0.9% and 1.0% of trade sales, respectively, for the Company's mature products
(Bipolar Logic, Small Signal Discretes and EPROM). In the comparable periods of
fiscal 1997, R&D expenditures of the Business primarily consisted of allocations
from National.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were $21.0 million, or
13.5% of trade sales, in the second quarter of fiscal 1998, compared to $23.2
million, or 15.1% of trade sales, in the second quarter of fiscal 1997. On a
year-to-date basis, SG&A was $42.0 million, or 13.4% of trade sales, compared to
$41.9 million, or 14.6% of trade sales for the comparable period of fiscal 1997.
The decrease in SG&A as a percent of trade sales is primarily attributable to
the effect of one-time retention and incentive bonuses charged to SG&A in the
second quarter of fiscal 1997 which did not recur in the second quarter of
fiscal 1998, lower G&A expenses due to lower stand-alone costs compared to the
direct and allocated G&A expenses of the Business, offset by higher selling
expenses primarily related to inefficiencies experienced while operating under
transition service agreements with National.
RESTRUCTURING
The first half of fiscal 1997 included a one-time restructuring charge of
$5.3 million for severance and other costs directly attributable to a workforce
reduction.
11
<PAGE>
INTEREST, NET
Interest, net was $13.1 million and $26.4 million in the second quarter and
first half of fiscal 1998, respectively, as a result of indebtedness incurred
concurrent with the Recapitalization, which occurred in the fourth quarter of
fiscal 1997. In the comparable periods of fiscal 1997, the Business was
allocated net interest expense from National. This amount is included in other
expense.
OTHER EXPENSE
Other expense was $0.5 million and $0.9 million in the second quarter and
first half of fiscal 1997, respectively, consisting of primarily net interest
expense allocated to the Business by National. There were no comparable amounts
incurred in the comparable periods of fiscal 1998.
INCOME TAXES
Income taxes were $6.1 million and $13.1 million in the second quarter and
first half of fiscal 1998, respectively, an effective tax rate of 35%. In the
comparable periods of fiscal 1997, the Business did not record a tax provision
or pay income taxes as it operated as a division of National.
LIQUIDITY AND CAPITAL RESOURCES
As of November 23, 1997, the Company's cash balance was $79.1 million, an
increase of $38.4 million from May 25, 1997. In addition, the Company had
available a Revolving Credit Facility of $130 million on November 23, 1997,
under which no amounts were outstanding. The Business had no cash as of November
24, 1996, as cash management was centralized by National and amounts were not
identifiable on a business specific basis.
In the second quarter and first half of fiscal 1998, the Company generated
sufficient cash from operations to fund its research and development, capital
expenditure and debt service requirements. Research and development expenditures
are made primarily to fund new product development. Capital expenditures in the
second quarter and first half of fiscal 1998 and for the remainder of the fiscal
year are being made primarily to increase capacity in the Company's
manufacturing facilities and to purchase and install an enterprise-wide
information system. The Company expects that its existing cash together with
available funds from its amended Senior Credit Facilities, and funds generated
from operations, will be sufficient to meet its investing and financing
requirements for the next twelve months.
The Company utilizes financial instruments to hedge its overall exposure to
the effects of foreign currency and interest rate fluctuations. The Company
utilizes short-term forward contracts to hedge currency exposure when deemed
necessary for expenses denominated in Malaysian ringgit and Philippine pesos, as
well as revenues denominated in Japanese yen and the major European currencies.
The recent devaluation of several currencies in Southeast Asia against the U.S.
dollar has not had, nor does the Company presently expect it to have, a material
adverse effect on the Company's results of operations or financial condition.
The Company currently benefits from lower dollar-denominated expenses incurred
by its manufacturing operations in Southeast Asia. The effect of lower
manufacturing costs is presently expected to substantially offset any adverse
impact to the Company's revenues in the region for the remainder of the fiscal
year, which may result from soft market conditions created by the devaluations
and other economic factors. Deferred gains from hedging transactions were
immaterial to the financial statements in the second quarter and first half of
fiscal 1998. The Company does not speculate in these financial instruments.
12
<PAGE>
OUTLOOK AND BUSINESS RISKS
The statements contained under this heading and in the Liquidity and Capital
Resources section of Management's Discussion and Analysis, other than statements
of historical facts, are forward looking statements based on current
expectations and management's estimates, which involve risks and uncertainties.
Actual results may differ materially from those set forth in such forward
looking statements.
The following factors may affect the Company's operating results for fiscal
1998: (i) the potential effect of the Company's substantially leveraged
financial condition on its liquidity, its ability to fund capital expenditures,
working capital and research and development and its ability to withstand
adverse general economic, market or competitive conditions and developments;
(ii) restrictive covenants contained in the Company's debt instruments that
could limit its ability to borrow additional funds, dispose of or acquire assets
or fund capital expenditures; (iii) the highly cyclical and competitive nature
of the semiconductor industry; (iv) the Company's dependence on continued demand
for the end-products such as personal computers, telecommunications, automotive,
and consumer and industrial electronic goods that incorporate the Company's
products; (v) the need to design, develop, manufacture, market and support new
products in order to remain competitive in the Company's markets; (vi) the
Company's dependence on sales to National Semiconductor; (vii) the Company's
dependence on the availability and cost of new materials used in its products
and upon key subcontractors providing it with wafer fabrication, assembly and
test services; (viii) the Company's reliance on complex manufacturing processes
and its sensitivity to maintaining yields, efficiencies and continuous
operations; (ix) uncertainties and legal risks associated with the dependence
on, and potential disputes concerning, patents and other intellectual property
rights; and (x) foreign currency and other risks associated with operating a
business internationally.
On November 25, 1997, the Company announced it had reached an agreement to
acquire all of the outstanding common stock of Raytheon Semiconductor, Inc.
("Raytheon") for approximately $120 million in cash. Raytheon designs,
manufactures and markets high-performance analog and mixed signal integrated
circuits for the personal computer, communications, broadcast video and
industrial markets. The transaction, which is presently expected to be completed
by December 31, 1997, will be accounted for as a purchase. While the Company
expects to recognize special charges related to certain acquisition and related
expenses during its third quarter, the amount of such charges and their impact
on the Company's operating results have yet to be determined. The Company
believes that its products, technologies and capabilities and those of Raytheon
are complementary, and that the separate operations are compatible. However, the
integration of the companies and the Company's higher leverage resulting from
the acquisition may have an unfavorable impact on future operating results if
the Company encounters unforeseen obstacles, or is unable to successfully
execute its integration plan.
The Company relies on certain subcontractors for wafer fabrication and
assembly and test services. In particular, the Company utilizes NS Electronics
(Bangkok) Ltd. ("NS Electronics") as a subcontractor for a significant portion
of assembly and test services for its non-volatile memory products. NS
Electronics has common ownership and business and management relationships with
Alphatec Electronics Public Company Ltd. ("Alphatec"). Alphatec has recently
reported financial difficulties, and its ability to continue its current
operations and the impact of such on the operations of NS Electronics are
uncertain. The Company's contract with NS Electronics expired on November 23,
1997 and negotiations to renew the contract are in progress. While negotiations
continue, the parties have agreed to operate under the pricing arrangements of
the proposed contract, which are generally favorable to the Company. The Company
continues to explore sourcing alternatives, including other subcontractors and
expansion of internal capacity. There can be no assurance that the Company would
be able to replace any loss of assembly or test services as a result of adverse
developments affecting Alphatec and NS Electronics, nor any assurance that such
services could be replaced on terms equally favorable to the Company.
13
<PAGE>
Accordingly, should NS Electronics cease or sharply curtail its operations in
the near future, there could be a material adverse effect on the Company's
results of operations in fiscal 1998.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings arising in
the ordinary course of its business. Management believes there is no litigation
pending that could have a material adverse effect on its results of operations
or its financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 First Amendment to Credit Agreement dated November 18, 1997
27 Financial Data Schedule
b) Reports on Form 8-K
FSC Semiconductor Corporation filed no reports on Form 8-K during the
quarter ended November 23, 1997.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
15
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
FSC SEMICONDUCTOR CORPORATION
Date: December 23, 1997 By: /s/ Joseph R. Martin
--------------------------------
Joseph R. Martin
Executive Vice President, Finance
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
16
<PAGE>
Exhibit 10.1
FIRST AMENDMENT TO CREDIT AGREEMENT
FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
November 18, 1997, among FSC SEMICONDUCTOR CORPORATION, a Delaware
corporation ("Holdings"), FAIRCHILD SEMICONDUCTOR CORPORATION, a Delaware
corporation (the "Borrower"), the lenders party to the Credit Agreement
referred to below (the "Banks"), BANKERS TRUST COMPANY, as Administrative
Agent (the "Administrative Agent"), CREDIT SUISSE FIRST BOSTON, as
Syndication Agent (the "Syndication Agent"), and CANADIAN IMPERIAL BANK OF
COMMERCE, as Documentation Agent (the "Documentation Agent", and together
with the Administrative Agent and the Syndication Agent, the "Agents").
Unless otherwise defined herein, all capitalized terms used herein and
defined in the Credit Agreement are used herein as so defined.
W I T N E S S E T H :
WHEREAS, Holdings, the Borrower, the Banks, the Administrative
Agent, the Syndication Agent and the Documentation Agent are parties to a
Credit Agreement, dated as of March 11, 1997 (as amended, modified or
supplemented through the date hereof, the "Credit Agreement");
WHEREAS, the Borrower desires to acquire substantially all of the
assets (or 100% of the capital stock of a corporation or other entity to be
formed to own and operate the business) of the Raytheon Semiconductor
Division of the Raytheon Company, for a purchase price not to exceed
$120,000,000, pursuant to an acquisition agreement (the "Acquisition
Agreement") between the Borrower and the Raytheon Company which conforms in
all material respects to the Exclusivity Agreement, dated October 27, 1997,
summarizing the terms and conditions of the Acquisition Agreement (the
"Summary of Terms"), attached hereto as Schedule I (collectively, the
"Raytheon Acquisition");
WHEREAS, in connection with the Raytheon Acquisition and in order to
consummate same, the Banks have agreed to increase the Total Revolving Loan
Commitment as set forth herein;
WHEREAS, subject to the terms and conditions set forth herein, the
Banks desire to (i) permit the Borrower to consummate the Raytheon
Acquisition and (ii) amend the Credit Agreement as provided herein; and
<PAGE>
WHEREAS, subject to the terms and conditions set forth below, the
parties hereto agree as follows;
NOW, THEREFORE, it is agreed:
1. Notwithstanding anything to the contrary contained in Sections 9.02, 9.05
and 9.14 of the Credit Agreement, the Banks hereby consent to the Borrower
consummating the Raytheon Acquisition, so long as (i) any Liens or Indebtedness
issued or assumed in connection with the Raytheon Acquisition are otherwise
permitted under the Credit Agreement, (ii) promptly after (but in no event later
than 30 days after) the consummation of the Raytheon Acquisition, 100% (or, in
the case of a Foreign Subsidiary, excluding that portion of the voting stock of
such Foreign Subsidiary which would be in excess of 65% of the total outstanding
voting stock of such Foreign Subsidiary) of the capital stock of any Subsidiary
acquired pursuant to the Raytheon Acquisition is pledged and delivered to the
Collateral Agent for the benefit of the Secured Creditors pursuant the Pledge
Agreement, (iii) within 10 days after the Raytheon Acquisition, each newly
acquired Domestic Wholly-Owned Subsidiary (x) executes and delivers a
counterpart of the Subsidiaries Guaranty and (y) secures the Borrower's
obligations pursuant to the Credit Agreement and the other Credit Documents (or
such Subsidiary's obligations pursuant to a Subsidiaries Guaranty) by executing
a counterpart of the Security Agreement and the Pledge Agreement and (iv) no
Default or Event of Default then exists or would result therefrom.
2. Section 9.05(ii) is hereby amended by deleting the number
"$5,000,000" appearing in the last line therein and inserting in lieu thereof
the number "$75,000,000".
3. The Credit Agreement is hereby amended by inserting the following
new Section 13.19:
"13.19. (a) The Borrower covenants and agrees that on and after the
First Amendment Effective Date, it shall not be permitted to incur Loans or
have Letters of Credit issued which would cause the sum of the then
outstanding principal amount of Revolving Loans and Swingline Loans and
Letter of Credit Outstandings to exceed $75,000,000 unless, in connection
with any such Credit Event, the Borrower establishes to the satisfaction of
the Administrative Agent (including by the delivery of a certificate of the
Borrower's chief financial officer setting forth in reasonable detail the
reasons therefor) that such incurrence of such
-2-
<PAGE>
Loans or issuance of such Letter of Credit would be permitted pursuant to
the terms of the Senior Subordinated Note Indenture."
4. On and after the Increase Effective Date (as defined below),
Schedule I to the Credit Agreement shall be hereby amended by deleting the
column entitled "Revolving Loan Commitment" appearing therein and inserting in
lieu thereof as a new column entitled "Revolving Loan Commitment" the
information set forth on Schedule II attached hereto, which Schedule II reflects
an increase in the Total Revolving Loan Commitment of $55,000,000. The Borrower
and the Banks hereby agree to the $55,000,000 increase in the Total Revolving
Loan Commitment. Each Bank hereby acknowledges and agrees that from and after
the Increase Effective Date its Revolving Loan Commitment shall be the amount
set forth opposite such Bank's name on Schedule II attached hereto, as such
amount may be adjusted from time to time in accordance with the terms of the
Credit Agreement. In connection with the increase in the Total Revolving Loan
Commitment pursuant to this Section 4, the Borrower shall, in coordination with
the Administrative Agent and the Banks, repay outstanding Revolving Loans of
certain Banks and, if necessary, incur additional Revolving Loans from other
Banks, in each case so that the Banks participate in each Borrowing of
outstanding Revolving Loans pro rata on the basis of their Revolving Loan
Commitments (after giving effect to this Amendment). It is hereby agreed that
any breakage or similar costs of the type described in Section 1.11 of the
Credit Agreement incurred by the Banks in connection with any repayment or
reborrowing of Revolving Loans contemplated by this Section 4 shall be for the
account of the Borrower.
5. Each Credit Party hereby agrees that, (i) on or after the
Increase Effective Date and upon the reasonable request of the Collateral Agent,
such Credit Party will execute such amendments to the Mortgages as the
Collateral Agent shall reasonably require in connection with the transactions
contemplated by this Amendment and (ii) all Revolving Loans, Swingline Loans and
Letters of Credit incurred pursuant to the additional Total Revolving Loan
Commitment effected hereby shall also be entitled to the benefits of the
Security Documents and the Guaranties.
6. The Borrower hereby covenants and agrees that, on the Increase
Effective Date, the Borrower shall have executed and delivered to the
Administrative Agent for the benefit of each Bank with a Revolving Loan
Commitment and whose Revolving Loan Commitment is being increased pursuant to
Section 4 of this Amendment (each such Bank, an "Increasing Bank") a new
Revolving Note reflecting the increased Revolving Loan Commitment of such Bank,
and the Increasing Banks shall surrender to the Borrower the Revolving Notes so
replaced.
-3-
<PAGE>
7. In order to induce the Banks to enter into this Amendment, the
Borrower hereby represents and warrants that (i) the representations, warranties
and agreements contained in Section 7 of the Credit Agreement are true and
correct in all material respects on and as of the First Amendment Effective Date
(except with respect to any representations and warranties limited by their
terms to a specific date, which shall be true and correct in all material
respects as of such date), (ii) there exists no Default or Event of Default on
the First Amendment Effective Date, in each case both before and after giving
effect to this Amendment and (iii) neither the execution, delivery or
performance by any credit Party of this Amendment, nor the consummation of the
transactions contemplated hereby (including, the incurrence of the additional
Total Revolving Loan Commitment as contemplated herein) violates or will violate
any term, provision or condition of the Senior Subordinated Note Documents, and
no consents or approvals shall be required to be obtained by Holdings or any of
its Subsidiaries from the holders of the Senior Subordinated Notes in connection
with the transactions contemplated herein.
8. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
9. This Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Administrative Agent.
10. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
11. This Amendment shall become effective on the date (the "First
Amendment Effective Date") when Holdings, the Borrower, each Subsidiary
Guarantor, the Required Banks and each Increasing Bank shall have signed a
counterpart hereof (whether the same or different counterparts) and shall have
delivered (including by way of facsimile) the same to the Administrative Agent
at the Notice Office.
12. For the purposes of this Amendment, the Increase Effective Date
shall mean the date on which all of the following conditions have been
satisfied:
(a) The First Amendment Effective Date shall have occurred;
-4-
<PAGE>
(b) There shall have been delivered to the Administrative Agent and
the Banks true and correct copies of the Acquisition Agreement, which shall
conform in all material respects with the terms and conditions set forth in
the Summary of Terms attached hereto as Schedule I with any material
departures or waivers therefrom to be reasonably satisfactory to the Agents
and the Required Banks; the Acquisition Agreement shall have been duly
executed and delivered by the parties thereto and shall be in full force
and effect; all conditions precedent to the consummation of the Raytheon
Acquisition as set forth in the Acquisition Agreement shall have been
satisfied, and not waived except with the consent (which will not be
unreasonably withheld) of each Agent and the Required Banks, to the
satisfaction of each Agent and the Required Banks; and the Raytheon
Acquisition shall have been, or shall substantially contemporaneously (and
in any event on the Increase Effective Date) be, consummated in accordance
with the Acquisition Agreement and all applicable law (excluding immaterial
violations of law which could not reasonably be expected to have, in the
aggregate for all such violations, a material adverse effect on the
consummation of the Raytheon Acquisition or on the operations, financial
condition or prospects of Holdings and its Subsidiaries taken as a whole);
(c) After giving effect to the Raytheon Acquisition, nothing shall
have occurred (and neither the Banks nor the Agents shall have become aware
of any facts or conditions not previously known) which the Agents or the
Required Banks shall determine (i) has, or is reasonably likely to have, a
material adverse effect on the rights or remedies of the Banks or the
Agents, or on the ability of the Credit Parties to perform their
obligations to them, or (ii) has, or is reasonably likely to have, a
material adverse effect on the operations, financial condition or prospects
of Holdings and its Subsidiaries taken as a whole;
(d) The Administrative Agent shall have received from Pierce Atwood,
counsel to Holdings and its Subsidiaries, an opinion addressed to each of
the Agents and each of the Banks, in form and substance satisfactory to the
Agents, and covering such matters incident to this Amendment and the
transactions contemplated herein (including the matters set forth in
Section 13.19 of the Credit Agreement (as amended hereby) as the Agents may
reasonably request; and
(e) The Administrative Agent shall have received resolutions of the
Board of Directors of each Credit Party, which resolutions shall be
certified by the Secretary or any Assistant Secretary of such Credit Party
and shall authorize the execution, delivery and performance by such Credit
Party of this Amendment and the consummation of the transactions
contemplated hereby, and the foregoing shall be reasonably acceptable to
the Agents in their reasonable discretion;
-5-
<PAGE>
13. From and after the First Amendment Effective Date, all references
in the Credit Agreement and the other Credit Documents to the Credit Agreement
shall be deemed to be references to the Credit Agreement as modified hereby.
* * *
-6-
<PAGE>
IN WITNESSES WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Amendment as of the date first
above written.
FSC SEMICONDUCTOR CORPORATION
By_______________________
Name:
Title:
FAIRCHILD SEMICONDUCTOR
CORPORATION
By__________________________
Name:
Title:
<PAGE>
BANKERS TRUST COMPANY,
Individually and as Administrative Agent
By___________________________
Name:
Title:
<PAGE>
CREDIT SUISSE FIRST BOSTON,
Individually and as Syndication Agent
By___________________________
Name:
Title:
By___________________________
Name:
Title:
<PAGE>
CANADIAN IMPERIAL BANK OF
COMMERCE, Individually and as
Documentation Agent
By___________________________
Name:
Title:
<PAGE>
ABN AMRO BANK, N.V.
By___________________________
Name:
Title:
By___________________________
Name:
Title:
<PAGE>
BANKBOSTON, N.A.
By___________________________
Name:
Title:
<PAGE>
THE BANK OF NOVA SCOTIA
By___________________________
Name:
Title:
<PAGE>
BANK OF SCOTLAND
By___________________________
Name:
Title:
<PAGE>
BANK OF TOKYO-MITSUBISHI
By___________________________
Name:
Title:
<PAGE>
BANQUE FRANCAISE DU COMMERCE
EXTERIEUR
By___________________________
Name:
Title:
<PAGE>
CHANCELLOR SENIOR SECURED
MANAGEMENT
By___________________________
Name:
Title:
<PAGE>
CORESTATES BANK, N.A.
By___________________________
Name:
Title:
<PAGE>
DRESDNER BANK AG, New York Branch and
Grand Cayman Branch
By___________________________
Name:
Title:
By___________________________
Name:
Title:
<PAGE>
SENIOR DEBT PORTFOLIO
By Boston Management and Research,
as Investment Advisor
By___________________________
Name:
Title:
<PAGE>
FIRST SOURCE FINANCIAL LLP
By First Source Financial, Inc.,
its Agent/Manager
By___________________________
Name:
Title:
<PAGE>
FLEET NATIONAL BANK
By___________________________
Name:
Title:
<PAGE>
THE FUJI BANK, LIMITED
NEW YORK BRANCH
By___________________________
Name:
Title:
<PAGE>
GENERAL ELECTRIC
CAPITAL CORPORATION
By___________________________
Name:
Title:
<PAGE>
KEYBANK NATIONAL ASSOCIATION
By___________________________
Name:
Title:
<PAGE>
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By___________________________
Name:
Title:
<PAGE>
THE MITSUBISHI TRUST & BANKING
CORPORATION, LOS ANGELES AGENCY
By___________________________
Name:
Title:
<PAGE>
PILGRIM AMERICA PRIME RATE TRUST
By___________________________
Name:
Title:
<PAGE>
PNC BANK, NATIONAL ASSOCIATION
By___________________________
Name:
Title:
<PAGE>
PRIME INCOME TRUST
By___________________________
Name:
Title:
<PAGE>
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
By___________________________
Name:
Title:
<PAGE>
SCHEDULE I
See attached.
<PAGE>
SCHEDULE II
Revolving
Bank Loan
Commitment ----
----------
Bankers Trust Company $30,083,333.34
Credit Suisse First Boston 30,083,333.33
Canadian Imperial Bank of Commerce 10,833,333.33
PNC Bank National Association 5,000,000.00
Fleet National Bank 5,000,000.00
The Fuji Bank, Limited New York Branch 5,000,000.00
Bank of Scotland 4,000,000.00
ABN Amro Bank, N.V. 4,000,000.00
First Source Financial LLP 4,000,000.00
Corestates Bank, N.A. 4,000,000.00
Bank of Tokyo-Mitsubishi 4,000,000.00
The Bank of Nova Scotia 4,000,000.00
The First National Bank of Boston 4,000,000.00
General Electric Capital Corporation 4,000,000.00
Banque Francaise du Commerce Exterieur 4,000,000.00
The Mitsubishi Trust & Banking Corporation,
Los Angeles Agency 4,000,000.00
Dresdner Bank AG, New York Branch
and Grand Cayman Branch 4,000,000.00
Van Kampen American Capital Prime Rate Income Trust --
Pilgrim America Prime Rate Trust --
Prime Income Trust --
Merrill Lynch Senior Floating Rate Fund, Inc. --
Total $130,000,000.00
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAY-31-1998 MAY-31-1998
<PERIOD-START> AUG-25-1997 MAY-26-1997
<PERIOD-END> NOV-23-1997 NOV-23-1997
<CASH> 79,100 79,100
<SECURITIES> 0 0
<RECEIVABLES> 94,100 94,100
<ALLOWANCES> 13,200 13,200
<INVENTORY> 78,200 78,200
<CURRENT-ASSETS> 252,000 252,000
<PP&E> 709,100 709,100
<DEPRECIATION> 424,100 424,100
<TOTAL-ASSETS> 581,400 581,400
<CURRENT-LIABILITIES> 128,900 128,900
<BONDS> 487,100 487,100
75,800 75,800
0 0
<COMMON> 200 200
<OTHER-SE> (111,000) (111,000)
<TOTAL-LIABILITY-AND-EQUITY> 581,400 581,400
<SALES> 195,800 395,300
<TOTAL-REVENUES> 195,800 395,300
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<TOTAL-COSTS> 165,500 331,700
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<INTEREST-EXPENSE> 13,100 26,400
<INCOME-PRETAX> 17,200 37,200
<INCOME-TAX> 6,100 13,100
<INCOME-CONTINUING> 11,100 24,100
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<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 11,100 24,100
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