<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1999
REGISTRATION NO. 333-78665
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FAIRCHILD SEMICONDUCTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3674 77-0449095
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
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333 WESTERN AVENUE, MAIL STOP 01-00
SOUTH PORTLAND, MAINE 04106
(207) 775-8100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
SEE TABLE OF ADDITIONAL REGISTRANTS BELOW
-------------------------
DANIEL E. BOXER, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
FAIRCHILD SEMICONDUCTOR CORPORATION
333 WESTERN AVENUE, MAIL STOP 01-00
SOUTH PORTLAND, MAINE 04106
(207) 775-8100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-------------------------
WITH COPIES TO:
NINA P. GRAYSON, ESQ.
DECHERT PRICE & RHOADS
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
(212) 698-3500
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
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10 3/8% Senior Subordinated
Notes Due 2007................ $300,000,000 100% $300,000,000 $83,400(2)
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Guarantees of Fairchild
Semiconductor International,
Inc. and Fairchild
Semiconductor Corporation of
California.................... $300,000,000 -- -- $0(3)
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(1) Estimated pursuant to Rule 457(f) solely for purposes of calculating the
registration fee.
(2) Previously paid.
(3) Pursuant to rule 457(n), no separate fees are payable for the guarantees.
-------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
FAIRCHILD SEMICONDUCTOR CORPORATION
TABLE OF ADDITIONAL REGISTRANTS
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PRIMARY
STANDARD
INDUSTRIAL IRS
CLASSIFICATION EMPLOYER
STATE OF CODE IDENTIFICATION
NAME INCORPORATION NUMBER NO.
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Fairchild Semiconductor International, Inc. .... Delaware 3674 04-3363001
Fairchild Semiconductor Corporation of
California.................................... Delaware 3674 04-3398512
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The address, including zip code, and telephone number, including area code,
of the principal offices of the additional registrants listed above (the
"Additional Registrants") is: 333 Western Avenue, Mail Stop 01-00, South
Portland, Maine 04100; the telephone number at that address is (207) 775-8100.
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SUBJECT TO COMPLETION, DATED AUGUST , 1999
PROSPECTUS
OFFER TO EXCHANGE
10 3/8% SENIOR SUBORDINATED NOTES DUE 2007 FOR ALL OUTSTANDING
10 3/8% SENIOR SUBORDINATED NOTES DUE 2007
OF
FAIRCHILD SEMICONDUCTOR CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1999, UNLESS EXTENDED.
-------------------------
Terms of the Exchange Offer:
-- We will exchange all Existing Notes that are validly tendered and not
withdrawn prior to the expiration of the Exchange Offer.
-- You may withdraw tenders of Existing Notes at any time prior to the
expiration of the Exchange Offer.
-- We believe that the exchange of Existing Notes will not be a taxable
event for U.S. federal income tax purposes, but you should see "Certain
United States Federal Income Tax Considerations" on page [154] for more
information.
-- We will not receive any proceeds from the Exchange Offer.
-- The terms of the Exchange Notes are substantially identical to the
Existing Notes, except that the Exchange Notes are registered under the
Securities Act of 1933 and the transfer restrictions and registration
rights applicable to the Existing Notes do not apply to the Exchange
Notes.
-------------------------
See "Risk Factors" beginning on page [13] for a discussion of certain risks
that should be considered by holders prior to tendering their Existing Notes.
-------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
-------------------------
The date of this prospectus is , 1999.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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TABLE OF CONTENTS
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PAGE
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Summary............................. 1
Risk Factors........................ 13
Forward-Looking Statements.......... 22
Sources and Uses of Proceeds........ 23
Capitalization...................... 24
Unaudited Pro Forma Combined
Condensed Financial Statement and
Unaudited Supplemental Data....... 25
Selected Consolidated Financial Data
of Fairchild...................... 32
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of Fairchild........ 34
Selected Historical Financial Data
of the Power Device Business...... 51
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of the Power Device
Business.......................... 52
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PAGE
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The Exchange Offer.................. 58
Industry Overview................... 67
Business............................ 71
The Acquisition..................... 85
Management.......................... 89
Certain Relationships and Related
Transactions...................... 97
Ownership of Capital Stock.......... 101
Description of Capital Stock........ 103
Description of Indebtedness......... 107
Description of the Notes............ 112
Certain United States Federal Income
Tax Considerations................ 153
Plan of Distribution................ 154
Legal Matters....................... 154
Experts............................. 155
Where You Can Find More
Information....................... 156
Glossary............................ 157
Index to Financial Statements....... F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS
LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE
ACCURATE ON THE DATE OF THIS DOCUMENT.
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SUMMARY
This summary may not contain all of the information that may be important
to you. You should read the entire prospectus, including the financial data and
related notes, before making an investment decision. Fairchild's fiscal year is
comprised of a twelve-month period ending on the Sunday on or immediately
preceding May 31 of each year. The power device business of Samsung Electronics
Co., Ltd. reports on a calendar year basis. See "Glossary" for a description of
certain other terms.
THE EXCHANGE OFFER
On April 7, 1999, we issued and sold $300.0 million aggregate principal
amount of 10 3/8% Senior Subordinated Notes Due 2007, which we refer to as the
Existing Notes. In connection with that sale, we entered into a registration
rights agreement with the initial purchasers of the Existing Notes in which we
agreed, among other things, to deliver this prospectus to you and to complete an
exchange offer for the Existing Notes. Pursuant to the registration rights
agreement, we are offering to exchange $300.0 million aggregate principal amount
of our 10 3/8% Senior Subordinated Notes Due 2007, which have been registered
under the Securities Act, which we refer to as the Exchange Notes, for a like
aggregate principal amount of our Existing Notes. We refer to this offer to
exchange Exchange Notes for Existing Notes in accordance with the terms set
forth in this prospectus and the accompanying Letter of Transmittal as the
Exchange Offer. You are entitled to exchange your Existing Notes for Exchange
Notes. The Exchange Notes have substantially identical terms to the Existing
Notes. We urge you to read the discussions under the headings "The Exchange
Offer" and "The Exchange Notes" in this Summary for further information
regarding the Exchange Offer and the Exchange Notes.
FAIRCHILD
Fairchild is the largest independent semiconductor company, based on pro
forma Fiscal 1999 revenues, focused solely on multi-market products.
Multi-market products are building block components that can be used in a wide
range of applications and are found in virtually all electronic devices. While
other semiconductor companies may generate greater revenues from the sale of
multi-market products, these companies derive more of their revenues from the
sale of other products than from multi-market products. We design, develop and
market analog, discrete, logic and non-volatile memory semiconductors. Analog
semiconductors are used to amplify electric signals and control power, light,
color and sound functions in electronic devices. Discrete semiconductors perform
basic signal amplification and switching functions. Logic semiconductors utilize
ones and zeros, the basic digital language, to provide decision making functions
in electronic circuits, such as turning an electronic switch on or off.
Non-volatile memory semiconductors are used to retain data after an electrical
device has been turned off. We supply customers in a diverse range of end
markets, including the computer, industrial, telecommunications, consumer
electronics and automotive industries. We are particularly strong in providing
discrete and analog power management products, which address the growing
requirement for portability and long battery life for computing and
communication devices.
Our business strategy is designed to maintain our multi-market product
leadership and to focus on value-added products for our customers that leverage
our strengths. Those strengths include developing and manufacturing devices for
managing power in electrical devices and converting physical data such as color,
light and sound into a digital format usable by electronic devices.
Additionally, we believe that we are competitive in our development of
technologies which allow for faster switching of voltages and technologies to
allow circuit boards and peripherals to communicate with one another and in the
design of ultra-small packages. We believe that we are well positioned for
growth as a result of the new products that we are developing, the devices we
have recently introduced, our strength in analog and discrete products and the
increasing semiconductor content of electronic products. We have wafer
fabrication
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plants in California, Maine, Utah and South Korea, and assembly facilities in
Malaysia and the Philippines.
Worldwide semiconductor market revenues were approximately $125.6 billion
during 1998 according to the reports of Worldwide Semiconductor Trade Statistics
published by the Semiconductor Industry Association. Since 1990, global
semiconductor market revenues have expanded at a compounded annual growth rate
of approximately 12.0%. We operate primarily in the approximately $55.3 billion
segment of the semiconductor market relating to products that move and shape
electrical signals and which includes analog, discrete and logic products. We
believe that the markets we operate in provide us with attractive growth
opportunities. Revenues for analog and discrete markets are expected to grow
over the next three years at compounded annual growth rates of 11% and 8%,
respectively, according to Worldwide Semiconductor Trade Statistics.
Additionally, we focus on low-voltage CMOS (Complementary Metal Oxide
Semiconductor) fabrication, one of the fastest growing segments of the logic
industry. CMOS is one of the most common integrated circuit fabrication
technologies. The low voltage segment of CMOS in which we compete is expected by
Insight/Onsite to grow over the next five years at a compounded annual growth
rate of 13% in terms of revenues. We do not produce microcontrollers,
microprocessors or the complex system-on-a-chip semiconductors. We also do not
produce semiconductors that do not retain data after an electric device has been
turned off, which we refer to as volatile memory semiconductors.
THE ACQUISITION OF THE POWER DEVICE BUSINESS
On April 13, 1999, we purchased the power device business from Samsung
Electronics for approximately $414.9 million, including fees and expenses. The
power device business designs, manufactures and markets power discrete
semiconductors and standard analog integrated circuits serving the personal
computer, industrial, telecommunications and consumer electronics markets. The
power device business product portfolio includes a number of new product designs
with industry leading performance characteristics. The acquisition of the power
device business not only enhances our analog and power discrete product
offerings, but also requires Samsung Electronics to purchase minimum quantities
of our products and to use us for contract manufacturing at guaranteed profit
levels. Additionally, we expect to generate incremental revenues by offering the
newly acquired power device business products to our existing customers and by
offering our existing products to the power device business customers who
currently do not purchase from us. In connection with the acquisition of the
power device business, we have obtained a full income tax holiday for a period
of seven years in South Korea. In 1998, the power device business had revenues
of $386.5 million.
COMPANY STRENGTHS
We believe our core strengths are the following:
BREADTH OF PRODUCT PORTFOLIO. We provide our customers with one of the
largest product offerings in the industry for analog, discrete, logic and
non-volatile memory devices. Our analog device portfolio comprises over 2,300
products, including offerings in 92 of the top 100 best-selling analog product
types by volume. Our discrete device portfolio comprises over 4,000 products and
we believe it is one of the most comprehensive power device portfolios in the
industry. We develop products for a wide range of market applications, reducing
our dependence on any single product, application or market. In addition, we
believe that our ability to provide our customers with multiple products meets a
growing need among our end users for a single source of supply.
LEADERSHIP IN POWER SOLUTIONS. We believe there is an increasing demand
for a combination of sophisticated computing and communication capabilities,
frequently in the form of portable devices. We
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are a leader in providing solutions for managing the power required to operate
such devices. Our combined analog and discrete offering provides a complete
solution for power management:
Analog: We provide specific solutions for power conversion, temperature
sensing, management functions, battery chargers and motor controls.
Power Discrete: We provide comprehensive solutions for managing power from
the original power source to end products such as computers, cellular
phones and network devices.
HIGH QUALITY CUSTOMER SERVICE. Our customers recognize us for our high
quality of service. They require a reliable source of supply, often in high
volumes and with short lead times, demand quick responses to technical questions
and seek support in designing new applications which use our products. Because
we are an independent company focused solely on multi-market products, all of
our service and support efforts are tailored to meet these customer needs. As a
result of our efforts, we have received numerous customer and industry awards,
including supplier awards from Compaq Computer Corp., Siemens AG and Acer Inc.
and the European Mid-Size Vendor of the Year award from Dataquest.
HISTORY OF PRODUCT INNOVATION. Our success in introducing new products has
been an important source of our growth and profitability. We have been a
significant innovator in the multi-market segment of the semiconductor industry
with several leading edge technologies and industry firsts, including our
introduction of many new power management solutions over the past three decades
which set new standards for speed and efficiency. Since June 1997, we have
designed and introduced approximately 400 new products.
DIVERSE AND BLUE-CHIP CUSTOMER BASE. Our diverse customer base, which
spans a wide spectrum of end user markets, enables us to avoid some of the
volatility that may be encountered in specific semiconductor markets. We serve
more than 50,000 customers worldwide, with no single customer, other than
National Semiconductor and Samsung Electronics, providing more than 5% of our
pro forma Fiscal 1998 total revenue. Customers in our end user markets include
industry leaders such as Compaq, Ericsson, Lucent, Nortel Networks, Samsung
Electronics and Siemens.
EXPERIENCED MANAGEMENT. Our senior management team consists of seven
individuals who have on average approximately 25 years of experience in the
semiconductor industry. Our chief executive officer, Kirk P. Pond, has over 30
years of experience in the industry and has held senior management positions at
Texas Instruments and National Semiconductor. At National Semiconductor, Mr.
Pond was executive vice president and chief operating officer prior to his
current position at Fairchild.
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Our principal executive offices are located at 333 Western Avenue, Mail
Stop 01-00, South Portland, Maine 04106, and our telephone number is (207)
775-8100.
THE ACQUISITION
On April 13, 1999, Fairchild acquired, through an indirect wholly-owned
South Korean subsidiary, Fairchild Korea Semiconductor Ltd., substantially all
of the assets of and assumed certain of the liabilities of the power device
business of Samsung Electronics for aggregate cash consideration of
approximately $414.9 million, including fees and expenses. In connection with
the acquisition of the power device business, Fairchild Korea and Samsung
Electronics also entered into several agreements including:
- The Product Supply Agreement under which Samsung Electronics is required
to purchase for a three-year period guaranteed annual minimum levels of
products from the power device business based on historical volumes and
market prices.
- The Foundry Sale Agreement under which the power device business is
required to provide for a three-year period wafer foundry services for
Samsung Electronics.
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<PAGE> 8
- The Transitional Services Agreement under which Samsung Electronics is
required to provide operational and administrative services for the power
device business.
- The Assembly and Test Services Agreements under which Samsung Electronics
is required to provide assembly and test services for the power device
business.
In order to finance the acquisition of the power device business, we
completed the following financings. We used the gross proceeds from these
financings to pay the purchase price of the acquisition, to repay our then
existing senior credit facilities, to pay related fees and expenses and to fund
our working capital needs.
- We entered into the senior credit facilities, which provided us up to
$410.0 million in financing, consisting of a $100.0 million revolving
credit facility and $310.0 million of senior term facilities.
- Citicorp Mezzanine Partners, L.P. contributed $50.0 million in cash to
Fairchild Semiconductor International, Inc., our parent company, in
exchange for a pay-in-kind promissory note, which means that all interest
due and not paid in cash is added to the then outstanding principal
amount of the note, and a warrant to purchase 3,538,228 shares of the
common stock of Fairchild International. Fairchild International
contributed the $50.0 million from Citicorp Mezzanine Partners, L.P. to
us as a capital contribution.
- We issued the Existing Notes.
Concurrently with the closing of the offering of the Existing Notes, we
deposited with the United States Trust Company of New York, as escrow agent, the
net proceeds of the offering. In addition, in connection with the acquisition of
the power device business, we issued a promissory note to Samsung Electronics
for the purchase price of the power device business in order to satisfy certain
requirements of Korean law. In the event that the acquisition of the power
device business had not been consummated and Samsung Electronics had not
received in cash the full purchase price, in each case on or prior to April 23,
1999, we would have been required to redeem the Existing Notes. See "Description
of the Notes -- Special Redemption; Escrow." The acquisition of the power device
business was consummated on April 13, 1999 and Samsung Electronics has received
in cash the full purchase price prior to April 23, 1999. Accordingly, the net
proceeds of the offering were released from the escrow arrangement and used to
fund the acquisition of the power device business.
RECENT DEVELOPMENTS
On August 9, 1999, Fairchild International completed an initial public
offering of 20,000,000 shares of its Class A Common Stock for aggregate
consideration of $370.0 million. On August 12, 1999, National Semiconductor
Corporation, one of Fairchild International's shareholders, sold 3,000,000
shares of Fairchild International's Class A Common Stock in connection with an
over-allotment option exercised by Credit Suisse First Boston Corporation, one
of the underwriters in the initial public offering. The proceeds of the initial
public offering were used to repay $191.0 million of the amounts due under our
senior credit facilities, to repay all outstanding amounts due under Fairchild
International's 12.5% Subordinated Note Due 2008 of $53.0 million, to repay all
outstanding amounts due under Fairchild International's 11.74% Subordinated Note
Due 2008 of $101.4 million and to pay fees and expenses related to the initial
public offering. Concurrently with the completion of the initial public
offering, all of Fairchild International's 12% Series A Cumulative Compounding
Preferred Stock was converted into shares of Fairchild International's Class A
Common Stock. Immediately after the completion of the initial public offering,
Fairchild International had 59,022,480 shares of its Class A Common Stock
outstanding.
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<PAGE> 9
THE EXCHANGE OFFER
Securities Offered............ Up to $300,000,000 aggregate principal amount
of 10 3/8% Senior Subordinated Notes Due 2007.
The terms of the Exchange Notes and Existing
Notes are identical in all material respects,
except for transfer restrictions and
registration rights relating to the Existing
Notes.
The Exchange Offer............ We are offering the Exchange Notes to you in
exchange for a like principal amount of
Existing Notes. Existing Notes may be exchanged
only in integral multiples of $1,000. We intend
by the issuance of the Exchange Notes to
satisfy our obligations contained in the
Registration Rights Agreement.
Expiration Date; Withdrawal of
Tender...................... The Exchange Offer will expire at 5:00 p.m.,
New York City time, on , 1999, or
such later date and time to which it may be
extended by us. The tender of Existing Notes
pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date. Any
Existing Notes not accepted for exchange for
any reason will be returned without expense to
the tendering holder thereof as promptly as
practicable after the expiration or termination
of the Exchange Offer.
Certain Conditions to the
Exchange Offer................ Our obligation to accept for exchange, or to
issue Exchange Notes in exchange for, any
Existing Notes is subject to customary
conditions relating to compliance with any
applicable law or any applicable interpretation
by the staff of the Securities and Exchange
Commission, the receipt of any applicable
governmental approvals and the absence of any
actions or proceedings of any governmental
agency or court which could materially impair
our ability to consummate the Exchange Offer.
We currently expect that each of the conditions
will be satisfied and that no waivers will be
necessary. See "The Exchange Offer -- Certain
Conditions to the Exchange Offer."
Procedures for Tendering
Existing Notes................ If you wish to accept the Exchange Offer and
tender your Existing Notes, you must complete,
sign and date the Letter of Transmittal, or a
facsimile thereof, in accordance with its
instructions and the instructions in this
prospectus, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile,
together with such Existing Notes and any other
required documentation, to the Exchange Agent
at the address set forth herein. See "The
Exchange Offer -- Procedures for Tendering
Existing Notes."
Use of Proceeds............... We will not receive any proceeds from the
Exchange Offer.
Exchange Agent................ United States Trust Company of New York is
serving as the Exchange Agent in connection
with the Exchange Offer.
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Federal Income Tax
Consequences.................. The exchange of Notes pursuant to the Exchange
Offer should not be a taxable event for federal
income tax purposes. See "Certain United States
Federal Income Tax Considerations."
CONSEQUENCES OF EXCHANGING EXISTING NOTES PURSUANT TO THE EXCHANGE OFFER
Based on certain interpretive letters issued by the staff of the Securities
and Exchange Commission to third parties in unrelated transactions, we are of
the view that holders of Existing Notes (other than any holder who is an
"affiliate" of our company within the meaning of Rule 405 under the Securities
Act) who exchange their Existing Notes for Exchange Notes pursuant to the
Exchange Offer generally may offer such Exchange Notes for resale, resell such
Exchange Notes and otherwise transfer such Exchange Notes without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided:
- the Exchange Notes are acquired in the ordinary course of the holders'
business;
- the holders have no arrangement with any person to participate in a
distribution of such Exchange Notes; and
- neither the holder nor any other person is engaging in or intends to
engage in a distribution of the Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Existing Notes must acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes. See "Plan of
Distribution." In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the Exchange Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdiction or
in compliance with an available exemption from registration or qualification. We
have agreed, under the Registration Rights Agreement and subject to limitations
specified in the Registration Rights Agreement, to register or qualify the
Exchange Notes for offer or sale under the securities or blue sky laws of such
jurisdictions as any holder of the Notes reasonably requests in writing. If a
holder of Existing Notes does not exchange such Existing Notes for Exchange
Notes according to the terms of the Exchange Offer, such Existing Notes will
continue to be subject to the restrictions on transfer contained in the legend
printed on the Existing Notes. In general, the Existing Notes may not be offered
or sold, unless registered under the Securities Act, except under an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. Holders of Existing Notes do not have any appraisal or
dissenters' rights under the Delaware General Corporation Law in connection with
the Exchange Offer. See "The Exchange Offer -- Consequences of Failure to
Exchange; Resales of Exchange Notes."
The Existing Notes are currently eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages (PORTAL) market.
Following commencement of the Exchange Offer but prior to its completion, the
Existing Notes may continue to be traded in the PORTAL market. Following
completion of the Exchange Offer, the Exchange Notes will not be eligible for
PORTAL trading.
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THE EXCHANGE NOTES
The terms of the Exchange Notes and the Existing Notes are identical in all
material respects, except for certain transfer restrictions and registration
rights relating to the Existing Notes.
Issuer........................ Fairchild Semiconductor Corporation.
Securities Offered............ $300,000,000 aggregate principal amount of
10 3/8% Senior Subordinated Notes Due 2007.
Maturity Date................. October 1, 2007.
Interest Payment Dates........ April 1 and October 1 of each year, commencing
October 1, 1999.
Optional Redemption........... We cannot redeem the Exchange Notes (and any
outstanding Existing Notes) prior to April 1,
2003, except as discussed below. Until April 1,
2002, we can choose to redeem the Notes in an
amount not to exceed 35% of the sum of the
original principal amount of the Notes and the
original principal amount of any other notes
issued under the same Indenture, with money we
raise in certain equity offerings, as long as:
- we pay the holders of the Notes and any such
other notes redeemed a redemption price of
110 3/8% of the principal amount of the Notes
and any such other notes we redeem, plus
accrued interest to the date of redemption;
and
- at least 65% of the original aggregate
principal amount of the Notes and any such
other notes remains outstanding after each
such redemption.
On or after April 1, 2003, we can redeem some
or all of the Notes at the redemption prices
listed in the "Description of the
Notes -- Optional Redemption" section of this
prospectus, plus accrued interest to the date
of redemption.
Special Redemption............ We were required to redeem the Notes at a
redemption price of 100% of the aggregate
principal amount of the Notes, plus accrued
interest to the date of redemption in the event
that (1) the acquisition of the power device
business had not been completed and (2) Samsung
Electronics had not received in cash the full
purchase price, in each case on or prior to
April 23, 1999. The acquisition of the power
device business was completed on April 13,
1999, and Samsung Electronics received in cash
the full purchase price prior to April 23,
1999. See "Description of the Notes -- Escrow
of Proceeds; Special Redemption."
Change of Control............. If a change of control of our company occurs,
subject to certain conditions, we must give
holders of the Notes an opportunity to sell to
us the Notes at a purchase price of 101% of the
principal amount of the Notes, plus accrued
interest. The term "Change of Control" is
defined in the "Description of the
Notes -- Change of Control" section of this
prospectus.
Ranking....................... The Exchange Notes will be unsecured and
subordinated to our existing and future senior
indebtedness. As of May 30, 1999, after giving
pro forma effect to the initial public offering
of Class A Common Stock of Fairchild
International and the application of the
proceeds of such initial public offering, we
7
<PAGE> 12
had approximately $115.4 million of senior
indebtedness outstanding. The Exchange Notes
will rank equally in right of payment with our
outstanding 10 1/8% Senior Subordinated Notes
in an aggregate principal amount of $300.0
million and with any future senior subordinated
indebtedness. The terms "Senior Indebtedness"
and "Senior Subordinated Indebtedness" are
defined in the "Description of the
Notes -- Certain Definitions" section of this
prospectus.
Guaranty...................... The payment of the principal, premium and
interest on the Exchange Notes is fully and
unconditionally guaranteed on a senior
subordinated basis by Fairchild International
and our principal domestic subsidiaries. The
guarantee by Fairchild International and our
principal domestic subsidiaries will be
subordinated to all existing and future senior
indebtedness of Fairchild International and our
principal domestic subsidiaries, respectively,
including their guarantee of our obligations
under our senior credit facilities, and will
rank equally with the existing guaranties of
the 10 1/8% Senior Subordinated Notes.
Fairchild International currently conducts no
business and has no significant assets other
than our capital stock, all of which is pledged
to secure Fairchild International's obligations
under the senior credit facilities. See
"Description of the Notes -- Guaranties."
Restrictive Covenants......... The indenture governing the Existing Notes and
the Exchange Notes, which we refer to
collectively as the Notes, contain covenants
that limit our ability and certain of our
subsidiaries' ability to:
- incur additional indebtedness;
- pay dividends on our capital stock or redeem,
repurchase or retire our capital stock or
subordinated indebtedness;
- make investments;
- engage in transactions with affiliates;
- sell assets, including capital stock of
subsidiaries; and
- consolidate, merge or transfer assets.
These covenants are subject to important
exceptions and qualifications, which are
described in the "Description of the
Notes -- Certain Covenants" section of this
prospectus.
For a more detailed discussion of the Exchange Notes, see "Description of
the Notes."
RISK FACTORS
You should carefully consider all of the information set forth in this
prospectus and, in particular, the information under "Risk Factors," before
deciding to tender your Existing Notes in the Exchange Offer.
8
<PAGE> 13
SUMMARY HISTORICAL, PRO FORMA AND SUPPLEMENTAL DATA
In the tables below, we present unaudited pro forma financial data for
informational purposes only. Since the information in the tables is a summary,
you should read the following tables in conjunction with other information
contained under the caption "Unaudited Pro Forma Combined Condensed Financial
Statement and Unaudited Supplemental Data," and with the financial statements
and related notes and the other financial information contained elsewhere in
this prospectus.
FAIRCHILD
We present below summary historical, pro forma as adjusted and supplemental
data of Fairchild. We derived the historical balance sheet data as of May 30,
1999 and the historical statement of operations data for the years ended May 25,
1997, May 31, 1998 and May 30, 1999, from Fairchild's audited consolidated
financial statements and related notes, which are included elsewhere in this
prospectus. We derived the historical statement of operations data for the year
ended May 26, 1996, from Fairchild's audited consolidated financial statements,
which are not included in this prospectus. We derived the historical financial
data for the year ended May 28, 1995 from Fairchild's unaudited consolidated
financial statements that we prepared on the same basis as Fairchild's audited
consolidated financial statements. In our opinion, the unaudited financial data
include all adjustments (consisting of normal recurring adjustments) that we
consider necessary for a fair presentation of the data.
The unaudited pro forma as adjusted statement of operations data presented
below are based upon unaudited pro forma financial statements for the year ended
May 30, 1999 after giving effect to the acquisition of the power device business
and related transactions as if they had occurred on June 1, 1998, the initial
public offering of Class A Common Stock of Fairchild International and the
application of the proceeds of the initial public offering. The unaudited pro
forma as adjusted balance sheet data presented are based on assumptions that we
believe accurately represent the effect of the initial public offering and the
application of the proceeds of the initial public offering as if they had
occurred on May 30, 1999.
THE POWER DEVICE BUSINESS
We present below summary historical and pro forma data of the power device
business. We derived the historical financial data for the years ended December
31, 1996, 1997 and 1998 from the power device business' audited financial
statements and related notes, which are included elsewhere in this prospectus.
We derived the historical financial data for the twelve months ended March 31,
1999 from the power device business' unaudited financial statements and related
notes, which are not included in this prospectus. The unaudited pro forma data
presented below are based upon unaudited financial statements for the twelve
months ended March 31, 1999 for the power device business and are adjusted to
give pro forma effect to the contracts we entered into with Samsung Electronics
in connection with the acquisition of the power device business, and to
eliminate the historical expenses related to the liabilities that we did not
assume, and the related income tax effect of all pro forma adjustments. The
financial statements of the power device business for the three years ended
December 31, 1998 and the twelve months ended March 31, 1999 have been
translated from South Korean Won into U.S. Dollars, and are presented in
accordance with U.S. GAAP as described in "Selected Historical Financial Data of
the Power Device Business."
RAYTHEON
We present below summary historical data of Raytheon. We derived the
historical financial data for the years ended December 31, 1995, 1996 and 1997
from Raytheon's audited financial statements and related notes. Raytheon's
audited financial statements for the year ended December 31, 1997 are included
elsewhere in this prospectus.
9
<PAGE> 14
FAIRCHILD SEMICONDUCTOR CORPORATION
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MAY 30, 1999
FISCAL YEAR ENDED MAY ---------------------------
------------------------------------ PRO FORMA
1995 1996 1997 1998 HISTORICAL AS ADJUSTED(1)
------ ------- ------- ------- ---------- --------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(2)
Revenue:
Analog.................................. $ -- $ -- $ -- $ 32.0 $ 64.1 $ 64.1
Discrete................................ 116.4 175.0 164.5 187.3 180.3 180.3
Logic................................... 327.7 339.5 285.3 303.0 267.6 267.6
Memory(3)............................... 185.5 174.2 138.0 113.5 67.9 67.9
Power Device............................ -- -- -- -- 74.2 413.4
Contract manufacturing services......... 50.7 87.6 104.2 153.4 81.0 118.6
------ ------- ------- ------- ------- --------
Total revenue............................. $680.3 $ 776.3 $ 692.0 $789.2 $ 735.1 $1,111.9
====== ======= ======= ======= ======= ========
Gross profit(3)........................... $203.8 $ 216.8 $ 152.5 $230.5 $ 152.3 $ 279.5
Research and development.................. 31.0 30.3 18.9 35.7 39.3 52.4
Selling, general and administrative....... 100.3 114.4 96.4 92.0 105.1 161.5
Litigation settlement expense(4).......... -- -- -- -- -- 58.0
Restructuring, impairments, and other
charges(5).............................. -- -- 5.3 15.5 55.3 55.3
------ ------- ------- ------- ------- --------
Operating income (loss)................. $ 72.5 $ 72.1 $ 31.9 $ 87.3 $ (47.4) $ (47.7)
====== ======= ======= ======= ======= ========
OTHER FINANCIAL DATA:
Amortization of intangibles(1)(6)......... $ -- $ -- $ -- $ 1.4 $ 8.4 $ 33.5
Depreciation and other amortization(1).... 44.7 64.2 77.1 83.2 95.3 117.6
Capital expenditures(1)................... 112.9 153.9 47.1 78.0 46.2 52.5
Ratio of earnings to fixed charges(7)..... 75.3x 46.2x 2.9x 1.9x --(8) --(8)
SUPPLEMENTAL DATA:
Adjusted EBITDA(9)........................ $117.2 $ 136.3 $ 128.4 $187.4 $ 127.0 $ 232.1
CASH FLOWS PROVIDED FROM (USED IN):
Operating activities.................... 118.1 162.5 19.1 136.1 44.1
Investing activities.................... (118.1) (162.5) (54.3) (200.5) (474.6)
Financing activities.................... -- -- 75.9 30.2 486.4
</TABLE>
<TABLE>
<CAPTION>
AS OF MAY 30, 1999
-------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents................................... $ 62.4 $ 62.4
Accounts receivable, net.................................... 129.7 129.7
Inventories................................................. 148.6 148.6
Total assets................................................ 1,095.7 1,081.3
Long-term debt, including current portion................... 910.0 715.4
Total stockholder's equity (deficit)(10).................... (6.4) 173.4
</TABLE>
10
<PAGE> 15
POWER DEVICE BUSINESS
<TABLE>
<CAPTION>
YEAR ENDED TWELVE MONTHS ENDED
DECEMBER 31, MARCH 31, 1999
-------------------------- --------------------------
1996 1997 1998 HISTORICAL PRO FORMA(11)
------ ------ ------ ---------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................................... $471.8 $478.1 $386.5 $406.7 $451.0
Gross profit.................................... $ 56.5 $131.0 $137.3 $129.0 $153.4
Research and development........................ 18.6 19.2 15.2 14.8 14.8
Selling, general and administrative............. 29.0 34.3 33.8 36.1 36.5
Litigation settlement expense(4)................ -- -- 58.0 58.0 58.0
------ ------ ------ ------ ------
Operating income................................ $ 8.9 $ 77.5 $ 30.3 $ 20.1 $ 44.1
====== ====== ====== ====== ======
OTHER FINANCIAL DATA:
Adjusted EBITDA(9).............................. $ 57.9 $116.3 $110.6 $100.8 $124.8
CASH FLOWS PROVIDED FROM (USED IN):
Operating activities.......................... 39.4 74.3 128.1
Investing activities.......................... (88.5) (0.1) (5.7)
Financing activities.......................... 28.0 (157.1) (106.8)
Capital expenditures............................ 118.1 10.9 8.6 7.1 7.1
</TABLE>
RAYTHEON SEMICONDUCTOR, INC.(12)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $67.7 $68.4 $78.4
Gross profit................................................ $26.9 $27.2 $33.6
Research and development.................................... 12.2 11.7 12.1
Selling, general and administrative......................... 7.1 7.3 10.1
----- ----- -----
Operating income............................................ $ 7.6 $ 8.2 $11.4
===== ===== =====
OTHER FINANCIAL DATA:
Adjusted EBITDA(9).......................................... $14.7 $14.5 $17.8
CASH FLOWS PROVIDED FROM (USED IN):
Operating activities...................................... 8.4 12.6 13.2
Investing activities...................................... (1.7) (5.3) (2.7)
Financing activities...................................... (7.1) (7.4) (10.6)
Capital expenditures........................................ 1.8 7.4 2.7
</TABLE>
- -------------------------
(1) The pro forma combined financial data includes the pro forma results of
operations for the power device business for the twelve months ended March
31, 1999. The pro forma combined financial data excludes the actual results
of our Power Device Products Group for the period from April 14, 1999 to
May 30, 1999. For the period from April 14, 1999 to May 30, 1999,
amortization of intangibles, depreciation and amortization and capital
expenditures for our Power Device Products Group were $5.0 million, $2.1
million and $0.8 million, respectively.
(2) For the fiscal years ended May 1997 and prior, statement of operations data
includes the direct expense of the Fairchild Semiconductor business of
National Semiconductor and allocated expenses from National Semiconductor.
Such amounts may not be comparable to data for Fiscal 1998 or to the
historical and pro forma data for Fiscal 1999.
11
<PAGE> 16
(3) Revenues and gross profit in Fiscal 1999 were negatively impacted by $5.5
million and $15.4 million, respectively, due to charges for additional
sales and inventory reserves as a result of our Memory division
restructuring. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Fairchild -- Restructuring."
(4) Represents a one-time charge for settlement by Samsung Electronics of a
patent infringement lawsuit attributable to the power device business. The
associated liability is being retained by Samsung Electronics.
(5) In Fiscal 1997, restructuring, impairments and other charges consisted of
severance and other costs related to lay-offs that occurred in the first
quarter of Fiscal 1997. In Fiscal 1998, such charges consisted of
in-process research and development associated with the acquisition of
Raytheon. In Fiscal 1999, such charges consisted of $34.0 million of
in-process research and development associated with the acquisition of the
power device business and $21.3 million related to various restructuring
actions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Fairchild -- Restructuring."
(6) Amortization of intangibles primarily represents the amortization of
identifiable acquisition-related intangible assets.
(7) Earnings consist of income before income taxes plus fixed charges. Fixed
charges consist of interest expense on debt and amortization of deferred
debt issuance costs, and the portion (approximately one-third) of rental
expense that we believe is representative of the interest component of
rental expense.
(8) On a historical and pro forma basis, earnings were inadequate to cover
fixed charges by approximately $107.9 million and $127.5 million,
respectively, for the fiscal year ended May 30, 1999.
(9) Adjusted EBITDA is defined as operating income before other (income)
expense, interest expense, taxes, depreciation, amortization and, in the
case of Fairchild, (a) restructuring, impairments and other charges, (b)
charges of $15.4 million for additional sales and inventory reserves
associated with our Memory division restructuring included in gross profit
in Fiscal 1999 and (c) $14.1 million of retention bonuses in 1997
associated with the recapitalization of National Semiconductor and, in the
case of the power device business, a one-time charge of $58.0 million for
litigation settlement expense associated with the power device business.
Adjusted EBITDA is presented because we believe that EBITDA is a widely
accepted financial indicator of an entity's ability to incur and service
debt. Adjusted EBITDA should not be considered by an investor as an
alternative to net income or income from operations, as an indicator of
our operating performance or other combined operations or cash flow data
prepared in accordance with generally accepted accounting principles, or
as an alternative to cash flows as a measure of liquidity. Our computation
of Adjusted EBITDA may differ from similarly titled computations of other
companies.
(10) Pro forma stockholders' equity as adjusted for the initial public offering
will be reduced by $8.4 million for a one-time write-off of a receivable
from management investors of Fairchild International to pay their federal
and state individual income tax liabilities resulting from the lapse of
risks of forfeiture with respect to their stock ownership of Fairchild
International. Such receivables will be cancelled as a result of a public
offering of the common stock of Fairchild International. Additionally, we
will expense amounts to discharge their individual tax liabilities
associated with the cancellation. Pro forma stockholders' equity as
adjusted for the initial public offering has also been reduced by $6.0
million for the one-time write-off of unamortized debt issuance costs
associated with the debt being repaid, and $0.4 million for a prepayment
premium on the 12.5% Subordinated Note Due 2008. The expenses will reduce
stockholders' equity, but will not have any effect on Adjusted EBITDA.
(11) Pro forma data for the twelve months ended March 31, 1999 has been
presented to be consistent with the pro forma data for Fiscal 1999
presented for Fairchild.
(12) Fairchild purchased Raytheon Semiconductor, Inc. from Raytheon Company on
December 31, 1997.
12
<PAGE> 17
RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus, including the risks described below, which apply to the
Existing Notes as well as the Exchange Notes.
FAILURE TO TENDER YOUR EXISTING NOTES FOR EXCHANGE NOTES COULD LIMIT YOUR
ABILITY TO RESELL THE EXISTING NOTES.
The Existing Notes were not registered under the Securities Act or under
the securities laws of any state and may not be resold, offered for resale or
otherwise transferred unless they are subsequently registered or resold under an
exemption from the registration requirements of the Securities Act and
applicable state securities laws. If you do not exchange your Existing Notes for
Exchange Notes under the Exchange Offer, you will not be able to resell, offer
to resell or otherwise transfer the Existing Notes unless they are registered
under the Securities Act or unless you resell them, offer to resell or otherwise
transfer them under an exemption from the registration requirements of, or in a
transaction not subject to, the Securities Act. In addition, we will no longer
be under an obligation to register the Existing Notes under the Securities Act
except in the limited circumstances provided under the registration rights
agreement. In addition, if you want to exchange your Existing Notes in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes, you may be deemed to have received restricted securities, and,
if so, will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
THE ISSUANCE OF THE EXCHANGE NOTES MAY ADVERSELY AFFECT THE MARKET FOR THE
EXISTING NOTES.
To the extent that Existing Notes are tendered for exchange and accepted in
the Exchange Offer, the trading market for the untendered and tendered but
unaccepted Existing Notes could be adversely affected.
WE HAVE $715.4 MILLION OF TOTAL INDEBTEDNESS AND A DEBT TO EQUITY RATIO OF 4.0
TO 1.0, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR ABILITY
TO GROW AND COMPETE.
On a pro forma basis after giving effect to the initial public offering of
Class A Common Stock of Fairchild International and the application of the
proceeds of the initial public offering, as of May 30, 1999, we would have had
total indebtedness of $715.4 million, stockholder's equity of $173.4 million and
a ratio of debt to equity of 4.1 to 1.0. In addition, we and our subsidiaries
may be able to incur substantial additional indebtedness in the future, which
would increase our leverage.
Our substantial indebtedness:
- will require us to dedicate approximately $14.1 million of our cash flow
to principal payments on our indebtedness during the next fiscal year and
on a pro forma basis after giving effect to the acquisition of the power
device business, the financings in connection with the acquisition, the
application of the proceeds of such financings, the initial public
offering of Class A Common Stock of Fairchild International and the
application of the proceeds of the initial public offering, would have
required us to dedicate approximately $70.9 million of our cash flow to
interest payments on our indebtedness, thereby reducing the availability
of our cash flow to fund working capital, capital expenditures, research
and development efforts and other general corporate purposes;
- increases our vulnerability to general adverse economic and industry
conditions;
- limits our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- restricts us from making strategic acquisitions, introducing new
technologies or exploiting business opportunities; and
- places us at a competitive disadvantage compared to our competitors that
have less debt.
13
<PAGE> 18
See "Description of the Notes," "Capitalization," "Unaudited Pro Forma
Combined Condensed Financial Statements and Unaudited Supplemental Data" and
"Description of Indebtedness."
WE MAY NOT BE ABLE TO GENERATE THE NECESSARY AMOUNT OF CASH TO SERVICE OUR
EXISTING DEBT, WHICH MAY REQUIRE US TO REFINANCE OUR DEBT OR DEFAULT ON OUR
SCHEDULED DEBT PAYMENTS.
On a pro forma basis after giving effect to the acquisition of the power
device business, the financings in connection with the acquisition and the
application of the proceeds of such financings, the initial public offering of
Class A Common Stock of Fairchild International and the application of the
proceeds of the initial public offering, interest expense for Fiscal 1999 would
have been $79.9 million. On a pro forma basis after giving effect to the
acquisition of the power device business, the financings in connection with the
acquisition and the application of the proceeds of such financings, the initial
public offering of Class A Common Stock of Fairchild International and the
application of the proceeds of the initial public offering, our fixed charges
for Fiscal 1999 would have exceeded our earnings by $127.5 million. On a
historical basis, our fixed charges for Fiscal 1999 would have exceeded our
earnings by $107.9 million. Our historical financial results have been, and we
expect our future financial results will be, subject to substantial
fluctuations.
We cannot assure you that our business will generate sufficient cash flow
from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule or at all or that future borrowings
will be available to us under the senior credit facilities in an amount
sufficient to enable us to pay our indebtedness or to fund our other liquidity
needs. In addition, because our senior credit facilities, which represented
approximately 16.1% of our pro forma as adjusted indebtedness as of May 30,
1999, have variable interest rates, the cost of those borrowings will increase
if market interest rates increase. If we are unable to service our indebtedness,
we may need to refinance all or a portion of our indebtedness on or before
maturity. We cannot assure you that we would be able to refinance any of our
indebtedness on commercially reasonable terms or at all, which could cause us to
default on our obligations and impair our liquidity.
See "-- Cyclical Industry," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Fairchild" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Power Device Business."
YOUR RIGHT TO RECEIVE PAYMENTS ON THE EXCHANGE NOTES, LIKE THE EXISTING NOTES,
IS JUNIOR TO OUR AND OUR GUARANTORS' EXISTING SENIOR INDEBTEDNESS AND POSSIBLY
ALL OF OUR AND THEIR FUTURE BORROWINGS. FURTHERMORE, CLAIMS OF CREDITORS OF OUR
NON-GUARANTOR SUBSIDIARIES WILL HAVE PRIORITY WITH RESPECT TO THE ASSETS AND
EARNINGS OF SUCH SUBSIDIARIES OVER YOUR CLAIMS.
The Exchange Notes, like the Existing Notes, Fairchild International's
guaranty and the subsidiary guaranties will be subordinated to the prior payment
in full of our, Fairchild International's and the subsidiary guarantors', as the
case may be, current and future senior indebtedness. As of May 30, 1999, after
giving pro forma effect to the initial public offering of Class A Common Stock
of Fairchild International and the application of the proceeds of such initial
public offering, we would have had approximately $115.4 million of senior
indebtedness, Fairchild International would have had approximately $115.4
million of senior indebtedness (consisting solely of its senior guaranty of our
obligations under the senior credit facilities) and the subsidiary guarantors
would have had approximately $115.4 million of senior indebtedness (consisting
solely of their senior guaranty of our obligations under the senior credit
facilities). The Notes, Fairchild International's guaranty and the subsidiary
guaranties will rank equally with the 10 1/8% Senior Subordinated Notes and the
related guaranties from Fairchild International and the subsidiary guarantors.
Because of the subordination provisions of the Notes, in the event of the
bankruptcy, liquidation or dissolution of our company or any guarantor, our
assets or the assets of the guarantors would be available to pay obligations
under the Notes only after all payments had been made on our or the guarantors'
senior indebtedness. We cannot assure you that sufficient assets will remain
after all such payments have been made to make any payments on the Notes or the
14
<PAGE> 19
10 1/8% Senior Subordinated Notes, including payments of interest when due. The
term "senior indebtedness" is defined in the "Description of the
Notes -- Ranking" section of this prospectus.
We conduct a portion of our business through our subsidiaries. Some of our
domestic subsidiaries and all of our foreign subsidiaries, including Fairchild
Korea, are not guaranteeing the Notes. Less than two-thirds of the capital stock
of Fairchild Korea has been pledged to secure our obligations under the senior
credit facilities. Claims of creditors of our non-guarantor subsidiaries,
including trade creditors, secured creditors and creditors holding indebtedness
or guaranties issued by such subsidiaries, will generally have priority with
respect to the assets and earnings of such subsidiaries over the claims of
creditors of our company, including holders of the Notes, even if the
obligations of such subsidiaries do not constitute senior indebtedness. As of
May 30, 1999, the non-guarantor subsidiaries had approximately $83.5 million of
liabilities and held approximately 57.9% of our consolidated assets. After
giving pro forma effect to the acquisition of the power device business for
fiscal 1999, the non-guarantor subsidiaries generated approximately 71.0% of our
consolidated revenues.
See "Description of the Notes -- Ranking" and "Description of the
Notes -- Certain Covenants -- Limitations on Indebtedness."
OUR DEBT INSTRUMENTS RESTRICT OR PROHIBIT OUR ABILITY TO ENGAGE IN OR ENTER INTO
BUSINESS, OPERATING AND FINANCING ARRANGEMENTS, WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO TAKE ADVANTAGE OF POTENTIALLY PROFITABLE BUSINESS OPPORTUNITIES.
The operating and financial restrictions and covenants in our debt
instruments may limit our ability to finance our future operations or capital
needs or engage in other business activities that may be in our interest. Our
debt instruments impose significant operating and financial restrictions on us,
affecting our ability to incur additional indebtedness or create liens on our
assets, pay dividends, sell assets, engage in mergers or acquisitions, make
investments or engage in other business activities, which could place us at a
disadvantage relative to competitors not subject to such limitations. Failure to
comply with any such restrictions could result in a default under the terms of
our debt instruments. In the event of any such default, our debtholders could
demand payment of all borrowings outstanding, including accrued interest and
other fees. In addition, if we were unable to repay any borrowings under our
senior credit facilities when due, the lenders could proceed against their
collateral, which consists of substantially all of the assets of our company,
Fairchild International and our subsidiary guarantors. If the indebtedness under
our debt instruments were to be accelerated, the value of Fairchild
International's and our common stock would likely decrease significantly.
See "Description of the Notes" and "Description of Indebtedness."
FAIRCHILD INTERNATIONAL, OUR PARENT COMPANY, DOES NOT HAVE ANY RESOURCES TO
SUPPORT ITS GUARANTY OF THE NOTES.
Although Fairchild International has guaranteed the Notes on a senior
subordinated basis, it currently conducts no business and has no significant
assets other than our capital stock. Since all of our capital stock owned by
Fairchild International is pledged to secure Fairchild International's guaranty
of the senior credit facilities, there are currently no assets supporting
Fairchild International's guaranty of the Notes. Fairchild International's
guaranty of the Notes is subordinated in right of payment to the guaranty by
Fairchild International of our obligations under the senior credit facilities.
See "Description of the Notes -- Guaranties."
DOWNTURNS IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY OR CHANGES IN END USER
MARKET DEMANDS COULD REDUCE THE VALUE OF OUR BUSINESS.
The semiconductor industry is highly cyclical and the value of our business
may decline during the "down" portion of these cycles. During the latter half of
Fiscal 1998 and most of Fiscal 1999, we, as well as many others in our industry,
experienced significant declines in the pricing of our products as
15
<PAGE> 20
customers reduced demand forecasts and manufacturers reduced prices to keep
capacity utilization high. We believe these trends were due primarily to the
Asian financial crisis and excess personal computer inventories. We cannot
assure you that the market for semiconductors will improve or that our markets
will not experience additional, possibly more severe and prolonged, downturns in
the future. In addition, we may experience significant changes in our
profitability as a result of variations in sales, changes in product mix, price
competition for orders and the costs associated with the introduction of new
products. The markets for our products depend on continued demand for personal
computer, industrial, telecommunications, consumer electronics and automotive
goods, and these end user markets may experience changes in demand that will
adversely affect our prospects.
NEW TECHNOLOGIES COULD RESULT IN THE DEVELOPMENT OF NEW PRODUCTS AND A DECREASE
IN DEMAND FOR OUR PRODUCTS, AND WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS TO
SATISFY CHANGES IN CONSUMER DEMANDS.
Our failure to develop new technologies, or react to changes in existing
technologies, could materially delay our development of new products, which
could result in decreased revenues and a loss of market share to our
competitors. Rapidly changing technologies and industry standards, along with
frequent new product introductions, characterize the semiconductor industry. Our
financial performance depends on our ability to design, develop, manufacture,
assemble, test, market and support new products and enhancements on a timely and
cost-effective basis. For example, because we do not have a Flash Memory product
which is becoming a more significant product in the memory market, our revenues
from the memory segment of our business have decreased. We cannot assure you
that we will successfully identify new product opportunities and develop and
bring new products to market in a timely and cost-effective manner, or that
products or technologies developed by others will not render our products or
technologies obsolete or noncompetitive. A fundamental shift in technologies in
our product markets could have a material adverse effect on our competitive
position within the industry.
THE SEMICONDUCTOR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD
REDUCE THE VALUE OF AN INVESTMENT IN OUR COMPANY.
The semiconductor industry, and the multi-market semiconductor product
markets in particular, is highly competitive. Competition is based on price,
product performance, quality, reliability and customer service. In addition,
even in strong markets, price pressures may emerge as competitors attempt to
gain a greater market share by lowering prices. Competition in the various
markets in which we participate comes from companies of various sizes, many of
which are larger and have greater financial and other resources than we have and
thus are better able to pursue acquisition candidates and can better withstand
adverse economic or market conditions. In addition, companies not currently in
direct competition with us may introduce competing products in the future.
BECAUSE THE POWER DEVICE BUSINESS PREVIOUSLY OPERATED AS A DIVISION OF SAMSUNG
ELECTRONICS, THE COSTS OF OPERATING THIS BUSINESS AS AN INDEPENDENT ENTITY MAY
BE SIGNIFICANTLY GREATER THAN INITIALLY ESTIMATED.
The operation of the power device business as an independent entity may
result in our incurring operating costs and expenses significantly greater than
we anticipated prior to the acquisition of the power device business. Prior to
our purchase of it, the power device business was operated as a division of
Samsung Electronics. During 1998, the power device business incurred costs for
research and development, sales and marketing and general and administrative
activities. These costs represent expenses incurred directly by the power device
business and charges allocated to it by Samsung Electronics. The power device
business now obtains many of these services on an arm's length basis. However,
to provide these services for a transition period after the acquisition of the
power device business, we entered into a Transitional Services Agreement with
Samsung Electronics under which the power device business continues to obtain a
number of these services. We cannot assure you that upon termination of the
Transitional Services Agreement, we will be able to obtain similar services on
comparable terms. The pro forma data contained in this prospectus are based on
our estimates as to
16
<PAGE> 21
expenses on a stand-alone basis, including the effect of the Transitional
Services Agreement with Samsung Electronics, and contract manufacturing revenue
under our manufacturing agreements with Samsung Electronics. We cannot assure
you that such estimates are accurate or will reflect the actual expenses or
revenues of the power device business.
See "The Acquisition."
WE ENTERED INTO A NUMBER OF LONG-TERM SUPPLY AND SUPPORT CONTRACTS WITH SAMSUNG
ELECTRONICS IN CONNECTION WITH THE ACQUISITION OF THE POWER DEVICE BUSINESS, AND
ANY DECREASE IN THE PURCHASE REQUIREMENTS OF SAMSUNG ELECTRONICS OR THE
INABILITY OF SAMSUNG ELECTRONICS TO MEET ITS CONTRACTUAL OBLIGATIONS COULD
SUBSTANTIALLY REDUCE THE FINANCIAL PERFORMANCE OF OUR KOREAN SUBSIDIARY.
As a result of the acquisition of the power device business, we have
numerous arrangements with Samsung Electronics, including arrangements relating
to product sales, designation as a vendor to affiliated Samsung companies and
other services. Any material adverse change in the purchase requirements of
Samsung Electronics, in its ability to supply the agreed-upon services or in its
ability to fulfill its other obligations could have a material adverse effect on
our Korean subsidiary. Although historically the power device business generated
significant revenues from the sale of products to affiliated Samsung companies,
we cannot assure you that we will be able to sell any products to affiliated
Samsung companies or that the designation of the power device business as a
vendor to those affiliated Samsung companies will generate any revenues for our
company. Furthermore, under the Korean Fair Trade Law, the Fair Trade Commission
may issue an order requiring a change in the terms and conditions of the
agreements between us and Samsung Electronics if it concludes that Samsung
Electronics has provided us with undue support or discriminated against our
competitors.
See "The Acquisition."
THE POWER DEVICE BUSINESS SUBJECTS OUR COMPANY TO RISKS INHERENT IN DOING
BUSINESS IN KOREA, INCLUDING LABOR RISK, POLITICAL RISK AND CURRENCY RISK.
As a result of the acquisition of the power device business, we have
operations in South Korea and are subject to risks associated with doing
business in that country.
- In addition to other risks disclosed relating to international
operations, some businesses in South Korea are presently subject to labor
unrest. Also, relations between South Korea and North Korea have been
tense over most of South Korea's history. Recent events involving, among
other things, North Korea's refusal to comply with the Nuclear
Non-Proliferation Treaty and several naval confrontations, have caused
the level of tension between the two countries to increase. We cannot
assure you as to whether or when this situation will be resolved or
change abruptly as a result of current or future events. An adverse
change in economic or political conditions in South Korea or in its
relations with North Korea could have a material adverse effect on our
Korean subsidiary.
- The power device business' sales are denominated primarily in U.S.
Dollars while a significant portion of its costs of goods sold and its
operating expenses are denominated in Won. Although we have taken steps
to fix the costs subject to currency fluctuations and to balance U.S.
Dollar vs. Won costs, a significant decrease in the value of the U.S.
Dollar relative to the Won could have a material adverse effect on our
financial performance and results of operations.
A CHANGE IN FOREIGN TAX LAWS OR A DIFFERENCE IN THE CONSTRUCTION OF CURRENT
FOREIGN TAX LAWS BY RELEVANT FOREIGN AUTHORITIES COULD RESULT IN OUR NOT
RECOGNIZING THE BENEFITS WE ANTICIPATED IN CONNECTION WITH THE TRANSACTION
STRUCTURE USED TO CONSUMMATE THE ACQUISITION OF THE POWER DEVICE BUSINESS.
The transaction structure we utilized for the acquisition of the power
device business is based on assumptions about the various tax laws, including
withholding tax, and other relevant laws of foreign jurisdictions. In addition,
Fairchild Korea has been granted a ten year tax holiday. The first seven years
17
<PAGE> 22
are tax-free, followed by three years of income taxes at 50% of the statutory
rate. If our assumptions about tax and other relevant laws are incorrect, or if
foreign taxing jurisdictions were to change or modify the relevant laws, or if
Fairchild Korea were to lose its tax holiday, we could suffer adverse tax and
other financial consequences or lose the benefits anticipated from our
transaction structure. For a discussion of the transaction structure, see "The
Acquisition" and "Description of Indebtedness -- Senior Credit Facilities."
OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS NOT FACED BY DOMESTIC
COMPETITORS.
We cannot assure you that we will be successful in overcoming the risks
related to or arising from operating in international markets. We maintain
significant operations in Cebu, the Philippines, Penang, Malaysia and, through
the power device business, in South Korea. The following are risks inherent in
doing business on an international level:
- changes in import duties;
- trade restrictions;
- transportation delays;
- work stoppages;
- economic and political instability;
- foreign currency fluctuations; and
- the laws, including tax laws, and policies of the United States and of
the countries in which we manufacture our products.
PRODUCTION TIME AND THE OVERALL COST OF OUR PRODUCTS COULD INCREASE IF WE WERE
TO LOSE ONE OF OUR PRIMARY SUPPLIERS OR IF A PRIMARY SUPPLIER INCREASED THE
PRICES OF RAW MATERIALS.
Our manufacturing operations depend upon obtaining adequate supplies of raw
materials on a timely basis, and our results of operations could be adversely
affected if we were unable to obtain adequate supplies of raw materials in a
timely manner or if the costs of raw materials increased significantly. We
purchase raw materials such as silicon wafers, lead frames, mold compound,
ceramic packages and chemicals and gases from a limited number of suppliers on a
just-in-time basis. From time to time, suppliers may extend lead times, limit
supplies or increase prices due to capacity constraints or other factors. In
addition, we subcontract a minority of our wafer fabrication and assembly and
test operations to other manufacturers, including Torex, NS Electronics Ltd.,
Samsung Electronics and National Semiconductor. Our operations and ability to
satisfy customer obligations could be adversely affected if our relationships
with these subcontractors were disrupted or terminated.
DELAYS IN BEGINNING PRODUCTION AT NEW FACILITIES, IMPLEMENTING NEW PRODUCTION
TECHNIQUES, OR IN CURING PROBLEMS ASSOCIATED WITH TECHNICAL EQUIPMENT
MALFUNCTIONS ALL COULD ADVERSELY AFFECT OUR MANUFACTURING EFFICIENCIES.
Our manufacturing efficiency will be an important factor in our future
profitability, and we cannot assure you that we will be able to maintain our
manufacturing efficiency or increase manufacturing efficiency to the same extent
as our competitors. Our manufacturing processes are highly complex, require
advanced and costly equipment and are continuously being modified in an effort
to improve yields and product performance. Impurities or other difficulties in
the manufacturing process can lower yields.
In addition, as is common in the semiconductor industry, we have from time
to time experienced difficulty in beginning production at new facilities or in
effecting transitions to new manufacturing processes. As a consequence, we have
suffered delays in product deliveries or reduced yields. We may experience
manufacturing problems in achieving acceptable yields or experience product
delivery delays in the future as a result of, among other things, capacity
constraints, construction delays, upgrading or expanding existing facilities or
changing our process technologies, any of which could result in a loss of
18
<PAGE> 23
future revenues. Our operating results could also be adversely affected by the
increase in fixed costs and operating expenses related to increases in
production capacity if revenues do not increase proportionately.
THE FAILURE OF NATIONAL SEMICONDUCTOR TO MAINTAIN ITS PURCHASE REQUIREMENTS OR
MEET ITS CONTRACTUAL OBLIGATIONS COULD ADVERSELY AFFECT OUR CAPACITY UTILIZATION
AND PROFITABILITY.
We have several arrangements with National Semiconductor relating to the
provision of our services and the sale of our products. Any material adverse
change in the arrangements, such as National Semiconductor's ability to provide
the agreed-upon services, its ability to fulfill its intellectual property
indemnity obligations or its ability to fulfill its other obligations, could
have a material adverse effect on us. In addition, any material adverse change
in the purchase requirements of National Semiconductor under the foundry
services agreement, or failure to continue making purchases after expiration of
the agreement on June 11, 2000, could adversely affect our factory utilization
and profitability.
BECAUSE A LIMITED NUMBER OF PERSONS, INCLUDING MEMBERS OF OUR MANAGEMENT TEAM,
OWNS A MAJORITY OF SHARES OF OUR PARENT COMPANY AND THEREFORE INDIRECTLY
CONTROLS OUR COMPANY, DECISIONS MAY BE MADE BY THEM THAT MAY BE DETRIMENTAL TO
YOUR INTERESTS.
Sterling Holding Company, LLC and some of the key employees of our company
own 23,788,013 shares, or approximately 43.4%, of the outstanding Class A Common
Stock of our parent company, Fairchild International, the only class of voting
stock, and 28,396,000 shares of Class B Common Stock of Fairchild International
which are convertible into shares of Class A Common Stock on a one-to-one basis.
By virtue of such stock ownership, such persons have the power to direct our
affairs and are able to determine the outcome of matters required to be
submitted to stockholders for approval, including the election of a majority of
our directors and amendment of our Certificate of Incorporation. We cannot
assure you that such persons will not exercise their control over us in a manner
detrimental to your interests.
BECAUSE MUCH OF OUR SUCCESS AND VALUE LIES IN OUR OWNERSHIP AND USE OF
INTELLECTUAL PROPERTY, OUR FAILURE TO PROTECT THAT PROPERTY COULD ADVERSELY
AFFECT OUR FUTURE GROWTH AND CONTINUED SUCCESS.
Failure to protect our existing intellectual property rights may result in
our losing valuable technologies or having to pay others for infringing on their
intellectual property rights. We rely on patent, trade secret, trademark and
copyright law to protect such technologies. Some of our technologies are not
covered by any patent or patent application, and we cannot assure you that:
- any of the more than 250 U.S. patents owned by us or numerous other
patents which third parties license to us will not be invalidated,
circumvented, challenged or licensed to others; or
- any of our pending or future patent applications will be issued within
the scope of the claims sought by us, if at all.
In addition, effective patent, trademark, copyright and trade secret
protection may be unavailable, limited or not applied for in certain foreign
countries.
We also seek to protect our proprietary technologies, including
technologies that may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventors' rights agreements with our
collaborators, advisors, employees and consultants. We cannot assure you that
these agreements will not be breached, that we will have adequate remedies for
any breach or that such persons or institutions will not assert rights to
intellectual property arising out of such research. Certain of our technologies
have been licensed on a non-exclusive basis from National Semiconductor which
may license such technologies to others, including, commencing on March 11,
2002, our competitors. In addition, under a technology licensing and transfer
agreement, National Semiconductor has limited royalty-free, worldwide license
rights (without right to sublicense) to some of our technologies. If necessary
or desirable, we may seek licenses under patents or intellectual property rights
claimed by others. However, we cannot assure you that we will obtain such
licenses or that the terms of any offered
19
<PAGE> 24
licenses will be acceptable to us. The failure to obtain a license from a third
party for technologies we use could cause us to incur substantial liabilities
and to suspend the manufacture or shipment of products or our use of processes
requiring the technologies.
OUR FAILURE TO OBTAIN OR MAINTAIN THE RIGHT TO USE CERTAIN TECHNOLOGIES MAY
NEGATIVELY AFFECT OUR FINANCIAL RESULTS.
Our future success and competitive position depend in part upon our ability
to obtain or maintain certain proprietary technologies used in our principal
products, which is achieved in part by defending claims by our competitors of
intellectual property infringement. While we are not currently engaged in any
material intellectual property litigation, we could become subject to lawsuits
in which it is alleged that we have infringed upon the intellectual property
rights of others. Our involvement in intellectual property litigation could
result in significant expense to us, adversely affecting sales of the challenged
product or technologies and diverting the efforts of our technical and
management personnel, whether or not such litigation is resolved in our favor.
In the event of an adverse outcome as a defendant in any such litigation, we may
be required to:
- pay substantial damages;
- cease the manufacture, use, sale or importation of infringing products;
- expend significant resources to develop or acquire non-infringing
technologies;
- discontinue processes; or
- obtain licenses to the infringing technologies.
We cannot assure you that we would be successful in such development or
acquisition or that such licenses would be available under reasonable terms. Any
such development, acquisition or license could require the expenditure of
substantial time and other resources.
WE MAY NOT BE ABLE TO CONSUMMATE FUTURE ACQUISITIONS, AND CONSEQUENCES OF THOSE
ACQUISITIONS WHICH WE DO COMPLETE MAY ADVERSELY AFFECT US.
We plan to continue to pursue additional acquisitions of related
businesses. The expense incurred in consummating the future acquisition of
related businesses, or our failure or inability to integrate such businesses
successfully into our existing business, could result in our incurring
unanticipated expenses and losses. We plan to continue to pursue additional
acquisitions of related businesses in the future. We cannot assure you, however,
that we will be able to identify or finance additional acquisitions or that, if
consummated, we will realize any anticipated benefits from such acquisitions.
Should we successfully acquire another business, the process of integrating
acquired operations into our existing operations may result in unforeseen
operating difficulties and may require significant financial resources that
would otherwise be available for the ongoing development or expansion of our
existing operations. In addition, although Samsung Electronics assists us in
integrating the operations of the power device business into our operations
pursuant to the Transitional Services Agreement, we may encounter unforeseen
obstacles or costs in such integration. Possible future acquisitions could
result in the incurrence of additional debt, contingent liabilities and
amortization expenses related to goodwill and other intangible assets, all of
which could have a material adverse effect on our financial condition and
operating results.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE A CHANGE OF
CONTROL OFFER.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding notes, including the
Notes and the 10 1/8% Senior Subordinated Notes. The senior credit facilities
will prohibit us from purchasing any notes and will also provide that the
occurrence of certain kinds of change of control events will constitute a
default. In the event of a certain kind of change of control, we must offer to
repay all borrowings under the senior credit facilities or
20
<PAGE> 25
obtain the consent of our lenders under the senior credit facilities to the
purchase of notes. If we do not obtain such a consent or repay such borrowings,
we will remain prohibited from purchasing notes. In such case, our failure to
purchase tendered notes would constitute a default under the indenture governing
the Notes and the indenture governing our 10 1/8% Senior Subordinated Notes,
which, in turn, would constitute a default under the senior credit facilities.
We cannot assure you that we will have the financial ability to purchase
outstanding notes upon the occurrence of a change of control.
See "Description of the Notes -- Change of Control."
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM GUARANTORS.
Under federal bankruptcy law and comparable provisions of state fraudulent
transfer laws, a guaranty could be voided, or claims in respect of a guaranty
could be subordinated to all other debts of that guarantor if, among other
things, the guarantor, at the time it incurred the indebtedness evidenced by its
guaranty:
- received less than reasonably equivalent value or fair consideration for
its guaranty; and
- was insolvent or was rendered insolvent by reason of such incurrence; or
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by such guarantor pursuant to its guaranty could
be voided and required to be returned to such guarantor, or to a fund for the
benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets;
- the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE EXCHANGE
NOTES.
The Existing Notes are currently eligible for trading in the PORTAL market.
The Exchange Notes are new securities for which there is no established market.
We do not intend to list the Exchange Notes on any national securities exchange
or to seek the admission thereof to trading in the National Association of
Securities Dealers Automated Quotation System. Credit Suisse First Boston,
Morgan Stanley Dean Witter, Fleet Securities, Inc. and Salomon Smith Barney Inc.
acted as initial purchasers in connection with the offer and sale of the
Existing Notes. Each of the Initial Purchasers (other than Salomon Smith Barney
Inc.) has informed us that they intend to make a market in the Notes. However,
such initial purchasers may cease their market-making at any time. In addition,
the liquidity of the trading market in the Exchange Notes, and the market price
quoted for the Exchange Notes, may be adversely affected by changes in the
overall market for high yield securities and by changes in our financial
performance or prospects or in the prospects for companies in our industry
generally. As a result, we cannot assure you that an active trading market will
develop for the Exchange Notes.
21
<PAGE> 26
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. These statements
relate to analyses and other information which are based on forecasts of future
results and estimates of amounts not yet determinable. These statements also
relate to our future prospects, developments and business strategies.
These forward-looking statements are identified by their use of terms and
phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained in
sections entitled "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Fairchild,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Power Device Business," "Business" and other sections of this
prospectus.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, but are not limited to, the following: the
integration of the acquired power device business without disruption to
manufacturing, marketing and distribution activities; changes in general
economic and business conditions; changes in current pricing levels; changes in
political, social and economic conditions and local regulations; foreign
currency fluctuations; reductions in sales to any significant customers; changes
in sales mix; industry capacity; competition; disruptions of established supply
channels; manufacturing capacity constraints; the availability, terms and
deployment of capital; and our ability to accurately estimate the cost of
systems preparation and successfully implement for year 2000 compliance. Our
risks are more specifically described in the "Risk Factors" section of this
prospectus. If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, our actual results may vary materially
from those expected, estimated or projected.
We do not undertake to update our forward-looking statements or risk
factors to reflect future events or circumstances.
22
<PAGE> 27
SOURCES AND USES OF PROCEEDS
We will not receive any proceeds from the Exchange Offer. In consideration
for issuing the Exchange Notes, we will receive in exchange Existing Notes of
like principal amount, the terms of which are identical in all material respects
to the Exchange Notes. The Existing Notes surrendered in exchange for Exchange
Notes will be retired and canceled and cannot be reissued. Accordingly, issuance
of the Exchange Notes will not result in any increase in our indebtedness. We
have agreed to bear the expenses of the Exchange Offer. No underwriters are
being used in connection with the Exchange Offer.
We used the gross proceeds from the sale of the Existing Notes of $300.0
million, together with the $310.0 million from borrowings under the senior term
facilities, and a $50.0 million cash equity contribution to us from Fairchild
International as follows: (i) approximately $414.9 million to pay for the
purchase price of the power device business, including acquisition fees and
expenses, (ii) approximately $200.6 million to repay our existing senior credit
facilities, (iii) approximately $25.1 million to pay fees and expenses relating
to the financings in connection with the acquisition and the application of the
proceeds of the financings and (iv) approximately $19.4 million to fund our
working capital needs and to pay Korean value added tax in connection with the
acquisition of the power device business.
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<PAGE> 28
CAPITALIZATION
The following table sets forth the capitalization of our company as of May
30, 1999 (i) on an actual basis and (ii) as adjusted to give pro forma effect to
the initial public offering of Fairchild International's Class A Common Stock
and the application of the proceeds of its initial public offering. This table
should be read in conjunction with "Unaudited Pro Forma Combined Condensed
Financial Statement and Unaudited Supplemental Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Fairchild,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Power Device Business" and the financial statements of
Fairchild and the power device business included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF MAY 30, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents................................... $ 62.4 $ 62.4
====== ======
Long-term debt, including current portion:
Senior Credit Facilities:
Revolving Credit Facility(1)........................... $ -- $ --
Tranche A Facility(2).................................. 100.0 --
Tranche B Facility(2).................................. 210.0 115.4
10 1/8% Senior Subordinated Notes Due 2007(3)............. 300.0 300.0
10 3/8% Senior Subordinated Notes Due 2007................ 300.0 300.0
------ ------
Total long-term debt, including current portion...... 910.0 715.4
------ ------
Stockholder's Equity:
Common stock $.01 par value (1,000 shares authorized,
100 shares issued and outstanding actual and pro
forma).............................................. -- --
Additional paid-in capital............................. 62.0 256.6
Accumulated earnings (deficit)......................... (68.4) (83.2)
------ ------
Total stockholder's equity (deficit)(4).............. (6.4) 173.4
------ ------
Total capitalization.............................. $903.6 $888.8
====== ======
</TABLE>
- -------------------------
(1) Borrowings of up to $100.0 million under the revolving credit facility are
available for working capital and general corporate purposes.
(2) The outstanding indebtedness repaid with a portion of the proceeds of the
initial public offering included $194.6 million under our senior credit
facilities allocated as follows: $100.0 million of a tranche A term loan
that matures on March 31, 2004 and $94.6 million of tranche B term loan that
matures on December 15, 2004. At May 30, 1999, the weighted average interest
rate with respect to the tranche A term loan and the tranche B term loan was
approximately 8.0% per annum. The actual amount repaid was reduced by
$55,800 per day, the sum of accrued interest and prepayment premium on the
12.5% Subordinated Note Due 2008 per day and accrued interest on the 11.74%
Subordinated Note Due 2008 per day, until the closing of the initial public
offering.
(3) We must redeem $150.0 million principal amount of the 10 1/8% Senior
Subordinated Notes on March 15, 2005 and $75.0 million principal amount on
March 15, 2006, in each case at a redemption price of 100% of the principal
amount plus accrued interest to the date of redemption.
(4) Pro forma stockholders' equity as adjusted for the offering has been reduced
by $8.4 million for a one-time write-off of a receivable from the management
investors to pay their federal and state individual income tax liabilities
resulting from the lapse of risks of forfeiture with respect to their stock
ownership. Such receivables will be cancelled as a result of this offering.
Additionally, we will expense amounts to discharge their individual tax
liabilities associated with the cancellation. Pro forma stockholders' equity
as adjusted for the offering has also been reduced by $6.0 million for the
one-time write-off of unamortized debt issuance costs associated with the
debt being repaid, and $0.4 million for a prepayment-premium on the 12.5%
Subordinated Note Due 2008. These expenses will reduce stockholders' equity,
but will not have any effect on Adjusted EBITDA.
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<PAGE> 29
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENT
The following unaudited pro forma combined condensed financial statement is
based on the historical financial statements of Fairchild, which are included
elsewhere in this prospectus, and historical unaudited financial statements of
the power device business, which are not included in this prospectus. The
acquisition of the power device business was consummated on April 13, 1999 and,
accordingly, Fairchild's historical consolidated statements of operations
include the results of operations of the power device business beginning April
14, 1999.
The Unaudited Pro Forma Combined Condensed Statement of Operations gives
effect to the acquisition of the power device business, the financings in
connection with the acquisition, the application of the proceeds of such
financings, the initial public offering of Class A Common Stock of Fairchild
International and the application of the proceeds of the initial public offering
as if they were consummated on June 1, 1998. All of the pro forma adjustments
are described more fully in the accompanying notes. The pro forma adjustments
are based upon preliminary estimates and assumptions that we believe are
reasonable under the circumstances. In our opinion, all adjustments have been
made that are necessary to present fairly the pro forma data. Final amounts
could differ from those set forth below.
The Unaudited Pro Forma Combined Condensed Statement of Operations for the
fiscal year ended May 30, 1999 includes the historical statements of operations
of the power device business for the twelve months ended March 31, 1999.
Accordingly, the post-acquisition results of operations of our Power Device
Products Group for the period from April 14, 1999 through May 30, 1999 have been
excluded in the Unaudited Pro Forma Combined Condensed Statement of Operations
for the fiscal year ended May 30, 1999.
The power device business' historical financial information reflected in
the pro forma financial statement represents the accounts and operations of
Samsung Electronics with respect to the power device business. During the period
covered by the power device business' financial statements, the power device
business was conducted as a part of Samsung Electronics' overall operations, and
separate financial statements were not prepared. Fairchild has been advised by
Samsung Electronics that the power device business' financial statements were
prepared from the historical accounting records of Samsung Electronics and
include various allocations for costs and expenses. Therefore, the statements of
operations of the power device business may not be indicative of the results of
operations that would have resulted if the power device business had operated on
a stand-alone basis. Fairchild has been advised by Samsung Electronics that all
of the allocations and estimates reflected in the power device business'
financial statements are based on assumptions that Samsung Electronics believes
are reasonable under the circumstances.
The pro forma financial statement is presented for informational purposes
only and does not purport to be indicative of the results of operations that
actually would have been achieved had such transactions been consummated on the
dates or for the periods indicated, or results of operations as of any future
date or for any future period. The pro forma financial statement should be read
in conjunction with the accompanying notes, the financial statements and notes
thereto of Fairchild and the power device business which are included elsewhere
in this prospectus, "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Fairchild" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Power Device
Business."
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<PAGE> 30
FAIRCHILD SEMICONDUCTOR CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 30, 1999
-----------------------------------------------------------------------------
HISTORICAL
POWER POWER
POWER DEVICE POWER DEVICE
DEVICE BUSINESS DEVICE BUSINESS
BUSINESS PRO FORMA BUSINESS FAIRCHILD POST- PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ACQUISITION ADJUSTMENTS
---------- ----------- --------- ---------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenue
Net sales-trade................... $390.4 $ 12.2(1a) $413.4 $ 654.1 $(74.2) $ --
10.8(1b)
Contract manufacturing............ 16.3 21.3(1c) 37.6 81.0 -- --
------ ------ ------ ------- ------ ------
406.7 44.3 451.0 735.1 (74.2) --
Cost of sales
Cost of sales-trade............... 261.4 6.9(1a) 281.3 518.4 (49.7) 1.7(2a)
10.0(1d)
1.7(1e)
1.2(1f)
0.1(1g)
Cost of contract manufacturing.... 16.3 -- 16.3 64.4 -- --
------ ------ ------ ------- ------ ------
277.7 19.9 297.6 582.8 (49.7) 1.7
------ ------ ------ ------- ------ ------
Gross profit........................ 129.0 24.4 153.4 152.3 (24.5) (1.7)
Research and development............ 14.8 -- 14.8 39.3 (1.7) --
Selling, general and
administrative.................... 36.1 13.0(1a) 36.5 105.1 (10.2) 30.1(2a)
(7.3)(1d)
0.4(1e)
(5.7)(1h)
Litigation settlement expense....... 58.0 -- 58.0 -- -- --
Restructuring, impairments and other
charges........................... -- -- -- 55.3 -- --
------ ------ ------ ------- ------ ------
Operating income (loss)............. 20.1 24.0 44.1 (47.4) (12.6) (31.8)
Non-cash interest expense........... -- -- -- 8.3 -- 1.8(2b)
Cash interest expense, net.......... 4.0 (4.0)(1i) -- 52.2 (6.7) 40.5(2c)
Foreign currency gains, net......... (0.1) -- (0.1) -- -- --
------ ------ ------ ------- ------ ------
Income (loss) before income taxes... 16.2 28.0 44.2 (107.9) (5.9) (74.1)
Income taxes (benefits)............. 15.7 (15.7)(1j) -- (5.2) -- --(2d)
------ ------ ------ ------- ------ ------
Net income (loss)................... $ 0.5 $ 43.7 $ 44.2 $(102.7) $ (5.9) $(74.1)
====== ====== ====== ======= ====== ======
<CAPTION>
FISCAL YEAR ENDED MAY 30, 1999
-------------------------------------
INITIAL
PUBLIC
FAIRCHILD OFFERING PRO FORMA
PRO FORMA ADJUSTMENTS AS ADJUSTED
--------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenue
Net sales-trade................... $ 993.3 $ -- $ 993.3
Contract manufacturing............ 118.6 -- 118.6
-------- ------- --------
1,111.9 -- 1,111.9
Cost of sales
Cost of sales-trade............... 751.7 -- 751.7
Cost of contract manufacturing.... 80.7 -- 80.7
-------- ------- --------
832.4 -- 832.4
-------- ------- --------
Gross profit........................ 279.5 -- 279.5
Research and development............ 52.4 -- 52.4
Selling, general and
administrative.................... 161.5 -- 161.5
Litigation settlement expense....... 58.0 -- 58.0
Restructuring, impairments and other
charges........................... 55.3 -- 55.3
-------- ------- --------
Operating income (loss)............. (47.7) -- (47.7)
Non-cash interest expense........... 10.1 (1.1)(3a) 9.0
Cash interest expense, net.......... 86.0 (15.1)(3b) 70.9
Foreign currency gains, net......... (0.1) -- (0.1)
-------- ------- --------
Income (loss) before income taxes... (143.7) 16.2 (127.5)
Income taxes (benefits)............. (5.2) --(2d) (5.2)
-------- ------- --------
Net income (loss)................... $ (138.5) $ 16.2 $ (122.3)
======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statement of
operations.
26
<PAGE> 31
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
THE UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS GIVE EFFECT
TO THE FOLLOWING PRO FORMA ADJUSTMENTS:
1. PRO FORMA ADJUSTMENTS TO THE HISTORICAL RESULTS OF THE POWER DEVICE
BUSINESS.
(a) Historically, the power device business has recognized revenue for sales to
Samsung Electronics' foreign sales subsidiaries at the time of shipment to
such subsidiaries. The pro forma adjustment to net sales eliminates the
sales to the foreign sales subsidiaries of Samsung Electronics from the
revenue of the power device business and replaces them with the sales of
such subsidiaries to the ultimate third parties. Cost of sales is also
adjusted to reflect the change in the inventory held by the foreign sales
subsidiaries of Samsung Electronics. Historically, the selling expenses
incurred by the foreign sales subsidiaries of Samsung Electronics in
connection with their sales to third parties have been recorded by such
subsidiaries. The power device business' selling, general and
administrative expenses have been adjusted to give effect to the provisions
of the Overseas Sales Support Agreement, which provides for commissions to
be paid to the foreign sales subsidiaries of Samsung Electronics to provide
sales services to the power device business.
The pro forma increases to net sales, cost of sales and SG&A expenses are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MAY 30, 1999
------------
(IN
MILLIONS)
<S> <C>
Net sales -- trade.......................................... $12.2
Cost of sales -- trade...................................... 6.9
SG&A........................................................ 13.0
</TABLE>
(b) Historically, the power device business has sold its products to Samsung
Electronics at intercompany transfer prices. Under the terms of the Product
Supply Agreement, the power device business will sell its products to
Samsung Electronics at guaranteed minimum annual levels based on historical
volumes and at prices designed to reflect market prices, subject to
adjustments to reflect changes in market prices as published by Worldwide
Semiconductor Trade Statistics. In order to give effect to the minimum
contractual volumes over historical levels and the pricing structure under
the Product Supply Agreement, the pro forma net sales are increased by
$10.8 million for the fiscal year ended May 30, 1999.
(c) The pro forma adjustment to contract manufacturing revenue is $21.3 million
for the fiscal year ended May 30, 1999. This amount reflects the increase
in contract manufacturing revenue that will be required to generate the
minimum profit level guaranteed by Samsung Electronics under the Foundry
Sale Agreement of W53,700 million during the first three years following
consummation of the acquisition of the power device business (W27,700
million, W17,300 million and W8,700 million for the first, second and third
years, respectively). Historically, the power device business has provided
these contract manufacturing services, consisting of wafer fabrication
services, to Samsung Electronics at cost. The U.S. Dollar-denominated pro
forma adjustment has been recorded using the weighted average exchange rate
of 1,300 Won to one U.S. Dollar for the fiscal year ended May 30, 1999.
27
<PAGE> 32
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS -- (CONTINUED)
(d) Historically, the power device business has been charged at cost for
epitaxial fabrication services, assembly and test services and photo mask
supply services provided by Samsung Electronics' plants located in Onyang
and Kiheung, South Korea. Under the terms of the EPI Services Agreement,
the Onyang Assembly and Test Services Agreement and the Photo Mask Supply
Agreement, Samsung Electronics has agreed to provide the power device
business with these services for a three-year period following consummation
of the acquisition of the power device business at agreed-upon prices
denominated in U.S. Dollars in accordance with the terms of the above
agreements. In the case of the Onyang Assembly and Test Services Agreement,
the agreement provides for a 5% annual price decrease. The pro forma
adjustment reflects the effects of (i) replacing the actual historical
costs of these services with the negotiated costs of these services, which
negotiated costs include recovery of general and administrative and
interest costs attributable to these plants recorded in SG&A for the power
device business, based on historical product volumes and (ii) eliminating
the portion of historically allocated SG&A expenses to be included in such
negotiated costs.
The pro forma increases (decreases) to cost of sales and SG&A expenses are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MAY 30, 1999
---------------------
(IN MILLIONS)
<S> <C>
Cost of sales -- trade...................................... $10.0
SG&A........................................................ (7.3)
</TABLE>
(e) Historically, the power device business has been allocated charges for
information technology services, logistics and other general and
administrative services which were provided by Samsung Electronics. Under
the terms of the Transitional Services Agreement, Samsung Electronics has
agreed to provide to the power device business logistics and other general
and administrative services for a three-year period, at the fixed annual
price of $5.3 million. Information technology services are provided under a
separate agreement with Samsung SDS Co., Ltd. at the fixed annual price of
$3.8 million. The pro forma adjustments to cost of sales and SG&A expenses
reflect the effects of replacing the historical charges for such services
with the fixed prices included in the Transitional Services Agreement and
the agreement with Samsung SDS Co., Ltd. In addition, the pro forma
adjustment includes the effect of a fixed 1,200 Won to one U.S. Dollar
exchange rate used to translate the fixed charges included in the
Transitional Services Agreement and the agreement with Samsung SDS Co.,
Ltd.
The pro forma increases to cost of sales relating to information technology
services and SG&A expenses relating to logistics and other general and
administrative services are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MAY 30, 1999
---------------------
(IN MILLIONS)
<S> <C>
Cost of sales -- trade...................................... $1.7
SG&A........................................................ 0.4
</TABLE>
28
<PAGE> 33
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS -- (CONTINUED)
(f) Sales of particular MOSFET products, which are produced by the power
device business, will be subject to royalties arising from Fairchild's
existing license agreement with another semiconductor corporation. The pro
forma increase to cost of sales to give effect to such royalties is $1.2
million for the fiscal year ended May 30, 1999.
(g) Historically, the power device business has been charged at cost for
assembly and test services provided by Samsung Electronics' plant located
in Suzhou, China. Under the terms of the Suzhou Assembly and Test Services
Agreement, Samsung Electronics has agreed to provide the power device
business with assembly and test services for a three-year period following
consummation of the acquisition of the power device business at agreed-upon
prices denominated in U.S. Dollars. The pro forma adjustments reflect the
effects of replacing the actual historical costs of these services with the
negotiated costs of these services based on historical product volumes.
Although the Suzhou Assembly and Test Services Agreement provides for
annual price adjustments based upon the percentage change in the U.S.
Consumer Price Index, the pro forma adjustments do not give effect to such
price adjustments. The pro forma increase to cost of sales is $0.1 million
for the fiscal year ended May 30, 1999.
(h) Represents the elimination of royalty expense incurred by Samsung
Electronics attributable to the power device business which arises from
license agreements that were not transferred to Fairchild. This results in
a decrease to SG&A expense of $5.7 million for the fiscal year ended May
30, 1999.
(i) The pro forma adjustment to cash interest expense is $4.0 million for the
fiscal year ended May 30, 1999. This amount represents the elimination of
interest expense on bank borrowings, capital lease obligations and
corporate borrowings of Samsung Electronics allocated to the power device
business that were not transferred to Fairchild.
(j) The pro forma adjustment for the elimination of income taxes is $15.7
million for the fiscal year ended May 30, 1999. As a result of the
acquisition of the power device business, the power device business is
100% exempt from Korean income taxes for seven years beginning with the
first year in which taxable Korean income is generated.
2. PRO FORMA ADJUSTMENTS TO THE COMBINED RESULTS OF FAIRCHILD AND THE POWER
DEVICE BUSINESS.
(a) On April 13, 1999, Fairchild completed the acquisition of the power device
business for approximately $414.9 million. The purchase includes all of the
worldwide operations and assets of the power device business, which are
comprised in part of a high volume wafer fabrication plant in Bucheon,
South Korea, design and development operations in Bucheon, South Korea,
secured services for high volume assembly and test operations and worldwide
sales and marketing operations. The transaction is being accounted for as a
purchase.
The following table represents the allocation of the purchase price over
the historical net book value of the power device business' assets acquired
and liabilities assumed as of April 13, 1999. Also presented are the
amortization periods for each of the identifiable intangible assets for
purposes of calculating the pro forma adjustments to amortization expense
in the accompanying pro forma condensed consolidated statement of
operations. All intangible assets are being
29
<PAGE> 34
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS -- (CONTINUED)
amortized on a straight-line basis. The amount allocated to in-process
research and development was charged to expense in our fourth fiscal
quarter ended May 30, 1999.
<TABLE>
<CAPTION>
PERIOD OF
INTANGIBLE ASSETS AMOUNT AMORTIZATION
----------------- ------------- ------------
(IN MILLIONS)
<S> <C> <C>
Developed technology....................................... $140.9 15 years
Customer base.............................................. 53.9 8 years
In-process research and development........................ 34.0 --
Covenant not to compete.................................... 30.8 5 years
Trademarks and tradenames.................................. 25.1 4 years
Assembled workforce........................................ 4.8 3 years
------
Total................................................. $289.5
======
</TABLE>
Pro forma adjustments for depreciation and amortization of fixed assets and
other intangible assets are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MAY 30, 1999
-------------
(IN MILLIONS)
<S> <C>
Intangibles -- recorded in SG&A............................. $30.1
Fixed assets -- recorded in cost of sales-trade............. 1.7
</TABLE>
(b) In connection with the acquisition of the power device business, the
financings in connection with the acquisition and the application of the
proceeds of such financings, we incurred debt issuance costs of
approximately $22.3 million associated with the senior credit facilities
and the 10 3/8% Senior Subordinated Notes. These costs are comprised
primarily of financing costs and other professional fees that will be
deferred and amortized over the term of the related debt, which ranges from
5 to 8 1/2 years. The pro forma adjustment to non-cash interest expense
represents the incremental amortization of these debt issuance costs in the
amount of $1.8 million for the fiscal year ended May 30, 1999.
(c) In connection with the acquisition of the power device business, we entered
into the senior credit facilities, which provided up to $410.0 million in
financing, consisting of a $100.0 million revolving credit facility (under
which no amounts were drawn at closing of the acquisition of the power
device business) and $310.0 million of senior term facilities. We also
issued $300.0 million of 10 3/8% Senior Subordinated Notes Due 2007.
30
<PAGE> 35
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS -- (CONTINUED)
The pro forma increase to cash interest expense is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MAY 30, 1999
-------------
(IN MILLIONS)
<S> <C>
Senior Term Facilities -- Tranche A Facility (7.75%)........ $ 7.5
Senior Term Facilities -- Tranche B Facility (8.25%)........ 17.3
Notes (10.375%)............................................. 31.1
Interest expense on debt refinanced......................... (15.4)
------
Total.................................................. $ 40.5
======
</TABLE>
The senior term facilities bear interest at adjustable rates based on a
spread over LIBOR. An increase of 0.125% in the rate applicable to the
senior term facilities will increase interest expense and reduce net income
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MAY 30, 1999
-------------
(IN MILLIONS)
<S> <C>
Interest expense............................................ $ 0.4
=====
Net income.................................................. $(0.3)
=====
</TABLE>
(d) There is no pro forma adjustment for income taxes, as Fairchild has a net
operating loss and has fully reserved net operating loss carryforwards.
3. PRO FORMA ADJUSTMENTS MADE TO THE COMBINED RESULTS OF FAIRCHILD AND THE
POWER DEVICE BUSINESS TO GIVE EFFECT TO THE OFFERING.
(a) Represents the elimination of the amortization of deferred financing costs
associated with the debt being repaid. The pro forma reduction to interest
expense is $1.1 million for the fiscal year ended May 30, 1999. In
connection with the offering, we are required to write-off unamortized debt
issuance costs associated with debt being repaid. Approximately $6.0 million
will be written off concurrent with the offering. This non-recurring charge
has been excluded from the pro forma combined condensed statements
operations.
(b) Represents the elimination of interest expense of $15.1 million associated
with debt to be repaid with the proceeds of the offering.
31
<PAGE> 36
SELECTED CONSOLIDATED FINANCIAL DATA OF FAIRCHILD
The following table sets forth selected historical consolidated financial
data of Fairchild. The historical consolidated financial data as of May 31, 1998
and May 30, 1999 and for the fiscal years ended May 25, 1997, May 31, 1998 and
May 30, 1999 are derived from the audited consolidated financial statements of
Fairchild included elsewhere in this prospectus. The historical consolidated
financial data as of May 26, 1996 and May 25, 1997 and for the year ended May
26, 1996 are derived from audited consolidated financial statements of Fairchild
not included in this prospectus. The historical consolidated financial data as
of and for the fiscal year ended May 28, 1995 are derived from unaudited
consolidated financial statements of Fairchild that are not included in this
prospectus. We believe that such unaudited consolidated financial statements
include all adjustments necessary for the fair presentation of the financial
condition and the results of operations of Fairchild for such periods and as of
such dates. This information should be read in conjunction with the consolidated
financial statements of Fairchild included elsewhere in this prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Fairchild."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY
------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS DATA:(1)
Revenue(2).................................................. $680.3 $776.3 $692.0 $789.2 $ 735.1
Gross profit(2)............................................. $203.8 $216.8 $152.5 $230.5 $ 152.3
Research and development.................................... 31.0 30.3 18.9 35.7 39.3
Selling, general and administrative......................... 100.3 114.4 96.4 92.0 105.1
Restructuring, impairments and other charges(3)............. -- -- 5.3 15.5 55.3
------ ------ ------ ------ --------
Operating income (loss)................................... $ 72.5 $ 72.1 $ 31.9 $ 87.3 $ (47.4)
====== ====== ====== ====== ========
OTHER FINANCIAL DATA:
Revenue:
Analog.................................................... $ -- $ -- $ -- $ 32.0 $ 64.1
Discrete.................................................. 116.4 175.0 164.5 187.3 180.3
Logic..................................................... 327.7 339.5 285.3 303.0 267.6
Memory.................................................... 185.5 174.2 138.0 113.5 67.9
Power Device.............................................. -- -- -- -- 74.2
Contract manufacturing services........................... 50.7 87.6 104.2 153.4 81.0
------ ------ ------ ------ --------
Total revenue............................................... $680.3 $776.3 $692.0 $789.2 $ 735.1
====== ====== ====== ====== ========
Adjusted EBITDA(4).......................................... $117.2 $136.3 $128.4 $187.4 $ 127.0
Cash flows provided from (used in):
Operating activities...................................... 118.1 162.5 19.1 136.1 44.1
Investing activities...................................... (118.1) (162.5) (54.3) (200.5) (474.6)
Financing activities...................................... -- -- 75.9 30.2 486.4
Depreciation and amortization............................... 44.7 64.2 77.1 83.2 95.3
Amortization of intangibles(5).............................. -- -- -- 1.4 8.4
Capital expenditures........................................ 112.9 153.9 47.1 78.0 46.2
Ratio of earnings to fixed charges(6)....................... 75.3x 46.2x 2.9x 1.9x --(7)
HISTORICAL BALANCE SHEET DATA (END OF PERIOD):
Inventories................................................. $ 68.8 $ 93.1 $ 73.1 $108.0 $ 148.6
Total assets................................................ 323.2 432.7 554.3 631.8 1,095.7
Long-term debt, excluding current portion................... -- -- 409.0 438.1 895.9
Total stockholder's equity (deficit)........................ 233.2 349.2 16.7 46.3 (6.4)
</TABLE>
- -------------------------
(1) For the fiscal years ended May 1997 and prior, statement of operations data
includes the direct expense of the Fairchild Semiconductor business of
National Semiconductor and allocated expenses from National Semiconductor.
Such amounts may not be comparable to data for Fiscal 1999.
32
<PAGE> 37
(2) Revenues and gross profit in Fiscal 1999 were negatively impacted by $5.5
million and $15.4 million, respectively, due to charges for additional sales
and inventory reserves as a result of our Memory division restructuring. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Fairchild -- Restructuring."
(3) In Fiscal 1997, restructuring, impairments and other charges consisted of
severance and other costs related to lay-offs that occurred in the first
quarter of Fiscal 1997. In Fiscal 1998, such charges consisted of in-process
research and development associated with the acquisition of Raytheon. In
Fiscal 1999, such charges consisted of $34.0 million of in-process research
and development associated with the acquisition of the power device
business, and $21.3 million related to various restructuring actions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Fairchild -- Restructuring."
(4) Adjusted EBITDA is defined as operating income before other (income)
expense, interest expense, taxes, depreciation, amortization and (a)
restructuring, impairment and other charges, (b) charges of $15.4 million
for additional sales and inventory reserves associated with our Memory
division restructuring included in gross profit in Fiscal 1999 and (c) $14.1
million of retention bonuses in 1997 associated with the recapitalization of
National Semiconductor. Adjusted EBITDA is presented because we believe that
EBITDA is a widely accepted financial indicator of an entity's ability to
incur and service debt. Adjusted EBITDA should not be considered by an
investor as an alternative to net income or income from operations, as an
indicator of our operating performance or other combined operations or cash
flow data prepared in accordance with generally accepted accounting
principles, or as an alternative to cash flows as a measure of liquidity.
Our computation of Adjusted EBITDA may differ from similarly titled
computations of other companies.
(5) Amortization of intangibles primarily represents the amortization of
identifiable acquisition-related intangible assets.
(6) Earnings consist of income before income taxes plus fixed charges. Fixed
charges consist of interest expense on debt and amortization of deferred
debt issuance costs, and the portion (approximately one-third) of rental
expense that the Company believes is representative of the interest
component of rental expense.
(7) Earnings for Fiscal 1999 were inadequate to cover fixed charges by
approximately $107.9 million.
33
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF FAIRCHILD
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto of Fairchild included
elsewhere in this prospectus.
OVERVIEW
Fairchild 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 personal
computer, industrial, telecommunications, consumer electronics and automotive
markets. The predecessor to Fairchild was renowned as one of the pioneering
companies of the semiconductor industry. Fairchild invented the planar process
of manufacturing semiconductors, regarded as one of the most significant
achievements in the semiconductor industry since the invention of the
transistor. These early innovations form the base of a rich company history.
Acquired in 1979 by Schlumberger, Fairchild continued to innovate, introducing
logic products such as FAST(R) (Fairchild Advanced Schottky Technology) and
FACT(TM) (Fairchild Advanced CMOS Technology), which remain industry standard
products today. In 1987, Fairchild was acquired by National Semiconductor and
integrated into its operations. The assets of Fairchild were separated from
National Semiconductor on March 11, 1997 pursuant to an Agreement and Plan of
Recapitalization and Fairchild began operating as a stand-alone entity. At that
time, Fairchild's business consisted of the Logic Products Group, historically a
core business of Fairchild, and the Discrete Products Group and the Non-Volatile
Memory Products Group, historically multi-market businesses of National
Semiconductor. On December 31, 1997, Fairchild acquired all of the outstanding
common stock of Raytheon for approximately $117.0 million in cash. Raytheon
designs, manufactures and markets high-performance analog and mixed signal
semiconductors with long product lives for the personal computer,
communications, broadcast video and industrial markets. Immediately prior to the
closing of the transaction, Raytheon was renamed Fairchild Semiconductor
Corporation of California and, upon closing, became a wholly-owned subsidiary of
Fairchild. The transaction was accounted for as a purchase. Accordingly,
Fairchild's operating results in Fiscal 1998 include the operating results of
Fairchild Semiconductor Corporation of California as of the date of the
acquisition. On April 13, 1999, Fairchild acquired the power device business of
Samsung Electronics for $414.9 million in cash, including fees and expenses. The
power device business designs, manufactures and markets power discrete
semiconductors and standard analog integrated circuits serving the personal
computer, industrial, telecommunications and consumer electronics markets. The
transaction was accounted for as a purchase. Accordingly, Fairchild's operating
results in Fiscal 1999 include the operating results of the power device
business, now the Power Device Products Group, as of the date of the
acquisition. The results of operations in Fiscal 1997 for the period prior to
March 11, 1997 reflect the operating results of the Fairchild Semiconductor
Business of National Semiconductor, and are not necessarily indicative of the
results that would have been obtained as a stand-alone company during that time.
This is due in part to the fact that National Semiconductor allocated to the
Fairchild Semiconductor Business corporate and other overhead costs at levels
higher than those experienced as a stand-alone company. In addition, the
Fairchild Semiconductor Business, prior to the establishment of Fairchild,
provided contract manufacturing services to National Semiconductor at cost and
now provides such services at higher prices. Under manufacturing agreements with
National Semiconductor, National Semiconductor is required to purchase not less
than $330.0 million of contract manufacturing services from Fairchild during the
first 39 months after completion of the recapitalization of Fairchild.
Fairchild has defined five reportable segments, Analog Products Division,
which we refer to as Analog, Discrete Power and Signal Technologies Group, which
we refer to as Discrete, Logic Products Group, which we refer to as Logic,
Non-Volatile Memory Division, which we refer to as Memory, and Power Device
Products Group, which we refer to as Power Device. The following table sets
forth the composition of trade revenue by reportable segments and contract
manufacturing services, as a
34
<PAGE> 39
percentage of total revenues excluding one-time charges of $5.5 million in the
Memory segment in Fiscal 1999:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Analog.................................................. --% 4.1% 8.7%
Discrete................................................ 23.8 23.7 24.4
Logic................................................... 41.2 38.4 36.1
Memory.................................................. 19.9 14.4 9.9
Power Device............................................ -- -- 10.0
----- ----- -----
Subtotal trade sales............................... 84.9 80.6 89.1
Contract Manufacturing Services......................... 15.1 19.4 10.9
----- ----- -----
Total.............................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
QUARTERLY RESULTS
The following table sets forth the unaudited historical quarterly trade
sales and trade gross profits (losses) by Fairchild's reportable segments:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998
--------------------------------- ---------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TRADE SALES:
Analog.............................. $ -- $ -- $ -- $ -- $ -- $ -- $ 11.9 $ 20.1
Discrete............................ 35.9 39.7 42.7 46.2 48.2 47.0 49.6 42.5
Logic............................... 66.8 74.7 69.2 74.6 78.9 79.8 75.6 68.7
Memory.............................. 30.2 39.6 35.6 32.6 31.6 28.5 28.0 25.4
Power Device........................ -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total........................... $132.9 $154.0 $147.5 $153.4 $158.7 $155.3 $165.1 $156.7
====== ====== ====== ====== ====== ====== ====== ======
GROSS PROFIT (LOSS):
Analog.............................. $ -- $ -- $ -- $ -- $ -- $ -- $ 4.9 $ 7.2
Discrete............................ 10.7 11.2 13.4 15.8 18.9 17.9 17.3 12.8
Logic............................... 12.2 18.7 15.7 21.0 25.9 29.7 25.6 21.3
Memory.............................. 7.1 6.6 6.8 6.5 5.9 2.3 1.3 3.2
Power Device........................ -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total........................... $ 30.0 $ 36.5 $ 35.9 $ 43.3 $ 50.7 $ 49.9 $ 49.1 $ 44.5
====== ====== ====== ====== ====== ====== ====== ======
GROSS PROFIT (LOSS) PERCENTAGE:
Analog.............................. --% --% --% --% --% --% 41.2% 35.8%
Discrete............................ 29.8 28.2 31.4 34.2 39.2 38.1 34.9 30.1
Logic............................... 18.3 25.0 22.7 28.2 32.8 37.2 33.9 31.0
Memory.............................. 23.5 16.7 19.1 19.9 18.7 8.1 4.6 12.6
Power Device........................ -- -- -- -- -- -- -- --
Total........................... 22.6 23.7 24.3 28.2 31.9 32.1 29.7 28.4
<CAPTION>
FISCAL 1999
---------------------------------
Q1 Q2 Q3 Q4
------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
TRADE SALES:
Analog.............................. $ 16.9 $ 17.7 $ 15.1 $ 14.4
Discrete............................ 38.9 45.7 47.0 48.7
Logic............................... 60.9 67.7 65.6 73.4
Memory.............................. 18.4 20.9 19.3 14.8(1)
Power Device........................ -- -- -- 74.2
------ ------ ------ ------
Total........................... $135.1 $152.0 $147.0 $225.5
====== ====== ====== ======
GROSS PROFIT (LOSS):
Analog.............................. $ 5.9 $ 7.4 $ 5.2 $ 5.0
Discrete............................ 8.9 10.5 10.7 5.4
Logic............................... 14.8 17.7 20.4 20.6
Memory.............................. (0.8) (2.0) (0.8) (2.1)(1)
Power Device........................ -- -- -- 24.3
------ ------ ------ ------
Total........................... $ 28.8 $ 33.6 $ 35.5 $ 53.2
====== ====== ====== ======
GROSS PROFIT (LOSS) PERCENTAGE:
Analog.............................. 34.9% 41.8% 34.4% 34.7%
Discrete............................ 22.9 23.0 22.8 11.1
Logic............................... 24.3 26.1 31.1 28.1
Memory.............................. (4.3) (9.6) (4.1) (14.2)
Power Device........................ -- -- -- 32.7
Total........................... 21.3 22.1 24.1 23.6
</TABLE>
- -------------------------
(1) Excludes charges of $5.5 million and $15.4 million in trade sales and gross
profit, respectively.
YEAR ENDED MAY 30, 1999 COMPARED TO YEAR ENDED MAY 31, 1998
Results of Operations. Fairchild incurred a net loss of $102.7 million in
Fiscal 1999, compared to net income of $27.2 million in Fiscal 1998. The net
loss in Fiscal 1999 includes pre-tax charges totaling $75.9 million for
in-process research and development ($34.0 million) and the write-off of
deferred financing fees in connection with a refinancing of Fairchild's senior
credit facilities ($5.2 million) as part
35
<PAGE> 40
of the acquisition of the power device business of Samsung Electronics in April
1999, and restructuring and related charges totaling $36.7 million. The Fiscal
1999 restructuring charges pertain to a workforce reduction undertaken in the
first quarter ($4.5 million), the transfer of Analog assembly and test
operations in the third quarter ($2.7 million), the closure of the Mountain View
facility ($10.0 million) recorded in the fourth quarter and the restructuring of
the Memory business ($19.5 million), also in the fourth quarter. The charge for
the Memory restructuring includes $5.5 million and $9.9 million recorded as a
reduction to revenue and an increase to cost of sales, respectively, for
additional sales and inventory reserves associated with the restructuring. Net
income in Fiscal 1998 includes pre-tax charges of $15.5 million for in-process
research and development associated with the acquisition of Raytheon and an
after-tax charge of $1.5 million for the cumulative effect of a change in
accounting principle. Excluding unusual charges, net of tax effect, and
amortization of acquisition-related intangibles of $8.4 million and $1.4 million
in Fiscal 1999 and Fiscal 1998, respectively, Fairchild incurred a net loss of
$22.4 million in Fiscal 1999, compared to net income of $40.1 million in Fiscal
1998. The decrease is due primarily to soft market conditions in the
semiconductor industry that persisted for much of Fiscal 1999, which resulted in
severe price competition and factory underutilization, particularly in the first
half of Fiscal 1999, which negatively impacted gross profit.
Fairchild incurred an operating loss of $47.4 million in Fiscal 1999,
compared to operating income of $87.3 million in Fiscal 1998. Excluding unusual
charges, operating income was $23.3 million in Fiscal 1999, compared to $102.8
million in Fiscal 1998. Excluding unusual charges and depreciation and
amortization of $103.7 million and $84.6 million in Fiscal 1999 and Fiscal 1998,
respectively, earnings before interest, taxes and depreciation and amortization,
which we refer to as EBITDA, was $127.0 million in Fiscal 1999, compared to
$187.4 million in Fiscal 1998. EBITDA is presented because Fairchild believes
that it is a widely accepted financial indicator of an entity's ability to incur
or service debt. EBITDA should not be considered as an alternative to net
income, operating income, or other consolidated operations or cash flow data
prepared in accordance with generally accepted accounting principles, as an
indicator of the operating performance of Fairchild, or as an alternative to
cash flows as a measure of liquidity.
Revenues. Fairchild's revenues consist of trade sales to unaffiliated
customers (89.0% and 80.6% of total revenues in Fiscal 1999 and Fiscal 1998,
respectively) and contract manufacturing services to National Semiconductor
(11.0% and 19.4% of total revenues in Fiscal 1999 and Fiscal 1998,
respectively). Trade sales increased 2.9% to $654.1 million in Fiscal 1999 from
$635.8 million in Fiscal 1998. Trade sales in Fiscal 1999 include those of the
Power Device Products Group since the acquisition date of April 13, 1999, and a
full-year of Analog. Additionally, trade sales have been reduced by $5.5 million
in Fiscal 1999 for one-time charges for additional sales reserves as a result of
the Memory restructuring. Trade sales in Fiscal 1998 include those of Analog
since the acquisition date of December 31, 1997. Excluding Power Device
revenues, one time charges and normalizing Analog sales for the non-comparable
periods, trade sales decreased 14.0% in Fiscal 1999 from Fiscal 1998. All
segments reported trade sales decreases from the prior year, due to
industry-wide soft market conditions that were prevalent for much of Fiscal
1999. These soft market conditions, caused by the Asian financial crisis and
excess capacity in the semiconductor industry as a whole, resulted in severe
price pressures, which accounted for the majority of the revenue shortfall on a
comparable basis. Unit volume was flat for Fiscal 1999 as compared to Fiscal
1998.
Geographically, 33%, 17% and 50% of Fairchild's trade sales in Fiscal 1999
were generated in the United States, Europe and Asia, respectively, compared to
38%, 21% and 41%, respectively, in Fiscal 1998. Soft market conditions prevalent
in Fiscal 1999 negatively impacted all geographic regions. Trade sales in the
United States decreased 9.8% in Fiscal 1999 from Fiscal 1998. Excluding one time
charges, trade sales decreased 7.6%. Trade sales in Europe decreased 16.1% in
Fiscal 1999 from Fiscal 1998. Trade sales in Asia increased 24.3% in Fiscal 1999
over Fiscal 1998. Asia sales include those in Southeast Asia, Korea and Japan.
The increase in trade sales is due entirely to the acquisition of the Power
Device
36
<PAGE> 41
Product Group. Excluding the Power Device Product Group, Asia trade sales
decreased 2.1% in Fiscal 1999 from Fiscal 1998. Contract manufacturing revenues
decreased 47.2% to $81.0 million in Fiscal 1999, compared to $153.4 million in
Fiscal 1998. Contract manufacturing revenues in Fiscal 1999 include $18.7
million of billings under the guaranteed annual revenue and fixed cost recovery
provisions of the manufacturing agreements with National Semiconductor. The
decrease was due to reduced demand from National Semiconductor.
Gross Profit. Gross profit decreased 33.9% to $152.3 million in Fiscal
1999 from $230.5 million in Fiscal 1998. Gross trade profit in Fiscal 1999 was
negatively impacted by one-time charges of $15.4 million for additional sales
and inventory reserves as a result of the Memory restructuring action. Excluding
unusual charges, gross profit decreased 27.2% to $167.7 million in Fiscal 1999.
Gross profit includes $16.6 million and $36.3 million in Fiscal 1999 and Fiscal
1998, respectively, attributable to contract manufacturing services provided to
National Semiconductor. As a percentage of trade sales, gross trade profit,
which excludes contract manufacturing, was 20.7% in Fiscal 1999 compared to
30.5% in Fiscal 1998. Excluding unusual charges, gross trade profit as a
percentage of trade sales was 22.9% in Fiscal 1999. The decrease in gross trade
profits as a percentage of sales in Fiscal 1999 from Fiscal 1998 was due to
lower average trade selling prices and the negative effects of significantly
decreased demand from National Semiconductor.
Contract manufacturing gross profit decreased 54.3% in Fiscal 1999 from
Fiscal 1998. As a percentage of contract manufacturing revenue, contract
manufacturing gross profit was 20.5% in Fiscal 1999, compared to 23.7% in Fiscal
1998. The decrease in contract manufacturing gross profit as a percent of
contract manufacturing revenues is due to the negative effects of lower factory
utilization due to reduced demand from National Semiconductor and an unfavorable
sales mix toward ABiC wafers produced in Fairchild's six-inch fab in South
Portland, Maine.
Research and Development. Research and development expenses ("R&D") were
$39.3 million, or 6.0% of trade sales in Fiscal 1999, compared to $35.7 million,
or 5.6% of trade sales in Fiscal 1998. The increase in R&D expenses is due to
the addition of the R&D expenses of the power device business and a full year of
Analog R&D expenses in Fiscal 1999, as compared to five months of Analog R&D
expenses recorded in Fiscal 1998. R&D efforts are focused on Fairchild's growth
products (CMOS logic, DMOS, Analog and Power Device). In Fiscal 1999, R&D
expenditures were 7.7% of trade sales for these growth products, and 3.0% of
trade sales for all other products. In Fiscal 1998, R&D expenditures were 8.7%
and 2.7% for growth and all other products, respectively. The decrease in R&D
expenditures for growth products as a percentage of trade sales is due to the
relatively small R&D requirements of the power device business as a percentage
of sales.
Selling, General and Administrative. Selling, general and administrative
expenses ("SG&A") were $105.1 million, or 16.1% of trade sales in Fiscal 1999,
compared to $92.0 million or 14.5% of trade sales in Fiscal 1998. The increase
in SG&A expenses is due to the addition of the SG&A expenses of the power device
business, a full year of Analog SG&A expenses in Fiscal 1999, as compared to
five months of Analog SG&A expenses recorded in Fiscal 1998 and amortization of
acquisition-related intangibles, including a full year of amortization of
intangibles related to the Raytheon acquisition in Fiscal 1999 as compared to
five months in Fiscal 1998.
Restructuring. Fiscal 1999 included restructuring charges of $21.3
million, as Fairchild took several actions during Fiscal 1999 to reduce costs
and improve profitability in a number of areas. In the fourth quarter of Fiscal
1999, Fairchild took a pre-tax charge of $4.1 million for actions to improve the
profitability of the Memory Products Group. These actions include transferring
wafer fabrication activities in Salt Lake City, Utah to third-party
subcontractors and obsoleting Memory product lines. The charge consists of $3.9
million for non-cash asset impairments at Fairchild's facilities in Salt Lake
City, Utah and Sunnyvale, California, and $0.2 million for severance and
employee separation costs. In addition, Fairchild took charges of $5.5 million
and $9.9 million recorded to revenue and cost of sales,
37
<PAGE> 42
respectively, for additional sales and inventory reserves. Including these
charges, the total charge for the Memory restructuring was $19.5 million.
In the fourth quarter of Fiscal 1999, Fairchild took a pre-tax charge of
$10.0 million for the closure of its Mountain View facility, which supports the
Analog Products Group. Fairchild is transferring Analog wafer fabrication
activities to its facility in South Portland, Maine. As a result of this
transfer, Fairchild expects a substantial reduction in Analog wafer costs and
improved gross profit. The charge consists of $4.0 million for severance and
employee separation costs, $4.5 million for non-cash asset impairments,
including a one-time loss for the sale of the Mountain View facility of $1.9
million and $1.5 million in other exit costs. In March 1999, Fairchild sold the
facility for $30.2 million, net of closing costs, $0.5 million in escrow to
cover demolition costs, and a $3.5 million holdback, payment of which is
contingent upon either favorable action or no action within one year of the sale
date by the City of Mountain View with respect to the buyer's application to
increase the building density on the site. Fairchild views the holdback as a
contingent gain, and as such did not record this amount in its Statement of
Operations. Fairchild expects, however, that a favorable ruling will be granted
which will enable Fairchild to record a one-time gain from receipt of the
holdback in a subsequent period. In the third quarter of Fiscal 1999, Fairchild
took a pre-tax charge of $2.7 million for the transfer of Analog assembly and
test activities from its Mountain View facility to Fairchild's facility in
Penang, Malaysia and various third-party subcontractors. The charge consisted of
$1.9 million for non-cash asset impairments and $0.8 million for severance and
employee separation costs. Total charges for Analog restructuring activities,
including the loss on sale of the Mountain View facility, were $12.7 million in
Fiscal 1999.
In the first quarter of Fiscal 1999, Fairchild took a pre-tax restructuring
charge of $4.5 million in connection with a plan to reduce costs and improve
operating efficiencies. The charge consisted of $3.7 million for severance and
employee separation costs related to the reduction of approximately 600
salaried, hourly and temporary positions in the United States and Cebu, the
Philippines, representing approximately 10% of Fairchild's payroll. In addition,
$0.8 million was recorded for the write-off of various idle assets in
Fairchild's Mountain View and Salt Lake City facilities.
Interest expense, net. Interest expense, net was $60.5 million in Fiscal
1999, compared to $44.7 million in Fiscal 1998. The increase was due to the
write-off of deferred financing fees of $5.2 million in connection with the
refinancing of its senior credit facilities as part of the acquisition of the
power device business, incremental interest expense as a result of additional
indebtedness incurred to finance the acquisition, a full year of interest
expense on borrowings to finance the Raytheon acquisition, as compared to five
months in Fiscal 1998 and interest expense on short-term borrowings in Fiscal
1999 which did not occur in Fiscal 1998.
Income Taxes. Income tax expense (benefit) was a benefit of $(5.2) million
in Fiscal 1999, compared to income tax expense of $13.9 million in Fiscal 1998.
The effective tax rate for Fiscal 1999 was 4.8%, compared to 32.6% in Fiscal
1998. The decrease in the effective rate is due to the inability of Fairchild to
carry back its Fiscal 1999 operating loss due to the short time Fairchild has
operated as a stand-alone entity and a tax holiday for income generated by
Fairchild's Korean subsidiary, Fairchild Korea Semiconductor Ltd., formed as a
result of the acquisition of the power device business. Fairchild Korea has been
granted a ten year tax holiday. The first seven years are tax-free, followed by
three years of income taxes at 50% of the statutory rate.
Effective for the fiscal year ended May 30, 1999, Fairchild adopted SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information. In
accordance with the provisions of SFAS No. 131, comparative disclosures of
selected operating results of Fairchild's reportable segments have been included
for Fiscal 1998 and 1997.
38
<PAGE> 43
Analog and Mixed Signal Products Division. Fairchild formed the Analog and
Mixed Signal Products Division upon completion of the acquisition of Raytheon.
Its product offerings include standard linear products such as operational
amplifiers, low drop out regulators and ground fault interrupters, D/C to D/C
converters and high performance mixed signal products targeted toward broadcast
video applications. Analog revenues increased 100.3% to $64.1 million in Fiscal
1999 from $32.0 million in Fiscal 1998. Fiscal 1998 includes revenues of Analog
from the acquisition date. Normalized for the non-comparable period, Analog
revenues were $25.5 million in Fiscal 1999, a decrease of 20.3% from Fiscal
1998. The decrease for the comparable period in Fiscal 1999 from Fiscal 1998 is
due to revenue decreases in its mature products, combined with lower than
anticipated new product revenues.
Analog generated an operating loss of $2.4 million in Fiscal 1999 excluding
restructuring charges, compared to operating income of $2.2 million in Fiscal
1998. Normalized for the non-comparable period, the operating loss was $2.7
million in Fiscal 1999. The decrease in operating income is primarily driven by
the decline in revenues.
Discrete Power and Signal Technologies Products Group. Discrete designs,
manufactures and markets a broad line of DMOS power MOSFETs, which we refer to
as DMOS, and bipolar power transistors and small signal transistors, which we
refer to as Bipolar. Its products are primarily designed for low- and
medium-voltage applications, such as notebook computers. DMOS power MOSFETs are
manufactured using Fairchild's leading edge Trench technology. Discrete revenues
decreased 3.7% to $180.3 million in Fiscal 1999, compared to $187.3 million in
Fiscal 1998. The decrease is attributable to lower revenues for its mature
Bipolar products, which decreased 18.1% from Fiscal 1998, partially offset by
higher revenues for its DMOS products, which increased 7.9% from Fiscal 1998.
Discrete generated operating income of $4.8 million in Fiscal 1999,
compared to $44.9 million in Fiscal 1998. The decrease was due primarily to
lower gross profit as a result of lower contract manufacturing profits,
unfavorable sales mix, the negative effect of underutilization of the Salt Lake
City fab, driven by lower contract manufacturing and Memory volumes, and
inventory write-downs in the Cebu, the Philippines assembly and test facility.
Logic Products Group. Logic designs, manufactures and markets a broad line
of high-performance standard logic products. Its focus is on the growing CMOS
logic market, from industry standard FACT and HCMOS to new products such as
TinyLogic, GTL, LCX and LVT. Its products also include mature bipolar logic
products such as FAST, LS and TTL. Price competition was particularly intense in
Logic in Fiscal 1999. Logic revenues decreased 11.7% to $267.6 million in Fiscal
1999, compared to $303.0 million in Fiscal 1998. The decrease is attributable to
lower bipolar logic revenues, which decreased 29.4% from Fiscal 1998, partially
offset by higher CMOS revenues, which increased 1.9% in Fiscal 1999 due to
success in new product introductions. New product revenues doubled in Fiscal
1999 over Fiscal 1998.
Logic generated operating income of $35.7 million in Fiscal 1999, compared
to $70.0 million in Fiscal 1998. The decrease in operating income is
attributable to lower average selling prices due to soft market conditions in
Fiscal 1999 and lower contract manufacturing profits.
Non-Volatile Memory Division. Memory designs, manufactures and markets a
broad line of serial EEPROM and EPROM products. In order to improve the
profitability of Memory, Fairchild took a charge of $19.5 million in Fiscal
1999. Actions include transferring wafer fabrication activities in Salt Lake
City, Utah to third-party subcontractors and obsoleting Memory product lines.
Excluding a charge of $5.5 million recorded as a reduction to revenue in the
form of increased sales reserves as part of the restructuring, Memory revenues
decreased 35.3% to $73.4 million from $113.5 million in Fiscal 1998. The revenue
decrease was across all product lines. EEPROM revenues decreased 30.7% in Fiscal
1999 from Fiscal 1998, and EPROM revenues decreased 46.6% in Fiscal 1999 from
Fiscal 1998. The
39
<PAGE> 44
decreases are due to lower average selling prices, lower volumes due to soft
market conditions, and in the case of EPROM, a rapidly shrinking market, which
is being replaced by FLASH memory.
Memory generated an operating loss of $26.4 million in Fiscal 1999,
excluding the restructuring charge, compared to an operating loss of $14.2
million in Fiscal 1998. The increase in the operating loss is due primarily to
lower average selling prices as a result of soft market conditions in Fiscal
1999.
Power Device Products Group. Fairchild formed the Power Device Products
Group upon completion of the acquisition of the power device business from
Samsung Electronics on April 13, 1999. The Power Device Products Group's results
of operations are consolidated with those of Fairchild as of the acquisition
date. The Power Device Products Group designs, manufactures and markets power
discrete semiconductors and standard analog integrated circuits, serving the
personal computer, industrial, telecommunications and consumer electronics
markets. Its products are complementary to our existing Analog and Discrete
portfolios. The Power Device Products Group had revenues of $74.2 million,
consisting of analog and discrete revenues of $31.7 million and $40.7 million,
respectively, and operating income of $12.7 million in Fiscal 1999. The Power
Device Products Group performs foundry services under manufacturing agreements
with Samsung Electronics. Foundry revenues were $1.8 million in Fiscal 1999.
The combination of Fairchild's analog and discrete product portfolios with
those of the Power Device Products Group gives Fairchild offerings in 92 of the
top 100 best-selling analog product types by volume, and one of the broadest
portfolios of discrete products in the industry. On a combined basis,
Fairchild's analog and discrete revenues were $95.8 million and $221.0 million,
respectively, in Fiscal 1999 or 48.4% of Fairchild's trade revenues.
YEAR ENDED MAY 31, 1998 COMPARED TO YEAR ENDED MAY 25, 1997
RESULTS OF OPERATIONS. Net income increased 62.9% to $27.2 million in
Fiscal 1998, as compared to $16.7 million in Fiscal 1997. Net income in Fiscal
1998 includes a pre-tax charge for in-process research and development
associated with the acquisition of Raytheon ($15.5 million) and an after-tax
charge for the cumulative effect of a change in accounting principle pertaining
to business process reengineering costs associated with Fairchild's enterprise
software system implementation ($1.5 million) which had been previously
capitalized. Net income in Fiscal 1997 includes pre-tax charges related to
payment of retention bonuses ($14.1 million) and a restructuring charge ($5.3
million) related to workforce reductions. In addition, Fiscal 1998 net income
includes a full year of interest expense and income taxes, while Fiscal 1997
includes these charges only for the period subsequent to the recapitalization of
Fairchild. Prior to the recapitalization, the Fairchild Semiconductor Business
did not incur these costs. Excluding unusual charges and amortization of
acquisition-related intangibles of $1.4 million in Fiscal 1998, net of tax
effect, net income was $40.1 million and $36.1 million in Fiscal 1998 and Fiscal
1997, respectively.
Operating income, excluding unusual charges, increased 100.4% to $102.8
million in Fiscal 1998 from $51.3 million in Fiscal 1997. Included in operating
income is $36.3 million and $6.8 million of gross profit on contract
manufacturing services in Fiscal 1998 and 1997, respectively, under
manufacturing agreements with National Semiconductor. Gross profit on contract
manufacturing services in Fiscal 1997 was generated subsequent to the
recapitalization of Fairchild. Prior to the recapitalization, contract
manufacturing revenues were recorded at cost. In addition, operating income in
Fiscal 1998 increased over Fiscal 1997 due to higher trade revenues as a result
of the acquisition of Raytheon and improved market conditions, particularly in
the first half of the year, higher trade gross profit due to improved
40
<PAGE> 45
factory utilization, and the favorable effect of currency devaluations in
Southeast Asia on manufacturing costs. The following table depicts operating
income for Fairchild's reportable segments:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED MAY
----------------------
1997 1998
-------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Analog...................................................... $ -- $ 2.2
Discrete.................................................... 21.7 44.9
Logic....................................................... 21.3 70.0
Memory...................................................... 5.0 (14.2)
</TABLE>
Analog was formed upon the completion of the acquisition of Raytheon. Its
results are consolidated with those of Fairchild as of the date of acquisition.
Discrete and Logic operating profits increased 106.9% and 228.6%, respectively,
in Fiscal 1998 from Fiscal 1997. Memory suffered an operating loss in Fiscal
1998, due primarily to lower revenues and gross profits as a result of intense
price competition.
Excluding unusual charges, depreciation and amortization of $84.6 million
and $77.1 million in Fiscal 1998 and 1997, respectively, and other expense of
$1.4 million in Fiscal 1997, EBITDA increased 46.0% to $187.4 million in Fiscal
1998 from $128.4 million in Fiscal 1997.
Fairchild's results for the fiscal year ended May 31, 1998 consist of 53
weeks of activity, compared to 52 weeks for the fiscal years ended May 25, 1997
and May 26, 1996.
Revenues. Fairchild's revenues consist of trade sales to unaffiliated
customers (80.6% and 84.9% of total revenues in Fiscal 1998 and 1997,
respectively) and revenues from contract manufacturing services provided to
National Semiconductor (19.4% and 15.1% of total revenues in Fiscal 1998 and
1997, respectively).
Trade sales increased 8.2% to $635.8 million in Fiscal 1998 compared to
$587.8 million in Fiscal 1997. Trade sales for Fiscal 1998 include those of
Raytheon since the acquisition. Excluding Raytheon, trade sales increased 2.7%
in Fiscal 1998 over Fiscal 1997. The increase in trade sales was driven
primarily by increased unit volume, as average selling prices were flat. Average
selling prices increased year over year for the first three quarters in Fiscal
1998, but decreased significantly in the fourth quarter as industry-wide market
conditions softened.
Discrete trade sales increased 13.9% in Fiscal 1998 over Fiscal 1997. The
increase was due to higher average selling prices, driven by new product
introductions and a favorable sales mix, and slightly higher unit volume. DMOS
trade sales increased 39.9% in Fiscal 1998 over Fiscal 1997, offsetting a
decrease of 7.6% in Bipolar trade sales. The increase in DMOS trade sales was
due to higher sales volume of new products featuring Fairchild's Trench
technology, which offset price erosion in some of the more mature DMOS products.
The decrease in Bipolar trade sales was driven by a combination of lower sales
volume and slightly lower average selling prices. Reflective of Fairchild's
growth strategy, trade sales of DMOS products in Fiscal 1998 exceeded trade
sales in Bipolar products for the first time.
Logic trade sales increased 6.2% in Fiscal 1998 over Fiscal 1997. The
increase was driven by higher unit volume, which offset a decrease in average
selling prices. In Fiscal 1998, CMOS trade sales increased 14.3% over Fiscal
1997, offsetting a decrease of 2.8% in Bipolar trade sales. The increase in CMOS
trade sales was across all product lines, including VHC, LCX, FACT(TM) and
HCMOS. The decrease in Bipolar trade sales is reflective of the general market
trend toward lower power consuming CMOS products.
Memory trade sales decreased 17.7% in Fiscal 1998 over Fiscal 1997. The
decrease was driven by lower prices impacting all memory product lines due to
competitive pressures, partially offset by higher volume, particularly in
EEPROM. EEPROM, which is Fairchild's long-term focus in the non-volatile memory
market, had increased trade sales of 4.7% in Fiscal 1998 over Fiscal 1997. In a
declining market,
41
<PAGE> 46
EPROM trade sales decreased 46.2% in Fiscal 1998 over Fiscal 1997, as EPROMs are
being rapidly phased out by FLASH memory products in the marketplace.
Geographically, 38%, 21% and 41% of trade sales were derived in the United
States, Europe and Asia, respectively, in Fiscal 1998, compared to 38%, 20% and
42% in Fiscal 1997. Trade sales in all regions grew over Fiscal 1997 levels.
Europe increased 12.7%, the United States increased 8.8% and Asia increased
5.4%, despite soft economic conditions in the region. Asia trade sales were
influenced by strong growth in Southeast Asia, which offset a year over year
decline in Japan.
Contract manufacturing revenues increased 47.2% to $153.4 million in Fiscal
1998 compared to $104.2 million in Fiscal 1997. This increase, when normalized
for higher prices to include a markup for all of Fiscal 1998, reflects greater
demand from National Semiconductor, particularly in the first nine months of
Fiscal 1998. During the fourth quarter, foundry revenues decreased 26.1% from
the third quarter as National Semiconductor sharply cut back its demand in
response to its own publicly-announced restructuring created by soft market
conditions in the industry.
Gross Profit. Gross profit increased 51.2% to $230.5 million in Fiscal
1998, compared to $152.5 million in Fiscal 1997. Included in gross profit in
Fiscal 1998 and 1997 is $36.3 million and $6.8 million, respectively,
attributable to contract manufacturing services provided to National
Semiconductor. Prior to the recapitalization of Fairchild in Fiscal 1997, these
revenues were recorded at cost. Gross trade profit excluding contract
manufacturing increased 33.3% in Fiscal 1998 over Fiscal 1997. As a percentage
of trade sales, gross trade profits were 30.5% and 24.8% in Fiscal 1998 and
1997, respectively. The increase in gross trade profit as a percentage of trade
sales was due to increased factory utilization due to improved market conditions
that existed through the third quarter of Fiscal 1998, the favorable effect on
fixed cost absorption of increased demand from National Semiconductor in the
first nine months of Fiscal 1998, the favorable effects of currency devaluations
in Southeast Asia on Fairchild's manufacturing costs and the acquisition of
Raytheon, which increased Fairchild's portfolio of higher-margin products.
Research and Development. R&D expenses were $35.7 million, excluding a
$15.5 million pre-tax charge for purchased in-process R&D expenses associated
with the acquisition of Raytheon, or 5.6% of trade sales in Fiscal 1998,
compared to $18.9 million, or 3.2% of trade sales in Fiscal 1997. The increase
in R&D expenses is driven by higher spending to support new product development,
reflecting Fairchild's renewed emphasis on R&D efforts as a stand-alone company
following the recapitalization of Fairchild. Prior to the recapitalization, R&D
expenditures of the business primarily consisted of allocations from National
Semiconductor. Reflective of increased R&D efforts, Fairchild approximately
doubled the number of new products introduced in Fiscal 1998 from Fiscal 1997.
In addition, Fairchild is spending higher levels of R&D expenses for its Analog
and Mixed Signal products, reflecting its strategy to focus on and grow this
segment of its business. R&D efforts are focused on Fairchild's growth products:
CMOS Logic, DMOS, EEPROM and Analog. In Fiscal 1998, R&D expenditures were 8.9%
of trade sales for these growth products, and 0.5% of trade sales for
Fairchild's mature products (Bipolar Logic, Bipolar Discretes and EPROM).
Comparison of the above to Fiscal 1997 is not meaningful as Fairchild was not a
stand-alone entity for the entire year.
Selling, General and Administrative. SG&A expenses were $92.0 million, or
14.5% of trade sales, in Fiscal 1998, compared to $96.4 million, or 16.4% of
trade sales, in Fiscal 1997. Excluding one-time retention bonuses of $14.1
million charged in Fiscal 1997, SG&A expenses were $82.3 million, or 14.0% of
trade sales in Fiscal 1997. The increase in SG&A expenses as a percent of trade
sales after elimination of retention bonuses is due to higher selling and
marketing expenses driven by inefficiencies experienced in the first half of
Fiscal 1998 while operating under transition service agreements with National
Semiconductor, and in the second half of Fiscal 1998 due to the integration of
the Raytheon sales force into Fairchild. The increase in selling and marketing
expenses was partially offset by a decrease in general and administrative
expenses due to lower expenses incurred as a stand-alone entity in
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<PAGE> 47
Fiscal 1998 compared to Fiscal 1997, which reflects nine months of direct and
allocated expenses of the Fairchild Semiconductor Business while operated by
National Semiconductor.
Restructuring. Fiscal 1997 included a restructuring charge of $5.3
million, incurred in the first quarter, for severance and other costs directly
attributable to a workforce reduction.
Interest Expense, Net. Interest expense, net was $44.7 million and $9.3
million in Fiscal 1998 and 1997, respectively. Fiscal 1998 includes a full year
of interest expense on indebtedness incurred to finance the recapitalization of
Fairchild, while Fiscal 1997 contains approximately one quarter of such interest
expense. In addition, Fairchild incurred additional indebtedness due to the
purchase of Raytheon in the third quarter of Fiscal 1998. Prior to the
recapitalization in Fiscal 1997 of Fairchild, the Fairchild Semiconductor
Business was allocated net interest expense from National Semiconductor. This
amount is included in other expense.
Other Expenses. Other expense was $1.4 million in Fiscal 1997, consisting
primarily of net interest expense allocated to the Fairchild Semiconductor
Business by National Semiconductor. There were no comparable amounts incurred in
Fiscal 1998.
In the third quarter of Fiscal 1998, Fairchild took a pre-tax charge of
$15.5 million for purchased in-process research and development in conjunction
with the acquisition of Raytheon and an after-tax charge of $1.5 million for the
cumulative effect of an accounting charge pertaining to treatment of business
process reengineering costs associated with Fairchild's enterprise software
system implementation. The enterprise software system implementation costs,
relating to activities to assess the system's capabilities in light of
Fairchild's current business processes, were previously capitalized as part of
the cost of the software. Emerging Issues Task Force Issue 97-13, dated November
20, 1997, requires companies to expense such costs as incurred.
Income Taxes. Income taxes were $13.9 million and $4.5 million in Fiscal
1998 and 1997, respectively. In Fiscal 1998, income taxes were recorded at an
effective tax rate of 32.6%. In Fiscal 1997, income taxes were recorded only for
the period subsequent to the recapitalization of Fairchild, at an effective rate
of 38.7%. The lower tax rate in Fiscal 1998 is due to a higher proportion of
taxable income in lower tax countries as compared to Fiscal 1997. Prior to the
recapitalization of Fairchild, the Fairchild Semiconductor Business did not
record a tax provision or pay income taxes as it operated as a division of
National Semiconductor.
ACQUISITION OF THE POWER DEVICE BUSINESS
In connection with the acquisition of the power device business, Fairchild
allocated $34.0 million of the purchase price to in-process research and
development projects. This allocation represents the estimated fair value based
on risk-adjusted cash flows related to the incomplete products. At the date of
acquisition, the development of these projects had not yet reached technological
feasibility and the research and development in progress had no alternative
future uses. Accordingly, these costs were expensed as of the acquisition date.
Fairchild's management assessed and allocated values to the in-process
research and development. The value assigned to these assets was determined by
identifying significant research projects for which technological feasibility
had not been established, including development, engineering and testing
activities associated with the introduction of the power device business' next
generation products. A discussion of the most significant projects follows.
Smart Power Switch ("SPS"). This product line combines a Power Discrete
MOSFET and an analog IC in a single package to provide customers with low cost,
high functionality, high reliability and high productivity solutions. These
products are used in power chargers, and power supplies for PCs, TVs, VCRs, and
monitors. Research and development is focused on cost reduction and further
reliability
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<PAGE> 48
improvement of existing products. Long-term research and development is focused
on proprietary chip-on-chip assembly technology as well as developing a one-chip
solution.
Motor IC. This product line specializes in IC products that control
various motor drives. These products are used for driving motors in automotive,
camera, CD-ROM, CD player, floppy disk drive, hard disk drive, and video
recorder applications. Current research and development is focused on adding
more channels as well as adding more intelligence/functionality onto the IC
chips.
Integrated Gate Bipolar Transistor ("IGBT"). This product line uses a
proprietary silicon bonding process to fabricate devices for very high voltage
applications. Industrial segment applications include power supplies, welding
machines, robotics, ignition controls, and battery chargers. Consumer segment
applications include lighting ballasts, camera strobes, induction heaters,
microwave ovens, and washing machines. Research and development is focused on
developing IGBTs that will work with products that operate at higher frequency
ranges as well as higher voltages and higher currents.
The fair values assigned to each of the significant projects and estimated
time to complete are reported below. The estimated costs to complete for these
projects, which are estimated to be $4.7 million, are expected to be spent
evenly for the remainder of their respective development cycles.
<TABLE>
<CAPTION>
MAN-
FAIR VALUE MONTHS
PRODUCT (IN MILLIONS) TO COMPLETE
- ------- ------------- -----------
<S> <C> <C>
Smart Power Switch................................... $ 13.9 57
Motor IC............................................. 8.2 131
IGBT................................................. 6.5 25
All Others........................................... 5.4 147
------ ----
Total........................................... $ 34.0 360
====== ====
</TABLE>
The material risks associated with the successful completion of the
in-process technology are associated with the power device business' ability to
successfully finish the creation of viable prototypes and successful design of
the chips and masks required. Fairchild expects to benefit from the in-process
projects as the individual products that contain the in-process technology are
put into production and sold to end-users. The release dates for each of the
products within the product families are varied. The initial benefit received
from the significant in-process technologies will be gained starting the second
half of 1999.
The methodology used to assign value to purchased in-process research and
development was the income approach, which included an analysis of the markets,
cash flows, and risks associated with achieving such cash flows. Significant
assumptions that had to be made using this approach included revenue and
operating margin projections and determination of the applicable discount rate.
The forecast for the in-process project related products relied on sales
projections that were based on targeted market share and pricing estimates over
the expected product life cycles. In the model used to value the in-process
research and development projects, total projected revenues were expected to
exceed $200.0 million by 2003. Operating expenses for these products included
cost of goods sold and selling, general, and administrative expenses. Operating
expenses were estimated as a percentage of revenue, and were consistent with
historical results.
The forecasts used by Fairchild in valuing in-process research and
development were based upon assumptions Fairchild believes to be reasonable but
which are inherently uncertain and unpredictable. We cannot assure you that the
underlying assumptions used to estimate expected project sales or profits, or
the events associated with such projects, will transpire as estimated.
Fairchild's assumptions may be incomplete or inaccurate, and unanticipated
events and circumstances are likely to occur. For these reasons, actual results
may vary from the projected results.
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<PAGE> 49
The discount rate selected for power device business' in-process technology
was 20%. This discount rate is greater than Fairchild's weighted average cost of
capital (approximately 15% at the date of acquisition of the power device
business) and reflects the risk premium associated with achieving the forecasted
cash flows associated with these projects. These risks include the uncertainties
in the economic estimates described above; the inherent uncertainty surrounding
the successful development of the purchased in-process technology; the useful
life of such technology; the profitability levels of such technology; and the
uncertainty of technological advances that are unknown at this time.
ACQUISITION OF RAYTHEON
In connection with the acquisition of Raytheon, Fairchild allocated $15.5
million of the purchase price to in-process research and development projects.
This allocation represents the estimated fair value based on risk-adjusted cash
flows related to the incomplete products. At the date of acquisition, the
development of these projects had not yet reached technological feasibility and
the R&D in progress had no alternative future uses. Accordingly, these costs
were expensed as of the acquisition date.
Fairchild's management assessed and allocated values to the in-process
research and development. The values assigned to each purchased R&D project were
determined by identifying significant research projects for which technological
feasibility had not been established, including development, engineering and
testing activities associated with the introduction of the related products. The
products associated with these projects include a broad range of semiconductor
products used in power management and video integrated circuits, including
personal computers, broadcast video and data communications. The projects
identified can be categorized in the analog or video product families.
Analog Family. This family's strategy focuses on (i) a higher integration
of Ground Fault Interruptor chips and (ii) power for desktop personal computers,
notebook personal computers and cellular telephones. As of the acquisition date,
the remaining efforts for the projects to be completed included starting and
completing the beta testing phase of the development process, with a total
remaining cost to complete the testing of approximately $2.5 million, and
anticipated release dates by the end of Fiscal 1998.
Video Family. This family's in-process research and development was
identified in the following projects: (i) decoders and genlocks; (ii) digital
video encoders; and (iii) personal computer to television plug-n-play
converters. The remaining efforts for the projects to be completed included the
completion of the beta-testing phase of the development process for each
project. As of the acquisition date, remaining costs to complete were estimated
to be approximately $1.0 million for anticipated release dates by the end of
Fiscal 1998.
Decoders and Genlocks. These adaptive, combination based video decoders
are optimized for the video professional, allowing flexibility in system
performance while utilizing a common design approach. The genlocking analog to
digital converter is a companion product for both the new product decoders and
encoders. The products include analog, high-performance encoders which are in
the beta testing phase of development; a digital design, improved decoder for
personal computer and television applications which is in the alpha testing
phase of development; an improved genlocking digitizer which is in the design
phase of development; and an analog, genlocking decoder which is in the concept
phase of development.
Digital Video Encoders. The in-process product in this category is a
digital design video data processor, which is in the concept phase of
development.
Personal Computer to Television Plug-N-Play-Converter. The in-process
product in this category is an analog personal computer to television
plug-n-play converter which is in the beta testing stage of development. This
product will be the next generation of the current offering with many
enhancements.
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<PAGE> 50
The material risks associated with the successful completion of the
in-process technology include Fairchild's ability to successfully finish the
creation of viable prototypes, successful design of the chips and masks required
and the degree of the market's acceptance of these new products. As of the
acquisition date, Fairchild expected to benefit from the in-process projects as
the individual products that contain the in-process technology are put into
production and sold to end-users. Significant positive cash flows from these
projects were expected to begin during 1999.
The methodology used to assign value to purchased in-process research and
development projects was the income approach, which includes an analysis of the
markets, cash flows, and risks associated with achieving such cash flows.
Significant assumptions that had to be made using this approach included
projected revenues, operating margins and determining an appropriate discount
rate. The forecast for the in-process project related products relied on sales
estimates that were based on targeted market share, pricing estimates and
expected product life cycles. In the model used to value the in-process research
and development projects, total projected revenues from these products were
expected to exceed $150.0 million by Fiscal 2002. Revenues were expected to peak
in Fiscal 2001 and decline thereafter as other new products and technologies
were expected to enter the market. Operating expenses for these products
included cost of goods sold and selling, general and administrative expenses.
Operating expenses were estimated as a percentage of revenues and were
consistent with historical results. The discount rate utilized for the acquired
in-process technologies was estimated at 22.5% in consideration of Fairchild's
15% weighted average cost of capital. The discount rate utilized for the in-
process technology was determined to be higher than Fairchild's weighted average
cost of capital due to the fact that the technology had not yet reached
technological feasibility as of the date of valuation.
As of May 30, 1999, total actual revenues in the analog and video families
on the in-process R&D projects were approximately 50% and 70%, respectively, of
total expected revenues. The revenue shortfall in the analog family and the
reductions in expected cash flows were driven by lower demand from personal
computer customers and higher than expected costs on certain projects. Fairchild
has addressed the cost issues in the restructuring of its Mountain View
facility. The revenue and cash flow shortfall in the video family was driven by
unfavorable market conditions during Fiscal 1998. The weaker cash flows from
these projects has not had, nor is expected to have, any material adverse impact
on the results of operations of Fairchild or its financial position, including
the recoverability of intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
Fairchild has a borrowing capacity of $100.0 million for working capital
and general corporate purposes under the revolving credit facility. No amount
was drawn under the revolving credit facility at May 30, 1999.
Concurrent with the acquisition of the power device business, Fairchild
borrowed $310.0 million under its new senior term facilities consisting of a
$100.0 million tranche A facility and a $210.0 million tranche B facility. In
addition, Fairchild issued $300.0 million of 10 3/8% Senior Subordinated Notes
Due 2007 and received a $50.0 million capital contribution from Fairchild
International. The proceeds were used in part to repay the remaining principal
on the then existing senior credit facilities, fund the acquisition of the power
device business, pay Korean valued added tax in connection with the acquisition
(which was subsequently refunded in full) and fund working capital requirements.
Research and development expenditures are made primarily to fund new product
development. Capital expenditures in Fiscal 1999 were made primarily to increase
assembly and test capacity in Fairchild's manufacturing facilities and to
purchase and install an enterprise-wide information system. Capital expenditures
for the next twelve months are expected to be approximately $120.0 million and
will be made primarily to increase capacity and upgrade equipment in our
manufacturing facilities.
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<PAGE> 51
The senior credit facilities, the 10 1/8% Senior Subordinated Notes and the
10 3/8% Senior Subordinated Notes do, and other debt instruments Fairchild may
enter into in the future may, impose various restrictions and covenants on
Fairchild which could potentially limit Fairchild's ability to respond to market
conditions, to provide for unanticipated capital investments or to take
advantage of business opportunities. The restrictive covenants include
limitations on consolidations, mergers and acquisitions, restrictions on
creating liens, restrictions on paying dividends or making other similar
restricted payments, restrictions on asset sales, limitations on borrowing
money, and limitations on capital expenditures, among other restrictions. The
covenants relating to financial ratios include minimum fixed charge and interest
coverage ratios and a maximum leverage ratio. In addition, the senior credit
facilities, the 10 1/8% Senior Subordinated Notes and the 10 3/8% Senior
Subordinated Notes contain additional restrictions limiting the ability of
Fairchild to make dividends or advances to Fairchild International. However,
Fairchild's subsidiaries are permitted without material restrictions under
Fairchild's debt instruments to make dividends or advances to Fairchild. See
"Description of Indebtedness" for a detailed description of the covenants,
including restrictions on dividends, in Fairchild's debt instruments. Fairchild
believes that those funds permitted to be transferred to Fairchild, together
with existing cash, will be sufficient to meet Fairchild's cash obligations.
Fairchild 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 anticipated operating requirements and to fund its
research and development and capital expenditures for the next twelve months. In
the long-term, additional borrowing or equity investment may be required to fund
future acquisitions.
As of May 30, 1999, Fairchild's cash and cash equivalents balance was $62.4
million, an increase of $55.9 million from May 31, 1998.
During Fiscal 1999, Fairchild's operations generated $44.1 million in cash
compared to $136.1 million generated in Fiscal 1998. The decrease in cash
provided by operating activities reflects a decrease in net income adjusted for
noncash items of $80.6 million as well as a decrease in cash flows from changes
in operating assets and liabilities of $11.4 million. Net of the effect of
acquisitions, the change in accounts receivable resulted in a use of cash of
$53.2 million in Fiscal 1999. This is due to receivables generated by the Power
Device Products Group since the acquisition and a temporary increase in aged
balances due to the conversion of accounts receivable to our enterprise software
system in Fiscal 1999. Fairchild expects these aged balances to be reduced in
Fiscal 2000. Cash used in investing activities in Fiscal 1999 totaled $474.6
million compared to $200.5 million in Fiscal 1998. Capital expenditures in
Fiscal 1999 and Fiscal 1998 were being made principally to purchase and install
Fairchild's enterprise-wide information system and to increase capacity in
Fairchild's assembly and test facilities. Cash provided by financing activities
of $486.4 million in Fiscal 1999 was the result of repayments of long-term debt
of $151.3 million, issuance of new long-term debt of $610.0 million, a capital
contribution from Fairchild International of $50.0 million and payment of
financing fees of $22.3 million in connection with the acquisition of the power
device business. Cash provided by financing activities of $30.2 million in
Fiscal 1998 was primarily the result of borrowings used to fund the acquisition
of Raytheon offset by repayments of long-term debt.
On January 1, 1999, 11 of the 15 countries which are members of the
European Monetary Union introduced a new currency called the "Euro." The
conversion rates between the Euro and the participating nations' currencies were
irrevocably fixed on January 1, 1999. Until January 1, 2002, either the Euro or
a participating country's present currency (a "national currency") will be
accepted as legal currency. Fairchild has incorporated the necessary changes to
its information systems to allow it to conduct business in Euros, the cost of
which was not material. While it is not possible to predict the impact the Euro
will have on Fairchild's business or on the economy in general with certainty,
we currently do not anticipate that the Euro conversion will have a material
adverse impact on Fairchild's results of operations or financial condition.
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<PAGE> 52
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Fairchild is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. To mitigate these risks,
Fairchild utilizes derivative financial instruments. Fairchild does not use
derivative financial instruments for speculative or trading purposes. All of the
potential changes noted below are based on sensitivity analyses performed on
Fairchild's financial position at May 30, 1999. Actual results may differ
materially.
Fairchild uses forward and option contracts to hedge firm commitments and
option contracts to hedge anticipated transactions. Gains and losses on these
foreign currency exposures would generally be offset by corresponding losses and
gains on the related hedging instruments, resulting in negligible net exposure
to Fairchild.
A substantial majority of Fairchild's revenue, expense and capital
purchasing activities are transacted in U.S. dollars. However, Fairchild does
conduct these activities by way of transactions denominated in other currencies,
primarily the Korean won, Malaysian ringgit, Philippine peso, Japanese yen,
British pound, and the Euro. Exposures in the Korean won are minimal as won
denominated revenues and costs generally offset one another. To protect against
reductions in value and the volatility of future cash flows caused by changes in
other foreign exchange rates, Fairchild has established hedging programs.
Currency forward contracts and currency option contracts are utilized in these
hedging programs. Fairchild's hedging programs reduce, but do not always
entirely eliminate, the short-term impact of foreign currency exchange rate
movements. For example, an adverse change in any one exchange rate (defined as
20%) over the course of a year would result in an adverse impact on income
before taxes of less than $5.0 million for Fiscal 1999.
Fairchild has no interest rate exposure due to rate changes for the 10 1/8%
Senior Subordinated Notes or the 10 3/8% Senior Subordinated Notes. However,
Fairchild does have interest rate exposure with respect to the $310.0 million
term loan due to its variable LIBOR pricing. For example, a 50 basis point
increase in interest rates would result in increased annual interest expense of
$1.6 million for Fiscal 2000. From time to time, Fairchild enters into interest
rate swaps or interest rate caps, primarily to reduce its interest rate
exposure. As of May 30, 1999, Fairchild had an interest rate cap to cover
exposure on the $310.0 million term loan.
NATIONAL SEMICONDUCTOR RELATIONSHIP
Fairchild and National Semiconductor have arrangements relating to services
and sale of Fairchild's products as follows: First, National Semiconductor has
agreed to purchase products and services from Fairchild until June 11, 2000
under a foundry services agreement. Second, National Semiconductor has agreed to
provide administrative services to Fairchild under a transition services
agreement. Third, National Semiconductor has agreed to indemnify Fairchild
against losses relating to infringement of intellectual property rights of third
parties under a technology licensing and transfer agreement.
National Semiconductor, under the terms of the Asset Purchase Agreement
with Fairchild, 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 $80.0 million of contract manufacturing services in
Fiscal 2000. In addition, National Semiconductor is obligated to cover a
contractually agreed-upon amount of fixed costs in Fairchild's 6-inch wafer
fabrication plant in South Portland, Maine in Fiscal 2000. In the event National
Semiconductor does not purchase $80.0 million of contract manufacturing services
in Fiscal 2000, the Asset Purchase Agreement requires National Semiconductor to
reimburse Fairchild for unabsorbed fixed costs and lost profit on the revenue
shortfall.
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<PAGE> 53
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 of
Fairchild", 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.
In addition to the factors set forth under "Risk Factors," the following
factors may affect Fairchild's operating results for the coming year:
- Fairchild's dependence on continued demand for the end-products such as
personal computers, telecommunications, automotive, and consumer and
industrial electronic goods that incorporate Fairchild's products;
- the ability to efficiently integrate the operations of the power device
business into Fairchild and the risk of losing customers or employees of
the acquired operation; and
- Fairchild's ability to successfully execute on the transfer of wafer
manufacturing processes from its Mountain View facility to its South
Portland facility without negatively impacting yields and customer
service.
On June 24, 1999, the Board of Directors approved a change in the Company's
fiscal year from the last Sunday in May to the last Sunday in December. The
Company will file a Form 10-K for the short fiscal year from May 31, 1999 to
December 26, 1999, which we will refer to as "Stub Year 1999".
Market conditions have generally been improving since the third quarter of
Fiscal 1999. Despite improving market conditions, prices have remained soft as
the industry continues to cope with excess capacity, although Fairchild is
seeing a trend toward firming prices in a number of product segments. Management
also expects the normal seasonal summer slowdown in billings in the first
quarter of Stub Year 1999 as compared to the fourth quarter of Fiscal 1999. As a
result of the acquisition of the power device business, trade sales and EBITDA
in Stub Year 1999 will be substantially higher than the comparable period of
Fiscal 1999.
On August 9, 1999, Fairchild International completed an initial public
offering of 20,000,000 shares of its Class A Common Stock. The gross proceeds
from the offering were $370.0 million. The proceeds were used in part to fund a
capital contribution to Fairchild of $191.0 million, which was used to repay in
full the Tranche A term loan ($100.0 million) and to partially repay the Tranche
B term loan ($91.0 million).
YEAR 2000 COMPLIANCE
In the fourth quarter of Fiscal 1997, Fairchild commenced its enterprise
software system implementation project for the purpose of separating from
National Semiconductor's business systems. The system, which became operational
for several of Fairchild's critical business processes in the first half of
Fiscal 1999, is year 2000 compliant. Additional modules of the system are
scheduled to be implemented through Fiscal 2000. For those legacy systems that
will not be converted by December 31, 1999, year 2000 remediation projects are
underway, and are expected to be completed by September 30, 1999. Fairchild's
business is dependent upon its information systems as an integral part of all
major business processes. Additionally, internal resources have been redeployed
to identify, test and correct year 2000 problems in other systems throughout
Fairchild, including those systems embedded in Fairchild's machinery and
equipment. Identification of systems and equipment that are not year 2000
compliant has been completed. As of May 30, 1999, remediation projects to
correct identified problems are substantially completed. Final completion of all
projects is expected by September 30, 1999. Fairchild is also reviewing the year
2000 readiness and compliance of its principal suppliers of products and
services,
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<PAGE> 54
in order to identify and assess any negative impacts that such non-compliances
could have on Fairchild. In addition, Fairchild is working with its customers to
identify potential year 2000 issues with its products. Fairchild has completed
its assessments. Fairchild does not believe there are any year 2000 problems
with its products. No year 2000 issues were noted with its key suppliers which
in Fairchild's opinion would cause a major disruption to its operations. In
Fiscal 1999, 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 $1.1 million, the majority of which should be incurred before the
end of the second quarter of Fiscal 2000. Although we believe Fairchild's
systems will be year 2000 compliant, the failure of Fairchild's suppliers and
customers to address the year 2000 issue could result in disruption to
Fairchild's operations and have a significant adverse impact on its results of
operations, the extent of which Fairchild has not yet estimated. Fairchild is
actively engaged in preparing contingency plans in the event that key suppliers
fail to become year 2000 compliant. For example, for key materials which are
imported from outside the U.S., arrangements are being made to insure at least
four weeks of available supply. Fairchild, 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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In Fiscal 1999, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivatives and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
The AICPA issued two new Statements of Position ("SOP") prior to Fiscal
1999. SOP 98-1, Accounting for Costs of Computer Software Developed or Obtained
for Internal Use, requires that companies capitalize certain internal-use
software costs upon meeting of certain criteria. This SOP is effective for
fiscal years beginning after December 15, 1998. SOP 98-5, Reporting on the Costs
of Start-up Activities, requires companies to expense start-up costs and
organization costs as they are incurred. This SOP is effective for fiscal years
beginning after December 15, 1998.
Fairchild intends to adopt SOP 98-1 and SOP 98-5 in Stub Year 1999 and SFAS
No. 133 in 2001. Adoption of SOP 98-1 and SOP 98-5 is not expected to have a
material effect on the consolidated financial statements. Fairchild is presently
analyzing SFAS No. 133, and has not yet determined its impact on Fairchild's
consolidated financial statements.
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SELECTED HISTORICAL FINANCIAL DATA OF THE POWER DEVICE BUSINESS
The following table sets forth selected historical financial data of the
power device business. The historical financial data as of and for the years
ended December 31, 1996, 1997 and 1998 are derived directly from the audited
financial statements of the power device business included elsewhere in this
prospectus. The financial statements for the three years ended December 31, 1998
have been translated from South Korean Won into U.S. Dollars based on the
provisions of Statement of Financial Accounting Standards (SFAS) No. 52, Foreign
Currency Translation, and are presented in accordance with U.S. GAAP. For
historical financial information, assets and liabilities have been translated at
the exchange rate on the balance sheet date, and income statement amounts have
been translated using the weighted average of the exchange rates in effect
during the period. The income statement of the power device business has been
translated from Won into U.S. Dollars at the weighted average exchange rates of
805 Won, 951 Won and 1,399 Won to one U.S. Dollar for 1996, 1997 and 1998,
respectively. On June 29, 1999, the noon buying rate as reported by the Federal
Reserve Board of New York was 1,157.5 Won to one U.S. Dollar. This information
should be read in conjunction with the financial statements of the power device
business included elsewhere in this prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Power Device
Business."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $471.8 $478.1 $386.5
Gross profit................................................ $ 56.5 $131.0 $137.3
Research and development.................................... 18.6 19.2 15.2
Selling, general and administrative......................... 29.0 34.3 33.8
Litigation settlement expense............................... -- -- 58.0
------ ------ ------
Operating income............................................ $ 8.9 $ 77.5 $ 30.3
====== ====== ======
OTHER FINANCIAL DATA:
Revenue:
Discrete.................................................. $300.7 $286.4 $224.6
Analog.................................................... 117.4 154.3 145.3
Contract manufacturing services........................... 53.7 37.4 16.6
------ ------ ------
Total revenue............................................... $471.8 $478.1 $386.5
====== ====== ======
Depreciation and amortization............................... $ 49.0 $ 38.8 $ 22.3
Capital expenditures........................................ 118.1 10.9 8.6
HISTORICAL BALANCE SHEET DATA (END OF PERIOD):
Inventories................................................. $ 79.2 $ 50.5 $ 44.0
Total assets................................................ 340.1 188.6 170.3
Business equity............................................. 51.9 37.3 0.3
Cumulative translation adjustments.......................... (4.1) (18.6) (12.1)
</TABLE>
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<PAGE> 56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE POWER DEVICE BUSINESS
The following discussion should be read in conjunction with the financial
statements and notes thereto of the power device business included elsewhere in
this prospectus.
OVERVIEW
The power device business designs, manufactures and markets power discrete
semiconductors and standard analog integrated circuits serving the personal
computer, industrial, telecommunications and consumer electronics markets. On
April 13, 1999, Samsung Electronics sold the power device business to Fairchild
for approximately $414.9 million in cash, including fees and expenses. The power
device business is headquartered in Bucheon, South Korea. For all periods
presented, the power device business has been operated as part of the System LSI
Division of Samsung Electronics. The operating results of the power device
business are not necessarily indicative of the results that would have been
obtained on a stand-alone basis. See Notes to Unaudited Pro Forma Combined
Condensed Financial Statements and Unaudited Supplemental Data.
The functional currency of the power device business is the Won. The
financial statements for the three years ended December 31, 1998, have been
translated into U.S. Dollars based on the provisions of SFAS No. 52, and are
presented in accordance with U.S. GAAP. The income statement of the power device
business has been translated into U.S. Dollars at the weighted average rates of
805 Won, 951 Won, and 1,399 Won to one U.S. Dollar for 1996, 1997 and 1998,
respectively.
The following table summarizes the composition of the revenues of the power
device business as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Trade sales to unaffiliated customers....................... 38.1% 40.9% 48.0%
Trade sales to Samsung Electronics and affiliated Samsung
companies................................................. 19.9 19.7 25.3
Trade sales to Foreign Sales Subsidiaries of Samsung
Electronics............................................... 30.6 31.6 22.4
----- ----- -----
Total product sales......................................... 88.6 92.2 95.7
Contract manufacturing revenues -- Samsung Electronics...... 11.4 7.8 4.3
----- ----- -----
Total.................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
As part of the acquisition of the power device business, Fairchild
negotiated a Product Supply Agreement with Samsung Electronics, which provides
for guaranteed annual minimum levels of product purchases at historical volumes
and at current market-adjusted prices for three years. In addition, the Product
Supply Agreement stipulates that Samsung Electronics will undertake its best
efforts to assure that Fairchild is established as a preferred vendor of
affiliated Samsung companies to the extent permissible under applicable laws and
regulations. The foreign sales subsidiaries of Samsung Electronics re-sell
products of the power device business to third party customers in Asia, North
America, Europe and Japan. As part of the acquisition of the power device
business, Fairchild negotiated continued sales support by the foreign sales
subsidiaries of Samsung Electronics under a Transitional Services Agreement for
a period of three years. The power device business provides wafer fabrication
services to Samsung Electronics. Historically, contract manufacturing revenues
have been recorded at cost. As part of the acquisition of the power device
business, Fairchild negotiated a Foundry Sale Agreement with Samsung Electronics
which is designed to generate Won-denominated profits equivalent to $44.8
million over the next three years (assuming an exchange rate of 1,200 Won to one
U.S. Dollar).
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<PAGE> 57
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS. Net income was $15.7 million for 1998, compared to
$42.9 million for 1997. Net income for 1998 includes a one-time charge for a
settlement of a patent infringement lawsuit of $58.0 million which did not occur
in 1997. Excluding this one-time charge which will remain with Samsung
Electronics, net income was $73.7 million, an increase of 71.8% from 1997.
Operating income, excluding the one-time charge, was $88.3 million in 1998,
compared to $77.5 million in 1997, an increase of 13.9%. The increase in
operating income is due primarily to increased gross profit as a result of the
devaluation of the Won, lower depreciation and a full year's benefit of the
impact of cost reduction actions in 1998, which were undertaken during 1997.
Excluding the one-time charge, foreign currency gains and losses and
depreciation and amortization of $22.3 million and $38.8 million in 1998 and
1997, respectively, EBITDA was $110.6 million in 1998 as compared to $116.3
million in 1997. EBITDA is presented because we believe that it is a widely
accepted 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 power device business, or as an alternative to cash flows as
a measure of liquidity.
Revenues. The revenues of the power device business are comprised of
product sales to third parties, Samsung Electronics and affiliated Samsung
companies and foreign sales subsidiaries of Samsung Electronics (95.7% and 92.2%
of total revenues in 1998 and 1997, respectively) and revenues from contract
manufacturing services provided to Samsung Electronics (4.3% and 7.8% of total
revenues in 1998 and 1997, respectively). Product sales decreased 16.1% to
$369.9 million in 1998 from $440.7 million in 1997, driven by soft market
conditions in the semiconductor industry and the devaluation of the Won. The
decrease in product sales was driven by falling average selling prices, offset
by an increase in unit sales volume of 3.0% year over year. The decrease in
average selling prices is the result of price competition driven by excess
capacity in the semiconductor industry.
Sales of discrete products, representing 60.7% and 65.0% of 1998 and 1997
product sales, respectively, decreased 21.6% in 1998 from 1997. The decrease was
due entirely to lower average selling prices, which declined approximately 24%
in 1998 due in part to the devaluation of the Won, offset by slightly higher
volumes. Sales of analog products, representing 39.3% and 35.0% of 1998 and 1997
product sales, respectively, decreased 5.8% in 1998 from 1997. The decrease was
entirely due to lower average selling prices, which declined approximately 11%
in 1998 due in part to the devaluation of the Won, offset by higher volumes.
Geographically, 87.5%, 6.6% and 5.9% of product sales were derived in Asia,
North America and Europe in 1998, respectively, compared to 85.9%, 8.1% and 6.0%
in 1997. Product sales fell in all regions in 1998 from 1997. Product sales
decreased 14.5%, 31.8% and 17.4% in Asia, North America and Europe,
respectively, in 1998 as compared to 1997. The power device business' product
sales are primarily denominated in U.S. Dollars.
Contract manufacturing revenues decreased 55.6% to $16.6 million in 1998
from $37.4 million in 1997. Contract manufacturing revenues are recorded at
cost. The decrease in 1998 from 1997 was driven by lower demand from Samsung
Electronics.
Gross Profit. Despite lower revenues, gross profit increased 4.8% to
$137.3 million in 1998 from $131.0 million in 1997. As a percentage of product
sales, gross profits were 37.1% in 1998, compared to 29.7% in 1997. The increase
in gross profit as a percentage of product sales was driven by the devaluation
of the Won against the U.S. Dollar, as the power device business' manufacturing
cost structure is primarily Won-based, while revenues are predominately U.S.
Dollar-denominated. The Won devalued 47.1% against the U.S. Dollar in 1998. As a
result of the acquisition of the power device business, Fairchild is seeking to
minimize its exposure to fluctuations in the Won to U.S. Dollar exchange rate.
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<PAGE> 58
Actions to reduce such exposure include increasing revenues denominated in Won
and decreasing costs denominated in Won per the terms of agreements with Samsung
Electronics. Other actions include negotiating U.S. Dollar prices and payment
terms with subcontractors and hedging activities. In addition, gross profit as a
percentage of product sales was enhanced by a full-year's benefit of cost
reduction actions, including efficiencies realized from the transfer of wafer
fabrication processes relating to epitaxial fabrication, which is an
intermediate step in wafer fabrication, and assembly and test activities to
other Samsung Electronics' facilities, which was completed during 1997, offset
by the negative effect of falling average selling prices and reduced factory
utilization in the second half of 1998 as the power device business slowed
production in an effort to reduce inventories.
Research and Development. R&D expenses decreased 20.8% to $15.2 million or
4.1% of product sales in 1998, compared to $19.2 million or 4.4% of product
sales in 1997. The decrease in R&D expenses is due primarily to the devaluation
of the Won against the U.S. Dollar, as R&D expenses are primarily denominated in
Won. In Won, R&D expenses increased approximately 16% in 1998 from 1997 due to
increased headcount and expenses related to the operation of a pilot assembly
line for package development in 1998 which the power device business did not
incur in 1997.
Selling, General and Administrative. SG&A expenses decreased 1.5% to $33.8
million or 9.1% of product sales in 1998, from $34.3 million or 7.8% of product
sales in 1997. The decrease in SG&A expenses is due to the devaluation of the
Won, offset by higher Won-based allocations.
Litigation Settlement. The power device business incurred litigation
settlement costs, payable by Samsung Electronics, of $58.0 million in 1998
resulting from the settlement of a patent infringement lawsuit. No such amounts
were incurred in 1997.
Interest Expense, Net. Interest expense, net was $4.2 million and $10.1
million in 1998 and 1997, respectively. Interest is recorded on the allocated
portion of corporate borrowings by Samsung Electronics and on the amortization
of capital lease obligations on assets held by the power device business. The
reduction in interest in 1998 from 1997 is due primarily to lower corporate
borrowings allocated to the power device business in 1998. Both the allocated
corporate borrowings and the capital lease obligations were retained by Samsung
Electronics as part of the acquisition of the power device business.
Foreign Currency Losses, Net. The power device business experienced
foreign currency losses of $0.9 million in 1998, compared to $5.9 million in
1997. The decreased loss in 1998 is due to moderating foreign exchange losses in
1998 over 1997. In late 1997, the power device business suffered large foreign
exchange transaction losses on accounts payable denominated in U.S. Dollars,
resulting from the sudden devaluation of the Won. Accounts receivable
denominated in U.S. Dollars are not similarly exposed due to one to two day
settlements under letter of credit arrangements. Such transaction losses
moderated during 1998 as the Won strengthened against the U.S. Dollar during the
year.
Income Taxes. Income tax expense was $9.5 million and $18.5 million in
1998 and 1997, respectively. The effective tax rate was 37.8% in 1998, compared
to 30.2% in 1997. The increase in the effective rate is due to the translation
of the patent infringement settlement at the 1998 year ending exchange rate for
purposes of calculating Won-based income tax expense, as opposed to the weighted
average exchange rate for translating U.S. Dollar income tax expense, in
accordance with SFAS No. 52.
The effective tax rates on a Won-denominated basis were 28.8% and 30.2% in
1998 and 1997, respectively.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS. Net income was $42.9 million for 1997, compared to
$2.8 million for 1996. Operating income was $77.5 million in 1997, compared to
$8.9 million in 1996. The increase in
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<PAGE> 59
operating income is due primarily to increased gross profit as a result of the
devaluation of the Won, particularly in the second half of 1997, lower
depreciation and the favorable effect of cost reduction actions undertaken
during 1997. Excluding foreign currency gains and losses and depreciation and
amortization of $38.8 million and $49.0 million in 1997 and 1996, respectively,
EBITDA was $116.3 million in 1997, compared to $57.9 million in 1996.
Revenues. The revenues of the power device business are comprised of
product sales to third parties, Samsung Electronics and affiliated Samsung
companies and foreign sales subsidiaries of Samsung Electronics (92.2% and 88.6%
of total revenues in 1997 and 1996, respectively) and revenues from contract
manufacturing services provided to Samsung Electronics (7.8% and 11.4% of total
revenues in 1997 and 1996, respectively). Product sales increased 5.4% to $440.7
million in 1997 from $418.0 million in 1996. The increase in product sales was
driven by a 7.4% increase in unit shipments, offset by a slight decrease in
average selling prices.
Sales of discrete products, representing 65.0% and 71.9% of 1997 and 1996
product sales, respectively, decreased 4.7% in 1997 from 1996. The decrease was
due to lower average selling prices, which offset a 4% increase in sales
volumes. Sales of analog products, representing 35.0% and 28.1% of 1997 and 1996
product sales, respectively, increased 31.4% in 1997 from 1996. The increase was
due to higher sales volume across all product families and the sales ramp for
the proprietary Samsung Power Switch, offset by slightly lower average selling
prices.
Geographically, 85.9%, 8.1% and 6.0% of product sales were derived in Asia,
North America and Europe in 1997, respectively, compared to 86.4%, 7.7% and 5.9%
in 1996. Product sales increased in all regions in 1997 from 1996. Product sales
increased 4.8%, 11.4% and 6.1% in Asia, North America and Europe, respectively,
in 1997 compared to 1996. The power device business' product sales are
denominated primarily in U.S. Dollars.
Contract manufacturing revenues decreased 30.4% to $37.4 million in 1997
from $53.7 million in 1996. Contract manufacturing revenues are recorded at
cost. The decrease in 1997 from 1996 was driven by lower demand from Samsung
Electronics.
Gross Profit. Gross profit increased 132.2% to $131.0 million in 1997 from
$56.5 million in 1996. As a percentage of product sales, gross profits were
29.7% in 1997, compared to 13.5% in 1996. The increase in gross profit as a
percentage of product sales was driven primarily by the effect of a full-year's
benefit of cost reduction actions, including efficiencies realized from the
transfer of wafer fabrication processes relating to epitaxial fabrication, which
is an intermediate step in wafer fabrication, and assembly and test activities
to other Samsung Electronics' facilities, which was completed during 1997. In
addition, gross profit was negatively impacted by the devaluation of the Won
against the U.S. Dollar, particularly in the second half of 1997, as the power
device business' manufacturing cost structure is primarily Won-based. The Won
devalued 18.1% against the U.S. Dollar in 1997.
Research and Development. R&D expenses increased 3.2% to $19.2 million, or
4.4% of product sales in 1997 compared to $18.6 million or 4.4% of product sales
in 1996. The increase in R&D expenses is primarily due to increased headcount to
support new product and process development activities.
Selling, General and Administrative. SG&A expenses increased 18.4% to
$34.3 million or 7.8% of product sales in 1997, from $29.0 million or 6.9% of
product sales in 1996. The increase in SG&A expenses is due primarily to
increased allocations from Samsung Electronics.
Interest Expense, Net. Interest expense, net was $10.1 million and $10.4
million in 1997 and 1996, respectively. Interest is recorded on the allocated
portion of corporate borrowings by Samsung Electronics and on the amortization
of capital lease obligations on assets held by the power device business. The
reduction in interest in 1997 from 1996 is due primarily to lower corporate
borrowings
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<PAGE> 60
allocated to the power device business in 1997. Neither the allocated corporate
borrowings nor the capital lease obligations were assumed by Fairchild as part
of the acquisition of the power device business.
Foreign Currency Losses, Net. The power device business experienced
foreign currency losses of $5.9 million in 1997, compared to $0.5 million in
1996. The increased loss is due to large foreign exchange losses on accounts
payable denominated in U.S. Dollars in late 1997, resulting from the sudden
devaluation of the Won. Accounts receivable denominated in U.S. Dollars are not
similarly exposed due to one to two day settlements under letter of credit
arrangements. Such a devaluation did not occur in 1996.
Income Taxes. Income tax expense was $18.5 million in 1997, as compared to
an income tax benefit of $4.8 million in 1996. The effective tax rate was 30.2%
in 1997. The effective tax rate for 1996 is not meaningful as the power device
business incurred a net loss before income taxes. Income tax benefits incurred
in 1996 represent an increase in deferred tax assets due to net operating losses
and R&D tax credits that will be utilized to offset future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The power device business' cash flows from operations are used to fund its
working capital, research and development and capital expenditure requirements,
as well as to support the overall cash requirements of Samsung Electronics.
In 1998, the power device business generated cash from operations of $128.1
million compared to $74.3 million in 1997. The increase is due to higher net
income adjusted for non-cash items, due to improved profitability as a result of
the devaluation of the Won, and increased cash flows from changes in operating
assets and liabilities, principally trade accounts and notes receivable, due to
not selling its U.S. Dollar-denominated receivables to banks in 1997 in
anticipation of a stronger U.S. Dollar. Cash used by investing activities was
$5.7 million in 1998, compared to $0.1 million in 1997. The increase was due to
less proceeds received in 1998 for sales of property, plant and equipment,
offset by lower capital expenditures. Cash used in financing activities was
$106.8 million in 1998, compared to $157.1 million in 1997. The decrease was due
to lower net corporate borrowings and lower capital lease payments.
Over the past three years, the power device business has spent
approximately $135.9 million, primarily for a new wafer fabrication line.
Capital expenditures are expected to be approximately $20.0 million in 1999. The
power device business' future cash flows from operations may be used by
Fairchild and its subsidiaries for their working capital and financing
requirements.
YEAR 2000 COMPLIANCE
The power device business is dependent upon the information systems of
Samsung Electronics. Under the terms of an agreement with Samsung SDS Co., Ltd.
entered into in connection with the acquisition of the power device business,
Samsung SDS Co., Ltd. has agreed to provide information technology services to
the power device business and to support the use of its information systems by
the power device business for a three-year period following consummation of the
acquisition of the power device business. See "The Acquisition -- Transitional
Services Agreement." The terms of the agreement with Samsung SDS Co., Ltd.
require them to insure the systems utilized by the power device business are
year 2000 compliant. Samsung Electronics' systems have been certified by a
Korean government agency to be year 2000 compliant.
The power device business has deployed internal resources to identify, test
and correct year 2000 problems in other systems it employs, including those
embedded in its machinery and equipment. Year 2000 issues in its critical
manufacturing equipment and systems have been remedied. With the assistance of
Samsung Electronics, the power device business reviewed the year 2000 readiness
and
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<PAGE> 61
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 power device business. All key suppliers, including raw material suppliers
and subcontractors, have been assessed, with no major issues identified. In
addition, the power device business is working with its customers to identify
potential year 2000 problems with its products. To date, none have been
identified. For 1998, 1997 and 1996, incremental amounts incurred and charged to
expense to identify, test and correct year 2000 problems were immaterial to the
financial statements. Future amounts expected to be incurred are also believed
to be immaterial. Although the power device business expects its other systems
will be year 2000 compliant, either the failure of Samsung Electronics to make
its systems year 2000 compliant or the failure of its key suppliers and
customers to address the year 2000 issue could result in disruption to the
operations of the power device business and have a significant adverse effect on
its results of operations, the extent of which cannot be estimated. The power
device business is in the process of developing contingency plans in the event
that certain or all of Samsung Electronics' systems fail to become year 2000
compliant, or the operations of key suppliers or customers become disrupted.
Such contingency plans are expected to be completed by October 1999.
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<PAGE> 62
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We issued and sold the Existing Notes to the Initial Purchasers on April 7,
1999, which we refer to as the Issue Date. The Initial Purchasers subsequently
sold the Existing Notes to qualified institutional buyers in reliance on Rule
144A under the Securities Act. Because the Existing Notes are subject to certain
transfer restrictions, our company, Fairchild International and the initial
purchasers entered into a Registration Rights Agreement dated March 30, 1999
under which we agreed:
- within 60 days after the Issue Date, to prepare and file with the
Securities and Exchange Commission the Registration Statement of which
this prospectus is a part;
- within 150 days after the Issue Date, to use our best efforts to cause
the Registration Statement to become effective under the Securities Act;
- upon the effectiveness of the Registration Statement, to offer the
Exchange Notes in exchange for surrender of the Existing Notes; and
- to keep the Exchange Offer open for not less than 30 days (or longer if
required by applicable law) after the date notice of the Exchange Offer
is mailed to the holders of the Existing Notes.
The Registration Statement is intended to satisfy in part our obligations with
respect to the Existing Notes under the Registration Rights Agreement.
Under existing interpretations of the Securities and Exchange Commission,
the Exchange Notes will be freely transferable by holders other than our
affiliates after the Exchange Offer without further registration under the
Securities Act if the holder of the Exchange Notes represents that:
- it is acquiring the Exchange Notes in the ordinary course of its
business;
- it has no arrangement or understanding with any person to participate in
the distribution of the Exchange Notes; and
- it is not an affiliate of Fairchild, as such terms are interpreted by the
Securities and Exchange Commission.
However, broker-dealers, which we refer to as the Participating Broker-Dealers,
receiving Exchange Notes in the Exchange Offer will have a prospectus delivery
requirement with respect to resales of such Exchange Notes. The Securities and
Exchange Commission has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to Exchange Notes
(other than a resale of an unsold allotment from the original sale of the
Existing Notes) with this prospectus. Under the Registration Rights Agreement,
we are required to allow Participating Broker-Dealers and other persons, if any,
with similar prospectus delivery requirements to use this prospectus in
connection with the resale of such Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Existing Notes,
where such Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING EXISTING NOTES
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), we will accept for exchange Existing Notes which are properly
tendered on or prior to the Expiration Date and not withdrawn as permitted
below. As used in the prospectus, the term "Expiration Date" means 5:00 p.m.,
New York City time, on , 1999. However, if we, in our sole
discretion, have extended the period of time
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<PAGE> 63
for which the Exchange Offer is open, the term "Expiration Date" means the
latest time and date to which the Exchange Offer is extended.
As of the date of this prospectus, $300.0 million aggregate principal
amount of the Existing Notes are outstanding. This prospectus, together with the
Letter of Transmittal, is first being sent on or about , 1999 to
all holders of Existing Notes known to us. Our obligation to accept Existing
Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth under "-- Certain Conditions to the Exchange Offer"
below.
We expressly reserve the right, at any time or from time to time, to extend
the period of time during which the Exchange Offer is open, and thereby delay
acceptance for any exchange of any Existing Notes, by giving notice of such
extension to the holders of Existing Notes as described below. During any such
extension, all Existing Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by us. Any Existing Notes not
accepted for exchange for any reason will be returned without expense to the
tendering holder as promptly as practicable after the expiration or termination
of the Exchange Offer.
We expressly reserve the right to amend or terminate the Exchange Offer,
and not to accept for exchange any Existing Notes not previously accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under "-- Certain Conditions to the Exchange Offer." We will
give notice of any extension, amendment, non-acceptance or termination to the
holders of the Existing Notes as promptly as practicable, such notice in the
case of any extension to be issued no later than 9:00 a.m., New York City time,
on the next business day after the previously scheduled Expiration Date.
Holders of Existing Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law in connection with the Exchange
Offer.
PROCEDURES FOR TENDERING EXISTING NOTES
The tender to us of Existing Notes by a holder of Existing Notes as set
forth below and the acceptance of such tender by us will constitute a binding
agreement between the tendering holder and us upon the terms and subject to the
conditions set forth in this prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, a holder who wishes to tender Existing
Notes for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to United States Trust Company of New
York at one of the addresses set forth below under "-- Exchange Agent" on or
prior to the Expiration Date. In addition, the Exchange Agent must receive:
- certificates for such Existing Notes along with the Letter of
Transmittal, or
- prior to the Expiration Date, a timely confirmation of a book-entry
transfer of such Existing Notes into the Exchange Agent's account at The
Depository Trust Company pursuant to the procedure for book-entry
transfer described below, or
- the holder must comply with the guaranteed delivery procedure described
below.
The method of delivery of Existing Notes, Letters of Transmittal and all
other required documents is at your election and risk. If such delivery is by
mail, we recommend that you use registered mail, properly insured, with return
receipt requested. In all cases, you should allow sufficient time to assure
timely delivery. You should not send Letters of Transmittal or Existing Notes to
us.
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<PAGE> 64
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Existing Notes surrendered for
exchange are tendered:
- by a registered holder of the Existing Notes who has not completed the
box entitled "Special Issuance Instruction" or "Special Delivery
Instruction" on the Letter of Transmittal; or
- for the account of an Eligible Institution (as defined below).
In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantees
must be by a firm which is a member of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc. or by a
commercial bank or trust company having an office or correspondent in the United
States, which we collectively refer to as Eligible Institutions. If Existing
Notes are registered in the name of a person other than a signer of the Letter
of Transmittal, the Existing Notes surrendered for exchange must be endorsed by,
or be accompanied by a written instrument or instruments of transfer or
exchange, in satisfactory form as determined by us in our sole discretion, duly
executed by the registered holder with the signature on such Existing Notes
guaranteed by an Eligible Institution.
Any beneficial owner whose Existing Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee, and who wishes
to tender, should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Existing Notes, either (1) make appropriate arrangements to register
ownership of the Existing Notes in such owner's name or (2) obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Existing Notes tendered for exchange will be
determined by us in our sole discretion. This determination shall be final and
binding. We reserve the absolute right to reject any and all tenders of any
particular Existing Notes not properly tendered or to not accept any particular
Existing Notes which acceptance might, in our judgment or our counsel's
judgment, be unlawful. We also reserve the absolute right to waive any defects
or irregularities or conditions of the Exchange Offer as to any particular
Existing Notes either before or after the Expiration Date (including the right
to waive the ineligibility of any holder who seeks to tender Existing Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer as to any particular Existing Notes either before or after the
Expiration Date (including the Letter of Transmittal and the instructions to
such Letter of Transmittal) by us shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of
Existing Notes for exchange must be cured within such reasonable period of time
as we shall determine. Neither we, the Exchange Agent nor any other person shall
be under any duty to give notification of any defect or irregularity with
respect to any tender of Existing Notes for exchange, nor shall any of them
incur any liability for failure to give such notification.
If the Letter of Transmittal or any Existing Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
us, proper evidence satisfactory to us of their authority to so act must be
submitted.
By tendering, each holder of Existing Notes will represent to us in writing
that, among other things:
- the Exchange Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the holder and any
beneficial holder;
- neither the holder nor any such beneficial holder has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes; and
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<PAGE> 65
- neither the holder nor any such other person is an "affiliate," as
defined under Rule 405 of the Securities Act, of our company. If the
holder is not a broker-dealer, the holder must represent that it is not
engaged in nor does it intend to engage in distribution of the Exchange
Notes.
If any holder or any such other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of ours, or is engaged in, or intends to engage
in, or has an arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes to be acquired pursuant to the Exchange
Offer, such holder or any such other person (1) may not rely on the applicable
interpretations of the staff of the Securities and Exchange Commission and (2)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
If the holder is a broker-dealer, the holder must represent that it will
receive Exchange Notes for its own account in exchange for Existing Notes that
were acquired as a result of market-making activities or other trading
activities. Each broker-dealer that receives Exchange Notes for its own account
in exchange for Existing Notes, where such Existing Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
we will accept, promptly after the Expiration Date, all Existing Notes property
tendered, and will issue the Exchange Notes promptly after acceptance of the
Existing Notes. See "-- Certain Conditions to the Exchange Offer" below. For
purposes of the Exchange Offer, we shall be deemed to have accepted properly
tendered Existing Notes for exchange when, as and if we have given oral and
written notice to the Exchange Agent.
The Exchange Notes will bear interest from the most recent date to which
interest has been paid on the Existing Notes, or if no interest has been paid on
the Existing Notes, from April 7, 1999. Accordingly, registered holders of
Exchange Notes on the relevant record date for the first interest payment date
following the consummation of the Exchange Offer will receive interest accruing
from the most recent date to which interest has been paid or, if no interest has
been paid, from April 7, 1999. Existing Notes accepted for exchange will cease
to accrue interest from and after the date of consummation of the Exchange
Offer. Holders of Existing Notes whose Existing Notes are accepted for exchange
will not receive any payment in respect of accrued interest on such Existing
Notes otherwise payable on any interest payment date the record date for which
occurs on or after consummation of the Exchange Offer and will be deemed to have
waived their rights to receive such accrued interest on the Existing Notes.
In all cases, issuance of Exchange Notes for Existing Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (1) certificates for such Existing Notes
or a timely confirmation of a book-entry transfer of such Existing Notes into
the Exchange Agent's account at The Depository Trust Company, (2) a properly
completed and duly executed Letter of Transmittal and (3) all other required
documents. If any tendered Existing Notes are not accepted for any reason set
forth in the terms and conditions of the Exchange Offer or if Existing Notes are
submitted for a greater principal amount than the holder desires to exchange,
such unaccepted or non-exchanged Existing Notes will be returned without expense
to the tendering holder of such Existing Notes (or, in the case of Existing
Notes tendered by book-entry transfer into the Exchange Agent's account at The
Depository Trust Company according to the book-entry transfer procedures
described below, such non-exchanged Existing Notes will be credited to an
account maintained with such Depository Trust Company) as promptly as
practicable after the expiration of the Exchange Offer.
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<PAGE> 66
BOOK-ENTRY TRANSFER
Any financial institution that is a participant in The Depository Trust
Company's systems may make book-entry delivery of Existing Notes by causing The
Depository Trust Company to transfer such Existing Notes into the Exchange
Agent's account at The Depository Trust Company in accordance with The
Depository Trust Company's procedures for transfer. However, although delivery
of Existing Notes may be effected through book-entry transfer at The Depository
Trust Company, the Letter of Transmittal or facsimile thereof with any required
signature guarantees and any other required documents must, in any case, be
transmitted to and received by the Exchange Agent at one of the addresses set
forth below under "-- Exchange Agent" on or prior to the Expiration Date, unless
such holder has strictly complied with the guaranteed delivery procedures
described below.
We understand that the Exchange Agent has confirmed with the Book-Entry
Transfer Facility that any financial institution that is a participant in The
Depository Trust Company's system may utilize the Book-Entry Transfer Facility's
Automated Tender Offer Program to tender Existing Notes. We further understand
that the Exchange Agent will request, within two business days after the date
the Exchange Offer commences, that The Depository Trust Company establish an
account with respect to the Existing Notes for the purpose of facilitating the
Exchange Offer, and any participant may make book-entry delivery of Existing
Notes by causing The Depository Trust Company to transfer such Existing Notes
into the Exchange Agent's account in accordance with The Depository Trust
Company's Automated Tender Offer Program procedures for transfer. However, the
exchange of the Existing Notes so tendered will only be made after timely
confirmation of such book-entry transfer and timely receipt by the Exchange
Agent of an Agent's Message (as defined in the next sentence), an appropriate
Letter of Transmittal with any required signature guarantee, and any other
documents required. The term "Agent's Message" means a message, transmitted by
The Depository Trust Company and received by the Exchange Agent and forming part
of a confirmation of a book-entry transfer, which states that The Depository
Trust Company has received an express acknowledgment from a participant
tendering Existing Notes which are the subject of such confirmation of a
book-entry transfer and that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal and that we may enforce such
agreement against such participant.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Existing Notes desires to tender such
Existing Notes and the Existing Notes are not immediately available, or time
will not permit such holder's Existing Notes or other required documents to
reach the Exchange Agent before the Expiration Date, or the procedure for book-
entry transfer cannot be completed on a timely basis, a tender may nonetheless
be effected if:
- the tender is made through an Eligible Institution;
- prior to the Expiration Date, the Exchange Agent received from such
Eligible Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by us (by telegram, telex, facsimile
transmission, mail or hand delivery), setting forth the name and address
of the holder of Existing Notes and the amount of Existing Notes
tendered, stating that the tender is being made thereby and guaranteeing
that within five New York Stock Exchange trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Existing Notes, in proper form for transfer, or a
confirmation of a book-entry transfer, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
- the certificates for all physically tendered Existing Notes, in proper
form for transfer, or a confirmation of a book-entry transfer, as the
case may be, and all other documents required by the
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<PAGE> 67
Letter of Transmittal are received by the Exchange Agent within five NYSE
trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Existing Notes may be withdrawn at any time prior to the
Expiration Date. For a withdrawal to be effective, a written notice of
withdrawal must be received by the Exchange Agent at one of the addresses set
forth below under "-- Exchange Agent." Any such notice of withdrawal must:
- specify the name of the person having tendered the Existing Notes to be
withdrawn;
- identify the Existing Notes to be withdrawn (including the principal
amount of such Existing Notes); and
- where certificates for Existing Notes have been transmitted specify the
name in which such Existing Notes are registered, if different from that
of the withdrawing holder.
If certificates for Existing Notes have been delivered or otherwise identified
to the Exchange Agent, then, prior to the release of such certificates, the
withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an Eligible Institution unless such holder is an Eligible
Institution.
If Existing Notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at The Depository Trust Company to be credited
with the withdrawn Existing Notes and otherwise comply with the procedures of
such facility. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by us, whose determination
shall be final and binding on all parties. Any Existing Notes so withdrawn will
be deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Existing Notes which have been tendered for exchange but
which are not exchanged for any reason will be returned to the holder thereof
without cost to such holder (or in the case of Existing Notes tendered by
book-entry transfer into the Exchange Agent's account at The Depository Trust
Company according to the book-entry transfer procedures described above, such
Existing Notes will be credited to an account maintained with The Depository
Trust Company for the Existing Notes) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Existing Notes may be retendered by following one of the procedures described
under "-- Procedures for Tendering Existing Notes" above at any time on or prior
to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, we shall not be
required to accept for exchange, or to issue Exchange Notes in exchange for, any
Existing Notes and may terminate or amend the Exchange Offer if it any time
before the acceptance of such Existing Notes for exchange or the exchange of
Exchange Notes for such Existing Notes, we determine that:
- the Exchange Offer does not comply with any applicable law or any
applicable interpretation of the staff of the Securities and Exchange
Commission;
- we have not received all applicable governmental approvals; or
- any actions or proceedings of any governmental agency or court exist
which could materially impair our ability to consummate the Exchange
Offer.
The foregoing conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any such condition or may be
waived by us in whole or in part at any time and from time to time in our
reasonable discretion. Our failure at any time to exercise any of the
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foregoing rights shall not be deemed a waiver of such right and each such right
shall be deemed an ongoing right which may be asserted at any time and from time
to time.
In addition, we will not accept for exchange any Existing Notes tendered,
and no Exchange Notes will be issued in exchange for any such Existing Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended. In any such event we are required to use every reasonable effort to
obtain the withdrawal of any stop order at the earliest possible time.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as the Exchange
Agent for the Exchange Offer. All executed Letters of Transmittal should be
directed to the Exchange Agent at one of the addresses set forth below.
Questions and requests for assistance, requests for additional copies of this
prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C> <C>
By Hand, up to 4:30 p.m.: By Registered or Certified Mail: By Overnight Courier & By Hand
United States Trust Company United States Trust Company after 4:30 p.m. on the expiration
of New York of New York date only:
111 Broadway P.O. Box 844 United States Trust Company
Lower Level Attn: Corporate Trust Services of New York
Attn: Corporate Trust Services Cooper Station 770 Broadway, 13th Floor
New York, New York 10006 New York, New York New York, New York 10003
10276-0844 Attn: Corporate Trust Services
By Facsimile:
(212) 420-6211
Confirm by Telephone:
(800) 548-6565
</TABLE>
Delivery other than as set forth above will not constitute a valid
delivery.
FEES AND EXPENSES
We will not make any payments to brokers, dealers or others soliciting
acceptances of the Exchange Offer. The principal solicitation is being made by
mail; however, additional solicitations may be made in person or by telephone by
our officers and employees.
The expenses to be incurred in connection with the Exchange Offer will be
paid by us. Such expenses include fees and expenses of the Exchange Agent and
Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying amount as the
Existing Notes, which is the principal amount as reflected in our accounting
records on the date of the exchange and, accordingly, no gain or loss will be
recognized. The debt issuance costs will be capitalized and amortized to
interest expense over the term of the Exchange Notes.
TRANSFER TAXES
Holders who tender their Existing Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith, except that holders who
instruct us to register Exchange Notes in the name of,
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or request that Existing Notes not tendered or not accepted in the Exchange
Offer be returned to, a person other than the registered tendering holder will
be responsible for the payment of any applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF EXCHANGE NOTES
Holders of Existing Notes who do not exchange their Existing Notes for
Exchange Notes in the Exchange Offer will continue to be subject to the
restrictions on transfer of such Existing Notes as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of, the Securities Act and applicable state securities laws.
Existing Notes not exchanged pursuant to the Exchange Offer will continue to
accrue interest at 10 3/8% per annum and will otherwise remain outstanding in
accordance with their terms. Holders of Existing Notes do not have any appraisal
or dissenters' rights under the Delaware General Corporation Law in connection
with the Exchange Offer. In general, the Existing Notes may not be offered or
sold unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. We do not currently anticipate that we will register the
Existing Notes under the Securities Act. However, (i) if any Initial Purchaser
so requests with respect to Existing Notes not eligible to be exchanged for
Exchange Notes in the Exchange Offer and held by it following consummation of
the Exchange Offer or (ii) if any holder of Existing Notes (other than a
broker-dealer that receives Exchange Notes for its own account in exchange for
Existing Notes, where such Existing Notes were acquired by the broker-dealer as
a result of market-making or other trading activities) is not eligible to
participate in the Exchange Offer or, in the case of any holder of Existing
Notes (other than a broker-dealer that receives Exchange Notes for its own
account in exchange for Existing Notes, where such Existing Notes were acquired
by the broker-dealer as a result of market-making or other trading activities)
that participates in the Exchange Offer, does not receive Exchange Notes in
exchange for Existing Notes that may be sold without restriction under state and
federal securities laws (other than due solely to the status of such holder as
an affiliate of us within the meaning of the Securities Act), we are obligated
to file a shelf registration statement on the appropriate form under the
Securities Act relating to the Existing Notes held by such persons.
Based on certain interpretive letters issued by the staff of the Securities
and Exchange Commission to third parties in unrelated transactions, we are of
the view that Exchange Notes issued pursuant to the Exchange Offer may be
offered for resale, resold or otherwise transferred by holders thereof (other
than (i) any such holder which is an "affiliate" of us within the meaning of
Rule 405 under the Securities Act or (ii) any broker-dealer that purchases Notes
from us to resell pursuant to Rule 144A or any other available exemption)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holders' business and such holders have no arrangement
or understanding with any person to participate in the distribution of such
Exchange Notes. If any holder has any arrangement or understanding with respect
to the distribution of the Exchange Notes to be acquired pursuant to the
Exchange Offer, such holder (i) could not rely on the applicable interpretations
of the staff of the Securities and Exchange Commission and (ii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. A broker-dealer who holds
Existing Notes that were acquired for its own account as a result of
market-making or other trading activities may be deemed to be an "underwriter"
within the meaning of the Securities Act and must, therefore, deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of Exchange Notes. Each such broker-dealer that receives Exchange Notes
for its own account in exchange for Existing Notes, where such Existing Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge in the Letter of Transmittal that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See "Plan of Distribution."
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We have not requested the staff of the Securities and Exchange Commission to
consider the Exchange Offer in the context of a no-action letter, and there can
be no assurance that the staff would take positions similar to those taken in
the interpretive letters referred to above if we were to make such a no-action
request.
In addition, to comply with the securities laws of certain jurisdictions,
if applicable, the Exchange Notes may not be offered or sold unless they have
been registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and is complied with. We have agreed,
pursuant to the Registration Rights Agreement and subject to certain specified
limitations therein, to register or qualify the Exchange Notes for offer or sale
under the securities or blue sky laws of such jurisdictions in the United States
as any selling holder of the Notes reasonably requests in writing.
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INDUSTRY OVERVIEW
Semiconductors are the critical components used to create an increasing
variety of electronic products and systems. Since the invention of the
transistor in 1948, continuous improvements in semiconductor process and design
technologies have led to smaller, more complex and more reliable devices at a
lower cost per function. As performance has increased and size and cost have
decreased, semiconductors have expanded beyond their original primary
applications in computer systems to applications in telecommunications systems,
automotive products, consumer products and industrial automation and control
systems. In addition, system users and designers have demanded systems with
increased functionality, higher levels of performance, greater reliability and
shorter design cycle times, all in smaller packages at lower costs. These
demands have resulted in increased semiconductor content as a percentage of the
system costs of electronic products. The demand for electronic systems has also
expanded geographically with the emergence of new markets, particularly in the
Asia region.
Historically, changes in production capacity in the semiconductor industry
and, to a lesser extent, demand for electronic systems have resulted in
pronounced fluctuations in prices and margins. However, we believe that the
following factors may limit the severity of future cyclical variations: the
development of new semiconductor applications, the increased semiconductor
content as a percentage of total system cost, the trend towards consolidation in
the industry, more moderate capital spending on production capacity and the
increased customer use of just-in-time supply systems that have reduced
inventory levels.
Additionally, these trends have helped build demand for multi-market
companies that can provide a wide range of building block semiconductors as a
single-source supplier. Utilizing a single supplier with a sufficiently broad
product portfolio contributes to a manufacturer's overall cost reduction, and
helps to simplify the production of electronic products and systems.
Since 1990, the semiconductor market has expanded at a compounded annual
growth rate of approximately 12.0%, primarily as a result of two factors. The
first is the rapidly expanding end-user demand for faster, smaller and more
efficient electronic devices, with a greater range of functionality and
reliability, at lower costs. The second is the increasing value of
semiconductors as a percentage of the cost of electronic systems. According to
Worldwide Semiconductor Trade Statistics, the worldwide semiconductor total
available market declined to $125.6 billion in 1998 from $137.2 billion in 1997.
The decline was due primarily to an industry-wide drop in average selling prices
due to industry overcapacity. In addition, during the same period, total
available market for the DRAM segment of the semiconductor market declined by
29.3%, compared to a decline of 4.9% for all other segments in the aggregate.
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SEMICONDUCTOR CLASSIFICATIONS
The following table sets forth the worldwide semiconductor total available
market in each of the three product functions of the semiconductor industry:
<TABLE>
<CAPTION>
WORLDWIDE SEMICONDUCTOR TOTAL AVAILABLE MARKET(1)
------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 CAGR(2)
----- ----- ----- ----- ------ ------ ------ ------ ------ -------
(DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Micro components............. $ 9.2 $11.4 $13.9 $19.1 $ 23.8 $ 33.4 $ 39.8 $ 47.8 $ 47.3 22.7%
Memory:
Volatile................... 8.7 9.1 11.4 16.4 27.2 46.9 29.9 23.6 17.9 9.4%
Non-volatile............... 3.1 3.1 3.4 4.8 5.3 6.6 6.1 5.7 5.1 6.4%
----- ----- ----- ----- ------ ------ ------ ------ ------
Total memory............. 11.8 12.2 14.8 21.3 32.5 53.5 36.0 29.3 23.0 8.7%
Moving/Shaping............... 29.6 31.0 31.1 37.0 45.6 57.5 56.1 60.1 55.3 8.1%
----- ----- ----- ----- ------ ------ ------ ------ ------
Total.................... $50.5 $54.6 $59.9 $77.3 $101.9 $144.4 $132.0 $137.2 $125.6 12.0%
===== ===== ===== ===== ====== ====== ====== ====== ======
</TABLE>
- -------------------------
(1) According to Worldwide Semiconductor Trade Statistics. Due to rounding, some
totals are not arithmetically correct sums of their component figures.
(2) Compounded annual growth rate. Represents the compounded annual growth rate
for the semiconductor industry since 1990.
The semiconductor industry can be divided into three product functions:
microcomponents, memory and moving and shaping. Microcomponents include
microprocessors and microcontrollers that process data according to instruction
sets embedded within the semiconductors themselves. These are considered the
"brains" of the electronic system and are at the center of the system
architecture. Memory includes two types of memory devices, volatile and
non-volatile, that store data and instructions. Volatile memory devices, which
need continual application of electricity to retain data, can be segmented into
DRAM (dynamic random access memory), SRAM (static random access memory) and VRAM
(video random access memory). Non-volatile devices, which retain data after
power to the device has been shut off, can be segmented into ROM (read-only
memory), EPROM, EEPROM and FLASH (memories that enable high speed electrical
reprogramming). Moving and shaping includes the moving of commands and the
shaping of signals to enable electronic devices to perform intended functions,
including moving information into memory or from one sub-system to another, or
allowing microprocessors to process data.
Semiconductors are either analog/mixed signal, where electronic signals are
not viewed as "one" and "zero," or digital integrated circuits, such as logic
devices, that do rely on ones and zeroes to control the operation of electronic
systems. Furthermore, semiconductors are classified as either standard
components or application-specific components. Multi-market standard components
are used by a large group of systems designers for a broad range of
applications, while application-specific components are designed to perform
specific functions in specific applications.
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FAIRCHILD MARKETS
The following table sets forth information with respect to worldwide
semiconductor sales by product family and process technology in which we
participate:
<TABLE>
<CAPTION>
WORLDWIDE SEMICONDUCTOR SALES(1)
------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ----- ----- ----- ----- ----- -----
(DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MOVING & SHAPING:
ANALOG
Standard Linear....... $3.0 $3.0 $3.1 $ 3.8 $ 4.7 $ 5.7 $ 5.5 $ 6.2 $ 5.7
Mixed Signal.......... 4.8 5.3 5.6 6.9 8.9 10.9 11.5 13.6 13.3
---- ---- ---- ----- ----- ----- ----- ----- -----
Total.............. $7.8 $8.3 $8.7 $10.7 $13.6 $16.6 $17.0 $19.8 $19.0
==== ==== ==== ===== ===== ===== ===== ===== =====
DISCRETE
DMOS Power............ $0.6 $0.7 $0.8 $ 1.1 $ 1.4 $ 2.1 $ 2.2 $ 2.2 $ 2.0
Bipolar............... 4.2 4.2 4.1 4.6 5.5 7.1 6.2 6.1 5.3
IGBT.................. -- -- -- -- -- 0.5 0.6 0.6 0.7
---- ---- ---- ----- ----- ----- ----- ----- -----
Total.............. $4.8 $4.9 $4.9 $ 5.7 $ 6.9 $ 9.7 $ 9.0 $ 8.9 $ 8.0
==== ==== ==== ===== ===== ===== ===== ===== =====
LOGIC
Bipolar............... $1.5 $1.4 $1.3 $ 1.5 $ 1.3 $ 1.3 $ 0.9 $ 0.9 $ 0.6
CMOS/BiCMOS........... 1.1 1.1 1.0 1.4 1.8 2.3 2.1 2.4 1.9
---- ---- ---- ----- ----- ----- ----- ----- -----
Total.............. $2.6 $2.5 $2.3 $ 2.9 $ 3.1 $ 3.6 $ 3.0 $ 3.3 $ 2.5
==== ==== ==== ===== ===== ===== ===== ===== =====
MEMORY:
NON-VOLATILE MEMORY
EPROM................. $1.6 $1.4 $1.2 $ 1.3 $ 1.4 $ 1.4 $ 1.1 $ 0.7 $ 0.5
EEPROM(2)............. 0.2 0.2 0.5 0.7 0.7 0.9 0.9 0.9 0.9
---- ---- ---- ----- ----- ----- ----- ----- -----
Total.............. $1.8 $1.6 $1.7 $ 2.0 $ 2.1 $ 2.3 $ 2.0 $ 1.6 $ 1.4
==== ==== ==== ===== ===== ===== ===== ===== =====
</TABLE>
- -------------------------
(1) All data other than data for EEPROM, according to Worldwide Semiconductor
Trade Statistics. Due to rounding, some totals are not arithmetically
correct sums of their component figures.
(2) According to ICE Corporation and Dataquest.
MOVING AND SHAPING MARKETS
Analog Market. Analog products are used to shape or condition electrical
signals, to amplify electrical signal strength, to convert electrical signals to
and from digital "one or zero" levels, to regulate voltage levels and to provide
interfaces between other products within an electrical system. The analog market
is split into two major segments: Standard Linear and Mixed Signal. The Standard
Linear market is comprised of building block products such as amplifiers,
voltage regulators, data conversion, interface circuits, and comparators. These
products are used in all end systems, from computers and telecommunications, to
industrial, automotive and consumer applications. The Mixed Signal market
consists of more complex analog products, which also contain some digital
circuitry for timing, information control and data flow. Mixed Signal products
are often developed for specific applications,
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such as video encoding, hard disk drive control, data transmission, motor
control and power supply control. We compete in both the Standard Linear and
Mixed Signal markets.
Discrete Market. The discrete business, unlike logic and memory, is highly
fragmented and composed of dozens of middle market players. Discrete devices
consist of individual diodes or transistors, whereas integrated circuits (such
as memory or logic devices) combine millions of functions into a "single chip"
of silicon to form a more complex circuit. Discrete products are differentiated
almost entirely on the basis of performance, as opposed to on the basis of
function as in the integrated circuit market. We participate in both the power
and small signal discrete markets, manufacturing devices that condition power or
signals for use by other devices. While small signal discrete markets have
generally grown at slower, but more stable, rates than integrated circuit
markets, the power discrete market is rapidly growing due to the increasing
importance of power management, particularly in portable applications (e.g.,
pagers and notebook computers).
Standard Logic Market. Logic devices are integrated circuits that control
the operation of electronic systems and move data. The standard logic market is
fully digital and has five major participants, of which we are one of the
leaders. Standard logic products are fabricated through three primary process
technologies: Bipolar, CMOS and BiCMOS. Bipolar technology is targeted for high
speed applications while CMOS technology allows the manufacturer to create a
denser chip, consuming less power and generating less heat. BiCMOS is a hybrid
of Bipolar and CMOS. While Bipolar semiconductors were once used extensively in
large computer systems, CMOS has become the most prevalent technology,
particularly for devices used in portable personal computer systems. Given the
growing demand for portability, use of CMOS technology is expected to continue
to expand; however, the demand for Bipolar is expected to continue as a result
of its lower cost and suitability for particular applications.
MEMORY MARKET
Non-Volatile Memory Market. The memory market is comprised of volatile
memory devices (DRAM, SRAM and VRAM) and non-volatile memory devices (ROM,
EPROM, EEPROM and FLASH). Volatile memory devices need continual application of
electricity to retain data, while non-volatile memory retains data after the
power to the device has been turned off. Most of the historic economic
cyclicality in the semiconductor industry has been attributable to the volatile
memory market, as evidenced by a 29.3% decline in 1998 market sales versus a
4.9% decrease for the microcomponents, moving & shaping and non-volatile memory
markets.
We produce standard EPROM and EEPROM products, but also fabricate
application-specific EEPROM devices. We have standardized the
application-specific nature of the EEPROM process, having designed it to perform
functions in a specific application, but not be proprietary for any single
customer. EEPROMs are being used extensively due to their ease of
programmability, and the demand for these products is growing rapidly. The
EEPROM market has grown at a compounded annual growth rate of 20.7% from 1990 to
1998, ahead of the overall semiconductor market growth. EEPROMs are somewhat
isolated from FLASH products, as they serve different market needs.
Reprogrammable EEPROMs are used in many products to store frequently used phone
numbers (fax machines), store accumulated phone time (cellular phones) and
change authorization codes (keyless security systems). EPROMs have been losing
market share to FLASH products because FLASH memories are easily programmable
and have higher data densities. However, there is a level of EPROM demand that
is not economically served by FLASH. As a result, EPROMs are still utilized in
virtually all segments of the low-end consumer electronic market (e.g.,
answering machines, garage door openers and washing machines), where storage of
the instruction set for the microcontrollers require less than 2 Mb.
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BUSINESS
GENERAL
Fairchild is the largest independent semiconductor company, based on pro
forma Fiscal 1999 revenues, focused solely on multi-market products. We design,
develop and market analog, discrete, logic and non-volatile memory
semiconductors. Within our multi-market products portfolio, we are particularly
strong in providing discrete and analog power management solutions. Multi-market
products are the building block components for virtually all electronic devices,
from sophisticated computers and internet hardware to telecommunications
equipment to household appliances. Because of their basic functionality, our
products provide customers with greater design flexibility than more highly
integrated products and improve the performance of more complex devices or
systems. Given such characteristics, our products have a wide range of
applications. Our products are sold to customers in the personal computer,
industrial, telecommunications, consumer electronics and automotive markets.
With a history dating back more than 35 years, Fairchild's predecessors
were among the original founders of the semiconductor industry. The original
Fairchild was established in 1959 as a provider of memory and logic
semiconductors. Fairchild was acquired by Schlumberger in 1979. National
Semiconductor acquired Fairchild from Schlumberger in 1987, and fully integrated
it into its operations. Pursuant to the recapitalization of Fairchild, Fairchild
separated from National Semiconductor and became an independent company on March
11, 1997. At the time of the recapitalization, Fairchild consisted of the
discrete, logic and non-volatile memory businesses of National Semiconductor. On
December 31, 1997, Fairchild acquired Raytheon Semiconductor, Inc., a wholly
owned subsidiary of Raytheon Company, for approximately $117.0 million in cash.
Raytheon Semiconductor designs, manufactures and markets high-performance analog
and mixed signal semiconductors for the personal computer, communications,
broadcast video and industrial markets. Raytheon Semiconductor was combined with
the Non-Volatile Memory Products Group to form the Analog, Mixed Signal and Non-
Volatile Memory Products Group. Fairchild's other product groups include the
Discrete Power and Signal Technologies Group and the Logic Products Group.
On April 13, 1999, we purchased the power device business from Samsung
Electronics for approximately $414.9 million, including fees and expenses. The
power device business designs, manufactures and markets power discrete
semiconductors and standard analog integrated circuits serving the personal
computer, industrial, telecommunications and consumer electronics markets. The
power device business has developed a number of new product designs with
industry leading performance characteristics, such as its recent process
developments in trench technology and silicon bonding. The acquisition of the
power device business not only enhances our analog and power discrete product
offerings, but also provides us with a greater market presence in South Korea.
The acquisition of the power device business also provides us with additional
revenue opportunities through our relationship with Samsung Electronics:
- Samsung Electronics is required to purchase guaranteed minimum annual
levels of products from the power device business based on historical
volumes and market prices for a three-year period according to terms of a
product supply agreement.
- We are required to provide contract manufacturing services in the form of
wafer foundry services for Samsung Electronics for a three-year period
according to the terms of a foundry sale agreement. The agreement is
designed to provide us levels of profitability totaling W53,700 million
over three years.
In connection with the acquisition of the power device business, we have
obtained a full income tax holiday for a period of seven years in South Korea.
The power device business added approximately
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1,481 employees, most of whom work at its wafer fabrication facilities in South
Korea, to Fairchild's existing work force of approximately 6,600.
GROWTH STRATEGY
Our objective is to be the leading supplier of multi-market semiconductors
to the worldwide personal computer, industrial, telecommunications, consumer
electronics and automotive industries. Our business strategy emphasizes the
following key elements:
MAINTAIN HIGH QUALITY SERVICE. We seek to distinguish our service by
providing the industry's best support services, including electronic order
entry, just-in-time delivery and a full range of Internet services that provide
device specifications and order entry for samples. Since 1997, we have invested
in a number of innovative programs in order to deliver superior customer service
including:
- developing and maintaining four customer response centers staffed with
experienced employees to provide a link between customers and our design
engineers, manufacturing operations and sales personnel;
- creating a vice president of customer service position and establishing
customer focus teams and field application engineering teams;
- installing a state-of-the-art company-wide PeopleSoft enterprise software
system which provides a fully integrated order management, inventory and
manufacturing system;
- centralizing and consolidating our finished goods warehouse functions to
a primary site in Penang, Malaysia. This site, together with a Federal
Express shipment arrangement, facilitates timely movement of products
worldwide to end customers.
INTRODUCE NEW PRODUCTS. We are focused on expanding our customer base and
increasing our market share by continuing to develop new products and enhance
our current product portfolio to capitalize on industry trends. Since we became
a stand-alone company, we have designed and introduced approximately 400 new
products.
INCREASE MARKET PENETRATION OF EXISTING PRODUCTS. We are uniquely
positioned, as the only global semiconductor company focused solely on
multi-market semiconductors, to dedicate our sales and marketing efforts toward
expanding our market share of existing products. Our internal sales force,
authorized representatives and distributors continue to expand customer
information programs, including technical specifications, application notes and
on-line services, and augment our trade advertising and comprehensive customer
support efforts which facilitate the incorporation of our products into our
customers' designs.
MAKE SELECTED SYNERGISTIC ACQUISITIONS. We intend to pursue strategic
acquisitions of companies that will complement our existing business by
expanding our product offerings, research and development capabilities and
market share. In addition to the acquisition of the power device business, we
acquired Raytheon Semiconductor, Inc. from Raytheon Company in December 1997.
That acquisition provided us with the opportunity to enter the approximately
$19.0 billion analog market.
CONTINUE TO IMPROVE MANUFACTURING EFFICIENCY. We have made significant
capital expenditures to increase capacity and improve manufacturing efficiency.
Although we believe that our wafer fabrication plants and assembly and test
facilities are among the most productive and efficient in the industry, we will
continue to invest in our people and assets in order to increase productivity
and enhance process efficiency. We are currently in the process of transferring
our analog wafer fabrication plants from our Mountain View, California facility
to our South Portland, Maine facility, which is expected to reduce our wafer
costs by two-thirds.
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CUSTOMERS AND APPLICATIONS
Fairchild designs, develops and manufactures products that it supplies to
more than 50,000 customers. As a result of the acquisition of the power device
business, we provide a wide range of more than 10,000 analog, discrete, logic
and non-volatile memory products to our diverse customer base. Our position as a
strategic supplier of basic and essential semiconductor products fosters close
relationships with customers. These relationships result in additional growth
opportunities for sales of existing products as well as early knowledge of
customers' evolving requirements and opportunities arising from the related
development of their new products.
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The following table sets forth our principal end-user markets, the
percentage of pro forma trade revenue generated from each end-user market,
principal applications for our products and most of our significant customers.
Products from each of our businesses are used throughout each of the major end-
user markets set forth below.
<TABLE>
<CAPTION>
CONSUMER
END MARKETS: PERSONAL COMPUTERS INDUSTRIAL AND OTHER TELECOMMUNICATIONS ELECTRONICS AUTOMOTIVE
- --------------------------- ------------------ -------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
PERCENTAGE OF OUR TRADE 40% 25% 15% 16% 4%
REVENUE(1):
- -------------------------------------------------------------------------------------------------------------------------------
APPLICATIONS: Chips for Industrial Central office Cable television Airbags
smartcards automation and switching systems systems Antiskid braking
Disk drives control Data Network Compact disc kits
Internet hardware Intelligent power equipment players Automotive
Monitors switches Cellular Home security entertainment
Network Lighting systems telephones systems systems
controllers Motor controllers ISDN controllers Household Central locking
Optical scanners Power supplies Modems appliances systems
PDA Smartcard readers PBX systems Pay television Fuel injection
Printers Set-top boxes decoders circuits
PC motherboards Satellite Ignition circuits
receiver Transmission
decoding circuits control circuits
VCR
- -------------------------------------------------------------------------------------------------------------------------------
CUSTOMERS: Apple Allen Bradley AT&T Canon Bosch
Compaq American Power Alcatel Creative Design Chrysler
Dell Honeywell Ericsson Daewoo Delco Electronics
Gateway Reliance Lucent LG Electronics Ford
Hewlett-Packard Siemens Technologies Motorola Mitsubishi
IBM Tektronics Nokia Samsung Teves
Intel Teradyne Nortel Networks Electronics Toyota
NEC Samsung Sony
Samsung Electronics Thompson
Electronics Siemens Consumer
Seagate Technology Zenith
Toshiba
- -------------------------------------------------------------------------------------------------------------------------------
EXAMPLE OF PRODUCT Computer Electric motor Portable phone VCR Engine control
APPLICATION: assembly line
control
- -------------------------------------------------------------------------------------------------------------------------------
INPUT: Turn on computer Start motor assembly Turn on phone Program VCR to Start car
conveyor record
- -------------------------------------------------------------------------------------------------------------------------------
WHAT THE PRODUCT DOES: Boot up program Analog device to Power is routed EEPROM memory is Program in EPROM
moves from detect ground faults from battery to programmed to memory directs
EPROM to main active circuits start VCR fuel mixture
memory via logic by a discrete
chip; logic chips DMOS transistor
communicate
between main
memory and
processor
- -------------------------------------------------------------------------------------------------------------------------------
RESULT: Spreadsheet Potential electrical A phone call is Program is Car runs smoothly
application is hazard is made recorded with fewer
accessed eliminated emissions
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1998 combined trade revenues include those of Fairchild for the twelve-month
period ended November 29, 1998 and those of the power device business for
the twelve-months ended December 31, 1998 and are presented to be consistent
with the data reported by Worldwide Semiconductor Trade Statistics.
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PRODUCTS AND TECHNOLOGY
We design, develop and manufacture a broad range of products used in a wide
variety of microelectronic applications, including personal computer,
industrial, telecommunications, consumer products and automotive systems. Our
products are organized into three principal products groups: the Analog, Mixed
Signal and Non-Volatile Memory Products Group, the Discrete Power and Signal
Technologies Group, and the Logic Products Group. The power device business is
composed of power discrete and analog products. For purposes of this
presentation, these products have been combined with Analog and Mixed Signal
Products and the Discrete Power and Signal Technologies Group.
ANALOG, MIXED SIGNAL AND NON-VOLATILE MEMORY PRODUCTS GROUP
ANALOG AND MIXED SIGNAL PRODUCTS
Fairchild designs, manufactures and markets high-performance analog and
mixed signal integrated circuits for the personal computer, industrial, consumer
electronics and broadcast video markets. These products are manufactured using
leading-edge CMOS, BiCMOS, DMOS and bipolar technologies. Analog and mixed
signal products represent a significant long-term growth area of the
semiconductor industry. The increasing demand to integrate high performance
microprocessor-based electronics in equipment ranging from personal computers to
scientific instrumentation, telecommunications and data communications networks
has led analog and mixed signal semiconductor suppliers to create designs that
have higher levels of integration to reduce space and power requirements and
provide greater functionality, all at lower cost. We offer over 2,300 analog
device products, including offerings in 92 of the top 100 best selling (in terms
of volume) analog product types by volume. Major competitors include Analog
Devices, Burr Brown, Linear Technology, Intersil, ON Semiconductor, Philips and
Semtech.
Analog. Analog products control continuously variable functions such as
light, color, sound and power. They enable human beings to interface with the
digital world. We provide analog products that solve problems relating to power
conversion, temperature sensing, management functions, battery chargers and
motor controls. Our Smart Power Switch is a proprietary, multichip module
consisting of a power management integrated circuit and a MOSFET. Smart Power
Switches provide a solution for off-line power converter designs in power
supplies, battery chargers, PC peripherals, and home and consumer applications.
We also offer a mix of mature products, such as operational amplifiers, audio
amplifiers, regulators, compurators, references and timers, and ground fault
interrupters, which continue to generate significant revenues due to their long
product life cycles.
Mixed Signal. Mixed signal products are those which can process both
analog and digital information. Our mixed signal offerings include analog to
digital converters, digital to analog converters and market-leading digital
video encoders and decoders sold to manufacturers of high-end video equipment
and set top boxes.
We believe our Analog product portfolio is further enhanced by a wide
variety of packaging solutions that we have developed. These solutions include
surface mount and tiny packages.
NON-VOLATILE MEMORY PRODUCTS
Fairchild designs, manufactures and markets non-volatile memory circuits
which retain data after power to the device has been shut off. We offer an
extensive portfolio of high performance serial EEPROM and EPROM products. We do
not participate in the FLASH market segment. EPROMs are electrically
programmable read-only memories. These non-volatile memory devices are used in
the personal computer, industrial, telecommunications, consumer electronics and
automotive systems. Major competitors include ST Microlectronics, Advanced Micro
Devices, Atmel, Xicor and Microchip Technology.
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EEPROMS. EEPROMs are used primarily to store changing information in
consumer products and automotive applications such as microwaves, televisions,
stereos and automotive controls. EEPROMs are one of the growth products in the
group and a focus of non-volatile memory research and development expenditures.
We serve the serial EEPROM market with product offerings in (i) standard EEPROM
and (ii) Application Specific Standard Products. Our standard EEPROM products
serve each of the three bus interface protocols used with all industry standard
microcontrollers. Our Application Specific Standard Products are individually
developed for specific applications and combine our core EEPROM competencies
with logic capabilities. Our Application Specific Standard Products serve three
applications groups: HiSeC, Plug and Play and SPD. HiSeC, introduced in 1994, is
a single chip remote keyless entry solution which operates complex rolling codes
for secure entry. The device is intended for applications such as automotive
keyless entry systems, garage door openers and other applications where secure
transmission of a code is critical. Plug and Play devices allow manufacturers of
computer add-on cards to automatically configure their cards for the host
system. SPD, introduced in 1996, allows a computer to identify specifications of
an add-on memory module and is used in memory upgrade products.
EPROMS. The ability of EPROMs to be programmed electrically by the
equipment manufacturer enables them to achieve shorter time to market for new
products than if they used products that must be programmed by the chip
manufacturer. Today, EPROMs are primarily utilized in applications where storage
of the instruction sets for microcontrollers requires less than 2 Mb in density,
which is virtually all segments of the low-end consumer electronic market (e.g.,
answering machines, garage door openers and washing machines). The EPROM market
is declining as FLASH becomes cost-effective at lower densities. As a result, we
are incurring minimal research and development expenditures in this product
line. We currently sell EPROMs in densities ranging from 64K to 4Mb.
DISCRETE POWER AND SIGNAL TECHNOLOGIES GROUP
Discrete devices are individual diodes or transistors that perform basic
signal amplification and switching functions in electronic circuits. Driving the
long-term growth of discretes is the increasing importance of power management,
particularly in portable applications (e.g., pagers and notebook computers). We
participate in both the power and small signal discrete markets using our DMOS
and Bipolar technologies, manufacturing semiconductors that condition (or shape)
power or signals for use by other devices. The acquisition of the power device
business added significantly to our discrete product portfolio, with only small
signal transistors overlapping with our existing portfolio. While the world
market is dominated by such multinational semiconductor manufacturers as
Toshiba, ON Semiconductor and Philips, a significant portion of the industry is
fragmented where competition is primarily on a regional basis. Other competitors
include Siliconix and International Rectifier.
DMOS. DMOS discrete devices are used to convert, switch or otherwise shape
or condition electricity. We offer a wide range of DMOS power MOSFETs designed
for low and high voltage applications over a wide range of performance
characteristics, power handling capabilities and package options. We are
focusing on DMOS as our growth area due to the trend towards smaller and lighter
products and longer battery life, as well as batteries with built-in smart
functions. DMOS products are the focus of our research and development
expenditures. These expenditures have been directed primarily toward the
development of our leading-edge Trench technology. These products are commonly
found in portable computers and peripherals, portable telephones, automobiles,
and battery-powered devices. Our DMOS products include:
Low Voltage MOSFET. This product line is focused on developing products in
the Low Voltage DMOS area in support of the trend towards smaller and lighter
products, longer battery life expectancy, as well as batteries with built-in
smart functions. Research and development efforts and expenditures have been
directed towards the development of our leading edge Trench Technology. The
combination
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of leading edge wafer fabrication processes and new packaging technology
continues to allow our Low Voltage DMOS product families to set new standards
for low resistance and high current performance in miniature surface mount power
packaging. Our Low Voltage DMOS products are commonly found in portable
computers and peripherals, portable telephones, automobiles and battery-powered
devices.
High Voltage MOSFET. This product line offers a wide variety of HV MOSFET
devices designed for high voltage applications (200V to 900V) over a wide range
of performance characteristics, power handling capabilities and package options.
The product portfolio includes both N channel and P channel devices using
proprietary HDMOS process technology. These products are commonly found in power
system applications including flyback and forward converters and power factor
correction in switch-mode power supplies (SMPS).
IGBT. This product line offers very high voltage devices (600V to 1500V)
in a variety of package options. A proprietary silicon bonding process is being
used in the production of this family of products. Typical applications for
these devices are motor control, inverters, robotics, servo controls, power
supply and lamp ballast. IGBT will be a focused growth product line as more
industrial applications are designing products using this technology.
Bipolar. We manufacture and sell a wide range of bipolar discretes,
including single junction glass diodes, small signal transistors, bipolar power
transistors, JFETs and Zener diodes in a wide variety of package configurations.
These devices switch, amplify and otherwise shape or modify electronic signals
and are found in nearly every electronic product, including computers, cellular
phones, mass storage devices, televisions, radios, VCRs and camcorders.
LOGIC PRODUCTS GROUP
We design, develop and manufacture standard logic devices utilizing three
wafer fabrication processes: CMOS, BiCMOS and Bipolar. Within each of these
production processes, we manufacture products that possess advanced performance
characteristics, as well as mature products that provide high performance at low
cost to customers. Since market adoption rates of new standard logic families
have historically spanned several years, we continue to generate significant
revenues from our mature products. Customers are typically slow to move from an
older product to a newer one. Further, for any given product, standard logic
customers use several different generations of logic products in their designs.
As a result, typical life cycles for logic families are between 20 to 25 years.
Since it takes new logic products an average of three to five years to
reach full market acceptance, we continue to invest in new products to generate
future revenue growth. In addition, many of these investments have established
our logic devices as key components for the personal computer and
telecommunications markets, particularly in the internet and networking sector
and cellular communications sector. Internet appliances and internet
infrastructure equipment (e.g. LAN and WAN switches, hubs, routers and servers)
require high speed, high drive and low noise characteristics. We offer logic
devices using CMOS, BiCMOS and Bipolar processes that are required to achieve
these characteristics. Our ABT, LVT, ECL and GTL logic devices have all
successfully penetrated the internet hardware market. In addition, cellular
communications equipment such as cellular phones, pagers and base stations
requires low power and noise generation in very small packages. Our Tiny Logic,
VHC, LCX and FST technology have established our logic products as a leader in
addressing these requirements. Major competitors include Texas Instruments, ON
Semiconductor and Philips.
CMOS. CMOS is a technology that consumes less power than Bipolar
technology and therefore permits more transistors to be integrated into a single
integrated circuit. Portable applications such as laptop computers and cellular
telephones require the low power consumption of CMOS technology. As a result of
the general trend toward portability, CMOS technology has been expanding at the
expense of Bipolar technology, and is the focus of research and development
spending in the Logic Products Group.
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Our CMOS offerings include mature products such as FACT(TM), HCMOS, and CD4K,
and new products such as LCX, VHC, GTL, Switches and TinyLogic.
Bipolar. Bipolar devices typically operate at high speeds, require more
power, are less costly than CMOS devices and are used in many applications that
do not require CMOS solutions. We supply a full line of Bipolar products to a
broad customer base in a wide range of end-user applications. Bipolar products
are generally mature products that have few new product development activities
associated with them. Our Bipolar offerings include FAST(R), ALS, LS, ECL and
TTL.
BiCMOS. BiCMOS is a hybrid of CMOS and Bipolar technologies developed to
combine the high speed and high drive characteristics of bipolar technologies
with the low power consumption and high integration of CMOS technologies. BiCMOS
is an emerging technology which requires complex manufacturing processes and is
used in niche applications, primarily in the telecommunications market. Our
BiCMOS offerings include ABT and LVT.
According to reports issued by Insight/Onsite, a market research firm, we
were the third largest supplier of standard logic products in the world in 1997.
In the Low Voltage CMOS Logic market ($172.0 million total available market in
1998), the fastest growing portion of the CMOS Logic market, we held a No. 2
share position in 1998 behind the leader, Texas Instruments. We held a strong
No. 2 position in 1998 in the TTL Bipolar market as well with a 26% market
share.
SALES, MARKETING AND DISTRIBUTION
In Fiscal 1999, Fairchild derived approximately 58% of its trade sales from
original equipment manufacturer customers through its regional sales
organizations and 42% of its trade sales through distributors. Fairchild
operates regional sales organizations in Europe, headquartered in Swindon,
England, the Americas, headquartered in Sunnyvale, California, the Asia/Pacific
region, with offices in Kowloon, Hong Kong, the Japan region with its office in
Tokyo, Japan and the Korea region, with its office in Bucheon, South Korea. Each
of the regional sales organizations, with the exception of Korea, is supported
by logistics organizations which manage independently-operated free-on-board
warehouses. Product orders flow to Fairchild's manufacturing facilities, where
the product is made. Products are then shipped either directly to the customer
or indirectly to the customer via independently-operated warehouses in
Singapore, the United States and the United Kingdom.
Fairchild has dedicated direct sales organizations operating in Europe, the
Americas, Asia/Pacific, Japan and Korea that serve its major original equipment
manufacturer customers. Fairchild also has a large network of distributors and
manufacturer's representatives to distribute its products around the world. We
believe that maintaining a small, highly focused, direct sales force selling
products for each of Fairchild's businesses, combined with an extensive network
of distributors and manufacturer's representatives, is the most efficient way to
serve our multi-market customer base. Fairchild also maintains a dedicated
marketing organization, which consists of marketing organizations in each
product group, including tactical and strategic marketing and applications, as
well as marketing personnel located in each of the sales regions.
Typically, distributors handle a wide variety of products, including
products that compete with Fairchild products, and fill orders for many
customers. Some of Fairchild's sales to distributors primarily in North America
are made under agreements allowing for market price fluctuations and/or the
right of return on unsold merchandise, subject to the right terminating after
the expiration of a limited time period. Virtually all distribution agreements
contain a standard stock rotation provision allowing for minimum levels of
inventory returns. In Fairchild's experience, these inventory returns can
usually be resold. Manufacturer's representatives generally do not offer
products that compete directly with Fairchild's products, but may carry
complementary items manufactured by others. Manufacturer's
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representatives do not maintain a product inventory; instead, their customers
place large quantity orders directly with Fairchild and are referred to
distributors for smaller orders.
In 1998, the power device business derived approximately 73% of its trade
sales from third party original equipment manufacturer customers and Samsung
Electronics and affiliated Samsung companies and 27% of its trade sales through
distributors. The power device business has been historically supported by sales
organizations in Korea and in foreign sales subsidiaries of Samsung Electronics
throughout the world. Product orders flow to the power device business'
manufacturing facility in Bucheon, South Korea, where silicon wafers are
fabricated. Products are assembled and tested by either independently operated
subcontractors or manufacturing entities of Samsung Electronics. Finished
products are warehoused in a Samsung Electronics facility in Onyang, South
Korea. From there they are shipped either directly to customers, distributors or
sales agents or first to Samsung Electronics' foreign sales subsidiaries and
then to customers. As a result of the acquisition of the power device business,
assembly and testing services are provided under the Assembly and Test Services
Agreements, warehousing is provided under the Transitional Services Agreement,
and sales and distribution services are provided under an Overseas Sales
Services Agreement. See "The Acquisition."
RESEARCH AND DEVELOPMENT
Fairchild's expenditures for research and development in Fiscal 1997, 1998
and 1999 were $18.9 million, $35.7 million and $39.3 million, respectively. Such
expenditures represented 3.2%, 5.6% and 6.0% of trade sales in Fiscal 1997, 1998
and 1999, respectively. Manufacturing technology is a key determinant in the
improvement of semiconductor products. Each new generation of process technology
has resulted in products with higher speed and greater performance produced at
lower cost. Infrastructure investments made in recent years will enable
Fairchild to continue to achieve high volume, high reliability and low-cost
production using leading edge process technology. Fairchild's research and
development efforts are focused on new product development and improvements in
process technology in Fairchild's growth areas: CMOS logic, DMOS power
discretes, EEPROMs and analog and mixed signal products.
Each of Fairchild's product groups maintain independent research and
development organizations. Fairchild works closely with its major customers in
many research and development situations in order to increase the likelihood
that Fairchild's products will be designed directly into the customers' products
and achieve rapid and lasting market acceptance.
The power device business' expenditures for research and development in
1996, 1997 and 1998 were $18.6 million, $19.2 million and $15.2 million,
respectively. The power device business' research and development efforts are
focused on IGBT and HV MOSFET process and product development, Motor Control
integrated circuit and Samsung Power Switch product development and BCDMOS
process development.
The power device business' research and development team at the Bucheon
facility consists of design, application, process and package engineers. The
power device business ensures early adoption of its new products by engaging
application engineers to work side-by-side with design engineers and customers
during product definition and design phase to ensure customers' ease of
incorporating our products into their designs. Following the acquisition of the
power device business, research and development for power device business
products continues to be conducted by a research and development team at the
Bucheon facility.
MANUFACTURING
We operate six manufacturing facilities, four of which are front-end wafer
fabrication plants located in the United States and South Korea and two of which
are back-end assembly and test facilities in the Asia region. Our products are
manufactured and designed using a broad range of manufacturing
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processes and proprietary design methods. We use all of the prevalent
function-oriented process technologies for wafer fabrication, including CMOS,
Bipolar, BiCMOS, DMOS and non-volatile memory technologies. We use primarily
through-hole and surface mount technologies in our assembly and test operations,
in lead counts from two to fifty-six leads.
The table below sets forth information with respect to our manufacturing
facilities, products and technologies.
MANUFACTURING FACILITIES
<TABLE>
<CAPTION>
LOCATION PRODUCTS TECHNOLOGIES
-------- -------- ------------
<S> <C> <C>
FRONT-END FACILITIES:
South Portland, Maine Bipolar, CMOS and BiCMOS logic 4-inch fab -- 5.0/3.0 micron
products Bipolar and CMOS
5-inch fab -- 3.0/1.5 micron
Bipolar and CMOS
National Semiconductor contract 6-inch fab -- 1.5/0.5 micron
manufacturing CMOS and BiCMOS
Salt Lake City, Utah EPROMs, EEPROMs, ACE and USB 6-inch fab -- 1.0/0.65 micron
CMOS EPROM
Discrete power -- 2.0/0.8 micron CMOS
National Semiconductor contract EPROM
manufacturing -- 2.0 micron DMOS
Mountain View, California(1) Standard Linear products 4-inch fab -- 5.0/3.0 micron
Op Amps, Ground Fault Bipolar and CMOS
Interruptors
Bucheon, South Korea Power discrete semiconductors, 4-inch fab -- 5.0/4.0 micron
Standard analog integrated Bipolar
circuits 5-inch fab -- 2.0/0.8 micron
Bipolar and DMOS
BACK-END FACILITIES:
Penang, Malaysia Bipolar, CMOS and BiCMOS logic MDIP, SOIC, EIAJ, TSSOP, SSOP,
products 8-56 Pins
National Semiconductor assembly
and test services
Cebu, the Philippines Power and small signal discrete TO92, SOT-23, Super SOT,
National Semiconductor assembly SOT-223, TO220, TO263
and test services
</TABLE>
- -------------------------
(1) We are currently in the process of transferring our analog wafer fabrication
plant from our Mountain View, California facility to our South Portland,
Maine facility. On April 23, 1999, we sold our Mountain View property for
$35.7 million. See "-- Properties."
Fairchild's strategy is to have its manufacturing facilities dedicated to
its product groups. The South Portland, Maine wafer fabrication plant and
Penang, Malaysia assembly and test facility primarily support the Logic Products
Group. The Salt Lake City, Utah wafer fabrication plant and Cebu, the
Philippines assembly and test facility primarily support the Discrete Power and
Signal Technologies Group. The Mountain View, California facility supports the
Analog and Mixed Signal Products Group. Fairchild also subcontracts out a
minority of fabrication of wafers, primarily to Tower Semiconductor, Chartered
Semiconductor and Torex Semiconductor. In order to maximize our production
capacity, some of our back-end assembly and testing operations are also
subcontracted out. Primary subcontractors include Carsem, NS Electronics
(Bangkok) Ltd. and New Japan Radio Corporation.
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The power device business' wafer fabrication plant in Bucheon, South Korea,
supports the entire operations of the power device business. The power device
business subcontracts out nearly all of its assembly and test operations to
third party vendors, primarily to Korea Micro Industry, AUK and Woosuk
Electronic Company. The power device business also subcontracts manufacturing
services from Samsung Electronics. As a result of the acquisition of the power
device business, these services are provided under other manufacturing
agreements with Samsung Electronics.
Our manufacturing processes use many raw materials, including silicon
wafers, copper lead frames, mold compound, ceramic packages and various
chemicals and gases. We obtain our raw materials and supplies from a large
number of sources on a just-in-time basis. Although supplies for the raw
materials used by us are currently adequate, shortages could occur in various
essential materials due to interruption of supply or increased demand in the
industry.
BACKLOG
Our trade sales are made primarily pursuant to standard purchase orders
that are generally booked from one to twelve months in advance of delivery.
Backlog is influenced by several factors including market demand, pricing and
customer order patterns in reaction to product lead times. Quantities actually
purchased by customers, as well as prices, are subject to variations between
booking and delivery to reflect changes in customer needs or industry
conditions.
Fairchild sells products to many key customers pursuant to contracts.
Contracts are annual fixed-price agreements with customers setting forth the
terms of purchase and sale of specific products. These contracts allow Fairchild
to schedule production capacity in advance and allow customers to manage their
inventory levels consistent with just-in-time principles while shortening the
cycle times required to produce ordered products. However, quantity and price
agreements under these contracts are, as a matter of industry practice,
difficult to maintain and implement. Fairchild recognizes revenue from contract
manufacturing services but does not account for these revenues on a backlog
basis. For these reasons, Fairchild believes that the amount of backlog at a
particular date is not meaningful and is not necessarily a relevant indicator of
future revenues.
The power device business historically did not track backlog, but rather
negotiated pricing and delivery agreements with its customers from time to time
based on current market conditions. However, we intend to manage the backlog of
the power device business in a manner consistent with the historic management of
Fairchild's backlog.
SEASONALITY
Generally, Fairchild is affected by the seasonal trends of the
semiconductor and related industries. As a result of these trends, Fairchild
typically experiences lower revenue in the third fiscal quarter, primarily due
to customer demand adjustments as a result of holiday seasons around the world.
Revenue usually has a seasonal peak in Fairchild's fourth fiscal quarter. In
Fiscal 1999, the typical seasonality was impacted by the effect of the recovery
of the overall semiconductor market, pricing and back-end capacity constraints,
particularly in the fourth quarter. During the first three quarters of Fiscal
1999, unit shipments increased sequentially. However, this was offset by
sequential decreases in average selling prices, driven by over-capacity in the
industry. During the fourth quarter, average selling prices increased over the
third quarter, however unit shipments were flat compared to the third quarter
due to back-end capacity constraints.
The power device business is also affected by the seasonal trends of the
semiconductor and related industries. The power device business typically
experiences lower revenues in its fourth quarter. Revenue usually has a seasonal
peak in the third quarter. In 1998, the power device business did not experience
the typical seasonality in the third quarter due to market softness in the
semiconductor industry.
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COMPETITION
Markets for our products are highly competitive. Although only a few
companies compete with us in all of our product lines, we face significant
competition within each of our product lines from major international
semiconductor companies. Some of our competitors may have substantially greater
financial and other resources with which to pursue engineering, manufacturing,
marketing and distribution of their products. Competitors include manufacturers
of standard semiconductors, application-specific integrated circuits and fully
customized integrated circuits, as well as customers who develop their own
integrated circuit products.
We compete in different product lines to various degrees on the basis of
price, technical performance, product features, product system compatibility,
customized design, availability, quality and sales and technical support. Our
ability to compete successfully depends on elements both within and outside of
our control, including successful and timely development of new products and
manufacturing processes, product performance and quality, manufacturing yields
and product availability, customer service, pricing, industry trends and general
economic trends.
TRADEMARKS AND PATENTS
Fairchild owns rights to a number of trademarks and patents that are
important to its business. Among others, we consider Fairchild, FACT(TM) and
FAST(R) to be trademarks that are material to Fairchild's operations.
Fairchild's corporate policy is to protect proprietary products by
obtaining patents for such products when practicable. Under a technology
licensing and transfer agreement with National Semiconductor entered into in
connection with the recapitalization of Fairchild, Fairchild has acquired
approximately 150 U.S. patents and obtained perpetual, royalty free
non-exclusive licenses on approximately 250 of National Semiconductor's patents.
Pursuant to an acquisition agreement with Raytheon Company, Fairchild acquired
over 100 patents owned by Raytheon Semiconductor, Inc., as well as licensing
rights (similar to those granted to Fairchild by National Semiconductor in the
recapitalization of Fairchild) for other semiconductor-related intellectual
property of Raytheon Company not directly owned by Raytheon Semiconductor, Inc.
We believe that we have the right to use all technology used in the production
of our products.
Similarly, Fairchild acquired from Samsung Electronics a significant number
of licenses and patents (granted, applied for and under review for application).
We obtained approximately 125 U.S. patents and over 1,000 Korean patents
pursuant to the acquisition of the power device business. Fairchild also
received the rights to use all relevant trademarks. See "The
Acquisition -- Intellectual Property and Trademark License Agreements."
ENVIRONMENTAL MATTERS
Our operations are subject to environmental laws and regulations in the
countries in which we operate that regulate, among other things, air and water
emissions and discharges at or from our manufacturing facilities; the
generation, storage, treatment, transportation and disposal of hazardous
materials by our company; the investigation and remediation of environmental
contamination; and the release of hazardous materials into the environment at or
from properties operated by our company and at other sites. As with other
companies engaged in like businesses, the nature of our operations exposes our
company to the risk of liabilities and claims with respect to such matters. We
believe, however, that our operations are in substantial compliance with
applicable environmental laws and regulations. Fairchild's costs to comply with
environmental regulations were immaterial in Fiscal 1997, 1998 and 1999, as were
the power device business' environmental compliance costs for 1996, 1997 and
1998.
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Fairchild's facilities in South Portland, Maine, and, to a lesser extent,
Salt Lake City, Utah, have ongoing remediation projects to respond to releases
of hazardous materials that occurred prior to the consummation of the
recapitalization. Under the Asset Purchase Agreement, as supplemented by
ancillary agreements entered into in conjunction with the recapitalization,
National Semiconductor has agreed to indemnify Fairchild for the cost of these
projects, subject to limitations. Based on the historical costs of these
projects, we do not believe that future remediation costs will be material, even
without the indemnity.
Fairchild's Mountain View, California, facility is listed on the National
Priorities List under the Comprehensive Environmental Response, Compensation,
and Liability Act. Under the terms of the Acquisition Agreement with Raytheon
Company, dated December 31, 1997, Raytheon Company has retained responsibility
for, and has agreed to indemnify us with respect to, remediation costs or other
liabilities related to pre-acquisition contamination.
Although we believe that the power device business has no significant
environmental liabilities, Samsung Electronics has agreed to indemnify Fairchild
for environmental liabilities arising out of the Bucheon, South Korea plant or
the power device business, subject to limitations.
Future laws or regulations and changes in existing environmental laws or
regulations may subject our operations to different, additional or more
stringent standards. While historically the cost of compliance with
environmental laws has not had a material adverse effect on our results of
operations, business or financial condition, we cannot predict with certainty
our future costs of compliance because of changing standards and requirements.
We cannot assure you that material costs will not be incurred in connection with
the future compliance with environmental laws.
EMPLOYEES
Fairchild's worldwide workforce consisted of 8,090 full- and part-time
employees as of May 30, 1999, none of whom were represented by collective
bargaining agreements. Of the total number of employees, 6,636 were engaged in
manufacturing and information services, 332 were engaged in marketing and sales,
677 were engaged in administration and 445 were engaged in research and
development. Of the total number of employees, 3,241, or 40%, were employed in
the Logic Products Group, 2,665, or 33%, were employed in the Discrete Power and
Signal Technology Group, 362, or 4%, in the Analog, Mixed Signal and
Non-Volatile Memory Products Group, 1,481, or 18%, in the Power Device Products
Group and 341, or 4%, in corporate administration or centralized sales and
marketing activities. Fairchild believes that its relations with its employees
are satisfactory.
Fairchild Korea sponsors a Power Device Business Labor Council consisting
of seven representatives from the non-management workforce and seven members of
the management workforce. The Labor Council, under Korean law, is recognized as
a representative of the workforce for the purposes of consultation and
cooperation only. The Labor Council therefore has no right to take a work action
or to strike and is not party to any labor or collective bargaining agreements
with Fairchild Korea. Management of the power device business believes that its
relations with its employees and the Labor Council are satisfactory.
PROPERTIES
In the United States, our corporate headquarters as well as the
headquarters and wafer fabrication operations of the Logic Products Group are
located in approximately 240,000 square feet of space in properties that we own
in South Portland, Maine. Additional manufacturing, warehouse and office
facilities are housed in approximately 300,000 square feet and 120,000 square
feet of space in properties in Salt Lake City, Utah, which Fairchild owns, and
Mountain View, California, which Fairchild leases, respectively. Additional
office and manufacturing space is located in leased facilities in Sunnyvale,
California and San Diego, California.
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Fairchild is currently in the process of transferring its analog wafer
fabrication plant from its Mountain View, California facility to its South
Portland, Maine facility. On April 23, 1999, Fairchild sold its Mountain View
property for approximately $35.7 million. The sale price is subject to (1) a
$3.5 million holdback which will be paid to Fairchild unless the city council
rejects the buyer's application to increase its building density from 35% to
50%; and (2) a $500,000 deposit which will be placed into an escrow account and
will be released to Fairchild upon the demolition of the existing structures on
the Mountain View property. In connection with the sale of the Mountain View
property, Fairchild has entered into an agreement to lease back the property
until the transfer of its facility from the property is completed. We pay
monthly rent of $125,000 under the lease, which expires on December 31, 2000.
In Asia, we own or lease approximately 397,000 square feet and 170,000
square feet of manufacturing and warehouse space in Penang, Malaysia, and Cebu,
the Philippines, respectively. Leases affecting the facilities in Penang,
Malaysia, and Cebu, the Philippines, are generally in the form of long-term
ground leases, with Fairchild owning improvements on the land. The initial terms
of these leases will expire beginning in 2014. In some cases Fairchild has the
option to renew the lease term, while in others Fairchild has the option to
purchase the leased premises. We lease additional warehouse space in Singapore.
We maintain regional sales offices in leased space in Swindon, England,
Kowloon, Hong Kong, and Tokyo, Japan. In addition, we maintain smaller sales
offices in leased space around the world.
The power device business' corporate headquarters as well as its wafer
fabrication operations are located in approximately 766,000 square feet of space
in properties owned by the power device business in Bucheon, South Korea. See
"-- Manufacturing."
We believe that our facilities around the world, whether owned or leased,
are well-maintained. Our manufacturing facilities contain sufficient productive
capacity to meet our needs for the foreseeable future.
LEGAL PROCEEDINGS
From time to time we are involved in legal proceedings arising in the
ordinary course of business. We believe there is no litigation pending that
could have, individually or in the aggregate, a material adverse effect on our
business, financial condition, results of operations or cash flows.
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THE ACQUISITION
The following contains summaries of the material agreements which we
entered into in connection with the acquisition of the power device business.
The descriptions in the summaries of the terms and provisions of the agreements
are not complete, and you should read the agreements themselves, copies of which
have been filed or incorporated by reference as exhibits to the Registration
Statement of which this prospectus is a part.
BUSINESS TRANSFER AGREEMENT
The Business Transfer Agreement provided for the sale from Samsung
Electronics to Fairchild Korea, an indirect wholly owned subsidiary of
Fairchild, of substantially all of the assets and the assumption of the
liabilities occurring in the ordinary course of business of the power device
business for a purchase price of approximately $414.9 million, including fees
and expenses.
The assets purchased by Fairchild Korea include, among other things, land,
a manufacturing plant and other buildings in Bucheon, South Korea, as well as,
with some exceptions and limitations, all of the manufacturing equipment,
inventory, motor vehicles, contractual rights and obligations, governmental
permits and licenses and all other assets used to conduct the power device
business. In addition, the purchased assets included all of the patents,
trademarks, mask works, copyrights and other intellectual property used
primarily in the power device business. Samsung retained a co-ownership interest
in some of the assembly and test patents transferred in the acquisition.
Intellectual property which is used in connection with the power device
business, but which is also used by other affiliated Samsung companies, is
licensed to Fairchild Korea by Samsung Electronics. See "-- Intellectual
Property and Trademark License Agreements."
Fairchild Korea did not assume liabilities incurred by or relating to the
power device business on or prior to consummation of the acquisition of the
power device business, except for liabilities that arose in the ordinary course
of business and income tax liabilities as discussed below. The agreement
provides that Samsung Electronics will indemnify Fairchild Korea for those and
other excluded liabilities as well as for environmental liabilities of the power
device business. Samsung Electronics' liability under the environmental
indemnity, together with other indemnification claims under the agreement, is
limited to $150.0 million. Samsung Electronics will also indemnify Fairchild
Korea, for a period of three years after consummation of the acquisition of the
power device business, for damages that result from third-party claims that the
products of the power device business infringe patents owned by those third
parties that were issued before consummation of the acquisition. This separate
patent infringement indemnity is subject to limitations and conditions. For
example, it does not apply if the infringement claim would have been avoided
were it not for a post-closing product design change by Fairchild Korea. Samsung
Electronics' liability under the patent indemnity provision is limited to $40.0
million.
The agreement provides that the economic benefit or detriment of the power
device business inure to Fairchild Korea as of January 1, 1999. In connection
with this provision, Samsung Electronics agreed to pay Fairchild Korea an amount
equal to the net income before income taxes of the power device business from
January 1, 1999 to March 15, 1999, and half the net income before income taxes
from March 15, 1999 to April 13, 1999. Accordingly, the agreement provides that
Fairchild Korea assume liabilities for income taxes of the power device
business, with respect to amounts received, for the same period.
Under the agreement, Fairchild Korea agreed to offer employment to all
power device business employees in South Korea and to provide, either itself or
through the Transitional Services Agreement, employee benefits comparable to
those provided by Samsung Electronics at the time of consummation of the
acquisition of the power device business. The agreement also contains a
provision that generally forbids Samsung Electronics from competing with the
power device business for a period of five years
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after consummation of the acquisition of the power device business. In addition,
both Samsung Electronics and Fairchild Korea have agreed that, for one year
following consummation of the acquisition of the power device business, neither
of them will solicit any director, officer or employee of the other party to
terminate his or her employment with the other party. In case an employee of
either party seeks employment with the other without solicitation, Samsung
Electronics and Fairchild Korea have agreed to consult one another before making
a hiring decision.
As required by the Business Transfer Agreement, Samsung Electronics and
Fairchild Korea have entered into the Intellectual Property License Agreement,
the Transitional Services Agreement, the Assembly and Test Services Agreements,
the Trademark License Agreement, the Foundry Sale Agreement, the Product Supply
Agreement, the EPI Services Agreement, the Photo Mask Supply Agreement and an
employment agreement with Dr. Deok J. Kim, Vice President and General Manager of
the power device business.
In connection with the consummation of the acquisition of the power device
business, Fairchild, Fairchild Korea and Samsung Electronics entered into a
closing agreement providing, among other things, for post-consummation filings,
mechanisms for determining purchase price adjustments and confirming the
agreed-upon schedules to the Business Transfer Agreement.
INTELLECTUAL PROPERTY AND TRADEMARK LICENSE AGREEMENTS
Under the Intellectual Property License Agreement, Samsung Electronics
non-exclusively licensed to Fairchild Korea patent, copyright and mask work
rights that are used in connection with the power device business, but that were
not transferred to Fairchild Korea under the Business Transfer Agreement. The
licensed rights include rights to intellectual property of Samsung Electronics
as well as to intellectual property used in the power device business under
licenses granted by third parties, in each case to the extent Samsung
Electronics has the right to grant a license without obligation or accounting to
others. Licensed patent rights include rights to design, develop, make, have
made, use, offer for sale, import, package, sell or modify any product of the
power device business that is under design or development or being manufactured
or sold by the power device business on the date of the acquisition of the power
device business, as well as similar rights with respect to derivative products
that are designed for the power device business and embody technologies assigned
or licensed to Fairchild Korea in the acquisition of the power device business.
Samsung Electronics also sublicensed to Fairchild Korea rights to software
necessary for the operation of the power device business, for the life of
Samsung Electronics' license for that software.
For patents and other intellectual property that were transferred to
Fairchild Korea under the Business Transfer Agreement, Fairchild Korea has
non-exclusively licensed back to Samsung Electronics rights to such intellectual
property, to the extent Samsung Electronics needs such rights to fulfill
obligations to third parties under existing agreements, or to prosecute or
defend infringement and other claims of third parties arising in connection with
the power device business prior to the acquisition of the power device business.
Under the Trademark License Agreement, Samsung Electronics has licensed
Fairchild Korea to continue to use Samsung Electronics' trademarks on power
device business products, and to use part numbers and other proprietary
identification systems in the power device business as long as necessary for up
to ten years to avoid retooling, requalification of existing products or
customer disruption. Fairchild Korea has agreed to use its good faith efforts to
discontinue using Samsung Electronics' trademarks and to replace them with
Fairchild's trademarks and identification numbers. As the use of Samsung
Electronics trademarks by Fairchild Korea is discontinued, its rights under the
Trademark License Agreement will terminate.
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TRANSITIONAL SERVICES AGREEMENT
Under the Transitional Services Agreement, Samsung Electronics has agreed
to provide a number of business support services to Fairchild Korea that assist
the power device business' conversion into an indirect subsidiary of Fairchild.
The agreement requires Samsung Electronics to provide Fairchild Korea, for up to
three years following the acquisition of the power device business, logistics,
purchasing, sales, personnel, financial services, intellectual property
administration and other services that have been provided to the power device
business by Samsung Electronics or its sales subsidiaries and that were
necessary to operate the power device business during calendar year 1998.
Information technology services are provided under a separate agreement between
Fairchild Korea and Samsung SDS Co., Ltd. The Transitional Services Agreement
requires services to be provided at a cost per service consistent with costs
charged to the power device business during calendar year 1998, subject to
adjustments for inflation and before accounting for the effects of currency
exchange rate changes. Fairchild Korea has the right to terminate any given
service under the Transitional Services Agreement upon 90 days' notice. Under
the Transitional Services Agreement, Samsung Electronics bears any costs of
Fairchild Korea separating from the provided services, except for the costs of
any third-party assistance, which will be shared equally by Samsung Electronics
and Fairchild Korea, and costs of Fairchild International's or our company's
personnel, which will be borne by Fairchild. Samsung Electronics will invoice
Fairchild Korea monthly for services provided under the Transitional Services
Agreement.
MANUFACTURING AGREEMENTS
Samsung Electronics and Fairchild Korea have entered into several
manufacturing agreements, including a Product Supply Agreement pursuant to which
Fairchild Korea has agreed to supply products to Samsung Electronics, a Foundry
Sale Agreement pursuant to which Fairchild Korea has agreed to provide foundry
manufacturing services for Samsung Electronics, Assembly and Test Services
Agreements pursuant to which Samsung Electronics and one of its subsidiaries
have agreed to provide assembly and test services to Fairchild Korea, a Photo
Mask Supply Agreement pursuant to which Samsung Electronics has agreed to
provide mask work services for Fairchild Korea, and an EPI Services Agreement
pursuant to which Samsung Electronics has agreed to provide wafer fabrication
services for Fairchild Korea.
Under the Product Supply Agreement, Samsung Electronics has agreed that for
three years it will purchase power device business products from Fairchild Korea
at a volume level equal to 701,941,000 units per year, the average of its
purchases from the power device business during 1996, 1997 and 1998. Prices
charged to Samsung Electronics under the Product Supply Agreement will be based
on prices paid by Samsung Electronics during the power device business' fourth
quarter of 1998, subject to quarterly adjustment and reconciliation to reflect
changes in the worldwide market price for such products. Samsung Electronics has
also agreed that for three years it will provide Fairchild Korea with an
opportunity to match quotes of other suppliers with respect to Samsung
Electronics' needs for products manufactured by the power device business, to
the extent such needs exceed Samsung Electronics' committed volume of purchases
under the agreement. Samsung Electronics' purchase commitments are conditioned
on the ability of Fairchild Korea to satisfy Samsung Electronics' quality and
other specifications for the power device business products. Samsung Electronics
also agreed to use its best efforts to cause affiliated Samsung companies to
designate Fairchild Korea as a preferred supplier of power device business
products to the extent permissible under applicable laws and regulations.
Under the Foundry Sale Agreement, Fairchild Korea has agreed to provide
semiconductor wafer manufacturing services for Samsung Electronics for a
three-year period following consummation of the acquisition of the power device
business. The agreement is structured to provide that Fairchild Korea will earn
a profit from foundry sales to Samsung Electronics equal to 27.7 billion Won,
17.3 billion Won
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and 8.7 billion Won in each of the respective years of the agreement. Profits
earned in excess of each annual minimum amount will be counted toward the next
year's minimum profit amount.
Under the Assembly and Test Services Agreements, Samsung Electronics has
agreed to provide assembly and test services for Fairchild Korea at Samsung
Electronics' Onyang, South Korea facility and a subsidiary of Samsung
Electronics has agreed to provide such services at facilities in Suzhou, China
for three years following consummation of the acquisition of the power device
business. Under separate agreements for services to be provided at each
location, the costs charged for such services should be consistent (before
accounting for the effects of currency exchange rate changes) with historical
costs charged to the power device business, subject to adjustments for inflation
in the case of Suzhou and 5% annual price decreases, in the case of Onyang.
Fairchild Korea has the right to terminate the Suzhou agreement at any time, and
the Onyang agreement after its second anniversary, in either case upon 90 days'
notice. Each agreement also provides that Samsung Electronics in the case of
Onyang, or its subsidiary in the case of Suzhou, and Fairchild Korea will enter
into good-faith negotiations to allow Fairchild Korea the opportunity to own or
have an interest in the assembly and test facilities at Onyang and Suzhou.
Under the Photo Mask Supply Agreement, Samsung Electronics has agreed to
supply masks, which are used in semiconductor wafer manufacturing, to Fairchild
Korea for three years following consummation of the acquisition of the power
device business at costs consistent (before accounting for the effects of
currency exchange rate changes) with costs historically charged to the power
device business. Under the EPI Services Agreement, Samsung Electronics has
agreed to provide epitaxial fabrication, an intermediate step in wafer
manufacturing, for three years following consummation of the acquisition of the
power device business at costs consistent (before accounting for the effects of
currency exchange rate changes) with historical costs charged to the power
device business, plus a 10% markup.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the persons who
are members of the Board of Directors or executive officers of our company. Each
director of our company will hold office until the next annual meeting of
shareholders of our company or until his successor has been elected and
qualified.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Kirk P. Pond......................... 55 Chairman of the Board of Directors, President and
Chief Executive Officer
Joseph R. Martin..................... 51 Executive Vice President and Chief Financial Officer
and Director
Daniel E. Boxer...................... 53 Executive Vice President and Chief Administrative
Officer, General Counsel and Secretary
Jerry M. Baker....................... 47 Executive Vice President and General Manager, Discrete
Power and Signal Technologies Group
W. Wayne Carlson..................... 57 Executive Vice President and General Manager, Logic
Products Group
Keith Jackson........................ 43 Executive Vice President and General Manager, Analog,
Mixed Signal and Non-Volatile Memory Products Group
Darrell Mayeux....................... 56 Senior Vice President, Worldwide Sales and Marketing
David A. Henry....................... 37 Vice President, Corporate Controller
Matthew W. Towse..................... 37 Vice President, Treasurer
Brian L. Halla....................... 52 Director
William N. Stout..................... 60 Director
Richard M. Cashin, Jr. .............. 46 Director
Paul C. Schorr IV.................... 32 Director
Ronald W. Shelly..................... 55 Director
</TABLE>
Kirk P. Pond, Chairman of the Board of Directors, President and Chief
Executive Officer. Mr. Pond has been the President of our company since June
1996. Since 1987, Mr. Pond had held several executive positions with National
Semiconductor, most recently Executive Vice President and Chief Operating
Officer. Prior executive management positions were with Fairchild Semiconductor
Corporation, Texas Instruments and Timex Corporation.
Joseph R. Martin, Executive Vice President, Chief Financial Officer and
Director. Mr. Martin has been the Executive Vice President and Chief Financial
Officer of our company since June 1996. Mr. Martin had held several senior
financial positions with National Semiconductor since 1989, most recently as
Vice President of Finance, Worldwide Operations. Prior to joining National
Semiconductor, Mr. Martin was Senior Vice President and Chief Financial Officer
of VTC Incorporated.
Daniel E. Boxer, Executive Vice President and Chief Administrative Officer,
General Counsel and Secretary. Mr. Boxer joined our company in March 1997. He
has practiced law for 27 years and since 1975 had been a partner at the law firm
of Pierce Atwood, Portland, Maine. His practice at Pierce Atwood included
advising many large manufacturing companies, including our company, on business,
governmental, legal compliance and environmental issues. He was most recently a
senior partner and Chairman of the firm's Management Committee.
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Jerry M. Baker, Executive Vice President and General Manager, Discrete
Power and Signal Technologies Group. Mr. Baker has been Executive Vice
President and General Manager, Discrete Power and Signal Technologies Group,
since December 1996. He has spent more than 24 years in a variety of engineering
and management positions within National Semiconductor, most recently as Vice
President and General Manager, Discrete Products Divisions.
W. Wayne Carlson, Executive Vice President and General Manager, Logic
Products Group. Mr. Carlson has been Executive Vice President and General
Manager, Logic Products Group, since June 1996. He has 32 years of prior
engineering and management experience with National Semiconductor and Fairchild,
most recently as Vice President and General Manager, Data Management Division.
Keith Jackson, Executive Vice President and General Manager, Analog, Mixed
Signal and Non-Volatile Memory Products Group. Mr. Jackson joined our company
in March 1998. He has over 20 years of semiconductor industry experience. Most
recently, Mr. Jackson was President of TriTech Microelectronics in Singapore, a
manufacturer of analog and mixed signal products, which he joined in 1996. Prior
to that, he worked for National Semiconductor for 10 years, most recently as
Vice President and General Manager of the Analog and Mixed Signal division. He
has also held various marketing and engineering positions at National
Semiconductor and Texas Instruments.
Darrell Mayeux, Senior Vice President, Worldwide Sales and Marketing. Mr.
Mayeux has been Senior Vice President, Worldwide Sales and Marketing since
November 1996. He had been with National Semiconductor since 1992 as Vice
President of Sales and Marketing for Logic Products Group. He previously held
engineering, marketing and general management positions with Texas Instruments
and Philips.
David A. Henry, Vice President, Corporate Controller. Mr. Henry has been
Corporate Controller since December 1996. Previously, he had been with National
Semiconductor for eight years, and held various financial management positions,
most recently as Director of Financial Planning and Analysis for the Fairchild
Business of National Semiconductor. Mr. Henry previously worked for Amfac, Inc.
as well as Ernst and Whinney, and is a Certified Public Accountant.
Matthew W. Towse, Vice President, Treasurer. Mr. Towse became Treasurer in
March 1997. He had been with National Semiconductor for six years and has held
various financial management positions, most recently as Controller for the
Fairchild plant in South Portland, Maine. Mr. Towse previously worked for Ernst
& Young and is a Certified Public Accountant.
Brian L. Halla, Director. Mr. Halla became a Director upon consummation of
the recapitalization of Fairchild. He had been employed by National
Semiconductor since 1996, serving as Chairman of the Board, President and Chief
Executive Officer. From 1988 to 1996, he was employed by LSI Logic Corporation,
where he was (in reverse chronological order) Executive Vice President, LSI
Logic Products; Senior Vice President and General Manager, Microprocessor/DSP
Products Group; and Vice President, General Manager, Microprocessor Products
Group.
William N. Stout, Director. Mr. Stout became a Director in March 1997. He
has been Chairman and Chief Executive Officer of Sterling Holding Company, LLC
and Sterling's subsidiaries since 1988. Sterling is engaged, through
subsidiaries including Trompeter Electronics Inc. and Semflex, Inc. in the
manufacture and sale of coaxial connectors, coaxial cable and coaxial cable
assemblies. From 1985 to 1988, Mr. Stout was a private investor and consultant.
From 1979 to 1985, Mr. Stout was President and Chief Executive Officer of Lundy
Electronics & Systems, which manufactured electronic products and systems.
Richard M. Cashin, Jr., Director. Mr. Cashin became a Director in March
1997. He has been employed by Citicorp Venture Capital Ltd. since 1980, and has
been President since 1994. Mr. Cashin is
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a director of Lifestyle Furnishings International, Euramax International plc,
Delco Remy International, Gerber Childrenswear, MSX International, IPC
Information Systems and Titan Wheel International.
Paul C. Schorr IV, Director. Mr. Schorr became a Director in March 1997.
He has been employed by and been a Vice President of Citicorp Venture Capital
Ltd. since 1996. Prior to joining Citicorp Venture Capital Ltd., Mr. Schorr was
employed by McKinsey & Company, Inc. from 1993 to 1996 (in reverse chronological
order) as an engagement manager and an associate. He is a director of KEMET
Corporation and Sybron Chemical.
Ronald W. Shelly, Director. Mr. Shelly became a Director in June 1998.
Until January 31, 1999, he was employed by Solectron Texas, an electronic
manufacturing services company, where he served as its President from April 1996
until April 1999 when he retired. He currently serves as a consultant to
Solectron. Mr. Shelly has more than 30 years experience in the semiconductor
industry. Prior to joining Solectron, he was employed by Texas Instruments for
30 years, most recently as Executive Vice President, Custom Manufacturing
Services.
DIRECTOR COMPENSATION AND ARRANGEMENTS
Our board of directors is identical to that of our parent company,
Fairchild International. Two of our non-employee directors receive cash
compensation for their services as a director of Fairchild International.
Messrs. Stout and Shelly receive $20,000 per year, plus $1,500 for meetings
attended in person and $500 for meetings attended by teleconference. Messrs.
Halla, Cashin and Schorr do not receive cash compensation for their services as
directors. We do not pay our employee directors any fees or additional
compensation for service as members of our Board. Members of the Fairchild
International board of directors are not compensated separately for service on
our Board of Directors. We reimburse all our directors for expenses incurred in
attending our Board meetings.
In connection with Fairchild International's initial public offering, on
June 24, 1999 the Fairchild International Board of Directors authorized a
directors' option program pursuant to which non-employee Directors will receive
options to purchase 7,000 shares of Class A Common Stock of Fairchild
International each year at an exercise price equal to the fair market value of
the shares on the date of grant, subject to vesting over a five-year period
after the date of grant. In addition, the Fairchild International Board
authorized grants to each non-employee Director of options to purchase 10,000
shares of Class A Common Stock of Fairchild International, at an exercise price
equal to the fair market value of the shares at or prior to the initial public
offering, which options will be fully vested on the grant date.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Kirk P. Pond, Joseph R. Martin, Brian L. Halla, William N. Stout, Richard
M. Cashin, Jr., Paul C. Schorr IV and Ronald W. Shelly, who collectively
comprise our entire Board of Directors, are the members of our Compensation
Committee. Mr. Pond is Chairman of the Board of Directors and also holds the
positions of President and Chief Executive Officer. Mr. Martin, in addition to
his position as a Director, is also Executive Vice President and Chief Financial
Officer. Both Mr. Pond and Mr. Martin have received loans from Fairchild. See
"Certain Relationships and Related Transactions."
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EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation received by our Chief Executive Officer and our four other most
highly compensated executive officers relating to services rendered during
Fiscal 1999, 1998 and 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION --------------
---------------------------- NUMBER OF
FISCAL OTHER STOCK OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) (IN SHARES)(2) COMPENSATION(3)
- --------------------------- ------ -------- -------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kirk P. Pond(4)................ 1999 $450,008 $297,000 3,559,453 -- $ 40,321
Chairman of the Board of 1998 449,994 435,969 -- -- 39,844
Directors, President and Chief 1997 424,624 594,382 -- 100,000 3,018,314
Executive Officer
Joseph R. Martin............... 1999 284,600 128,700 1,779,730 -- 36,363
Executive Vice President and 1998 262,024 152,240 -- -- 19,818
Chief Financial Officer and 1997 201,614 147,385 -- 9,000 1,251,476
Director
Daniel E. Boxer................ 1999 275,002 108,900 732,627 -- 18,723
Executive Vice President and 1998 262,024 152,240 -- -- 254,283
Chief Administrative Officer, 1997 52,885 -- -- -- --
General Counsel and Secretary
Keith Jackson.................. 1999 275,002 82,500 151,380 -- 8,091
Executive Vice President and 1998 63,462 38,060 -- -- 69,000
General Manager, Analog and 1997 -- -- -- -- --
Non-Volatile Memory Products
Group
Jerry M. Baker................. 1999 250,010 82,500 732,627 -- 13,624
Executive Vice President and 1998 250,009 138,406 -- -- 12,598
General Manager, Discrete 1997 204,864 241,269 -- 10,000 602,782
Power and Signal Technologies
</TABLE>
- -------------------------
(1) Represents compensation resulting from the lapse of risks of forfeiture by
our executive officers with respect to their stock in Fairchild
International. As a result, each executive had individual income tax
liabilities. Loans of $1,686,164 to Mr. Pond, $843,094 to Mr. Martin,
$347,060 to Mr. Boxer, $70,340 to Mr. Jackson and $350,600 to Mr. Baker were
made by Fairchild to discharge their individual tax liabilities in June
1998. The amount of the loan, plus a gross-up for income taxes, was reported
as compensation at that time. These loans accrue interest at 6% per annum.
The loans plus accrued interest will be forgiven over a four-year period.
(2) All options granted were for National Semiconductor common stock pursuant to
National Semiconductor's Stock Option Plan. We did not assume National
Semiconductor's obligations under its Stock Option Plan.
(3) Amounts shown reflect contributions and allocations to National
Semiconductor and/or Fairchild defined contribution retirement plans and the
value of insurance premiums paid by National Semiconductor and/or Fairchild
for term life insurance and disability insurance as follows: For Fiscal
1999, all amounts shown. For Fiscal 1998, all amounts shown except $238,262
for Mr. Boxer representing a one-time signing bonus and $69,000 for Mr.
Jackson for relocation expenses. For Fiscal 1997, $18,314 for Mr. Pond;
$4,289 for Mr. Martin; and $4,500 for Mr. Baker. The remainder of the
amounts shown for Fiscal 1997 are comprised of one-time retention bonuses
paid by National Semiconductor as follows: $3,000,000 to Mr. Pond, of which
$1,628,000 is attributed to deferred compensation; $1,247,187 to Mr. Martin,
of which $814,000 is attributed to deferred compensation; and $598,282 to
Mr. Baker, of which $332,000 is attributed to deferred compensation. All
amounts attributed to deferred compensation were contributed in Fiscal 1997
to the Fairchild NSC Deferred Compensation Plan Trust and used by that trust
to purchase shares of 12% Series A Cumulative Compounding Preferred Stock of
Fairchild International pursuant to the Fairchild NSC Deferred Compensation
Plan. Those shares of stock were converted into Class A Common Stock of
Fairchild International and distributed by the trust to participants in the
plan in connection with Fairchild International's initial public offering.
See "Deferred Compensation Agreements" below and notes 7 and 8 of the
ownership table under "Ownership of Capital Stock".
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(4) In addition to the amounts disclosed in the table, Mr. Pond received, as
long-term compensation from National Semiconductor a severance payment from
National Semiconductor of $742,757 in Fiscal 1997. National Semiconductor's
obligations under the Performance Award Plan were not assumed by Fairchild.
The following table provides information with respect to the named
executive officers concerning the exercise of National Semiconductor options
during Fiscal 1999, and unexercised National Semiconductor options held as of
the end of Fiscal 1999. No stock options were granted during Fiscal 1998 under
the FSC Semiconductor Stock Option Plan to the named executive officers.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
NUMBER OF UNEXERCISED UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY
ACQUIRED ON VALUE FISCAL 1998 OPTIONS AT FISCAL
NAME EXERCISE(1) REALIZED(2) END 1998 END
- ---- ------------ ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Kirk P. Pond.......................... -- $ -- 80,000(3) $290,000(3)(4)
</TABLE>
- -------------------------
(1) Options exercised were for National Semiconductor common stock. The table
excludes any shares acquired under the National Semiconductor Employees
Stock Purchase Plan.
(2) Equals the market value of the underlying shares (based on the opening price
of National Semiconductor on the date of exercise) minus the exercise price.
(3) All options held by Mr. Pond were exercisable at the end of Fiscal 1999.
(4) Represents the difference between $19.375, the market price per share of
National Semiconductor common stock at fiscal year end, and the exercise
price.
DEFERRED COMPENSATION AGREEMENTS
National Semiconductor adopted the National Semiconductor Corporation
Deferred Compensation Plan shortly before the establishment of Fairchild as an
independent entity in March 1997. Under the Deferred Compensation Plan, Kirk P.
Pond, Joseph R. Martin, W. Wayne Carlson and Jerry M. Baker elected to defer
receipt of amounts that otherwise would have become payable in Fiscal 1997 under
National Semiconductor's Key Employee Incentive Plan, Discrete Retention Bonus
Plan, Discrete Performance Incentive Plan -- Executive Level and/or letter
agreements with National Semiconductor concerning payments related to the
establishment of Fairchild as an independent entity. In March 1997, Fairchild
assumed the Deferred Compensation Plan and all liabilities with respect to
payments due thereunder, and the Deferred Compensation Plan participants
released National Semiconductor from those liabilities. The Deferred
Compensation Plan is administered by the Board of Directors. No compensation
from Fairchild is eligible for deferral under the plan.
Amounts participants deferred in Fiscal 1997 pursuant to the Deferred
Compensation Plan were credited to an account for that participant on the books
of Fairchild and will be credited with earnings based on the employee's
election. Each Deferred Compensation Plan participant elected that specific
portions of the earnings on his deferrals would be measured based on the
performance of Fairchild International's previously issued 12% Series A
Cumulative Compounding Preferred Stock and common stock, and that a portion of
the earnings on his deferrals would be measured based on short-term U.S.
Treasury obligations.
In March 1997, Fairchild established the Fairchild NSC Deferred
Compensation Plan Trust, a grantor trust to which National Semiconductor
contributed cash in an amount equal to the aggregate amount of deferrals under
the Deferred Compensation Plan as of the closing date of the recapitalization of
Fairchild. The trust agreement establishing the trust provided that such amount
were invested in specific amounts of Fairchild International's previously issued
12% Series A Cumulative Compounding Preferred Stock and common stock.
Accordingly, the trust purchased common and preferred stock based on elections
made by participants in the Deferred Compensation Plan.
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Following the completion of Fairchild International's initial public
offering, each participant in the Deferred Compensation Plan elected to receive
a payout of his deferrals in the form of common stock of Fairchild International
to the extent the earnings on his deferrals tracked the performance of the 12%
Series A Cumulative Compounding Preferred Stock or common stock of Fairchild
International. In connection with the initial public offering, Fairchild
International amended the Deferred Compensation Plan to permit these elections
to be made. As a result of their elections, the plan participants received a
distribution of shares of common stock of Fairchild International received in
the conversion of the 12% Series A Cumulative Compounding Preferred Stock of
Fairchild International. Following consummation of the initial public offering,
the trust distributed 346,933 shares of Class A Common Stock of Fairchild
International, equal in aggregate value to approximately $6.4 million. Fairchild
International filed a registration statement to enable the plan participants to
sell these shares of common stock beginning immediately upon consummation of the
initial public offering, in part to pay income taxes due as a result of the
distribution of the common stock by the trust. See "Ownership of Capital Stock,
specifically note 7 of the stock ownership table in such section."
Following the initial public offering of Fairchild International, the
Fairchild NSC Deferred Compensation Plan Trust continues to hold 217,760 shares
of Class A Common Stock of Fairchild International attributable to one
participant in the plan who elected to have earnings on his deferrals measured
against the performance of the Class A Common Stock. The plan's trust holds no
other assets.
EMPLOYMENT AGREEMENTS
In March 1997, Fairchild and Sterling entered into an employment agreement
with each of Kirk P. Pond and Joseph R. Martin. The employment agreements were
entered into upon the closing of the recapitalization in 1997.
Mr. Pond is employed as Chairman of the Board of Directors and as Chief
Executive Officer of Fairchild. Mr. Martin is employed as Executive Vice
President and Chief Financial Officer, and serves as a member of our Board of
Directors. The agreements provide for Mr. Martin and Mr. Pond to serve on our
Board of Directors, and Sterling has committed to honor its commitment to each
executive under the agreements to assure their continued membership on the Board
of Directors. The respective agreements provide for an annual base salary of
$450,000 for Mr. Pond (which was subsequently increased to $600,000) and
$250,000 for Mr. Martin (which was subsequently increased to $360,000), subject
in each case to increases at the discretion of the Board of Directors and to
annual performance bonuses in accordance with the FSC Semiconductor Corporation
1997 Executive Officer Incentive Plan. Each agreement also provides for the
executive to receive standard Fairchild benefits. The term of each agreement is
three years subject to automatic renewal for up to two consecutive one-year
terms unless, in each case, either we or the executive gives prior notice of
non-renewal. Under each agreement, either we or the executive may terminate the
agreement with or without cause. If we terminate without cause or the executive
terminates with cause, each agreement requires us to pay the executive monthly
severance payments (approximately equal to his salary at the time of termination
plus an amount equal to incentive awards payable in the fiscal year prior to
termination) until the end of the term of the agreement or for 24 months if
longer. Each executive is subject to a non-competition covenant during the term
of his agreement and for a period of at least 24 months following termination or
expiration of the agreement.
PERSONAL SAVINGS AND RETIREMENT PLAN
We have adopted a Personal Savings and Retirement Plan, which we refer to
as the Retirement Plan, for all eligible employees who are not foreign nationals
or contract employees. The Retirement Plan includes a cash or deferred
arrangement under Section 401(k) of the Internal Revenue Code and matching
contributions under Section 401(m) of the Internal Revenue Code. Under the
401(k) plan, participants may elect to defer from 1% to 15% of their
compensation on an after-tax basis, directing the investment of these elective
deferrals among several mutual funds. We will make quarterly matching
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contributions equal to 75% of the first 6% of an employee's before-tax elective
deferral contributions for the period. Both elective deferrals and matching
contributions under the 401(k) plan will be fully vested at all times.
FAIRCHILD BENEFIT RESTORATION PLAN
We have adopted the Fairchild Benefit Restoration Plan. Under the Fairchild
Benefit Restoration Plan, all participants in the Fairchild Personal Savings and
Retirement Plan who are exempt status employees in job grade nine or higher are
eligible (i) to defer on a before-tax basis amounts over and above those they
are permitted by law to defer under Fairchild's Retirement Plan and (ii) to
receive matching contributions from our company equal to the difference between
matching contributions received under the Retirement Plan and the matching
contributions they would have received under the Retirement Plan but for
statutory limits applicable to such contributions. Deferral and matching
contributions are credited to accounts established and maintained by our
company. Interest at a rate equal to a commonly reported rate for long-term
"A"-rated corporate bonds is credited to participants' accounts at such times as
determined by the Board of Directors, which administers the Fairchild Benefit
Restoration Plan. The Fairchild Benefit Restoration Plan is an unfunded plan of
deferred compensation, and amounts payable thereunder are paid out of our
general corporate assets and are subject to the claims of our general creditors.
FAIRCHILD INCENTIVE PROGRAM
We have adopted the Fairchild Incentive Program. Under the Fairchild
Incentive Program, all of our regular full-and part-time employees (with limited
exceptions) are eligible to receive annual or semiannual incentive awards. The
amount of each payment is based on a given employee's "Target Award." Under the
current formulation of the Fairchild Incentive Program, the Target Award is 5%
of annual compensation for non-exempt employees, from 5% to 15% (depending on
grade level) of annual compensation for exempt employees, and up to 35%
(depending on grade level) of annual compensation for all management-level
employees with the title of Director or Vice President. Payment awards range
from 0% to 250% of the Target Award, depending on whether we achieve
pre-established earnings goals. Participants in the Fairchild Incentive Program
in job grade nine or higher are eligible to defer awards, and to the extent that
the deferral option applies only to those Fairchild Incentive Program
participants in job grade nine or higher, it constitutes a separate unfunded
plan known as the Fairchild Select Employee Incentive Deferral Plan. For
participants who elect deferral, we will establish and maintain book-entry
accounts to which we shall credit deferred payments and interest equal to a
commonly reported rate for long-term "A"-rated corporate bonds. We pay deferred
amounts and accrued interest to participants upon termination or on the date
pre-selected by the participant according to the terms of the Deferral Plan. The
Compensation Committee, which is presently comprised of the entire Board of
Directors, administers the Fairchild Incentive Program and reserves the right,
among other things, not to make award payments, and to modify or amend the
Fairchild Incentive Program. The Deferral Plan is an unfunded plan of deferred
compensation, and benefits payable thereunder are paid out of our general
corporate assets and are subject to the claims of our general creditors.
FSC SEMICONDUCTOR CORPORATION 1997 EXECUTIVE OFFICER INCENTIVE PLAN
We adopted the FSC Semiconductor Corporation 1997 Executive Officer
Incentive Plan on March 11, 1997 and subsequently amended and restated it on
June 1, 1998. Under the Executive Officer Incentive Plan, executive officers
with the title of either Executive Vice President or President may be eligible
to receive annual incentive awards, based on a "Target Award" which ranges from
40% to 90% of an officer's base annual compensation. Actual award payments range
from 0% to 250% of the Target Award depending on the extent to which we achieve
or surpass pre-established earnings goals. Participants may elect to defer all
or any portion of an award payment. For participants who elect deferral, we will
establish and maintain book-entry accounts, and credit cash account annually
with deferred payments, as well as interest at a rate equal to a commonly
reported rate for long-term A-rated
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corporate bonds. We pay deferrals and accrued interest thereon to participants
upon termination or on a date pre-selected by the participant according to the
terms of the Executive Officer Incentive Plan. The Board of Directors determines
eligibility for Executive Officer Incentive Plan participation, performance
goals and other terms of the Executive Officer Incentive Plan. To the extent of
any deferrals, the Executive Officer Incentive Plan is an unfunded plan of
deferred compensation, and benefits payable thereunder are paid out of our
general corporate assets and are subject to the claims of our general creditors.
1997 STOCK OPTION PLAN
Fairchild International has adopted the 1997 Stock Option Plan. Fairchild
International has authorized for grant to regular salaried officers and key
employees of our company and Fairchild International options for up to 8,421,980
shares of Class A Common Stock of Fairchild International under the 1997 Stock
Option Plan, as amended (excluding shares issuable upon exercise of options
granted to directors of Fairchild International). The 1997 Stock Option Plan was
amended in connection with the initial public offering of Fairchild
International to give effect to the increase in the number of shares available
for grant from 6,084,000 shares to 8,421,980 shares. The plan authorizes
Fairchild International to grant either (i) options intended to constitute
incentive stock options under the Internal Revenue Code of 1986, as amended, or
(ii) non-qualified stock options. Under the 1997 Stock Option Plan, the board of
directors of Fairchild International determines the exercise price of each
option granted. The maximum term of any option is ten years from the date of
grant for incentive stock options and ten years and one day from the date of
grant for non-qualified stock options. Options granted are exercisable at the
determination of the board of directors of Fairchild International, and most
options currently vest ratably over approximately five years. Within any
one-year period, employees may not receive options to purchase more than 200,000
shares of Class A Common Stock of Fairchild International. As of June 25, 1999,
there were 4,282,570 shares of common stock subject to outstanding options. On
June 24, 1999, the board of directors of Fairchild International authorized
grants of options to purchase a total of 575,000 shares of Class A Common Stock
of Fairchild International, including options for 200,000 shares to Kirk P.
Pond, 100,000 shares to Joseph R. Martin, 75,000 shares to Daniel E. Boxer,
50,000 shares to Keith Jackson and 50,000 shares to Jerry M. Baker. The options
will vest over a five-year period following the date of grant and may be
exercised at the fair market value on the date of grant. In addition, the board
of Fairchild International authorized the grant of options to purchase shares of
Class A Common Stock of Fairchild International to eligible employees, subject
to the discretion of the Board of Directors of Fairchild International, equal in
the aggregate to 2% of the number of shares outstanding after giving effect to
the offering. These options will vest over a five-year period and will be
exercisable at the fair market value on the date of grant.
EMPLOYEE STOCK PURCHASE SAVINGS PLAN
Fairchild International adopted the Employee Stock Purchase Savings Plan
(the "Savings Plan"), pursuant to which participating employees contribute a
portion of their salary, through payroll deductions, to the Savings Plan and in
return obtain an interest in the Savings Plan. The contributions to the Savings
Plan are held in trust for the benefit of the participating employees and are
invested in one or more money-market funds. In addition, participating employees
become eligible to use funds contributed to the Savings Plan to purchase, if
they so choose, shares of Class A Common Stock of Fairchild International
concurrently and in connection with an initial public offering of such stock.
Upon the initial public offering of Class A Common Stock of Fairchild
International registered with the SEC, the Savings Plan authorizes Fairchild
International to issue to participating employees up to the lesser of (i) shares
having an aggregate sales price of $5.0 million and (ii) shares representing
2.5% of the total number of shares issuable pursuant to such initial public
offering. Such shares were offered to participating employees at the public
offering price.
In conjunction with the initial public offering of Class A Common Stock of
Fairchild International, Fairchild International terminated the Savings Plan.
Upon the termination of the Savings Plan, each
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participating employee received in a lump sum all of the employee's
contributions to the Savings Plan plus accrued interest. Each employee had the
option to keep the funds or use any portion of the funds to purchase shares of
Class A Common Stock of Fairchild International at the price per share in
Fairchild International's initial public offering. Had Fairchild International
terminated the Savings Plan on May 30, 1999, participating employees would have
been entitled to receive payments totalling $1,923,085 and 103,951 shares of
Class A Common Stock of Fairchild International would have been issuable if
participating employees had chosen to use all such funds to purchase shares of
Class A Common Stock as described above.
In connection with the initial public offering of Fairchild International,
on June 24, 1999 the board of directors authorized a new employee stock purchase
plan, pursuant to which U.S. employees of Fairchild and its U.S. subsidiaries
will have an opportunity to purchase shares of Class A Common Stock of Fairchild
International at a price equal to 85% of the market value on the first or last
day of each calendar quarter, whichever is lower. The plan will be designed and
operated to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code.
The board of directors of Fairchild International also approved on June 24,
1999 a stock purchase plan which will cover foreign employees of Fairchild's
subsidiaries. To the extent permissible under applicable laws, the plan will
contain benefits and provisions similar to the plan for U.S. employees.
POWER DEVICE BUSINESS EMPLOYMENT AGREEMENTS AND BENEFIT PLANS
In connection with the acquisition of the power device business, we
executed employment agreements with Dr. Deok J. Kim, Vice President and General
Manager of the power device business, the head of sales and marketing of the
power device business and the Vice President of the Bucheon plant.
We also provide key management of the power device business, as well as all
other employees, with compensation and benefits plans comparable to those that
were in place on the date of the acquisition of the power device business. These
plans consist of all legally mandated and nationally-sponsored benefits plans
such as national medical insurance, unemployment insurance and a national
pension program, as well as privately sponsored plans such as a medical
treatment guarantee program and a personal pension contribution program. We will
either continue in the Samsung Electronics-sponsored programs that currently
exist or replicate existing Samsung Electronics programs under the sponsorship
of Fairchild Korea Semiconductor Ltd.
In addition to the above-mentioned benefits plans, we are continuing
incentive compensation programs of the power device business which existed at
the date of the acquisition of the power device business. These programs include
an Individual Incentive Plan which provides potential annual incentive
compensation for key employees, a Productivity Incentive Plan which pays
semi-annually based on productivity rankings and a Management by Objectives
Incentive Plan which pays semi-annually based on reaching EBITDA goals (as
defined in the plan). These incentive plans make incentive payments available in
multiples of the employee's monthly base salary, with varying caps on the
payments available under the various plans, so that an employee can earn a
maximum of 200% of monthly base salary under any one plan. Under all of the
various incentive plans, the average employee will receive approximately six
months of pay in the form of incentive payments during a fiscal year.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Citicorp Venture Capital Ltd. owns an interest in Sterling. Citicorp
Mezzanine Partners, L.P., the general partner of which is an affiliate of
Citicorp Venture Capital, contributed $50.0 million in cash to Fairchild
International in exchange for a 12.5% Subordinated Note Due 2008 and a warrant
to purchase 3,538,228 shares of Fairchild International's common stock.
Fairchild International contributed the $50.0 million from Citicorp Mezzanine
Partners, L.P. to our company as a capital contribution. The
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12.5% Subordinated Note was repaid in full in connection with the initial public
offering of Class A Common Stock of Fairchild International, upon which event
the warrant became no longer exercisable.
In connection with the recapitalization of Fairchild, the existing
stockholders of Fairchild International entered into the Stockholders' Agreement
containing agreements among such stockholders with respect to the capital stock
and corporate governance of our company and Fairchild International. Amendments
to the Stockholders' Agreement, which were effected on May 29, 1998, resulted in
the lapse of risks of forfeiture by executive officers of Fairchild with respect
to their stock in Fairchild International. The lapse of such restrictions
resulted in the incurrence by such executive officers of liability for federal
and state income tax. Fairchild made loans to such executive officers in June
1998 to enable such officers to fund such tax liabilities. These loans were in
the following amounts: Kirk P. Pond -- $1,686,164; Joseph R. Martin -- $843,094;
Daniel E. Boxer -- $347,060; Darrell Mayeux -- $347,060; W. Wayne
Carlson -- $347,060; and Jerry M. Baker -- $350,600. Such loans bear interest at
a rate of 6% per annum. Such loans (including accrued but unpaid interest
thereon) were canceled upon the occurrence of the initial public offering of
Class A Common Stock of Fairchild International. We paid to such executive
officers amounts sufficient to enable them to discharge all tax liabilities
arising out of the cancellation of such loans (as well as all tax liabilities
arising out of such payments). Any such executive officer whose employment
terminated prior to the completion of the initial public offering was required
to repay any uncanceled amounts immediately. The amounts paid by Fairchild with
respect to such executive officers' tax liabilities (assuming no repayment
obligation on the part of any executive officer and cancellation in full after 4
years) were as follows: Kirk P. Pond -- $1,811,523; Joseph R.
Martin -- $905,763; Daniel E. Boxer -- $372,858; Darrell Mayeux -- $372,858; W.
Wayne Carlson -- $372,858; and Jerry M. Baker -- $384,287.
Pursuant to an Agreement and Plan of Recapitalization, dated January 24,
1997, between Sterling Holding Company, LLC and National Semiconductor, the
following transactions occurred concurrently on March 11, 1997:
- National Semiconductor transferred to our company -- which was at that
time newly formed in connection with the plan of
recapitalization -- substantially all of the assets and liabilities of
the Fairchild Semiconductor business in exchange for promissory notes in
the aggregate principal amount of $401.6 million and all of our capital
stock.
- National Semiconductor transferred all of our capital stock and
approximately $12.8 million in cash to Fairchild International -- also
newly formed at that time in connection with the plan of
recapitalization -- in exchange for shares of the common and preferred
stock of Fairchild International and the 11.74% Subordinated Note due
2008 in the principal amount of $77.0 million.
- Fairchild International issued common and preferred stock to Sterling
Holding Company, LLC for approximately $58.5 million in cash.
- Fairchild International issued common and preferred stock to Kirk P.
Pond, Joseph R. Martin and other key employees of our company for a total
of $6.5 million in cash.
- Fairchild International contributed cash in the amount of approximately
$77.8 million to the capital of our company.
- We borrowed $120.0 million under a bank credit facility and received the
net proceeds of approximately $291.0 million from the issuance of
high-yield debt.
- We repaid the $401.6 million in promissory notes issued to National
Semiconductor in cash.
In the transactions described above, each of National Semiconductor, Sterling
Holding Company, LLC and the management investors paid $0.13 per share for
common stock of Fairchild International (after giving effect to a four-for-one
common stock split distributed to stockholders on April 29, 1998) and paid
$1,000 per share for preferred stock of Fairchild International.
Concurrently with the recapitalization, Fairchild and National
Semiconductor entered into several agreements that remain in effect. Under the
Asset Purchase Agreement, dated as of March 11, 1997, National Semiconductor
agreed to indemnify Fairchild for damages arising out of any liabilities other
than those assumed by Fairchild in connection with such asset sale. In addition,
the Asset Purchase
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Agreement contains a provision that, subject to limitations, forbids National
Semiconductor for a period of five years beginning on March 11, 1997 from
engaging in any business competing with our products in existence on March 11,
1997. For a period of 39 months beginning on March 11, 1997 the Asset Purchase
Agreement, subject to limitations, forbids Fairchild from engaging in any
business competing with National Semiconductor's products in existence on March
11, 1997.
Under the Technology Licensing and Transfer Agreement, dated March 11,
1997, between Fairchild and National Semiconductor, National Semiconductor
assigned or non-exclusively licensed to Fairchild patent, copyright, maskwork,
trade secret and trademark rights necessary to Fairchild's business and to make
improvements to Fairchild's product line. These rights include a non-exclusive
license to practice processes necessary to Fairchild's business. For patent
rights, National Semiconductor assigned to Fairchild 150 patents and granted
Fairchild a worldwide, royalty-free, non-exclusive license under applicable
patents and patent applications, for the life of such patents (but without right
to sublicense) to manufacture, package, use, sell, offer for sale, import,
design or develop Fairchild's products and improvements to those products. With
respect to copyrights and maskworks used in Fairchild's business. National
Semiconductor granted Fairchild an undivided interest in certain co-owned
copyrights and maskworks. For trademarks, National Semiconductor assigned
trademarks related to Fairchild's products and granted licenses recognizing
transitional use of visible trademarks and of product-embedded trademarks, which
embedded trademarks in some cases will not be eliminated until the relevant
product is discontinued or replaced. For patents that National Semiconductor
assigned to Fairchild, a worldwide, paid-up, royalty-free, non-exclusive
license, with a limited right to sublicense, was granted by Fairchild to
National Semiconductor. National Semiconductor and Fairchild further
cross-licensed discoveries, improvements or inventions occurring within one year
after March 11, 1997, with no right to grant sublicenses (except for the purpose
of settling third party claims against Fairchild). The agreement further
provides that National Semiconductor, for a period of time, shall indemnify and
render assistance to Fairchild for intellectual property claims made by third
parties.
Under the National Foundry Services Agreement and the Fairchild Foundry
Services Agreement, each dated March 11, 1997, National Semiconductor and
Fairchild agreed to manufacture semiconductor products (i.e., provide "foundry"
services) for each other during at least the 39-month period beginning on March
11, 1997. Foundry services are the manufacturing processes through which
thousands of integrated circuits are fabricated from raw silicon wafers. The
Fairchild Foundry Services Agreement establishes the terms and conditions under
which Fairchild provides foundry services for National Semiconductor and the
National Foundry Services Agreement defines the terms and conditions under which
National Semiconductor provides foundry services for Fairchild. Both foundry
agreements (i) establish the processes the foundry service provider shall use,
(ii) define purchase commitments and production forecasts, (iii) establish
pricing, (iv) provide for engineering support from the other party, (v)
establish quality standards, (vi) specify delivery and payment terms among other
things, and (vii) specify warranty and inspection terms.
The National Assembly Services Agreement and the Fairchild Assembly
Services Agreement, each dated March 11, 1997, provide for assembly and test
services between National Semiconductor and Fairchild during at least the
39-month period beginning on March 11, 1997. During the assembly and test phase
of semiconductor production, the thousands of integrated circuits produced on
silicon wafers during the foundry phase are separated and packaged into
individual devices ready for sale to customers. The National Assembly Services
Agreement sets forth the terms and conditions under which National Semiconductor
provides such services for Fairchild. The Fairchild Assembly Services Agreement
sets forth the terms and conditions under which Fairchild provides such services
to National Semiconductor. Similar to the foundry agreements, the assembly
agreements establish terms for (i) volume commitments and production planning,
(ii) ordering and shipping, (iii) quality, inspection and acceptance of finished
goods and (iv) pricing and payment.
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Manufacturing services provided to Fairchild under the National Foundry
Services Agreement and the National Assembly Services Agreement relate primarily
to products in the Memory Division. Costs for these services aggregated
approximately 1% of Fairchild's total manufacturing costs for Fiscal 1999.
National Semiconductor and Fairchild entered into the Mil/Aero Wafer and
Services Agreement, dated March 11, 1997, which establishes, in a similar
fashion, the terms and conditions under which Fairchild manufactures integrated
circuits for military and aerospace industry customers of National
Semiconductor.
Under a letter agreement, dated March 11, 1997, between National
Semiconductor and Fairchild, National Semiconductor is required to purchase from
Fairchild a minimum of $330.0 million in goods and services in the 39-month
period beginning on March 11, 1997, under the Fairchild Foundry Services
Agreement, Fairchild Assembly Services Agreement and the Mil/Aero Wafer and
Services Agreement.
Under the Transition Services Agreement, dated March 11, 1997, National
Semiconductor provided a number of business support services to Fairchild in
order to assist in Fairchild's conversion to an independent entity, from March
11, 1997 until, in most instances, June 1, 1998, which deadline was extended
with respect to some services until August 31, 1998. These services included (i)
data processing and communication services, (ii) financial and administrative
support, (iii) purchasing services, (iv) marketing and sales services, (v)
logistics and operational support services, (vi) human resources and benefits
services and (vii) security assistance and consulting. National Semiconductor
also agreed to provide Fairchild, during such period, with additional services
as provided in separate shared facilities and services agreements for the South
Portland, Maine, site and a sublease for the Santa Clara, California, site (the
latter site having been vacated by Fairchild during Fiscal Year 1998).
Generally, such agreements provided that National Semiconductor would invoice
Fairchild for the services provided, with certain charges based on a fixed cost
and other charges based on National Semiconductor's actual incurred costs. In
addition, under the agreements National Semiconductor granted to Fairchild a
royalty-free, perpetual and irrevocable worldwide license to use National
Semiconductor's in-house business, engineering and manufacturing systems
software. The license survives termination of such agreements.
During the fiscal years ended May 25, 1997, May 31, 1998 and May 30, 1999,
Fairchild incurred costs of $2.8 million, $14.0 million and $5.6 million,
respectively, for manufacturing services provided by National Semiconductor
under the National Foundry Services Agreement and the National Assembly Services
Agreement and $15.3 million, $46.6 million and $15.1 million, respectively, for
business support services provided by National Semiconductor under the
Transition Services Agreement. In addition, during the fiscal years ended May
25, 1997, May 31, 1998 and May 30, 1999, Fairchild generated revenues of $20.9
million, $124.5 million and $62.9 million, respectively, for manufacturing
services provided by Fairchild under the Fairchild Foundry Services Agreement
and the Mil/Aero Wafer and Services Agreement, and $7.6 million, $28.9 million
and $18.1 million, respectively, for manufacturing services provided under the
Fairchild Assembly Services Agreement. On a combined basis during the fiscal
years ended May 25, 1997, May 31, 1998 and May 30, 1999, Fairchild generated
revenues of $28.5 million, $153.4 million and $81.0 million, respectively, for
manufacturing services provided by Fairchild under the letter agreement dated
March 11, 1997.
The terms of the agreements described above were the result of arms-length
negotiations and in our opinion are no less favorable to Fairchild than those
that could be obtained from non-affiliated parties.
Keith Jackson, Executive Vice President, Analog, Mixed Signal and
Non-Volatile Memory Products Group, received a loan in the amount of $100,000
from Fairchild on April 15, 1998 in order to assist him in covering the costs of
relocating to take this position. Such loan bears interest at a rate of 6% per
annum, with all accrued interest payable on each April 15, beginning April 15,
1999. The outstanding principal of the loan is payable in full upon the earlier
of (a) six months after any initial public offering of our company's stock, (b)
60 days after Mr. Jackson ceases to be employed by Fairchild or (c) April 15,
2003.
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OWNERSHIP OF CAPITAL STOCK
We are a wholly owned subsidiary of Fairchild International. The following
table sets forth information regarding the beneficial ownership of each holder
of 5% or more of the outstanding shares of Class A Common Stock of Fairchild
International (its only voting class of stock), each director and each executive
officer named in the Summary Compensation Table, and all directors and officers
as a group, as of August 12, 1999 after giving effect to the initial public
offering of Class A Common Stock of Fairchild International, the exercise by the
underwriters of their over-allotment option in connection with the initial
public offering and the conversion of the shares of 12% Series A Cumulative
Compounding Preferred Stock of Fairchild International into shares of Class A
Common Stock of Fairchild International in connection with the initial public
offering.
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON
STOCK(1) STOCK(2)
--------------------- -------------------- PERCENT OF ALL
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT COMMON STOCK(3)
- ------------------------ ---------- -------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Sterling Holding Company, LLC
c/o Fairchild Semiconductor Corporation
333 Western Avenue
South Portland, Maine 04106(4)(5)............... 18,233,419 30.9% 28,396,000 95.8% 52.6%
National Semiconductor Corporation
2900 Semiconductor Drive
Santa Clara, California 95052(6)................ 5,998,360 10.2% 1,245,000 4.2% 8.2%
Joseph R. Martin
c/o Fairchild Semiconductor Corporation
333 Western Avenue
South Portland, Maine 04106(7).................. 1,474,752 2.5% -- -- 1.7%
Kirk P. Pond
c/o Fairchild Semiconductor Corporation
333 Western Avenue
South Portland, Maine 04106(7).................. 1,407,828 2.4% -- -- 1.6%
Daniel E. Boxer(8).............................. 668,208 1.1% -- -- 0.8%
Jerry M. Baker(7)............................... 668,208 1.1% -- -- 0.8%
Keith Jackson................................... 83,520 0.1% -- -- 0.1%
Brian L. Halla(6)............................... 5,998,360 10.2% 1,245,000 4.2% 8.2%
William N. Stout(4)............................. 18,233,419 30.9% 28,396,000 95.8% 52.6%
Richard M. Cashin(4)............................ 18,233,419 30.9% 28,396,000 95.8% 52.6%
Paul C. Schorr IV(4)............................ 18,233,419 30.9% 28,396,000 95.8% 52.6%
Ronald W. Shelly................................ -- -- -- -- --
All directors and executive officers as a group
(14 persons)(4)(6)(7)......................... 30,011,943 50.8% 29,641,000 100.0% 67.2%
</TABLE>
(footnotes on following page)
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(1) Does not include shares of Class A Common Stock of Fairchild International
issuable upon conversion of Class B Common Stock of Fairchild International.
A holder of Class B Common Stock of Fairchild International may convert any
or all of his shares into an equal number of shares of Class A Common Stock
of Fairchild International, provided that such conversion would be permitted
only to the extent that the holder of shares to be converted would be
permitted under applicable law to hold the total number of shares of Class A
Common Stock of Fairchild International which would be held after giving
effect to the conversion.
(2) Does not include shares of Class B Common Stock of Fairchild International
issuable upon conversion of Class A Common Stock of Fairchild International.
A holder of Class A Common Stock of Fairchild International may convert any
or all of his shares into an equal number of shares of Class B Common Stock
of Fairchild International.
(3) Represents the percentage of the total number of shares of Class A Common
Stock of Fairchild International and Class B Common Stock of Fairchild
International combined.
(4) William N. Stout, who is one of our directors, is affiliated with Sterling
in the capacities described under "Management -- Directors and Executive
Officers." All shares listed for Mr. Stout are held by Sterling, which Mr.
Stout may be deemed to beneficially own. Mr. Stout disclaims beneficial
ownership of such shares, except for 18,223 shares of either class of common
stock, which Mr. Stout has the right to acquire in exchange for an ownership
interest in Sterling. Richard M. Cashin and Paul C. Schorr IV, two of our
directors, are affiliated with Sterling in the capacities described under
"Management -- Directors and Executive Officers" and footnote (5) below. All
shares listed for Mr. Cashin and Mr. Schorr are held by Sterling, which Mr.
Cashin and Mr. Schorr may be deemed to beneficially own. Each of Mr. Cashin
and Mr. Schorr disclaims beneficial ownership of such shares, except for
959,490 shares and 72,911 shares of either class of common stock, which Mr.
Cashin and Mr. Schorr, respectively, have the right to acquire in exchange
for an ownership interest in Sterling.
(5) Citicorp Venture Capital Ltd. owns an interest in Sterling and could have
the right to acquire up to 19.9% of the Class A Common Stock of Fairchild
International and an additional 19.3% of Class B Common Stock of Fairchild
International from Sterling in exchange for its interest in Sterling.
Citicorp Mezzanine Partners, L.P., the general partner of which is an
affiliate of Citicorp Venture Capital, contributed $50.0 million in cash to
Fairchild International in exchange for a 12.5% Subordinated Note Due 2008
of Fairchild International and a warrant to purchase 3,538,228 shares of
common stock of Fairchild International. Fairchild International contributed
such $50.0 million to Fairchild as a capital contribution. The 12.5%
Subordinated Note Due 2008 of Fairchild International was repaid in full in
connection with the initial public offering of Fairchild International, and
therefore the warrant became no longer exercisable and was cancelled.
(6) Brian L. Halla, who is one of our directors, is affiliated with National
Semiconductor in the capacities described under "Management -- Directors and
Executive Officers." All shares listed for Mr. Halla are held by National
Semiconductor, which Mr. Halla may be deemed to beneficially own. Mr. Halla
disclaims beneficial ownership of such shares.
(7) Share amounts include shares distributed to executive officers by H.M.
Payson & Co., trustee of the Fairchild NSC Deferred Compensation Plan Trust
as a result of their election to receive shares of Class A Common Stock of
Fairchild International held by the trust. See "Management -- Deferred
Compensation Agreements," "Management -- Executive Compensation" and
specifically note 3 of the Summary Compensation Table in that subsection.
(8) Does not include 1,903,836 shares of Class A Common Stock held by H.M.
Payson & Co. and Daniel E. Boxer, as trustees of the Kirk P. Pond Children's
Trust. Mr. Boxer disclaims beneficial ownership of such shares.
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DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of Fairchild International
gives effect to the initial public offering and the conversion of all
outstanding shares of 12% Series A Cumulative Compounding Preferred Stock of
Fairchild International into Class A Common Stock of Fairchild International,
which occurred simultaneously with the initial public offering. The capital
stock of Fairchild International consists of 220,000,000 authorized shares of
common stock, par value $.01 per share, divided into two classes consisting of
(a) 110,000,000 shares of Class A Common Stock, of which 54,773,020 shares are
outstanding and (b) 110,000,000 shares of Class B Common Stock, of which
33,376,000 shares are outstanding. The capital stock of Fairchild International
also consists of 100,000 authorized shares of preferred stock, par value $.01
per share, none of which is issued or outstanding. On January 5, 1998, the Board
of Directors of Fairchild International approved a four-for-one common stock
split in the form of a stock dividend. Stockholders received three additional
shares for each share held. Such distribution was made on April 29, 1998 to
stockholders of Fairchild International of record on that date. All share
amounts in the accompanying consolidated financial statements have been restated
to retroactively reflect the split.
The following description of the terms and provisions of the capital stock
of Fairchild International is not complete, and you should read the Restated
Certificate of Incorporation and By-Laws of Fairchild International which have
been filed as exhibits, or incorporated by reference, to the Registration
Statement of which this prospectus is a part.
CLASS A COMMON STOCK OF FAIRCHILD INTERNATIONAL
The holders of Class A Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. The
Restated Certificate of Incorporation of Fairchild International provides for
cumulative voting for directors. With cumulative voting, at each election for
directors, each holder of Class A Common Stock is entitled to as many votes as
would equal the number of shares he or she holds multiplied by the number of
directors to be elected. The holder may cast all of his or her votes for a
single candidate or may distribute them among any number of candidates. Under
cumulative voting, a minority holder has a greater possibility of influencing
the election of directors because, for example, the minority holder can increase
the number of votes such holder may cast for an individual director. The holders
of Class A Common Stock will be entitled to such dividends as may be declared at
the discretion of the Board of Directors of Fairchild International out of funds
legally available for that purpose. The holders of Class A Common Stock will be
entitled to share ratably with holders of Class B Common Stock in the net assets
of Fairchild International upon liquidation after payment or provision for all
liabilities. A holder of Class A Common Stock may convert any or all of his
shares into an equal number of shares of Class B Common Stock of Fairchild
International. Fairchild International has never paid and does not anticipate
declaring or paying any cash dividends on shares of its Class A Common Stock in
the foreseeable future. As of June 30, 1999, there were 84 holders of record of
Class A Common Stock.
CLASS B COMMON STOCK OF FAIRCHILD INTERNATIONAL
Except as required by law, the holders of Class B Common Stock have no
voting rights. The holders of Class B Common Stock will be entitled to such
dividends as may be declared at the discretion of the Board of Directors of
Fairchild International out of funds legally available for that purpose. The
holders of Class B Common Stock will be entitled to share ratably with holders
of Class A Common Stock of Fairchild International in the net assets of
Fairchild International upon liquidation after payment or provision for all
liabilities. A holder of Class B Common Stock may convert any or all of his
shares into an equal number of shares of Class A Common Stock of Fairchild
International, provided that such conversion would be permitted only to the
extent that the holder of such shares to be converted certifies
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<PAGE> 108
to Fairchild International in writing that the holder would be permitted under
applicable law to hold the total number of shares of Class A Common Stock of
Fairchild International which would be held after giving effect to the
conversion. Fairchild International has never paid and does not anticipate
declaring or paying any cash dividends on shares of its Class B Common Stock in
the foreseeable future. As of June 30, 1999, there were 2 holders of record of
Class B Common Stock.
PREFERRED STOCK OF FAIRCHILD INTERNATIONAL
Under the Restated Certificate of Incorporation of Fairchild International,
the Board of Directors of Fairchild International will have the authority to
issue up to 100,000 shares of preferred stock, but only in connection with the
adoption of a stockholder rights plan. A stockholder rights plan may only be
adopted by the Board of Directors of Fairchild International with the approval
of holders of a majority of outstanding Class A Common Stock of Fairchild
International or with the unanimous consent of the Board of Directors of
Fairchild International, unless Sterling and its affiliates hold less than 15%
of outstanding common stock of Fairchild International, in which case approval
by a majority of the Board of Directors of Fairchild International is required.
If the Board of Directors of Fairchild International has such requisite
authority, it will be authorized to issue preferred stock in connection with a
stockholder rights plan in one or more series, and to fix the voting powers,
designations, preferences, and relative, participating, optional or other
special rights and qualifications, limitations and restrictions of each series,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, and the number of shares constituting any
series. The ability of the Board of Directors of Fairchild International to
issue preferred stock could have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from acquiring, a majority
of outstanding Class A Common Stock of Fairchild International. The ability of
the Board of Directors of Fairchild International to establish the preferences
and rights of the shares of any series of preferred stock may also afford
holders of any preferred stock preferences, powers and rights (including voting
rights) senior to the rights of holders of the Class A Common Stock of Fairchild
International. Fairchild International has no present plans to issue any shares
of preferred stock.
OTHER PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION OF FAIRCHILD
INTERNATIONAL
The Restated Certificate of Incorporation of Fairchild International
contains provisions affecting the rights of the stockholders of Fairchild
International and the powers of the Board of Directors of Fairchild
International, including the following:
- Fairchild International will not be subject to the provisions of Section
203 of the General Corporation Law of Delaware regulating takeovers.
Section 203 generally makes it more difficult for a third party to take
control of a company by prohibiting a third party owning more than 15% of
the company's stock from entering into transactions with the company
unless the Board of Directors or stockholders unaffiliated with the third
party approve either the third party or the transaction at issue, before
the third party becomes a 15% owner or the third party acquires at least
85% of the company's stock.
- A stockholder rights plan can be adopted only with the consent of holders
of a majority of outstanding Class A Common Stock of Fairchild
International or with the unanimous consent of the Board of Directors of
Fairchild International, except that if Sterling's and its affiliates'
ownership is less than 15% of the outstanding common stock of Fairchild
International, then a stockholder rights plan can be adopted with the
consent of a majority of the Board of Directors of Fairchild
International. A stockholder rights plan generally makes it more
difficult for a hostile bidder to take control of a company by providing
existing stockholders with special rights which would make it
uneconomical for the third party to acquire additional interests. If the
board of directors of Fairchild International is authorized to and
decides to implement a stockholder rights
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plan, the plan adopted by the board may deter acquisitions which you
might deem to be in your best interests.
- The Board of Directors of Fairchild International must have no fewer than
seven and no more than nine members and may not be divided into classes.
The term of each member of the Board of Directors of Fairchild
International expires at each annual stockholders' meeting. Having a
minimum number of Directors ensures that cumulative voting will operate
to protect the interests of minority shareholders, since with a smaller
Board it would take a greater percentage of votes to elect one Director.
Similarly, by prohibiting a classified Board, the Restated Certificate of
Incorporation of Fairchild International ensures that stockholders may
replace the entire Board at each annual election.
- Stockholders of Fairchild International may act by written consent,
without a meeting and without notice or a vote. This provision enables
stockholders to act on matters subject to a shareholder vote without
waiting until the next annual or special meeting of stockholders.
- Each of the provisions of the Restated Certificate of Incorporation of
Fairchild International described above, and the provision described
above under "Preferred Stock of Fairchild International" that limits the
board of directors' ability to issue preferred stock other than in
connection with a stockholder rights plan, may be amended only with the
approval of holders of 75% of outstanding Class A Common Stock of
Fairchild International. Amending other provisions requires approval by
holders of a majority of outstanding Class A Common Stock of Fairchild
International. The provision requiring a supermajority vote also cannot
be amended without the consent of holders of 75% of the Class A Common
Stock. If a third party -- that is, a person or entity other than the
principal stockholders of Fairchild International or members of the
management of Fairchild International -- acquires more than 40% of the
Class A Common Stock of Fairchild International, then the holders of a
majority of the Class A Common Stock could amend the foregoing
provisions. If, after any transfer by Sterling Holding Company, LLC and
its affiliates, Sterling and the affiliates together own less than 15% of
outstanding common stock of Fairchild International, then holders of a
majority of the Class A Common Stock could amend the supermajority
provisions itself. The effect of each supermajority provision is that
holders of 25% of Class A Common Stock of Fairchild International could
block amendments to the Restated Certificate of Incorporation of
Fairchild International affecting the provisions described above.
WARRANT
In connection with the acquisition of the power device business, Fairchild
International issued to Citicorp Mezzanine Partners, L.P. a warrant to purchase
its common stock. The warrant entitled the holder to purchase 3,538,228 shares
of common stock of Fairchild International from 18 months until 9 years after
the issuance thereof at an exercise price of $0.01 per share, subject to
adjustment to prevent dilution. Under the terms of the warrant, if Fairchild
International prepaid in full its 12.5% Subordinated Note Due 2008 within 18
months after its issuance, the warrant would not be exercisable. Since Fairchild
International repaid in full its 12.5% Subordinated Note Due 2008 with a portion
of the proceeds of the initial public offering of Fairchild International, the
warrant is not exercisable.
STOCKHOLDERS' AGREEMENT
The existing stockholders of Fairchild International entered into a
Securities Purchase and Holders Agreement, which we refer to as the
Stockholders' Agreement, containing agreements among such stockholders with
respect to the capital stock and corporate governance of our company and
Fairchild International.
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The Stockholders' Agreement contains provisions which restrict the ability
of the stockholders to transfer any common stock of Fairchild International or
12% Series A Cumulative Compounding Preferred Stock. Neither Sterling nor any of
its affiliates may sell any of their shares of common stock of Fairchild
International to us or any of our affiliates without offering the other
stockholders who are party to the agreement a pro rata opportunity to
participate in such sale. In addition, the Stockholders' Agreement restricts
transactions between our company and Fairchild International, on the one hand,
and owners of 15% or more of the common stock of Fairchild International and
their affiliates, on the other hand. Some of our principal stockholders,
including Sterling and National Semiconductor, have the right to have observers
present at meetings of the Board of Directors of Fairchild International if they
are not represented on its Board. Fairchild International cannot issue shares of
stock to Sterling or any of its affiliates without offering the other parties to
the Stockholders Agreement an equal opportunity to purchase its shares.
The Stockholders' Agreement also contains provisions that require Fairchild
International to give Sterling Holding Company, LLC, one of the principal
stockholders of Fairchild International, advance notice of conversions or
exchanges of the common stock of Fairchild International or any action affecting
the voting rights of the common stock of Fairchild International. After
receiving such notice, Sterling has the right to prevent the action for up to 90
days if, as a result of the action, Sterling would control or have power over a
greater number of shares than it would be permitted to have under Small Business
Administration regulations. The Stockholders' Agreement also requires Fairchild
International to notify Sterling of actions that would result in the number of
record holders of the voting stock of Fairchild International increasing from
fewer than 50 to 50 or more.
Amendments to the Stockholders' Agreement, which were effected on May 29,
1998, resulted in the lapse of risks of forfeiture by our executive officers
with respect to some of their stock in Fairchild International. The lapse of
such restrictions resulted in the incurrence by such executive officers of
liability for federal and state income tax. We made loans to such executive
officers in June 1998 to enable such officers to fund such tax liabilities and
in connection with this offering will forgive such loans and indemnify these
executives for such taxes. See "Certain Relationships and Related Transactions."
REGISTRATION RIGHTS AGREEMENT
In connection with the entry by the existing stockholders of Fairchild
International into the Stockholders' Agreement, Fairchild International,
Sterling, some key employees of Fairchild, National Semiconductor and such
stockholders entered into a Registration Rights Agreement. Pursuant to the
Registration Rights Agreement, upon the written request of Sterling or National
Semiconductor, Fairchild International will prepare and file a registration
statement with the Securities and Exchange Commission concerning the
distribution of all or part of the shares held by Sterling or National
Semiconductor and use its best efforts to cause such registration statement to
become effective. If at any time Fairchild International files a registration
statement for the common stock of Fairchild International pursuant to a request
by Sterling, National Semiconductor or otherwise (other than a registration
statement on Form S-8, Form S-4 or any similar form, a registration statement
filed in connection with a share exchange or an offering solely to our employees
or existing stockholders, or a registration statement registering a unit
offering), Fairchild International will use its best efforts to allow the other
parties to the Registration Rights Agreement to have their shares of common
stock (or a portion of their shares when an underwriter determines that
registering fewer than all their shares is advisable) included in such offering
of common stock. Fairchild International will pay the registration expenses of
the selling stockholders, other than underwriting fees, brokerage fees and
transfer taxes applicable to the shares sold by such stockholders or the fees
and expenses of any accountants or other representatives retained by a selling
stockholder.
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DESCRIPTION OF INDEBTEDNESS
The following is a summary of significant indebtedness of our company and
Fairchild International that are outstanding following consummation of the
initial public offering of Fairchild International. To the extent such summary
contains descriptions of documents governing our indebtedness, such descriptions
do not purport to be complete and are qualified in their entirety by reference
to such documents, which we will provide you upon request.
SENIOR CREDIT FACILITIES
GENERAL. In connection with the acquisition of the power device business,
we entered into the senior credit facilities with a syndicate of financial
institutions, as lenders, Credit Suisse First Boston, New York Branch, as the
Administrative Agent, Salomon Brothers Holding Company Inc, as Syndication
Agent, and ABN Amro Bank, N.V. and Fleet National Bank, as Documentation Agents.
The senior credit facilities provide for up to $410.0 million of aggregate
borrowing capacity for Fairchild consisting of:
- a secured $100.0 million funded tranche A term loan facility;
- a secured $210.0 million funded tranche B term loan facility; and
- a secured $100.0 million revolving line of credit, including up to $10.0
million of swingline loans.
GUARANTEES; SECURITY. Our obligations under the senior credit facilities
are unconditionally guaranteed, jointly and severally, by Fairchild
International, Fairchild Semiconductor Corporation of California and all of our
subsequently acquired or organized domestic, and, to the extent no adverse tax
consequences will result, foreign, subsidiaries. Our obligations and those of
such guarantors under the senior credit facilities are secured by a pledge of
all of our capital stock and by substantially all of the assets of our company,
Fairchild International, Fairchild Semiconductor Corporation of California and
all of our subsequently acquired or organized domestic, and, to the extent no
adverse tax consequences will result, foreign, subsidiaries. None of our foreign
subsidiaries guarantee the senior credit facilities, and the senior credit
facilities are not secured by a pledge of the intercompany debt obligations of
Fairchild Korea. The only intercompany debt obligation of Fairchild Korea is
with respect to the corporate bonds issued by it in connection with the
acquisition of the power device business. Less than two-thirds of the capital
stock of Fairchild Korea has been pledged to secure the senior credit
facilities.
AMORTIZATION; INTEREST; FEES; MATURITY. The tranche A facility is subject
to amortization payments required to be made in quarterly installments which
commence on September 30, 1999 until final payment is made on March 31, 2004.
The tranche B facility is subject to amortization payments required to be made
in quarterly installments which commence on September 30, 1999 until final
payment is made on December 15, 2004. The revolving credit facility is available
until March 31, 2004 unless terminated earlier under the terms of the facility.
Borrowings under the tranche A facility, tranche B facility and revolving
credit facility portions of the senior credit facilities bear interest at a rate
equal to, at our option, either (i) a base rate which is based on the prime rate
most recently announced by the Administrative Agent or the Federal Funds rate
plus one-half of 1% or (ii) the applicable London interbank offered rate, in
each case plus an applicable margin determined by reference to the ratio of
Consolidated Indebtedness to Consolidated EBITDA (each as defined in the senior
credit facilities). In general, Consolidated Indebtedness means the debt
obligations of our company and our subsidiaries and Consolidated EBITDA means
our company's consolidated net income before interest, taxes, depreciation and
amortization. In addition, the senior credit facilities are subject to a
commitment fee of 0.50% per annum of the undrawn portion of the revolving credit
facility, and letter of credit fees with respect to each letter of credit
outstanding under the senior credit facilities equal to (i) the spread over
Adjusted LIBO Rate (as defined in the senior
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credit facilities) in effect for loans under the revolving credit facility and
(ii) 0.25% per annum on the face amount of all outstanding letters of credit. In
general, Adjusted LIBO Rate means the London interbank offered rate as adjusted
by the applicable reserve percentage.
PREPAYMENTS. The loans under the senior credit facilities are required to
be prepaid with all or a portion of the net cash proceeds from asset and capital
stock sales and dispositions, incurrences of indebtedness, offerings of common
equity securities and by 50 or 75% of our annual Excess Cash Flow (as defined in
the senior credit facilities). In general, Excess Cash Flow means, for any
fiscal year of our company, the excess of (a) the sum of:
- consolidated EBITDA for such fiscal year;
- extraordinary cash receipts of our company and our subsidiaries during
such fiscal year; and
- reductions to noncash working capital of our company and our subsidiaries
for such fiscal year;
over (b) the sum of:
- cash income taxes payable by our company and our subsidiaries for such
fiscal year;
- cash interest paid by our company and our subsidiaries during such fiscal
year;
- capital expenditures made in cash during such fiscal year;
- permanent repayments of indebtedness made by our company and our
subsidiaries during such fiscal year;
- prepayments of the principal of loans during such fiscal year;
- extraordinary cash expenses paid by our company and our subsidiaries
during such fiscal year;
- additions to noncash working capital for such fiscal year; and
- the amount of permitted capital expenditures being carried forward from
such fiscal year into the next fiscal year, net of the amount of
permitted capital expenditures carried forward into such fiscal year from
the previous fiscal year.
Voluntary prepayments may be made in whole or in part without premium or
penalty.
COVENANTS AND EVENTS OF DEFAULT. The senior credit facilities contain,
among other things, covenants and restrictions under which we and our
subsidiaries, subject to customary exceptions described in the senior credit
facilities, may not:
- incur additional indebtedness and guarantees, except indebtedness
incurred pursuant to the senior credit facilities, the Notes, other
indebtedness existing on the date of the senior credit facilities,
additional debt in an amount not exceeding $20.0 million and other
customary exceptions;
- create liens;
- enter into agreements with negative pledge clauses;
- enter into sale and lease-back transactions;
- directly or indirectly lend money or credit or make advances to any
person;
- purchase or acquire any stock, obligations or securities of, or any other
interest in, or make any capital contribution to, any other person;
- wind-up, liquidate or dissolve their affairs, merge or consolidate with
another company or otherwise dispose of all or part of its property or
assets, or purchase or otherwise acquire the assets of another person;
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- authorize, declare or pay any dividends with respect to Fairchild
International or any of its subsidiaries, except to Fairchild
International to pay taxes, certain operating expenses and other limited
exceptions;
- enter into any transaction with any affiliate of Fairchild International
and its subsidiaries, other than those transactions that are entered into
in the ordinary course of business and are on terms and conditions
substantially as favorable to Fairchild International or such subsidiary
as would be reasonably obtained by Fairchild International or such
subsidiary at that time in a comparable arm's-length transaction with a
person other than an affiliate;
- make capital expenditures in excess of $90.0 million through December 31,
1999, with such amount increasing to $135.0 million each year after 2002;
- permit the ratios of earnings to interest expense, earnings to fixed
charges and indebtedness to earnings to fall below levels specified in
the senior credit facilities, with such levels increasing year over year
through December 31, 2002 for the ratio of earnings to fixed charges and
through December 31, 2003 for the ratio of earnings to interest expense
and indebtedness to earnings;
- amend or modify the provisions of their existing indebtedness or
certificate of incorporation and by-laws except amendments or
modifications that do not materially adversely affect the interests of
the lenders;
- create restrictions on their subsidiaries from conducting activities such
as payment of dividends or making loans to us or other of our
subsidiaries;
- with respect to Fairchild International's subsidiaries, issue any capital
stock;
- form new subsidiaries; or
- change their or Fairchild International's business activities.
The senior credit facilities also include events of default customary for
these types of credit facilities and transactions, including but not limited to
nonpayment of principal or interest, violation of covenants, incorrectness of
representations and warranties, cross defaults and cross acceleration,
bankruptcy, material judgments, ERISA, actual or asserted invalidity of the
guarantees or the security documents and changes of control of our company. The
occurrence of any event of default could result in the acceleration of our and
the guarantors' obligations under the senior credit facilities, which could
materially and adversely affect value of our common stock.
10 1/8% SENIOR SUBORDINATED NOTES DUE 2007
We are the primary obligor on $300,000,000 in aggregate principal amount of
10 1/8% Senior Subordinated Notes. The 10 1/8% Senior Subordinated Notes bear
interest at a rate of 10 1/8% per annum, payable semi-annually on March 15 and
September 15 of each year.
We are required to redeem $150.0 million principal amount of 10 1/8% Senior
Subordinated Notes on March 15, 2005 and $75.0 million principal amount of
10 1/8% Senior Subordinated Notes on March 15, 2006, in each case at a
redemption price of 100% of the principal amount plus accrued interest to the
date of redemption, subject to our right to credit against any such redemption
10 1/8% Senior Subordinated Notes acquired by our company otherwise than through
any such redemption. The 10 1/8% Senior Subordinated Notes are not otherwise
redeemable prior to March 15, 2002, except that, until March 15, 2000, we may
redeem up to an aggregate of $105.0 million of the principal amount of the
10 1/8% Senior Subordinated Notes at the redemption price of 110% of the
principal amount of the 10 1/8% Senior Subordinated Notes plus accrued interest
to the date of redemption with the net proceeds of one or more underwritten
primary public offerings of common stock of our company or Fairchild
International under effective registration statement, if at least $150.0 million
of the principal amount of the 10 1/8% Senior
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Subordinated Notes remains outstanding after each such redemption. On and after
March 15, 2002, the 10 1/8% Senior Subordinated Notes are redeemable at our
option at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest to the applicable redemption
date, if redeemed during the 12-month period beginning on March 15 in the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2002........................................................ 105.063%
2003........................................................ 103.375
2004........................................................ 101.688
2005 and thereafter......................................... 100.000
</TABLE>
Upon a change of control of our company, each holder of the 10 1/8% Senior
Subordinated Notes may require us to repurchase the 10 1/8% Senior Subordinated
Notes held by such holder at 101% of the principal amount thereof plus accrued
interest to the date of repurchase.
The 10 1/8% Senior Subordinated Notes are unsecured senior subordinated
obligations of our company and are subordinated in right of payment to all of
our existing and future senior indebtedness. The 10 1/8% Senior Subordinated
Notes rank pari passu in right of payment with all of our senior subordinated
indebtedness and senior to any other of our subordinated indebtedness.
The payment of principal, premium, if any, and interest on the 10 1/8%
Senior Subordinated Notes is fully and unconditionally guaranteed on a senior
subordinated basis by Fairchild International and the subsidiary guarantors. The
guaranties by Fairchild International and the subsidiary guarantors are
subordinated to all existing and future senior indebtedness of such parties,
including Fairchild International's and the subsidiary guarantors' guaranties of
our obligations under the senior credit facilities. Fairchild International
currently conducts no business and has no significant assets other than our
capital stock, all of which has been pledged to secure Fairchild International's
obligations under the senior credit facilities. The guaranty of Fairchild
International or a subsidiary guarantor, as the case may be, may be released
upon a sale of Fairchild International or a subsidiary guarantor, as the case
may be, or upon repayment or defeasance of the 10 1/8% Senior Subordinated Notes
in each case as permitted by the indenture governing the 10 1/8% Senior
Subordinated Notes.
The indenture governing the 10 1/8% Senior Subordinated Notes contains
restrictive covenants substantially identical to those contained in the
indenture governing the Notes under which we and our subsidiaries, subject to
exceptions described in the indenture governing the 10 1/8% Senior Subordinated
Notes, may not:
- incur additional indebtedness, except (1) if following such additional
incurrence, the ratio of earnings to interest expense does not exceed 2.0
to 1.0 or (2) under the senior credit facilities, existing on the issue
date, guaranties of indebtedness by us and our subsidiaries, other
indebtedness not exceeding $50.0 million and other customary exceptions;
- make payments, such as dividends, stock redemptions or repayments of
subordinated debt obligations, if we are in default under the indenture
governing the 10 1/8% Senior Subordinated Notes, if we under the
indenture may not incur additional indebtedness or if the payment exceeds
a limit specified in the indenture, except payments made from the
proceeds of a substantially concurrent sale of our capital stock, for the
retirement of subordinated obligations, for dividends which are otherwise
allowed, for the repurchase of shares of common stock held by our
employees and other customary exceptions;
- enter into agreements that limit the ability of our restricted
subsidiaries under the indenture governing the 10 1/8% Senior
Subordinated Notes from paying dividends or any indebtedness owed to,
making loans or advances to, or transferring any of its property or
assets to us, except for those
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restrictions in place on the issue date, restrictions pursuant to
agreements effecting refinancing indebtedness and other customary
exceptions;
- dispose of any assets, unless the consideration received in return
consists of 85% cash and represents the fair market value of the assets
and the proceeds of the disposition are applied according to the terms of
the indenture governing the 10 1/8% Senior Subordinated Notes;
- enter into any transaction with affiliates of our company, unless the
transactions (1) are entered into in the ordinary course of business, (2)
are on terms and conditions substantially as favorable to the affiliate
as would be reasonably obtained by the affiliate at that time in a
comparable arm's-length transaction with a person other than an affiliate
of our company and (3) are approved by a nationally recognized investment
banking firm to be fair, if such transaction exceeds $12.0 million, and
other customary exceptions;
- dispose of capital stock of those subsidiaries of our company restricted
under the indenture governing the 10 1/8% Senior Subordinated Notes,
subject to customary exceptions; or
- wind-up, liquidate or dissolve their affairs, or merge or consolidate
with or transfer all or substantially all of their assets to another
person, subject to customary exceptions.
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DESCRIPTION OF THE NOTES
GENERAL
Fairchild issued the Existing Notes under the Indenture between itself and
United States Trust Company of New York, as trustee (the "Trustee"). The terms
of the Indenture apply to the Existing Notes and to the Exchange Notes for which
you may tender your Existing Notes pursuant to the Exchange Offer (all such
Notes being collectively referred to in this section as the "Notes"). The terms
of the Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (the "Trust Indenture
Act").
Certain terms used in this description are defined under the caption
"-- Certain Definitions." In this description, the word "Company" refers only to
Fairchild Semiconductor Corporation and not to any of its subsidiaries.
The following description is only a summary of the material provisions of
the Indenture and the Registration Rights Agreement. We urge you to read the
Indenture and the Registration Rights Agreement because they, and not this
description, define your rights as holders of these Notes. You may request
copies of these agreements at our address set forth under "Where You Can Find
More Information."
BRIEF DESCRIPTION OF THE NOTES
THE NOTES
These Notes:
- are unsecured senior subordinated obligations of the Company;
- are subordinated in right of payment to all existing and future Senior
Indebtedness of the Company;
- are senior in right of payment to any future Subordinated Obligations of
the Company; and
- are subject to registration with the Securities and Exchange Commission
pursuant to the Registration Rights Agreement.
THE GUARANTIES
The Fairchild International Guaranty and each Subsidiary Guaranty:
- unconditionally guarantee the obligations of the Company under the Notes;
and
- are senior subordinated obligations of Fairchild International and the
relevant Subsidiary Guarantor, as the case may be.
PRINCIPAL, MATURITY AND INTEREST
The Company issued the Notes initially in the principal amount of $300.0
million. The Company issued the Notes in denominations of $1,000 and integral
multiples of $1,000. The Notes will mature on October 1, 2007. Subject to our
compliance with the covenant described under the caption "-- Certain
Covenants -- Limitation on Indebtedness," we are permitted to issue more Notes
under the Indenture in an unlimited principal amount ("Additional Notes"). Any
such Additional Notes that are actually issued will be treated as issued and
outstanding Notes (and as the same class as the initial Notes) for all purposes
of the Indenture and this "Description of the Notes," unless the context
indicates otherwise.
Interest on these Notes will accrue at the rate of 10 3/8% per annum and
will be payable semiannually in arrears on April 1 and October 1, commencing on
October 1, 1999. The Company will make each
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interest payment to the holders of record of these Notes on the immediately
preceding March 15 and September 15. We will pay interest on overdue principal
at 1% per annum in excess of the above rate and will pay interest on overdue
installments of interest at such higher rate to the extent lawful.
Interest on these Notes will accrue from the date of original issuance or,
if interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Additional interest may accrue on the Notes in certain circumstances
pursuant to the Registration Rights Agreement.
OPTIONAL REDEMPTION
Except as set forth below, we will not be entitled to redeem the Notes at
our option prior to April 1, 2003.
On and after April 1, 2003, we will be entitled at our option to redeem all
or a portion of these Notes upon not less than 30 nor more than 60 days' notice,
at the redemption prices (expressed as percentages of principal amount) set
forth below plus accrued and unpaid interest thereon, if any, to the applicable
redemption date, if redeemed during the 12-month period beginning on April 1 in
the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003........................................................ 105.188%
2004........................................................ 103.458
2005........................................................ 101.729
2006 and thereafter......................................... 100.000
</TABLE>
In addition, prior to April 1, 2002, we may at our option on one or more
occasions redeem Notes (which includes Additional Notes, if any) in an aggregate
principal amount not to exceed 35% of the aggregate principal amount of Notes
(which includes Additional Notes, if any) originally issued at a redemption
price of 110 3/8% of the principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the redemption date, with the net cash proceeds
from one or more Public Equity Offerings; provided, however, that:
(1) at least 65% of such aggregate principal amount of Notes (which
includes Additional Notes, if any) remains outstanding immediately
after the occurrence of each such redemption (other than Notes held,
directly or indirectly, by the Company or its Affiliates); and
(2) each such redemption occurs within 90 days after the date of the
related Public Equity Offering.
SPECIAL REDEMPTION; ESCROW OF OFFERING PROCEEDS
In the event that (1) the Acquisition of the Power Device Business had not
been consummated and (2) Samsung Electronics had not received in cash the full
purchase price for the Acquisition, in each case on or prior to April 23, 1999,
Fairchild would have been required to redeem the Notes (the "Special
Redemption") at a redemption price (the "Special Redemption Price") of 100% of
the aggregate principal amount thereof, plus accrued and unpaid interest thereon
(subject to the right of holders of record on the relevant date to receive
interest due on such date) to the date of redemption (the "Special Redemption
Date"). We would have been required to cause the notice of the Special
Redemption to be mailed on or prior to April 26, 1999 and we would have been
required to redeem the Notes on or prior to May 3, 1999, or, in the event that
Fairchild was restricted by Korean law from redeeming the Notes, we would have
been required to redeem the Notes on the earlier of (1) the fifth
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business day immediately following the date such restriction is no longer
applicable and (2) July 1, 1999.
Concurrently with the closing of the sale of the Notes, Fairchild entered
into an escrow agreement (the "Escrow Agreement") with United States Trust
Company of New York, as escrow agent (the "Escrow Agent"), pursuant to which
Fairchild deposited with the Escrow Agent, the net proceeds of the sale of the
Notes.
Fairchild was only entitled to direct the Escrow Agent to release the
escrowed funds in accordance with the provisions of the Escrow Agreement.
Pursuant to the Escrow Agreement, the Escrow Agent was required to release the
escrowed funds upon the satisfaction of certain conditions, including the
presentation of an officer's certificate certifying that (1) the Acquisition of
the Power Device Business has been consummated pursuant to the terms of the
Business Transfer Agreement on or prior to April 23, 1999 and (2) following the
release of the escrowed funds, such funds, together with the proceeds of other
Transactions, will be applied by Fairchild in the manner described under
"Sources and Uses of Proceeds."
If the Escrow Agent had received a notice of Special Redemption pursuant to
the terms of the Notes, the Escrow Agent would have been required to liquidate
the escrowed funds then held by it on or before the Special Redemption Date and
release to the Paying Agent for the Notes the escrowed funds in order to fund,
in part, the Special Redemption Price on or prior to such date.
Certain provisions relating to Fairchild's obligation to redeem the Notes
in the Special Redemption may not be waived or modified without the written
consent of the holders of all the Notes.
SELECTION AND NOTICE OF REDEMPTION
If we are redeeming less than all the Notes at any time, the Trustee will
select Notes on a pro rata basis, by lot or by such other method as the Trustee
in its sole discretion shall deem to be fair and appropriate.
Notes redeemed in part will be redeemed only in principal amounts of
$1,000. We will cause notices of redemption to be mailed by first-class mail at
least 30 but not more than 60 days before the redemption date to each holder of
Notes to be redeemed at its registered address.
If any Note is to be redeemed in part only, the notice of redemption that
relates to that Note shall state the portion of the principal amount thereof to
be redeemed. We will issue a new Note in principal amount equal to the
unredeemed portion of the original Note in the name of the holder thereof upon
cancelation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption.
GUARANTIES
Fairchild International and each Subsidiary Guarantor will jointly and
severally guarantee, on a senior subordinated basis, our obligations under the
Notes. Each Subsidiary Guaranty will be limited as necessary to prevent such
Subsidiary Guaranty from being rendered voidable under applicable law relating
to fraudulent conveyance or fraudulent transfer or similar laws affecting the
rights of creditors generally. See "Risk Factors -- Fraudulent Conveyance
Matters."
Each Subsidiary Guarantor that makes a payment under its Subsidiary
Guaranty will be entitled to a contribution from each other Subsidiary Guarantor
in an amount equal to such other Subsidiary Guarantor's pro rata portion of such
payment based on the respective net assets of all the Subsidiary Guarantors at
the time of such payment determined in accordance with GAAP.
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If a Subsidiary Guaranty were to be rendered voidable, it could be
subordinated by a court to all other indebtedness (including guarantees and
other contingent liabilities) of the applicable Subsidiary Guarantor and,
depending on the amount of such indebtedness, a Subsidiary Guarantor's liability
on its Subsidiary Guaranty could be reduced to zero.
Pursuant to the Indenture, Fairchild International or a Subsidiary
Guarantor may consolidate with, merge with or into, or transfer all or
substantially all its assets to any other Person to the extent described below
under "-- Certain Covenants -- Merger and Consolidation;" provided, however,
that if such other Person is not the Company, Fairchild International's
obligations under the Fairchild International Guaranty or such Subsidiary
Guarantor's obligations under its Subsidiary Guaranty, as the case may be, must
be expressly assumed by such other Person.
A Subsidiary Guarantor will be released and relieved from all its
obligations under its Subsidiary Guaranty:
(1) upon the sale or other disposition (including by way of consolidation
or merger) of such Subsidiary Guarantor; or
(2) upon the sale or disposition of all or substantially all the assets of
such Subsidiary Guarantor;
in each case other than to the Company or an Affiliate of the Company and as
permitted by the Indenture.
RANKING
NOTES AND GUARANTIES VERSUS SENIOR INDEBTEDNESS.
The indebtedness evidenced by the Notes, the Fairchild International
Guaranty and the Subsidiary Guaranties are the senior subordinated obligations
of the Company, Fairchild International and the Subsidiary Guarantors, as the
case may be. The payment of the principal of, premium, if any, and interest on
the Notes and the payment of the Fairchild International Guaranty and any
Subsidiary Guaranty is subordinate in right of payment, as set forth in the
Indenture, to the prior payment in full in cash when due of all Obligations with
respect to Senior Indebtedness of the Company, Fairchild International or the
relevant Subsidiary Guarantor, as the case may be, whether outstanding on the
Issue Date or thereafter incurred, including the obligations of the Company,
Fairchild International and such Subsidiary Guarantor under the Credit
Agreement.
As of May 30, 1999, after giving pro forma effect to the initial public
offering of Fairchild International's Class A Common Stock and the application
of the proceeds of such public offering:
(1) the Senior Indebtedness of the Company would have been approximately
$115.4 million, all of which would have been secured indebtedness under
the Senior Credit Facilities;
(2) the Senior Indebtedness of Fairchild International would have been
approximately $115.4 million, consisting of the Fairchild
International's senior guaranty of the Company's obligations under the
Senior Credit Facilities; and
(3) the Senior Indebtedness of the Subsidiary Guarantors would have been
approximately $115.4 million, consisting of the Subsidiary Guarantors'
senior guaranty of the Company's obligations under the Senior Credit
Facilities.
In addition, the Company would have had additional availability of $100.0
million for borrowings of Senior Indebtedness under the Revolving Credit
Facility. Although the Indenture contains limitations on the amount of
additional Indebtedness that the Company and the Subsidiary Guarantors may
incur, under certain circumstances the amount of such Indebtedness could be
substantial and, in any case, such Indebtedness may be Senior Indebtedness. See
"-- Certain Covenants -- Limitation on Indebtedness."
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GUARANTIES VERSUS OTHER LIABILITIES OF SUBSIDIARIES.
A portion of the operations of the Company are conducted through its
subsidiaries. Some of the Company's domestic subsidiaries and all of its foreign
subsidiaries, including Fairchild Korea, are not guaranteeing the Notes. Claims
of creditors of such non-guarantor subsidiaries, including trade creditors,
secured creditors and creditors holding indebtedness and guarantees issued by
such non-guarantor subsidiaries, and claims of preferred stockholders, if any,
of such non-guarantor subsidiaries generally will have priority with respect to
the assets and earnings of such non-guarantor subsidiaries over the claims of
creditors of the Company, including holders of the Notes, even if such
obligations do not constitute Senior Indebtedness. The Notes, the Fairchild
International Guaranty and each Subsidiary Guaranty, therefore, will be
effectively subordinated to creditors (including trade creditors) and preferred
stockholders of such non-guarantor subsidiaries of the Company. See "Risk
Factors -- Subordination."
As of May 30, 1999, the total liabilities of the Company's non-guarantor
subsidiaries are $83.5 million. Although the Indenture limits the incurrence of
Indebtedness and preferred stock of certain of the Company's subsidiaries, such
limitation is subject to a number of significant qualifications. Moreover, the
Indenture does not impose any limitation on the incurrence by such subsidiaries
of liabilities that are not considered Indebtedness or Preferred Stock under the
Indenture. See "-- Certain Covenants -- Limitation on Indebtedness."
NOTES AND GUARANTIES VERSUS OTHER SENIOR SUBORDINATED INDEBTEDNESS.
Only Indebtedness of the Company, Fairchild International or a Subsidiary
Guarantor that is Senior Indebtedness will rank senior to the Notes, the
Fairchild International Guaranty and the relevant Subsidiary Guaranty in
accordance with the provisions of the Indenture. The Notes, the Fairchild
International Guaranty and each Subsidiary Guaranty will in all respects rank
pari passu with all other Senior Subordinated Indebtedness of the Company,
Fairchild International and the relevant Subsidiary Guarantor, respectively.
The Company and each Subsidiary Guarantor have agreed in the Indenture that
they will not Incur, directly or indirectly, any Indebtedness that is
subordinate or junior in ranking in right of payment to its Senior Indebtedness
unless such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness. Unsecured
Indebtedness is not deemed to be subordinated or junior to Secured Indebtedness
merely because it is unsecured.
PAYMENT OF NOTES.
We are not permitted to pay principal of, premium, if any, or interest on,
the Notes or make any deposit pursuant to the provisions described under
"-- Defeasance" below and may not repurchase, redeem or otherwise retire any
Notes (collectively, "pay the Notes") if either of the following (each, a
"Payment Default") occurs:
(1) any Obligations with respect to Senior Indebtedness are not paid in
full when due; or
(2) any other default on Senior Indebtedness occurs and the maturity of
such Senior Indebtedness is accelerated in accordance with its terms;
unless, in either case, the Payment Default has been cured or waived and any
such acceleration has been rescinded in writing or such Senior Indebtedness has
been paid in full in cash. Regardless of the foregoing, we are permitted to pay
the Notes without regard to the foregoing if the Company and the Trustee receive
written notice approving such payment from the Representative of the Senior
Indebtedness with respect to which the Payment Default has occurred and is
continuing.
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During the continuance of any default (other than a Payment Default) with
respect to any Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated immediately without further notice (except such
notice as may be required to effect such acceleration) or the expiration of any
applicable grace periods, we are not permitted to pay the Notes for a period (a
"Payment Blockage Period") commencing upon the receipt by the Trustee (with a
copy to the Company) of written notice (a "Blockage Notice") of such default
from the Representative of the holders of such Designated Senior Indebtedness
specifying an election to effect a Payment Blockage Period and ending 179 days
thereafter. The Payment Blockage Period will end earlier if such Payment
Blockage Period is terminated:
(1) by written notice to the Trustee and the Company from the Person or
Persons who gave such Blockage Notice;
(2) because no defaults continue in existence which would permit the
acceleration of the maturity of any Designated Senior Indebtedness at
such time; or
(3) because such Designated Senior Indebtedness has been repaid in full in
cash.
Notwithstanding the provisions described above, unless the holders of such
Designated Senior Indebtedness or the Representative of such holders have
accelerated the maturity of such Designated Senior Indebtedness, or any Payment
Default otherwise exists, we are permitted to resume payments on the Notes after
the end of such Payment Blockage Period. The Notes shall not be subject to more
than one Payment Blockage Period in any consecutive 360-day period, irrespective
of the number of defaults with respect to Designated Senior Indebtedness during
such period, except that if any Blockage Notice is delivered to the Trustee by
or on behalf of holders of Designated Senior Indebtedness (other than holders of
the Bank Indebtedness), a Representative of holders of Bank Indebtedness may
give another Blockage Notice within such period. However, in no event may the
total number of days during which any Payment Blockage Period or Periods is in
effect exceed 179 days in the aggregate during any 360 consecutive day period,
and there must be 181 days during any 360-day consecutive period during which no
Payment Blockage Period is in effect.
Upon any payment or distribution by the Company upon any liquidation,
dissolution, winding up, assignment for the benefit of creditors or marshalling
of assets of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property:
(1) the holders of Senior Indebtedness will be entitled to receive payment
in full in cash of all Obligations with respect to such Senior
Indebtedness before the Noteholders are entitled to receive any payment
or distribution; and
(2) until all Obligations with respect to Senior Indebtedness are paid in
full in cash, any payment or distribution to which Noteholders would be
entitled but for the subordination provisions of the Indenture will be
made to holders of such Senior Indebtedness as their interests may
appear.
If a distribution is made to Noteholders that, due to the subordination
provisions, should not have been made to them, such Noteholders are required to
hold it in trust for the holders of Senior Indebtedness and pay it over to them
as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, we
or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness or the Representative of such holders of the acceleration. If any
Designated Senior Indebtedness is outstanding at the time of such acceleration,
neither the Company nor any Subsidiary Guarantor may pay the Notes until five
Business Days after the Representatives of all the issues of Designated Senior
Indebtedness receive notice of such acceleration and, thereafter, may pay the
Notes only if the Indenture otherwise permits payment at that time.
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The obligations of Fairchild International under the Fairchild
International Guaranty and of a Subsidiary Guarantor under its Subsidiary
Guaranty are senior subordinated obligations. As such, the rights of Noteholders
to receive payment by Fairchild International or by a Subsidiary Guarantor
pursuant to the Fairchild International Guaranty or a Subsidiary Guaranty will
be subordinated in right of payment to the rights of holders of Senior
Indebtedness of Fairchild International or such Subsidiary Guarantor, as the
case may be. The terms of the subordination provisions described above with
respect to the Company's obligations under the Notes apply equally to Fairchild
International and a Subsidiary Guarantor and the obligations of Fairchild
International and such Subsidiary Guarantor under the Fairchild International
Guaranty or a Subsidiary Guaranty, as the case may be.
By reason of the subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company, Fairchild International or a
Subsidiary Guarantor who are holders of Senior Indebtedness of the Company,
Fairchild International or a Subsidiary Guarantor, as the case may be, may
recover more, ratably, than the Noteholders, and creditors of the Company who
are not holders of Senior Indebtedness may recover less, ratably, than holders
of Senior Indebtedness and may recover more, ratably, than the Noteholders.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Notes
pursuant to the provisions described under "-- Defeasance," if the foregoing
subordination provisions were not violated at the time the respective amounts
were deposited pursuant to such defeasance provisions.
BOOK-ENTRY, DELIVERY AND FORM
The Existing Notes were, and the Exchange Notes will be, issued in the form
of one or more global notes (the "Global Note") deposited with, or on behalf of,
the Depository and registered in the name of the Depository or its nominee.
Except as set forth below, the Global Note may be transferred, in whole and not
in part, only to the Depository or another nominee of the Depository. You may
hold your beneficial interests in the Global Note directly through the
Depository if you have an account with the Depository or indirectly through
organizations which have accounts with the Depository.
The Depository has advised the Company as follows: the Depository is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (which may
include the Initial Purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depository's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
(collectively, the "indirect participants") that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly.
The Company expects that pursuant to procedures established by the
Depository, upon the deposit of the Global Note with the Depository, the
Depository will credit, on its book-entry registration and transfer system, the
principal amount of Notes represented by such Global Note to the accounts of
participants. The accounts to be credited shall be designated by the Initial
Purchasers. Ownership of beneficial interests in the Global Note will be limited
to participants or persons that may hold interests through participants.
Ownership of beneficial interests in the Global Note will be shown on, and the
transfer of those ownership interests will be effected only through, records
maintained by the Depository
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(with respect to participants' interests), the participants and the indirect
participants (with respect to the owners of beneficial interests in the Global
Note other than participants). The laws of some jurisdictions may require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in the Global Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of any related Notes
evidenced by the Global Note for all purposes of such Notes and the Indenture.
Except as set forth below, as an owner of a beneficial interest in the Global
Note, you will not be entitled to have the Notes represented by the Global Note
registered in your name, will not receive or be entitled to receive physical
delivery of certificated Notes and will not be considered to be the owner or
holder of any Notes under the Global Note. We understand that under existing
industry practice, in the event an owner of a beneficial interest in the Global
Note desires to take any action that the Depository, as the holder of the Global
Note, is entitled to take, the Depository would authorize the participants to
take such action, and the participants would authorize beneficial owners owning
through such participants to take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
We will make payments of principal of, premium, if any, and interest on
Notes represented by the Global Note registered in the name of and held by the
Depository or its nominee to the Depository or its nominee, as the case may be,
as the registered owner and holder of the Global Note.
We expect that the Depository or its nominee, upon receipt of any payment
of principal of, premium, if any, or interest on the Global Note will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. We also expect that
payments by participants or indirect participants to owners of beneficial
interests in the Global Note held through such participants or indirect
participants will be governed by standing instructions and customary practices
and will be the responsibility of such participants or indirect participants. We
will not have any responsibility or liability for any aspect of the records
relating to, or payments made on account of, beneficial ownership interests in
the Global Note for any Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests or for any other aspect
of the relationship between the Depository and its participants or indirect
participants or the relationship between such participants or indirect
participants and the owners of beneficial interests in the Global Note owning
through such participants or indirect participants.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility or liability for the
performance by the Depository or its participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES
Subject to certain conditions, the Notes represented by the Global Note are
exchangeable for certificated Notes in definitive form of like tenor in
denominations of $1,000 and integral multiples thereof if:
(1) the Depository notifies the Company that it is unwilling or unable to
continue as Depository for the Global Note or if at any time the
Depository ceases to be a clearing agency registered under the Exchange
Act and, in either case, we are unable to appoint a qualified successor
within 90 days;
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(2) we in our discretion at any time determine not to have all the Notes
represented by the Global Note; or
(3) a default entitling the holders of the Notes to accelerate the maturity
thereof has occurred and is continuing.
Any Note that is exchangeable as above is exchangeable for certificated
Notes issuable in authorized denominations and registered in such names as the
Depository shall direct. Subject to the foregoing, the Global Note is not
exchangeable, except for a Global Note of the same aggregate denomination to be
registered in the name of the Depository or its nominee. In addition, such
certificates will bear the legend referred to under "Transfer Restrictions"
(unless we determine otherwise in accordance with applicable law), subject, with
respect to such certificated Notes, to the provisions of such legend.
SAME-DAY PAYMENT
The Indenture requires us to make payments in respect of Notes (including
principal, premium, if any, and interest) by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address.
REGISTERED EXCHANGE OFFER; REGISTRATION RIGHTS
We have agreed pursuant to the Registration Rights Agreement with the
Initial Purchasers that we will, at our cost:
(1) within 60 days after the Issue Date, file a registration statement (the
"Exchange Offer Registration Statement") with the Securities and
Exchange Commission with respect to a registered offer (the "Registered
Exchange Offer") to exchange the Existing Notes for the Exchange Notes,
which must have terms substantially identical in all material respects
to the Existing Notes (except that the Exchange Notes will not contain
terms with respect to transfer restrictions);
(2) use our best efforts to cause the Exchange Offer Registration Statement
to be declared effective under the Securities Act within 150 days after
the Issue Date;
(3) upon the effectiveness of the Exchange Offer Registration Statement,
offer the Exchange Notes in exchange for surrender of the Existing
Notes; and
(4) keep the Registered Exchange Offer open for not less than 30 days (or
longer if required by applicable law) after the date notice of the
Registered Exchange Offer is mailed to the holders of the Notes.
For each Existing Note surrendered to us pursuant to the Registered
Exchange Offer, we will issue an Exchange Note having a principal amount equal
to that of the surrendered Existing Note. Interest on each Exchange Note will
accrue from the last interest payment date on which interest was paid on the
Note surrendered in exchange thereof or, if no interest has been paid on such
Note, from the date of its original issue.
In the event that (1) applicable interpretations of the staff of the
Securities and Exchange Commission do not permit us to effect such a Registered
Exchange Offer, (2) if for any other reason the Registered Exchange Offer is not
consummated within 180 days of the date of the Registration Rights Agreement, or
(3) if the Initial Purchasers so request with respect to Notes not eligible to
be exchanged for Exchange Notes in the Registered Exchange Offer, or (4) if any
holder of Notes is not
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eligible to participate in the Registered Exchange Offer or does not receive
freely tradeable Exchange Notes in the Registered Exchange Offer, we will, at
our cost:
(1) as promptly as practicable, file a shelf registration statement (the
"Shelf Registration Statement") covering resales of the Notes or the
Exchange Notes, as the case may be;
(2) use our best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act; and
(3) keep the Shelf Registration Statement effective until the earlier of
(A) the time when the Notes covered by the Shelf Registration Statement
can be sold pursuant to Rule 144 without any limitations under clauses
(c), (e), (f) and (h) of Rule 144 and (B) two years from the Issue
Date.
We will, in the event a Shelf Registration Statement is filed, among other
things, provide to each holder for whom such Shelf Registration Statement was
filed copies of the prospectus which is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement has
become effective and take certain other actions as are required to permit
unrestricted resales of the Notes or the Exchange Notes, as the case may be. A
holder selling such Notes or Exchange Notes pursuant to the Shelf Registration
Statement generally would be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement that are applicable to such holder (including
certain indemnification obligations).
We will pay additional cash interest on the Notes if:
(1) on or prior to June 7, 1999 (60 days after the Issue Date), neither the
Exchange Offer Registration Statement nor the Shelf Registration
Statement has been filed with the Securities and Exchange Commission;
(2) on or prior to October 5, 1999 (180 days after the Issue Date), neither
the Registered Exchange Offer has been consummated nor the Shelf
Registration Statement has been declared effective; or
(3) after either the Exchange Offer Registration Statement or the Shelf
Registration Statement is declared effective, such Registration
Statement thereafter ceases to be effective or usable (subject to
certain exceptions) in connection with resales of Notes or Exchange
Notes in accordance with and during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses
(1) through (3), a "Registration Default").
Additional cash interest will accrue on the Notes and the Exchange Notes at
the rate of 0.50% per annum (increasing by 0.50% per annum at the end of each
90-day period thereafter) from and including the date on which any such
Registration Default shall occur to but excluding the date on which all
Registration Defaults have been cured; provided, however, that in no event shall
such additional interest exceed 2.0% per annum. Such interest is payable in
addition to any other interest payable from time to time with respect to the
Notes and the Exchange Notes.
All references in the Indenture, in any context, to any amount of interest
or any other amount payable on or with respect to any of the Notes shall be
deemed to include payment of any additional interest pursuant to the
Registration Rights Agreement.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Notes at a purchase price in
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cash equal to 101% of the principal amount thereof plus any accrued and unpaid
interest to the date of purchase (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant interest
payment date):
(1) prior to the earlier to occur of (A) the first public offering of
common stock of Fairchild International or (B) the first public
offering of common stock of the Company, the Permitted Holders cease to
be the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act), directly or indirectly, of a majority in the
aggregate of the total voting power of the Voting Stock of the Company,
whether as a result of issuance of securities of Fairchild
International or the Company, any merger, consolidation, liquidation or
dissolution of Fairchild International or the Company, any direct or
indirect transfer of securities by Fairchild International or otherwise
(for purposes of this clause (1) and clauses (2) and (4) below, the
Permitted Holders shall be deemed to beneficially own any Voting Stock
of a Person (the "specified entity") held by any other Person (the
"parent entity") so long as the Permitted Holders beneficially own (as
so defined), directly or indirectly, in the aggregate a majority of the
voting power of the Voting Stock of the parent entity); provided,
however, that notwithstanding the foregoing, CVC shall be deemed to
beneficially own a majority of the voting power of the Voting Stock of
Sterling (or any successor) so long as CVC, employees, officers and
directors of CVC and corporations, partnerships and other entities at
least a majority of the equity in which is held in the aggregate by CVC
and its employees, officers and directors hold in the aggregate no less
than a majority of the economic interests in Sterling (or such
successor);
(2) after the earlier to occur of (A) the first public offering of common
stock of Fairchild International or (B) the first public offering of
the common stock of the Company, any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), other than one or more
Permitted Holders, is or becomes the beneficial owner (as defined in
clause (1) above, except that for purposes of this clause (2) such
person shall be deemed to have "beneficial ownership" of all shares
that any such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total voting power of the Voting
Stock of the Company; provided, however, that the Permitted Holders
beneficially own (as defined in clause (1) above), directly or
indirectly, in the aggregate a lesser percentage of the total voting
power of the Voting Stock of the Company than such other person and do
not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the Board of Directors
(for the purposes of this clause (2), such other person shall be deemed
to beneficially own any Voting Stock of a specified entity held by a
parent entity, if such other person is the beneficial owner (as defined
in this clause (2)), directly or indirectly, of more than 35% of the
voting power of the Voting Stock of such parent entity and the
Permitted Holders beneficially own (as defined in clause (1) above),
directly or indirectly, in the aggregate a lesser percentage of the
voting power of the Voting Stock of such parent entity and do not have
the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the board of directors of such
parent entity);
(3) individuals who on the Issue Date constituted the Board of Directors
(together with any new directors (A) whose election by such Board of
Directors or whose nomination for election by the stockholders of the
Company was approved by a vote of a majority of the directors of the
Company then still in office who were either directors on the Issue
Date or whose election or nomination for election was previously so
approved or (B) who were elected to the Board of Directors pursuant to
the Stockholders' Agreement, as amended, modified or supplemented from
time to time) cease for any reason to constitute a majority of the
Board of Directors then in office; or
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(4) the merger or consolidation of the Company with or into another Person
or the merger of another Person with or into the Company, or the sale
of all or substantially all the assets of the Company to another Person
(other than a Person that is controlled by the Permitted Holders), if
the securities of the Company that are outstanding immediately prior to
such transaction and which represent 100% of the aggregate voting power
of the Voting Stock of the Company are changed into or exchanged for
cash, securities or property, unless pursuant to such transaction such
securities are changed into or exchanged for, in addition to any other
consideration, securities of the surviving Person or transferee that
represent, immediately after such transaction, at least a majority of
the aggregate voting power of the Voting Stock of the surviving Person
or transferee.
Within 30 days following any Change of Control (but subject to compliance
with the immediately succeeding paragraph), the Company shall mail a notice to
each Holder with a copy to the Trustee stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require the Company to purchase such Holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof
plus any accrued and unpaid interest to the date of purchase (subject
to the right of holders of record on the relevant record date to
receive interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of Control;
(3) the repurchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Company, consistent with the
covenant described hereunder, that a Holder must follow in order to
have its Notes purchased.
If the terms of the Credit Agreement prohibit the Company from making the
foregoing offer upon a Change of Control or from purchasing any Notes pursuant
thereto, prior to the mailing of the notice to Holders described in the
preceding paragraph, but in any event within 30 days following any Change of
Control, the Company covenants to:
(1) repay in full all indebtedness outstanding under the Credit Agreement
or offer to repay in full all such indebtedness and repay the
indebtedness of each lender who has accepted such offer; or
(2) obtain the requisite consent under the Credit Agreement to permit the
purchase of the Notes as described above.
The Company must first comply with the covenant described above before it
will be required to purchase Notes in the event of a Change of Control;
provided, however, that the Company's failure to comply with the covenant
described in the preceding sentence or to make a Change of Control offer because
of any such failure shall constitute a Default described in clause (4) under
" -- Defaults" below (and not under clause (2) thereof). As a result of the
foregoing, a holder of the Notes may not be able to compel the Company to
purchase the Notes unless the Company is able at the time to refinance all
indebtedness outstanding under the Credit Agreement or obtain requisite consents
under the Credit Agreement.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to the covenant
described hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
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The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. We have no present intention to engage
in a transaction involving a Change of Control, although we could decide to do
so in the future. Subject to the limitations discussed below, we could, in the
future, enter into certain transactions, including acquisitions, refinancings or
other recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect our capital structure or credit ratings.
Restrictions on our ability to incur additional Indebtedness are contained in
the covenants described under "-- Certain Covenants -- Limitation on
Indebtedness." Such restrictions can only be waived with the consent of the
holders of a majority in principal amount of the Notes then outstanding. Except
for the limitations contained in such covenants, however, the Indenture does not
contain any covenants or provisions that may afford holders of the Notes
protection in the event of a highly leveraged transaction.
The Credit Agreement will prohibit us from purchasing any Notes, and also
provides that the occurrence of certain change of control events with respect to
the Company would constitute a default thereunder. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing Notes,
the Company could seek the consent of its lenders to the purchase of Notes or
could attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing Notes. In such case, the Company's
failure to comply with this covenant would constitute a Default under the
Indenture which would, in turn, constitute a default under the Credit Agreement.
In such circumstances, the subordination provisions in the Indenture would
likely restrict payment to the Holders of Notes.
Future indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased upon a Change of Control. Moreover,
the exercise by the holders of their right to require us to repurchase the Notes
could cause a default under such indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on us. Finally,
our ability to pay cash to the holders of Notes following the occurrence of a
Change of Control may be limited by our then existing financial resources. There
can be no assurance that sufficient funds will be available when necessary to
make any required repurchases. The provisions under the Indenture relative to
our obligation to make an offer to repurchase the Notes as a result of a Change
of Control may be waived or modified with the written consent of the holders of
a majority in principal amount of the Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company shall not, and shall not
permit any Restricted Subsidiary to, Incur, directly or indirectly, any
Indebtedness except that the Company may Incur Indebtedness if, after giving
effect thereto, the Consolidated Coverage Ratio exceeds 2.0 to 1.0.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(1) Indebtedness of the Company or any Restricted Subsidiary Incurred
pursuant to the Revolving Credit Facilities; provided, however, that,
immediately after giving effect to any such Incurrence, the aggregate
principal amount of all Indebtedness incurred under this clause (1)
and then outstanding does not exceed the greater of (A) $100.0 million
and (B) the sum of 50% of the book value of the inventory of the
Company and its Restricted Subsidiaries and 65% of the book value of
the accounts receivables of the Company and its Restricted
Subsidiaries;
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(2) Indebtedness of the Company Incurred pursuant to the Term Loan
Facilities; provided, however, that, after giving effect to any such
Incurrence, the aggregate principal amount of all Indebtedness
Incurred under this clause (2) and then outstanding does not exceed
$310.0 million less the aggregate sum of all principal payments
actually made from time to time after the Issue Date with respect to
such Indebtedness (other than principal payments made from any
permitted Refinancings thereof);
(3) Indebtedness of the Company or any Restricted Subsidiary owed to and
held by the Company or a Wholly Owned Subsidiary; provided, however,
that any subsequent issuance or transfer of any Capital Stock which
results in any such Wholly Owned Subsidiary ceasing to be a Wholly
Owned Subsidiary or any subsequent transfer of such Indebtedness
(other than to the Company or another Wholly Owned Subsidiary) shall
be deemed, in each case, to constitute the Incurrence of such
Indebtedness by the issuer thereof;
(4) Indebtedness of the Company or any Restricted Subsidiary owed to and
held by any Restricted Subsidiary (other than a Wholly Owned
Subsidiary); provided, however, that (A) any such Indebtedness shall
be unsecured Subordinated Obligations of the Company or such
Restricted Subsidiary, as applicable, and (B) any subsequent issuance
or transfer of any Capital Stock of such Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to the Company, a
Wholly Owned Subsidiary or another Restricted Subsidiary) shall be
deemed to constitute the Incurrence of such Indebtedness by the issuer
thereof;
(5) Indebtedness consisting of the Notes and the Exchange Notes (other
than Additional Notes) and the Purchase Price Note;
(6) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1), (2), (3), (4) or (5) of this covenant);
(7) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant
to paragraph (a) or pursuant to clause (5), (6) or this clause (7);
(8) Hedging Obligations of the Company or any Restricted Subsidiary under
or with respect to Interest Rate Agreements and Currency Agreements
entered into in the ordinary course of business and not for the
purpose of speculation;
(9) Indebtedness of the Company or any Restricted Subsidiary in respect of
performance bonds and surety or appeal bonds entered into by the
Company and the Restricted Subsidiaries in the ordinary course of
their business;
(10) Indebtedness consisting of the Subsidiary Guaranties and the
Guarantees of Indebtedness Incurred pursuant to paragraph (a) or
pursuant to clause (1), (2), (5), (6) and (7) above and (15) below;
(11) Indebtedness of the Company or any Restricted Subsidiary arising from
the honoring by a bank or other financial institution of a check,
draft or similar instrument inadvertently (except in the case of
daylight overdrafts) drawn against insufficient funds in the ordinary
course of business, provided that such Indebtedness is satisfied
within five business days of Incurrence;
(12) Indebtedness consisting of Capital Lease Obligations in an aggregate
principal amount which, when added together with the amount of
Indebtedness Incurred pursuant to this clause (12) and then
outstanding, does not exceed $15.0 million; provided, however, that
the assets subject to the related capital lease are not owned or used
by the Company or any Restricted Subsidiary on the Issue Date or the
Acquisition Closing Date;
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(13) Indebtedness of the Company or any Restricted Subsidiary consisting of
indemnification, adjustment of purchase price or similar obligations,
in each case incurred in connection with the disposition of any assets
of the Company or any Restricted Subsidiary in a principal amount not
to exceed the gross proceeds actually received by the Company or any
Restricted Subsidiary in connection with such disposition;
(14) Indebtedness of a Foreign Subsidiary Incurred to finance the purchase,
lease or improvement of property (real or personal) or equipment, in
each case incurred no more than 180 days after such purchase, lease or
improvement of such property, and any Refinancing Indebtedness in
respect of such Indebtedness; provided, however, that, except in the
case of the Incurrence of any such Refinancing Indebtedness, at the
time of the Incurrence of such Indebtedness and after giving effect
thereto, (A) the Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) above and (B) the aggregate
amount of all Indebtedness Incurred pursuant to this clause (14) and
then outstanding (including any such Refinancing Indebtedness) shall
not exceed 20% of Consolidated Net Tangible Assets as of the end of
the most recent fiscal quarter ending at least 45 days prior to the
date of such Incurrence; and
(15) Indebtedness of the Company in an aggregate principal amount which,
together with all other Indebtedness of the Company and the Restricted
Subsidiaries outstanding on the date of such Incurrence (other than
Indebtedness permitted by clauses (1) through (14) above or paragraph
(a) above) does not exceed $50.0 million.
(c) Notwithstanding the foregoing, the Company shall not, and shall not
permit any Restricted Subsidiary to, Incur any Indebtedness pursuant to the
foregoing paragraph (b) if the proceeds thereof are used, directly or
indirectly, to Refinance any Subordinated Obligations unless such Indebtedness
shall be subordinated to the Notes or the relevant Subsidiary Guaranty, as
applicable, to at least the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant,
(1) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses and
(2) an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described above.
(e) Notwithstanding paragraphs (a) and (b) above, the Company shall not,
and shall not permit any Subsidiary Guarantor to, Incur (1) any Indebtedness if
such Indebtedness is subordinate or junior in ranking in any respect to any
Senior Indebtedness of the Company or such Subsidiary Guarantor, as applicable,
unless such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness or (2) any
Secured Indebtedness (other than trade payables incurred in the ordinary course
of business) that is not Senior Indebtedness unless contemporaneously therewith
effective provision is made to secure the Notes or the relevant Subsidiary
Guaranty, as applicable, equally and ratably with such Secured Indebtedness for
so long as such Secured Indebtedness is secured by a Lien.
Limitation on Restricted Payments. (a) The Company shall not, and shall
not permit any Restricted Subsidiary, directly or indirectly, to make a
Restricted Payment if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness;" or
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(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal
quarter immediately following the fiscal quarter during which the
Notes are originally issued to the end of the most recent fiscal
quarter ending at least 45 days (or, if less, the number of days
after the end of such fiscal quarter as the consolidated financial
statements of the Company shall be provided to the Noteholders
pursuant to the Indenture) prior to the date of such Restricted
Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company from the
issuance or sale of its Capital Stock (other than Disqualified
Stock) subsequent to the Issue Date (other than an issuance or sale
to a Subsidiary of the Company and other than an issuance or sale to
an employee stock ownership plan or to a trust established by the
Company or any of its Subsidiaries for the benefit of their
employees to the extent that the purchase by such plan or trust is
financed by Indebtedness of such plan or trust to the Company or any
Subsidiary or Indebtedness Guaranteed by the Company or any
Subsidiary);
(C) the amount by which Indebtedness of the Company or any Restricted
Subsidiary is reduced on the Company's consolidated balance sheet
upon the conversion or exchange (other than by a Subsidiary of the
Company) subsequent to the Issue Date of any Indebtedness of the
Company or any Restricted Subsidiary convertible or exchangeable for
Capital Stock (other than Disqualified Stock) of the Company (less
the amount of any cash, or the fair value of any other property,
distributed by the Company or any Restricted Subsidiary upon such
conversion or exchange); and
(D) an amount equal to the sum of (i) the net reduction in Investments
in Unrestricted Subsidiaries resulting from dividends, repayments of
loans or advances or other transfers of assets subsequent to the
Issue Date, in each case to the Company or any Restricted Subsidiary
from Unrestricted Subsidiaries, and (ii) the portion (proportionate
to the Company's equity interest in such Subsidiary) of the fair
market value of the net assets of an Unrestricted Subsidiary at the
time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum shall not
exceed, in the case of any Unrestricted Subsidiary, the amount of
Investments previously made (and treated as a Restricted Payment) by
the Company or any Restricted Subsidiary in such Unrestricted
Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(1) any Restricted Payment made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Capital Stock of the Company
(other than Disqualified Stock and other than Capital Stock issued or
sold to a Subsidiary of the Company or an employee stock ownership plan
or to a trust established by the Company or any of its Subsidiaries for
the benefit of their employees to the extent that the purchase by such
plan or trust is financed by Indebtedness of such plan or trust to the
Company or any Subsidiary of the Company or Indebtedness Guaranteed by
the Company or any Subsidiary of the Company); provided, however, that
(A) such Restricted Payment shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such
sale shall be excluded from the calculation of amounts under clause
(3)(B) of paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value of Subordinated Obligations made by exchange
for, or out of the proceeds of the substantially
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concurrent sale of, Indebtedness which is permitted to be Incurred
pursuant to the covenant described under "-- Limitation on
Indebtedness;" provided, however, that such purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value
shall be excluded in the calculation of the amount of Restricted
Payments;
(3) any purchase or redemption of Disqualified Stock of the Company or a
Restricted Subsidiary made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Disqualified Stock of the Company
or a Restricted Subsidiary which is permitted to be Incurred pursuant
to the covenant described under "-- Limitation on Indebtedness;"
provided, however, that such purchase or redemption shall be excluded
in the calculation of the amount of Restricted Payments;
(4) any purchase or redemption of Subordinated Obligations from Net
Available Cash to the extent permitted by the covenant described under
"-- Limitation on Sales or Assets and Subsidiary Stock;" provided,
however, that such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments;
(5) upon the occurrence of a Change of Control and within 60 days after the
completion of the offer to repurchase the Notes pursuant to the
covenant described under "-- Change of Control" above (including the
purchase of the Notes tendered), any purchase or redemption of
Subordinated Obligations required pursuant to the terms thereof as a
result of such Change of Control at a purchase or redemption price not
to exceed the outstanding principal amount thereof, plus any accrued
and unpaid interest; provided, however, that (A) at the time of such
purchase or redemption no Default shall have occurred and be continuing
(or would result therefrom), (B) the Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the
covenant described under "-- Limitation on Indebtedness" after giving
pro forma effect to such Restricted Payment and (C) such purchase or
redemption shall be included in the calculation of the amount of
Restricted Payments;
(6) dividends paid within 60 days after the date of declaration thereof if
at such date of declaration such dividend would have complied with this
covenant; provided, however, that at the time of payment of such
dividend, no other Default shall have occurred and be continuing (or
result therefrom); provided further, however, that such dividend shall
be included in the calculation of the amount of Restricted Payments;
(7) the repurchase or other acquisition of shares of, or options to
purchase shares of, common stock of the Company or any of its
Subsidiaries from employees, former employees, directors or former
directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including
employment agreements) or plans (or amendments thereto) approved by the
Board of Directors under which such individuals purchase or sell or are
granted the option to purchase or sell, shares of such common stock;
provided, however, that the aggregate amount of such repurchases shall
not exceed the sum of $7.0 million and the Net Cash Proceeds from the
sale of Capital Stock to members of management or directors of the
Company and its Subsidiaries that occurs after the Issue Date (to the
extent the Net Cash Proceeds from the sale of such Capital Stock have
not otherwise been applied to the payment of Restricted Payments by
virtue of clause (3)(B) of paragraph (a) above); provided further,
however, that (A) such repurchases shall be excluded in the calculation
of the amount of Restricted Payments and (B) the Net Cash Proceeds from
such sale shall be excluded from the calculation of amounts under
clause (3)(B) of paragraph (a) above;
(8) dividends or advances to Fairchild International in an amount necessary
to pay holding company expenses, such amount not to exceed $500,000 in
any fiscal year of the Company;
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provided, however, that such dividends and advances shall be excluded
in the calculation of the amount of Restricted Payments; or
(9) Restricted Payments not exceeding $25.0 million in the aggregate;
provided, however, that (A) at the time of such Restricted Payments, no
Default shall have occurred and be continuing (or result therefrom) and
(B) such Restricted Payments shall be included in the calculation of
the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (a) pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to
the Company, (b) make any loans or advances to the Company or (c) transfer any
of its property or assets to the Company, except:
(1) any encumbrance or restriction pursuant to an agreement in effect at or
entered into on the Issue Date, or, in the case of the Credit
Agreement, as in effect on the Acquisition Closing Date;
(2) any encumbrance or restriction with respect to a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the
funds or credit support utilized to consummate, the transaction or
series of related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was acquired by the
Company) and outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred
to in clause (1) or (2) of this covenant or this clause (3) or
contained in any amendment to an agreement referred to in clause (1) or
(2) of this covenant or this clause (3); provided, however, that the
encumbrances and restrictions with respect to such Restricted
Subsidiary contained in any such refinancing agreement or amendment are
no more restrictive in any material respect than the encumbrances and
restrictions with respect to such Restricted Subsidiary contained in
such agreements;
(4) any such encumbrance or restriction consisting of customary
non-assignment provisions in leases governing leasehold interests to
the extent such provisions restrict the transfer of the lease or the
property leased thereunder;
(5) in the case of clause (c) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the
property subject to such security agreements or mortgages;
(6) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of
all or substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition; and
(7) any restriction in any agreement that is not more restrictive than the
restrictions under the terms of the Credit Agreement as in effect on
the Acquisition Closing Date.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration at the
time of such Asset Disposition at least equal to the fair market value
(including as to the value of all non-cash
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consideration), as determined in good faith by the Board of Directors,
of the shares and assets subject to such Asset Disposition;
(2) at least 85% of the consideration thereof received by the Company or
such Restricted Subsidiary is in the form of cash or cash equivalents;
and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary,
as the case may be)
(A) first, to the extent the Company elects (or is required by the terms
of any Indebtedness), to prepay, repay, redeem or purchase Senior
Indebtedness or Indebtedness (other than any Disqualified Stock) of
a Wholly Owned Subsidiary (in each case other than Indebtedness owed
to the Company or an Affiliate of the Company) within one year from
the later of the date of such Asset Disposition and the receipt of
such Net Available Cash;
(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A), to the extent the
Company elects, to acquire Additional Assets within one year from
the later of the date of such Asset Disposition and the receipt of
such Net Available Cash;
(C) third, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an offer
to the holders of the Notes (and to holders of other Senior
Subordinated Indebtedness designated by the Company) to purchase
Notes (and such other Senior Subordinated Indebtedness) pursuant to
and subject to the conditions contained in the Indenture; and
(D) fourth, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A), (B) and (C) to (x)
the acquisition by the Company or any Wholly Owned Subsidiary of
Additional Assets or (y) the prepayment, repayment or purchase of
Indebtedness (other than any Disqualified Stock) of the Company
(other than Indebtedness owed to an Affiliate of the Company) or
Indebtedness of any Subsidiary (other than Indebtedness owed to the
Company or an Affiliate of the Company);
in each case within one year from the later of the receipt of such Net Available
Cash and the date the offer described in clause (b) below is consummated;
provided, however, that in connection with any prepayment, repayment or purchase
of Indebtedness pursuant to clause (A), (C) or (D) above, the Company or such
Restricted Subsidiary shall permanently retire such Indebtedness and shall cause
the related loan commitment, if any, to be permanently reduced in an amount
equal to the principal amount so prepaid, repaid or purchased. Notwithstanding
the foregoing provisions of this paragraph, the Company and the Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
with this paragraph except to the extent that the aggregate Net Available Cash
from all Asset Dispositions which are not applied in accordance with this
paragraph exceeds $10.0 million. Pending application of Net Available Cash
pursuant to this covenant, such Net Available Cash shall be invested in
Permitted Investments or used to reduce loans outstanding under any revolving
credit facility.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the assumption of Indebtedness of the Company or any
Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such Asset
Disposition and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash.
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(b) In the event of an Asset Disposition that requires the purchase of the
Notes (and other Senior Subordinated Indebtedness) pursuant to clause
(a)(3)(C) above, the Company will be required to purchase Notes
tendered pursuant to an offer by the Company for the Notes (and other
Senior Subordinated Indebtedness) at a purchase price of 100% of their
principal amount (without premium) plus accrued but unpaid interest
(or, in respect of such other Senior Subordinated Indebtedness, such
lesser price, if any, as may be provided for by the terms of such
Senior Subordinated Indebtedness) in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
Indenture. If the aggregate purchase price of Notes (and any other
Senior Subordinated Indebtedness) tendered pursuant to such offer is
less than the Net Available Cash allotted to the purchase thereof, the
Company will be required to apply the remaining Net Available Cash in
accordance with clause (a)(3)(D) above. If the aggregate purchase price
of the Notes (and any other Senior Subordinated Indebtedness) tendered
exceeds the Net Available Cash allotted to the purchase thereof, the
Company will select the Notes (and any other Senior Subordinated
Indebtedness) to be purchased on a pro rata basis but in denominations
of $1,000 or multiples thereof. The Company shall not be required to
make such an offer to purchase Notes (and other Senior Subordinated
Indebtedness) pursuant to this covenant if the Net Available Cash
available therefor is less than $10.0 million (which lesser amount
shall be carried forward for purposes of determining whether such an
offer is required with respect to the Net Available Cash from any
subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other
securities laws or regulations in connection with the repurchase of
Notes pursuant to this covenant. To the extent that the provisions of
any securities laws or regulations conflict with provisions of this
covenant, the Company shall comply with the applicable securities laws
and regulations and shall not be deemed to have breached its
obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof:
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of $1.0
million, (A) are set forth in writing and (B) have been approved by a
majority of the members of the Board of Directors having no personal
stake in such Affiliate Transaction; and
(3) if such Affiliate Transaction involves as amount in excess of $10.0
million, have been determined by (A) a nationally recognized investment
banking firm to be fair, from a financial standpoint, to the Company
and its Restricted Subsidiaries or (B) an accounting or appraisal firm
nationally recognized in making such determinations to be on terms that
are not less favorable to the Company and its Restricted Subsidiaries
than the terms that could be obtained in an arms-length transaction
from a Person that is not an Affiliate of the Company.
(b) The provisions of the foregoing paragraph (a) shall not prohibit;
(1) any Restricted Payment permitted to be paid pursuant to the covenant
described under "-- Limitation on Restricted Payments;"
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(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans
approved by the Board of Directors;
(3) the grant of stock options or similar rights to employees and directors
of the Company pursuant to plans approved by the Board of Directors;
(4) loans or advances to employees in the ordinary course of business in
accordance with the past practices of the Company or its Restricted
Subsidiaries, but in any event not to exceed $5.0 million in the
aggregate outstanding at any one time;
(5) reasonable fees, compensation or employee benefit arrangements to and
indemnity provided for the benefit of directors, officers or employees
of the Company or any Subsidiary in the ordinary course of business;
(6) any Affiliate Transaction between the Company and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries;
(7) any Affiliate Transaction with National Semiconductor pursuant to
written agreements in effect on the Issue Date and as amended, renewed
or extended from time to time; provided, however, that any such
amendment, renewal or extension shall not contain terms which are
materially less favorable to the Company than those in the agreements
in effect on the Issue Date; and
(8) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any Capital
Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any
of its Capital Stock except:
(1) to the Company or a Wholly Owned Subsidiary;
(2) if, immediately after giving effect to such issuance, sale or other
disposition, neither the Company nor any of its Subsidiaries own any
Capital Stock of such Restricted Subsidiary;
(3) if, immediately after giving effect to such issuance, sale or other
disposition, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in such Person remaining after
giving effect thereto would have been permitted to be made under the
covenant described under "-- Limitation on Restricted Payments" if made
on the date of such issuance, sale or other disposition; or
(4) directors' qualifying shares.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor Company")
shall be a Person organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) shall expressly assume, by
an indenture supplemental thereto, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of
the Company under the Notes and the Indenture;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or
any Subsidiary as a result of such transaction as having been Incurred
by such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing;
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(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness;"
(4) immediately after giving effect to such transaction, the Successor
Company shall have Consolidated Net Worth in an amount that is not less
than the Consolidated Net Worth of the Company immediately prior to
such transaction; and
(5) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and any supplemental indenture comply
with the Indenture;
provided, however, that clauses (3) and (4) above shall not apply if, in the
good faith determination of the Board of Directors, whose determination shall be
evidenced by a resolution of the Board of Directors, the principal purpose and
effect of such transaction is to change the jurisdiction of incorporation of the
Company.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the Notes.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of transactions, all or substantially all of its assets to any Person unless:
(1) the resulting, surviving or transferee Person (if not such Subsidiary)
shall be a Person organized and existing under the laws of the
jurisdiction under which such Subsidiary was organized or under the
laws of the United States of America, or any State thereof or the
District of Columbia, and such Person shall expressly assume, by
executing a Guaranty Agreement, all the obligations of such Subsidiary,
if any, under its Subsidiary Guaranty;
(2) immediately after giving effect to such transaction or transactions on
a pro forma basis (and treating any Indebtedness which becomes an
obligation of the resulting, surviving or transferee Person as a result
of such transaction as having been issued by such Person at the time of
such transaction), no Default shall have occurred and be continuing;
and
(3) the Company delivers to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger or
transfer and such Guaranty Agreement, if any, complies with the
Indenture.
The provisions of clauses (1) and (2) above shall not apply to any one or
more transactions which constitute an Asset Disposition if the Company has
complied with the applicable provisions of the covenant described under
"-- Limitation on Sales of Assets and Subsidiary Stock" above.
Pursuant to the Indenture, Fairchild International will covenant not to
merge with or into, or convey, transfer or lease, in one transaction or a series
of transactions, all or substantially all of its assets to any Person unless:
(1) the resulting, surviving or transferee Person (if not Fairchild
International) shall be a Person organized and existing under the laws
of the jurisdiction under which Fairchild International was organized
or under the laws of the United States of America, or any State thereof
or the District of Columbia, and such Person shall expressly assume, by
executing a Guaranty Agreement, all the obligations of Fairchild
International, if any, under the Fairchild International Guaranty;
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(2) immediately after giving effect to such transaction or transactions on
a pro forma basis (and treating any Indebtedness which becomes an
obligation of the resulting, surviving or transferee Person as a result
of such transaction as having been issued by such Person at the time of
such transaction), no Default shall have occurred and be continuing;
and
(3) the Company delivers to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger or
transfer and such Guaranty Agreement, if any, complies with the
Indenture.
Future Guarantors. In the event that, after the Issue Date, any Restricted
Subsidiary (other than a Foreign Subsidiary) (1) Incurs any Indebtedness
pursuant to paragraph (a) or pursuant to clause (1) or (10) of paragraph (b) of
the covenant described under "-- Limitation on Indebtedness" above and (2) until
the termination of the Credit Agreement, either has Guaranteed or will as a
result of such Incurrence be required to Guarantee any Obligations under the
Credit Agreement, the Company shall cause such Restricted Subsidiary to
Guarantee the Notes pursuant to a Subsidiary Guaranty on the terms and
conditions set forth in the Indenture and shall cause all Indebtedness of such
Restricted Subsidiary owing to the Company or any other Subsidiary of the
Company and not previously discharged to be converted into Capital Stock of such
Restricted Subsidiary (other than Disqualified Stock).
Securities and Exchange Commission Reports. Whether or not subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, we will file
with the Securities and Exchange Commission and provide the Trustee and
Noteholders with such annual reports and such information, documents and other
reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. corporation subject to such Sections at the times specified
for such filings under such Sections. However, we will not be required to file
any reports, documents or other information if the Securities and Exchange
Commission will not accept such a filing.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in the payment of interest on the Notes when due, continued
for 30 days;
(2) a default in the payment of principal of any Note when due at its
Stated Maturity, upon redemption, upon required repurchase, upon
declaration or otherwise;
(3) the failure by the Company or Fairchild International to comply with
its obligations under "-- Certain Covenants -- Merger and
Consolidation" above;
(4) the failure by the Company to comply for 30 days after notice with any
of its obligations in the covenants described above under "-- Change of
Control" (other than a failure to purchase the Notes) or under
"-- Certain Covenants" under "-- Limitation on Indebtedness,"
"-- Limitation on Restricted Payments," " -- Limitation on Restrictions
on Distributions from Restricted Subsidiaries," "-- Limitation on Sales
of Assets and Subsidiary Stock" (other than a failure to purchase the
Notes), "-- Limitation on Affiliate Transactions," "-- Limitation on
the Sale or Issuance of Capital Stock of Restricted Subsidiaries,"
"-- Future Guarantors" or "-- Securities and Exchange Commission
Reports;"
(5) the failure by the Company to comply for 60 days after notice with its
other agreements contained in the Indenture;
(6) Indebtedness of the Company or any Significant Subsidiary is not paid
within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $10.0 million
(the "cross acceleration provision");
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(7) certain events of bankruptcy, insolvency or reorganization of the
Company or a Significant Subsidiary (the "bankruptcy provisions");
(8) any judgment or decree for the payment of money in excess of $10.0
million is entered against the Company or a Significant Subsidiary,
remains outstanding for a period of 60 days following such judgment and
is not discharged, waived or stayed within 10 days after notice (the
"judgment default provision"); or
(9) the Fairchild International Guaranty or any Subsidiary Guaranty ceases
to be in full force and effect (other than in accordance with the terms
of the Fairchild International Guaranty or such Subsidiary Guaranty) or
Fairchild International or any Subsidiary Guarantor denies or
disaffirms its obligations under the Fairchild International Guaranty
or its Subsidiary Guaranty, as the case may be.
However, a default under clauses (4), (5) and (8) will not constitute an
Event of Default until the Trustee or the holders of 25% in principal amount of
the outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately; provided, however, that if upon such declaration there are
any amounts outstanding under the Credit Agreement and the amounts thereunder
have not been accelerated, such principal and interest shall be due and payable
upon the earlier of the time such amounts are accelerated or five Business Days
after receipt by the Company and the Representative under the Credit Agreement
of such declaration. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium, if any, or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding Notes
have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after
the receipt thereof and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction inconsistent with such request
within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any
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remedy available to the Trustee or of exercising any trust or power conferred on
the Trustee. The Trustee, however, may refuse to follow any direction that
conflicts with law or the Indenture or that the Trustee determines is unduly
prejudicial to the rights of any other holder of a Note or that would involve
the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal of or interest on any Note, the Trustee may withhold
notice if and so long as a committee of its trust officers determines that
withholding notice is not opposed to the interest of the holders of the Notes.
In addition, the Company is required to deliver to the Trustee, within 120 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. The Company
also is required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any event which would constitute certain Defaults,
their status and what action the Company is taking or proposes to take in
respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
holder of an outstanding Note affected thereby, no amendment may, among other
things:
(1) reduce the amount of Notes whose holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on any
Note;
(3) reduce the principal of or extend the Stated Maturity of any Note;
(4) reduce the premium payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under
"-- Optional Redemption" above;
(5) make any Note payable in money other than that stated in the Note;
(6) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due
dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's Notes;
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions;
(8) make any change to the subordination provisions of the Indenture that
would adversely affect the Noteholders;
(9) make any change in the Fairchild International Guaranty or any
Subsidiary Guaranty that would adversely affect the Noteholders; or
(10) make any change in the provisions described under "-- Escrow of
Offering Proceeds; Special Redemption" above.
Without the consent of any holder of the Notes, the Company and Trustee may
amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of the obligations of the
Company under the Indenture, to provide for uncertificated Notes in addition to
or in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the
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uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to add
guarantees with respect to the Notes, to release a Subsidiary Guaranty when
permitted by the Indenture, to secure the Notes, to add to the covenants of the
Company for the benefit of the holders of the Notes or to surrender any right or
power conferred upon the Company, to make any change that does not adversely
affect the rights of any holder of the Notes or to comply with any requirement
of the Securities and Exchange Commission in connection with the qualification
of the Indenture under the Trust Indenture Act. However, no amendment may be
made to the subordination provisions of the Indenture that adversely affects the
rights of any holder of Senior Indebtedness then outstanding unless the holders
of such Senior Indebtedness (or their Representative) consents to such change.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Existing Notes were and the Exchange Notes will be issued in registered
form and are transferable only upon the surrender of the Notes being transferred
for registration of transfer. The Company may require payment of a sum
sufficient to cover any tax, assessment or other governmental charge payable in
connection with certain transfers and exchanges.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under "-- Change of
Control" and under the covenants described under "-- Certain Covenants" (other
than the covenant described under "-- Merger and Consolidation"), the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under
"-- Defaults" above and the limitations contained in clauses (3) and (4) of the
first paragraph under "-- Certain Covenants -- Merger and Consolidation" above
("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (4), (6), (7) (with respect only to
Significant Subsidiaries) or (8) under "-- Defaults" above or because of the
failure of the Company to comply with clause (3) or (4) of the first paragraph
under "-- Certain Covenants -- Merger and Consolidation" above or the failure of
Fairchild International to comply with the limitation under the fifth paragraph
under "-- Certain Covenants -- Merger and Consolidation" above. If the Company
exercises its legal defeasance option or its covenant defeasance option,
Fairchild International and each Subsidiary Guarantor will be released from all
of its obligations with respect to the Fairchild International Guaranty or its
Subsidiary Guaranty, as the case may be.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with
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certain other conditions, including delivery to the Trustee of an Opinion of
Counsel to the effect that holders of the Notes will not recognize income, gain
or loss for U.S. Federal income tax purposes as a result of such deposit and
defeasance and will be subject to U.S. Federal income tax on the same amounts
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable U.S. Federal income tax law).
CONCERNING THE TRUSTEE
United States Trust Company of New York is the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes are governed by, and construed
in accordance with, the laws of the State of New York without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Acquisition Closing Date" means the date the Company consummates the
Acquisition of the Power Device Business from Samsung Electronics.
"Additional Assets" means (1) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business, (2) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary or (3)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; provided, however, that any such Restricted
Subsidiary described in clauses (2) or (3) above is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "-- Certain Covenants -- Limitation
on Restricted Payments," "-- Certain Covenants -- Limitation on Affiliate
Transactions" and "-- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 10% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
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"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (1) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (2) all or substantially all the assets of any division
or line of business of the Company or any Restricted Subsidiary or (3) any other
assets of the Company or any Restricted Subsidiary outside of the ordinary
course of business of the Company or such Restricted Subsidiary (other than, in
the case of (1), (2) and (3) above, (x) a disposition by a Restricted Subsidiary
to the Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary, (y) for purposes of the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition that constitutes a Restricted Payment permitted by the covenant
described under "-- Certain Covenants -- Limitation on Restricted Payments" and
(z) disposition of assets with a fair market value of less than $100,000).
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (1) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (2) the sum of all such payments.
"Banks" has the meaning specified in the Credit Agreement.
"Bank Indebtedness" means all Obligations pursuant to the Credit Agreement.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day other than a Saturday, Sunday or a day on
which commercial banking institutions are authorized or required by law to close
in New York City.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (a) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days (or, if less, the
number of days after the end of such fiscal quarter as the consolidated
financial statements of the Company shall be provided to the Noteholders
pursuant to the Indenture) prior to the
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date of such determination to (b) Consolidated Interest Expense for such four
fiscal quarters; provided, however, that:
(1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains
outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or
both, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first day
of such period and the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of
such period;
(2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness since the beginning
of such period or if any Indebtedness is to be repaid, repurchased,
defeased or otherwise discharged (in each case other than Indebtedness
Incurred under any revolving credit facility unless such Indebtedness
has been permanently repaid and has not been replaced) on the date of
the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio, EBITDA and Consolidated Interest Expense for such
period shall be calculated on a pro forma basis as if such discharge
had occurred on the first day of such period and as if the Company or
such Restricted Subsidiary has not earned the interest income actually
earned during such period in respect of cash or Temporary Cash
Investments used to repay, repurchase, defease or otherwise discharge
such Indebtedness;
(3) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition, the EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive)
directly attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to the
EBITDA (if negative), directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced by an
amount equal to the Consolidated Interest Expense directly attributable
to any Indebtedness of the Company or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to the
Company and its continuing Restricted Subsidiaries in connection with
such Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary is sold, the Consolidated Interest Expense for
such period directly attributable to the Indebtedness of such
Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale);
(4) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any person which becomes a Restricted
Subsidiary) or an acquisition of assets, including any acquisition of
assets occurring in connection with a transaction requiring a
calculation to be made hereunder, which constitutes all or
substantially all of an operating unit of a business, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any
Indebtedness) as if such Investment or acquisition occurred on the
first day of such period; and
(5) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company
or any Restricted Subsidiary since the beginning of such period) shall
have made any Asset Disposition, any Investment or acquisition of
assets that would have required an adjustment pursuant to clause (3) or
(4) above if made by the Company or a Restricted Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of
such period.
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For purposes of this definition, whenever pro forma effect is to be given
to an acquisition of assets, the amount of income or earnings relating thereto
and the amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest of such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months).
"Consolidated Current Liabilities" as of the date of determination means
the aggregate amount of liabilities of the Company and its consolidated
Restricted Subsidiaries which may properly be classified as current liabilities
(including taxes accrued as estimated), on a consolidated basis, after
eliminating (1) all intercompany items between the Company and any Restricted
Subsidiary and (2) all current maturities of long-term Indebtedness, all as
determined in accordance with GAAP consistently applied.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication:
(1) interest expense attributable to Capital Lease Obligations and the
interest expense attributable to leases constituting part of a
Sale/Leaseback Transaction;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest expenses;
(5) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing;
(6) net costs associated with Hedging Obligations involving any Interest
Rate Agreement (including amortization of fees);
(7) Preferred Stock dividends accrued by consolidated Restricted
Subsidiaries in respect of all Preferred Stock held by Persons other
than the Company or a Restricted Subsidiary;
(8) interest incurred in connection with Investments in discontinued
operations;
(9) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by (or secured by the assets
of) the Company or any Restricted Subsidiary; and
(10) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust
to pay interest or fees to any Person (other than the Company) in
connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(1) any net income of any Person (other than the Company) if such Person is
not a Restricted Subsidiary, except that (A) subject to the exclusion
contained in clause (4) below, the Company's equity in the net income
of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution paid to a Restricted
Subsidiary, to the limitations contained in clause (3) below) and (B)
the Company's equity in
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a net loss of any such Person for such period shall be included in
determining such Consolidated Net Income;
(2) any net income (or loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition;
(3) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A)
subject to the exclusion contained in clause (4) below, the Company's
equity in the net income of any such Restricted Subsidiary for such
period shall be included in such Consolidated Net Income up to the
aggregate amount of cash that could have been distributed by such
Restricted Subsidiary consistent with such restrictions during such
period to the Company or another Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution paid to another Restricted Subsidiary, to the limitation
contained in this clause) and (B) the Company's equity in a net loss of
any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income;
(4) any gain (or loss) realized upon the sale or other disposition of any
assets of the Company or its consolidated Subsidiaries (including
pursuant to any sale-and-leaseback arrangement) which is not sold or
otherwise disposed of in the ordinary course of business and any gain
(or loss) realized upon the sale or other disposition of any Capital
Stock of any Person;
(5) extraordinary gains or losses; and
(6) the cumulative effect of a change in accounting principles.
(7) Notwithstanding the foregoing, for the purposes of the covenant
described under "-- Certain Covenants -- Limitation on Restricted
Payments" only, there shall be excluded from Consolidated Net Income
any dividends, repayments of loans or advances or other transfers of
assets from Unrestricted Subsidiaries to the Company or a Restricted
Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Tangible Assets" as of any date of determination means
the total amount of assets (less accumulated depreciation and amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a consolidated balance sheet of
the Company and its consolidated Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, and after giving effect to purchase
accounting and after deducting therefrom Consolidated Current Liabilities and,
to the extent otherwise included, the amounts of:
(1) minority interests in consolidated Subsidiaries held by Persons other
than the Company or a Restricted Subsidiary;
(2) excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Board of Directors;
(3) any revaluation or other write-up in book value of assets subsequent to
the Issue Date as a result of a change in the method of valuation in
accordance with GAAP consistently applied;
(4) unamortized debt discount and expenses and other unamortized deferred
charges, goodwill, patents, trademarks, service marks, trade names,
copyrights, licenses, organization or developmental expenses and other
intangible items;
(5) treasury stock;
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(6) cash set apart and held in a sinking or other analogous fund
established for the purpose of redemption or other retirement of
Capital Stock to the extent such obligation is not reflected in
Consolidated Current Liabilities; and
(7) Investments in and assets of Unrestricted Subsidiaries.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (1) the par
or stated value of all outstanding Capital Stock of the Company plus (2) paid-in
capital or capital surplus relating to such Capital Stock plus (3) any retained
earnings or earned surplus less (A) any accumulated deficit and (B) any amounts
attributable to Disqualified Stock.
"Credit Agreement" means (1) prior to the Acquisition Closing Date, the
Credit Agreement, as amended, dated as of March 11, 1997, by and among Fairchild
International, the Company, certain of its Subsidiaries, the lenders referred to
therein, Bankers Trust Company, as Administrative Agent, Credit Suisse First
Boston, as Syndication Agent, and Canadian Imperial Bank of Commerce, as
Documentation Agent, together with the related documents thereto and (2) on or
after the Acquisition Closing Date, the Credit Agreement to be entered into by
and among Fairchild International, the Company, certain of its Subsidiaries, the
lenders referred to therein and Credit Suisse First Boston, as Administrative
Agent, together with the related documents thereto (including without limitation
the term loans and revolving loans thereunder, any guarantees and security
documents), as amended, extended, renewed, restated, supplemented or otherwise
modified (in whole or in part, and without limitation as to amount, terms,
conditions, covenants and other provisions) from time to time, and any agreement
(and related document) governing Indebtedness incurred to refund or refinance,
in whole or in part, the borrowings and commitments then outstanding or
permitted to be outstanding under such Credit Agreement or a successor Credit
Agreement, whether by the same or any other lender or group of lenders.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or beneficiary.
"CVC" means Citicorp Venture Capital Ltd.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (1) the Bank Indebtedness; provided,
however, that Bank Indebtedness outstanding under any Credit Agreement that
Refinanced in part, but not in whole, the previously outstanding Bank
Indebtedness shall only constitute Designated Senior Indebtedness if it meets
the requirements of succeeding clause (2); and (2) any other Senior Indebtedness
of the Company which, at the date of determination, has an aggregate principal
amount outstanding of, or under which, at the date of determination, the holders
thereof are committed to lend up to, at least $10.0 million and is specifically
designated by the Company in the instrument evidencing or governing such Senior
Indebtedness as "Designated Senior Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (1) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(2) is convertible or exchangeable for Indebtedness or Disqualified Stock or (3)
is redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the first anniversary of the Stated Maturity of the Notes;
provided, however, that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or
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"change of control" occurring prior to the first anniversary of the Stated
Maturity of the Notes shall not constitute Disqualified Stock if the "asset
sale" or "change of control" provisions applicable to such Capital Stock are not
more favorable to the holders of such Capital Stock than the provisions
described under "-- Change of Control" and under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock."
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income:
(1) all income tax expense of the Company and its consolidated Restricted
Subsidiaries;
(2) depreciation expense of the Company and its consolidated Restricted
Subsidiaries;
(3) amortization expense of the Company and its consolidated Restricted
Subsidiaries (excluding amortization expense attributable to a prepaid
cash item that was paid in a prior period); and
(4) all other non-cash charges of the Company and its consolidated
Restricted Subsidiaries (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash
expenditures in any future period);
in each case for such period. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated
Net Income to compute EBITDA only to the extent (and in the same proportion)
that the net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Restricted
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to such
Restricted Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fairchild International" means Fairchild Semiconductor International,
Inc., a Delaware corporation, and any successor corporation.
"Fairchild International Guaranty" means the Guarantee by Fairchild
International of the Company's obligations with respect to the Notes contained
in the Indenture.
"Foreign Subsidiary" means any Restricted Subsidiary not created or
organized in the United States or any state thereof and that conducts
substantially all its operations outside of the United States.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (1)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (2) statements and
pronouncements of the Financial Accounting Standards Board, (3) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (4) the rules and regulations of the Securities and
Exchange Commission governing the inclusion of financial statements (including
pro forma financial statements) in periodic reports required to be filed
pursuant to Section 13 of the Exchange Act, including opinions and
pronouncements in staff accounting bulletins and similar written statements from
the accounting staff of the Securities and Exchange Commission. All ratios and
computations based on GAAP contained in the Indenture shall be computed in
conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (1) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services,
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to take-or-pay or to maintain financial statement conditions or otherwise) or
(2) entered into for the purpose of assuring in any other manner the obligee of
such Indebtedness of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Guaranty Agreement" means a supplemental indenture, in a form satisfactory
to the Trustee, pursuant to which Fairchild International or a Subsidiary
Guarantor becomes subject to the applicable terms and conditions of the
Indenture.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal of and premium (if any) in respect of (A) indebtedness of
such Person for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable;
(2) all Capital Lease Obligations of such Person and all Attributable Debt
in respect of Sale/Leaseback Transactions entered into by such Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such
Person and all obligations of such Person under any title retention
agreement (but excluding trade accounts payable arising in the ordinary
course of business);
(4) all obligations of such Person for the reimbursement of any obligor on
any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (1) through
(3) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if
and to the extent drawn upon, such drawing is reimbursed no later than
the tenth Business Day following payment on the letter of credit);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of such Person, the liquidation
preference with respect to, any Preferred Stock (but excluding, in each
case, any accrued dividends);
(6) all obligations of the type referred to in clauses (1) through (5) of
other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly
or indirectly, as obligor, guarantor or otherwise, including by means
of any Guarantee;
(7) all obligations of the type referred to in clauses (1) through (6) of
other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed
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by such Person), the amount of such obligation being deemed to be the
lesser of the value of such property or assets or the amount of the
obligation so secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date; provided,
however, that the amount outstanding at any time of any Indebtedness issued with
original issue discount shall be deemed to be the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such indebtedness at such time as determined in accordance with
GAAP.
"Interest Rate Agreement" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary," the definition of "Restricted Payment" and the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments;"
(1) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net
assets of any Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary equal to an amount (if
positive) equal to (x) the Company's "Investment" in such Subsidiary at
the time of such redesignation less (y) the portion (proportionate to
the Company's equity interest in such Subsidiary) of the fair market
value of the net assets of such Subsidiary at the time of such
redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
non-cash form), in each case net of:
(1) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a
consequence of such Asset Disposition;
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(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be, repaid out
of the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition; and
(4) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated
with the property or other assets disposed in such Asset Disposition
and retained by the Company or any Restricted Subsidiary after such
Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Obligations" means with respect to any Indebtedness all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements,
and other amounts payable pursuant to the documentation governing such
Indebtedness.
"Permitted Holders" means (1) CVC, (2) any officer, employee or director of
CVC or any trust, partnership or other entity established solely for the benefit
of such officers, employees or directors, (3) any officer, employee or director
of Fairchild International, the Company or any Subsidiary or any trust,
partnership or other entity established solely for the benefit of such officers,
employees or directors, and (4) in the case of any individual, any Permitted
Transferee of such individual (as defined in the Stockholders Agreement), except
a Permitted Transferee by virtue of Section 3.4(b)(iv) thereof; provided,
however, that in no event shall individuals collectively be deemed to be
"Permitted Holders" with respect to more than 30% of the total voting power of
Fairchild International or the Company.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) a Restricted Subsidiary or a Person that will, upon the making of such
Investment, become a Restricted Subsidiary; provided, however, that the
primary business of such Restricted Subsidiary is a Related Business;
(2) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted
Subsidiary; provided, however, that such Person's primary business is a
Related Business;
(3) Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionaire trade
terms as the Company or any such Restricted Subsidiary deems reasonable
under the circumstances;
(5) payroll, travel and similar advances to cover matters that are expected
at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of
business;
(6) loans or advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted
Subsidiary;
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(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or
any Restricted Subsidiary or in satisfaction of judgments;
(8) any Person to the extent such Investment represents the non-cash
portion of the consideration received for an Asset Disposition as
permitted pursuant to the covenant described under "--Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock;" and
(9) so long as no Default shall have occurred and be continuing (or result
therefrom), any Person engaged in a Related Business in an aggregate
amount which, when added together with the amount of all the
Investments made pursuant to this clause (9) which at such time have
not been repaid through repayments of loans or advances or other
transfers of assets, does not exceed $30.0 million.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of (1) the Company or (2) Fairchild International (to the extent
the proceeds thereof are contemporaneously contributed to the Company), in each
case pursuant to an effective registration statement under the Securities Act.
"Purchase Price Note" means the promissory note, not to exceed $455.0
million, of the Company and Fairchild Korea to be issued to Samsung Electronics
on the Acquisition Closing Date for the purchase price of the Power Device
Business.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (1) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (2) such Refinancing Indebtedness
has an Average Life at the time such Refinancing Indebtedness is Incurred that
is equal to or greater than the Average Life of the Indebtedness being
Refinanced and (3) such Refinancing Indebtedness has an aggregate principal
amount (or if Incurred with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or if Incurred
with original issue discount, the aggregate accreted value) then outstanding or
committed (plus fees and expenses, including any premium and defeasance costs)
under the Indebtedness being Refinanced; provided further, however, that
Refinancing Indebtedness shall not include (x) Indebtedness of a Subsidiary that
Refinances Indebtedness of the Company or (y) Indebtedness of the Company or a
Restricted Subsidiary that Refinances Indebtedness of an Unrestricted
Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of the Company and the Restricted Subsidiaries on the Issue
Date.
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"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Company; provided, however, that if and for
so long as any Senior Indebtedness lacks such a representative, then the
Representative for such Senior Indebtedness shall at all times be the holders of
a majority in outstanding principal amount of such senior Indebtedness.
"Restricted Payment" with respect to any Person means:
(1) the declaration or payment of any dividends or any other distributions
of any sort in respect of its Capital Stock (including any payment in
connection with any merger or consolidation involving such Person) or
similar payment to the direct or indirect holders of its Capital Stock
(other than dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and dividends or distributions
payable solely to the Company or a Restricted Subsidiary, and other
than pro rata dividends or other distributions made by a Subsidiary
that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an
entity other than a corporation));
(2) the purchase, redemption or other acquisition or retirement for value
of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of
any option to exchange any Capital Stock (other than into Capital Stock
of the Company that is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated
Obligations (other than the purchase, repurchase or other acquisition
of Subordinated Obligations purchased in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in
each case due within one year of the date of acquisition); or
(4) the making of any Investment in any Person (other than a Permitted
Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Revolving Credit Facilities" means the revolving credit facility contained
in the Credit Agreement and any other facility or financing arrangement that
Refinances or replaces, in whole or in part, any such revolving credit facility.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" of any Person means all (1) Bank Indebtedness of or
guaranteed by such Person, whether outstanding on the Issue Date or thereafter
Incurred, and (2) Indebtedness of such Person, whether outstanding on the Issue
Date or thereafter Incurred, including interest thereon, in respect of (A)
Indebtedness for money borrowed, (B) Indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which such
Person is responsible or liable and (C) Hedging Obligations, unless, in the case
of (1) and (2), in the instrument creating or evidencing the same or pursuant to
which the same is outstanding, it is provided that such obligations are
subordinate in right of payment to the obligations under the Notes; provided,
however, that Senior Indebtedness shall not include (i) any obligation of such
Person to any subsidiary of such Person, (ii) any liability for Federal, state,
local or other taxes owed or owing by such Person, (iii) any accounts payable or
other liability to trade creditors arising in the ordinary course of business
(including guarantees thereof or instruments evidencing such liabilities), (iv)
any Indebtedness of such Person (and any accrued and
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unpaid interest in respect thereof) which is subordinate or junior by its terms
to any other Indebtedness or other obligation of such Person (including, in the
case of the Company, the Notes and 10 1/8% Senior Subordinated Notes Due 2007
and, in the case of Fairchild International, its 11.74% Subordinated Note due
March 14, 2008 and 12.5% Subordinated PIK Note due February 1, 2008) or (v) that
portion of any Indebtedness which at the time of Incurrence is Incurred in
violation of the Indenture (but as to any such Indebtedness under the Credit
Agreement, no such violation shall be deemed to exist if the Representative of
the Lenders thereunder shall have received an officers' certificate of the
Company to the effect that the issuance of such Indebtedness does not violate
such covenant and setting forth in reasonable detail the reasons therefor).
"Senior Subordinated Indebtedness" means (1) with respect to the Company,
the Notes, the 10 1/8% Senior Subordinated Notes and any other Indebtedness of
the Company that specifically provides that such Indebtedness is to rank pari
passu with the Notes in right of payment and is not subordinated by its terms in
right of payment to any Indebtedness or other obligation of the Company which is
not Senior Indebtedness of the Company and (2) with respect to Fairchild
International or a Subsidiary Guarantor, their respective Guarantees of the
Notes, the 10 1/8% Senior Subordinated Notes and any other Indebtedness of such
Person that specifically provides that such Indebtedness rank pari passu with
such Guaranty in respect of payment and is not subordinated by its terms in
respect of payment to any Indebtedness or other obligation of such Person which
is not Senior Indebtedness of such Person; provided, however, that Senior
Subordinated Indebtedness shall not include, in the case of Fairchild
International, the 11.74% Subordinated Note due March 14, 2008.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the Securities and Exchange Commission.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Stockholders' Agreement" means the Securities Purchase and Holders
Agreement among the stockholders of Fairchild International, as in effect on the
Issue Date.
"Subordinated Obligation" means any Indebtedness of the Company or any
Subsidiary Guarantor (whether outstanding on the Issue Date or thereafter
Incurred) which is subordinate or junior in right of payment to, in the case of
the Company, the Notes or, in the case of such Subsidiary Guarantor, its
Subsidiary Guaranty, pursuant to a written agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (1) such Person, (2) such Person
and one or more Subsidiaries of such Person or (3) one or more Subsidiaries of
such Person.
"Subsidiary Guarantor" means Fairchild Semiconductor Corporation of
California and any other subsidiary of the Company that Guarantees the Company's
obligations with respect to the Notes.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes.
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"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of America or
any agency thereof or obligations guaranteed by the United States of
America or any agency thereof;
(2) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the
laws of the United States of America, any state thereof or any foreign
country recognized by the United States, and which bank or trust
company has capital, surplus and undivided profits aggregating in
excess of $50.0 million (or the foreign currency equivalent thereof)
and has outstanding debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act)
or any money-market fund sponsored by a registered broker dealer or
mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above
entered into with a bank meeting the qualifications described in clause
(2) above;
(4) investments in commercial paper, maturing not more than 90 days after
the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of
the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's
Investors Service, Inc. or "A-1" (or higher) according to Standard and
Poor's Ratings Group; and
(5) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least
"A" by Standard & Poor's Ratings Group or "A" by Moody's Investors
Service, Inc.
"Term Loan Facilities" means the term loan facilities contained in the
Credit Agreement and any other facility or financing arrangement that Refinances
in whole or in part any such term loan facility.
"Unrestricted Subsidiary" means (1) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (2) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "--Certain Covenants -- Limitation on
Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under
"-- Certain Covenants -- Limitation on Indebtedness" and (y) no Default shall
have occurred and be continuing. Any such designation by the Board of Directors
shall be evidenced to the Trustee by promptly filing with the Trustee a copy of
the resolution of the Board of Directors giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality
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thereof) for the payment of which the full faith and credit of the United States
of America is pledged and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or one or more Wholly Owned Subsidiaries.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax consequences of the Exchange Offer to a holder of Existing Notes that
is an individual citizen or resident of the United States or a United States
corporation that purchased the Existing Notes pursuant to their original issue.
This discussion is based on the Internal Revenue Code of 1986, as amended to the
date hereof, existing and proposed Treasury regulations, and judicial and
administrative determinations, all of which are subject to change at any time,
possibly on a retroactive basis. The following relates only to the Existing
Notes, and the Exchange Notes received in exchange for the Existing Notes, that
are held as "capital assets" within the meaning of Section 1221 of the Internal
Revenue Code by U.S. holders. It does not discuss state, local, or foreign tax
consequences, nor does it discuss tax consequences to subsequent purchasers
(persons who did not purchase the Existing Notes pursuant to their original
issue), or to categories of holders that are subject to special rules, such as
foreign persons, tax-exempt organizations, insurance companies, banks and
dealers in stocks and securities. Tax consequences may vary depending on the
particular status of an investor. No rulings will be sought from the Internal
Revenue Service with respect to the federal income tax consequences of the
Exchange Offer.
This section does not purport to deal with all aspects of federal income
taxation that may be relevant to an investor's decision to exchange Existing
Notes for Exchange Notes. Each investor should consult with its own tax advisor
concerning the application of the federal income tax laws and other tax laws to
its particular situation before determining whether to exchange Existing Notes
for Exchange Notes.
THE EXCHANGE OFFER
The exchange of Existing Notes in the Exchange Offer should be treated as a
continuation of the corresponding Existing Notes because the terms of the
Exchange Notes are not materially different from the terms of the Existing
Notes. Accordingly, such exchange should not constitute a taxable event to U.S.
holders, and therefore:
- no gain or loss should be realized by U.S. holders upon receipt of an
Exchange Note;
- the holding period of the Exchange Note should include the holding period
of the Existing Note for which the Exchange Note was exchanged; and
- the adjusted tax basis of the Exchange Note should be the same as the
adjusted tax basis of the Existing Note for which the Exchange Note was
exchanged immediately before the exchange.
STATED INTEREST
Stated interest on a Note will be taxable to a U.S. holder as ordinary
interest income at the time that such interest accrues or is received, in
accordance with the U.S. holder's regular method of accounting for federal
income tax purposes. The Notes are not considered to have been issued with
original issue discount for federal income tax purposes.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
A U.S. holder's tax basis in a Note generally will be its cost. A U.S.
holder generally will recognize gain or loss on the sale, exchange or retirement
of a Note in an amount equal to the difference between the amount realized on
the sale, exchange or retirement and the tax basis of the Note. Gain or loss
recognized on the sale, exchange or retirement of a Note (excluding amounts
received in respect of accrued interest which will be taxable as ordinary
interest income) generally will be capital gain or loss, and will be long-term
capital gain or loss if the Note was held for more than one year.
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<PAGE> 158
BACKUP WITHHOLDING
Under certain circumstances, a U.S. holder of a Note may be subject to
"backup withholding" at a 31% rate with respect to payments of interest on a
Note or the gross proceeds from the disposition of a Note.
This withholding generally applies if the U.S. holder fails to furnish his
or her social security number or other taxpayer identification number in the
specified manner and in certain circumstances. Any amount withheld from a
payment to a U.S. holder under the backup withholding rules is allowable as a
credit against such U.S. holder's federal income tax liability, provided that
the required information is furnished to the IRS. Corporations and certain other
entities described in the Internal Revenue Code and Treasury regulations are
exempt from backup withholding if their exempt status is properly established.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Existing Notes where such Existing Notes were acquired as a result
of market-making activities or other trading activities. We have agreed that,
for a period of 180 days after the Expiration Date, we will make this
prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until , 1999 (90
days after the date of this prospectus), all dealers effecting transactions in
the Exchange Notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Noes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such Exchange Notes. Any broker-dealer
that resells Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal. We have agreed to pay all expenses incident to the Exchange Offer
(including the expenses of one counsel for the Holders of the Notes) other than
commissions or concessions of any brokers or dealers and will indemnify the
Holders of the Securities (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Exchange Notes
offered hereby will be passed upon for us by Dechert Price & Rhoads, New York,
New York.
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EXPERTS
The consolidated financial statements and schedule of Fairchild
Semiconductor Corporation as of May 31, 1998 and May 30, 1999, and for each of
the years in the three-year period ended May 30, 1999, have been included herein
and in this registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The report of KPMG LLP covering the May 30, 1999 consolidated financial
statements of Fairchild Semiconductor Corporation contains an explanatory
paragraph that states that Fairchild Semiconductor Corporation changed its
method of accounting for business process reengineering costs in 1998 to adopt
the provisions of the Emerging Issues Task Force Issue 97-13, "Accounting for
Business Process Reengineering Costs."
The consolidated financial statements and schedule of Fairchild
Semiconductor International Inc. as of May 31, 1998 and May 30, 1999, and for
each of the years in the three-year period ended May 30, 1999, have been
included herein and in this registration statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The report of KMPG LLP covering the May 30, 1999 consolidated financial
statements of Fairchild Semiconductor International, Inc. contains an
explanatory paragraph that states that Fairchild Semiconductor International,
Inc. changed its method of accounting for business process reengineering costs
in 1998 to adopt the provisions of the Emerging Issues Task Force Issue 97-13,
"Accounting for Business Process Reengineering Costs."
The audited financial statements of the power device business included in
this prospectus have been audited by Samil Accounting Corporation, independent
certified public accountants, whose report thereon appears herein. Such
financial statements have been so included in reliance upon the report of such
independent accountants given on the authority of said firm as experts in
accounting and auditing.
The financial statements of Raytheon Semiconductor, Inc. as of December 31,
1997 and for the year then ended, have been included herein and in this
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
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<PAGE> 160
WHERE YOU CAN FIND MORE INFORMATION
As a result of the Exchange Offer, we will become subject to the
informational requirements of the Exchange Act. You may read and copy any
reports or other information filed by us at the Securities and Exchange
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices located
at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL
60661 and Seven World Trade Center, 13(th) Floor, New York, NY 10048. Copies of
such material can be obtained from the Public Reference Section of the SEC upon
payment of certain fees prescribed by the SEC. You may call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information contained in the
public reference room. Our filings with the Securities and Exchange Commission
will also be available to the public from commercial document retrieval services
and at the Securities and Exchange Commission's Web site at
"http://www.sec.gov."
Our reporting obligation under the Exchange Act shall be automatically
suspended at the beginning of our fiscal year 2001. After such time, we will
cease to file reports or other information with the SEC.
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act of 1933, covering the notes to be issued in the exchange offer
(File No. 333-78665). This prospectus, which is a part of the registration
statement, does not contain all of the information included in the registration
statement. Any statement made in this prospectus concerning the contents of any
contract, agreement or other document is not necessarily complete. For further
information with respect to our company and the notes to be issued in the
Exchange Offer, please reference the registration statement, including its
exhibits. If we have filed any contract, agreement or other document as an
exhibit to the registration statement, you should read the exhibit for a more
complete understanding of the documents or matter involved.
Copies of the registration statement, including all related exhibits and
schedules, may be inspected without charge at the public reference facilities
maintained by the SEC, or obtained at prescribed rates from the Public Reference
Section of the SEC at the address set forth above. In addition, you may request
a copy of any of these filings, at no cost, by writing or telephoning us at the
following address or phone number:
Fairchild Semiconductor Corporation
333 Western Avenue, Mail Stop 01-00
South Portland, ME 04106
Telephone: (207) 775-8100
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GLOSSARY
ABT........................ Advanced BiCMOS Technology.
ALS........................ Advanced Low Power Schottky.
Application Specific
Standard Product........... A standard integrated circuit designed for a
specific product or application, such as a VCR,
stereo or microwave.
BiCMOS..................... BiCMOS is a hybrid of CMOS and bipolar technologies
developed to combine the high speed characteristics
of bipolar technologies with the low power
consumption and high integration of CMOS
technologies.
Bipolar.................... A manufacturing process that uses two opposite
electrical poles to build semiconductors.
CD4K....................... Metal Gate Logic.
CMOS....................... Complementary Metal Oxide Semiconductor. Currently
the most common integrated circuit fabrication
process technology, CMOS is one of the latest
fabrication techniques to use metal oxide
semiconductor transistors.
Die........................ A piece of a semiconductor wafer containing the
circuitry of a single chip.
Diode...................... An electronic device that allows current to flow in
only one direction.
Discrete................... A single individually packaged component.
DMOS....................... Diffused Metal Oxide Semiconductor. A process
technology used in power discrete fabrication.
ECL........................ Emitter Coupled Logic.
EEPROM..................... Electrically Erasable and Programmable Read-Only
Memory. A form of non-volatile memory that can be
erased electronically before being reprogrammed.
EPROM...................... Electrically Programmable Read-Only Memory.
Non-volatile memory which may be erased by exposure
to ultraviolet light and which can be reprogrammed
only by an external programming unit.
Fab........................ The facility that fabricates the wafer.
FACT(TM)................... Fairchild Advanced CMOS Technology. FACT(TM)
enhances connections between products, permitting
faster speeds at higher powers.
FAST(R).................... Fairchild Advanced Schottky Technology. FAST(R)
enhances connections between products, permitting
low power consumption at lower speeds.
FET........................ Field Effect Transistor.
Flash Memory............... A type of non-volatile memory, similar to an EEPROM
in that it is erasable and reprogrammable. The
difference is that it must be erased and
reprogrammed in sectors, not individual bits.
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Foundry.................... A wafer fabrication plant that manufactures silicon
for another business.
GFI........................ Ground Fault Interruptors.
GTL........................ Gunning Transceiver Logic.
HV MOSFET.................. High Voltage MOSFET.
IGBT....................... Insulated Gate Bipolar Transistor. A semiconductor
within an electronic switch, an IGBT operates at
high voltages.
Input-output interface..... A connection in electronic equipment allowing
circuits to connect more efficiently, such as
increasing speed by reducing power.
Integrated Circuit......... A combination of two or more transistors on a base
material, usually silicon. All semiconductor chips,
including memory chips and logic chips, are just
very complicated integrated circuits with thousands
of transistors.
LAN........................ Local Area Network. A local area network links many
nearby computers so that they may communicate and
share information. For example, an office network
is often LAN.
Lead Frames................ A conductive frame that brings the electrical
signals to and from the die.
Logic Product.............. A product that contains digital integrated circuits
that move and shape, rather than store,
information.
LS......................... Low Power Schottky.
LVT........................ Low Voltage Technology. Low voltage technology
enhances connections between products, permitting
circuits at different voltages to interface.
Mask....................... A piece of glass on which an integrated circuit's
circuitry design is laid out. Integrated circuits
may require up to 20 different layers of design,
each with its own mask. In the integrated circuit
production process, a light shines through the mask
leaving an image of the design on the wafer. Also
known as a reticle.
Mb......................... Mega Bit. One million (or 1,048,576) bits as a unit
of data size or memory capacity.
Memory..................... A group of integrated circuits that a computer uses
to store data and programs, such as ROM, RAM, DRAM,
SRAM, EEPROM and EPROM.
Micron..................... 1/25,000 of an inch. Circuity on an integrated
circuit typically follows lines that are less than
one micron wide.
MOS........................ Metal Oxide Semiconductor.
MOSFET..................... Metal Oxide Semiconductor FET. A semiconductor
within an electronic switch, a MOSFET operates at
mid-range voltages.
Motherboard................ The main piece of circuitry inside a PC.
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Non-volatile Memory........ Memory products which retain their data content
without the need for constant power supply.
Op Amp..................... Operational Amplifier.
Package.................... A protective case that surrounds the die,
consisting of a plastic housing and a lead frame.
PC......................... Personal Computer.
Planar Technology.......... By the later 1950s, transistors were made in
batches through a simple photolithographic
technique known as the mesa process. This process,
which led directly to the creation of the
commercially viable integrated circuit, is a form
of contact printing.
A cross section of a typical mesa transistor
resembles a mesa of silicon squatting on top of a
foundation of silicon. The three essential parts of
a transistor are all there: the base is the mesa,
the collector is the foundation, and the emitter is
a tiny piece of doped silicon embedded in the base.
To fabricate a mesa transistor, a flat wafer of
silicon was doped with either positive ions or
electrons, covered with a photomask (a photographic
plate), exposed to ultraviolet light and then
immersed in an acid bath, which etched away the
exposed area around the mesa.
For all the manufacturing benefits brought about by
the mesa process, it had two major drawbacks: the
mesa was susceptible to both physical harm and
contamination, and the process did not lend itself
to the making of resistors. Then Jean Hoerni, a
Swiss physicist and one of Fairchild
Semiconductor's founders, invented an ingenious way
around these obstacles by creating a flat, or
planar, transistor.
Instead of mounting the mesa, or base, on top of a
foundation of silicon, he diffused it into the
foundation, which served as the collector. Next he
diffused the emittor into the base. (The base was
composed of negatively doped silicon, the collector
and emitor of positively doped silicon; the first
planar device was thus a pnp transistor.) Then he
covered the whole thing with a protective coating
of silicon dioxide, an insulator, leaving certain
areas in the base and the emitter uncovered. He
diffused a thin layer of aluminum into these areas,
thereby creating "wires" that hooked the device up
to the outside (this was the idea of his colleague
and Fairchild Semiconductor's co-founder, Robert
Noyce). The result was a durable and reliable
transistor, and the all-important breakthrough that
made commercial production of integrated circuits
possible.
Plug and Play.............. A protocol that supports automated configuration of
add on cards.
Power Discrete............. A discrete device that converts, switches or
conditions electricity.
PROM....................... Programmable Read-Only Memory. Similar to ROM in
that once programmed it can be "read only" and not
changed. Programmable ROM means that customers can
program the integrated circuits themselves, so that
the integrated circuit need not be programmed when
it is manufactured. The programming is possible
because of a
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series of fuses in the circuitry that can be
selectively blown to create a unique type of data.
RAM........................ Random Access Memory. A type of volatile memory,
forming the main memory of a computer where
applications and files are run.
ROM........................ Read-Only Memory. Memory that is programmed by the
manufacturer and cannot be changed. Typically, ROM is used to provide start-up
data when a computer is first turned on.
Semiconductor.............. A material with electrical conducting properties in
between those of metals and insulators. (Metals
always conduct and insulators never conduct, but
semiconductors sometimes conduct.) Essentially,
semiconductors transmit electricity only under
certain circumstances, such as when given a
positive or negative electric charge. Therefore, a
semiconductor's ability to conduct can be turned on
or off by manipulating those charges and this
allows the semiconductor to act as an electric
switch. The most common semiconductor material is
silicon, used as the base of most semiconductor
chips today because it is relatively inexpensive
and easy to create.
Silicon bonding............ A manufacturing process used to bond together two
silicon wafers, allowing higher resistivity in one
layer and lower resistivity in the other to help
conduct current.
Sort....................... The process of evaluating die into different
grades, good/bad or speed grades.
SPD........................ Serial Presence Detect.
Transistor................. An individual circuit that can amplify or switch
electric current. This is the building block of all
integrated circuits and semiconductors.
Trench technology.......... A manufacturing process used to etch trenches into
silicon wafers, allowing the transistor to be
placed both on the sides of the trenches and on the
surface of the wafer to enable transistors to be
condensed into a smaller area.
TTL........................ Transistor Transistor Logic.
Ultra small packaging...... The process of encasing very small semiconductors
so that they are protected and electronically and
mechanically connected to the outside world.
VHC........................ Very High Speed CMOS.
Volatile Memory............ Memory products which lose their data content when
the power supply is switched off.
Wafer...................... Thin, round, flat piece of silicon that is the base
of most integrated circuits.
WAN........................ Wide Area Network. A wide area network links many
computers from potentially all over the world so
that they may communicate and share information.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FAIRCHILD SEMICONDUCTOR CORPORATION
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at May 31, 1998 and May 30,
1999...................................................... F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended May 30, 1999............... F-4
Consolidated Statements of Cash Flows for the years ended
May 31, 1998 and May 30, 1999............................. F-5
Consolidated Statements of Stockholder's Equity (Deficit)
for each of the years in the three-year period ended May
30, 1999.................................................. F-6
Notes to Consolidated Financial Statements.................. F-7
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
Independent Auditors' Report................................ F-39
Consolidated Balance Sheets at May 31, 1998 and May 30,
1999...................................................... F-40
Consolidated Statements of Operations for each of the years
in the three-year period ended May 30, 1999............... F-41
Consolidated Statements of Cash Flows for the years ended
May 31, 1998 and May 30, 1999............................. F-42
Consolidated Statements of Stockholder's Equity (Deficit)
for each of the years in the three-year period ended May
30, 1999.................................................. F-43
Notes to Consolidated Financial Statements.................. F-44
POWER DEVICE BUSINESS
Report of Independent Accountants........................... F-79
Statements of Net Assets (Liabilities) as of December 31,
1997 and 1998............................................. F-80
Statements of Operations and Comprehensive Income (Loss) for
each of the years in the three-year period ended December
31, 1998.................................................. F-81
Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1998................. F-82
Notes to Financial Statements............................... F-83
RAYTHEON SEMICONDUCTOR, INC.
Independent Auditors' Report................................ F-99
Balance Sheet as of December 31, 1997....................... F-100
Statement of Income for the year ended December 31, 1997.... F-101
Statement of Stockholder's Equity for the year ended
December 31, 1997......................................... F-102
Statement of Cash Flows for the year ended December 31,
1997...................................................... F-103
Notes to Financial Statements............................... F-104
</TABLE>
F-1
<PAGE> 166
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Fairchild Semiconductor Corporation:
We have audited the accompanying consolidated balance sheets of Fairchild
Semiconductor Corporation and subsidiaries (the "Company") as of May 31, 1998
and May 30, 1999, the related consolidated statements of operations and
stockholder's equity (deficit) for each of the years in the three-year period
ended May 30, 1999, and the related consolidated statements of cash flows for
the years ended May 31, 1998 and May 30, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements were prepared on the basis of
presentation as described in Note 1. Prior to March 11, 1997, the statements
present the combined business equity and the related combined revenues less
direct expenses before taxes of the Fairchild Semiconductor Business of National
Semiconductor Corporation (the Business), and are not intended to be a complete
presentation of the Business' financial position, results of operations or cash
flows. The results of operations before taxes are not necessarily indicative of
the results of operations before taxes that would have been recorded by the
Company on a stand-alone basis.
In our opinion, the accompanying financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
May 31, 1998 and May 30, 1999, the results of operations for each of the years
in the three year period ended May 30, 1999, and the results of cash flows for
the years ended May 31, 1998 and May 30, 1999, on the basis described in Note 1,
in conformity with generally accepted accounting principles.
As discussed in Note 17 to the financial statements, the Company changed
its method of accounting for business process reengineering costs in 1998 to
adopt the provisions of the Emerging Issues Task Force Issue 97-13, "Accounting
for Business Process Reengineering Costs".
KPMG LLP
Boston, Massachusetts
June 30, 1999, except as to Note 19, which is as of August 9, 1999
F-2
<PAGE> 167
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6.5 $ 62.4
Accounts receivable, net of allowances of $14.2 and $9.2
at May 31, 1998 and May 30, 1999, respectively......... 75.0 129.7
Inventories............................................... 108.0 148.6
Other current assets...................................... 20.0 65.7
------ --------
Total current assets................................... 209.5 406.4
Property, plant and equipment, net.......................... 342.9 360.2
Deferred income taxes, net.................................. 16.1 2.8
Intangible assets, net of accumulated amortization of $1.4
and $9.9 at May 31, 1998 and May 30, 1999, respectively... 31.5 278.5
Other assets................................................ 30.4 47.8
------ --------
Total assets........................................... $630.4 $1,095.7
====== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt......................... $ 13.2 $ 14.1
Accounts payable.......................................... 76.3 105.7
Accrued expenses and other current liabilities............ 55.9 85.0
------ --------
Total current liabilities.............................. 145.4 204.8
Long-term debt, less current portion........................ 438.1 895.9
Other liabilities........................................... 0.6 1.4
------ --------
Total liabilities...................................... 584.1 1,102.1
------ --------
Commitments and contingencies
Stockholder's equity (deficit):
Common stock, $.01 par value; 1,000 shares authorized, 100
shares issued and outstanding at May 31, 1998 and May
30, 1999 respectively.................................. -- --
Additional paid-in capital................................ 12.0 62.0
Accumulated earnings (deficit)............................ 34.3 (68.4)
------ --------
Total stockholder's equity (deficit)................... 46.3 (6.4)
------ --------
Total liabilities and stockholder's equity (deficit)... $630.4 $1,095.7
====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 168
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenue:
Net sales -- trade........................................ $587.8 $635.8 $ 654.1
Contract manufacturing -- National Semiconductor.......... 104.2 153.4 81.0
------ ------ -------
Total revenue.......................................... 692.0 789.2 735.1
Operating expenses:
Cost of sales............................................. 442.1 441.6 518.4
Cost of contract manufacturing -- National
Semiconductor.......................................... 97.4 117.1 64.4
Research and development.................................. 18.9 35.7 39.3
Selling, general and administrative....................... 96.4 92.0 105.1
Purchased in-process research and development............. -- 15.5 34.0
Restructuring and impairments............................. 5.3 -- 21.3
------ ------ -------
Total operating expenses............................... 660.1 701.9 782.5
------ ------ -------
Operating income (loss)..................................... 31.9 87.3 (47.4)
Interest expense, net....................................... 9.3 44.7 60.5
Other expense, net.......................................... 1.4 -- --
------ ------ -------
Income (loss) before income taxes........................... 21.2 42.6 (107.9)
Provision (benefit) for income taxes........................ 4.5 13.9 (5.2)
------ ------ -------
Income (loss) before cumulative effect of change in
accounting principle...................................... 16.7 28.7 (102.7)
Cumulative effect of change in accounting principle, net of
tax effect of $0.8 million................................ -- (1.5) --
------ ------ -------
Net income (loss)........................................... $ 16.7 $ 27.2 $(102.7)
====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 169
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
MAY 31, 1998 MAY 30, 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 27.2 $(102.7)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of change in accounting principle,
net................................................... 1.5 --
Restructuring, net of cash expended.................... -- 17.3
Depreciation and amortization.......................... 84.6 103.7
Loss on disposal of fixed assets....................... 0.9 0.3
Non-cash interest expense.............................. 2.8 8.4
Purchased in-process research and development.......... 15.5 34.0
Deferred income taxes.................................. 2.8 (6.3)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable.................................... 18.5 (53.2)
Inventories............................................ (21.3) 8.5
Other current assets................................... (1.6) 2.3
Accounts payable....................................... (4.2) 25.3
Accrued expenses and other current liabilities......... 11.6 12.5
Other assets and liabilities, net...................... (2.2) (6.0)
------- -------
Cash provided by operating activities................ 136.1 44.1
------- -------
Cash flows from investing activities:
Capital expenditures...................................... (78.0) (46.2)
Proceeds from sale of property, plant and equipment....... -- 31.2
Purchase of molds and tooling............................. (5.7) (3.8)
Refundable payment of value added tax associated with
acquisition............................................ -- (40.9)
Acquisitions, net of cash acquired........................ (116.8) (414.9)
------- -------
Cash used by investing activities.................... (200.5) (474.6)
------- -------
Cash flows from financing activities:
Repayment of long-term debt............................... (58.7) (151.3)
Issuance of long-term debt................................ 90.0 610.0
Capital contribution from Fairchild International......... -- 50.0
Debt issuance costs....................................... (1.1) (22.3)
------- -------
Cash provided by financing activities................ 30.2 486.4
------- -------
Net change in cash and cash equivalents..................... (34.2) 55.9
Cash and cash equivalents at beginning of period............ 40.7 6.5
------- -------
Cash and cash equivalents at end of period.................. $ 6.5 $ 62.4
======= =======
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes........................................... $ 8.9 $ --
======= =======
Interest............................................... $ 43.8 $ 46.6
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 170
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- ADDITIONAL ACCUMULATED STOCKHOLDER'S
(000'S) PAR PAID-IN EARNINGS BUSINESS EQUITY
SHARES VALUE CAPITAL (DEFICIT) EQUITY (DEFICIT)
------- ----- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at May 26, 1996........ -- -- -- -- 349.2 349.2
Revenues less expenses........ -- -- -- -- 9.6 9.6
Net intercompany activity..... -- -- -- -- (25.4) (25.4)
--- -- ------- ------- ------- -------
Balances at March 10, 1997...... -- -- -- -- 333.4 333.4
Recapitalization of
Business...................... 0.1 -- 333.4 -- (333.4) --
Distribution to National
Semiconductor by Fairchild.... -- -- (401.6) -- -- (401.6)
Capital contribution from
Fairchild International....... -- -- 77.8 -- -- 77.8
Net income for the period from
March 11, 1997 through
May 25, 1997.................. -- -- -- 7.1 -- 7.1
--- -- ------- ------- ------- -------
Balances at May 25, 1997........ 0.1 -- 9.6 7.1 -- 16.7
Net income.................... -- -- -- 27.2 -- 27.2
Adjustment to business equity
assumed....................... -- -- 2.4 -- -- 2.4
--- -- ------- ------- ------- -------
Balances at May 31, 1998........ 0.1 -- 12.0 34.3 -- 46.3
Net income (loss)............. -- -- -- (102.7) -- (102.7)
Capital contribution from
Fairchild International....... -- -- 50.0 -- -- 50.0
--- -- ------- ------- ------- -------
Balances at May 30, 1999........ 0.1 $-- $ 62.0 $ (68.4) $ -- $ (6.4)
--- -- ------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 171
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Fairchild Semiconductor Corporation ("Fairchild" or the "Company"), was
incorporated on February 10, 1997 by National Semiconductor Corporation
("National Semiconductor" or "National"). On March 11, 1997, National
Semiconductor consummated an Agreement and Plan of Recapitalization
("Recapitalization"). As part of the Recapitalization, National Semiconductor
transferred all of the capital stock of Fairchild and approximately $12.8
million in cash to Fairchild Semiconductor International, Inc. ("Fairchild
International"), the parent company of Fairchild, in exchange for shares of
Fairchild International's 12% Series A Cumulative Compounding Preferred Stock,
Fairchild International's common stock and a promissory note in the principal
amount of approximately $77.0 million.
In addition, National Semiconductor transferred substantially all of the
assets and liabilities of the Fairchild Semiconductor Business (the "Business")
to Fairchild. The Business was defined as the logic, discrete and memory
divisions of National Semiconductor. The Recapitalization was accounted for as a
leveraged recapitalization, whereby Fairchild assumed the historical operating
results of the Business. Fairchild is a leading global designer, developer and
manufacturer of high performance multi-market semiconductors. Fairchild's logic,
discrete, non-volatile memory and analog and mixed signal products are the
building block components for virtually all electronic devices, from
sophisticated computers to household appliances. The Company is headquartered in
South Portland, Maine, and has manufacturing operations in South Portland,
Maine, West Jordan, Utah, Mountain View, California, Cebu, the Philippines,
Penang, Malaysia and Bucheon, South Korea.
On December 31, 1998, Fairchild acquired Raytheon Semiconductor Inc.,
("Raytheon"). On April 13, 1999, Fairchild acquired the Power Device Business of
Samsung Electronics. See Note 16.
BASIS OF PRESENTATION
The consolidated financial statements at May 31, 1998 and May 30, 1999 and
for the fiscal years then ended and for the period from March 11, 1997 through
May 25, 1997, include the accounts and operations of the Company and its
wholly-owned subsidiaries.
Prior to March 11, 1997, the combined balance sheets included the assets
and liabilities that were directly related to the Business as they were operated
within National Semiconductor. These balance sheets did not include National
Semiconductor's corporate assets or liabilities not specifically identifiable to
Fairchild. National Semiconductor performed cash management on a centralized
basis and processed related receivables and certain payables, payroll and other
activity for Fairchild. These systems did not track receivables, liabilities and
cash receipts and payments on a business specific basis. Accordingly, it was not
practical to determine certain assets and liabilities associated with the
Business. Given these constraints, certain supplemental cash flow information is
presented in lieu of a statement of cash flows for the year ended May 25, 1997
(See Note 15). The cash flows may have been significantly different if not for
the centralized cash management system of National Semiconductor.
Prior to March 11, 1997, the combined statements of operations included all
revenues and costs attributable to the Business including an allocation of the
costs of shared facilities and overhead of National Semiconductor. In addition,
certain costs incurred at Fairchild plants for the benefit of other National
Semiconductor product lines were allocated from Fairchild to National
Semiconductor. All of the allocations and estimates in the combined statements
of operations were based on assumptions that management believes were reasonable
under the circumstances. However, these allocations and esti-
F-7
<PAGE> 172
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION -- (CONTINUED)
mates are not necessarily indicative of the costs that would have resulted if
the Business had been operated on a stand alone basis.
Transactions with National Semiconductor have been identified in the
financial statements as transactions between related parties to the extent
practicable (See Note 11).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the Sunday on or nearest preceding May
31. The Company's results for the fiscal years May 25, 1997, May 31, 1998 and
May 30, 1999 consist of 52 weeks, 53 weeks, and 52 weeks, respectively.
PRINCIPLES OF CONSOLIDATION
Commencing with the Recapitalization, the consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
Revenue from the sale of semiconductor products is recognized when shipped,
with a provision for estimated returns and allowances recorded at the time of
shipment. Contract manufacturing revenues are recognized upon completion of the
contracted services.
RESEARCH AND DEVELOPMENT COSTS
The Company's research and development expenditures are charged to expense
as incurred.
RELATED PARTY ACTIVITY
In conjunction with the Recapitalization, Fairchild and National
Semiconductor executed several agreements, which govern the performance of
manufacturing services by Fairchild on behalf of National Semiconductor and by
National Semiconductor on behalf of Fairchild. In addition, National
Semiconductor provided a number of business support services to Fairchild
through May 30, 1999.
Prior to the Recapitalization, the Business performed contract
manufacturing services for National Semiconductor. The revenues for these
services are reflected at cost in the accompanying consolidated statements of
operations.
Manufacturing costs were generally apportioned between National
Semiconductor and the Business' product lines based upon budgeted and actual
factory production loading. Certain manufacturing costs (e.g., material costs)
that were specifically identifiable with a particular product line were charged
or credited directly without apportionment.
National Semiconductor also performed manufacturing services for the
Business and incurred other elements of cost of sales on behalf of the Business,
including freight, duty, warehousing, and purchased manufacturing services from
third party vendors.
F-8
<PAGE> 173
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Shared or common costs, including certain general and administrative, sales
and marketing, and research and development expenses, have been allocated from
National Semiconductor's corporate office, selling and marketing locations, and
manufacturing sites to the Business or from the Business' plants to National
Semiconductor product lines on a basis which is considered to fairly and
reasonably reflect the utilization of the services provided to, or benefit
obtained by, the business receiving the charge. National Semiconductor had net
interest income on a consolidated basis for all periods presented prior to the
Recapitalization. Although not material, these amounts have been allocated to
the Business prior to the Recapitalization on the basis of net assets and are
included in other (income) expense (See Note 11).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is generally
depreciated based upon the following estimated useful lives: buildings and
improvements, ten to thirty years, and machinery and equipment, three to five
years. Depreciation is computed using the straight-line method.
INTANGIBLE ASSETS
Intangible assets were recorded as part of the Raytheon and Power Device
Business acquisitions and are amortized by the use of the straight-line method
over their estimated lives, which are generally three to fifteen years. (See
Note 16)
OTHER ASSETS
Other assets include debt acquisition costs which represent costs incurred
related to the issuance of the Company's long-term debt. The costs are being
amortized using the effective interest method over the related term of the
borrowings, which ranges from five to ten years, and are included in interest
expense. Also included in other assets are mold and tooling costs. Molds and
tools are amortized over their expected useful lives, generally one to three
years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets not held for
sale, including intangible assets, by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values. Based on
these evaluations, there were no adjustments to the carrying value of long-lived
assets in Fiscal Years 1997, 1998 and 1999, except as discussed in Note 10.
F-9
<PAGE> 174
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
CURRENCIES
The Company's functional currency for all operations worldwide is the U.S.
dollar. Accordingly, gains and losses from translation of foreign currency
financial statements are included in current results. In addition, cash
conversion of foreign currency and foreign currency transactions are also
included in current results.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company utilizes various off-balance sheet financial instruments to
manage market risks associated with the fluctuations in certain interest rates
and foreign currency exchange rates. It is the Company's policy to use
derivative financial instruments to protect against market risk arising from the
normal course of business. Gains and losses on financial instruments that are
intended to hedge an identifiable firm commitment are deferred and included in
the measurement of the underlying transaction. Gains and losses on hedges of
anticipated transactions are deferred until such time as the underlying
transactions are recognized or immediately when the transaction is no longer
expected to occur. The criteria the Company uses for designating an instrument
as a hedge include the instrument's effectiveness in risk reduction and
one-to-one matching of derivative instruments to underlying transactions. In
addition, the Company uses forward and option contracts to hedge certain
non-U.S. denominated asset and liability positions. Gains and losses on these
contracts are matched with the underlying gains and losses resulting from
currency movement on these balance sheet positions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable and
payable, and accrued liabilities approximate fair value due to the short-term
maturities of these assets and liabilities. Fair values of long term debt,
interest rate swaps and caps, currency forward contracts and currency options
are based on quoted market prices or pricing models using prevailing financial
market information at the date of measurement.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INCOME TAXES
Prior to the Recapitalization, the Business did not file separate income
tax returns but rather was included in the income tax returns filed by National
Semiconductor and its subsidiaries in various domestic and foreign
jurisdictions. Therefore, no provision for income taxes has been recorded in the
accompanying consolidated financial statements for the period May 27, 1996
through March 10, 1997. Upon the Recapitalization, the Company became
responsible for its income taxes and, therefore, the provision for income taxes
included in the accompanying 1997 statement of operations is for the period
March 11, 1997 through May 25, 1997.
F-10
<PAGE> 175
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The Company and its wholly owned subsidiaries in the U.S. file a
consolidated federal income tax return and, where applicable, combined state and
local tax returns with Fairchild International. The provision for current and
deferred federal and state taxes represents the amount calculated on a separate
return basis in accordance with the tax sharing arrangement with Fairchild
International.
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
EMPLOYEE STOCK PLAN
The Company accounts for its stock option plan in accordance with
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees." In 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 provides
an alternative to APB No. 25 and is effective for fiscal years beginning after
December 15, 1995. As permitted under SFAS No. 123, the Company continues to
account for its stock option plan in accordance with the provisions of APB No.
25 (see Note 6) and provides the disclosure of pro forma net income as if the
fair value method under SFAS No. 123 had been applied.
RECLASSIFICATION
Certain fiscal 1997 and 1998 amounts have been reclassified to conform with
the current year presentation.
F-11
<PAGE> 176
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- FINANCIAL STATEMENT DETAILS
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Inventories(1)
Raw materials........................................................... $ 13.0 $ 13.6
Work in process......................................................... 69.5 93.1
Finished goods.......................................................... 25.5 41.9
------ ------
$108.0 $148.6
====== ======
Other current assets
Refundable payment of value added tax associated with acquisition....... $ -- $ 40.9
Non-trade receivable from manufacturing subcontractor................... 12.7 4.5
Deferred income taxes................................................... 1.6 7.6
Prepaid and other current assets........................................ 5.7 12.7
------ ------
$ 20.0 $ 65.7
====== ======
Property, plant and equipment(1)
Land.................................................................... $ 23.5 $ 19.0
Buildings and improvements.............................................. 154.7 177.0
Machinery and equipment................................................. 575.1 681.7
Construction in progress................................................ 46.5 18.1
------ ------
Total property, plant and equipment.................................. 799.8 895.8
Less accumulated depreciation........................................... 456.9 535.6
------ ------
$342.9 $360.2
====== ======
</TABLE>
<TABLE>
<CAPTION>
PERIOD OF
AMORTIZATION
------------
<S> <C> <C> <C>
Intangible assets(1)
Developed technology...................................... 15 years $ 28.8 $169.7
Customer base............................................. 8 years -- 53.9
Covenant not to compete................................... 5 years -- 30.8
Trademarks and tradenames................................. 4 years -- 25.1
Assembled workforce....................................... 3 years 4.1 8.9
------ ------
Total intangible assets.............................................. 32.9 288.4
Less accumulated amortization........................................... (1.4) (9.9)
------ ------
$ 31.5 $278.5
====== ======
</TABLE>
F-12
<PAGE> 177
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- FINANCIAL STATEMENT DETAILS -- (CONTINUED)
<TABLE>
<CAPTION>
MAY 31, MAY 25,
1998 1999
------- -------
<S> <C> <C> <C>
Accrued expenses(1)
Payroll and employee related accruals................................... $ 23.4 $ 29.3
Accrued interest........................................................ 8.1 13.5
Restructuring and related allowances.................................... -- 12.5
Income taxes payable.................................................... 3.2 0.3
Other................................................................... 21.2 29.4
------ ------
$ 55.9 $ 85.0
====== ======
</TABLE>
- -------------------------
(1) Approximately $49.1 million of inventory, $101.3 million of property, plant
and equipment, $255.5 million of intangible assets and $9.5 million of
accrued liabilities were obtained through the Power Device acquisition
completed in April 1999, and contribute to the growth in each respective
account in fiscal 1999.
NOTE 4 -- LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- --------
(IN MILLIONS)
<S> <C> <C>
Term Loans Payable:
Tranche A................................................. $ 62.5 $ 100.0
Tranche B................................................. -- 210.0
Tranche C................................................. 88.8 --
Senior subordinated notes payable......................... 300.0 600.0
------ --------
Total long-term debt................................... 451.3 910.0
Less current portion........................................ 13.2 14.1
------ --------
Long-term portion...................................... $438.1 $ 895.9
====== ========
</TABLE>
On March 11, 1997 the Company entered into a Senior Credit Facilities
Agreement which, on December 31, 1997, was amended and restated ("Original
Credit Agreement") in order to permit the acquisition of Raytheon (See Note 16).
On April 14, 1999 the Company entered into a new Senior Credit Facilities
Agreement ("Credit Agreement") with a syndicate of financial institutions in
order to refinance the Original Credit Agreement and finance the acquisition of
the Power Device Business (See Note 16). A portion of the proceeds from the new
Credit Agreement was used to repay in full all outstanding amounts under the
Original Credit Agreement.
Borrowings under the Credit Agreement are segregated into two tranches:
$100.0 million Tranche A Term Loans and $210.0 million Tranche B Term Loans. The
Tranche A Term Loans are scheduled to mature on March 31, 2004, and are subject
to quarterly principal payments ranging from $3.8 million to $6.8 million
commencing September 30, 1999. The Tranche B Term Loans are scheduled to mature
on December 15, 2004, and are subject to quarterly principal payments ranging
from $0.5 to $0.7 million
F-13
<PAGE> 178
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT -- (CONTINUED)
commencing September 30, 1999 and ending September 30, 2004 with a final
principal payment of $198.5 million due December 15, 2004. The Credit Agreement
also includes a Revolving Credit Facility of $100.0 million. The Revolving
Credit Facility is scheduled to mature on March 31, 2004. No amounts were
outstanding under the Revolving Credit Facility at May 30, 1999.
The Credit Agreement accrues interest based on either the bank's base rate
or the Eurodollar rate, at the option of the Company. The interest rate was 7.7%
for the Tranche A term loan and 8.2% for the Tranche B term loan at May 30,
1999. The Company pays a commitment fee of 0.5% per annum of the unutilized
commitments under the Revolving Credit Agreement. Borrowings are secured by
substantially all assets of Fairchild.
On April 7, 1999, the Company issued $300.0 million of 10 3/8% Senior
Subordinated Notes (the "10 3/8% Notes") at face value. The 10 3/8% Notes pay
interest on April 1 and October 1 of each year commencing October 1, 1999 and
are due October 1, 2007. The 10 3/8% Notes are unsecured and are subordinated to
all existing and future senior indebtedness of Fairchild. Until April 1, 2002,
the Company can redeem an amount not to exceed 35% of the 10 3/8% Notes with
proceeds raised from certain public equity offerings. On or after April 1, 2003,
the 10 3/8% Notes are redeemable by the Company, in whole or in part, at
redemption prices ranging from 100% to approximately 105% of the principal
amount.
On March 11, 1997, the Company issued $300.0 million of 10 1/8% Senior
Subordinated Notes (the "10 1/8% Notes" and, together with the 10 3/8% Notes,
the "Notes") at face value. The 10 1/8% Notes pay interest on March 15 and
September 15 of each year commencing September 15, 1997. The 10 1/8% Notes are
unsecured and are subordinated to all existing and future senior indebtedness of
Fairchild. The 10 1/8% Notes are redeemable by the Company, in whole or in part,
on or after March 15, 2002 at redemption prices ranging from 100% to
approximately 105% of the principal amount. The Company is required to redeem
$150.0 million principal amount of 10 1/8% Notes on March 15, 2005 and $75.0
million principal amount of 10 1/8% Notes on March 15, 2006 and 2007,
respectively, in each case at a redemption price of 100% of the principal amount
plus accrued interest to the date of redemption.
The payment of principal and interest on the Credit Agreement and the Notes
is fully and unconditionally guaranteed by Fairchild International. Fairchild
International is the parent company of Fairchild and currently conducts no
business and has no significant assets other than the capital stock of Fairchild
and certain deferred tax assets related to interest on its debt. Fairchild has
eleven direct subsidiaries and one indirect subsidiary, of which only one direct
subsidiary, Fairchild Semiconductor Corporation of California ("Fairchild
California"), is a guarantor on the Credit Agreement and the Notes. The
remaining direct and indirect subsidiaries are foreign-based and do not
guarantee either the Credit Agreement or the Notes.
The Credit Agreement and the indenture under which the Notes were issued
contain certain restrictive financial and operating covenants, including
limitations on stock repurchases and prohibitions on the payment of dividends,
with which the Company was in compliance at May 30, 1999.
F-14
<PAGE> 179
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT -- (CONTINUED)
Aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
2000........................................................ 14.1
2001........................................................ 17.1
2002........................................................ 25.1
2003........................................................ 25.1
2004........................................................ 29.1
Thereafter.................................................. 799.5
--------
$ 910.0
========
</TABLE>
On April 29, 1997 and January 7, 1998, the Company entered into interest
rate swap agreements to reduce the impact of changes in interest rates on its
Senior Credit Facilities described above under the Original Credit Agreement.
The swap agreements fixed the interest rate on $60.0 million of the Senior
Credit Facility at 9.26% through May 2001, and $90.0 million of the Senior
Credit Facility at 8.21% through February 2000. The notional face amount of the
swap agreements was $151.3 million at May 31, 1998 (See Note 14). The swap
agreement covering $60.0 million of the Senior Credit Facility was canceled
without penalty on May 26, 1999. The swap agreement covering $90.0 million was
settled on April 28, 1999 at a cost to the Company of $0.6 million.
On April 28, 1999, the Company entered into an Interest Rate Cap Agreement.
This agreement caps the interest rate at 8.0% and 8.3% on the outstanding
balances of the Tranche A and Tranche B Term Loans, respectively. The interest
rate cap agreement expires August 31, 1999.
NOTE 5 -- INCOME TAXES
As discussed in Note 2, the Business did not pay income taxes directly or
file separate income tax returns prior to the Recapitalization, and therefore,
no provision for income taxes has been recorded in the accompanying financial
statements for the period from May 27, 1996 to March 10, 1997.
In conjunction with the acquisition of the Power Device Business, the
Korean government granted a ten year tax holiday to Fairchild Korea
Semiconductor Ltd. The exemption is 100% for the first seven years of the
holiday and 50% for the remaining three years of the holiday. Taxes exempted
include income taxes, dividend withholding taxes, acquisition tax, registration
tax, property tax and aggregate land tax. As such, no provision for income taxes
for Korea has been provided.
F-15
<PAGE> 180
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES -- (CONTINUED)
The provision (benefit) for income taxes included in the accompanying
consolidated statements of operations for Fiscal Years 1997, 1998 and 1999,
consisted of the following:
<TABLE>
<CAPTION>
MARCH 11, YEAR ENDED
1997 TO ------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
--------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S. .................................................. $ 9.1 $24.4 $ (92.4)
Foreign................................................ 2.5 18.2 (15.5)
----- ----- -------
$11.6 $42.6 $(107.9)
===== ===== =======
Income tax provision (benefit):
Current:
U.S. federal........................................ $ -- $ 7.1 $ (1.3)
U.S. state and local................................ -- 1.5 0.3
Foreign............................................. 1.4 3.3 2.1
----- ----- -------
1.4 11.9 1.1
Deferred:
U.S. federal........................................ 2.5 1.2 (5.9)
U.S. state and local................................ 0.6 (0.4) (0.4)
Foreign............................................. -- 1.2 --
----- ----- -------
3.1 2.0 (6.3)
Total income tax provision (benefit):
U.S. federal........................................... 2.5 8.3 (7.2)
U.S. state and local................................... 0.6 1.1 (0.1)
Foreign................................................ 1.4 4.5 2.1
----- ----- -------
$ 4.5 $13.9 $ (5.2)
===== ===== =======
</TABLE>
F-16
<PAGE> 181
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES -- (CONTINUED)
The reconciliation between the income tax rate computed by applying the
U.S. federal statutory rate and the reported worldwide tax rate follows:
<TABLE>
<CAPTION>
MARCH 11,
1997 TO
MAY 25, MAY 31, MAY 30,
1997 1998 1999
--------- ------- -------
<S> <C> <C> <C>
U.S. federal statutory rate............................... 35.0% 35.0% 35.0%
U.S. state and local taxes, net of federal benefit........ 3.7% 2.0% 1.6%
Tax differential related to foreign income................ -- (4.4)% (9.5)%
Loss not utilized......................................... -- -- (22.3)%
---- ---- -----
38.7% 32.6% 4.8%
==== ==== =====
</TABLE>
The tax effects of temporary differences in the recognition of income and
expense for tax and financial reporting purposes that give rise to significant
portions of the deferred tax assets and the deferred tax liabilities at May 31,
1998 and May 30, 1999 are presented below:
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards......................... $ -- $ 30.1
Reserves and accruals..................................... 11.9 26.1
Plant and equipment....................................... 2.8 3.5
Intangibles, primarily intellectual property and
software............................................... 31.2 22.7
Tax credit carryovers..................................... 3.8 1.4
------ ------
Total gross deferred tax assets........................ 49.7 83.8
Valuation allowance....................................... (30.7) (58.4)
------ ------
Net deferred tax assets................................ 19.0 25.4
Deferred tax liabilities (all foreign):
Intangibles, primarily intellectual property.............. -- (9.9)
Plant and equipment....................................... -- (3.7)
Capital allowance......................................... (1.4) (1.4)
------ ------
Total deferred tax liabilities......................... (1.4) (15.0)
------ ------
Net deferred tax assets..................................... $ 17.6 $ 10.4
====== ======
</TABLE>
In assessing the realizability of deferred tax assets, the Company
considered its taxable future earnings and the expected timing of the reversal
of temporary differences. Accordingly, the Company has recorded a valuation
allowance which reduces the gross deferred tax asset to an amount which the
F-17
<PAGE> 182
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES -- (CONTINUED)
Company believes will more likely than not be realized. Deferred tax assets and
liabilities are classified in the consolidated balance sheet based on the
classification of the related asset or liability.
Net operating loss, research and development credit and foreign tax credit
carryforwards totaled $80.1 million, $0.2 million and $1.2 million,
respectively, as of May 30, 1999. The net operating loss expires in 2019. The
research and development credits expire in varying amounts in 2012, 2013 and
2019. The foreign tax credits expire in varying amounts in 2002 through 2004.
Deferred income taxes have not been provided for the undistributed earnings
of the Company's foreign subsidiaries, which aggregated approximately $13.8
million at May 30, 1999. The Company plans to reinvest all such earnings for
future expansion. The amount of taxes attributable to these undistributed
earnings is not practicably determinable.
NOTE 6 -- STOCK BASED COMPENSATION
At May 30, 1999, the Company has one stock-based compensation plan, the
1997 Stock Option Plan of Fairchild International, as amended, (the "Plan")
which is described below. The Company accounts for its stock option plan in
accordance with the provisions of APB No. 25. As such, compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeds the exercise price. During the year ended May 30, 1999, Fairchild
International granted 25,600 stock options with exercise prices less than the
market price of the underlying stock on the date of the grant, and recorded
total deferred compensation of $0.3 million. Had compensation cost for the
Company's stock option plan been determined consistent with SFAS Statement No.
123, the Company would have reported net income (loss) of $16.7 million, $27.2
million and $(102.9) million, respectively, in fiscal years 1997, 1998 and 1999,
respectively.
The Company estimates the fair value of each option as of the date of grant
using a Black-Scholes pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected volatility......................................... -- -- 49%
Dividend yield.............................................. -- -- --
Risk-free interest rate..................................... 6.17% 5.88% 4.43%
Expected life, in years..................................... 2.6 2.9 3.4
</TABLE>
Under the Plan, Fairchild International may grant options for up to
6,084,000 shares of Class A common stock. Options granted under the Plan may be
either (a) options intended to constitute incentive stock options ("ISOs") under
the Internal Revenue Code or (b) non-qualified stock options. Options may be
granted under the Plan to regular salaried key employees (including officers) of
the Company and its subsidiaries.
The exercise price of each option granted under the Plan shall be as
determined by the Board of Directors of Fairchild International (the "Board").
The maximum term of any option shall be ten years from the date of grant for
incentive stock options and ten years and one day from the date of grant for
non-qualified stock options. Options granted under the Plan are exercisable at
the determination of the Board, currently vesting ratably over approximately 4
years. Employees receiving options under the
F-18
<PAGE> 183
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- STOCK BASED COMPENSATION -- (CONTINUED)
Plan may not receive in any one year period options to purchase more than
200,000 shares of common stock.
A summary of the status of the Company's stock option plan as of May 25,
1997, May 31, 1998 and May 30, 1999, and changes during the years then ended are
presented in the table below:
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...... -- $ -- 2,029 $0.13 3,584 $ 2.20
Granted............................... 2,097 0.13 1,777 4.29 972 10.00
Exercised............................. -- -- (142) 0.13 (93) 0.13
Canceled.............................. (68) 0.13 (80) 0.13 (180) 6.83
----- ----- ------
Outstanding at end of year............ 2,029 $0.13 3,584 $2.20 4,283 $ 3.82
===== ===== ======
Exercisable at end of year............ -- $ -- 798 $0.13 1,612 $ 1.82
Weighted average fair value of options
granted............................. $0.02 $0.22 $ 0.09
</TABLE>
Information with respect to stock options outstanding and stock options
exercisable at May 30, 1999, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
(000'S) REMAINING AVERAGE (000'S) AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$.13......................... 2,683 7.95 $ 0.13 1,337 $ 0.13
$10.00....................... 1,600 9.28 10.00 275 10.00
----- -----
4,283 8.45 $ 3.82 1,612 $ 1.82
===== =====
</TABLE>
NOTE 7 -- RETIREMENT PLANS
The Company sponsors the Fairchild Personal Savings and Retirement Plan
(the "Retirement Plan"), contributory savings plan which qualifies under section
401(k) of the Internal Revenue Code. The Retirement Plan covers substantially
all employees in the United States. At the inception of the Retirement Plan, the
Company provided a matching contribution equal to 50% of employee elective
deferrals up to a maximum of 6% of an employee's annual compensation. Effective
June 1, 1997, the Company increased the matching contribution to 75% of employee
elective deferrals. The Company also maintains a non-qualified Benefit
Restoration Plan, under which employees who have otherwise exceeded annual IRS
limitations for elective deferrals can continue to contribute to their
retirement
F-19
<PAGE> 184
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- RETIREMENT PLANS -- (CONTINUED)
savings. The Company matches employee elective deferrals to the Benefit
Restoration Plan on the same basis as the Retirement Plan.
Employees in Malaysia participate in a defined contribution plan. The
Company has funded accruals for this plan in accordance with statutory
regulations in Malaysia.
Under the National Pension Fund Law of Korea, the Company is required to
pay a certain percentage of employee retirement benefits to the National Pension
Fund in exchange for a reduction in severance liabilities. Contributed amounts
shall be refunded from the National Pension Plan to employees on their
retirement. This amount has been offset against deferred compensation except for
the portion related to employees with less than one year of service which is
included in current assets.
Total expense recognized under these plans was $1.1 million, $3.4 million
and $3.5 million for the years ended May 25, 1997, May 31, 1998 and May 30,
1999, respectively.
Employees in the Philippines participate in a defined benefit plan that was
assumed by the Company from National Semiconductor as part of the
Recapitalization. The benefits are based on years of service and a multiple of
the employee's final monthly salary. The Company's funding policy is to
contribute annually the amount necessary to maintain the plan on an actuarially
sound basis. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future. The contributions made for the years ended May 25, 1997, May 31, 1998
and May 30, 1999 are not material to the financial statements.
Prior to the Recapitalization, employees of the Business participated in
several National Semiconductor retirement, employee benefit, and incentive
plans. No liabilities related to retirement and similar plans, other than those
disclosed above, were assumed by the Company.
NOTE 8 -- LEASE COMMITMENTS
Rental expense related to certain facilities and equipment of the Company's
plants was $5.0 million, $9.5 million, and $12.5 million for fiscal years 1997,
1998 and 1999, respectively.
Future minimum lease payments under noncancelable operating leases as of
May 30, 1999 are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Fiscal Year
2000........................................................ $11.2
2001........................................................ 7.3
2002........................................................ 3.6
2003........................................................ 1.9
2004........................................................ 1.7
Thereafter.................................................. 4.6
-----
$30.3
=====
</TABLE>
F-20
<PAGE> 185
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- STOCKHOLDER'S EQUITY
The Company's capital structure consists of 1,000 authorized shares of
common stock , $.01 par value, of which 100 shares were issued and outstanding
at May 31, 1998 and May 30, 1999, respectively. The Company was formed as a
wholly-owned subsidiary of National Semiconductor on February 10, 1997. On March
11, 1997, concurrent with the Recapitalization, National Semiconductor
transferred all of the common stock of the Company to Fairchild International in
exchange for shares of Fairchild International stock. Immediately following the
transfer of stock to Fairchild International, Fairchild International invested
an additional $77.8 million in the Company.
In addition, the Company borrowed $120.0 million under term bank loans and
issued $300.0 million of 10 1/8% Notes as described in Note 4. The proceeds from
these borrowings were used to repay demand purchase notes from the Company to
National Semiconductor in the aggregate principal amount of $401.6 million, and
certain debt acquisition costs as described in Note 2. The purchase notes had
been issued by the Company and its foreign subsidiaries in exchange for the
assets and liabilities of the Business. The repayment of the purchase notes is
included in the accompanying consolidated statements of stockholder's equity as
a distribution to National Semiconductor.
Certain amendments to the Securities Purchase and Holders Agreement, dated
as of March 11, 1997 (the "Stockholders Agreement"), which were effected in May
1998, resulted in the lapse of certain risks of forfeiture by the management
investors with respect to their stock ownership of Fairchild International. The
lapse of such restrictions resulted in the incurrence by the Company of
deductible compensation expense for income tax purposes of $10.4 million in
Fiscal Year 1998. The tax effect of the compensation expense of $2.1 million was
recorded as a reduction in income taxes payable and payable to Fairchild
International at May 31, 1998. The tax effect was recorded using the alternative
minimum tax rate of 20%. In connection with this transaction, loans aggregating
$5.0 million were made by the Company to the management investors to pay their
federal and state individual income tax liabilities in June 1998. Such loans
(including accrued but unpaid interest thereon) will be cancelled over the four-
year period following their creation, or earlier, in whole, upon the occurrence
of certain qualifying public offerings of the Company's or Fairchild
International's stock and, in part, upon the death or disability of the obligor.
The Company has also agreed to pay to such executive officers amounts sufficient
to enable them to discharge all tax liabilities arising out of the cancellation
of such loans (as well as all tax liabilities arising out of such payments). Any
such executive officer whose employment terminates will be required to repay any
uncancelled amounts immediately.
On April 13, 1999, the Company acquired the Power Device Business of
Samsung Electronics. As part of the financing for the acquisition, which is
described in Note 4, the Company received a capital contribution of $50.0
million from Fairchild International. (See also Note 16.)
NOTE 10 -- RESTRUCTURING CHARGES
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 asset impairments relate to idle
production equipment in the Company's Mountain View, California and West Jordan,
Utah facilities, which primarily serve the company's Analog and Discrete product
groups, respectively. As of May 30, 1999 these assets have been disposed of. The
charge for employee separation arrangements provided for severance and other
benefits 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. The affected employees, who
F-21
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FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- RESTRUCTURING CHARGES -- (CONTINUED)
work in production, engineering, sales and marketing and administration, are
located in the United States and Cebu, the Philippines.
In the third quarter of fiscal 1999, the Company recorded a pre-tax
restructuring charge of approximately $2.7 million related to the transfer of
all assembly and test work performed at its Mountain View, California facility
to its Penang, Malaysia facility. The charge consisted of $1.9 million of
non-cash asset impairments and $0.8 million for severance and other benefits for
54 production employees terminated as a result of the transfer. The asset
impairments consist of production equipment that will be idled as a result of
this action. As of May 30, 1999 these assets have been disposed of.
In connection with the sale of its Mountain View, California facility on
April 2, 1999, the Company announced the transfer of all wafer production to its
South Portland, Maine facility. In the fourth quarter of fiscal 1999, the
Company recorded a pre-tax restructuring charge of approximately $10.0 million,
which consisted of $2.6 million of non-cash asset impairments, $4.0 million for
severance and employee benefits, $1.9 million for a loss on sale of the facility
and $1.5 million for other exit costs. This action will result in the
termination of approximately 170 salaried, hourly and temporary employees, all
of whom work for the Company's Analog and Mixed Signal Division in Mountain View
or San Diego, California in the areas of production, engineering, selling and
marketing and administration. Other exit costs include $1.0 million to be paid
under a non-cancellable operating lease after operations cease as well as other
incremental costs associated with the facility closure. The non-cash asset
impairments primarily consist of production equipment that will not be
transferred to South Portland, Maine. The assets will be disposed of during the
first half of fiscal 2000.
During the fourth quarter of fiscal 1999, the Company also recorded a
pre-tax charge of $4.1 million related to the restructuring of its memory
product lines, whereby the Company is streamlining its operations to focus
solely on its most profitable products. The charge includes $3.9 million for
non-cash asset impairments and $0.2 million for employee separation costs all of
which have been paid at May 30, 1999. The non-cash impairments consist of
production equipment and other equipment in West Jordan and Sunnyvale,
California that become idle as a result of the plan. The assets will be disposed
of during the second half of fiscal 2000.
The Memory Division product line restructuring plan also included amounts
for the write-off of inventories ($9.9 million) as well as provisions for
additional distribution sales allowances required as a result of this action
($5.5 million). These costs have been excluded from the restructuring charge and
have been recorded as a reduction against net sales in the case of the
distribution sales allowances and as a charge to cost of sales for the inventory
write-offs.
F-22
<PAGE> 187
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- RESTRUCTURING CHARGES -- (CONTINUED)
The following table summarizes the recorded accruals and uses of the above
restructuring and impairment actions:
<TABLE>
<CAPTION>
ASSET SEVERANCE EXIT
IMPAIRMENTS BENEFITS COSTS TOTAL
----------- --------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
FIRST QUARTER RESTRUCTURING
Total charge..................................... $ 0.8 $ 3.7 $ -- $ 4.5
Cash payments.................................... -- (3.1) -- (3.1)
Non-cash items................................... (0.8) -- -- (0.8)
Adjustments...................................... -- (0.3) -- (0.3)
----- ----- ----- -----
Accrual balance as of May 30, 1999.......... -- 0.3 -- 0.3
THIRD QUARTER RESTRUCTURING
Total charge..................................... $ 1.9 $ 0.8 $ -- $ 2.7
Cash payments.................................... -- (0.7) -- (0.7)
Non-cash items................................... (1.9) -- -- (1.9)
----- ----- ----- -----
Accrual balance as of May 30, 1999.......... -- 0.1 -- 0.1
FOURTH QUARTER MOUNTAIN VIEW RESTRUCTURING
Total charge..................................... $ 4.5 $ 4.0 $ 1.5 $10.0
Cash payments.................................... -- -- -- --
Non-cash items................................... (3.4) -- -- (3.4)
----- ----- ----- -----
Accrual balance as of May 30, 1999.......... 1.1 4.0 1.5 6.6
FOURTH QUARTER MEMORY DIVISION RESTRUCTURING
Total charge..................................... $ 3.9 $ 0.2 $ -- $ 4.1
Cash payments.................................... -- (0.2) -- (0.2)
Non-cash items................................... (3.9) -- -- (3.9)
----- ----- ----- -----
Accrual balance as of May 30, 1999.......... -- -- -- --
----- ----- ----- -----
Total accrual balance as of May 30, 1999......... $ 1.1 $ 4.4 $ 1.5 $ 7.0
===== ===== ===== =====
</TABLE>
In June 1996, National Semiconductor announced a restructuring of its
operations and the intent to pursue a sale or partial financing of the Business.
In connection with the restructuring, the Business recorded a $5.3 million
nonrecurring charge related to work force reductions. During the year ended May
25, 1997, $5.3 million of severance was paid to terminated employees.
F-23
<PAGE> 188
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- RELATED PARTY TRANSACTIONS
Related party activity between the Company and National Semiconductor, in
addition to contract manufacturing services performed for National
Semiconductor, is summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MAY 27, 1996 MARCH 11, 1997 YEAR YEAR
THROUGH THROUGH ENDED ENDED
MARCH 10, 1997 MAY 25, 1997 MAY 31, 1998 MAY 30, 1999
-------------- -------------- ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Manufacturing services performed by
National Semiconductor plants or
purchased from third parties...... $34.3 $ 2.8 $14.0 $ 5.6
Headquarters, freight, duty,
warehousing and other elements of
cost of sales..................... 41.8 3.7 17.9 4.4
----- ----- ----- -----
$76.1 $ 6.5 $31.9 $10.0
===== ===== ===== =====
Cost of business support services
provided by National
Semiconductor..................... $ -- $11.6 $28.7 $10.7
===== ===== ===== =====
Operating costs allocated to the
Business by National
Semiconductor..................... $63.9 $ -- $ -- $ --
===== ===== ===== =====
Operating costs allocated to
National Semiconductor by the
Business.......................... $ 9.6 $ -- $ -- $ --
===== ===== ===== =====
</TABLE>
Amounts receivable from National Semiconductor, included in accounts
receivable, totaled $12.4 million, and $12.0 million at May 31, 1998 and May 30,
1999, respectively. Amounts payable to National Semiconductor, included in
accounts payable, totaled $5.3 million and $0.4 million at May 31, 1998 and May
30, 1999, respectively.
NOTE 12 -- CONTINGENCIES
The Company's facilities in South Portland, Maine, West Jordan, Utah, Cebu,
the Philippines, and Penang, Malaysia, have ongoing remediation projects to
respond to certain releases of hazardous substances that occurred prior to the
Recapitalization. Pursuant to the Asset Purchase Agreement, National
Semiconductor has agreed to indemnify the Company for the future costs of these
projects. The costs incurred to respond to these conditions were not material to
the consolidated financial statements during fiscal years 1997, 1998 and 1999,
respectively.
The Company's former Mountain View, California, facility is located on a
contaminated site under the Comprehensive Environmental Response, Compensation
and Liability Act. Under the terms of the Acquisition Agreement with Raytheon
Company, dated December 31, 1997, Raytheon Company has assumed responsibility
for all remediation costs or other liabilities related to historical
contamination.
In addition, in the normal course of business, the Company is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. All such matters are
subject to uncertainties and outcomes that are not predictable with assurance.
Consequently, the Company is unable to ascertain the ultimate aggregate amount
of monetary liability or financial impact with respect to these matters at May
30, 1999. It is management's
F-24
<PAGE> 189
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- CONTINGENCIES -- (CONTINUED)
opinion that after final disposition, any monetary liability or financial impact
to the Company would not be material to the Company's financial position, annual
results of operations or cash flows.
NOTE 13 -- FINANCIAL INSTRUMENTS
FOREIGN CURRENCY INSTRUMENTS
The objective of the Company's foreign exchange risk management policy is
to preserve the U.S. dollar value of after-tax cash flows in relation to
non-U.S. dollar currency fluctuations. The Company uses forward and option
contracts to hedge firm commitments and option contracts to hedge anticipated
transactions. Gains and losses on financial instruments that are intended to
hedge an identifiable firm commitment are deferred and included in the
measurement of the underlying transaction. Gains and losses on hedges of
anticipated transactions are deferred until such time as the underlying
transactions are recognized or immediately when the transaction is no longer
expected to occur. In addition, the Company uses forward and option contracts to
hedge certain non-U.S. denominated asset and liability positions. Gains and
losses on these contracts are matched with the underlying gains and losses
resulting from currency movement on these balance sheet positions. Gains and
losses on any instruments not meeting the above criteria are recognized in
income in the current period. Net gains and losses from foreign currency
transactions were not material for fiscal years 1997, 1998 and 1999.
INTEREST RATE DERIVATIVES
The Company utilizes interest rate swap or interest rate cap agreements to
limit the impact of the variable interest rate of certain long-term debt. The
variable rates on swaps and caps are based primarily on U.S. dollar LIBOR, and
the swaps are reset on a quarterly basis. The differential between fixed and
variable rates to be paid or received on swaps is accrued as interest rates
change in accordance with the agreements and is included in current interest
expense. The costs of interest rate cap agreements are included in interest
expense ratably over the lives of the agreements. Payments to be received as a
result of the cap agreements are accrued as a reduction of interest expense. As
of May 30, 1999, no swap agreements were outstanding, and the outstanding
interest rate cap agreement had a maturity of three months.
FAIR VALUE AND NOTIONAL PRINCIPAL OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The table below shows the fair value and notional principal of the
Company's off-balance sheet instruments as of May 31, 1998 and May 30, 1999. The
notional principal amounts for off-balance sheet instruments provide one measure
of the transaction volume outstanding as of year end and do not represent the
amount of the Company's exposure to credit or market loss. The estimates of fair
value are based on applicable and commonly used pricing models using prevailing
financial market information as of May 31, 1998, and May 30, 1999. Although the
following table reflects the notional principal and fair value of amounts of
off-balance sheet instruments, it does not reflect the gains or losses
associated with the exposures and transactions that the off-balance sheet
instruments are intended to hedge. The amounts ultimately realized upon
settlement of these financial instruments, together with the gains and
F-25
<PAGE> 190
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- FINANCIAL INSTRUMENTS -- (CONTINUED)
losses on the underlying exposures will depend on actual market conditions
during the remaining life of the instruments.
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 30, 1999
----------------------------------- -----------------------------------
NOTIONAL CARRYING ESTIMATED NOTIONAL CARRYING ESTIMATED
PRINCIPAL AMOUNT FAIR VALUE PRINCIPAL AMOUNT FAIR VALUE
--------- -------- ---------- --------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest Rate
Instruments
Swaps................. $151.3 $ -- $(0.5) $ -- $-- $ --
Caps.................. -- -- -- 310.0 -- --
Foreign Exchange
Instruments
Purchased Options..... 31.7 0.8 0.6 32.1 -- --
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary table of estimated fair values of financial instruments follows:
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 30, 1999
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Long Term Debt
Senior Subordinated Notes.................. $300.0 $310.5 $600.0 $603.0
Term Loans................................. 151.3 151.3 310.0 310.0
</TABLE>
NOTE 14 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting information about operating segments and related
disclosures about products, geographic information and major customers.
Comparative operating segment information for fiscal 1997 and 1998 is also
presented in accordance with SFAS No. 131.
Fairchild designs, develops, manufactures and markets high performance
multi-market semiconductors. The Company is currently organized into five
operating segments. There are four product line operating segments: Analog and
Mixed Signal Products Division, Discrete Power and Signal Technologies Group,
Logic Products Group and the Non-Volatile Memory Division. In addition, the
Company currently treats the recently acquired Power Device Business as an
operating segment. Each of these groups has a vice president, general manager
who reports directly to the Chief Executive Officer ("CEO"). The CEO allocates
resources to each of these groups using information on their revenues and
operating profits before interest, taxes and non-recurring items. The CEO has
been identified as the Chief Operating Decision Maker as defined by SFAS No.
131. Fairchild's products in all operating groups are sold to original equipment
manufacturers and distributors throughout the world.
F-26
<PAGE> 191
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
In addition to the operating segments mentioned above, the Company also
operates sales and marketing, information systems, finance and administration
groups that are led by vice presidents and that also report to the CEO. The
expenses of these groups are allocated to the operating segments and are
included in the operating results reported below. The Company does not allocate
income taxes to its operating segments, and while interest expense allocations
are made for informational purposes, the operating segments are principally
evaluated on operating profit before interest and taxes.
Although the Company does not specifically identify and allocate all assets
by operating segment, it is the Company's strategy to have its capital intensive
manufacturing plants dedicated to its operating segments. Operating segments do
not sell products to each other, and accordingly, there are no inter-segment
revenues to be reported. The accounting policies for segment reporting are the
same as for the Company as a whole.
Statement of operations information on reportable segments for the three
years ended May 30, 1999 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUE AND OPERATING INCOME (LOSS):
Analog and Mixed Signal Products Division
Trade revenue............................................ $ -- $ 32.0 $ 64.1
Operating income (loss).................................. -- 2.2 (2.4)
------ ------ ------
Discrete Power and Signal Technologies Group
Trade revenue............................................ $164.5 $187.3 $180.3
Contract manufacturing revenue........................... 15.1 34.5 9.1
Operating income......................................... 21.7 44.9 4.8
------ ------ ------
Logic Products Group
Trade revenue............................................ $285.3 $303.0 $267.6
Contract manufacturing revenue........................... 89.1 118.9 71.9
Operating income......................................... 21.3 70.0 35.7
------ ------ ------
Non-Volatile Memory Division
Trade revenue............................................ $138.0 $113.5 $ 73.4
Operating income (loss).................................. 5.0 (14.2) (26.4)
------ ------ ------
Power Device Products Group
Trade revenue............................................ $ -- $ -- $ 74.2
Operating income......................................... -- -- 12.7
------ ------ ------
</TABLE>
F-27
<PAGE> 192
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Other(1)
Revenue.................................................. $ -- $ -- $ (5.5)
Operating income (loss).................................. (16.1) (15.6) (71.8)
------ ------ ------
Total Consolidated
Trade revenue............................................ $587.8 $635.8 $654.1
Contract manufacturing revenue........................... 104.2 153.4 81.0
Operating income (loss).................................. 31.9 87.3 (47.4)
</TABLE>
- ---------------
(1) Other includes in fiscal year 1997, $5.3 million for restructuring and $10.8
million not allocated to the operating segments for amounts charged to the
Fairchild Business by National pursuant to "push-down" accounting rules
applied in connection with the Recapitalization. In fiscal 1998, such
amounts represent purchased in-process research and development. For fiscal
1999, such charges include $34.0 million for purchased in-process research
and development, $21.3 million for restructuring, $15.4 million for
additional charges taken for asset impairments in connection with the Memory
restructuring and $1.1 million of other charges not allocated to the
operating segments.
Property, plant and equipment (including molds and tooling) and
depreciation and amortization by reportable operating segment as of and for the
years ended May 31, 1998 and May 30, 1999 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT(1) AND DEPRECIATION AND
AMORTIZATION
Analog and Mixed Signal Products Division
Property, plant and equipment............................. $ 49.1 $ 8.3
Depreciation and amortization............................. 3.3 8.9
------ ------
Discrete Power and Signal Technologies Group
Property, plant and equipment............................. $114.8 $ 94.7
Depreciation and amortization............................. 20.8 24.6
------ ------
Logic Products Group
Property, plant and equipment............................. $172.5 $151.2
Depreciation and amortization............................. 51.7 53.2
------ ------
Non-Volatile Memory Division
Property, plant and equipment............................. $ -- $ --
Depreciation and amortization............................. 8.8 9.9
------ ------
</TABLE>
F-28
<PAGE> 193
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Power Device Products Group
Property, plant and equipment............................. $ -- $100.1
Depreciation and amortization............................. -- 7.1
------ ------
Other
Property, plant and equipment............................. $ 6.5 $ 5.9
Depreciation and amortization............................. -- --
------ ------
Total Consolidated
Property, plant and equipment............................. $342.9 $360.2
Depreciation and amortization............................. 84.6 103.7
</TABLE>
- ---------------
(1) Property, plant and equipment includes molds and tooling, which is
classified in other assets on the consolidated balance sheets. Intangible
assets are solely identifiable to the Analog and Mixed Signal Division and
the Power Device Products Group.
Geographic revenue information for the three years ended May 30, 1999 is
based on the locations of the selling entities within the indicated geographic
areas. No individual foreign country is material to total revenues.
Revenues from unaffiliated customers by geographic region were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
TOTAL REVENUES:
United States............................................ $326.9 $395.7 $299.5
Asia..................................................... 247.5 260.9 324.3
Europe................................................... 117.6 132.6 111.3
------ ------ ------
Total...................................................... $692.0 $789.2 $735.1
====== ====== ======
</TABLE>
In fiscal years 1997, 1998 and 1999, National Semiconductor accounted for
15.1%, 19.4% and 11.0% of the Company's total revenues.
F-29
<PAGE> 194
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
Geographic property, plant and equipment balances as of May 31, 1998 and
May 30, 1999 are based on the physical locations within the indicated geographic
areas and are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
United States............................................. $257.0 $174.4
Korea..................................................... -- 100.1
Philippines............................................... 36.8 40.5
Malaysia.................................................. 47.4 39.7
All others................................................ 1.7 5.5
------ ------
Total....................................................... $342.9 $360.2
====== ======
</TABLE>
NOTE 15 -- SUPPLEMENTAL CASH FLOW INFORMATION
As described in Note 1, National Semiconductor'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
Semiconductor's corporate transaction systems are not designed to track
receivables and certain liabilities and cash receipts and payments on a business
specific basis. Given these constraints, the following data is presented to
facilitate analysis of key components of cash flow activity for fiscal year
1997:
<TABLE>
<CAPTION>
YEAR ENDING
MAY 25,
1997
-------------
(IN MILLIONS)
<S> <C>
Operating activities:
Revenues less expenses.................................... $ 16.7
Depreciation and amortization............................. 77.1
Deferred taxes............................................ (19.6)
Loss on disposal of equipment, molds and tooling.......... 1.0
Increase in accounts receivable........................... (79.6)
Decrease in inventories................................... 20.0
Increase in prepaid expenses and other current assets..... (5.8)
Increase in other assets.................................. 0.9
Increase in accounts payable.............................. 12.2
Increase in accrued expenses and other liabilities........ 21.6
Net financing provided to National Semiconductor*......... (25.4)
-------
Cash provided by operating activities.................. 19.1
-------
Investing activities:
Capital expenditures...................................... (47.1)
Purchase of molds and tooling............................. (7.2)
-------
Cash used by investing activities...................... (54.3)
-------
</TABLE>
F-30
<PAGE> 195
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- SUPPLEMENTAL CASH FLOW INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDING
MAY 25,
1997
-------------
(IN MILLIONS)
<S> <C>
Financing activities:
Issuance of long-term debt................................ 420.0
Debt acquisition costs.................................... (20.3)
Capital contribution from Fairchild International......... 77.8
Distribution to National Semiconductor.................... (401.6)
-------
Cash provided by financing activities.................. 75.9
-------
Net change in cash and cash equivalents..................... 40.7
Cash and cash equivalents at beginning of year.............. --
-------
Cash and cash equivalents at end of year.................... $ 40.7
=======
</TABLE>
- -------------------------
* Net financing provided from (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.
Cash paid for interest by the Company totaled $0.1 million for the period
from March 11, 1997 through May 25, 1997. The Business did not make any cash
payments for interest prior to March 11, 1997, as discussed in Note 2. No cash
payments were made for income taxes.
NOTE 16 -- ACQUISITIONS
In April 1999, the Company completed the acquisition of the Power Device
Business of Samsung Electronics for a purchase price of approximately $414.9
million, including related acquisition expenses. The Power Device Business
designs, manufactures and markets power discrete semiconductors and standard
analog integrated circuits serving the personal computer, industrial,
telecommunications and consumer electronics markets. The purchase includes all
of the worldwide operations and assets of the Power Device Business, which are
comprised in part of a high volume wafer fabrication plant in Bucheon, South
Korea, design and development operations in Bucheon, South Korea, secured
services for high volume assembly and test operations and worldwide sales and
marketing operations. The purchase price was financed through a combination of
borrowings under the Company's new Senior Credit Facilities, a capital
contribution from Fairchild International and the 10 3/8% Notes. (See Note 4.)
The Power Device Business acquisition has been accounted for by the
purchase method of accounting and accordingly, the results of operations of the
Power Device Business are included in the accompanying consolidated financial
statements since the acquisition date. Assets acquired and liabilities assumed
have been recorded at their estimated fair values as of the acquisition date.
The purchase price exceeded the fair value of the net tangible assets acquired
by approximately $289.5 million. Approximately $34.0 million of the purchase
price in excess of fair value of net tangible assets was allocated to purchased
in-process research and development. Accordingly, the Company recorded a
non-recurring charge for this purchased in-process research and development
concurrent with the acquisition. The remaining purchase price in excess of fair
value of net tangible assets was allocated to various intangible assets, which
will be amortized on a straight-line basis over three to fifteen years.
F-31
<PAGE> 196
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- ACQUISITIONS -- (CONTINUED)
On December 31, 1997, the Company acquired all of the outstanding common
stock of Raytheon for approximately $117.0 million in cash plus transaction
expenses. Raytheon, based in Mountain View, California, designs, manufactures
and markets high performance analog and mixed signal integrated circuits for the
personal computer, communications, broadcast video and industrial markets. The
acquisition was accounted for by the purchase method of accounting and
accordingly, the results of operations of Raytheon are included in the
accompanying consolidated financial statements since that date. The purchase
price exceeded the fair value of the net tangible assets by approximately $48.4
million. Approximately $15.5 million of the purchase price in excess of fair
value of net tangible assets was allocated to purchased in-process research and
development. Accordingly, the Company recorded a non-recurring charge for this
purchased in-process research and development concurrent with the acquisition.
The remaining purchase price in excess of fair value of net tangible assets was
allocated to various intangible assets, which will be amortized on a
straight-line basis over three to fifteen years.
The following unaudited pro forma consolidated results of operations are
presented as if the Power Device Business and Raytheon acquisitions had been
made at the beginning of the periods presented below:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------
MAY 31, MAY 30,
1998 1999
-------- --------
(IN MILLIONS)
<S> <C> <C>
Revenues................................................. $1,300.7 $1,111.9
Net income (loss)........................................ 33.0 (138.5)
</TABLE>
The pro forma results of operations include adjustments to give effect to
the contracts the Company entered into with Samsung Electronics, additional
depreciation and amortization related to the increased value of acquired fixed
assets and identifiable intangibles, interest expense on debt assumed issued to
finance the purchases, as well as adjustments to eliminate historical expenses
which will not be incurred by the Company. The unaudited pro forma information
is not necessarily indicative of the results of operations that would have
occurred had the purchases been made at the beginning of the periods presented
or the future results of the combined operations.
NOTE 17 -- CHANGE IN ACCOUNTING PRINCIPLE
Effective in the third quarter of Fiscal Year 1998, the Company adopted the
provisions of Emerging Issues Task Force Issue 97-13 "Accounting for Business
Process Reengineering Costs." This Issue requires companies to write-off
business process reengineering costs that had been previously capitalized. The
Company had been capitalizing such costs in conjunction with its enterprise
software implementation project. The Issue requires companies to write-off these
costs in the quarter that contains November 20, 1997.
The cumulative effect of adoption of this Issue resulted in a charge of
$1.5 million; net of taxes of $0.8 million for the year ended May 31, 1998. Of
the pre-tax write-off, $1.6 million applies to costs incurred in Fiscal Year
1998, while $0.7 million applies to costs incurred in Fiscal Year 1997. The
charge relates specifically to costs incurred to assess the system's
capabilities in light of the Company's current business processes, which under
prior guidance was capitalizable to the cost of the software.
F-32
<PAGE> 197
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Below are condensed consolidating balance sheets, statements of operations
and statements of cash flows of Fairchild as of and for the years ended May 30,
1999 and May 31, 1998:
FAIRCHILD SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
MAY 30, 1999
-------------------------------------------------------------------------
UNCONSOLIDATED CONSOLIDATED
FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
CORPORATION SUBSIDIARY SUBSIDIARIES ELIMINATIONS CORPORATION
-------------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 33.1 $ 0.3 $ 29.0 $ -- $ 62.4
Accounts receivable, net............ 35.6 10.4 83.7 -- 129.7
Inventories......................... 83.4 17.0 48.2 -- 148.6
Other current assets................ 15.0 0.4 50.3 -- 65.7
------- ------ ------ ------- --------
Total current assets......... 167.1 28.1 211.2 -- 406.4
Property, plant and equipment, net.... 166.1 8.3 185.8 -- 360.2
Deferred income taxes, net............ 10.0 7.8 (15.0) -- 2.8
Intangible assets, net................ 8.0 28.1 242.4 -- 278.5
Investment in subsidiaries............ 267.8 83.2 -- (351.0) --
Other assets.......................... 36.6 1.6 9.6 -- 47.8
------- ------ ------ ------- --------
Total assets................. $ 655.6 $157.1 $634.0 $(351.0) $1,095.7
======= ====== ====== ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt... $ 14.1 $ -- $ -- $ -- $ 14.1
Accounts payable.................... 45.4 4.4 55.9 -- 105.7
Accrued expenses and other current
liabilities....................... 50.0 8.0 27.0 -- 85.0
------- ------ ------ ------- --------
Total current liabilities.... 109.5 12.4 82.9 -- 204.8
Long-term debt, less current
portion............................. 895.9 -- -- -- 895.9
Net intercompany (receivable)
payable............................. (344.2) (24.3) 368.5 -- --
Other liabilities..................... 0.8 -- 0.6 -- 1.4
------- ------ ------ ------- --------
Total liabilities............ 662.0 (11.9) 452.0 -- 1,102.1
------- ------ ------ ------- --------
Commitments and contingencies
Stockholder's equity (deficit):
Common stock........................ -- -- -- -- --
Additional paid-in capital.......... 62.0 -- -- -- 62.0
Accumulated earnings (deficit)...... (68.4) 169.0 182.0 (351.0) (68.4)
------- ------ ------ ------- --------
Total stockholder's equity
(deficit).................. (6.4) 169.0 182.0 (351.0) (6.4)
------- ------ ------ ------- --------
Total liabilities and
stockholder's equity
(deficit).................. $ 655.6 $157.1 $634.0 $(351.0) $1,095.7
======= ====== ====== ======= ========
</TABLE>
F-33
<PAGE> 198
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIRCHILD SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 30, 1999
-------------------------------------------------------------------------
UNCONSOLIDATED CONSOLIDATED
FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
CORPORATION SUBSIDIARY SUBSIDIARIES ELIMINATIONS CORPORATION
-------------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Net sales -- trade........... $ 177.1 $ 64.2 $ 412.8 $ -- $ 654.1
Net sales -- intercompany.... 536.8 -- 101.1 (637.9) --
Contract manufacturing --
National Semiconductor.... 81.0 -- -- -- 81.0
------- ------ ------- ------- -------
Total revenue........ 794.9 64.2 513.9 (637.9) 735.1
Operating expenses:
Cost of sales................ 57.1 39.7 421.6 -- 518.4
Cost of
sales -- intercompany..... 596.9 -- 41.0 (637.9) --
Cost of contract
manufacturing -- National
Semiconductor............. 64.4 -- -- -- 64.4
Research and development..... 26.1 10.8 2.4 -- 39.3
Selling, general and
administrative............ 62.9 13.8 28.4 -- 105.1
Purchased in-process research
and development........... -- -- 34.0 -- 34.0
Restructuring and
impairments............... 8.6 12.7 -- -- 21.3
------- ------ ------- ------- -------
Total operating
expenses........... 816.0 77.0 527.4 (637.9) 782.5
------- ------ ------- ------- -------
Operating income (loss)........ (21.1) (12.8) (13.5) -- (47.4)
Interest expense, net.......... 54.1 4.4 2.0 -- 60.5
Equity in subsidiary (income)
loss......................... 33.6 22.8 -- (56.4) --
------- ------ ------- ------- -------
Income (loss) before income
taxes........................ (108.8) (40.0) (15.5) 56.4 (107.9)
Provision (benefit) for income
taxes........................ (6.1) (1.2) 2.1 -- (5.2)
------- ------ ------- ------- -------
Net income (loss).............. $(102.7) $(38.8) $ (17.6) $ 56.4 $(102.7)
======= ====== ======= ======= =======
</TABLE>
F-34
<PAGE> 199
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIRCHILD SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 30, 1999
-------------------------------------------------------------
UNCONSOLIDATED CONSOLIDATED
FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
CORPORATION SUBSIDIARY SUBSIDIARIES CORPORATION
-------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Cash flows provided by (used in)
operating activities:............ $(14.7) $(29.4) $ 88.2 $ 44.1
------ ------ ------- -------
Cash flows from investing
activities:
Capital expenditures............. (26.6) (0.5) (19.1) (46.2)
Proceeds from sale of property,
plant and equipment........... 1.0 30.2 -- 31.2
Purchase of molds and tooling.... -- -- (3.8) (3.8)
Refundable payment of value added
tax associated with
acquisitions.................. -- -- (40.9) (40.9)
Net intercompany investing....... (406.8) -- 406.8 --
Acquisitions, net of cash
acquired...................... (8.1) -- (406.8) (414.9)
------ ------ ------- -------
Cash provided by (used in)
investing activities........ (440.5) 29.7 (63.8) (474.6)
------ ------ ------- -------
Cash flows from financing
activities:
Repayment of long-term debt...... (151.3) -- -- (151.3)
Issuance of long-term debt....... 610.0 -- -- 610.0
Capital contribution from
Fairchild International....... 50.0 -- -- 50.0
Debt issuance costs.............. (22.3) -- -- (22.3)
------ ------ ------- -------
Cash provided by financing
activities.................. 486.4 -- -- 486.4
------ ------ ------- -------
Net change in cash and cash
equivalents...................... 31.2 0.3 24.4 55.9
Cash and cash equivalents at
beginning of period.............. 1.9 -- 4.6 6.5
------ ------ ------- -------
Cash and cash equivalents at end of
period........................... $ 33.1 $ 0.3 $ 29.0 $ 62.4
====== ====== ======= =======
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes.................. $ (2.0) $ -- $ 2.0 $ --
====== ====== ======= =======
Interest...................... $ 46.6 $ -- $ -- $ 46.6
====== ====== ======= =======
</TABLE>
F-35
<PAGE> 200
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIRCHILD SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
MAY 31, 1998
-------------------------------------------------------------------------
UNCONSOLIDATED CONSOLIDATED
FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
CORPORATION SUBSIDIARY SUBSIDIARIES ELIMINATIONS CORPORATION
-------------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 1.9 $ -- $ 4.6 $ -- $ 6.5
Accounts receivable, net................ 24.7 13.3 37.0 -- 75.0
Inventories............................. 90.7 14.8 2.5 -- 108.0
Other current assets.................... 13.2 0.5 6.3 -- 20.0
------ ------ ------ ------- ------
Total current assets............. 130.5 28.6 50.4 -- 209.5
Property, plant and equipment, net........ 209.0 48.1 85.8 -- 342.9
Deferred income taxes, net................ 12.2 5.3 (1.4) -- 16.1
Intangible assets, net.................... -- 31.5 -- -- 31.5
Investment in subsidiaries................ 211.0 -- -- (211.0) --
Other assets.............................. 19.2 1.6 9.6 -- 30.4
------ ------ ------ ------- ------
Total assets..................... $581.9 $115.1 $144.4 $(211.0) $630.4
====== ====== ====== ======= ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt....... $ 13.2 $ -- $ -- $ -- $ 13.2
Accounts payable........................ 56.1 5.5 14.7 -- 76.3
Accrued expenses and other current
liabilities........................... 38.6 1.8 15.5 -- 55.9
------ ------ ------ ------- ------
Total current liabilities........ 107.9 7.3 30.2 -- 145.4
Long-term debt, less current portion...... 438.1 -- -- -- 438.1
Net intercompany (receivable) payable..... (10.5) (9.6) 20.1 -- --
Other liabilities......................... 0.1 -- 0.5 -- 0.6
------ ------ ------ ------- ------
Total liabilities................ 535.6 (2.3) 50.8 -- 584.1
------ ------ ------ ------- ------
Commitments and contingencies
Stockholder's equity:
Common stock............................ -- -- -- -- --
Additional paid-in capital.............. 12.0 -- -- -- 12.0
Accumulated earnings.................... 34.3 117.4 93.6 (211.0) 34.3
------ ------ ------ ------- ------
Total stockholder's equity....... 46.3 117.4 93.6 (211.0) 46.3
------ ------ ------ ------- ------
Total liabilities and
stockholder's equity........... $581.9 $115.1 $144.4 $(211.0) $630.4
====== ====== ====== ======= ======
</TABLE>
F-36
<PAGE> 201
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIRCHILD SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1998
-------------------------------------------------------------------------
UNCONSOLIDATED CONSOLIDATED
FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
CORPORATION SUBSIDIARY SUBSIDIARIES ELIMINATIONS CORPORATION
-------------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Net sales -- trade................ $ 222.1 $32.1 $ 381.6 $ -- $635.8
Net sales -- intercompany......... 786.6 -- 114.4 (901.0) --
Contract manufacturing -- National
Semiconductor................... 153.4 -- -- -- 153.4
-------- ----- ------- ------- ------
Total revenue.............. 1,162.1 32.1 496.0 (901.0) 789.2
Operating expenses:
Cost of sales..................... 39.3 20.0 382.3 -- 441.6
Cost of sales -- intercompany..... 830.0 -- 71.0 (901.0) --
Cost of contract manufacturing --
National Semiconductor.......... 117.1 -- -- -- 117.1
Research and development.......... 30.1 4.6 1.0 -- 35.7
Selling, general and
administrative.................. 65.8 5.1 21.1 -- 92.0
Purchased in-process research and
development..................... 15.5 -- -- -- 15.5
-------- ----- ------- ------- ------
Total operating expenses... 1,097.8 29.7 475.4 (901.0) 701.9
-------- ----- ------- ------- ------
Operating income (loss)............. 64.3 2.4 20.6 -- 87.3
Interest expense, net............... 43.0 1.8 (0.1) -- 44.7
Equity in subsidiary (income)
loss.............................. (16.9) -- -- 16.9 --
-------- ----- ------- ------- ------
Income (loss) before income taxes... 38.2 0.6 20.7 (16.9) 42.6
Provision (benefit) for income
taxes............................. 9.5 0.2 4.2 -- 13.9
-------- ----- ------- ------- ------
Income (loss) before cumulative
effect of change in accounting
principle......................... 28.7 0.4 16.5 (16.9) 28.7
Cumulative effect of change in
accounting principle, net of tax
effect of $0.8 million............ (1.5) -- -- -- (1.5)
-------- ----- ------- ------- ------
Net income (loss)................... $ 27.2 $ 0.4 $ 16.5 $ (16.9) $ 27.2
======== ===== ======= ======= ======
</TABLE>
F-37
<PAGE> 202
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIRCHILD SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1998
---------------------------------------------------------------------------
UNCONSOLIDATED CONSOLIDATED
FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CORPORATION
-------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash flows provided by operating
activities:................... $ 105.4 $ 0.4 $ 30.3 $-- $ 136.1
------- ----- ------ -- -------
Cash flows from investing
activities:
Capital expenditures.......... (48.7) (0.4) (28.9) -- (78.0)
Purchase of molds and
tooling.................... -- -- (5.7) -- (5.7)
Acquisitions, net of cash
acquired................... (116.8) -- -- -- (116.8)
------- ----- ------ -- -------
Cash used by investing
activities............... (165.5) (0.4) (34.6) -- (200.5)
------- ----- ------ -- -------
Cash flows from financing
activities:
Repayment of long-term debt... (58.7) -- -- -- (58.7)
Issuance of long-term debt.... 90.0 -- -- -- 90.0
Debt issuance costs........... (1.1) -- -- -- (1.1)
------- ----- ------ -- -------
Cash provided by financing
activities............... 30.2 -- -- -- 30.2
------- ----- ------ -- -------
Net change in cash and cash
equivalents................... (29.9) -- (4.3) -- (34.2)
Cash and cash equivalents at
beginning of period........... 31.8 -- 8.9 -- 40.7
------- ----- ------ -- -------
Cash and cash equivalents at end
of period..................... $ 1.9 $ -- $ 4.6 $-- $ 6.5
------- ----- ------ -- -------
Supplemental Cash Flow
Information:
Cash paid during the year for:
Income taxes............... $ 7.7 $ -- $ 1.2 $-- $ 8.9
------- ----- ------ -- -------
Interest................... $ 43.8 $ -- $ -- $-- $ 43.8
------- ----- ------ -- -------
</TABLE>
NOTE 19 -- SUBSEQUENT EVENT
On August 9, 1999, Fairchild International completed an initial public
offering of 20,000,000 shares of its Class A Common Stock. The gross proceeds
from the offering of $370.0 million were used in part to fund a capital
contribution to Fairchild of $191.0 million. These proceeds were used to repay
in full the Tranche A term loan ($100.0 million) and to partially repay the
Tranche B term loan ($91.0 million).
F-38
<PAGE> 203
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Fairchild Semiconductor International, Inc.:
We have audited the accompanying consolidated balance sheets of Fairchild
Semiconductor International, Inc. and subsidiaries (the "Company") as of May 31,
1998 and May 30, 1999, the related consolidated statements of operations and
stockholders' equity (deficit) for each of the years in the three-year period
ended May 30, 1999, and the related consolidated statements of cash flows for
the years ended May 31, 1998 and May 30, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements were prepared on the basis of
presentation as described in Note 1. Prior to March 11, 1997, the statements
present the combined business equity and the related combined revenues less
direct expenses before taxes of the Fairchild Semiconductor Business of National
Semiconductor Corporation (the Business), and are not intended to be a complete
presentation of the Business' financial position, results of operations or cash
flows. The results of operations before taxes are not necessarily indicative of
the results of operations before taxes that would have been recorded by the
Company on a stand-alone basis.
In our opinion, the accompanying financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
May 31, 1998 and May 30, 1999, the results of operations for each of the years
in the three year period ended May 30, 1999, and the results of cash flows for
the years ended May 31, 1998 and May 30, 1999, on the basis described in Note 1,
in conformity with generally accepted accounting principles.
As discussed in Note 18 to the financial statements, the Company changed
its method of accounting for business process reengineering costs in 1998 to
adopt the provisions of the Emerging Issues Task Force Issue 97-13, "Accounting
for Business Process Reengineering Costs".
KPMG LLP
Boston, Massachusetts
June 30, 1999, except as to Note 20, which is as of August 9, 1999
F-39
<PAGE> 204
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6.5 $ 62.4
Accounts receivable, net of allowances of $14.2 and $9.2
at May 31, 1998 and May 30, 1999, respectively......... 75.0 129.7
Inventories............................................... 108.0 148.6
Other current assets...................................... 20.0 65.7
------- --------
Total current assets................................... 209.5 406.4
Property, plant and equipment, net.......................... 342.9 360.2
Deferred income taxes, net.................................. 20.0 2.8
Intangible assets, net of accumulated amortization of $1.4
and $9.9 at May 31, 1998 and May 30, 1999, respectively... 31.5 278.5
Other assets................................................ 30.4 47.8
------- --------
Total assets........................................... $ 634.3 $1,095.7
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt......................... $ 13.2 $ 14.1
Accounts payable.......................................... 74.0 99.6
Accrued expenses and other current liabilities............ 55.9 85.0
------- --------
Total current liabilities.............................. 143.1 198.7
Long-term debt, less current portion........................ 526.7 1,045.9
Other liabilities........................................... 0.6 1.4
------- --------
Total liabilities...................................... 670.4 1,246.0
------- --------
Redeemable preferred stock -- 12% Series A cumulative
compounding preferred stock, $.01 par value, $1,000 stated
value; 70,000 shares authorized, issued and outstanding at
May 31, 1998 and May 30, 1999............................. 80.5 90.1
Commitments and contingencies
Stockholders' equity (deficit):
Class A common stock, $.01 par value, voting; 80,000,000
shares authorized, 29,238,800 and 29,591,440 shares
issued and outstanding at May 31, 1998 and May 30, 1999
respectively........................................... 0.3 0.3
Class B common stock, $.01 par value, nonvoting;
80,000,000 shares authorized, 33,635,520 and 33,376,000
shares issued and outstanding at May 31, 1998 and May
30, 1999, respectively................................. 0.3 0.3
Additional paid-in capital................................ 9.5 9.6
Accumulated deficit....................................... (126.7) (250.6)
------- --------
Total stockholders' equity (deficit)................... (116.6) (240.4)
------- --------
Total liabilities and stockholders' equity (deficit)... $ 634.3 $1,095.7
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-40
<PAGE> 205
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenue:
Net sales -- trade........................................ $587.8 $635.8 $ 654.1
Contract manufacturing -- National Semiconductor.......... 104.2 153.4 81.0
------ ------ -------
Total revenue.......................................... 692.0 789.2 735.1
Operating expenses:
Cost of sales............................................. 442.1 441.6 518.4
Cost of contract manufacturing -- National
Semiconductor.......................................... 97.4 117.1 64.4
Research and development.................................. 18.9 35.7 39.3
Selling, general and administrative....................... 96.4 92.0 105.1
Purchased in-process research and development............. -- 15.5 34.0
Restructuring and impairments............................. 5.3 -- 21.3
------ ------ -------
Total operating expenses............................... 660.1 701.9 782.5
------ ------ -------
Operating income (loss)..................................... 31.9 87.3 (47.4)
Interest expense, net....................................... 11.2 54.5 71.8
Other expense, net.......................................... 1.4 -- --
------ ------ -------
Income (loss) before income taxes........................... 19.3 32.8 (119.2)
Provision (benefit) for income taxes........................ 3.8 10.7 (5.1)
------ ------ -------
Income (loss) before cumulative effect of change in
accounting principle...................................... 15.5 22.1 (114.1)
Cumulative effect of change in accounting principle, net of
tax effect of $0.8 million................................ -- (1.5) --
------ ------ -------
Net income (loss)........................................... $ 15.5 $ 20.6 $(114.1)
====== ====== =======
Net income (loss) applicable to common stockholders......... $ 11.9 $(123.9)
====== =======
Basic earnings (loss) per common share:
Income before cumulative effect of change in accounting
principle.............................................. $ 0.21 $ (1.97)
Cumulative effect of change in accounting principle....... (0.02) --
------ -------
$ 0.19 $ (1.97)
====== =======
Diluted earnings (loss) per common share:
Income before cumulative effect of change in accounting
principle.............................................. $ 0.20 $ (1.97)
Cumulative effect of change in accounting principle....... (0.02) --
------ -------
$ 0.18 $ (1.97)
====== =======
Weighted average common shares:
Basic..................................................... 62.8 62.9
====== =======
Diluted................................................... 65.0 62.9
====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE> 206
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
MAY 31, 1998 MAY 30, 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 20.6 $(114.1)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization of deferred compensation.................. 0.2 --
Cumulative effect of change in accounting principle,
net................................................... 1.5 --
Restructuring, net of cash expended.................... -- 17.3
Depreciation and amortization.......................... 84.6 103.7
Loss on disposal of fixed assets....................... 0.9 0.3
Non-cash interest expense.............................. 12.5 19.8
Purchased in-process research and development.......... 15.5 34.0
Deferred income taxes.................................. (0.4) (2.4)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable.................................... 18.6 (53.2)
Inventories............................................ (21.3) 8.5
Other current assets................................... (1.6) 2.3
Accounts payable....................................... (6.5) 21.4
Accrued expenses and other current liabilities......... 13.7 12.5
Other assets and liabilities, net...................... (2.2) (6.0)
------- -------
Cash provided by operating activities................ 136.1 44.1
------- -------
Cash flows from investing activities:
Capital expenditures...................................... (78.0) (46.2)
Proceeds from sale of property, plant and equipment....... -- 31.2
Purchase of molds and tooling............................. (5.7) (3.8)
Refundable payment of value added tax associated with
acquisition............................................ -- (40.9)
Acquisitions, net of cash acquired........................ (116.8) (414.9)
------- -------
Cash used by investing activities.................... (200.5) (474.6)
------- -------
Cash flows from financing activities:
Repayment of long-term debt............................... (58.7) (151.3)
Issuance of long-term debt................................ 90.0 660.0
Debt issuance costs....................................... (1.1) (22.3)
------- -------
Cash provided by financing activities................ 30.2 486.4
------- -------
Net change in cash and cash equivalents..................... (34.2) 55.9
Cash and cash equivalents at beginning of period............ 40.7 6.5
------- -------
Cash and cash equivalents at end of period.................. $ 6.5 $ 62.4
======= =======
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes........................................... $ 8.9 $ --
======= =======
Interest............................................... $ 43.8 $ 46.6
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE> 207
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------- TOTAL
CLASS A CLASS B ADDITIONAL STOCKHOLDERS'
CLASS A CLASS B PAR PAR PAID-IN ACCUMULATED BUSINESS EQUITY
SHARES SHARES VALUE VALUE CAPITAL DEFICIT EQUITY (DEFICIT)
------- ------- ------- ------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at May 26, 1996........ -- -- $ -- $ -- $ -- $ -- $ 349.2 $ 349.2
Revenues less expenses........ -- -- -- -- -- -- 9.6 9.6
Net intercompany activity..... -- -- -- -- -- -- (25.4) (25.4)
---- ---- ---- ---- ------- ------- ------- -------
Balances at March 10, 1997...... -- -- -- -- -- -- 333.4 333.4
Recapitalization of
Business................... -- -- -- -- -- 333.4 (333.4) --
Distribution to National
Semiconductor by
Fairchild.................. -- -- -- -- -- (401.6) -- (401.6)
PIK Note issued as additional
purchase consideration for
the stock of Fairchild..... -- -- -- -- -- (77.0) -- (77.0)
Issuance of common stock...... 28.8 33.6 0.1 0.1 7.6 -- -- 7.8
Net income.................... -- -- -- -- -- 5.9 -- 5.9
Dividends on redeemable
preferred stock............ -- -- -- -- -- (1.8) -- (1.8)
---- ---- ---- ---- ------- ------- ------- -------
Balances at May 25, 1997........ 28.8 33.6 0.1 0.1 7.6 (141.1) -- (133.3)
Net income.................... -- -- -- -- -- 20.6 -- 20.6
Dividends on redeemable
preferred stock............ -- -- -- -- -- (8.6) -- (8.6)
Adjustment to business equity
assumed.................... -- -- -- -- -- 2.4 -- 2.4
Issuance of common stock...... 0.4 -- -- -- -- -- -- --
Common stock split issued in
the form of a stock
dividend (4-1)............. -- -- 0.2 0.2 (0.4) -- -- --
Deferred compensation related
to the grant of stock
options.................... -- -- -- -- 0.2 -- -- 0.2
Tax benefit from compensation
related to lifting of
restrictions on common
stock owned by management
investors.................. -- -- -- -- 2.1 -- -- 2.1
---- ---- ---- ---- ------- ------- ------- -------
Balances at May 31, 1998........ 29.2 33.6 0.3 0.3 9.5 (126.7) -- (116.6)
Net loss...................... -- -- -- -- -- (114.1) -- (114.1)
Dividends on redeemable
preferred stock............ -- -- -- -- -- (9.8) -- (9.8)
Issuance of common stock...... 0.2 -- -- -- -- -- -- --
Conversion of common stock.... 0.2 (0.2) -- -- -- -- -- --
Deferred compensation related
to the grant of stock
options.................... -- -- -- -- 0.1 -- -- 0.1
---- ---- ---- ---- ------- ------- ------- -------
Balances at May 30, 1999........ 29.6 33.4 $0.3 $0.3 $ 9.6 $(250.6) $ -- $(240.4)
==== ==== ==== ==== ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE> 208
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Fairchild Semiconductor International, Inc. ("Fairchild International" or
the "Company"), formerly known as FSC Semiconductor Corporation, was
incorporated on March 10, 1997 by National Semiconductor Corporation ("National
Semiconductor" or "National"). On March 11, 1997, National Semiconductor
consummated an Agreement and Plan of Recapitalization ("Recapitalization"). As
part of the Recapitalization, National Semiconductor transferred all of the
capital stock of Fairchild Semiconductor Corporation ("Fairchild") and
approximately $12.8 million in cash to Fairchild International in exchange for
shares of Fairchild International' 12% Series A Cumulative Compounding Preferred
Stock, Fairchild International' common stock and a promissory note in the
principal amount of approximately $77.0 million.
In addition, National Semiconductor transferred substantially all of the
assets and liabilities of the Fairchild Semiconductor Business (the "Business")
to Fairchild. The Business was defined as the logic, discrete and memory
divisions of National Semiconductor. The Recapitalization was accounted for as a
leveraged recapitalization, whereby Fairchild assumed the historical operating
results of the Business. Fairchild is a leading global designer, developer and
manufacturer of high performance multi-market semiconductors. Fairchild's logic,
discrete, non-volatile memory and analog and mixed signal products are the
building block components for virtually all electronic devices, from
sophisticated computers to household appliances. The Company is headquartered in
South Portland, Maine, and has manufacturing operations in South Portland,
Maine, West Jordan, Utah, Mountain View, California, Cebu, the Philippines,
Penang, Malaysia and Bucheon, South Korea.
On December 31, 1998, Fairchild acquired Raytheon Semiconductor Inc.,
("Raytheon"). On April 13, 1999, Fairchild acquired the Power Device Business of
Samsung Electronics. See Note 17.
BASIS OF PRESENTATION
The consolidated financial statements at May 31, 1998 and May 30, 1999 and
for the fiscal years then ended and for the period from March 11, 1997 through
May 25, 1997, include the accounts and operations of the Company and its
wholly-owned subsidiaries.
Prior to March 11, 1997, the combined balance sheets included the assets
and liabilities that were directly related to the Business as they were operated
within National Semiconductor. These balance sheets did not include National
Semiconductor's corporate assets or liabilities not specifically identifiable to
Fairchild. National Semiconductor performed cash management on a centralized
basis and processed related receivables and certain payables, payroll and other
activity for Fairchild. These systems did not track receivables, liabilities and
cash receipts and payments on a business specific basis. Accordingly, it was not
practical to determine certain assets and liabilities associated with the
Business. Given these constraints, certain supplemental cash flow information is
presented in lieu of a statement of cash flows for the year ended May 25, 1997
(See Note 16). The cash flows may have been significantly different if not for
the centralized cash management system of National Semiconductor.
Prior to March 11, 1997, the combined statements of operations included all
revenues and costs attributable to the Business including an allocation of the
costs of shared facilities and overhead of National Semiconductor. In addition,
certain costs incurred at Fairchild plants for the benefit of other National
Semiconductor product lines were allocated from Fairchild to National
Semiconductor. All of the allocations and estimates in the combined statements
of operations were based on assumptions that management believes were reasonable
under the circumstances. However, these allocations and esti-
F-44
<PAGE> 209
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION -- (CONTINUED)
mates are not necessarily indicative of the costs that would have resulted if
the Business had been operated on a stand alone basis.
Transactions with National Semiconductor have been identified in the
financial statements as transactions between related parties to the extent
practicable (See Note 12).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the Sunday on or nearest preceding May
31. The Company's results for the fiscal years May 25, 1997, May 31, 1998 and
May 30, 1999 consist of 52 weeks, 53 weeks, and 52 weeks, respectively.
PRINCIPLES OF CONSOLIDATION
Commencing with the Recapitalization, the consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
Revenue from the sale of semiconductor products is recognized when shipped,
with a provision for estimated returns and allowances recorded at the time of
shipment. Contract manufacturing revenues are recognized upon completion of the
contracted services.
RESEARCH AND DEVELOPMENT COSTS
The Company's research and development expenditures are charged to expense
as incurred.
RELATED PARTY ACTIVITY
In conjunction with the Recapitalization, Fairchild and National
Semiconductor executed several agreements, which govern the performance of
manufacturing services by Fairchild on behalf of National Semiconductor and by
National Semiconductor on behalf of Fairchild. In addition, National
Semiconductor provided a number of business support services to Fairchild
through May 30, 1999.
Prior to the Recapitalization, the Business performed contract
manufacturing services for National Semiconductor. The revenues for these
services are reflected at cost in the accompanying consolidated statements of
operations.
Manufacturing costs were generally apportioned between National
Semiconductor and the Business' product lines based upon budgeted and actual
factory production loading. Certain manufacturing costs (e.g., material costs)
that were specifically identifiable with a particular product line were charged
or credited directly without apportionment.
National Semiconductor also performed manufacturing services for the
Business and incurred other elements of cost of sales on behalf of the Business,
including freight, duty, warehousing, and purchased manufacturing services from
third party vendors.
F-45
<PAGE> 210
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Shared or common costs, including certain general and administrative, sales
and marketing, and research and development expenses, have been allocated from
National Semiconductor's corporate office, selling and marketing locations, and
manufacturing sites to the Business or from the Business' plants to National
Semiconductor product lines on a basis which is considered to fairly and
reasonably reflect the utilization of the services provided to, or benefit
obtained by, the business receiving the charge. National Semiconductor had net
interest income on a consolidated basis for all periods presented prior to the
Recapitalization. Although not material, these amounts have been allocated to
the Business prior to the Recapitalization on the basis of net assets and are
included in other (income) expense (See Note 12).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is generally
depreciated based upon the following estimated useful lives: buildings and
improvements, ten to thirty years, and machinery and equipment, three to five
years. Depreciation is computed using the straight-line method.
INTANGIBLE ASSETS
Intangible assets were recorded as part of the Raytheon and Power Device
Business acquisitions and are amortized by the use of the straight-line method
over their estimated lives, which are generally three to fifteen years. (See
Note 17)
OTHER ASSETS
Other assets include debt acquisition costs which represent costs incurred
related to the issuance of the Company's long-term debt. The costs are being
amortized using the effective interest method over the related term of the
borrowings, which ranges from five to ten years, and are included in interest
expense. Also included in other assets are mold and tooling costs. Molds and
tools are amortized over their expected useful lives, generally one to three
years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets not held for
sale, including intangible assets, by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values. Based on
these evaluations, there were no adjustments to the carrying value of long-lived
assets in Fiscal Years 1997, 1998 and 1999, except as discussed in Note 11.
F-46
<PAGE> 211
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
CURRENCIES
The Company's functional currency for all operations worldwide is the U.S.
dollar. Accordingly, gains and losses from translation of foreign currency
financial statements are included in current results. In addition, cash
conversion of foreign currency and foreign currency transactions are also
included in current results.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company utilizes various off-balance sheet financial instruments to
manage market risks associated with the fluctuations in certain interest rates
and foreign currency exchange rates. It is the Company's policy to use
derivative financial instruments to protect against market risk arising from the
normal course of business. Gains and losses on financial instruments that are
intended to hedge an identifiable firm commitment are deferred and included in
the measurement of the underlying transaction. Gains and losses on hedges of
anticipated transactions are deferred until such time as the underlying
transactions are recognized or immediately when the transaction is no longer
expected to occur. The criteria the Company uses for designating an instrument
as a hedge include the instrument's effectiveness in risk reduction and
one-to-one matching of derivative instruments to underlying transactions. In
addition, the Company uses forward and option contracts to hedge certain
non-U.S. denominated asset and liability positions. Gains and losses on these
contracts are matched with the underlying gains and losses resulting from
currency movement on these balance sheet positions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable and
payable, and accrued liabilities approximate fair value due to the short-term
maturities of these assets and liabilities. Fair values of long term debt,
interest rate swaps and caps, currency forward contracts and currency options
are based on quoted market prices or pricing models using prevailing financial
market information at the date of measurement.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INCOME TAXES
Prior to the Recapitalization, the Business did not file separate income
tax returns but rather was included in the income tax returns filed by National
Semiconductor and its subsidiaries in various domestic and foreign
jurisdictions. Therefore, no provision for income taxes has been recorded in the
accompanying consolidated financial statements for the period May 27, 1996
through March 10, 1997. Upon the Recapitalization, the Company became
responsible for its income taxes and, therefore, the provision for income taxes
included in the accompanying 1997 statement of operations is for the period
March 11, 1997 through May 25, 1997.
F-47
<PAGE> 212
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
NET INCOME (LOSS) PER COMMON SHARE
The Company has presented net income (loss) per share pursuant to SFAS No.
128, Earnings per Share, and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98. Net income (loss) per common share is presented for
the years ended May 31, 1998 and May 30, 1999 only because it is not meaningful
for earlier years since the Company did not have common stock outstanding for
the entire period during any earlier year.
Basic income (loss) per share was computed by dividing net income (loss)
applicable to common stockholders by the weighted average shares of common stock
outstanding. Diluted income (loss) per share also gives effect to all dilutive
potential common shares outstanding, consisting solely of outstanding stock
options.
The following table reconciles net income (loss) to net income (loss)
applicable to common stockholders, and basic to diluted weighted average shares
outstanding:
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Basic weighted average common shares outstanding............ 62.8 62.9
Net effect of dilutive stock options based on the treasury
stock method using the average market price............... 2.2 --
----- -------
Diluted weighted average common shares outstanding.......... 65.0 62.9
===== =======
Net income.................................................. $20.6 $(114.1)
Dividends on redeemable preferred stock..................... 8.7 9.8
----- -------
Net income applicable to common stockholders................ $11.9 $(123.9)
===== =======
</TABLE>
Options to purchase 750,000 and 4,282,570 shares of common stock were
outstanding at May 31, 1998 and May 30, 1999, respectively, but were not
included in the computation of diluted earnings per share because the effect of
including such options would be anti-dilutive.
EMPLOYEE STOCK PLAN
The Company accounts for its stock option plan in accordance with
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees." In 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 provides
an alternative to APB No. 25 and is effective for fiscal years beginning after
December 15, 1995. As permitted under SFAS No. 123, the Company continues to
account for its stock
F-48
<PAGE> 213
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
option plan in accordance with the provisions of APB No. 25 (see Note 6) and
provides the disclosure of pro forma net income as if the fair value method
under SFAS No. 123 had been applied.
RECLASSIFICATION
Certain fiscal 1997 and 1998 amounts have been reclassified to conform with
the current year presentation.
NOTE 3 -- FINANCIAL STATEMENT DETAILS
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Inventories(1)
Raw materials........................................................... $ 13.0 $ 13.6
Work in process......................................................... 69.5 93.1
Finished goods.......................................................... 25.5 41.9
------ ------
$108.0 $148.6
====== ======
Other current assets
Refundable payment of value added tax associated with acquisition....... $ -- $ 40.9
Non-trade receivable from manufacturing subcontractor................... 12.7 4.5
Deferred income taxes................................................... 1.6 7.6
Prepaid and other current assets........................................ 5.7 12.7
------ ------
$ 20.0 $ 65.7
====== ======
Property, plant and equipment(1)
Land.................................................................... $ 23.5 $ 19.0
Buildings and improvements.............................................. 154.7 177.0
Machinery and equipment................................................. 575.1 681.7
Construction in progress................................................ 46.5 18.1
------ ------
Total property, plant and equipment.................................. 799.8 895.8
Less accumulated depreciation........................................... 456.9 535.6
------ ------
$342.9 $360.2
====== ======
</TABLE>
<TABLE>
<CAPTION>
PERIOD OF
AMORTIZATION
------------
<S> <C> <C> <C>
Intangible assets(1)
Developed technology...................................... 15 years $ 28.8 $169.7
Customer base............................................. 8 years -- 53.9
Covenant not to compete................................... 5 years -- 30.8
Trademarks and tradenames................................. 4 years -- 25.1
Assembled workforce....................................... 3 years 4.1 8.9
------ ------
Total intangible assets.............................................. 32.9 288.4
Less accumulated amortization........................................... (1.4) (9.9)
------ ------
$ 31.5 $278.5
====== ======
</TABLE>
F-49
<PAGE> 214
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- FINANCIAL STATEMENT DETAILS -- (CONTINUED)
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Accrued expenses(1)
Payroll and employee related accruals................................... $ 23.4 $ 29.3
Accrued interest........................................................ 8.1 13.5
Restructuring and related allowances.................................... -- 12.5
Income taxes payable.................................................... 3.2 0.3
Other................................................................... 21.2 29.4
------ ------
$ 55.9 $ 85.0
====== ======
</TABLE>
- -------------------------
(1) Approximately $49.1 million of inventory, $101.3 million of property, plant
and equipment, $255.5 million of intangible assets and $9.5 million of
accrued liabilities were obtained through the Power Device acquisition
completed in April 1999, and contribute to the growth in each respective
account in fiscal 1999.
NOTE 4 -- LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- --------
(IN MILLIONS)
<S> <C> <C>
Term Loans Payable:
Tranche A................................................. $ 62.5 $ 100.0
Tranche B................................................. -- 210.0
Tranche C................................................. 88.8 --
Senior subordinated notes payable......................... 300.0 600.0
PIK note payable.......................................... 88.6 99.2
CMP note payable.......................................... -- 50.8
------ --------
Total long-term debt................................... 539.9 1,060.0
Less current portion........................................ 13.2 14.1
------ --------
Long-term portion...................................... $526.7 $1,045.9
====== ========
</TABLE>
On March 11, 1997 Fairchild entered into a Senior Credit Facilities
Agreement which, on December 31, 1997, was amended and restated ("Original
Credit Agreement") in order to permit the acquisition of Raytheon (See Note 17).
On April 14, 1999 the Company entered into a new Senior Credit Facilities
Agreement ("Credit Agreement") with a syndicate of financial institutions in
order to refinance the Original Credit Agreement and finance the acquisition of
the Power Device Business (See Note 17). A portion of the proceeds from the new
Credit Agreement was used to repay in full all outstanding amounts under the
Original Credit Agreement.
Borrowings under the Credit Agreement are segregated into two tranches:
$100.0 million Tranche A Term Loans and $210.0 million Tranche B Term Loans. The
Tranche A Term Loans are scheduled to
F-50
<PAGE> 215
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT -- (CONTINUED)
mature on March 31, 2004, and are subject to quarterly principal payments
ranging from $3.8 million to $6.8 million commencing September 30, 1999. The
Tranche B Term Loans are scheduled to mature on December 15, 2004, and are
subject to quarterly principal payments ranging from $0.5 to $0.7 million
commencing September 30, 1999 and ending September 30, 2004 with a final
principal payment of $198.5 million due December 15, 2004. The Credit Agreement
also includes a Revolving Credit Facility of $100.0 million. The Revolving
Credit Facility is scheduled to mature on March 31, 2004. No amounts were
outstanding under the Revolving Credit Facility at May 30, 1999.
The Credit Agreement accrues interest based on either the bank's base rate
or the Eurodollar rate, at the option of Fairchild. The interest rate was 7.7%
for the Tranche A term loan and 8.2% for the Tranche B term loan at May 30,
1999. Fairchild pays a commitment fee of 0.5% per annum of the unutilized
commitments under the Revolving Credit Agreement. Borrowings are secured by
substantially all assets of Fairchild.
On April 7, 1999, Fairchild issued $300.0 million of 10 3/8% Senior
Subordinated Notes (the "10 3/8% Notes") at face value. The 10 3/8% Notes pay
interest on April 1 and October 1 of each year commencing October 1, 1999 and
are due October 1, 2007. The 10 3/8% Notes are unsecured and are subordinated to
all existing and future senior indebtedness of Fairchild. Until April 1, 2002,
Fairchild can redeem an amount not to exceed 35% of the 10 3/8% Notes with
proceeds raised from certain public equity offerings. On or after April 1, 2003,
the 10 3/8% Notes are redeemable by Fairchild, in whole or in part, at
redemption prices ranging from 100% to approximately 105% of the principal
amount.
On March 11, 1997, Fairchild issued $300.0 million of 10 1/8% Senior
Subordinated Notes (the "10 1/8% Notes" and, together with the 10 3/8% Notes,
the "Notes") at face value. The 10 1/8% Notes pay interest on March 15 and
September 15 of each year commencing September 15, 1997. The 10 1/8% Notes are
unsecured and are subordinated to all existing and future senior indebtedness of
Fairchild. The 10 1/8% Notes are redeemable by Fairchild, in whole or in part,
on or after March 15, 2002 at redemption prices ranging from 100% to
approximately 105% of the principal amount. Fairchild is required to redeem
$150.0 million principal amount of 10 1/8% Notes on March 15, 2005 and $75.0
million principal amount of 10 1/8% Notes on March 15, 2006 and 2007,
respectively, in each case at a redemption price of 100% of the principal amount
plus accrued interest to the date of redemption.
The payment of principal and interest on the Credit Agreement and the Notes
is fully and unconditionally guaranteed by Fairchild International. Fairchild
International is the parent company of Fairchild and currently conducts no
business and has no significant assets other than the capital stock of Fairchild
and certain deferred tax assets related to interest on its debt. Fairchild has
eleven direct subsidiaries and one indirect subsidiary, of which only one direct
subsidiary, Fairchild Semiconductor Corporation of California ("Fairchild
California"), is a guarantor on the Credit Agreement and the Notes. The
remaining direct and indirect subsidiaries are foreign-based and do not
guarantee either the Credit Agreement or the Notes.
On April 13, 1999, in connection with the acquisition of the Power Device
Business, the Company entered into a Subordinated Credit Agreement with Citicorp
Mezzanine Partners, L.P. ("CMP Note") in the principal amount of $50.0 million.
The CMP Note bears interest at 12.5% per annum and matures on April 13, 2008. If
the Company voluntarily prepays any or all of the loan, the interest rate on the
amount prepaid is increased to 18% per annum retroactive to April 13, 1999.
Since the Company plans to repay the loan within 18 months, the Company is
accruing interest on the CMP Note at a rate
F-51
<PAGE> 216
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT -- (CONTINUED)
of 18% per annum in accordance with EITF Issue No. 86-15. To the extent any
Fairchild International senior indebtedness prohibits Fairchild International
from paying interest on the CMP Note in cash, such interest shall be paid by
adding interest to the then outstanding principal amount of the CMP Note. Such
amounts shall accrue interest as a portion of the principal amount of the PIK
Notes from the applicable interest payment date. The CMP Note is subordinated to
both the Senior Credit Facilities and the Notes. In connection with the issuance
of the CMP Note, Fairchild International issued a warrant for the purchase of
3,538,228 shares of common stock of Fairchild International at an exercise price
of $0.01 per share. See Note 10.
On March 11, 1997, the Company issued a promissory note ("PIK Note") in the
principal amount of approximately $77.0 million to National Semiconductor as
part of the consideration for all of the capital stock of Fairchild. The PIK
Note bears interest at 11.74% per annum and matures in 2008. During Fiscal Year
1998, National Semiconductor sold its interest in the PIK Note to a number of
financial institutions. To the extent any Fairchild International senior
indebtedness prohibits Fairchild International from paying interest due on the
PIK Notes in cash, such interest shall be paid by adding such interest to the
then outstanding principal amount of the PIK Notes. Such amount shall accrue
interest as a portion of the principal amount of the PIK Notes from the
applicable interest payment date. The PIK Notes are subordinated to both the
Senior Credit Facilities and the Notes.
The Credit Agreement, the indenture under which the Notes were issued, the
CMP Note, and the PIK Note contain certain restrictive financial and operating
covenants, including limitations on stock repurchases and prohibitions on the
payment of dividends, with which the Company was in compliance at May 30, 1999.
Aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
2000........................................................ 14.1
2001........................................................ 17.1
2002........................................................ 25.1
2003........................................................ 25.1
2004........................................................ 29.1
Thereafter.................................................. 949.5
--------
$1,060.0
========
</TABLE>
On April 29, 1997 and January 7, 1998, the Company entered into interest
rate swap agreements to reduce the impact of changes in interest rates on its
Senior Credit Facilities described above under the Original Credit Agreement.
The swap agreements fixed the interest rate on $60.0 million of the Senior
Credit Facility at 9.26% through May 2001, and $90.0 million of the Senior
Credit Facility at 8.21% through February 2000. The notional face amount of the
swap agreements was $151.3 million at May 31, 1998 (See Note 14). The swap
agreement covering $60.0 million of the Senior Credit Facility was canceled
without penalty on May 26, 1999. The swap agreement covering $90.0 million was
settled on April 28, 1999 at a cost to the Company of $0.6 million.
F-52
<PAGE> 217
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT -- (CONTINUED)
On April 28, 1999, the Company entered into an Interest Rate Cap Agreement.
This agreement caps the interest rate at 8.0% and 8.3% on the outstanding
balances of the Tranche A and Tranche B Term Loans, respectively. The interest
rate cap agreement expires August 31, 1999.
NOTE 5 -- INCOME TAXES
As discussed in Note 2, the Business did not pay income taxes directly or
file separate income tax returns prior to the Recapitalization, and therefore,
no provision for income taxes has been recorded in the accompanying financial
statements for the period from May 27, 1996 to March 10, 1997.
In conjunction with the acquisition of the Power Device Business, the
Korean government granted a ten year tax holiday to Fairchild Korea
Semiconductor Ltd. The exemption is 100% for the first seven years of the
holiday and 50% for the remaining three years of the holiday. Taxes exempted
include income taxes, dividend withholding taxes, acquisition tax, registration
tax, property tax and aggregate land tax. As such, no provision for income taxes
for Korea has been provided.
F-53
<PAGE> 218
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES -- (CONTINUED)
The provision (benefit) for income taxes included in the accompanying
consolidated statements of operations for Fiscal Years 1997, 1998 and 1999,
consisted of the following:
<TABLE>
<CAPTION>
MARCH 11, YEAR ENDED
1997 TO ------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
--------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S. .................................................. $7.2 $14.6 $(103.7)
Foreign................................................ 2.5 18.2 (15.5)
---- ----- -------
$9.7 $32.8 $(119.2)
==== ===== =======
Income tax provision (benefit):
Current:
U.S. federal........................................ $ -- $ 7.1 $ (4.8)
U.S. state and local................................ -- 1.5 --
Foreign............................................. 1.4 3.3 2.1
---- ----- -------
1.4 11.9 (2.7)
Deferred:
U.S. federal........................................ 1.9 (2.0) (2.5)
U.S. state and local................................ 0.5 (0.4) 0.1
Foreign............................................. -- 1.2 --
---- ----- -------
2.4 (1.2) (2.4)
Total income tax provision (benefit):
U.S. federal........................................... 1.9 5.1 (7.3)
U.S. state and local................................... 0.5 1.1 0.1
Foreign................................................ 1.4 4.5 2.1
---- ----- -------
$3.8 $10.7 $ (5.1)
==== ===== =======
</TABLE>
F-54
<PAGE> 219
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES -- (CONTINUED)
The reconciliation between the income tax rate computed by applying the
U.S. federal statutory rate and the reported worldwide tax rate follows:
<TABLE>
<CAPTION>
MARCH 11,
1997 TO
MAY 25, MAY 31, MAY 30,
1997 1998 1999
--------- ------- -------
<S> <C> <C> <C>
U.S. federal statutory rate............................... 35.0% 35.0% 35.0%
U.S. state and local taxes, net of federal benefit........ 4.1% 3.3% 1.4%
Tax differential related to foreign income................ -- (5.7)% (8.6)%
Loss not utilized......................................... -- -- (23.5)%
---- ---- -----
39.1% 32.6% 4.3%
==== ==== =====
</TABLE>
The tax effects of temporary differences in the recognition of income and
expense for tax and financial reporting purposes that give rise to significant
portions of the deferred tax assets and the deferred tax liabilities at May 31,
1998 and May 30, 1999 are presented below:
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards......................... $ -- $ 34.0
Reserves and accruals..................................... 15.9 26.5
Plant and equipment....................................... 2.8 3.5
Intangibles, primarily intellectual property and
software............................................... 31.2 22.7
Tax credit carryovers..................................... 3.8 1.4
------ ------
Total gross deferred tax assets........................ 53.7 88.1
Valuation allowance....................................... (30.7) (62.7)
------ ------
Net deferred tax assets................................ 23.0 25.4
Deferred tax liabilities (all foreign):
Intangibles, primarily intellectual property.............. -- (9.9)
Plant and equipment....................................... -- (3.7)
Capital allowance......................................... (1.4) (1.4)
------ ------
Total deferred tax liabilities......................... (1.4) (15.0)
------ ------
Net deferred tax assets..................................... $ 21.6 $ 10.4
====== ======
</TABLE>
In assessing the realizability of deferred tax assets, the Company
estimated its future earnings and the expected timing of the reversal of
temporary differences. Accordingly, the Company has recorded a valuation
allowance which reduces the gross deferred tax asset to an amount which the
Company
F-55
<PAGE> 220
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES -- (CONTINUED)
believes will more likely than not be realized. Deferred tax assets and
liabilities are classified in the consolidated balance sheet based on the
classification of the related asset or liability.
Net operating loss, research and development credit and foreign tax credit
carryforwards totaled $90.3 million, $0.2 million and $1.2 million,
respectively, as of May 30, 1999. The net operating loss expires in 2019. The
research and development credits expire in varying amounts in 2012, 2013 and
2019. The foreign tax credits expire in varying amounts in 2002 through 2004.
Deferred income taxes have not been provided for the undistributed earnings
of the Company's foreign subsidiaries, which aggregated approximately $13.8
million at May 30, 1999. The Company plans to reinvest all such earnings for
future expansion. The amount of taxes attributable to these undistributed
earnings is not practicably determinable.
NOTE 6 -- STOCK BASED COMPENSATION
At May 30, 1999, the Company has one stock-based compensation plan, the
1997 Stock Option Plan, as amended, (the "Plan") which is described below. The
Company accounts for its stock option plan in accordance with the provisions of
APB No. 25. As such, compensation expense is recorded on the date of grant only
if the current market price of the underlying stock exceeds the exercise price.
During the year ended May 30, 1999, the Company granted 25,600 stock options
with exercise prices less than the market price of the underlying stock on the
date of the grant, and recorded total deferred compensation of $0.3 million. Had
compensation cost for the Company's stock option plan been determined consistent
with SFAS Statement No. 123, the Company would have reported net income (loss)
of $15.5 million, $20.6 million and $(114.3) million, respectively, in fiscal
years 1997, 1998 and 1999, respectively.
The Company estimates the fair value of each option as of the date of grant
using a Black-Scholes pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected volatility......................................... -- -- 49%
Dividend yield.............................................. -- -- --
Risk-free interest rate..................................... 6.17% 5.88% 4.43%
Expected life, in years..................................... 2.6 2.9 3.4
</TABLE>
Under the Plan, the Company may grant options for up to 6,084,000 shares of
Class A common stock. Options granted under the Plan may be either (a) options
intended to constitute incentive stock options ("ISOs") under the Internal
Revenue Code or (b) non-qualified stock options. Options may be granted under
the Plan to regular salaried key employees (including officers) of the Company
and its subsidiaries.
The exercise price of each option granted under the Plan shall be as
determined by the Board of Directors (the "Board"). The maximum term of any
option shall be ten years from the date of grant for incentive stock options and
ten years and one day from the date of grant for non-qualified stock options.
Options granted under the Plan are exercisable at the determination of the
Board, currently vesting ratably over approximately 4 years. Employees receiving
options under the Plan may not receive in any one year period options to
purchase more than 200,000 shares of common stock.
F-56
<PAGE> 221
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- STOCK BASED COMPENSATION -- (CONTINUED)
A summary of the status of the Company's stock option plan as of May 25,
1997, May 31, 1998 and May 30, 1999, and changes during the years then ended are
presented in the table below:
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...... -- $ -- 2,029 $0.13 3,584 $ 2.20
Granted............................... 2,097 0.13 1,777 4.29 972 10.00
Exercised............................. -- -- (142) 0.13 (93) 0.13
Canceled.............................. (68) 0.13 (80) 0.13 (180) 6.83
----- ----- ------
Outstanding at end of year............ 2,029 $0.13 3,584 $2.20 4,283 $ 3.82
===== ===== ======
Exercisable at end of year............ -- $ -- 798 $0.13 1,612 $ 1.82
Weighted average fair value of options
granted............................. $0.02 $0.22 $ 0.09
</TABLE>
Information with respect to stock options outstanding and stock options
exercisable at May 30, 1999, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
(000'S) REMAINING AVERAGE (000'S) AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$.13......................... 2,683 7.95 $ 0.13 1,337 $ 0.13
$10.00....................... 1,600 9.28 10.00 275 10.00
----- -----
4,283 8.45 $ 3.82 1,612 $ 1.82
===== =====
</TABLE>
NOTE 7 -- RETIREMENT PLANS
The Company sponsors the Fairchild Personal Savings and Retirement Plan
(the "Retirement Plan"), contributory savings plan which qualifies under section
401(k) of the Internal Revenue Code. The Retirement Plan covers substantially
all employees in the United States. At the inception of the Retirement Plan, the
Company provided a matching contribution equal to 50% of employee elective
deferrals up to a maximum of 6% of an employee's annual compensation. Effective
June 1, 1997, the Company increased the matching contribution to 75% of employee
elective deferrals. The Company also maintains a non-qualified Benefit
Restoration Plan, under which employees who have otherwise exceeded annual IRS
limitations for elective deferrals can continue to contribute to their
retirement savings. The Company matches employee elective deferrals to the
Benefit Restoration Plan on the same basis as the Retirement Plan.
F-57
<PAGE> 222
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- RETIREMENT PLANS -- (CONTINUED)
Employees in Malaysia participate in a defined contribution plan. The
Company has funded accruals for this plan in accordance with statutory
regulations in Malaysia.
Under the National Pension Fund Law of Korea, the Company is required to
pay a certain percentage of employee retirement benefits to the National Pension
Fund in exchange for a reduction in severance liabilities. Contributed amounts
shall be refunded from the National Pension Plan to employees on their
retirement. This amount has been offset against deferred compensation except for
the portion related to employees with less than one year of service which is
included in current assets.
Total expense recognized under these plans was $1.1 million, $3.4 million
and $3.5 million for the years ended May 25, 1997, May 31, 1998 and May 30,
1999, respectively.
Employees in the Philippines participate in a defined benefit plan that was
assumed by the Company from National Semiconductor as part of the
Recapitalization. The benefits are based on years of service and a multiple of
the employee's final monthly salary. The Company's funding policy is to
contribute annually the amount necessary to maintain the plan on an actuarially
sound basis. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future. The contributions made for the years ended May 25, 1997, May 31, 1998
and May 30, 1999 are not material to the financial statements.
Prior to the Recapitalization, employees of the Business participated in
several National Semiconductor retirement, employee benefit, and incentive
plans. No liabilities related to retirement and similar plans, other than those
disclosed above, were assumed by the Company.
NOTE 8 -- LEASE COMMITMENTS
Rental expense related to certain facilities and equipment of the Company's
plants was $5.0 million, $9.5 million, and $12.5 million for fiscal years 1997,
1998 and 1999, respectively.
Future minimum lease payments under noncancelable operating leases as of
May 30, 1999 are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Fiscal Year
2000........................................................ $11.2
2001........................................................ 7.3
2002........................................................ 3.6
2003........................................................ 1.9
2004........................................................ 1.7
Thereafter.................................................. 4.6
-----
$30.3
=====
</TABLE>
NOTE 9 -- REDEEMABLE PREFERRED STOCK
Concurrent with the Recapitalization, the Company authorized 70,000 shares
of redeemable preferred stock at a par value of $.01, all of which are
designated as 12% Series A cumulative compounding preferred stock (the
"Redeemable Preferred Stock"). The Redeemable Preferred Stock
F-58
<PAGE> 223
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- REDEEMABLE PREFERRED STOCK -- (CONTINUED)
has a stated value of $1,000 per share and is entitled to annual dividends when,
as and if declared, which dividends will be cumulative, whether or not earned or
declared, and will accrue at a rate of 12%, compounding annually. At May 31,
1998 and May 30, 1999, 70,000 shares were issued and outstanding. The total
liquidation value of the shares outstanding at May 31, 1998 and May 30, 1999, in
the amounts of $80.5 million and $90.1 million, respectively, is classified in
the Company's balance sheet as Redeemable Preferred Stock. (See Note 10)
The Redeemable Preferred Stock is mandatorily redeemable in 2009. The
Company may optionally redeem, in whole or in part, the Redeemable Preferred
Stock at any time at a price per share of $1,000, plus accrued and unpaid
dividends to the date of redemption.
At the option of the Company, the Redeemable Preferred Stock may be
exchanged for junior subordinated debentures of the Company. The face value of
such junior subordinated debentures shall be (i) $1,000 per share of Redeemable
Preferred Stock exchanged, plus (ii) all accrued but unpaid dividends on such
stock to the date of exchange. Their maturity date will be the same as the
mandatory redemption date of the Redeemable Preferred Stock, and they shall bear
interest at a rate equal to the lesser of 12% and the maximum interest rate
permitted to be deducted as accrued under the relevant provisions of the
Internal Revenue Code of 1986.
NOTE 10 -- STOCKHOLDERS' EQUITY
RECAPITALIZATION
On March 11, 1997, National Semiconductor consummated the Recapitalization
under which the following transactions occurred:
(i) National Semiconductor, pursuant to an Asset Purchase Agreement,
transferred all of the assets and liabilities of the Business to
Fairchild and its subsidiaries in exchange for demand purchase notes
of Fairchild and its subsidiaries in the aggregate principal amount
of $401.6 million (the "Purchase Price Notes");
(ii) National Semiconductor transferred all of the capital stock of
Fairchild and approximately $12.8 million in cash to the Company in
exchange for shares of Redeemable Preferred Stock, shares of Class A
voting and Class B non-voting common stock, and a promissory PIK Note
of the Company in the principal amount of approximately $77.0
million;
(iii) The Company issued Redeemable Preferred Stock and additional common
stock in the aggregate amounts of approximately $65.0 million;
(iv) The Company contributed cash in the amount of approximately $77.8
million to the capital of Fairchild;
(v) Fairchild borrowed $120.0 million under term bank loans and issued
$300.0 million of 10 1/8% Senior Subordinated Notes due 2007 (as
described in Note 4). The proceeds from these borrowings were used to
repay the Purchase Price Notes and certain debt acquisition costs.
The transaction was accounted for as a leveraged recapitalization whereby
the Company assumed the historical operating results of the Business.
Accordingly, the repayment of the Purchase Price Notes of $401.6 and issuance of
the PIK Note of $77.0 million were included in the statements of equity as a
distribution to National Semiconductor by Fairchild and the Company,
respectively.
F-59
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
COMMON STOCK
On January 5, 1998, the Board of Directors approved a four-for-one common
stock split in the form of a stock dividend. Stockholders received three
additional shares for each share held. Such distribution was made on April 29,
1998 to stockholders of record on that date. All share amounts in the
accompanying consolidated financial statements have been restated to
retroactively reflect the split.
As approved by stockholders on April 24, 1998, the Company has authorized
160,000,000 shares of common stock at a par value of $.01 per share, divided
into two classes consisting of 80,000,000 shares of Class A stock and 80,000,000
shares of Class B stock. Previously, 60,000,000 shares were authorized,
consisting of 30,000,000 shares of Class A stock and 30,000,000 shares of Class
B stock. The holders of Class A stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Except as
required by law, the holders of Class B stock have no voting rights. A holder of
either class of common stock may convert any or all of his shares into an equal
number of shares of the other class of common stock provided that in the case of
a conversion from Class B stock, which is nonvoting, into Class A stock, which
is voting, such conversion would be permitted only to the extent that the holder
of shares to be converted would be permitted under applicable law to hold the
total number of shares of Class A stock which would be held after giving effect
to the conversion.
In connection with the issuance of the CMP Note (see Note 4), the Company
issued a warrant for the purchase of 3,538,228 shares of Class A common stock of
the Company at an exercise price of $0.01 per share to Citicorp Mezzaine
Partners, L.P. The warrant can be exercised from 18 months until nine years
after the issuance thereof. If the Company prepays in full the CMP Note within
18 months after the issuance, the warrant will not become exercisable. The
Company intends to repay this note within 18 months of issuance, therefore the
value of this warrant was deemed to be immaterial, and no amount of the proceeds
of the CMP Note were allocated to this warrant.
Certain amendments to the Securities Purchase and Holders Agreement, dated
as of March 11, 1997 (the "Stockholders Agreement"), which were effected in May
1998, resulted in the lapse of certain risks of forfeiture by the management
investors with respect to their stock ownership of the Company. The lapse of
such restrictions resulted in the incurrence by the Company of deductible
compensation expense for income tax purposes of $10.4 million in Fiscal Year
1998. The tax effect of the compensation expense of $2.1 million was recorded as
a reduction in income taxes payable and an increase to additional paid-in
capital at May 31, 1998. The tax effect was recorded using the alternative
minimum tax rate of 20%. In connection with this transaction, loans aggregating
$5.0 million were made by the Company to the management investors to pay their
federal and state individual income tax liabilities in June 1998. Such loans
(including accrued but unpaid interest thereon) will be cancelled over the four-
year period following their creation, or earlier, in whole, upon the occurrence
of certain qualifying public offerings of the Company's or Fairchild's stock
and, in part, upon the death or disability of the obligor. The Company has also
agreed to pay to such executive officers amounts sufficient to enable them to
discharge all tax liabilities arising out of the cancellation of such loans (as
well as all tax liabilities arising out of such payments). Any such executive
officer whose employment terminates will be required to repay any uncancelled
amounts immediately.
NOTE 11 -- RESTRUCTURING CHARGES
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
F-60
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- RESTRUCTURING CHARGES -- (CONTINUED)
million. The restructuring charge consisted of $0.8 million related to non-cash
asset impairments and $3.7 million of employee separation costs. The asset
impairments relate to idle production equipment in the Company's Mountain View,
California and West Jordan, Utah facilities, which primarily serve the company's
Analog and Discrete product groups, respectively. As of May 30, 1999 these
assets have been disposed of. The charge for employee separation arrangements
provided for severance and other benefits 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. The affected employees,
who work in production, engineering, sales and marketing and administration, are
located in the United States and Cebu, the Philippines.
In the third quarter of fiscal 1999, the Company recorded a pre-tax
restructuring charge of approximately $2.7 million related to the transfer of
all assembly and test work performed at its Mountain View, California facility
to its Penang, Malaysia facility. The charge consisted of $1.9 million of
non-cash asset impairments and $0.8 million for severance and other benefits for
54 production employees terminated as a result of the transfer. The asset
impairments consist of production equipment that will be idled as a result of
this action. As of May 30, 1999 these assets have been disposed of.
In connection with the sale of its Mountain View, California facility on
April 2, 1999, the Company announced the transfer of all wafer production to its
South Portland, Maine facility. In the fourth quarter of fiscal 1999, the
Company recorded a pre-tax restructuring charge of approximately $10.0 million,
which consisted of $2.6 million of non-cash asset impairments, $4.0 million for
severance and employee benefits, $1.9 million for a loss on sale of the facility
and $1.5 million for other exit costs. This action will result in the
termination of approximately 170 salaried, hourly and temporary employees, all
of whom work for the Company's Analog and Mixed Signal Division in Mountain View
or San Diego, California in the areas of production, engineering, selling and
marketing and administration. Other exit costs include $1.0 million to be paid
under a non-cancellable operating lease after operations cease as well as other
incremental costs associated with the facility closure. The non-cash asset
impairments primarily consist of production equipment that will not be
transferred to South Portland, Maine. The assets will be disposed of during the
first half of fiscal 2000.
During the fourth quarter of fiscal 1999, the Company also recorded a
pre-tax charge of $4.1 million related to the restructuring of its memory
product lines, whereby the Company is streamlining its operations to focus
solely on its most profitable products. The charge includes $3.9 million for
non-cash asset impairments and $0.2 million for employee separation costs all of
which have been paid at May 30, 1999. The non-cash impairments consist of
production equipment and other equipment in West Jordan and Sunnyvale,
California that become idle as a result of the plan. The assets will be disposed
of during the second half of fiscal 2000.
The Memory Division product line restructuring plan also included amounts
for the write-off of inventories ($9.9 million) as well as provisions for
additional distribution sales allowances required as a result of this action
($5.5 million). These costs have been excluded from the restructuring charge and
have been recorded as a reduction against net sales in the case of the
distribution sales allowances and as a charge to cost of sales for the inventory
write-offs.
F-61
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- RESTRUCTURING CHARGES -- (CONTINUED)
The following table summarizes the recorded accruals and uses of the above
restructuring and impairment actions:
<TABLE>
<CAPTION>
ASSET SEVERANCE EXIT
IMPAIRMENTS BENEFITS COSTS TOTAL
----------- --------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
FIRST QUARTER RESTRUCTURING
Total charge..................................... $ 0.8 $ 3.7 $ -- $ 4.5
Cash payments.................................... -- (3.1) -- (3.1)
Non-cash items................................... (0.8) -- -- (0.8)
Adjustments...................................... -- (0.3) -- (0.3)
----- ----- ----- -----
Accrual balance as of May 30, 1999.......... -- 0.3 -- 0.3
THIRD QUARTER RESTRUCTURING
Total charge..................................... $ 1.9 $ 0.8 $ -- $ 2.7
Cash payments.................................... -- (0.7) -- (0.7)
Non-cash items................................... (1.9) -- -- (1.9)
----- ----- ----- -----
Accrual balance as of May 30, 1999.......... -- 0.1 -- 0.1
FOURTH QUARTER MOUNTAIN VIEW RESTRUCTURING
Total charge..................................... $ 4.5 $ 4.0 $ 1.5 $10.0
Cash payments.................................... -- -- -- --
Non-cash items................................... (3.4) -- -- (3.4)
----- ----- ----- -----
Accrual balance as of May 30, 1999.......... 1.1 4.0 1.5 6.6
FOURTH QUARTER MEMORY DIVISION RESTRUCTURING
Total charge..................................... $ 3.9 $ 0.2 $ -- $ 4.1
Cash payments.................................... -- (0.2) -- (0.2)
Non-cash items................................... (3.9) -- -- (3.9)
----- ----- ----- -----
Accrual balance as of May 30, 1999.......... -- -- -- --
----- ----- ----- -----
Total accrual balance as of May 30, 1999......... $ 1.1 $ 4.4 $ 1.5 $ 7.0
===== ===== ===== =====
</TABLE>
In June 1996, National Semiconductor announced a restructuring of its
operations and the intent to pursue a sale or partial financing of the Business.
In connection with the restructuring, the Business recorded a $5.3 million
nonrecurring charge related to work force reductions. During the year ended May
25, 1997, $5.3 million of severance was paid to terminated employees.
F-62
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- RELATED PARTY TRANSACTIONS
Related party activity between the Company and National Semiconductor, in
addition to contract manufacturing services performed for National
Semiconductor, is summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MAY 27, 1996 MARCH 11, 1997 YEAR YEAR
THROUGH THROUGH ENDED ENDED
MARCH 10, 1997 MAY 25, 1997 MAY 31, 1998 MAY 30, 1999
-------------- -------------- ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Manufacturing services performed by
National Semiconductor plants or
purchased from third parties...... $34.3 $ 2.8 $14.0 $ 5.6
Headquarters, freight, duty,
warehousing and other elements of
cost of sales..................... 41.8 3.7 17.9 4.4
----- ----- ----- -----
$76.1 $ 6.5 $31.9 $10.0
===== ===== ===== =====
Cost of business support services
provided by National
Semiconductor..................... $ -- $11.6 $28.7 $10.7
===== ===== ===== =====
Operating costs allocated to the
Business by National
Semiconductor..................... $63.9 $ -- $ -- $ --
===== ===== ===== =====
Operating costs allocated to
National Semiconductor by the
Business.......................... $ 9.6 $ -- $ -- $ --
===== ===== ===== =====
</TABLE>
Amounts receivable from National Semiconductor, included in accounts
receivable, totaled $12.4 million, and $12.0 million at May 31, 1998 and May 30,
1999, respectively. Amounts payable to National Semiconductor, included in
accounts payable, totaled $5.3 million and $0.4 million at May 31, 1998 and May
30, 1999, respectively.
NOTE 13 -- CONTINGENCIES
The Company's facilities in South Portland, Maine, West Jordan, Utah, Cebu,
the Philippines, and Penang, Malaysia, have ongoing remediation projects to
respond to certain releases of hazardous substances that occurred prior to the
Recapitalization. Pursuant to the Asset Purchase Agreement, National
Semiconductor has agreed to indemnify the Company for the future costs of these
projects. The costs incurred to respond to these conditions were not material to
the consolidated financial statements during fiscal years 1997, 1998 and 1999,
respectively.
The Company's former Mountain View, California, facility is located on a
contaminated site under the Comprehensive Environmental Response, Compensation
and Liability Act. Under the terms of the Acquisition Agreement with Raytheon
Company, dated December 31, 1997, Raytheon Company has assumed responsibility
for all remediation costs or other liabilities related to historical
contamination.
In addition, in the normal course of business, the Company is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. All such matters are
subject to uncertainties and outcomes that are not predictable with assurance.
Consequently, the Company is unable to ascertain the ultimate aggregate amount
of monetary liability or financial impact with respect to these matters at May
30, 1999. It is management's
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- CONTINGENCIES -- (CONTINUED)
opinion that after final disposition, any monetary liability or financial impact
to the Company would not be material to the Company's financial position, annual
results of operations or cash flows.
NOTE 14 -- FINANCIAL INSTRUMENTS
FOREIGN CURRENCY INSTRUMENTS
The objective of the Company's foreign exchange risk management policy is
to preserve the U.S. dollar value of after-tax cash flows in relation to
non-U.S. dollar currency fluctuations. The Company uses forward and option
contracts to hedge firm commitments and option contracts to hedge anticipated
transactions. Gains and losses on financial instruments that are intended to
hedge an identifiable firm commitment are deferred and included in the
measurement of the underlying transaction. Gains and losses on hedges of
anticipated transactions are deferred until such time as the underlying
transactions are recognized or immediately when the transaction is no longer
expected to occur. In addition, the Company uses forward and option contracts to
hedge certain non-U.S. denominated asset and liability positions. Gains and
losses on these contracts are matched with the underlying gains and losses
resulting from currency movement on these balance sheet positions. Gains and
losses on any instruments not meeting the above criteria are recognized in
income in the current period. Net gains and losses from foreign currency
transactions were not material for fiscal years 1997, 1998 and 1999.
INTEREST RATE DERIVATIVES
The Company utilizes interest rate swap or interest rate cap agreements to
limit the impact of the variable interest rate of certain long-term debt. The
variable rates on swaps and caps are based primarily on U.S. dollar LIBOR, and
the swaps are reset on a quarterly basis. The differential between fixed and
variable rates to be paid or received on swaps is accrued as interest rates
change in accordance with the agreements and is included in current interest
expense. The costs of interest rate cap agreements are included in interest
expense ratably over the lives of the agreements. Payments to be received as a
result of the cap agreements are accrued as a reduction of interest expense. As
of May 30, 1999, no swap agreements were outstanding, and the outstanding
interest rate cap agreement had a maturity of three months.
FAIR VALUE AND NOTIONAL PRINCIPAL OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The table below shows the fair value and notional principal of the
Company's off-balance sheet instruments as of May 31, 1998 and May 30, 1999. The
notional principal amounts for off-balance sheet instruments provide one measure
of the transaction volume outstanding as of year end and do not represent the
amount of the Company's exposure to credit or market loss. The estimates of fair
value are based on applicable and commonly used pricing models using prevailing
financial market information as of May 31, 1998, and May 30, 1999. Although the
following table reflects the notional principal and fair value of amounts of
off-balance sheet instruments, it does not reflect the gains or losses
associated with the exposures and transactions that the off-balance sheet
instruments are intended to hedge. The amounts ultimately realized upon
settlement of these financial instruments, together with the gains and
F-64
<PAGE> 229
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- FINANCIAL INSTRUMENTS -- (CONTINUED)
losses on the underlying exposures will depend on actual market conditions
during the remaining life of the instruments.
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 30, 1999
----------------------------------- -----------------------------------
NOTIONAL CARRYING ESTIMATED NOTIONAL CARRYING ESTIMATED
PRINCIPAL AMOUNT FAIR VALUE PRINCIPAL AMOUNT FAIR VALUE
--------- -------- ---------- --------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest Rate
Instruments
Swaps................. $151.3 $ -- $(0.5) $ -- $-- $ --
Caps.................. -- -- -- 310.0 -- --
Foreign Exchange
Instruments
Purchased Options..... 31.7 0.8 0.6 32.1 -- --
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary table of estimated fair values of financial instruments follows:
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 30, 1999
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Long Term Debt
Senior Subordinated Notes.................. $300.0 $310.5 $600.0 $603.0
Term Loans................................. 151.3 151.3 310.0 310.0
PIK Note................................... 88.6 87.7 99.2 94.2
CMP Note................................... -- -- 50.8 50.8
</TABLE>
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting information about operating segments and related
disclosures about products, geographic information and major customers.
Comparative operating segment information for fiscal 1997 and 1998 is also
presented in accordance with SFAS No. 131.
Fairchild designs, develops, manufactures and markets high performance
multi-market semiconductors. The Company is currently organized into five
operating segments. There are four product line operating segments: Analog and
Mixed Signal Products Division, Discrete Power and Signal Technologies Group,
Logic Products Group and the Non-Volatile Memory Division. In addition, the
Company currently treats the recently acquired Power Device Business as an
operating segment. Each of these groups has a vice president, general manager
who reports directly to the Chief Executive Officer ("CEO"). The CEO allocates
resources to each of these groups using information on their revenues and
operating profits before interest, taxes and non-recurring items. The CEO has
been identified as the
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
Chief Operating Decision Maker as defined by SFAS No. 131. Fairchild's products
in all operating groups are sold to original equipment manufacturers and
distributors throughout the world.
In addition to the operating segments mentioned above, the Company also
operates sales and marketing, information systems, finance and administration
groups that are led by vice presidents and that also report to the CEO. The
expenses of these groups are allocated to the operating segments and are
included in the operating results reported below. The Company does not allocate
income taxes to its operating segments, and while interest expense allocations
are made for informational purposes, the operating segments are principally
evaluated on operating profit before interest and taxes.
Although the Company does not specifically identify and allocate all assets
by operating segment, it is the Company's strategy to have its capital intensive
manufacturing plants dedicated to its operating segments. Operating segments do
not sell products to each other, and accordingly, there are no inter-segment
revenues to be reported. The accounting policies for segment reporting are the
same as for the Company as a whole.
Statement of operations information on reportable segments for the three
years ended May 30, 1999 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUE AND OPERATING INCOME (LOSS):
Analog and Mixed Signal Products Division
Trade revenue............................................ $ -- $ 32.0 $ 64.1
Operating income (loss).................................. -- 2.2 (2.4)
------ ------ ------
Discrete Power and Signal Technologies Group
Trade revenue............................................ $164.5 $187.3 $180.3
Contract manufacturing revenue........................... 15.1 34.5 9.1
Operating income......................................... 21.7 44.9 4.8
------ ------ ------
Logic Products Group
Trade revenue............................................ $285.3 $303.0 $267.6
Contract manufacturing revenue........................... 89.1 118.9 71.9
Operating income......................................... 21.3 70.0 35.7
------ ------ ------
Non-Volatile Memory Division
Trade revenue............................................ $138.0 $113.5 $ 73.4
Operating income (loss).................................. 5.0 (14.2) (26.4)
------ ------ ------
Power Device Products Group
Trade revenue............................................ $ -- $ -- $ 74.2
Operating income......................................... -- -- 12.7
------ ------ ------
</TABLE>
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Other(1)
Revenue.................................................. $ -- $ -- $ (5.5)
Operating income (loss).................................. (16.1) (15.6) (71.8)
------ ------ ------
Total Consolidated
Trade revenue............................................ $587.8 $635.8 $654.1
Contract manufacturing revenue........................... 104.2 153.4 81.0
Operating income (loss).................................. 31.9 87.3 (47.4)
</TABLE>
- ---------------
(1) Other includes in fiscal year 1997, $5.3 million for restructuring and $10.8
million not allocated to the operating segments for amounts charged to the
Fairchild Business by National pursuant to "push-down" accounting rules
applied in connection with the Recapitalization. In fiscal 1998, such
amounts represent purchased in-process research and development. For fiscal
1999, such charges include $34.0 million for purchased in-process research
and development, $21.3 million for restructuring, $15.4 million for
additional charges taken for asset impairments in connection with the Memory
restructuring and $1.1 million of other charges not allocated to the
operating segments.
Property, plant and equipment (including molds and tooling) and
depreciation and amortization by reportable operating segment as of and for the
years ended May 31, 1998 and May 30, 1999 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT(1) AND DEPRECIATION AND
AMORTIZATION
Analog and Mixed Signal Products Division
Property, plant and equipment............................. $ 49.1 $ 8.3
Depreciation and amortization............................. 3.3 8.9
------ ------
Discrete Power and Signal Technologies Group
Property, plant and equipment............................. $114.8 $ 94.7
Depreciation and amortization............................. 20.8 24.6
------ ------
Logic Products Group
Property, plant and equipment............................. $172.5 $151.2
Depreciation and amortization............................. 51.7 53.2
------ ------
Non-Volatile Memory Division
Property, plant and equipment............................. $ -- $ --
Depreciation and amortization............................. 8.8 9.9
------ ------
</TABLE>
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Power Device Products Group
Property, plant and equipment............................. $ -- $100.1
Depreciation and amortization............................. -- 7.1
------ ------
Other
Property, plant and equipment............................. $ 6.5 $ 5.9
Depreciation and amortization............................. -- --
------ ------
Total Consolidated
Property, plant and equipment............................. $342.9 $360.2
Depreciation and amortization............................. 84.6 103.7
</TABLE>
- ---------------
(1) Property, plant and equipment includes molds and tooling, which is
classified in other assets on the consolidated balance sheets. Intangible
assets are solely identifiable to the Analog and Mixed Signal Division and
the Power Device Products Group.
Geographic revenue information for the three years ended May 30, 1999 is
based on the locations of the selling entities within the indicated geographic
areas. No individual foreign country is material to total revenues.
Revenues from unaffiliated customers by geographic region were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
TOTAL REVENUES:
United States............................................ $326.9 $395.7 $299.5
Asia..................................................... 247.5 260.9 324.3
Europe................................................... 117.6 132.6 111.3
------ ------ ------
Total...................................................... $692.0 $789.2 $735.1
====== ====== ======
</TABLE>
In fiscal years 1997, 1998 and 1999, National Semiconductor accounted for
15.1%, 19.4% and 11.0% of the Company's total revenues.
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
Geographic property, plant and equipment balances as of May 31, 1998 and
May 30, 1999 are based on the physical locations within the indicated geographic
areas and are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
United States............................................. $257.0 $174.4
Korea..................................................... -- 100.1
Philippines............................................... 36.8 40.5
Malaysia.................................................. 47.4 39.7
All others................................................ 1.7 5.5
------ ------
Total....................................................... $342.9 $360.2
====== ======
</TABLE>
NOTE 16 -- SUPPLEMENTAL CASH FLOW INFORMATION
As described in Note 1, National Semiconductor'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
Semiconductor's corporate transaction systems are not designed to track
receivables and certain liabilities and cash receipts and payments on a business
specific basis. Given these constraints, the following data is presented to
facilitate analysis of key components of cash flow activity for fiscal year
1997:
<TABLE>
<CAPTION>
YEAR ENDING
MAY 25,
1997
-------------
(IN MILLIONS)
<S> <C>
Operating activities:
Revenues less expenses.................................... $ 15.5
Depreciation and amortization............................. 77.1
Deferred taxes............................................ (20.3)
Loss on disposal of equipment, molds and tooling.......... 1.0
Non-cash interest expense................................. 1.9
Increase in accounts receivable........................... (79.6)
Decrease in inventories................................... 20.0
Increase in prepaid expenses and other current assets..... (5.8)
Increase in other assets.................................. 0.9
Increase in accounts payable.............................. 12.2
Increase in accrued expenses and other liabilities........ 21.6
Net financing provided to National Semiconductor*......... (25.4)
-------
Cash provided by operating activities.................. 19.1
-------
Investing activities:
Capital expenditures...................................... (47.1)
Purchase of molds and tooling............................. (7.2)
-------
Cash used by investing activities...................... (54.3)
-------
</TABLE>
F-69
<PAGE> 234
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- SUPPLEMENTAL CASH FLOW INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDING
MAY 25,
1997
-------------
(IN MILLIONS)
<S> <C>
Financing activities:
Issuance of long-term debt................................ 420.0
Debt acquisition costs.................................... (20.3)
Issuance of common stock.................................. 7.8
Issuance of preferred stock............................... 70.0
Distribution to National Semiconductor.................... (401.6)
-------
Cash provided by financing activities.................. 75.9
-------
Net change in cash and cash equivalents..................... 40.7
Cash and cash equivalents at beginning of year.............. --
-------
Cash and cash equivalents at end of year.................... $ 40.7
=======
</TABLE>
- -------------------------
* Net financing provided from (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.
Cash paid for interest by the Company totaled $0.1 million for the period
from March 11, 1997 through May 25, 1997. The Business did not make any cash
payments for interest prior to March 11, 1997, as discussed in Note 2. No cash
payments were made for income taxes.
During the year ended May 25, 1997, the Company issued a note to National
Semiconductor in the principal amount of approximately $77.0 million as
additional purchase consideration for the capital stock of Fairchild. The
Company recorded the note as an increase to long-term debt and accumulated
deficit. For the period from March 11 through May 25, 1997, and for fiscal 1998
and fiscal 1999, the Company accumulated dividends on the redeemable preferred
stock of approximately $1.8 million, $8.6 million and $9.8 million,
respectively. The Company recorded the accumulated dividends as an increase to
the carrying value of the redeemable preferred stock and accumulated deficit.
NOTE 17 -- ACQUISITIONS
In April 1999, the Company completed the acquisition of the Power Device
Business of Samsung Electronics for a purchase price of approximately $414.9
million, including related acquisition expenses. The Power Device Business
designs, manufactures and markets power discrete semiconductors and standard
analog integrated circuits serving the personal computer, industrial,
telecommunications and consumer electronics markets. The purchase includes all
of the worldwide operations and assets of the Power Device Business, which are
comprised in part of a high volume wafer fabrication plant in Bucheon, South
Korea, design and development operations in Bucheon, South Korea, secured
services for high volume assembly and test operations and worldwide sales and
marketing operations. The purchase price was financed through a combination of
borrowings under the Company's new Senior Credit Facilities, the CMP Note and
the 10 3/8% Notes. (See Note 4.)
The Power Device Business acquisition has been accounted for by the
purchase method of accounting and accordingly, the results of operations of the
Power Device Business are included in the accompanying consolidated financial
statements since the acquisition date. Assets acquired and
F-70
<PAGE> 235
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- ACQUISITIONS -- (CONTINUED)
liabilities assumed have been recorded at their estimated fair values as of the
acquisition date. The purchase price exceeded the fair value of the net tangible
assets acquired by approximately $289.5 million. Approximately $34.0 million of
the purchase price in excess of fair value of net tangible assets was allocated
to purchased in-process research and development. Accordingly, the Company
recorded a non-recurring charge for this purchased in-process research and
development concurrent with the acquisition. The remaining purchase price in
excess of fair value of net tangible assets was allocated to various intangible
assets, which will be amortized on a straight-line basis over three to fifteen
years.
On December 31, 1997, the Company acquired all of the outstanding common
stock of Raytheon for approximately $117.0 million in cash plus transaction
expenses. Raytheon, based in Mountain View, California, designs, manufactures
and markets high performance analog and mixed signal integrated circuits for the
personal computer, communications, broadcast video and industrial markets. The
acquisition was accounted for by the purchase method of accounting and
accordingly, the results of operations of Raytheon are included in the
accompanying consolidated financial statements since that date. The purchase
price exceeded the fair value of the net tangible assets by approximately $48.4
million. Approximately $15.5 million of the purchase price in excess of fair
value of net tangible assets was allocated to purchased in-process research and
development. Accordingly, the Company recorded a non-recurring charge for this
purchased in-process research and development concurrent with the acquisition.
The remaining purchase price in excess of fair value of net tangible assets was
allocated to various intangible assets, which will be amortized on a
straight-line basis over three to fifteen years.
The following unaudited pro forma consolidated results of operations are
presented as if the Power Device Business and Raytheon acquisitions had been
made at the beginning of the periods presented below:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
MAY 31, MAY 30,
1998 1999
---------- ----------
(IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenues................................................. $1,300.7 $1,111.9
Net income (loss)........................................ 20.6 (155.9)
Net income (loss) applicable to common stockholders...... 11.9 (165.7)
Net earnings (loss) per share:
Basic.................................................. $ 0.19 $ (2.63)
Diluted................................................ $ 0.18 $ (2.63)
</TABLE>
The pro forma results of operations include adjustments to give effect to
the contracts the Company entered into with Samsung Electronics, additional
depreciation and amortization related to the increased value of acquired fixed
assets and identifiable intangibles, interest expense on debt assumed issued to
finance the purchases, as well as adjustments to eliminate historical expenses
which will not be incurred by the Company. The unaudited pro forma information
is not necessarily indicative of the results of operations that would have
occurred had the purchases been made at the beginning of the periods presented
or the future results of the combined operations.
F-71
<PAGE> 236
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- CHANGE IN ACCOUNTING PRINCIPLE
Effective in the third quarter of Fiscal Year 1998, the Company adopted the
provisions of Emerging Issues Task Force Issue 97-13 "Accounting for Business
Process Reengineering Costs." This Issue requires companies to write-off
business process reengineering costs that had been previously capitalized. The
Company had been capitalizing such costs in conjunction with its enterprise
software implementation project. The Issue requires companies to write-off these
costs in the quarter that contains November 20, 1997.
The cumulative effect of adoption of this Issue resulted in a charge of
$1.5 million; net of taxes of $0.8 million for the year ended May 31, 1998. Of
the pre-tax write-off, $1.6 million applies to costs incurred in Fiscal Year
1998, while $0.7 million applies to costs incurred in Fiscal Year 1997. The
charge relates specifically to costs incurred to assess the system's
capabilities in light of the Company's current business processes, which under
prior guidance was capitalizable to the cost of the software.
NOTE 19 -- CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Below are condensed consolidating balance sheets, statements of operations
and statements of cash flows of Fairchild International as of and for the years
ended May 30, 1999 and May 31, 1998:
F-72
<PAGE> 237
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
MAY 30, 1999
-----------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ -- $ 33.1 $ 0.3 $ 29.0 $ -- $ 62.4
Accounts receivable,
net................... -- 35.6 10.4 83.7 -- 129.7
Inventories............. -- 83.4 17.0 48.2 -- 148.6
Other current assets.... -- 15.0 0.4 50.3 -- 65.7
------- ------- ------ ------ ------- --------
Total current
assets.......... -- 167.1 28.1 211.2 -- 406.4
Property, plant and
equipment, net.......... -- 166.1 8.3 185.8 -- 360.2
Deferred income taxes,
net..................... -- 10.0 7.8 (15.0) -- 2.8
Intangible assets, net.... -- 8.0 28.1 242.4 -- 278.5
Investment in
subsidiaries............ (6.4) 267.8 83.2 -- (344.6) --
Other assets.............. -- 36.6 1.6 9.6 -- 47.8
------- ------- ------ ------ ------- --------
Total assets...... $ (6.4) $ 655.6 $157.1 $634.0 $(344.6) $1,095.7
======= ======= ====== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt........ $ -- $ 14.1 $ -- $ -- $ -- $ 14.1
Accounts payable........ -- 45.4 4.4 55.9 (6.1) 99.6
Accrued expenses and
other current
liabilities........... -- 50.0 8.0 27.0 -- 85.0
------- ------- ------ ------ ------- --------
Total current
liabilities..... -- 109.5 12.4 82.9 (6.1) 198.7
Long-term debt, less
current portion......... 150.0 895.9 -- -- -- 1,045.9
Net intercompany
(receivable) payable.... (6.1) (344.2) (24.3) 368.5 6.1 --
Other liabilities......... -- 0.8 -- 0.6 -- 1.4
------- ------- ------ ------ ------- --------
Total
liabilities..... 143.9 662.0 (11.9) 452.0 -- 1,246.0
------- ------- ------ ------ ------- --------
Redeemable preferred
stock................... 90.1 -- -- -- -- 90.1
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............... 9.6 62.0 -- -- (62.0) 9.6
Accumulated earnings
(deficit)............. (250.6) (68.4) 169.0 182.0 (282.6) (250.6)
------- ------- ------ ------ ------- --------
Total
stockholders'
equity
(deficit)....... (240.4) (6.4) 169.0 182.0 (344.6) (240.4)
------- ------- ------ ------ ------- --------
Total liabilities
and
stockholders'
equity
(deficit)....... $ (6.4) $ 655.6 $157.1 $634.0 $(344.6) $1,095.7
======= ======= ====== ====== ======= ========
</TABLE>
F-73
<PAGE> 238
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 30, 1999
-----------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Net sales -- trade...... $ -- $ 177.1 $ 64.2 $412.8 $ -- $ 654.1
Net
sales -- intercompany... -- 536.8 -- 101.1 (637.9) --
Contract
manufacturing --
National
Semiconductor......... -- 81.0 -- -- -- 81.0
------- ------- ------ ------ ------- -------
Total revenue..... -- 794.9 64.2 513.9 (637.9) 735.1
Operating expenses:
Cost of sales........... -- 57.1 39.7 421.6 -- 518.4
Cost of
sales -- intercompany.. -- 596.9 -- 41.0 (637.9) --
Cost of contract
manufacturing -- National
Semiconductor......... -- 64.4 -- -- -- 64.4
Research and
development........... -- 26.1 10.8 2.4 -- 39.3
Selling, general and
administrative........ -- 62.9 13.8 28.4 -- 105.1
Purchased in-process
research and
development........... -- -- -- 34.0 -- 34.0
Restructuring and
impairments........... -- 8.6 12.7 -- -- 21.3
------- ------- ------ ------ ------- -------
Total operating
expenses........ -- 816.0 77.0 527.4 (637.9) 782.5
------- ------- ------ ------ ------- -------
Operating income (loss)... -- (21.1) (12.8) (13.5) -- (47.4)
Interest expense, net..... 11.3 54.1 4.4 2.0 -- 71.8
Equity in subsidiary
(income) loss........... 102.7 33.6 22.8 -- (159.1) --
------- ------- ------ ------ ------- -------
Income (loss) before
income taxes............ (114.0) (108.8) (40.0) (15.5) 159.1 (119.2)
Provision (benefit) for
income taxes............ 0.1 (6.1) (1.2) 2.1 -- (5.1)
------- ------- ------ ------ ------- -------
Net income (loss)......... $(114.1) $(102.7) $(38.8) $(17.6) $ 159.1 $(114.1)
======= ======= ====== ====== ======= =======
</TABLE>
F-74
<PAGE> 239
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 30, 1999
--------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used in)
operating activities:.......... $ -- $ (14.7) $(29.4) $ 88.2 $ 44.1
------ ------- ------ ------- -------
Cash flows from investing
activities:
Capital expenditures........... -- (26.6) (0.5) (19.1) (46.2)
Proceeds from sale of property,
plant and equipment.......... -- 1.0 30.2 -- 31.2
Purchase of molds and
tooling...................... -- -- -- (3.8) (3.8)
Refundable payment of value
added tax associated with
acquisitions................. -- -- -- (40.9) (40.9)
Investment (in) from
affiliate.................... (50.0) 50.0 -- -- --
Net intercompany investing..... (406.8) -- 406.8 --
Acquisitions, net of cash
acquired..................... -- (8.1) -- (406.8) (414.9)
------ ------- ------ ------- -------
Cash provided by (used in)
investing activities....... (50.0) (390.5) 29.7 (63.8) (474.6)
------ ------- ------ ------- -------
Cash flows from financing
activities:
Repayment of long-term debt.... -- (151.3) -- -- (151.3)
Issuance of long-term debt..... 50.0 610.0 -- -- 660.0
Debt issuance costs............ -- (22.3) -- -- (22.3)
------ ------- ------ ------- -------
Cash provided by financing
activities................. 50.0 436.4 -- -- 486.4
------ ------- ------ ------- -------
Net change in cash and cash
equivalents.................... -- 31.2 0.3 24.4 55.9
Cash and cash equivalents at
beginning of period............ -- 1.9 -- 4.6 6.5
------ ------- ------ ------- -------
Cash and cash equivalents at end
of period...................... $ -- $ 33.1 $ 0.3 $ 29.0 $ 62.4
------ ------- ------ ------- -------
Supplemental Cash Flow
Information:
Cash paid (refunded) during the
year for:
Income taxes................. $ -- $ (2.0) $ -- $ 2.0 $ --
------ ------- ------ ------- -------
Interest..................... $ -- $ 46.6 $ -- $ -- $ 46.6
------ ------- ------ ------- -------
</TABLE>
F-75
<PAGE> 240
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
MAY 31, 1998
-----------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ -- $ 1.9 $ -- $ 4.6 $ -- $ 6.5
Accounts receivable,
net.................. -- 24.7 13.3 37.0 -- 75.0
Inventories............. -- 90.7 14.8 2.5 -- 108.0
Other current assets.... -- 13.2 0.5 6.3 -- 20.0
------- ------ ------ ------ ------- ------
Total current
assets........ -- 130.5 28.6 50.4 -- 209.5
Property, plant and
equipment, net.......... -- 209.0 48.1 85.8 -- 342.9
Deferred income taxes,
net..................... 3.9 12.2 5.3 (1.4) -- 20.0
Intangible assets, net.... -- -- 31.5 -- -- 31.5
Investment in
subsidiaries............ 46.3 211.0 -- -- (257.3) --
Other assets.............. -- 19.2 1.6 9.6 -- 30.4
------- ------ ------ ------ ------- ------
Total assets.... $ 50.2 $581.9 $115.1 $144.4 $(257.3) $634.3
======= ====== ====== ====== ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt....... $ -- $ 13.2 $ -- $ -- $ -- $ 13.2
Accounts payable........ -- 56.1 5.5 14.7 (2.3) 74.0
Accrued expenses and
other current
liabilities.......... -- 38.6 1.8 15.5 -- 55.9
------- ------ ------ ------ ------- ------
Total current
liabilities... -- 107.9 7.3 30.2 (2.3) 143.1
Long-term debt, less
current portion......... 88.6 438.1 -- -- -- 526.7
Net intercompany
(receivable) payable.... (2.3) (10.5) (9.6) 20.1 2.3 --
Other liabilities......... -- 0.1 -- 0.5 -- 0.6
------- ------ ------ ------ ------- ------
Total
liabilities... 86.3 535.6 (2.3) 50.8 -- 670.4
------- ------ ------ ------ ------- ------
Redeemable preferred
stock................... 80.5 -- -- -- -- 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 12.0 -- -- (12.0) 9.5
Accumulated earnings
(deficit)............ (126.7) 34.3 117.4 93.6 (245.3) (126.7)
------- ------ ------ ------ ------- ------
Total
stockholders'
equity
(deficit)..... (116.6) 46.3 117.4 93.6 (257.3) (116.6)
------- ------ ------ ------ ------- ------
Total
liabilities
and
stockholders'
equity
(deficit)..... $ 50.2 $581.9 $115.1 $144.4 $(257.3) $634.3
======= ====== ====== ====== ======= ======
</TABLE>
F-76
<PAGE> 241
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1998
-----------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Net sales -- trade...... $ -- $ 222.1 $32.1 $381.6 $ -- $635.8
Net sales --
intercompany.......... -- 786.6 -- 114.4 (901.0) --
Contract
manufacturing --
National
Semiconductor......... -- 153.4 -- -- -- 153.4
------ -------- ----- ------ ------- ------
Total revenue..... -- 1,162.1 32.1 496.0 (901.0) 789.2
Operating expenses:
Cost of sales........... -- 39.3 20.0 382.3 -- 441.6
Cost of sales --
intercompany.......... -- 830.0 -- 71.0 (901.0) --
Cost of contract
manufacturing -- National
Semiconductor......... -- 117.1 -- -- -- 117.1
Research and
development........... -- 30.1 4.6 1.0 -- 35.7
Selling, general and
administrative........ -- 65.8 5.1 21.1 -- 92.0
Purchased in-process
research and
development........... -- 15.5 -- -- -- 15.5
------ -------- ----- ------ ------- ------
Total operating
expenses........ -- 1,097.8 29.7 475.4 (901.0) 701.9
------ -------- ----- ------ ------- ------
Operating income (loss)... -- 64.3 2.4 20.6 -- 87.3
Interest expense, net..... 9.8 43.0 1.8 (0.1) -- 54.5
Equity in subsidiary
(income) loss........... (28.7) (16.9) -- -- 45.6 --
------ -------- ----- ------ ------- ------
Income (loss) before
income taxes............ 18.9 38.2 0.6 20.7 (45.6) 32.8
Provision (benefit) for
income taxes............ (3.2) 9.5 0.2 4.2 -- 10.7
------ -------- ----- ------ ------- ------
Income (loss) before
cumulative effect of
change in accounting
principle............... 22.1 28.7 0.4 16.5 (45.6) 22.1
Cumulative effect of
change in accounting
principle, net of tax
effect of $0.8
million................. (1.5) -- -- -- -- (1.5)
------ -------- ----- ------ ------- ------
Net income (loss)......... $ 20.6 $ 28.7 $ 0.4 $ 16.5 $ (45.6) $ 20.6
====== ======== ===== ====== ======= ======
</TABLE>
F-77
<PAGE> 242
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1998
-----------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows provided by
operating activities:... $ -- $ 105.4 $ 0.4 $ 30.3 $-- $ 136.1
---- ------- ----- ------ --- -------
Cash flows from investing
activities:
Capital expenditures.... -- (48.7) (0.4) (28.9) -- (78.0)
Purchase of molds and
tooling............... -- -- -- (5.7) -- (5.7)
Acquisitions, net of
cash acquired......... -- (116.8) -- -- -- (116.8)
---- ------- ----- ------ --- -------
Cash used by investing
activities.......... -- (165.5) (0.4) (34.6) -- (200.5)
---- ------- ----- ------ --- -------
Cash flows from financing
activities:
Repayment of long-term
debt.................. -- (58.7) -- -- -- (58.7)
Issuance of long-term
debt.................. -- 90.0 -- -- -- 90.0
Debt issuance costs..... -- (1.1) -- -- -- (1.1)
---- ------- ----- ------ --- -------
Cash provided by
financing
activities.......... -- 30.2 -- -- -- 30.2
---- ------- ----- ------ --- -------
Net change in cash and
cash equivalents........ -- (29.9) -- (4.3) -- (34.2)
Cash and cash equivalents
at beginning of
period.................. -- 31.8 -- 8.9 -- 40.7
---- ------- ----- ------ --- -------
Cash and cash equivalents
at end of period........ $ -- $ 1.9 $ -- $ 4.6 $-- $ 6.5
==== ======= ===== ====== === =======
Supplemental Cash Flow
Information:
Cash paid during the
year for:
Income taxes.......... $ -- $ 7.7 $ -- $ 1.2 $-- $ 8.9
==== ======= ===== ====== === =======
Interest.............. $ -- $ 43.8 $ -- $ -- $-- $ 43.8
==== ======= ===== ====== === =======
</TABLE>
NOTE 20 -- SUBSEQUENT EVENT
On August 9, 1999, Fairchild International completed an initial public
offering of 20,000,000 shares of its Class A Common Stock. The gross proceeds
from the offering of $370.0 million were used to repay the 11.74% PIK Note
($101.4 million), to repay the 12.5% CMP Note ($53.0 million), including a
prepayment penalty of $0.8 million, to fund a capital contribution to Fairchild
($191.0 million) which was used to repay the Tranche A term loan and partially
repay the Tranche B term loan, and to pay fees and expenses from the offering.
In addition, as a result of the offering, the warrant issued to Citicorp
Mezzanine Partners to purchase 3,538,228 shares of the Company's Class A Common
Stock became unexercisable.
F-78
<PAGE> 243
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Samsung Electronics Co., Ltd.
In our opinion, the accompanying statements of net assets (liabilities) and
the related statements of operations and comprehensive income (loss) and cash
flows present fairly, in all material respects, the financial position of the
Power Device Business of Samsung Electronics Co., Ltd. (the "Business") at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Business' management, our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 11 to the financial statements, the operations of the
Business, and those of similar companies in the Republic of Korea, have been
significantly affected, and will continue to be affected for the foreseeable
future, by the country's unstable economy caused in part by the currency
volatility in the Asia Pacific region.
The Business is an operating unit of Samsung Electronics Co., Ltd. and, as
discussed in Notes 3, 7 and 15, has engaged in various transactions with Samsung
Electronics Co., Ltd.
Samil Accounting Corporation
Seoul, Korea
February 24, 1999
F-79
<PAGE> 244
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
STATEMENTS OF NET ASSETS (LIABILITIES)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
1997 1998
---------- ----------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18 $ 37
Trade accounts and notes receivable, net.................. 28,445 26,605
Inventories............................................... 50,469 43,977
Deferred tax assets....................................... 909 1,184
Prepaid expenses and other current assets................. 2,317 3,750
-------- --------
Total current assets................................... 82,158 75,553
Advances to employees....................................... 5,398 2,632
Property, plant and equipment, net.......................... 93,166 90,955
Deposit for deferred employee compensation.................. 6,272 --
Intangible assets, net...................................... 1,182 887
Other assets................................................ 419 262
-------- --------
Total assets........................................... 188,595 170,289
-------- --------
LIABILITIES
Current liabilities:
Corporate borrowings...................................... 9,750 12,641
Current portion of capital lease obligation............... 12,706 8,086
Trade accounts and notes payable.......................... 11,086 13,729
Income taxes payable to Samsung........................... 6,394 12,947
Accrued expenses and other accounts payable............... 6,621 70,594
-------- --------
Total current liabilities.............................. 46,557 117,997
Corporate borrowings........................................ 92,032 46,065
Capital lease obligation.................................... 15,151 9,667
Deferred employee compensation.............................. 13,004 6,471
Deferred tax liabilities.................................... 3,173 1,914
-------- --------
Total liabilities...................................... 169,917 182,114
-------- --------
Commitments and contingencies
NET ASSETS (LIABILITIES)
Business equity............................................. 37,301 272
Accumulated other comprehensive loss --
Cumulative translation adjustments........................ (18,623) (12,097)
-------- --------
Total net assets (liabilities)......................... $ 18,678 $(11,825)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-80
<PAGE> 245
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
Revenues:
Net sales............................................ $418,047 $440,700 $369,899
Contract manufacturing -- Samsung Electronics........ 53,735 37,428 16,620
-------- -------- --------
Total revenue........................................ 471,782 478,128 386,519
-------- -------- --------
Operating expenses:
Cost of sales........................................ 361,624 309,712 232,562
Cost of contract manufacturing -- Samsung
Electronics....................................... 53,735 37,428 16,620
Research and development............................. 18,579 19,205 15,224
Selling, general and administrative.................. 28,950 34,280 33,812
Litigation settlement................................ -- -- 58,000
-------- -------- --------
Total operating expenses.......................... 462,888 400,625 356,218
-------- -------- --------
Operating income....................................... 8,894 77,503 30,301
Interest expense, net.................................. 10,384 10,076 4,205
Foreign currency losses, net........................... 497 5,933 923
-------- -------- --------
Income (loss) before income taxes...................... (1,987) 61,494 25,173
Income tax benefit (provision)......................... 4,754 (18,549) (9,519)
-------- -------- --------
Net income............................................. 2,767 42,945 15,654
-------- -------- --------
Other comprehensive income (loss):
Net foreign currency translation adjustments...... (4,837) (14,491) 6,526
-------- -------- --------
Comprehensive income (loss)............................ $ (2,070) $ 28,454 $ 22,180
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE> 246
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income................................................ $ 2,767 $ 42,945 $ 15,654
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 48,965 38,792 22,289
Provision for (recovery of) doubtful accounts........... (6) 93 7
Provision for (reversal of) inventory reserve........... (216) (3,713) 1,016
Accrual for litigation settlement....................... -- -- 58,000
Loss on disposition of property, plant and equipment.... 1,545 423 498
Deferred employee compensation.......................... 1,407 (8,623) 3,745
Deferred income taxes................................... (4,365) 8,648 (1,534)
Changes in operating assets and liabilities:
Trade accounts and notes receivable..................... 3,283 (28,329) 5,817
Inventories............................................. 13,092 (3,166) 12,617
Prepaid expenses and other current assets............... 2,629 720 (894)
Advances to employees................................... (1,208) 1,702 3,188
Deposit for deferred employee compensation.............. (1,036) 4,057 6,345
Other assets............................................ 1,463 516 198
Trade accounts and notes payable........................ (2,942) 1,008 638
Income taxes payable to Samsung......................... (4,966) 6,394 6,553
Accrued expenses and other accounts payable............. (12,388) 19,152 4,232
Payment of deferred employee compensation............... (8,642) (6,299) (10,278)
--------- --------- ---------
Net cash provided by operating activities............... 39,382 74,320 128,091
--------- --------- ---------
Cash Flows From Investing Activities:
Acquisition of property, plant and equipment............ (118,005) (10,259) (7,671)
Proceeds from sale of property, plant and equipment..... 30,644 10,593 2,297
Acquisition of intangible assets........................ (1,134) (454) (319)
--------- --------- ---------
Net cash used in investing activities................... (88,495) (120) (5,693)
--------- --------- ---------
Cash Flows from Financing Activities:
Corporate borrowing, net................................ 54,223 (75,678) (43,076)
Capital lease payment................................... (9,335) (23,819) (11,046)
Net capital distribution................................ (16,867) (57,593) (52,683)
--------- --------- ---------
Net cash provided by (used in) financing activities..... 28,021 (157,090) (106,805)
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 21,092 82,907 (15,574)
--------- --------- ---------
Net increase in cash and cash equivalents................... -- 17 19
Cash and cash equivalents, beginning of period.............. 1 1 18
--------- --------- ---------
Cash and cash equivalents, end of period.................... $ 1 $ 18 $ 37
========= ========= =========
Supplemental disclosure of cash flows information:
Interest paid........................................... $ 396 $ 252 $ 9
========= ========= =========
Machinery and equipment acquired under capital lease.... $ 103 $ 673 $ 942
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE> 247
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION:
BUSINESS
The Power Device Business (the "Business") was established in 1985 as an
operating unit of Samsung Electronics Co., Ltd. ("Samsung"). The Business is not
a distinct legal entity. The Business designs, develops and manufactures
discrete and standard analog semiconductors. These products are used in major
market worldwide sectors including computers, computer peripherals, office
equipment, consumer electronics, lighting, communications, and industrial
equipment. The Business is located in Bucheon, the Republic of Korea ("Korea")
and shares the Samsung Bucheon factory with Samsung's Multimedia Business.
On December 20, 1998, Samsung entered into a Business Transfer Agreement
(the "Agreement") with Fairchild Semiconductor Corporation ("Fairchild"). Under
terms of the Agreement, Fairchild shall purchase substantially all of the assets
including allocated notes receivable and prepaid expenses and assume certain
liabilities of the Business in exchange for $455,000 thousand in cash, subject
to certain conditions and adjustments. In conjunction with the transfer of the
Business, Samsung intends to pay an employee bonus to the employees staying with
the Business to the closing date.
BASIS OF PRESENTATION
The Securities and Exchange Commission, in Staff Accounting Bulletin Number
55, requires that historical financial statements of a subsidiary, division, or
lesser business component of another entity include certain expenses incurred by
the parent on its behalf. These expenses generally include, but are not limited
to, officer and employee salaries, rent, depreciation, advertising, accounting
and legal services, other selling, general and administrative expenses and other
such expenses. These financial statements include such expenses and services.
These financial statements present the assets, liabilities, results of
operations and cash flows of the Business. Because the Business did not
previously prepare separate financial statements, these financial statements
were derived by extracting the assets, liabilities and results of operations of
the Business from the corresponding Samsung accounts. As a result, the carved
out financial statements contain allocations of certain Samsung assets,
liabilities, revenues and expenses attributable to the Business deemed
reasonable by management to present the Business on a stand-alone basis.
Although the Business' management is unable to estimate the actual benefits
which would have been realized and costs which would have been incurred had the
respective transactions been executed with independent third parties, the
allocation methodologies described below and within the respective notes to
financial statements, where appropriate, are considered reasonable by
management. The financial position and results of operations of the Business
may, however, differ from the results which may have been achieved had the
Business operated as an independent legal entity. Additionally, future expenses
incurred as an independent entity may not be comparable to the historical
levels.
The carved out financial statements are presented in accordance with
generally accepted accounting principles of the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies followed by the Business in the
preparation of its financial statements are summarized below.
F-83
<PAGE> 248
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
RELATED PARTY ACTIVITY AND ALLOCATIONS
The financial statements reflect the assets, liabilities, revenue and
expenses that were directly related to the Business as it operated within
Samsung. In cases involving assets and liabilities not specifically identifiable
to any particular facility, a portion of such items were allocated to the
Business based on assumptions that management considers reasonable in the
circumstances.
Samsung uses a centralized approach to cash management and the financing of
its operations. These systems did not track cash balances, notes receivable
balances and bank borrowings on a business specific basis. Accordingly, notes
receivable and debt not specifically identifiable to the operations of any
particular facility were allocated annually to the Business based on the
customer sales ratio and fixed asset ratio of the Business, respectively, as a
percentage of Samsung for each respective period. Interest expense on allocated
debt was determined by applying the average interest rates of Samsung during the
respective periods. Management believes the debt allocation basis is reasonable
as the Business operates in a highly capital intensive industry and capital
expenditures are financed through bank borrowings.
Manufacturing costs were generally apportioned between the Business and
Samsung's other product lines based upon actual factory production loading.
Certain manufacturing costs (e.g., material costs) that were specifically
identifiable with a particular product line were charged directly.
Other operating units of Samsung also performed manufacturing services for
the Business and incurred other elements of cost of sales on behalf of the
Business, including freight, duty, warehousing, and purchased manufacturing
services from third party vendors. Costs of these services are specifically
identified as they relate to the Business. Also, the Business has performed
contract manufacturing related to wafer foundry services for Samsung. The
revenues for these services are reflected at cost in the accompanying statements
of operations. These costs include manufacturing costs incurred within the
Samsung Bucheon factory and do not include cost of raw materials and/or
processing costs incurred outside of the Samsung Bucheon factory.
Shared or common costs, including certain general and administrative, sales
and marketing, and research and development expenses, have been allocated from
Samsung's corporate office, selling and marketing locations, and manufacturing
sites to the Business on a basis which is considered by management to reasonably
reflect the utilization of such services by the operating unit receiving the
charge. These allocations were based on sales revenues, the number of employees
and working hours. Research and development (R&D) expenses represent the actual
costs incurred by the Bucheon factory plus R&D expenses specifically incurred by
Samsung on behalf of the Business.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
revenues and expenses in the financial statements and accompanying notes.
Significant estimates made by management include those related to the useful
lives of property, plant and equipment, allowances for doubtful accounts and
customer returns, inventory realizability, contingent liabilities and allocated
expenses. Actual results could differ from those estimates, and such differences
may be material to the financial statements.
F-84
<PAGE> 249
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and cash in bank accounts,
with original maturities of three months or less.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Business provides an allowance for doubtful accounts and notes
receivable to reduce such receivables to their probable estimated collectable
amounts.
INVENTORIES
Inventories are stated at the lower of cost or market, using the weighted
average method, except for materials in-transit, for which cost is determined
using the specific identification method.
INTANGIBLE ASSETS
Intangible assets, principally patent rights, are stated at cost and
amortized on a straight-line basis over their estimated useful lives of 10 years
which does not exceed the patent period.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as set forth below:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
-------------
<S> <C>
Buildings................................................... 15 - 40 years
Building related structures................................. 7 - 40 years
Machinery and equipment..................................... 5 years
Tools....................................................... 5 years
Furniture and fixtures...................................... 5 years
Vehicles.................................................... 5 years
</TABLE>
Assets under capital leases and leasehold improvements are amortized over
the shorter of the asset life or the remaining lease term. Amortization of
assets under capital leases is included within depreciation expense.
Upon retirement or other disposal of fixed assets, the costs and related
accumulated depreciation or amortization are eliminated from the accounts, and
any resulting gain or loss is reflected in income for the period. Routine
maintenance and repairs are charged to expense as incurred. Expenditures which
enhance the value or significantly extend the useful lives of the related assets
are capitalized.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Business adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of". In accordance
with this standard, management periodically evaluates the carrying value of
long-lived assets to be held and used, when events and circumstances warrant
such a review.
F-85
<PAGE> 250
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
The carrying value of long-lived assets is considered impaired when the
anticipated undiscounted cash flows is separately identifiable and is less than
the carrying value of the assets. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair market value of the
long-lived assets.
Fair market value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. The adoption of this
new accounting standard did not have a material effect on the Business'
operating results or financial position.
WARRANTIES
The Business' products are generally warranted for up to one year from
customer receipt. Estimated future costs of repair, replacement, or customer
accommodations are reflected in income for the period of the related sales.
RECOGNITION OF REVENUES
Revenues from the sale of products are recognized on the transfer of
ownership upon shipment. The Business provides a reserve for product returns
from all customers at the time revenue is recognized. Contract manufacturing
revenues are recognized based on completion of respective stages of production,
defined as wafer fabrication and electronic die sorting.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
The Business receives, under the terms of specific legislation, research
and development grants for projects selected by the government. Such grants,
collectively insignificant, are recorded as liabilities since the grant monies
must be repaid upon conclusion of the project.
INCOME TAXES
The Business is not a separate taxable entity for Korean or international
tax purposes and has not filed separate income tax returns, but rather was
included in the income tax returns filed by Samsung. Accordingly, income tax
expense in the carved out financial statements has been calculated as if filed
on a separate tax return basis. The Business accounts for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS 109 requires
an asset and liability approach for financial accounting and reporting for
income tax purposes. Under the asset and liability method, deferred income taxes
are recognized for temporary differences, net operating loss carryforwards and
credits by applying enacted statutory tax rates applicable to future years.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
Investment R&D tax credits are accounted for by the flow-through method
whereby they reduce income taxes in the period the assets giving rise to such
credits are placed in service. To the extent such credits are not currently
utilized, deferred tax assets, subject to considerations about the need for a
valuation allowance, are recognized for the carryforward account.
F-86
<PAGE> 251
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
DEFERRED EMPLOYEE COMPENSATION
In accordance with statutory regulations in Korea, employees and directors
with one year or more of service are entitled to receive a lump-sum payment upon
termination of their employment with the Business, based on years of service and
rate of pay at the time of termination. The accrual for deferred compensation
approximates the amount required if all employees were to terminate employment
at the balance sheet date.
The annual provision for deferred compensation charged to operations is
calculated based on the net change in the deferred compensation amount, assuming
the termination of all eligible employees and directors as of the beginning and
end of the period, plus the actual payments made during the period.
Under the National Pension Fund Law of Korea, the Business is required to
pay a certain percentage of employee retirement benefits to the National Pension
Fund in exchange for a reduction in their severance pay. Contributed amounts
shall be refunded from the National Pension Plan to employees on their
retirement. This amount has been offset against deferred compensation except for
the portion related to employees with less than one year of service which is
included in current assets.
Deferred employee compensation is partially funded through a group
severance insurance plan with Samsung Life Insurance Co., Ltd., an affiliate of
Samsung. The amounts deposited under this insurance plan are classified as
noncurrent assets and may only be withdrawn for the actual payment of deferred
compensation.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in currencies other than the Korean won
have been translated at the rate of exchange on the balance sheet date. Gains
and losses resulting from the translation are reflected in income for the
period.
The Business' functional currency is the Korean won, the primary currency
in which business is conducted, and its official accounting records are
maintained in Korean won. The accompanying financial statements are reported in
US dollars pursuant to SFAS No. 52, "Foreign Currency Translation." Assets and
liabilities are translated at the exchange rate as of the balance sheet date.
All revenue and expense accounts are translated at a weighted-average exchange
rate in effect during the respective period.
Resulting translation adjustments are recorded in a separate component of
net assets entitled "Cumulative Translation Adjustment." All amounts in these
financial statements have been presented in thousands of US dollars, unless
otherwise stated.
The exchange rates used to translate the financial statements are as
follows:
<TABLE>
<CAPTION>
EXCHANGE RATES USED
-------------------------------------
BALANCE SHEET REVENUE AND EXPENSE
ACCOUNTS ACCOUNTS
-------------- -------------------
<S> <C> <C>
1996................................................ US$1 = 844.20 US$1 = 804.78
1997................................................ US$1 = 1415.20 US$1 = 951.11
1998................................................ US$1 = 1207.80 US$1 = 1398.88
</TABLE>
F-87
<PAGE> 252
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
COMPREHENSIVE INCOME
Effective January 1, 1996, the Business retroactively adopted SFAS No. 130,
"Reporting Comprehensive Income". SFAS 130 establishes standards for the
reporting and display of comprehensive income. The components of comprehensive
income (loss) include net income and foreign currency translation adjustments.
There is no tax effect on the foreign currency translation adjustments.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Business to a
concentration of credit risk consist primarily of cash and cash equivalents and
trade accounts and notes receivable.
The Business deposits its cash with a major Korean bank. Deposits in this
bank may exceed the amount of insurance provided on such deposits. However, the
Business is exposed to loss only to the extent of the amount of cash reflected
on its statements of net assets. The Business has not experienced losses on its
bank cash deposits.
The Business performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral for domestic
customers on accounts or notes receivable. The Business maintains reserves for
potential credit losses, but historically has not experienced significant losses
related to individual customers or groups of customers in any particular
industry or geographic area. The Business derives a substantial portion of its
revenues from export sales through Samsung's foreign subsidiaries in Asia, North
America and Europe.
A substantial portion of the components necessary for the manufacture and
operation of many of the Business' products are obtained from the other
operating units of Samsung and its affiliates. The disruption or termination of
any of these sources could have a material adverse effect on the Business'
operating results and financial condition.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, trade accounts and notes
receivable, trade accounts and notes payable, and accrued expenses and other
accounts payable approximates fair value due to the short-term nature of these
instruments.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The provisions
of the statement require the recognition of all derivatives as either assets or
liabilities in the financial statements and the measurement of those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This statement is effective for fiscal years beginning after June 15, 1999. The
Business is currently not separately engaged in any derivatives or hedging
activities.
In 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which provides guidance
concerning recognition and measurement of costs associated with developing or
acquiring software for internal use. In 1998, the AICPA also issued Statement of
Position
F-88
<PAGE> 253
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
98-5, "Reporting on the Costs of Start-Up Activities", which provides guidance
concerning the costs of start-up activities. For accounting purposes, start-up
activities are defined as one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory or
with a new class of customer, initiating a new process in an existing facility,
or commencing some new operation. Both pronouncements are effective for
financial statements of years beginning after December 15, 1998, with earlier
application encouraged. Management does not believe that adoption of these
pronouncements will have a material impact on the financial statements of the
Business.
3. TRADE ACCOUNTS AND NOTES RECEIVABLE:
Trade accounts and notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Trade accounts receivable
Due from third parties.................................... $10,820 $ 9,198
Due from Samsung subsidiaries and affiliates.............. 9,173 2,338
------- -------
19,993 11,536
Trade notes receivable
Due from third parties.................................... 8,205 7,516
Due from Samsung subsidiaries and affiliates.............. 353 7,666
------- -------
8,558 15,182
Allowance for doubtful accounts............................. (106) (113)
$28,445 $26,605
======= =======
</TABLE>
At December 31, 1997 and 1998, trade accounts receivable of $17,992
thousand and $6,148 thousand, respectively, are denominated in foreign
currencies, primarily US dollars. Trade notes receivable represents amounts due
from domestic customers maturing generally within 90 to 120 days with no
interest charge.
F-89
<PAGE> 254
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Finished products........................................... $15,606 $21,482
Work-in-process............................................. 25,395 19,632
Raw materials and supplies.................................. 10,444 6,411
Materials in-transit........................................ 1,757 201
------- -------
53,202 47,726
Allowance for obsolete and excess inventory................. (2,733) (3,749)
------- -------
$50,469 $43,977
======= =======
</TABLE>
At December 31, 1998, substantially all of the Business' inventories are
insured against fire and other casualty losses.
At December 31, 1998, a portion of the Business' inventory up to a maximum
amount of $27,654 thousand is pledged as collateral for a bank loan of Samsung.
At December 31, 1998, a total of approximately $9,136 thousand of raw materials
and work-in-process inventories was held by the Business' subcontractors
including Samsung plants in Korea and China. Also, at December 31, 1998, all
finished goods inventories were held by the Samsung Onyang plant in Korea for
warehousing.
5. ADVANCES TO EMPLOYEES:
The Business provides advances to its employees primarily for the purchase
or lease of residential properties. Advances to employees are provided for
periods of up to 7 years and earn interest at a maximum annual rate not to
exceed 4%.
F-90
<PAGE> 255
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Buildings................................................... $ 38,666 $ 44,948
Building related structures................................. 6,124 7,175
Machinery and equipment..................................... 165,362 190,421
Tools....................................................... 3,046 2,894
Furniture and fixtures...................................... 7,737 8,757
Vehicles.................................................... 497 466
--------- ---------
221,432 254,661
Accumulated depreciation.................................... (137,891) (172,685)
--------- ---------
83,541 81,976
Land........................................................ 8,973 8,563
Construction in progress.................................... 510 247
Machinery in transit........................................ -- 4
Other....................................................... 142 165
--------- ---------
$ 93,166 $ 90,955
========= =========
</TABLE>
At December 31, 1998, substantially all of the Business' property, plant
and equipment, other than land and certain construction in progress, are insured
against fire and other casualty losses. A substantial portion of the Business'
property, plant and equipment at December 31, 1998 is pledged as collateral for
various bank loans of Samsung.
Depreciation expense for property, plant and equipment was $48,812
thousand, $38,564 thousand and $21,540 thousand for the years ended December 31,
1996, 1997, and 1998, respectively.
At December 31, 1998, approximately $6,132 thousand of the Business'
manufacturing machinery and equipment was held by its subcontractors, primarily
in Korea.
Property, plant and equipment under capital leases, which include primarily
machinery and equipment, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Cost........................................................ $ 40,114 $ 40,325
Accumulated amortization.................................... (30,387) (33,658)
-------- --------
$ 9,727 $ 6,667
======== ========
</TABLE>
Amortization expense for assets under capital leases for the years ended
December 31, 1996, 1997 and 1998 is $15,026 thousand, $9,350 thousand and $4,002
thousand, respectively.
F-91
<PAGE> 256
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. TRADE ACCOUNTS AND NOTES PAYABLE:
Trade accounts and notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Trade accounts payable
Due to third parties...................................... $ 9,091 $11,035
Due to Samsung subsidiary and affiliates.................. 1,283 2,203
------- -------
10,374 13,238
Trade notes payable
Due to third parties...................................... 712 409
Due to Samsung subsidiary and affiliates.................. -- 82
------- -------
712 491
------- -------
$11,086 $13,729
======= =======
</TABLE>
At December 31, 1997 and 1998, trade accounts payable of $10,204 thousand
and $12,925 thousand, respectively, are denominated in foreign currencies,
primarily US dollars.
8. CORPORATE BORROWINGS:
The Business does not undertake its own financing but has been able to
benefit from the financing obtained by Samsung. Corporate borrowings have been
allocated based on the methodology described in Note 2. The interest expense on
the allocated corporate borrowings has been calculated using average interest
rates of 6.48%, 7.30%, and 9.69% for the years ended December 31, 1996, 1997,
and 1998, respectively.
Samsung has entered into various types of short-term financing arrangements
including usance financing and bank overdrafts. The Business does not have its
own usance letter of credit but benefits from such letter of credit of Samsung
when needed. At December 31, 1998, no borrowings existed from such short-term
financing arrangements. The Business does not have any debt sharing or other
arrangements with Samsung. Consequently, corporate borrowings have been
classified as current and long-term based on the expected maturities of the
contractual obligations into which Samsung has entered.
F-92
<PAGE> 257
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. DEFERRED EMPLOYEE COMPENSATION:
Changes in deferred employee compensation are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1997 1998
------- --------
<S> <C> <C>
Beginning balance........................................... $27,926 $ 13,004
Provision................................................... (8,623) 3,745
Payments.................................................... (6,299) (10,278)
------- --------
Ending balance.............................................. $13,004 $ 6,471
======= ========
</TABLE>
During 1998, certain employees elected to take early settlement of deferred
compensation. As a result, the Business paid approximately $2,436 thousand in
cash from the deferred employee compensation balance, net of advances due from
employees of $2,751 thousand.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
On December 30, 1998, a settlement agreement was reached resolving a patent
infringement lawsuit. Under the terms of this settlement, Samsung shall pay the
principal sum of $58,000 thousand. The litigation settlement has been accrued in
the financial statements of the Business as of December 31, 1998 and for the
year then ended.
Samsung is also alleged, in the United States, to have infringed a method
claimed by a patent owned by Northern Telecom ("NT"), in the production of its
memory devices. The patent expired in 1994 and hence NT's claim is limited to
past damages based on a reasonable royalty accrued between February 1989 and
June 1994, and prejudgment interest thereon. In September 1998, the District
Court granted Samsung's motion for summary judgment, finding the patent invalid
and dismissed the case. NT filed a motion to set aside the judgment which was
denied on December 10, 1998. Additionally, NT has brought an action against
Samsung alleging an infringement of a patent in Germany. The German patent is a
counterpart of the patent being litigated in the United States. In May 1997, the
court allowed the action but did not fix the amount of damages to be paid and
Samsung appealed against this decision. The proceedings are currently pending
and the next hearing is scheduled for March 1999. Similar to the case in the
United States, the German patent expired in 1995 and potential liability is
limited to past damages. While it is not feasible to predict or determine the
final outcome of these proceedings at the present time, management does not
believe that they will result in a materially adverse effect on the financial
position or results of operations of Samsung or the Business.
LICENSING AND SUBCONTRACT AGREEMENTS
Samsung has entered into various licensing agreements, some of which relate
to Power Device products either directly or indirectly. Royalty expense incurred
by or allocated to the Business was $636 thousand, $5,922 thousand, and $6,004
thousand for the years ended December 31, 1996, 1997, and 1998, respectively.
The allocation was made based on the relative sales value for the respective
period.
The Business has two 7-year subcontract agreements with Usha HBB (India)
Ltd. ("Usha") and Psi Technologies, Inc. ("Psi"), third party subcontractors, in
connection with assembly and test of
F-93
<PAGE> 258
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
certain products of the Business. The Usha agreement provides for the
subcontractor to provide and the Business to purchase at least 480 million units
per year at a unit price of $0.01153. And the Psi agreement provides for the
subcontractor to provide and the Business to purchase at least 4 million units
per month at a unit price of $0.0581. These unit prices in the agreements are
subject to adjustment to reflect changes in market prices. The agreements with
Usha and Psi expire in July 2001 and July 2005, respectively.
Subject to the subcontractors' quality and performance, at December 31,
1998, the approximate future purchase commitments under these agreements are as
follows:
<TABLE>
<CAPTION>
YEAR PURCHASE COMMITMENT
---- -------------------
<S> <C>
1999.............................................. $ 8,323
2000.............................................. 8,323
2001.............................................. 6,017
2002.............................................. 2,789
2003.............................................. 2,789
2004 and thereafter............................... 4,416
-------
Total............................................. $32,657
=======
</TABLE>
Total payments to Usha and Psi under the agreements were $3,734 thousand,
$3,953 thousand and $5,169 thousand for the years ended December 31, 1996, 1997
and 1998, respectively. For each of these periods, the Business purchased the
minimum guaranteed units.
GUARANTEE PROVIDED
In relation to the Business, Samsung has guaranteed payment of principal
and interest on a bank loan provided to Korea Microsystems, Inc., a third-party
subcontractor of the Business, up to $2,070 thousand due in April 2002.
F-94
<PAGE> 259
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
CAPITAL LEASE
With respect to the Business, Samsung leases machinery and equipment under
capital lease arrangements. The future minimum lease payments under the capital
leases are as follows:
<TABLE>
<CAPTION>
MINIMUM
LEASE
FOR THE YEAR ENDING DECEMBER 31, PAYMENTS
- -------------------------------- --------
<S> <C>
1999........................................................ $ 8,086
2000........................................................ 6,467
2001........................................................ 3,177
2002........................................................ 1,475
Thereafter.................................................. 226
-------
Total.................................................. 19,431
Less: amount representing interest.......................... (1,678)
-------
Present value of minimum lease payments..................... 17,753
Less: current portion....................................... (8,086)
-------
Total capital lease obligation, non-current portion......... $ 9,667
=======
</TABLE>
11. UNSTABLE ECONOMIC ENVIRONMENT:
The operations of the Business, and those of similar companies in Korea,
have been affected, and may continue to be affected for the foreseeable future,
by the unstable economic conditions in Korea and the Asia Pacific region.
Specific factors that impact these companies include volatility in the value of
the Korean won and interest rates and the general deterioration of the economies
of countries in the Asia Pacific region.
12. BUSINESS EQUITY:
Business equity represents Samsung's ownership interest in the recorded net
assets (liabilities) of the Business. A summary of activity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Beginning balance...................................... $ 66,049 $ 51,949 $ 37,301
Net income............................................. 2,767 42,945 15,654
Net capital distribution............................... (16,867) (57,593) (52,683)
-------- -------- --------
Ending balance......................................... $ 51,949 $ 37,301 $ 272
======== ======== ========
</TABLE>
F-95
<PAGE> 260
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES:
As discussed in Note 2, the Business did not pay income taxes directly or
file separate income tax returns. The Business incurs income tax liabilities in
Korean won and based on taxable income determined in accordance with generally
accepted accounting principles and tax laws of Korea. The tax provision
(benefit) included in these financial statements reflects current tax expense
and the impact of accounting for deferred taxes under the asset and liability
method, including the impact of foreign currency translation of such deferred
tax amounts.
The income tax provision (benefit) for 1996, 1997 and 1998 consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Current................................................... -- $ 9,515 $11,178
Deferred.................................................. $(4,754) 9,034 (1,659)
------- ------- -------
Income tax provision (benefit)............................ $(4,754) $18,549 $ 9,519
======= ======= =======
</TABLE>
The deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the Business' ability to generate taxable
income within the period which the temporary differences reverse, the outlook of
the Korean economic environment and the overall future industry outlook.
Management has considered these factors in reaching its conclusion as to the
need for a valuation allowance for financial reporting purposes.
The Business does not have any formalized tax sharing agreement with
Samsung.
The income tax effect of temporary differences comprising the deferred tax
assets and deferred tax liabilities as of December 31, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets -- current:
Inventory reserve......................................... $ 842 $ 1,154
Other..................................................... 67 30
------- -------
909 1,184
------- -------
Deferred tax assets (liabilities) -- non-current:
Provision for deferred employee compensation.............. -- 783
Excess depreciation....................................... (3,173) (2,697)
------- -------
(3,173) (1,914)
------- -------
Net deferred tax liabilities................................ $(2,264) $ (730)
======= =======
</TABLE>
Realization of deferred tax assets is dependent upon taxable income within
carry forward periods available under the tax laws. Management has concluded
that it is "more likely than not" that the Business will realize the full
benefit of deferred tax assets.
F-96
<PAGE> 261
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES: -- (CONTINUED)
The statutory income tax rate, including tax surcharges, applicable to the
Business for 1996, 1997 and 1998 is approximately 30.8%. The reconciliation from
income taxes calculated at the statutory tax rate to the effective income tax
amount for each of the periods is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ------- ------
<S> <C> <C> <C>
Taxes at Korean statutory tax rate......................... $ (612) $18,940 $7,753
R&D tax credit............................................. (4,375) (391) (675)
Effect of tax rate change on beginning cumulative temporary
differences.............................................. 233 -- --
Effect of exchange rate changes............................ -- -- 2,441
------- ------- ------
Effective income tax amounts............................... $(4,754) $18,549 $9,519
======= ======= ======
</TABLE>
The current and deferred income tax provisions were computed on a Korean
won basis, the functional currency of the Business, and translated into US
dollars using the weighted average exchange rate. The effect of exchange rate
changes in the amount of $2,441 thousand reflects the impact of translating the
litigation settlement discussed in Note 10, using the rate at which such
transaction was recognized for financial reporting purposes.
14. OTHER COMPREHENSIVE INCOME (LOSS):
For the years ended December 31, 1996, 1997 and 1998, foreign currency
translation adjustments are the only components of other comprehensive income.
There are no related tax effects allocated to foreign currency translation
adjustments due to the fact that the Business' functional currency is Korean
won.
A summary of cumulative translation adjustments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Cumulative translation adjustments:
Beginning balance..................................... $ 705 $ (4,132) $(18,623)
Current-period change................................. (4,837) (14,491) 6,526
------- -------- --------
Ending balance........................................ $(4,132) $(18,623) $(12,097)
======= ======== ========
</TABLE>
F-97
<PAGE> 262
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. RELATED PARTY TRANSACTIONS:
Related party activity between the Business and Samsung (including
subsidiaries and affiliates of Samsung) is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Product sales to other operating units of Samsung...... $ 66,834 $ 68,472 $ 56,126
Product sales to foreign sales subsidiaries of
Samsung.............................................. 144,338 150,943 86,552
Product sales to other Samsung subsidiaries and
affiliates........................................... 27,032 25,503 41,691
-------- -------- --------
Total sales....................................... $238,204 $244,918 $184,369
======== ======== ========
Manufacturing services performed by other operating
units of Samsung..................................... $ 81,151 $ 75,962 $ 49,775
Manufacturing services performed by a Chinese
subsidiary of Samsung................................ 5,149 22,086 16,352
Purchase of raw materials from Samsung affiliates...... 15,966 20,797 10,626
-------- -------- --------
Total manufacturing costs......................... $102,266 $118,845 $ 76,753
======== ======== ========
Selling, general and administrative expenses allocated
from Samsung......................................... $ 26,891 $ 27,880 $ 27,536
======== ======== ========
Sales of manufacturing equipment to other operating
units of Samsung..................................... $ 12,590 $ 6,945 $ 56
======== ======== ========
Purchase of manufacturing equipment from other
operating units of Samsung........................... $ 20,937 $ 1,088 $ 2,355
======== ======== ========
</TABLE>
16. GEOGRAPHIC INFORMATION:
The Business is engaged in one industry segment, namely the development,
manufacture and marketing of power semiconductors. Sales data, summarized by
geographic area, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Korea.................................................. $178,321 $171,058 $137,111
Asia................................................... 182,839 207,602 186,668
North America.......................................... 32,001 35,638 24,308
Europe................................................. 24,886 26,402 21,812
-------- -------- --------
Total............................................. $418,047 $440,700 $369,899
======== ======== ========
</TABLE>
Substantially all of the Business' assets are located in Korea.
F-98
<PAGE> 263
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Raytheon Semiconductor, Inc:
We have audited the accompanying balance sheet of Raytheon Semiconductor,
Inc. (a wholly owned subsidiary of Thornwood Trust) (the Company) as of December
31, 1997, and the related statements of income, stockholder's equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Raytheon Semiconductor, Inc.
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
KPMG LLP
Mountain View, California
February 27, 1998
F-99
<PAGE> 264
RAYTHEON SEMICONDUCTOR, INC.
(A WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 186
Accounts receivable, net of allowances of $2,073.......... 11,414
Inventories............................................... 18,125
Prepaid expenses and other................................ 262
-------
Total current assets................................... 29,987
Property, plant, and equipment, net......................... 21,532
-------
Total assets........................................... $51,519
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,711
Accrued compensation...................................... 2,575
Accrued liabilities....................................... 1,062
-------
Total current liabilities.............................. 7,348
Commitments and contingencies
Stockholder's equity
Common stock, $0.01 par value; 2,500 authorized, issued,
and outstanding........................................ --
Additional paid-in-capital................................ 44,171
-------
Total liabilities and stockholder's equity............. $51,519
=======
</TABLE>
See accompanying notes to financial statements.
F-100
<PAGE> 265
RAYTHEON SEMICONDUCTOR, INC.
(A WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Net sales................................................... $78,369
Cost of sales............................................... 44,815
-------
Gross profit........................................... 33,554
Operating expenses:
Research and development.................................. 12,128
Selling, general, and administrative...................... 10,064
-------
Total operating expenses............................... 22,192
-------
Operating income....................................... 11,362
Other expense............................................... 88
-------
Income before income taxes............................. 11,274
Provision for income tax expense............................ 4,395
-------
Net income............................................. $ 6,879
=======
</TABLE>
See accompanying notes to financial statements.
F-101
<PAGE> 266
RAYTHEON SEMICONDUCTOR, INC.
(A WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------
PARENT COMMON STOCK ADDITIONAL TOTAL
COMPANY --------------- PAID-IN- STOCKHOLDER'S
INVESTMENT SHARES AMOUNT CAPITAL EQUITY
---------- ------ ------ ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balances at beginning of year........ $ 54,874 -- $-- $ -- $ 54,874
Net income........................... 6,879 -- -- -- 6,879
Net transfers to parent.............. (17,582) -- -- -- (17,582)
Incorporation of Company on December
31, 1997........................... (44,171) 2,500 -- 44,171 --
-------- ----- -- ------- --------
Balances at end of year.............. $ -- 2,500 $-- $44,171 $ 44,171
======== ===== == ======= ========
</TABLE>
See accompanying notes to financial statements.
F-102
<PAGE> 267
RAYTHEON SEMICONDUCTOR, INC.
(A WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 6,879
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 6,397
Changes in operating assets and liabilities:
Accounts receivable.................................. (2,112)
Inventory............................................ 2,977
Prepaid expenses and other........................... (76)
Accounts payable..................................... (221)
Accrued expenses..................................... (595)
--------
Net cash provided by operating activities......... 13,249
--------
Cash flows from investing activities -- additions to
property, plant and equipment............................. (2,718)
--------
Cash flows from financing activities -- transfers to Parent
Company Investment........................................ (10,570)
--------
Net decrease in cash........................................ (39)
Cash, beginning of year..................................... 225
--------
Cash, end of year........................................... $ 186
========
Supplemental disclosure of cash flow information:
Deferred taxes transferred to Parent Company Investment per
terms of the Acquisition Agreement........................ $ 7,012
========
</TABLE>
See accompanying notes to financial statements.
F-103
<PAGE> 268
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) BACKGROUND AND BASIS OF PRESENTATION
Raytheon Semiconductor Inc. (the Company) is a wholly owned subsidiary of
Thornwood Trust (Thornwood) which is a wholly owned unit of Raytheon Company
(Raytheon). The Company's Multimedia Business Unit, based in San Diego,
California, designs and manufactures digital and mixed-signal integrated
circuits (IC) for use in broadcast video, computer graphics, multimedia, imaging
and communications applications. The Analog and High Speed Communications
Business Units, both based in Mountain View, California, manufacture DC-DC
converters, voltage regulator modules and IC's used by customers in high
performance microprocessors and networking applications. The Company sells
mainly through distributors in North America, Asia, and Europe.
Fairchild Semiconductor Corporation (Fairchild) acquired all the
outstanding shares of the Company subsequent to the close of business on
December 31, 1997 (see Note 10). Prior to this transaction, the net assets of
the Company represented an operating division of Raytheon. These financial
statements report the operating results of the Company as a division of
Raytheon. As a division of Raytheon, certain costs included in the income
statement were determined on the basis of allocations from Corporate
Headquarters and represent management's best estimate of the cost that would
have been incurred had the division operated independently. As a result, the
financial statements presented may not reflect the financial position or results
of operations which would have been realized had the Company operated as a
nonaffiliated entity for the year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk principally consist of trade accounts receivable.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral on accounts receivable, as the majority of the
Company's customers are large, well established companies. The Company maintains
reserves for potential credit losses, but historically has not experienced any
significant losses related to individual customers or groups of customers in any
particular industry or geographic area.
REVENUE RECOGNITION
Revenue is primarily recognized at the time product is shipped. The Company
provides for estimated returns of products sold to distributors under various
sales incentive programs and for general product returns from all customers.
Reductions of net sales revenue under these programs are recorded at the time
products are shipped.
F-104
<PAGE> 269
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost, or net realizable value. Cost is determined on a first-in,
first-out basis.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation is
generally provided on the double declining balance (buildings), or sum-of-years
digits method based on the following estimated useful lives:
<TABLE>
<S> <C>
Buildings................................................... 20 to 45 years
Machinery and equipment..................................... 3 to 10 years
Computer software and other assets.......................... 7 years
</TABLE>
Leasehold improvements are amortized over the lesser of the remaining term
of the lease or the estimated useful life of the improvement.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards of the Company. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded using the intrinsic value-based method. The Company adopted
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, on January 1, 1996, which permits entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
PARENT COMPANY INVESTMENT
As a division of Raytheon, the Company's operating cash requirements have
been met with transfers from Raytheon as required. Cash balances of the Company
not required for operations have been transferred to Raytheon, and all cash
receipts and disbursements and intercompany charges related to the Company's
operations have been credited to or charged against Parent Company Investment.
F-105
<PAGE> 270
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) CORPORATE ALLOCATIONS
The accompanying statement of income includes charges allocated by Raytheon
representing the Company's share of certain costs incurred by Raytheon in
support of the Company's operations. Services provided by Raytheon in 1997 were
primarily financial, legal and administrative in nature. Costs have been
allocated to the Company based on the proportion of Raytheon expenses
represented by Company expenses. Management has reviewed the allocations made by
Raytheon and believes them to be reasonable. In all cases, the corporate charges
assessed approximate the amounts which would have been incurred by the Company
if it had operated on a standalone basis during the year.
The total amounts allocated to the Company for the year ended December 31,
1997 and included in the statement of income are as follows (in thousands):
<TABLE>
<S> <C>
Cost of sales............................................... $3,647
Research and development.................................... 1,059
Selling, general and administrative......................... 1,715
------
$6,421
======
</TABLE>
Additionally, in 1997, substantially all employees of the Company
participated in the defined benefit pension plans of Raytheon. Under the plans,
benefits are generally based on years of service and the employee's compensation
during the years before retirement. Total expense allocated to the Company for
1997 was $572.
Subject to certain age and service requirements, substantially all
employees of the Company in 1997 were eligible to participate in Raytheon's
defined contribution plans. Employees participating in the Raytheon Savings and
Investment Plan could contribute up to 17% of their pay subject to prescribed
Internal Revenue Code ("IRC") limits. Raytheon matched 50% of the employees'
contributions, up to a maximum of 3% of each participating individual's
compensation. Total expense charged to the Company for this plan in 1997 was
$458. For employees participating in the Raytheon Employee Stock Ownership Plan,
the Company's annual contribution was approximately one half of one percent of
salary, as limited by the IRC. Total expense charged to the Company for this
plan in 1997 was $105.
Raytheon allocated charges for the employee benefit plans based primarily
on headcount and eligible payroll. Management has reviewed the allocations made
by Raytheon in respect of employee benefit plans and believes them to be
reasonable.
Subject to the Acquisition Agreement with Fairchild, substantial changes to
the Company's pension and benefit plans are expected for 1998. See Note 10.
(4) INVENTORIES
Inventories as of December 31, 1997, consisted of the following (in
thousands):
<TABLE>
<S> <C>
Finished goods.............................................. $ 6,012
Work in process............................................. 10,419
Raw materials............................................... 1,694
-------
$18,125
=======
</TABLE>
F-106
<PAGE> 271
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment as of December 31, 1997, consisted of the
following (in thousands):
<TABLE>
<S> <C>
Land........................................................ $ 616
Buildings and leasehold improvements........................ 22,802
Machinery and equipment..................................... 61,159
Computer software........................................... 2,898
Construction in progress.................................... 427
-------
87,902
Less accumulated depreciation and amortization.............. 66,370
-------
Property, plant, and equipment, net......................... $21,532
=======
</TABLE>
(6) FEDERAL INCOME TAXES
The provision for income taxes for the year ended December 31, 1997, was
(in thousands):
<TABLE>
<S> <C>
Current income tax expense:
Federal................................................... $2,299
State..................................................... 473
------
2,772
------
Deferred income tax expense:
Federal................................................... 1,247
State..................................................... 376
------
1,623
Total tax expense................................. $4,395
======
</TABLE>
The provision for income taxes for 1997 differs from the U.S. statutory
rate due to the following (in thousands):
<TABLE>
<S> <C>
Computed expected tax expense............................... $3,833
State income tax, net of federal tax benefit................ 562
------
$4,395
======
</TABLE>
F-107
<PAGE> 272
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) FEDERAL INCOME TAXES -- (CONTINUED)
Current income tax expense is included as a transfer to Raytheon in the
Parent Company Investment account. The sources and tax effects of temporary
differences which give rise to deferred income tax balances are as follows (in
thousands):
<TABLE>
<S> <C>
Current deferred tax assets:
Inventory reserves........................................ $2,196
Accounts receivables allowances........................... 829
Accrued expenses.......................................... 801
------
3,826
Noncurrent deferred tax assets:
Depreciation and amortization............................. 1,568
------
$5,394
======
</TABLE>
Under the terms of the Acquisition Agreement with Fairchild, the deferred
tax assets will not be transferred to Fairchild and accordingly are included as
a transfer to Raytheon as of December 31, 1997. See Note 10.
(7) EMPLOYEE STOCK PLANS
STOCK BASED COMPENSATION
The Company's employees participate in the Raytheon Stock Option Plan (the
Plan) which provides for the grant of incentive stock options and nonqualified
stock options to employees, directors and consultants of the Company at the fair
market value of Raytheon's common stock on the date of grant.
The vesting and exercise provisions of the option grants under the Plan are
determined by the Board of Directors. Options generally vest ratably over a
four-year period commencing from the date of grant, subject to one year of
employment and generally expire in 10 years from the date of grant.
The Company has elected to use the intrinsic value-based method to account
for all of its stock-based employee compensation plans. Accordingly, no
compensation cost has been recognized for its stock options in the accompanying
financial statements because the fair value of the underlying common stock
equals the exercise price of the stock options at the date of grant. Pursuant to
SFAS No. 123, Accounting for Stock Based Compensation, the Company is required
to disclose the pro forma effects on the net income of the Company as if the
Company had elected to use the fair value approach to account for its
stock-based employee compensation plan.
Had compensation cost for the Company's plans been determined consistent
with the fair value approach under SFAS No. 123, the Company's 1997 net income
would have been $6,476.
The fair value of each option is estimated using a Black-Scholes option
pricing model with the following weighted average assumptions: risk-free
interest rate of 6.5%, an expected life of 5 years, and volatility of 24%. No
dividend impact was considered as Raytheon has never declared, and does not have
plans to declare, any future dividends. No option or equity instruments were
issued to nonemployees.
F-108
<PAGE> 273
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) EMPLOYEE STOCK PLANS -- (CONTINUED)
The following table summarizes activity under the plan as of December 31,
1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------ ---------
<S> <C> <C>
Outstanding at beginning of year............................ 67,320 $39.25
Options granted............................................. 32,500 51.13
Options exercised........................................... (8,900) 31.02
Options canceled............................................ -- --
------
Outstanding at end of year.................................. 90,920 44.30
======
Options vested at year-end.................................. 58,420 $40.60
======
Weighted-average fair value of options granted during the
year...................................................... $13.98
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
- ----------------------------------------- -----------
WEIGHTED-AVERAGE
EXERCISE OPTIONS REMAINING OPTIONS
PRICE OUTSTANDING LIFE IN YEARS EXERCISABLE
- -------- ----------- ---------------- -----------
<S> <C> <C> <C>
$16.95 2,000 1.96 years 2,000
21.80 1,000 4.06 1,000
31.91 2,020 5.65 2,020
31.47 5,000 5.73 5,000
32.53 10,000 6.48 10,000
32.88 3,000 6.65 3,000
39.03 14,000 7.49 14,000
52.56 20,400 8.44 20,400
51.75 1,000 8.66 1,000
47.13 4,000 9.15 --
51.69 28,500 9.50 --
------ ------
44.30 90,920 58,420
====== ====== ======
</TABLE>
Pursuant to the Acquisition Agreement with Fairchild (see Note 10), all
unvested outstanding options at December 31, 1997 are canceled.
F-109
<PAGE> 274
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company had commitments under long-term operating
leases requiring approximate annual rentals as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 812
1999........................................................ 844
2000........................................................ 439
2001........................................................ --
2002........................................................ --
Thereafter.................................................. --
------
$2,095
======
</TABLE>
Rental expense for 1997 amounted to $533.
The Company's Mountain View facility is located on a contaminated site
under the Comprehensive Environmental Liability Act (the "Act"). During the year
the Company paid $2,164 for remediation costs which were reimbursed by Raytheon.
Under the terms of the Acquisition Agreement executed on December 31, 1997(see
Note 10), future responsibility for these costs will be assumed by Raytheon. All
other environmental costs are immaterial to the Company and have been expensed
as incurred.
The Company is subject to various claims and legal proceedings in the
normal course of business. None of the claims or potential claims outstanding at
December 31, 1997 are anticipated to have a material impact on the financial
position, cash flows, or results of operations of the Company after taking into
consideration provisions already recorded.
(9) RELATED PARTY TRANSACTIONS, AND GEOGRAPHIC INFORMATION
In 1997, the Company had $2,134 of net sales to affiliate companies of
Raytheon; the related cost of sales amounted to $1,126. There were no other
transactions with affiliate companies of Raytheon during 1997.
The Company's export sales for the year ended December 31, 1997 was $24,810
principally to customers Europe and Asia.
(10) SUBSEQUENT EVENT
As discussed in Note 1, prior to the formation of the Company on December
31, 1997, the Company operated as a division of Raytheon. On December 31, 1997,
the Company was incorporated as a wholly-owned subsidiary of Thornwood Trust
(Thornwood), a Massachusetts Business Trust and wholly-owned unit of Raytheon.
Subsequent to the close of business on December 31, 1997, Fairchild
acquired 100% of the outstanding shares of common stock of the Company from
Thornwood for approximately $117 million. Upon closing of the acquisition, the
Company became a business unit of Fairchild.
Pursuant to the Acquisition Agreement, Raytheon will retain and be
responsible for liabilities accrued by employees of the Company through December
31, 1997 under any defined benefit pension plan or other employee-related
benefit plans. In addition, Raytheon will retain all liability and
F-110
<PAGE> 275
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(10) SUBSEQUENT EVENT -- (CONTINUED)
responsibility for the disposition of interests under the Raytheon Savings and
Investment Plan and the Raytheon Stock Ownership Plan with respect to all
employees of the Company who were participants in either of the plans as of
December 31, 1997.
Raytheon will also retain and be responsible for all liabilities related to
environmental remediation activities, including those required by the United
States Environmental Protection Agency, at the Company's Mountain View,
California facility which arose prior to December 31, 1997 or were created by
the release of hazardous substances that first occurred prior to December 31,
1997.
F-111
<PAGE> 276
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides in relevant
part that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such person's conduct was unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Section 145 also provides that to the extent a director, officer, employee
or agent of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to above, or defense of any
claim issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Furthermore, Section 145 provides that nothing in the above-described
provisions shall be deemed exclusive of any other rights to indemnification or
advancement of expenses to which any person may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise.
The Bylaws of each of Fairchild Holdings and our company provide for the
indemnification of any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "proceeding") by
reason of the fact that such person is or was a director or officer of such
company or a constituent corporation absorbed in a consolidation or merger, or
is or was serving at the request of such company or a constituent corporation
absorbed in a consolidation or merger, as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, or is or was
a director or officer of such company serving at its request as an
administrator, trustee or other fiduciary of one or more of the employee benefit
plans of such company or other enterprise, against expenses (including
attorneys' fees), liability and loss actually and reasonably incurred or
suffered by such person in connection with such
II-1
<PAGE> 277
proceeding, whether or not the indemnified liability arises or arose from any
threatened, pending or completed proceeding by or in the right of such company,
except to the extent that such indemnification is prohibited by applicable law.
The Bylaws of each of Fairchild Holdings and our company also provide that such
indemnification shall not be deemed exclusive of any other rights to which those
indemnified may be entitled as a matter of law or under any by-law, agreement,
vote of stockholders or otherwise.
The Bylaws of Fairchild Semiconductor Corporation of California provide for
indemnification for each person who is or was a director or officer of such
company (and the heirs, executors or administrators of such person) who is or
was made a party to, or is or was involved in, any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director or
officer of such company or is or was serving at the request or for the benefit
of such company as a director, officer, employee or agent of another corporation
partnership, joint venture, trust, employee benefit plan, or other enterprise,
shall be held harmless and indemnified by such company against any expense,
liability or loss (including, without limitation, judgments, fines, settlement
payments and the expense of legal counsel) incurred by such person in any such
capacity to the fullest extent permitted by applicable law. The right to
indemnification shall also include the right to be paid by such company the
expenses incurred in defending any such proceeding in advance of its final
disposition to the fullest extent permitted by applicable law. Fairchild
Semiconductor Corporation of California may provide indemnification to other
employees and agents of such company as may be authorized from time to time by
the Board of Directors to the fullest extent permitted by applicable law.
Section 102(b)(7) of the Delaware General Corporation Law provides that a
corporation may in its certificate of incorporation eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director except for
liability: for any breach of the director's duty of loyalty to the corporation
or its stockholders; for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; under Section 174 of the
Delaware General Corporation Law (pertaining to certain prohibited acts
including unlawful payment of dividends or unlawful purchase or redemption of
the corporation's capital stock); or for any transaction from which the director
derived an improper personal benefit. The Certificate of Incorporation of each
of Fairchild Holdings, our company and Fairchild Semiconductor Corporation of
California contains a provision so limiting the personal liability of directors
of such company.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
2.01 Agreement and Plan of Recapitalization dated January 24,
1997 between Sterling Holding Company, LLC and National
Semiconductor (incorporated by reference from the Company's
Registration Statement on Form S-4, filed May 12, 1997 (File
No. 333-26897)).
2.02 Asset Purchase Agreement dated as of March 11, 1997 between
the Company and National Semiconductor (incorporated by
reference from the Company's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
2.03 Acquisition Agreement dated November 25, 1997 between the
Company and Raytheon Company (incorporated by reference from
the Company's Current Report on Form 8-K dated December 31,
1997, filed January 13, 1998).
</TABLE>
II-2
<PAGE> 278
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
2.04 Amendment No. 1 to Acquisition Agreement dated December 29,
1997 between the Company and Raytheon Company (incorporated
by reference from the Company's Current Report on Form 8-K
dated December 31, 1997, filed January 13, 1998).
2.05 Exhibit 3.14 to Acquisition Agreement dated December 29,
1997 between the Company and Raytheon Company (incorporated
by reference from the Company's Current Report on Form 8-K
dated December 31, 1997, filed January 13, 1998).
2.06 Business Transfer Agreement dated December 20, 1998 between
Samsung Electronics and the Company (incorporated by
reference from the Company's Current Report on Form 8-K
dated April 13, 1999, filed April 27, 1999).
2.07 Closing Agreement dated April 13, 1999 among Samsung
Electronics, Fairchild Korea and the Company (incorporated
by reference from the Company's Current Report on Form 8-K
dated April 13, 1999, filed April 27, 1999).
3.01 Certificate of Incorporation of the Company (incorporated by
reference from the Company's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
3.02 Bylaws of the Company (incorporated by reference from the
Company's Registration Statement on Form S-4, filed May 12,
1997 (File No. 333-26897)).
3.03 Certificate of Incorporation of Fairchild International
(incorporated by reference from the Company's Registration
Statement on Form S-4, filed May 12, 1997 (File No.
333-26897)).
3.04 Bylaws of Fairchild International (incorporated by reference
from the Company's Registration Statement on Form S-4, filed
May 12, 1997 (File No. 333-26897)).
3.05 Certificate of Amendment to Certificate of Incorporation of
Fairchild International (incorporated by reference from
Fairchild International's Registration Statement on Form
S-8, filed July 7, 1998 (File No. 333-58603)).
3.06 Certificate of Amendment of Certificate of Incorporation of
Fairchild International (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
3.07 Restated Certificate of Incorporation of Fairchild
International (incorporated by reference from Amendment No.
3 to Fairchild International's Registration Statement on
Form S-1, filed July 9, 1999 (File No. 333-78557)).
3.08 Certificate of Incorporation of Fairchild Semiconductor
Corporation of California.+
3.09 Bylaws of Fairchild Semiconductor Corporation of
California.+
3.10 Certificate of Amendment of Certificate of Incorporation of
Fairchild Semiconductor Corporation of California.+
4.01 Indenture dated April 7, 1999 among the Company, Fairchild
International, as Guarantor, Fairchild Semiconductor
Corporation of California, as Guarantor, and the United
States Trust Company of New York (incorporated by reference
from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
4.02 Form of 10 3/8% Senior Subordinated Notes Due 2007 (included
in Exhibit 4.01).
4.03 Registration Rights Agreement dated March 30, 1999 among the
Company, Fairchild International, as Guarantor, Fairchild
California, as Guarantor, Credit Suisse First Boston
Corporation, Morgan Stanley & Co. Incorporated, Salomon
Smith Barney Inc. and Fleet Securities, Inc. (incorporated
by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
5.01 Opinion of Dechert Price & Rhoads.
</TABLE>
II-3
<PAGE> 279
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.01 Indenture dated as of March 11, 1997 among the Company,
Fairchild International, as Guarantor and United States
Trust Company of New York, as Trustee relating to the
Company's 10 1/8% Senior Subordinated Notes (incorporated by
reference from the Company's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.02 Form of 10 1/8% Senior Subordinated Notes Due 2007 (included
in Exhibit 10.01).
10.03 Technology Licensing and Transfer Agreement dated March 11,
1997 between National Semiconductor and the Company
(incorporated by reference from Amendment No. 3 to the
Company's Registration Statement on Form S-4, filed July 9,
1997 (File No. 333-26897)).
10.04 Transition Services Agreement dated March 11, 1997 between
National Semiconductor and the Company (incorporated by
reference from the Company's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.05 Fairchild Foundry Services Agreement dated March 11, 1997
between National Semiconductor and the Company (incorporated
by reference from Amendment No. 3 to the Company's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.06 Revenue Side Letter dated March 11, 1997 between National
Semiconductor and the Company (incorporated by reference
from Amendment No. 3 to the Company's Registration Statement
on Form S-4, filed July 9, 1997 (File No. 333-26897)).
10.07 Fairchild Assembly Services Agreement dated March 11, 1997
between National Semiconductor and the Company (incorporated
by reference from Amendment No. 3 to the Company's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.08 National Foundry Services Agreement dated March 11, 1997
between National Semiconductor and the Company (incorporated
by reference from Amendment No. 3 to the Company's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.09 National Assembly Services Agreement dated March 11, 1997
between National Semiconductor and the Company (incorporated
by reference from Amendment No. 3 to the Company's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.10 Mil/Aero Wafer and Services Agreement dated March 11, 1997
between National Semiconductor and the Company (incorporated
by reference from Amendment No. 3 to the Company's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.11 Shared Services Agreement (South Portland) dated March 11,
1997 between National Semiconductor and the Company
(incorporated by reference from the Company's Registration
Statement on Form S-4, filed May 12, 1997 (File No.
333-26897)).
10.12 Credit Agreement dated March 11, 1997 among the Company,
Fairchild International, Various Banks, Bankers Trust
Company, Credit Suisse First Boston Corporation and Canadian
Imperial Bank of Commerce (incorporated by reference from
the Company's Registration Statement on Form S-4, filed May
12, 1997 (File No. 333-26897)).
10.13 Corporate Agreement dated February 20, 1992 between Torex
Semiconductor Ltd. and National Semiconductor (incorporated
by reference from Amendment No. 3 to the Company's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.14 Assembly/Test Subcontract Agreement dated August 13, 1998
between NS Electronics Bangkok (1993) Ltd. and the Company
(incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended May 31, 1998, filed
August 27, 1998).
10.15 Supply Agreement dated January 20, 1996 between National
Semiconductor and Dynacraft Industries Sdn. Bhd.
(incorporated by reference from Amendment No. 3 to the
Company's Registration Statement on Form S-4, filed dated
July 9, 1997 (File No. 333-26897)).
</TABLE>
II-4
<PAGE> 280
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.16 Licensing and Manufacturing Agreement dated April 27, 1990
between National Semiconductor and Waferscale Integration,
Inc. (incorporated by reference from Amendment No. 3 to the
Company's Registration Statement on Form S-4, filed July 9,
1997 (File No. 333-26897)).
10.17 Qualified Titles Corresponding to Registry Title Nos. 19, 44
and 3400-Mk 12 from the State of Penang, Malaysia and
corresponding Sale and Purchase Agreements, each dated March
11, 1997, between National Semiconductor Sdn. Bhd. and
Fairchild Semiconductor Sdn. Bhd. (incorporated by reference
from the Company's Registration Statement on Form S-4, filed
May 12, 1997 (File No. 333-26897)).
10.18 Lease Agreement dated October 10, 1979 between Export
Processing Zone Authority and Fairchild Semiconductor (Hong
Kong) Limited, and Supplemental Agreements thereto dated May
1, 1982; December 12, 1983; August 17, 1984; March 10, 1987;
February 16, 1990; August 25, 1994; May 29, 1995; June 7,
1995; November 9, 1995; and October 24, 1996 (incorporated
by reference from the Company's Registration Statement on
Form S-4, filed May 12, 1997 (File No. 333-26897)).
10.19 Lease for Santa Clara Facilities dated as of March 11, 1997
between National Semiconductor and the Company (incorporated
by reference from the Company's Registration Statement on
Form S-4, filed May 12, 1997 (File No. 333-26897)).
10.20 Shared Facilities Agreement (South Portland) dated March 11,
1997 between National Semiconductor and the Company
(incorporated by reference from the Company's Registration
Statement on Form S-4, filed May 12, 1997 (File No.
333-26897)).
10.21 Environmental Side Letter dated March 11, 1997 between
National Semiconductor and the Company (incorporated by
reference from the Company's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.22 Master Sublease Agreement dated March 11, 1997 between
National Semiconductor and the Company and Master Lease
Agreement dated December 13, 1994 between General Electric
Capital Corporation and National Semiconductor (incorporated
by reference from the Company's Registration Statement on
Form S-4, filed May 12, 1997 (File No. 333-26897)).
10.23 Fairchild NSC Deferred Compensation Plan Trust established
effective March 11, 1997 (incorporated by reference from the
Company's Registration Statement on Form S-4, filed May 12,
1997 (File No. 333-26897)).
10.24 Fairchild NSC Deferred Compensation Plan assumed and
continued, effective March 11, 1997 (included as Schedule A
to Exhibit 10.23).
10.25 Fairchild Benefit Restoration Plan (incorporated by
reference from the Company's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.26 Fairchild Incentive Plan (incorporated by reference from the
Company's Registration Statement on Form S-4, filed May 12,
1997 (File No. 333-26897)).
10.27 FSC Semiconductor Corporation Executive Officer Incentive
Plan (incorporated by reference from the Company's
Registration Statement on Form S-4, filed May 12, 1997 (File
No. 333-26897)).
10.28 FSC Semiconductor Corporation Stock Option Plan
(incorporated by reference from the Company's Registration
Statement on Form S-4, filed May 12, 1997 (File No.
333-26897)).
10.29 Employment Agreement dated March 11, 1997 among the Company,
Fairchild International, Sterling Holding Company, LLC and
Kirk P. Pond (incorporated by reference from the Company's
Registration Statement on Form S-4, filed May 12, 1997 (File
No. 333-26897)).
</TABLE>
II-5
<PAGE> 281
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.30 Employment Agreement dated March 11, 1997 among the Company,
Fairchild International, Sterling Holding Company, LLC and
Joseph R. Martin (incorporated by reference from the
Company's Registration Statement on Form S-4, filed May 12,
1997 (File No. 333-26897)).
10.31 Credit Agreement -- Amended and Restated as of December 31,
1997 (incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 1,
1998, filed April 13, 1998).
10.32 Employee Stock Purchase Savings Plan, as amended as of June
25, 1998 (incorporated by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1998, filed August 27, 1998).
10.33 Fairchild Revocable Savings Plan Trust, dated February 20,
1998, executed by Fleet Bank of Maine, as trustee
(incorporated by reference from Fairchild International's
Registration Statement on Form S-8, filed July 7, 1998 (File
No. 333-58603)).
10.34 Amendment to Securities Purchase and Holders Agreement dated
May 29, 1998 (incorporated by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1998, filed August 27, 1998).
10.35 Form of Promissory Note between the Company and Management
Investors dated June 3, 1998 (incorporated by reference from
the Company's Annual Report on Form 10-K for the fiscal year
ended dated May 31, 1998, filed August 27, 1998).
10.36 Second Amendment to Amended and Restated Credit Agreement
dated August 25, 1998 among Fairchild International, the
Company, the lenders party to the Credit Agreement dated
March 11, 1997, Bankers Trust Company, Credit Suisse First
Boston Corporation and Canadian Imperial Bank of Commerce
(incorporated by reference from the Company's Current Report
on Form 10-Q for the fiscal quarter ended August 30, 1998,
filed October 9, 1998).
10.37 Purchase Agreement dated March 30, 1999 among the Company,
Fairchild International, Fairchild Semiconductor Corporation
of California, Credit Suisse First Boston Corporation,
Morgan Stanley & Co. Incorporated, Salomon Smith Barney Inc.
and Fleet Securities, Inc. (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
10.38 Transitional Services Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.39 Product Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.40 Foundry Sale Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea (incorporated by reference
from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.41 Intellectual Property License Agreement dated April 13, 1999
between Samsung Electronics and Fairchild Korea
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.42 Trademark License Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
</TABLE>
II-6
<PAGE> 282
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.43 Assembly and Test Services Agreement (Onyang) dated April
13, 1999 between Samsung Electronics and Fairchild Korea
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.44 Assembly and Test Services Agreement (Suzhou) dated April
13, 1999 between SESS Electronics Suzhou Semiconductor Co.,
Ltd. and Fairchild Korea (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
10.45 EPI Services Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea (incorporated by reference
from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.46 Photo Mask Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.47 Credit Agreement dated April 14, 1999 among the Company,
Fairchild International, certain lenders named within the
Credit Agreement, Credit Suisse First Boston Corporation,
Salomon Brothers Holding Company Inc., ABN Amro Bank NV and
Fleet National Bank (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
10.48 Employment Agreement dated March 28, 1999 between Fairchild
International and Deok-Jung Kim (incorporated by reference
from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.49 Employment Agreement dated as of April 23, 1999 between the
Company and Kyoung-Soo Kim (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
10.50 Sublease Agreement dated April 23, 1999 between Veritas
Software Corporation and Fairchild California (incorporated
by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.51 Fairchild Executive Incentive Plan, as amended and restated,
effective June 1, 1998 (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
10.52 Securities Purchase and Holders Agreement dated as of March
11, 1997 among Fairchild International, Sterling, National
Semiconductor and Management Investors (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
12.01 Statement of Computation of Ratio of Earnings to Fixed
Charges.
21.01 Subsidiaries of the Company and the Additional Registrants.+
23.01 Consent of Dechert Price & Rhoads (included in the opinion
filed as Exhibit 5.01).
23.02 Consent of Samil Accounting Corporation.
23.03 Consent of KPMG LLP.
23.04 Consent of KPMG LLP.
23.05 Consent of KPMG LLP.
24.01 Power of Attorney+
</TABLE>
II-7
<PAGE> 283
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
25.01 Statement of Eligibility and Qualification of United States
Trust Company of New York on Form T- 1.+
99.01 Form of Letter of Transmittal.+
99.02 Form of Notice of Guaranteed Delivery.+
</TABLE>
- ------------------------
+ Previously filed.
II-8
<PAGE> 284
(b) Financial Statement Schedules:
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Fairchild Semiconductor Corporation:
Under date of June 30, 1999, except as to Note 19, which is as of August 9,
1999, we reported on the consolidated balance sheets of Fairchild Semiconductor
Corporation and subsidiaries as of May 31, 1998 and May 30, 1999, the related
consolidated statements of operations and stockholder's equity (deficit) for
each of the years in the three-year period ended May 30, 1999, and the related
consolidated statements of cash flows for the years ended May 31, 1998 and May
30, 1999. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule
listed in Item 21(b). This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Boston, Massachusetts
June 30, 1999
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS.
<TABLE>
<CAPTION>
DEFERRED TAX
RETURNS AND VALUATION
DESCRIPTION ALLOWANCES ALLOWANCE TOTAL
- ----------- ----------- ------------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Balances at May 26, 1996................................... $ -- $ -- $ --
Charged to costs and expenses.............................. 3.1 -- 3.1
Deductions................................................. -- -- --
Charged to other accounts.................................. 12.8(1) 30.7(1) 43.5
------ ----- ------
Balances at May 25, 1997................................... 15.9 30.7 46.6
Charged to costs and expenses.............................. 41.8 -- 41.8
Deductions................................................. (45.5) -- (45.5)
Charged to other accounts.................................. 2.0(2) -- 2.0
------ ----- ------
Balances at May 31, 1998................................... 14.2 30.7 44.9
Charged to costs and expenses.............................. 29.8 32.0 61.8
Deductions................................................. (34.9) -- (34.9)
Charged to other accounts.................................. 0.1(2) -- 0.1
------ ----- ------
Balances at May 30, 1999................................... $ 9.2 $62.7 $ 71.9
====== ===== ======
</TABLE>
- -------------------------
(1) Upon the consummation of the Recapitalization on March 11, 1997, these
amounts were established and charged to Business Equity.
(2) These amounts represent valuation reserves obtained through the acquisitions
of Raytheon Semiconductor and the power device business for $2.0 million and
$0.1 million, respectively.
All other schedules are omitted because of the absence of the conditions
under which they are required or because the information required by such
omitted schedules is set forth in the financial statements or the notes thereto.
II-9
<PAGE> 285
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Fairchild Semiconductor International, Inc.:
Under date of June 30, 1999, except as to Note 20, which is as of August 9,
1999, we reported on the consolidated balance sheets of Fairchild Semiconductor
International, Inc. and subsidiaries as of May 31, 1998 and May 30, 1999, the
related consolidated statements of operations and stockholders' equity (deficit)
for each of the years in the three-year period ended May 30, 1999, and the
related consolidated statements of cash flows for the years ended May 31, 1998
and May 30, 1999. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule listed in Item 21(b). This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Boston, Massachusetts
June 30, 1999
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS.
<TABLE>
<CAPTION>
DEFERRED TAX
RETURNS AND VALUATION
DESCRIPTION ALLOWANCES ALLOWANCE TOTAL
- ----------- ----------- ------------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Balances at May 26, 1996................................... $ -- $ -- $ --
Charged to costs and expenses.............................. 3.1 -- 3.1
Deductions................................................. -- -- --
Charged to other accounts.................................. 12.8(1) 30.7(1) 43.5
------ ----- ------
Balances at May 25, 1997................................... 15.9 30.7 46.6
Charged to costs and expenses.............................. 41.8 -- 41.8
Deductions................................................. (45.5) -- (45.5)
Charged to other accounts.................................. 2.0(2) -- 2.0
------ ----- ------
Balances at May 31, 1998................................... 14.2 30.7 44.9
Charged to costs and expenses.............................. 29.8 32.0 61.8
Deductions................................................. (34.9) -- (34.9)
Charged to other accounts.................................. 0.1(2) -- 0.1
------ ----- ------
Balances at May 30, 1999................................... $ 9.2 $62.7 $ 71.9
====== ===== ======
</TABLE>
- -------------------------
(1) Upon the consummation of the Recapitalization on March 11, 1997, these
amounts were established and charged to Business Equity.
(2) These amounts represent valuation reserves obtained through the acquisitions
of Raytheon Semiconductor and the power device business for $2.0 million and
$0.1 million, respectively.
All other schedules are omitted because of the absence of the conditions
under which they are required or because the information required by such
omitted schedules is set forth in the financial statements or the notes thereto.
II-10
<PAGE> 286
ITEM 22. UNDERTAKINGS
(a) Each of the undersigned registrants hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the
II-11
<PAGE> 287
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
each registrant pursuant to the foregoing provisions, or otherwise, each
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrants of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, each registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) Each of the undersigned registrants hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(d) Each of the undersigned registrants hereby undertakes to supply by
means of a post-effective amendment all information concerning a transaction,
and the corporation being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
II-12
<PAGE> 288
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
below-named Registrant has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of South Portland, State of Maine, on the 13th day of
August 1999.
FAIRCHILD SEMICONDUCTOR
CORPORATION
By: /s/ DANIEL E. BOXER
---------------------------------------
Executive Vice President
and General Counsel
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities at the above-named Registrant on August 13, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman of the Board of Directors, President
- --------------------------------------------------- and Chief Executive Officer (principal
Kirk P. Pond executive officer)
* Executive Vice President, Chief Financial
- --------------------------------------------------- Officer and Director (principal financial
Joseph R. Martin officer)
/s/ DAVID A. HENRY Vice President, Corporate Controller (principal
- --------------------------------------------------- accounting officer)
David A. Henry
* Director
- ---------------------------------------------------
William N. Stout
* Director
- ---------------------------------------------------
Paul C. Schorr IV
* Director
- ---------------------------------------------------
Ronald W. Shelly
</TABLE>
* By: /s/ DANIEL E. BOXER
---------------------------------------------------
Daniel E. Boxer
Attorney-in-fact
II-13
<PAGE> 289
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
below-named Registrant has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of South Portland, State of Maine, on the 13th day of
August 1999.
FAIRCHILD SEMICONDUCTOR
INTERNATIONAL, INC.
By: /s/ DANIEL E. BOXER
---------------------------------------
Executive Vice President
and General Counsel
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities at the above-named Registrant on August 13, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman of the Board of Directors, President
- --------------------------------------------------- and Chief Executive Officer (principal
Kirk P. Pond executive officer)
* Executive Vice President, Chief Financial
- --------------------------------------------------- Officer and Director (principal financial
Joseph R. Martin officer)
/s/ DAVID A. HENRY Vice President, Corporate Controller (principal
- --------------------------------------------------- accounting officer)
David A. Henry
* Director
- ---------------------------------------------------
William N. Stout
* Director
- ---------------------------------------------------
Paul C. Schorr IV
* Director
- ---------------------------------------------------
Ronald W. Shelly
</TABLE>
* By: /s/ DANIEL E. BOXER
---------------------------------------------------
Daniel E. Boxer
Attorney-in-fact
II-14
<PAGE> 290
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
below-named Registrant has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of South Portland, State of Maine, on the 13th day of
August 1999.
FAIRCHILD SEMICONDUCTOR
CORPORATION OF CALIFORNIA
By: /s/ DANIEL E. BOXER
---------------------------------------
Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities at the above-named Registrant on August 13, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* President and Chief Executive Officer
- --------------------------------------------------- (principal executive officer)
Kirk P. Pond
* Executive Vice President, Chief Financial
- --------------------------------------------------- Officer and Director (principal financial and
Joseph R. Martin accounting officer)
/s/ DANIEL E. BOXER Director
- ---------------------------------------------------
Daniel E. Boxer
</TABLE>
* By: /s/ DANIEL E. BOXER
---------------------------------------------------
Daniel E. Boxer
Attorney-in-fact
II-15
<PAGE> 291
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
2.01 Agreement and Plan of Recapitalization dated January 24,
1997 between Sterling Holding Company, LLC and National
Semiconductor (incorporated by reference from the Company's
Registration Statement on Form S-4, filed May 12, 1997 (File
No. 333-26897)).
2.02 Asset Purchase Agreement dated as of March 11, 1997 between
the Company and National Semiconductor (incorporated by
reference from the Company's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
2.03 Acquisition Agreement dated November 25, 1997 between the
Company and Raytheon Company (incorporated by reference from
the Company's Current Report on Form 8-K dated December 31,
1997, filed January 13, 1998).
2.04 Amendment No. 1 to Acquisition Agreement dated December 29,
1997 between the Company and Raytheon Company (incorporated
by reference from the Company's Current Report on Form 8-K
dated December 31, 1997, filed January 13, 1998).
2.05 Exhibit 3.14 to Acquisition Agreement dated December 29,
1997 between the Company and Raytheon Company (incorporated
by reference from the Company's Current Report on Form 8-K
dated December 31, 1997, filed January 13, 1998).
2.06 Business Transfer Agreement dated December 20, 1998 between
Samsung Electronics and the Company (incorporated by
reference from the Company's Current Report on Form 8-K
dated April 13, 1999, filed April 27, 1999).
2.07 Closing Agreement dated April 13, 1999 among Samsung
Electronics, Fairchild Korea and the Company (incorporated
by reference from the Company's Current Report on Form 8-K
dated April 13, 1999, filed April 27, 1999).
3.01 Certificate of Incorporation of the Company (incorporated by
reference from the Company's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
3.02 Bylaws of the Company (incorporated by reference from the
Company's Registration Statement on Form S-4, filed May 12,
1997 (File No. 333-26897)).
3.03 Certificate of Incorporation of Fairchild International
(incorporated by reference from the Company's Registration
Statement on Form S-4, filed May 12, 1997 (File No.
333-26897)).
3.04 Bylaws of Fairchild International (incorporated by reference
from the Company's Registration Statement on Form S-4, filed
May 12, 1997 (File No. 333-26897)).
3.05 Certificate of Amendment to Certificate of Incorporation of
Fairchild International (incorporated by reference from
Fairchild International's Registration Statement on Form
S-8, filed July 7, 1998 (File No. 333-58603)).
3.06 Certificate of Amendment of Certificate of Incorporation of
Fairchild International (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
3.07 Restated Certificate of Incorporation of Fairchild
International (incorporated by reference from Amendment No.
3 to Fairchild International's Registration Statement on
Form S-1, filed July 9, 1999 (File No. 333-78557)).
3.08 Certificate of Incorporation of Fairchild Semiconductor
Corporation of California.+
3.09 Bylaws of Fairchild Semiconductor Corporation of
California.+
</TABLE>
<PAGE> 292
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
3.10 Certificate of Amendment of Certificate of Incorporation of
Fairchild Semiconductor Corporation of California.+
4.01 Indenture dated April 7, 1999 among the Company, Fairchild
International, as Guarantor, Fairchild Semiconductor
Corporation of California, as Guarantor, and the United
States Trust Company of New York (incorporated by reference
from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
4.02 Form of 10 3/8% Senior Subordinated Notes Due 2007 (included
in Exhibit 4.01).
4.03 Registration Rights Agreement dated March 30, 1999 among the
Company, Fairchild International, as Guarantor, Fairchild
California, as Guarantor, Credit Suisse First Boston
Corporation, Morgan Stanley & Co. Incorporated, Salomon
Smith Barney Inc. and Fleet Securities, Inc. (incorporated
by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
5.01 Opinion of Dechert Price & Rhoads.
10.01 Indenture dated as of March 11, 1997 among the Company,
Fairchild International, as Guarantor and United States
Trust Company of New York, as Trustee relating to the
Company's 10 1/8% Senior Subordinated Notes (incorporated by
reference from the Company's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.02 Form of 10 1/8% Senior Subordinated Notes Due 2007 (included
in Exhibit 10.01).
10.03 Technology Licensing and Transfer Agreement dated March 11,
1997 between National Semiconductor and the Company
(incorporated by reference from Amendment No. 3 to the
Company's Registration Statement on Form S-4, filed July 9,
1997 (File No. 333-26897)).
10.04 Transition Services Agreement dated March 11, 1997 between
National Semiconductor and the Company (incorporated by
reference from the Company's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.05 Fairchild Foundry Services Agreement dated March 11, 1997
between National Semiconductor and the Company (incorporated
by reference from Amendment No. 3 to the Company's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.06 Revenue Side Letter dated March 11, 1997 between National
Semiconductor and the Company (incorporated by reference
from Amendment No. 3 to the Company's Registration Statement
on Form S-4, filed July 9, 1997 (File No. 333-26897)).
10.07 Fairchild Assembly Services Agreement dated March 11, 1997
between National Semiconductor and the Company (incorporated
by reference from Amendment No. 3 to the Company's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.08 National Foundry Services Agreement dated March 11, 1997
between National Semiconductor and the Company (incorporated
by reference from Amendment No. 3 to the Company's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
</TABLE>
<PAGE> 293
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
10.09 National Assembly Services Agreement dated March 11, 1997
between National Semiconductor and the Company (incorporated
by reference from Amendment No. 3 to the Company's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.10 Mil/Aero Wafer and Services Agreement dated March 11, 1997
between National Semiconductor and the Company (incorporated
by reference from Amendment No. 3 to the Company's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.11 Shared Services Agreement (South Portland) dated March 11,
1997 between National Semiconductor and the Company
(incorporated by reference from the Company's Registration
Statement on Form S-4, filed May 12, 1997 (File No.
333-26897)).
10.12 Credit Agreement dated March 11, 1997 among the Company,
Fairchild International, Various Banks, Bankers Trust
Company, Credit Suisse First Boston Corporation and Canadian
Imperial Bank of Commerce (incorporated by reference from
the Company's Registration Statement on Form S-4, filed May
12, 1997 (File No. 333-26897)).
10.13 Corporate Agreement dated February 20, 1992 between Torex
Semiconductor Ltd. and National Semiconductor (incorporated
by reference from Amendment No. 3 to the Company's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.14 Assembly/Test Subcontract Agreement dated August 13, 1998
between NS Electronics Bangkok (1993) Ltd. and the Company
(incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended May 31, 1998, filed
August 27, 1998).
10.15 Supply Agreement dated January 20, 1996 between National
Semiconductor and Dynacraft Industries Sdn. Bhd.
(incorporated by reference from Amendment No. 3 to the
Company's Registration Statement on Form S-4, filed dated
July 9, 1997 (File No. 333-26897)).
10.16 Licensing and Manufacturing Agreement dated April 27, 1990
between National Semiconductor and Waferscale Integration,
Inc. (incorporated by reference from Amendment No. 3 to the
Company's Registration Statement on Form S-4, filed July 9,
1997 (File No. 333-26897)).
10.17 Qualified Titles Corresponding to Registry Title Nos. 19, 44
and 3400-Mk 12 from the State of Penang, Malaysia and
corresponding Sale and Purchase Agreements, each dated March
11, 1997, between National Semiconductor Sdn. Bhd. and
Fairchild Semiconductor Sdn. Bhd. (incorporated by reference
from the Company's Registration Statement on Form S-4, filed
May 12, 1997 (File No. 333-26897)).
10.18 Lease Agreement dated October 10, 1979 between Export
Processing Zone Authority and Fairchild Semiconductor (Hong
Kong) Limited, and Supplemental Agreements thereto dated May
1, 1982; December 12, 1983; August 17, 1984; March 10, 1987;
February 16, 1990; August 25, 1994; May 29, 1995; June 7,
1995; November 9, 1995; and October 24, 1996 (incorporated
by reference from the Company's Registration Statement on
Form S-4, filed May 12, 1997 (File No. 333-26897)).
10.19 Lease for Santa Clara Facilities dated as of March 11, 1997
between National Semiconductor and the Company (incorporated
by reference from the Company's Registration Statement on
Form S-4, filed May 12, 1997 (File No. 333-26897)).
</TABLE>
<PAGE> 294
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
10.20 Shared Facilities Agreement (South Portland) dated March 11,
1997 between National Semiconductor and the Company
(incorporated by reference from the Company's Registration
Statement on Form S-4, filed May 12, 1997 (File No.
333-26897)).
10.21 Environmental Side Letter dated March 11, 1997 between
National Semiconductor and the Company (incorporated by
reference from the Company's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.22 Master Sublease Agreement dated March 11, 1997 between
National Semiconductor and the Company and Master Lease
Agreement dated December 13, 1994 between General Electric
Capital Corporation and National Semiconductor (incorporated
by reference from the Company's Registration Statement on
Form S-4, filed May 12, 1997 (File No. 333-26897)).
10.23 Fairchild NSC Deferred Compensation Plan Trust established
effective March 11, 1997 (incorporated by reference from the
Company's Registration Statement on Form S-4, filed May 12,
1997 (File No. 333-26897)).
10.24 Fairchild NSC Deferred Compensation Plan assumed and
continued, effective March 11, 1997 (included as Schedule A
to Exhibit 10.23).
10.25 Fairchild Benefit Restoration Plan (incorporated by
reference from the Company's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.26 Fairchild Incentive Plan (incorporated by reference from the
Company's Registration Statement on Form S-4, filed May 12,
1997 (File No. 333-26897)).
10.27 FSC Semiconductor Corporation Executive Officer Incentive
Plan (incorporated by reference from the Company's
Registration Statement on Form S-4, filed May 12, 1997 (File
No. 333-26897)).
10.28 FSC Semiconductor Corporation Stock Option Plan
(incorporated by reference from the Company's Registration
Statement on Form S-4, filed May 12, 1997 (File No.
333-26897)).
10.29 Employment Agreement dated March 11, 1997 among the Company,
Fairchild International, Sterling Holding Company, LLC and
Kirk P. Pond (incorporated by reference from the Company's
Registration Statement on Form S-4, filed May 12, 1997 (File
No. 333-26897)).
10.30 Employment Agreement dated March 11, 1997 among the Company,
Fairchild International, Sterling Holding Company, LLC and
Joseph R. Martin (incorporated by reference from the
Company's Registration Statement on Form S-4, filed May 12,
1997 (File No. 333-26897)).
10.31 Credit Agreement -- Amended and Restated as of December 31,
1997 (incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 1,
1998, filed April 13, 1998).
10.32 Employee Stock Purchase Savings Plan, as amended as of June
25, 1998 (incorporated by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1998, filed August 27, 1998).
10.33 Fairchild Revocable Savings Plan Trust, dated February 20,
1998, executed by Fleet Bank of Maine, as trustee
(incorporated by reference from Fairchild International's
Registration Statement on Form S-8, filed July 7, 1998 (File
No. 333-58603)).
10.34 Amendment to Securities Purchase and Holders Agreement dated
May 29, 1998 (incorporated by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1998, filed August 27, 1998).
</TABLE>
<PAGE> 295
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
10.35 Form of Promissory Note between the Company and Management
Investors dated June 3, 1998 (incorporated by reference from
the Company's Annual Report on Form 10-K for the fiscal year
ended dated May 31, 1998, filed August 27, 1998).
10.36 Second Amendment to Amended and Restated Credit Agreement
dated August 25, 1998 among Fairchild International, the
Company, the lenders party to the Credit Agreement dated
March 11, 1997, Bankers Trust Company, Credit Suisse First
Boston Corporation and Canadian Imperial Bank of Commerce
(incorporated by reference from the Company's Current Report
on Form 10-Q for the fiscal quarter ended August 30, 1998,
filed October 9, 1998).
10.37 Purchase Agreement dated March 30, 1999 among the Company,
Fairchild International, Fairchild Semiconductor Corporation
of California, Credit Suisse First Boston Corporation,
Morgan Stanley & Co. Incorporated, Salomon Smith Barney Inc.
and Fleet Securities, Inc. (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
10.38 Transitional Services Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.39 Product Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.40 Foundry Sale Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea (incorporated by reference
from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.41 Intellectual Property License Agreement dated April 13, 1999
between Samsung Electronics and Fairchild Korea
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.42 Trademark License Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.43 Assembly and Test Services Agreement (Onyang) dated April
13, 1999 between Samsung Electronics and Fairchild Korea
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.44 Assembly and Test Services Agreement (Suzhou) dated April
13, 1999 between SESS Electronics Suzhou Semiconductor Co.,
Ltd. and Fairchild Korea (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
10.45 EPI Services Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea (incorporated by reference
from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
</TABLE>
<PAGE> 296
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
10.46 Photo Mask Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.47 Credit Agreement dated April 14, 1999 among the Company,
Fairchild International, certain lenders named within the
Credit Agreement, Credit Suisse First Boston Corporation,
Salomon Brothers Holding Company Inc., ABN Amro Bank NV and
Fleet National Bank (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
10.48 Employment Agreement dated March 28, 1999 between Fairchild
International and Deok-Jung Kim (incorporated by reference
from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.49 Employment Agreement dated as of April 23, 1999 between the
Company and Kyoung-Soo Kim (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
10.50 Sublease Agreement dated April 23, 1999 between Veritas
Software Corporation and Fairchild California (incorporated
by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.51 Fairchild Executive Incentive Plan, as amended and restated,
effective June 1, 1998 (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
10.52 Securities Purchase and Holders Agreement dated as of March
11, 1997 among Fairchild International, Sterling, National
Semiconductor and Management Investors (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
12.01 Statement of Computation of Ratio of Earnings to Fixed
Charges.
21.01 Subsidiaries of the Company and the Additional Registrants.+
23.01 Consent of Dechert Price & Rhoads (included in the opinion
filed as Exhibit 5.01).
23.02 Consent of Samil Accounting Corporation.
23.03 Consent of KPMG LLP.
23.04 Consent of KPMG LLP.
23.05 Consent of KPMG LLP.
24.01 Power of Attorney+
25.01 Statement of Eligibility and Qualification of United States
Trust Company of New York on Form T- 1.+
99.01 Form of Letter of Transmittal.+
99.02 Form of Notice of Guaranteed Delivery.+
</TABLE>
- ------------------------
+ Previously filed.
<PAGE> 1
[LETTERHEAD]
Exhibit 5.01
August 13, 1999
Fairchild Semiconductor Corporation
Fairchild Semiconductor International, Inc.
Fairchild Semiconductor Corporation of California
333 Western Avenue, Mail Stop 01-00
South Portland, Maine 04106
Fairchild Semiconductor Corporation
10-3/8% Senior Subordinated Notes Due 2007
Guaranteed by Fairchild Semiconductor International, Inc.
and Fairchild Semiconductor Corporation of California
Gentlemen and Ladies:
We have acted as counsel for Fairchild Semiconductor Corporation, a
Delaware corporation (the "Issuer"), Fairchild Semiconductor International,
Inc., a Delaware corporation ("Fairchild International"), and Fairchild
Semiconductor Corporation of California, a Delaware corporation ("Fairchild
California," and together with Fairchild International, the "Guarantors"), in
connection with the filing by the Issuer and the Guarantors of a Registration
Statement on Form S-4, as amended (Registration No. 333-78665) (the
"Registration Statement"), with the Securities and Exchange Commission for the
purpose of registering the issuance of up to $300,000,000 aggregate principal
amount of the Issuer's 10-3/8% Senior Subordinated Notes Due 2007 (the "Exchange
Notes") and the Guarantors' guarantees thereof (the "Exchange Guarantees") under
the Securities Act of 1933, as amended (the "Act"). The Exchange Notes are to be
issued in exchange for an equal aggregate principal amount of the Issuer's
outstanding 10-3/8% Senior Subordinated Notes Due 2007 (the "Existing Notes")
and the Guarantors' guarantees thereof pursuant to the Registration Rights
Agreement among the Issuer, Fairchild International, Fairchild California,
Credit Suisse First Boston Corporation, Morgan Stanley & Co. Incorporated,
Salomon Smith Barney Inc. and Fleet Securities, Inc. incorporated by reference
as Exhibit 4.03 to the Registration Statement. The Exchange Notes and Exchange
Guarantees are to be issued pursuant to the terms of the indenture (the
"Indenture") among the Issuer, Fairchild International, Fairchild California and
United States Trust Company of New York, as trustee (the "Trustee"),
incorporated by reference as Exhibit 4.01 to the Registration Statement. The
Indenture is to be qualified under the Trust Indenture Act of 1939, as amended
(the "TIA").
In connection with the foregoing, we have reviewed such records,
documents, agreements and certificates, and examined such questions of law, as
we have considered necessary or appropriate for the purpose of this opinion. In
making our examination of records, documents, agreements and certificates, we
have assumed the authenticity of the same, the correctness of the information
contained therein, the genuineness of all signatures, the authority of all
persons entering and maintaining records or executing documents, agreements and
certificates (other than persons executing documents, agreements and
certificates on behalf of the Issuer and the Guarantors), and the conformity to
authentic originals of all items submitted to us as copies (whether certified,
conformed, photostatic or by other electronic means) of records, documents,
agreements or certificates. In rendering our opinion, we have relied as to
factual matters upon certificates of public officials and certificates and
representations of officers of the Issuer and the Guarantors.
We have assumed that the Indenture has been duly authorized, executed
and delivered by the Trustee and constitutes a legal, valid and binding
agreement of the Trustee. In addition, we have assumed that there will be no
changes in applicable law between the date of this opinion and the date of
issuance and delivery of the Exchange Notes and the Exchange Guarantees.
<PAGE> 2
Based upon the foregoing and having regard for such legal
considerations as we deem relevant, we are of the opinion that:
1. The Exchange Notes have been duly authorized by the Issuer and when
the Registration Statement has been declared effective, when the Indenture has
been duly qualified under the TIA, when the Exchange Notes have been duly
executed by the Issuer and when the Exchange Notes have been duly authenticated
by the Trustee in accordance with the terms of the Indenture and issued and
delivered against exchange of the Existing Notes in accordance with the terms
set forth in the prospectus which is included in the Registration Statement, the
Exchange Notes will be valid and binding obligations of the Issuer, subject to
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance,
fraudulent transfer and similar laws affecting creditors' rights and remedies
generally and general principles of equity.
2. The Exchange Guarantees have been duly authorized by the Guarantors
and when the Registration Statement has been declared effective, when the
Indenture has been duly qualified under the TIA, when the Exchange Notes have
been duly executed by the Issuer, when the Exchange Guarantees have been duly
executed by the Guarantor and when the Exchange Notes have been duly
authenticated by the Trustee in accordance with the terms of the Indenture and
issued and delivered against exchange of the Existing Notes in accordance with
the terms set forth in the prospectus which is included in the Registration
Statement, the Exchange Guarantees will be valid and binding obligations of the
Guarantors, subject to bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, fraudulent transfer and similar laws affecting creditors'
rights and remedies generally and general principles of equity.
This opinion is rendered to the Issuer and the Guarantors in connection
with the filing of the Registration Statement and for no other purpose. We
express no opinion as to the laws of any jurisdiction other than the laws of the
United States of America, the State of New York and the General Corporation Law
of the State of Delaware. The opinions expressed herein are based on states of
law, documentation and fact as they exist on the date hereof, and we do not
undertake to advise you of any changes therein which hereafter may be brought to
our attention.
We hereby consent to the filing of this opinion as Exhibit 5.01 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the prospectus which is included in the Registration Statement. In
giving the foregoing consent, we do not admit that we come within the category
of persons whose consent is required by the Act or the rules and regulations
promulgated thereunder.
Very truly yours,
/s/ DECHERT PRICE & RHOADS
<PAGE> 1
EXHIBIT 12.01
Fairchild Semiconductor Corporation
Computation of Ratio of Earnings to Fixed Charges
(Dollars in millions)
<TABLE>
<CAPTION>
Fiscal Year Ended May
------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
------ ------ ------ ------ ------ ----------------
Pro Forma
Historical as Adjusted
---------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income taxes $ 74.3 $ 72.3 $ 21.2 $ 42.6 $(107.9) $(127.5)
Interest expense -- -- 9.3 44.7 60.5 79.9
Interest portion of rental expense 1.0 1.6 1.7 3.2 4.2 4.2
------ ------ ------ ------ ------ ------
Total earnings $ 75.3 $ 73.9 $ 32.2 $ 90.5 $(43.2) $(43.4)
====== ====== ====== ====== ====== ======
Fixed charges:
Interest expense -- -- 9.3 44.7 60.5 79.9
Interest portion of rental expense 1.0 1.6 1.7 3.2 4.2 4.2
------ ------ ------ ------ ------ ------
Total fixed charges $ 1.0 $ 1.6 $ 11.0 $ 47.9 $ 64.7 $ 84.1
====== ====== ====== ====== ====== ======
Ratio of earnings to fixed charges 75.3 46.2 2.9 1.9 --(1) --(1)
</TABLE>
(1) Earnings were inadequate to cover fixed charges by $107.9 million and
$127.5 million, respectively, for the historical and Pro Forma as adjusted
year ended May 30, 1999.
<PAGE> 1
Exhibit 23.02
[SAMIL ACCOUNTING CORPORATION LETTERHEAD]
August 13, 1999
We hereby consent to the use in this Registration Statement on Form S-4 (No.
333-78665) of Fairchild Semiconductor International, Inc. of our report dated
February 24, 1999 relating to the financial statements of the Power Device
Business of Samsung Electronics Co., Ltd., which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
/s/ Samil Accounting Corporation
Samil Accounting Corporation
Seoul, Korea
August 13, 1999
<PAGE> 1
Exhibit 23.03
The Board of Directors
Fairchild Semiconductor Corporation:
We consent to the inclusion of our reports dated June 30, 1999, except as to
Note 19, which is as of August 9, 1999, with respect to the consolidated balance
sheets of Fairchild Semiconductor Corporation and Subsidiaries as of May 31,
1998 and May 30, 1999, and the related consolidated statements of operations and
stockholder's equity (deficit) for each of the years in the three-year period
ended May 30, 1999, and the related consolidated statements of cash flows for
the years ended May 31, 1998 and May 30, 1999, and the related schedule, which
reports appear in this Registration Statement, and to the reference to our firm
under the heading "Experts" in this Registration Statement on Form S-4.
As discussed in Note 17 to the financial statements, the Company changed its
method of accounting for business process reengineering costs in 1998 to adopt
the provisions of the Emerging Issues Task Force Issue 97-13, "Accounting for
Business Process Reengineering Costs."
/s/ KPMG LLP
Boston, Massachusetts
August 13, 1999
<PAGE> 1
Exhibit 23.04
The Board of Directors
Fairchild Semiconductor International, Inc.:
We consent to the inclusion of our reports dated June 30, 1999, except as to
Note 20, which is as of August 9, 1999, with respect to the consolidated balance
sheets of Fairchild Semiconductor International, Inc. and Subsidiaries as of May
31, 1998 and May 30, 1999, and the related consolidated statements of operations
and stockholders' equity (deficit) for each of the years in the three-year
period ended May 30, 1999, and the related consolidated statements of cash flows
for the years ended May 31, 1998 and May 30, 1999, and the related schedule,
which reports appear in this Registration Statement, and to the reference to our
firm under the heading "Experts" in this Registration Statement on Form S-4.
As discussed in Note 18 to the financial statements, the Company changed its
method of accounting for business process reengineering costs in 1998 to adopt
the provisions of the Emerging Issues Task Force Issue 97-13, "Accounting for
Business Process Reengineering Costs."
/s/ KPMG LLP
Boston, Massachusetts
August 13, 1999
<PAGE> 1
Exhibit 23.05
The Board of Directors
Fairchild Semiconductor Corporation of California
(formerly known as Raytheon Semiconductor, Inc.):
We consent to the inclusion of our report dated February 27, 1998, with respect
to the balance sheet of Raytheon Semiconductor, Inc. (a wholly owned subsidiary
of Thornwood Trust) as of December 31, 1997, and the related statements of
income, stockholder's equity, and cash flows for the year then ended, which
report appears in this Registration Statement, and to the reference to our firm
under the heading "Experts" in this Registration Statement on Form S-4.
Mountain View, California
August 13, 1999
