<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 August 30, 1998
[ ] 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
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 September 30, 1998:
<TABLE>
<CAPTION>
Title of Each Class Number of Shares
------------------- ----------------
<S> <C>
Class A Common Stock; $0.01 par value 29,256,200
Class B Common Stock; $0.01 par value 33,635,520
</TABLE>
<PAGE>
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended August 30, 1998 and
August 24, 1997 3
Condensed Consolidated Balance Sheets as of August 30, 1998
(Unaudited) and May 31, 1998 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended August 30, 1998 and
August 24, 1997 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Part II. Other Information
Item 1 Legal Proceedings 12
Item 6 Exhibits and Reports on Form 8-K 12
Signature 13
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
August 30, August 24,
1998 1997
---- ----
(In millions)
<S> <C> <C>
Revenue:
Net sales--trade $ 135.1 $ 158.7
Contract manufacturing--National Semiconductor 9.9 40.8
-------- --------
Total revenue 145.0 199.5
Operating expenses:
Cost of sales 106.3 108.0
Cost of contract manufacturing--National Semiconductor 8.3 30.1
Research and development 9.2 7.1
Selling, general and administrative 22.6 21.0
Restructuring 4.5 --
-------- --------
Total operating expenses 150.9 166.2
-------- --------
Operating income (loss) (5.9) 33.3
Interest, net 14.4 13.3
-------- --------
Income (loss) before income taxes (20.3) 20.0
Provision (benefit) for income taxes (4.1) 7.0
-------- --------
Net income (loss) $ (16.2) $ 13.0
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
August 30, May 31,
1998 1998
---- ----
(In millions)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5.0 $ 6.5
Receivables, net 75.5 75.0
Inventories 106.1 108.0
Other current assets 11.0 20.0
-------- --------
Total current assets 197.6 209.5
Property, plant and equipment, net 333.4 342.9
Deferred income taxes 25.4 21.4
Intangible assets, net 30.6 31.5
Other assets 33.0 30.4
-------- --------
Total assets $ 620.0 $ 635.7
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 29.8 $ 13.2
Accounts payable 57.9 75.4
Accrued expenses and other current liabilities 54.2 55.9
-------- --------
Total current liabilities 141.9 144.5
Long-term debt, less current portion 529.2 526.7
Other liabilities 1.2 0.6
-------- --------
Total liabilities 672.3 671.8
Redeemable preferred stock 82.8 80.5
Commitments and contingencies
Stockholders' equity (deficit):
Class A common stock 0.3 0.3
Class B common stock 0.3 0.3
Additional paid-in capital 9.5 9.5
Accumulated deficit (145.2) (126.7)
-------- --------
Total stockholders' equity (deficit) (135.1) (116.6)
-------- --------
Total liabilities and stockholders' equity (deficit) $ 620.0 $ 635.7
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
August 30, August 24,
1998 1997
---- ----
(In millions)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(16.2) $ 13.0
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 23.3 20.0
Restructing charge, net of cash expended 2.4 --
Non-cash interest expense 2.5 2.3
(Gain) loss on disposal of property, plant and equipment (0.2) 0.2
Deferred income taxes (4.1) 4.4
Changes in operating assets and liabilities, net:
Accounts receivable (0.5) (15.7)
Inventories 1.9 1.5
Prepaid expenses and other current assets 9.1 2.3
Current liabilities (20.8) 5.8
Other assets and liabilities (2.7) (0.1)
------ ------
Cash provided by (used in) operating activities (5.3) 33.7
Cash flows from investing activities:
Capital expenditures (13.0) (11.8)
Proceeds from sale of property, plant and equipment 1.0 --
Purchase of molds and tooling (0.8) (1.2)
------ ------
Cash used in investing activities (12.8) (13.0)
Cash flows from financing activities:
Proceeds from revolving credit facility, net 16.6 --
Repayment of long-term debt -- (2.7)
------ ------
Cash provided by (used in) financing activities 16.6 (2.7)
------ ------
Net change in cash and cash equivalents (1.5) 18.0
Cash and cash equivalents at beginning of period 6.5 40.7
------ ------
Cash and cash equivalents at end of period $ 5.0 $ 58.7
------ ------
------ ------
Supplemental cash flow information:
Cash paid for:
Income taxes $ 0.2 $ 0.3
------ ------
------ ------
Interest $ 3.4 $ 3.9
------ ------
------ ------
</TABLE>
For the three-month periods ended August 30, 1998 and August 24, 1997,
the Company accumulated dividends on the redeemable preferred stock of
approximately $2.3 million and $1.9 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 August 30, 1998 and May 31, 1998 and the
Condensed Consolidated Statements of Operations and Cash Flows for the
three-month periods ended August 30, 1998 and August 24, 1997 were prepared by
the Company. In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring items) necessary to present fairly the financial position and
results of operations of the Company. 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 consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
fiscal year ended May 31, 1998.
Note 2 - Inventories
The components of inventories are as follows:
<TABLE>
<CAPTION>
August 30, May 31,
1998 1998
---- ----
(In millions)
<S> <C> <C>
Raw materials $ 9.4 $ 13.0
Work in process 72.0 69.5
Finished goods 24.7 25.5
------ ------
Total inventories $106.1 $108.0
------ ------
------ ------
</TABLE>
Note 3 - Restructuring charge
In the first quarter of fiscal 1999, in connection with management's
plan to reduce costs and improve operating efficiencies, the Company recorded a
pre-tax restructuring charge of approximately $4.5 million. The restructuring
charge consisted of $0.8 million related to non-cash asset impairments and $3.7
million of employee separation costs. The charge for employee separation
arrangements accrues for the termination and other severance costs associated
with the approximately 600 salaried, hourly and temporary employees severed as a
result of this action, a reduction of approximately 10% of the Company's
payroll. Through the first quarter of fiscal 1999, approximately $2.1 million of
these costs have been paid with the remaining $1.6 million of accruals to be
expended by the end of fiscal 1999.
Note 4 - Long-term debt
Effective August 25, 1998, the Company executed a Second Amendment to
its Amended and Restated Credit Agreement, modifying certain restrictive
financial and operating covenants with which (as modified) the Company was in
compliance at August 30, 1998. All other terms and conditions of the Credit
Agreement remained unchanged.
6
<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, discrete power and signal technology and analog and mixed signal
semiconductors, serving the telecommunications, consumer, industrial, personal
systems and automotive markets.
Results of Operations
The Company incurred a net loss of $16.2 million in the first quarter of
fiscal 1999, compared to net income of $13.0 million in the first quarter of
fiscal 1998. Fiscal 1999 first quarter net loss includes a net loss of $0.3
million for Raytheon Semiconductor ("Raytheon" or "Analog"), which was not
acquired until the third quarter of fiscal 1998. Excluding a one-time
restructuring charge of $4.5 million, Fairchild had an operating loss for the
first three months of fiscal 1999 of $1.4 million as compared to operating
income of $33.3 million in the same period last year. Analog operations broke
even for the first three months of fiscal 1999. The decrease is primarily
attributable to lower trade and contract manufacturing revenues and a
corresponding deterioration in margins resulting from soft market conditions,
due to excess personal computer inventories in the sales channels and adverse
effects on semiconductor demand driven by economic uncertainty in Southeast
Asia. These forces have combined to cause excess capacity in the semiconductor
industry resulting in price and margin erosion. Excluding depreciation and
amortization of $23.3 million and $20.0 million in the first quarters of fiscal
1999 and 1998, respectively, and one-time charges, earnings before interest,
taxes, depreciation and amortization ("EBITDA") were $21.9 million in the first
quarter of fiscal 1999 compared to $53.3 million in the first quarter of fiscal
1998. Excluding Analog, EBITDA was $19.7 million for the first three months of
fiscal 1999, a 63% reduction from the comparable period of fiscal 1998. 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.
Revenues
The Company's revenues consist of trade sales to unaffiliated customers
(93.2% and 79.5% of total revenues in the first quarters of fiscal 1999 and
1998, respectively) and revenues from contract manufacturing services provided
to National Semiconductor ("National") (6.8% and 20.5% of total revenues in the
first quarters of fiscal 1999 and 1998, respectively).
Trade revenues decreased 14.9% to $135.1 million in the first quarter of
fiscal 1999 compared with $158.7 million in the first quarter of fiscal 1998.
Trade sales for the three months ended August 30, 1998 include those of Analog.
Excluding Analog, trade sales decreased 25.5% over the comparable period in
fiscal 1998. This decline impacted all product groups and is the result of
continued industry-wide market softness, which began in the second half of
fiscal 1998. Logic, Discrete and Memory trade sales decreased by 23.3%, 18.8%
and 41.4%, respectively, in the first quarter of fiscal 1999 over the first
quarter of fiscal 1998. Geographically, excluding Analog, 37%, 22% and 41% of
trade sales were derived from North America, Europe and Asia/Pacific,
respectively, in the first quarter of fiscal 1999 compared to 36%, 19% and 45%
in the first quarter of fiscal 1998. All regions experienced decreases in trade
sales in the first quarter of fiscal 1999 compared to the first quarter of
fiscal 1998. Trade sales decreased by 23.5%, 13.9% and 32.1% in North America,
Europe and Asia/Pacific, respectively. Contract manufacturing revenues decreased
sharply in the first quarter of fiscal 1999 to $9.9 million compared to $40.8
million in the first quarter of fiscal 1998, reflecting reduced demand from
National.
7
<PAGE>
Gross Profit
Gross profit decreased 50.5% to $30.4 million in the first quarter of
fiscal 1999 compared to $61.4 million in the first quarter of fiscal 1998.
Excluding the effect of Raytheon, gross trade profit decreased 60.1% in the
first quarter of fiscal 1999 over the first quarter of fiscal 1998. As a
percentage of trade sales, gross trade profits were 21.3% in the first quarter
of fiscal 1999, compared to 32.0% in the first quarter of fiscal 1998. The
decrease in gross trade profit as a percentage of trade sales was due to lower
average selling prices and decreased factory utilization due to soft market
conditions. Contract manufacturing gross profit decreased 85.1% to $1.6 million
in the first quarter of fiscal 1999 compared to $10.7 million in the first
quarter of fiscal 1998. Contract manufacturing gross profit for the first
quarter of fiscal 1999 includes $6.2 million of fixed cost reimbursement under
the Company's manufacturing agreements with National.
Research and Development
Research and development expenses ("R&D") were $9.2 million, or 6.8% of
trade sales, in the first quarter of fiscal 1999, compared to $7.1 million, or
4.5% of trade sales, in the first quarter of fiscal 1998. The increase in R&D
expenses is driven by R&D costs incurred by Analog in fiscal 1999 which the
Company did not incur in fiscal 1998. R&D efforts are focused on the Company's
growth products: CMOS Logic, DMOS, EEPROM and Analog. In the first quarters of
fiscal 1999 and 1998, R&D expenditures were 9.3% and 7.3% of trade sales,
respectively, for these growth products, and 0.8% and 0.8% of trade sales,
respectively, for the Company's mature products (Bipolar Logic, Bipolar
Discretes and EPROM).
Selling, General and Administrative
Selling, general and administrative expenses ("SG&A") were $22.6
million, or 16.7% of trade sales, in the first quarter of fiscal 1999, compared
to $21.0 million, or 13.2% of trade sales, in the first quarter of fiscal 1998.
The increase in SG&A expenses is primarily the result of the incremental SG&A
expenses of Analog, which the Company did not incur in the first quarter of
fiscal 1998.
Restructuring
The Company incurred a pre-tax restructuring charge of approximately
$4.5 million in the first quarter of fiscal 1999. The charge consisted of $0.8
million related to non-cash asset impairments and $3.7 million of employee
separation costs which are expected to be substantially expended by the end of
fiscal 1999.
Interest, Net
Interest, net was $14.4 million in the first quarter of fiscal 1999,
compared to $13.3 million in the first quarter of fiscal 1998. The increase is
principally the result of indebtedness incurred to fund the Raytheon
acquisition, which occurred in the third quarter of fiscal 1998.
Income Taxes
Income tax expense (benefit) was $(4.1) million for the first quarter
of fiscal 1999, compared to $7.0 million in the first quarter of fiscal 1998.
The effective tax rates for the first quarter of fiscal 1999 and 1998 were 20.2%
and 35.0%, respectively. The decrease in the effective tax rate is due to the
Company's inability to carry-back current year net operating losses due to the
short time the Company has operated as a stand-alone entity.
8
<PAGE>
Liquidity and Capital Resources
As of August 30, 1998, the Company's cash and cash equivalents balance
was $5.0 million, a decrease of $1.5 million from May 31, 1998. In addition, the
Company had $113.4 million available under its Revolving Credit Facility at
August 30, 1998.
During the three months ended August 30, 1998, the Company's operations
used $5.3 million in cash compared to $33.7 million generated from operating
activities in the first three months of fiscal 1998. The decrease in cash
provided by operating activities reflects a decrease in net income adjusted for
noncash items of $32.2 million as well as a decrease in cash flows from changes
in operating assets and liabilities of $6.8 million. Cash used in investing
activities during the first three months of fiscal 1999 totaled $12.8 million
compared to $13.0 million in the first three months of fiscal 1998. Capital
expenditures in the first quarter of fiscal 1999 were being made principally to
purchase and install the Company's enterprise-wide information system whereas in
the first quarter of fiscal 1998, capital purchases were being made primarily to
increase capacity in the Company's manufacturing facilities. Cash provided by
financing activities of $16.6 million for the first three months of fiscal 1999
was the result of net proceeds from the Company's Revolving Credit Facility.
Cash used in financing activities of $2.7 million for the first three months of
fiscal 1998 was due to repayments of long-term debt.
The Company expects that its existing cash together with funds
available from its amended Senior Credit Facilities and funds generated from
operations will be sufficient to meet its anticipated operating requirements and
to fund its research and development and capital expenditures for the next
twelve months. Capital expenditures for the balance of fiscal 1999 will be
primarily made for the completion of the enterprise software system
implementation and to increase assembly and test capacity.
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 and option contracts to hedge currency
exposure when deemed necessary for expenses denominated in Malaysian ringgit and
Philippine peso, as well as revenues denominated in Japanese yen and the major
European currencies. The devaluation of several currencies in Southeast Asia
against the U.S. dollar and the recent currency restrictions imposed by the
Malaysian government have not had, nor does the Company presently expect these
events 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, and the fact that its sales in that region (excluding Japan) are
denominated in U.S. dollars. As discussed in greater depth in "Outlook and
Business Risks," recent economic developments and the associated currency
devaluations have softened demand in that region, thereby negatively affecting
the Company's revenues and profitability. Deferred gains from hedging
transactions were immaterial to the Company's operating results in the first
quarters of fiscal 1999 and 1998. The Company does not speculate in these
financial instruments.
Outlook and Business Risks
The statements contained under this heading and elsewhere in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", 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 or contemplated by such forward-looking statements.
The following factors may affect the Company's operating results for
fiscal 1999: (i) the potential effect of the Company's substantially leveraged
financial condition on its liquidity, its ability to fund capital expenditures,
working capital, debt service 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
9
<PAGE>
nature of the semiconductor industry and the potential for continued softness in
demand; (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 ability to successfully
integrate Raytheon and other potential acquisitions into the Company's
operations and the resultant risk of losing key customers or employees of the
acquired operation; (vii) the Company's dependence on sales to National
Semiconductor; (viii) the Company's dependence on the availability and cost of
raw materials used in its products and upon key subcontractors providing it with
wafer fabrication, assembly and test services; (ix) the Company's reliance on
complex manufacturing processes and its sensitivity to maintaining yields,
efficiencies and continuous operations; (x) uncertainties and legal risks
associated with the dependence on, and potential disputes concerning, patents
and other intellectual property rights; and (xi) foreign currency and other
risks associated with operating a global business.
The industry is currently experiencing soft market conditions, which
began in the second half of fiscal 1998, due to the Asian financial crisis and
an inventory correction in the personal computer market, resulting in excess
capacity in the semiconductor industry as a whole. These factors have combined
to cause severe price pressures and reduced demand, which will continue to
negatively impact the Company's trade revenues and gross profit in the second
quarter of fiscal 1999 as compared to the second quarter of fiscal 1998. In
response, the Company has undertaken cost reduction initiatives, including
factory shutdowns and headcount reductions. Despite these actions and a recent
upswing in order rates, the Company expects its trade revenues and gross profit
as a percent of sales in the second quarter of fiscal 1999 to remain
substantially below the comparable period of fiscal 1998. No assurance can be
given that order rates will continue to improve, nor that such cost reduction
measures will produce improved gross profit in the subsequent periods of fiscal
1999 and beyond.
In the fourth quarter of fiscal 1998, National informed the Company
that its demand would be significantly lower in fiscal 1999 than in fiscal 1998.
This has resulted in significantly lower contract manufacturing revenues in the
first quarter of fiscal 1999 as compared to the first quarter of fiscal 1998 and
will result in substantially lower contract manufacturing revenues throughout
fiscal 1999 as compared to fiscal 1998. Such reduced demand will negatively
impact factory utilization, particularly in the 6-inch fab in South Portland,
Maine. National, under the terms of the Asset Purchase Agreement (the
"Agreement"), is obligated to purchase an aggregate of $330.0 million of
contract manufacturing services during the 39 month period which began March 11,
1997, including a minimum of $90.0 million of contract manufacturing services in
fiscal 1999. In addition, National is obligated to cover a contractually
agreed-upon amount of fixed costs in the Company's 6-inch fab in South Portland,
Maine in fiscal 1999. While National's ordering and payment schedules for fiscal
1999 remain under discussion, National has reaffirmed its commitment to remain
in compliance with the terms of the Agreement.
The combination of soft market conditions and reduced demand
from National will result in a net loss for the second quarter of fiscal
1999. In addition, start-up issues with the shipping and logistics modules
of the Company's enterprise software system have caused a temporary increase
in delinquent backlog; however, the Company has experienced no significant
cancellations of backlog, and expects the problem to be resolved by the end
of the second quarter. No assurance can be given that such start-up issues
will not have a further negative effect on trade revenues and profit in the
second quarter. Should prices, order rates and the Company's ability to
serve its backlog not improve during the second quarter or National not
comply with its obligations under the Agreement, the Company may experience
a loss in the third quarter of Fiscal Year 1999 and in subsequent periods as
well. In light of the foregoing conditions and uncertainties, the Company
expects substantially lower profits in fiscal 1999 as compared to fiscal 1998
(and potentially a net loss in fiscal 1999).
The Company's assembly and test facilities, as well as certain
subcontractors for wafer fabrication and assembly and test services, are located
in Southeast Asia and Japan. Reliance on these facilities, as well as
subcontractors located in this region of the world, entails certain risks, both
political and economic,
10
<PAGE>
including political instability, asset seizures or nationalizations, currency
controls and exchange rate fluctuations. While the Company has not experienced
any significant disruptions in its operations in that part of the world, no
assurance can be given that such continued economic and political instability
would not result in an adverse effect on the Company's operations or financial
condition.
In the fourth quarter of fiscal 1997, the Company commenced its
enterprise software system implementation project for the purpose of separating
from National's business systems. The system, which became operational for
several of the Company's critical business processes in the first quarter of
fiscal 1999, is year 2000 compliant. Additional modules of the system are
scheduled to be implemented throughout fiscal 1999. The Company's business is
dependent upon its information systems as an integral part of all major business
processes. As the Company begins the implementation of critical operational and
logistical modules, there is a risk that these implementations could be delayed,
could experience difficulties or in fact may not be successful and could
adversely affect future results of operations and cash flows. Additionally,
internal resources have been redeployed to identify, test and correct year 2000
problems in other systems throughout the Company, including those systems
embedded in the Company's machinery and equipment. The Company is also reviewing
the year 2000 readiness and compliance of its principal suppliers of products
and services, in order to identify and assess any negative impacts that such
non-compliances could have on the Company. In addition, the Company is working
with its customers to identify potential year 2000 issues with its products. To
date, none have been identified. Management expects that its assessments will be
completed by December 31, 1998. During the first quarters of fiscal 1999 and
1998, respectively, incremental amounts incurred and charged to expense to
identify, test and correct such other year 2000 problems were immaterial to the
financial statements. Future incremental expenditures are currently estimated to
be approximately $2.0 million, the majority of which should be incurred before
the end of fiscal 1999. Although management believes the Company's systems will
be year 2000 compliant, the failure of the Company's suppliers and customers to
address the year 2000 issue could result in disruption to the Company's
operations and have a significant adverse impact on its results of operations,
the extent of which the Company has not yet estimated. The Company is not
actively engaged in preparing contingency plans in the event that key suppliers
or customers fail to become year 2000 compliant. However, the Company, in the
ordinary course of business, seeks to expand its customer base to lessen
dependence on any one customer for a significant portion of its revenues, and
seeks second sources of supply for its key products and services where
appropriate.
11
<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 Credit Agreement - Second Amendment as of August 25, 1998
27 Financial Data Schedule
b) Reports on Form 8-K
FSC Semiconductor Corporation filed no reports on Form 8-K during
the quarter ended August 30, 1998.
Items 2, 3, 4 and 5 are not applicable and have been omitted.
12
<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: October 9, 1998 By: /s/ Joseph R. Martin
---------------------
Executive Vice President, Finance
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
13
<PAGE>
EXHIBIT 10.1
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(this "Second Amendment"), dated as of August 25, 1998, 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 and amended and restated as of December
31, 1997 (as amended, modified or supplemented to the date hereof, the "Credit
Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement
as herein provided;
NOW, THEREFORE, it is agreed:
1. Section 4.02(f) of the Credit Agreement is hereby amended
by (i) in clause (iv) of the first parenthetical thereof, deleting the word
"and" appearing at the end thereof, (ii) redesignating clause "(v)" of the first
parenthetical thereof as clause "(vi)" thereof (and changing the reference in
said clause to "clause (v)" to "clause (vi)"), (iii) inserting, immediately
after clause (iv) of the first parenthetical thereof, the following:
", (v) 50% of the Net Sale Proceeds from the sale of the Mountain View
Property but only to the extent that the Borrower has delivered a
certificate to the Administrative Agent on or prior to the date of such
sale stating that the Borrower (or any of its Subsidiaries which are
Guarantors) intends to apply such Net Sale Proceeds towards Capital
Expenditures within 270 days after the date of such sale and" and
(iv) deleting the last sentence thereof and inserting in lieu thereof the
following new sentence:
"To the extent any Net Sale Proceeds are not required to be applied
pursuant to this Section 4.02(f) as a result of clause (iv) or (v)
contained in the parenthetical appearing in the first sentence of this
Section 4.02(f), then on the 270th day after the date of the respective
sale or disposition, the Net Sale Proceeds from the respective sale or
disposition shall be applied as otherwise required by this Section
4.02(f) (determined without regard to clause (iv) or (v), as the case
may be, contained in the parenthetical appearing in this first sentence
of this Section 4.02(f)) to the extent not actually used as
contemplated by said clause (iv) or (v), as the case may be, by said
270th day."
2. Section 9.02 of the Credit Agreement is hereby amended by
(i) in clause (ix) thereof, deleting the word "and" appearing at the end
thereof, (ii) in clause (x) thereof, deleting the period appearing at the end
thereof and inserting in lieu thereof a semi-colon and (iii) inserting in
appropriate order the following new clause:
<PAGE>
"(xi) the Borrower (or its Subsidiary that is the fee owner of
the Mountain View Property) shall be permitted to consummate the sale
of the Mountain View Property, so long as (A) such sale is for fair
market value (as determined in good faith by the Board of Directors of
the Borrower (or such Subsidiary)), (B) such sale results in
consideration consisting of at least 85% (for this purpose, taking the
amount of cash and the fair market value of all non-cash consideration,
as determined in good faith by the Borrower (or such Subsidiary)) of
cash, (C) such sale is consummated (and the Net Sale Proceeds therefrom
are applied in accordance with, and to the extent required by, Section
4.02(f)) on or prior to May 28, 2000 and (D) there shall exist no
Default or Event of Default (both before and after giving effect
thereto)."
3. Section 9.07 of the Credit Agreement is hereby amended by
deleting said Section in its entirety and inserting in lieu thereof the
following new Section 9.07:
"9.07 Capital Expenditures. (a) Holdings will not, and will
not permit any of its Subsidiaries to, make any Capital Expenditures,
except that (x) during the fiscal year ended May 31, 1998 (taken as one
accounting period), the Borrower and its Subsidiaries may make Capital
Expenditures in an aggregate amount not to exceed $85,000,000, (y)
during each of the fiscal year ended May 30, 1999 (taken as one
accounting period) and the fiscal year ended May 28, 2000 (taken as one
accounting period), the Borrower and its Subsidiaries may make Capital
Expenditures in an aggregate amount not to exceed $50,000,000 in each
such fiscal year and (z) during each fiscal year thereafter (taken as
one accounting period), the Borrower and its Subsidiaries may make
Capital Expenditures in an aggregate amount not to exceed $105,000,000.
(b) Notwithstanding anything to the contrary contained in
clause (a) above, to the extent that the aggregate amount of Capital
Expenditures made by the Borrower and its Subsidiaries pursuant to
Section 9.07(a) in any fiscal year of the Borrower is less than
$85,000,000 (or, in the case of each of the fiscal year ended May 30,
1999 and the fiscal year ended May 28, 2000, $50,000,000, or, in the
case of a fiscal year beginning after May 28, 2000, $105,000,000), the
amount of such difference, but in no case more than $25,000,000, may be
carried forward and used to make Capital Expenditures in the
immediately succeeding fiscal year, provided that amounts once carried
forward to such succeeding fiscal year shall lapse and terminate at the
end of such fiscal year.
(c) In addition to the Capital Expenditures permitted pursuant
to preceding clauses (a) and (b) of this Section 9.07, the Borrower and
its Subsidiaries may make additional Capital Expenditures consisting of
(x) the reinvestment of proceeds of Recovery Events not required to be
applied to prepay the Loans pursuant to Section 4.02(h) and (y) the Net
Sale Proceeds from the sale of the Mountain View Property not required
to be applied to prepay the Loans pursuant to Section 4.02(f)."
4. Section 9.08 of the Credit Agreement is hereby amended by
deleting said Section in its entirety and inserting in lieu thereof the
following new Section 9.08:
9.08 Consolidated Interest Coverage Ratio. Holdings will not
permit the Consolidated Interest Coverage Ratio for any period of four
consecutive fiscal quarters (or, if shorter, the period beginning on
the first day of the fiscal year beginning on, or closest to, May 26,
1997 and ended on the last day of a fiscal quarter ended thereafter),
in each case taken as one accounting period, ended on the last day of a
fiscal quarter described below to be less than the amount set forth
opposite such fiscal quarter below:
<TABLE>
<CAPTION>
Fiscal Quarter Ended
In, or Closest to Ratio
----------------- -----
<S> <C>
August, 1997 2.60:1.0
November, 1997 2.60:1.0
February, 1998 2.60:1.0
May, 1998 3.00:1.0
</TABLE>
<PAGE>
<TABLE>
<S> <C>
August, 1998 3.00:1.0
November, 1998 2.70:1.0
February, 1999 2.50:1.0
May, 1999 2.75:1.0
August, 1999
and thereafter 3.50:1.0
</TABLE>
5. Section 9.10 of the Credit Agreement is hereby amended by
deleting said Section in its entirety and inserting in lieu thereof the
following new Section 9.10:
9.10 Maximum Leverage Ratio. Holdings will not permit the
Leverage Ratio at any time during a fiscal quarter set forth below to be greater
than the ratio set forth opposite such fiscal quarter below:
<TABLE>
<CAPTION>
Fiscal Quarter Ended
In, or Closest to Ratio
----------------- -----
<S> <C>
August, 1997 3.50:1.0
November, 1997 3.50:1.0
February, 1998 3.50:1.0
May, 1998 3.00:1.0
August, 1998 3.25:1.0
November, 1998 4.00:1.0
February, 1999 4.00:1.0
May, 1999 3.75:1.0
August, 1999 3.00:1.0
November, 1999 3.00:1.0
February, 2000 3.00:1.0
May, 2000
and thereafter 2.50:1.0"
</TABLE>
6. Section 11.01 of the Credit Agreement is hereby amended by
inserting the following new definition in the appropriate alphabetical order:
"Mountain View Property" shall mean that certain parcel of
land (and the improvements thereon) located at 350 Ellis Street,
Mountain View, California.
7. The Banks hereby waive compliance by Holdings with the
requirements of Section 9.09 of the Credit Agreement but only with respect to
each period of four consecutive fiscal quarters (in each case taken as one
accounting period) ended on the last day of any fiscal quarter in the fiscal
year ended May 30, 1999.
8. In order to induce the Banks to enter into this Second
Amendment, each of Holdings and the Borrower hereby represents and warrants that
(i) all 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
Second Amendment Effective Date (as defined below) and after giving effect to
this Second Amendment (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 Second Amendment Effective Date, in each case both before and
after giving effect to this Second Amendment, and (iii) neither the execution,
delivery or performance by any Credit Party of this Second Amendment, nor the
consummation of the transactions contemplated hereby, 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.
9. This Second 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.
<PAGE>
10. This Second 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.
11. THIS SECOND 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.
12. This Second Amendment shall become effective on the date
(the "Second Amendment Effective Date") when Holdings, the Borrower, each
Subsidiary Guarantor and the Required Banks 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.
13. From and after the Second 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.
* * *
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized offers to execute and deliver this Second 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>
AMARA-1 FINANCE LTD.
By:
-----------------------------------
Name:
Title:
<PAGE>
AMARA-2 FINANCE LTD.
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 TRUST COMPANY
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>
FIRST SOURCE FINANCIAL LLP
By First Source Financial, Inc.,
its Agent/Manager
By:
-----------------------------------
Name:
Title:
<PAGE>
FLEET NATIONAL BANK
By:
-----------------------------------
Name:
Title:
<PAGE>
THE MITSUBISHI TRUST AND BANKING
CORPORATION, LOS ANGELES AGENCY
By:
-----------------------------------
Name:
Title:
<PAGE>
NATEXIS BANQUE BFCE
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
<PAGE>
PILGRIM AMERICA PRIME RATE TRUST
By: PILGRIM AMERICA INVESTMENTS,
INC. as its Investment Manager
By:
-----------------------------------
Name:
Title:
<PAGE>
PNC BANK, NATIONAL ASSOCIATION
By:
-----------------------------------
Name:
Title:
<PAGE>
ABN AMRO BANK, N.V.
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME
INCOME TRUST
By:
-----------------------------------
Name:
Title:
<PAGE>
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
By:
-----------------------------------
Name:
Title:
<PAGE>
ACKNOWLEDGED AND AGREED:
FAIRCHILD SEMICONDUCTOR CORPORATION
OF CALIFORNIA
By:
------------------------------------
Name:
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-30-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-30-1998
<CASH> 5,000
<SECURITIES> 0
<RECEIVABLES> 87,900
<ALLOWANCES> 12,400
<INVENTORY> 106,100
<CURRENT-ASSETS> 197,600
<PP&E> 807,900
<DEPRECIATION> 474,500
<TOTAL-ASSETS> 620,000
<CURRENT-LIABILITIES> 141,900
<BONDS> 529,200
82,800
0
<COMMON> 600
<OTHER-SE> (135,700)
<TOTAL-LIABILITY-AND-EQUITY> 620,000
<SALES> 145,000
<TOTAL-REVENUES> 145,000
<CGS> 114,600
<TOTAL-COSTS> 150,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,400
<INCOME-PRETAX> (20,300)
<INCOME-TAX> (4,100)
<INCOME-CONTINUING> (16,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,200)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
