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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-15181
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 04-3363001
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
333 WESTERN AVENUE, SOUTH PORTLAND, ME 04106
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (207) 775-8100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of August 12, 1999 was $552,000,000.
The number of shares outstanding of the Registrant's Class A and Class B
Common Stock as of August 12, 1999 was 58,790,814 and 29,641,000 respectively.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
GENERAL
Fairchild Semiconductor International, Inc. ("Fairchild International",
formerly known as FSC Semiconductor Corporation), through its wholly-owned
subsidiary Fairchild Semiconductor Corporation (collectively "Fairchild" or the
"Company") 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 Ltd. in 1979. National
Semiconductor acquired Fairchild from Schlumberger in 1987, and fully integrated
it into its operations. Pursuant to an Agreement and Plan of Recapitalization
("Recapitalization"), Fairchild separated from National Semiconductor
Corporation ("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. ("Raytheon"),
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. The Company'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 Co., Ltd. ("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 53,700 million
South Korean won 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 1,481
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employees, most of whom work at its wafer fabrication facilities in South Korea,
to our existing work force of approximately 6,600.
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
We design, manufacture and market 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
We design, manufacture and market 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.
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
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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 (such as 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 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
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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 (such as 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, OAL
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. Our CMOS offerings include mature products
such as FACTTM, 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
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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.
SALES, MARKETING AND DISTRIBUTION
In Fiscal 1999, the Company 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. We operate
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 our 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.
The Company has dedicated direct sales organizations operating in Europe,
the Americas, Asia/Pacific, Japan and Korea that serve its major original
equipment manufacturer customers. We also have a large network of distributors
and manufacturer's representatives to distribute our products around the world.
We believe that maintaining a small, highly focused, direct sales force selling
products for each of our businesses, combined with an extensive network of
distributors and manufacturer's representatives, is the most efficient way to
serve our multi-market customer base. We also maintain 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 our products, and fill orders for many customers.
Some of our 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
the Company's experience, these inventory returns can usually be resold.
Manufacturer's representatives generally do not offer products that compete
directly with our products, but may carry complementary items manufactured by
others. Manufacturer's representatives do not maintain a product inventory;
instead, their customers place large quantity orders directly with Fairchild
International 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 with Samsung Electronics, warehousing is provided under a
transitional services agreement with Samsung Electronics, and sales and
distribution services are provided under an overseas sales services agreement.
RESEARCH AND DEVELOPMENT
Our expenditures for research and development in Fiscal 1999, 1998 and 1997
were $39.3 million, $35.7 million and $18.9 million, respectively. Such
expenditures represented 6.0%, 5.6% and 3.2% of trade sales in
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Fiscal 1999, 1998 and 1997, 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 the Company to continue to achieve high volume, high
reliability and low-cost production using leading edge process technology. Our
research and development efforts are focused on new product development and
improvements in process technology in our growth areas: CMOS logic, DMOS power
discretes, and analog and mixed signal products.
Each of our product groups maintain independent research and development
organizations. We work closely with our major customers in many research and
development situations in order to increase the likelihood that our 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
1998, 1997 and 1996 were $15.2 million, $19.2 million and $18.6 million,
respectively. The power device business' research and development efforts are
focused on IGBT and HV MOSFET process and product development, motor control
integrated circuits 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 Philippines and Malaysia. Our
products are manufactured and designed using a broad range of manufacturing
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
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LOCATION PRODUCTS TECHNOLOGIES
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FRONT-END FACILITIES:
South Portland, Maine Bipolar, CMOS and BiCMOS 4-inch fab - 5.0/3.0 micron
logic products Bipolar and CMOS
5-inch fab - 3.0/1.5 micron
National Semiconductor Bipolar and CMOS
contract manufacturing 6-inch fab - 1.5/0.5 micron
CMOS and BiCMOS
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LOCATION PRODUCTS TECHNOLOGIES
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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 EPROM
- 2.0 micron DMOS
National Semiconductor
contract manufacturing
Mountain View, California(1) Standard Linear products 4-inch fab - 5.0/3.0 micron
Bipolar and CMOS
Op Amps, Ground Fault
Interruptors
Bucheon, South Korea Power discrete 4-inch fab - 5.0/4.0 micron
semiconductors, Standard Bipolar
analog integrated circuits 5-inch fab - 2.0/0.8 micron
Bipolar and DMOS
BACK-END FACILITIES:
Penang, Malaysia Bipolar, CMOS and BiCMOS MDIP, SOIC, EIAJ, TSSOP,
logic products SSOP,
8-56 Pins
National Semiconductor
assembly and test services
Cebu, the Philippines Power and small signal TO92, SOT-23, Super SOT,
discrete National SOT-223, TO220, TO263
Semiconductor assembly and
test services
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(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.
Our strategy is to have manufacturing facilities dedicated to our 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. We also subcontract out a minority of our wafer
fabrication needs, 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.
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.
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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.
We sell 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 the Company 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. We recognize revenue from contract manufacturing
services but do not account for these revenues on a backlog basis. For these
reasons, we believe 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
our backlog.
SEASONALITY
Generally, we are affected by the seasonal trends of the semiconductor and
related industries. As a result of these trends, we typically experience lower
revenue in the third fiscal quarter, primarily due to customer demand
adjustments as a result of holiday seasons around the world. Revenue usually has
a seasonal peak in our fourth fiscal quarter. In Fiscal 1999, the typical
seasonality was affected 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.
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.
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TRADEMARKS AND PATENTS
The Company 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 our operations.
Our 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 Semiconductor Corporation, we 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, we acquired over 100
patents owned by Raytheon Semiconductor, Inc., as well as licensing rights
(similar to those granted to Fairchild International by National Semiconductor
in the recapitalization of Fairchild Semiconductor Corporation) 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, we 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. We also received the rights to
use all relevant trademarks.
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. Our 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.
Our 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 us 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.
Our 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 the
Company 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
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requirements. We cannot assure you that material costs will not be incurred in
connection with the future compliance with environmental laws.
EMPLOYEES
Our 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. The Company 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 Semiconductor Ltd. Management of the power device business
believes that its relations with its employees and the Labor Council are
satisfactory.
STATEMENT REGARDING THE PRIVATE SECURITIES LITIGATION REFORM ACT
Some information in this Annual Report on Form 10-K, including but not
limited to the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section, may constitute forward-looking statements as
such term is defined in Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "seeks," "approximately," "intends,"
"plans," "estimates," "anticipates," or "hopeful," or the negative of those
terms or other comparable terminology, or by discussions of strategy, plans or
intentions. Forward-looking statements involve risks and uncertainties,
including those described in the Risk Factors section of Item 1 of this Annual
Report set forth below. Such risks and uncertainties could cause actual results
to be materially different than those in the forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. We assume no obligation to update such
information.
RISK FACTORS
Our business is subject to the following risk factors:
UPON THE COMPLETION OF OUR INITIAL PUBLIC OFFERING ON AUGUST 9, 1999, WE HAD
$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 our acquisition of the power
device business from Samsung Electronics in April 1999, the financings in
connection with that acquisition, the application of the proceeds of such
financings, and the completion of our IPO on August 9, 1999 and the application
of the proceeds from our IPO, as of May 30, 1999, we would have had total
indebtedness of $715.4 million, stockholders' equity of $179.9 million and a
ratio of debt to equity of 4.0 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, our IPO and the
application of the proceeds from the IPO, would have
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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.
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, the
application of the proceeds of such financings, the IPO and the application of
the proceeds from the IPO, our 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,
the application of the proceeds of such financings, our IPO and the application
of the proceeds from the IPO, 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 $119.2 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 our 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.
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 Semiconductor Corporation and its subsidiary guarantors. If the
indebtedness under our debt instruments were to be accelerated, the value of our
common stock would likely decrease significantly.
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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 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, are 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 OUR 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.
We purchased the power device business from Samsung Electronics in April
1999. 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
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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.
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.
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 South Korean Won. Although we have taken steps to
fix the costs subject to currency fluctuations and to balance 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 Semiconductor Ltd., our South Korean subsidiary, 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. 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
Semiconductor Ltd. were to lose its tax holiday, we could suffer adverse tax and
other financial consequences or lose the benefits anticipated from our
transaction structure.
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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 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.
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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 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 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;
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- 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.
ITEM 2. 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 we own, and Mountain
View, California, which we lease, respectively. Additional office and
manufacturing space is located in leased facilities in Sunnyvale, California and
San Diego, California.
We are currently in the process of transferring our analog wafer
fabrication plant from the Mountain View, California facility to our South
Portland, Maine facility. On April 23, 1999, the Company 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 us 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 has been placed into an escrow account and will be
released to us upon the demolition of the existing structures on the Mountain
View property. In connection with the sale of the Mountain View property, the
Company 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, under which we own improvements on the land. The initial terms of
these leases will expire beginning in 2014. In some cases we have the option to
renew the lease term, while in others we have 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.
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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.
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.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings arising in
the ordinary course of business. Management believes there is no litigation
pending that could have, individually or in the aggregate, a material adverse
effect on its business, financial condition, results of operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A Common Stock began trading on the New York Stock Exchange on
August 4, 1999. There is no established public trading market for our Class B
Common Stock. No established public trading market existed for either class of
our common stock during the period covered by this annual report, and
accordingly no high and low sales prices have been provided with respect to our
common stock.
As of August 12, 1999, there were 147 holders of record of our Class A
Common Stock and two holders of our Class B Common Stock. We have not paid
dividends on our Common Stock and have no present intention of so doing. Certain
agreements, pursuant to which we have borrowed funds, contain provisions that
limit the amount of dividends and stock repurchases that we may make. (See Note
4 to the Company's Consolidated Financial Statements.)
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of the Company. The historical consolidated financial data as of May 30,
1999 and May 31, 1998 and for the fiscal years ended May 30, 1999, May 31, 1998
and May 25, 1997 are derived from the audited consolidated financial statements
of the Company included elsewhere in this Form 10-K. The historical consolidated
financial data as of May 25, 1997 and May 26, 1996 and for the year ended May
26, 1996 are derived from audited consolidated financial statements of the
Company not included in this Form 10-K. The historical consolidated financial
data as of and for the fiscal year ended May 28, 1995 are derived from unaudited
consolidated financial statements of the Company that are not included in this
Form 10-K. We believe that such unaudited consolidated financial statements
included all adjustments necessary for the fair presentation of the financial
condition and the results of operations of the Company for such period and as of
such date. This information should be read in conjunction with the consolidated
financial statements of the Company and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Form
10-K.
17
<PAGE> 19
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Trade revenue.............................. $ 654.1 $ 635.8 $ 587.8 $688.7 $629.6
Contract manufacturing revenue............. 81.0 153.4 104.2 87.6 50.7
-------- ------- ------- ------ ------
Total revenue......................... $ 735.1 $ 789.2 $ 692.0 $776.3 $680.3
-------- ------- ------- ------ ------
Trade gross profit......................... $ 135.7 $ 194.2 $ 145.7 $216.8 $203.8
% of trade revenue......................... 20.7% 30.5% 24.8% 31.5% 32.4%
Contract manufacturing gross profit........ 16.6 36.3 6.8 -- --
% of contract manufacturing revenue........ 20.5% 23.7% 6.5% -- --
Total gross profit......................... 152.3 230.5 152.5 216.8 203.8
% of total revenue......................... 20.7% 29.2% 22.0% 27.9% 30.0%
Net income (loss)(3)....................... (114.1) 20.6 15.5 72.3 74.3
OTHER FINANCIAL DATA:
EBIT(1)(2)................................. $ 23.3 $ 102.8 $ 51.3 $ 72.1 $ 72.5
Depreciation and other amortization........ 95.3 83.2 77.1 64.2 44.7
Amortization of intangibles................ 8.4 1.4 -- -- --
EBITDA(1)(2)............................... 127.0 187.4 128.4 136.3 117.2
Capital expenditures....................... 46.2 78.0 47.1 153.9 112.9
CONSOLIDATED BALANCE SHEET DATA (END OF
PERIOD):
Inventories................................ $ 148.6 $ 108.0 $ 73.1 $ 93.1 $ 68.8
Total assets............................... 1,095.7 634.3 555.0 432.7 323.2
Long-term debt, less current portion....... 1,045.9 526.7 487.9 -- --
Redeemable preferred stock................. 90.1 80.5 71.8 -- --
Stockholders' equity (deficit)............. (240.4) (116.6) (133.3) 349.2 233.2
</TABLE>
- ---------------
(1) Excludes one-time charges of $55.3 million for purchased in-process research
and development and restructuring and impairments, and $15.4 million for
additional sales and inventory reserves associated with our Memory
restructuring action in Fiscal 1999; $15.5 million for purchased in-process
research and development in Fiscal 1998; and $14.1 million for retention
bonuses and $5.3 million for a restructuring charge in Fiscal 1997.
(2) Excludes other (income) expense.
(3) Prior to March 11, 1997, the amounts presented include revenues less direct
and allocated expenses. (See Note 1 to Consolidated Financial Statements.)
18
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto of Fairchild International
included elsewhere in this Form 10-K.
OVERVIEW
The Company is a leading designer, manufacturer and supplier of
high-performance logic, non-volatile memory, discrete power and signal
technology and analog and mixed signal semiconductors, serving the personal
computer, industrial, telecommunications, consumer electronics and automotive
markets. The predecessor to Fairchild Semiconductor Corporation, a wholly-owned
subsidiary of Fairchild International, was renowned as one of the pioneering
companies of the semiconductor industry. The founders of the Fairchild
Semiconductor business in the 1950's 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 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, the Fairchild business was acquired by National Semiconductor
and integrated into its operations. The assets of the Fairchild business were
separated from National Semiconductor on March 11, 1997 pursuant to an Agreement
and Plan of Recapitalization and the Company began operating as a stand-alone
entity. At that time, our businesses consisted of the Logic Products Group,
historically a core business of Fairchild, the Discrete Products Group and the
Non-Volatile Memory Products Group, historically multi-market businesses of
National Semiconductor. On December 31, 1997, the Company 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
the Company. The transaction was accounted for as a purchase. Accordingly, the
Company'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, the Company 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, the Company'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 (the "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 Business corporate and other overhead costs at levels higher
than those experienced as a stand-alone company. In addition, the Business,
prior to the establishment of the Company, provided contract manufacturing
services to National Semiconductor at cost and now provides such services at
higher prices. Under manufacturing agreements with National Semiconductor, it is
required to purchase not less than $330.0 million of contract manufacturing
services from the Company during the first 39 months after consummation of the
Recapitalization.
The Company 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
19
<PAGE> 21
revenue by reportable segments and contract manufacturing services, as a
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
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Analog...................................................... 8.7% 4.1% --
Discrete.................................................... 24.4% 23.7% 23.8%
Logic....................................................... 36.1% 38.4% 41.2%
Memory...................................................... 9.9% 14.4% 19.9%
Power Device................................................ 10.0% -- --
----- ----- -----
Subtotal trade sales................................... 89.1% 80.6% 84.9%
Contract Manufacturing Services............................. 10.9% 19.4% 15.1%
----- ----- -----
Total.................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
YEAR ENDED MAY 30, 1999 COMPARED TO YEAR ENDED MAY 31, 1998
Results of Operations. The Company incurred a net loss of $114.1 million
in Fiscal 1999, compared to net income of $20.6 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 our senior credit
facilities ($5.2 million) as part 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,
the Company incurred a net loss of $33.4 million in Fiscal 1999, compared to net
income of $33.5 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.
The Company 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 the Company 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 the Company, or as an alternative to
cash flows as a measure of liquidity.
Revenues. The Company's revenues consist of trade sales to unaffiliated
customers (89.1% and 80.6% of total revenues in Fiscal 1999 and Fiscal 1998,
respectively) and contract manufacturing services to National Semiconductor
(10.9% 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
20
<PAGE> 22
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 the Company'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 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 unusual 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 the Company'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 our 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
21
<PAGE> 23
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 the Company took several actions during Fiscal 1999 to reduce costs
and improve profitability in a number of areas. In the fourth quarter of Fiscal
1999, the Company 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 the Company's facilities in Salt Lake
City, Utah and Sunnyvale, California, and $0.2 million for severance and
employee separation costs. In addition, the Company took charges of $5.5 million
and $9.9 million recorded to revenue and cost of sales, 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, the Company took a pre-tax charge of
$10.0 million for the closure of its Mountain View facility, which supports the
Analog Products Group. The Company is transferring Analog wafer fabrication
activities to its facility in South Portland, Maine. As a result of this
transfer, the Company 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, the Company 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. The Company views the holdback as a
contingent gain, and as such did not record this amount in its Statement of
Operations. The Company expects, however, that a favorable ruling will be
granted which will enable the Company to record a one-time gain from receipt of
the holdback in a subsequent period. In the third quarter of Fiscal 1999, the
Company took a pre-tax charge of $2.7 million for the transfer of Analog
assembly and test activities from its Mountain View facility to the Company'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, the Company 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 the Company's
payroll. In addition, $0.8 million was recorded for the write-off of various
idle assets in the Company's Mountain View and Salt Lake City facilities.
Interest expense, net. Interest expense, net was $71.8 million in Fiscal
1999, compared to $54.5 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 $(5.1) million
in Fiscal 1999, compared to income tax expense of $10.7 million in Fiscal 1998.
The effective tax rate for Fiscal 1999 was 4.3%, compared to 32.6% in Fiscal
1998. The decrease in the effective rate is due to the inability of the Company
to carry back its Fiscal 1999 operating loss due to the short time it has
operated as a stand-alone entity and a tax holiday for income generated by our
Korean subsidiary, Fairchild Korea Semiconductor Ltd., formed as a result of the
acquisition of the power device business. Fairchild Korea Semiconductor Ltd. 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.
22
<PAGE> 24
Effective for the fiscal year ended May 30, 1999, the Company 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 the Company's reportable segments have been
included for Fiscal 1998 and 1997.
Analog and Mixed Signal Products Division. The Company 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 our 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, the Company 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 decreases are due to lower average
23
<PAGE> 25
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. The Company 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 the Company 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 the Company's analog and discrete product portfolios
with those of the Power Device Products Group gives the Company 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,
our analog and discrete revenues were $95.8 million and $221.0 million,
respectively, in Fiscal 1999 or 48.4% of our trade revenues.
YEAR ENDED MAY 31, 1998 COMPARED TO YEAR ENDED MAY 25, 1997
Results of Operations. Net income increased 32.9% to $20.6 million in
Fiscal 1998, as compared to $15.5 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 the Company'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.
Prior to the Recapitalization, the 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 $33.5 million and
$34.9 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 factory
utilization, and the favorable
24
<PAGE> 26
effect of currency devaluations in Southeast Asia on manufacturing costs. The
following table depicts operating income for our reportable segments:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MAY
-----------------
1998 1997
------- ------
(IN MILLIONS)
<S> <C> <C>
Analog...................................................... $ 2.2 $ --
Discrete.................................................... 44.9 21.7
Logic....................................................... 70.0 21.3
Memory...................................................... (14.2) 5.0
</TABLE>
Analog was formed upon the completion of the acquisition of Raytheon. Its
results are consolidated with those of the Company 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.
The Company'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. The Company'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 our 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 our 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, FACTTM 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 had increased trade sales of 4.7% in Fiscal 1998 over Fiscal
1997. In a declining market, 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.
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<PAGE> 27
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, 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 our
manufacturing costs and the acquisition of Raytheon, which increased our
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 the Company's renewed emphasis on R&D efforts as a stand-alone
company following the Recapitalization. Prior to the Recapitalization, R&D
expenditures of the Business primarily consisted of allocations from National
Semiconductor. Reflective of increased R&D efforts, the Company approximately
doubled the number of new products introduced in Fiscal 1998 from Fiscal 1997.
In addition, the Company 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 our 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 our mature
products (Bipolar Logic, Bipolar Discretes and EPROM). Comparison of the above
to Fiscal 1997 is not meaningful as the Company 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 the Company. 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 Fiscal 1998
compared to Fiscal 1997, which reflects nine months of direct and allocated
expenses of the 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 $54.5 million and $11.2
million in Fiscal 1998 and 1997, respectively. Fiscal 1998 includes a full year
of interest expense on indebtedness incurred to finance the Recapitalization of
the Company, while Fiscal 1997 contains approximately one quarter of such
interest expense. In addition, the Company incurred additional indebtedness due
to the purchase of Raytheon in the
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<PAGE> 28
third quarter of Fiscal 1998. Prior to the Recapitalization, the 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 Business by National
Semiconductor. There were no comparable amounts incurred in Fiscal 1998.
In the third quarter of Fiscal 1998, the Company 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 our enterprise software system
implementation. The enterprise software system implementation costs, relating to
activities to assess the system's capabilities in light of our 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 $10.7 million and $3.8 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 Semiconductor
Corporation, at an effective rate of 39.1%. 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, the 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, the
Company 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.
The Company'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 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.
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<PAGE> 29
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>
FAIR VALUE MAN-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. The Company 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 the Company in valuing in-process research and
development were based upon assumptions the Company 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. The
Company'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.
The discount rate selected for power device business' in-process technology
was 20%. This discount rate is greater than the Company'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, the Company 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.
The Company'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
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<PAGE> 30
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.
The material risks associated with the successful completion of the
in-process technology include the Company'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, the Company 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 the Company's
15% weighted average cost of capital. The discount rate utilized for the
in-process technology was determined to be higher than the Company'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
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<PAGE> 31
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. The Company 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 the Company or its
financial position, including the recoverability of intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company 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 the Company issued the $50.0 million 12.5% Subordinated Note Due
2008. 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 the Company'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.
The senior credit facilities, the 10 1/8% Senior Subordinated Notes and the
10 3/8% Senior Subordinated Notes do, and other debt instruments the Company may
enter into in the future may, impose various restrictions and covenants on the
Company which could potentially limit the Company'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. The senior credit facilities also
limit our ability to modify our certificate of incorporation, bylaws,
shareholder agreements, voting trusts or similar arrangements. 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 our subsidiaries to make dividends or advances to our Company. However, our
subsidiaries are permitted without material restrictions under our debt
instruments to make dividends or advances to Fairchild. We believe that those
funds permitted to be transferred to us, together with existing cash, will be
sufficient to meet our cash obligations. The Company expects that its existing
cash, together with available funds from its amended senior credit facilities
and funds generated from operations, will be sufficient to meet its 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, the Company's cash and cash equivalents balance was
$62.4 million, an increase of $55.9 million from May 31, 1998.
During Fiscal 1999, the Company'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 $76.8 million as well as a decrease in cash flows from changes
in operating assets and liabilities of $15.2 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
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<PAGE> 32
conversion of accounts receivable to our enterprise software system in Fiscal
1999. The Company expects these aged balances to be reduced during the next
twelve months. 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
the Company's enterprise-wide information system and to increase capacity in the
Company'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 and issuance of new long-term debt of $660.0 million and
associated 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. The Company 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 the Company'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 the Company's results of operations or financial condition.
LIQUIDITY AND CAPITAL RESOURCES OF FAIRCHILD INTERNATIONAL EXCLUDING OUR
SUBSIDIARIES
Fairchild International is a holding company, the principal assets of which
are the stock of its subsidiary, Fairchild Semiconductor Corporation. Fairchild
International on a stand-alone basis has no cash flow from operations in Fiscal
1999. Fairchild International on a stand-alone basis has no cash requirements
for the next twelve months.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. To mitigate these risks, the
Company utilizes derivative financial instruments. The Company 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 the
Company's financial position at May 30, 1999. Actual results may differ
materially.
The Company 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 the Company.
A substantial majority of the Company's revenue, expense and capital
purchasing activities are transacted in U.S. dollars. However, the Company 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, the Company has established hedging
programs. Currency forward contracts and currency option contracts are utilized
in these hedging programs. The Company'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.
The Company has no interest rate exposure due to rate changes for the
10 1/8% Senior Subordinated Notes, the 10 3/8% Senior Subordinated Notes, the
11.74% Subordinated Note Due 2008 or the 12.5% Subordinated Note Due 2008.
However, the Company 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
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<PAGE> 33
rates would result in increased annual interest expense of $1.6 million for the
next twelve months. From time to time, the Company enters into interest rate
swaps or interest rate caps, primarily to reduce its interest rate exposure. As
of May 30, 1999, the Company had an interest rate cap to cover exposure on the
$310.0 million term loan.
NATIONAL SEMICONDUCTOR RELATIONSHIP
The Company and National Semiconductor have arrangements relating to
services and sale of the Company's products as follows: First, National
Semiconductor has agreed to purchase products and services from the Company
until June 11, 2000 under a foundry services agreement. Second, National
Semiconductor has agreed to provide administrative services to the Company under
a transition services agreement. Third, National Semiconductor has agreed to
indemnify the Company 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 the Company, 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
for the period from May 30, 1999 to May 20, 2000. In addition, National
Semiconductor is obligated to cover a contractually agreed-upon amount of fixed
costs in the Company's 6-inch wafer fabrication plant in South Portland, Maine
during the next twelve months. In the event National Semiconductor does not
purchase $80.0 million of contract manufacturing services in the next twelve
months, the Asset Purchase Agreement requires National Semiconductor to
reimburse the Company for unabsorbed fixed costs and lost profit on the revenue
shortfall.
OUTLOOK AND BUSINESS RISKS
The statements contained under this heading and elsewhere in "Management's
Discussion and Analysis of Financial Condition and Results of Operations", other
than statements of historical facts, are forward-looking statements based on
current expectations and management's estimates, which involve risks and
uncertainties. Actual results may differ materially from those set forth in or
contemplated by such forward-looking statements.
The following factors may affect the Company's operating results in the
coming year: (i) the potential effect of the Company's substantially leveraged
financial condition on its liquidity, its ability to fund capital expenditures,
working capital, debt service and research and development and its ability to
withstand adverse general economic, market or competitive conditions and
developments; (ii) restrictive covenants contained in the Company's debt
instruments that could limit its ability to borrow additional funds, dispose of
or acquire assets or fund capital expenditures; (iii) the highly cyclical and
competitive nature of the semiconductor industry and the potential for continued
softness in demand; (iv) the Company's dependence on continued demand for the
end-products such as personal computers, telecommunications, automotive, and
consumer and industrial electronic goods that incorporate its products; (v) the
need to design, develop, manufacture, market and support new products in order
to remain competitive in our markets; (vi) the ability to efficiently integrate
the operations of the power device business into the Company and the risk of
losing customers or employees of the acquired operation; (vii) the Company's
dependence on the availability and cost of raw materials used in its products
and upon key subcontractors providing it with wafer fabrication, assembly and
test services; (viii) the Company's reliance on complex manufacturing processes
and its sensitivity to maintaining yields, efficiencies and continuous
operations; (ix) the Company'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; (x)
uncertainties and legal risks associated with the dependence on, and potential
disputes concerning patents and other intellectual property rights; and (xi)
foreign currency and other risks associated with operating a global business.
On June 24, 1999, the Board of Directors approved a change in the Company's
fiscal year end from the last Sunday in May to the last Sunday in December. The
Company will file a Form 10-K for the transition period from May 31, 1999 to
December 26, 1999, which we will refer to as "Stub Year 1999."
32
<PAGE> 34
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 the Company is
seeing a trend toward firming prices in certain 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, the Company 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
connection with the offering, the Company will incur one-time charges of
approximately $14.3 million in the first quarter of Stub Year 1999 for the
forgiveness of certain loans to our management investors which became cancelable
upon the occurance of the offering, and the write-off of deferred financing fees
associated with debt repaid as a result of 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.
Contract manufacturing revenues with National Semiconductor decreased
substantially in Fiscal 1999 and Fiscal 1998. National Semiconductor did not
meet its revenue obligation in Fiscal 1999, and consequently paid $18.7 million
in penalties under the terms of the manufacturing agreements. However, the
demand shortfall caused factory underutilization, particularly in the 6-inch fab
in South Portland, Maine. For the period from May 31, 1999 to May 26, 2000,
National Semiconductor is obligated to purchase $80.0 million of contract
manufacturing services. Although demand from National Semiconductor increased in
the second half of Fiscal 1999, there can be no assurance that demand will
remain at these levels. Should National Semiconductor not meet its purchase
commitment, it could result in lower fixed cost absorption, and hence could
negatively impact gross profit in Stub Year 1999.
As a result of the acquisition of the power device business, Samsung
Electronics became one of our largest customers. Under the terms of the Product
Supply Agreement, Samsung Electronics is contractually obligated to purchase
approximately 702 million units of power device products during the year
following the acquisition, and for the following two years. Their purchase
commitment is contingent upon our ability to satisfy Samsung Electronics'
quality and other specifications for power device products. Should the Company
not be able to comply with such specifications, or Samsung Electronics not
fulfill its obligation under the Product Supply Agreement, there could be a
material adverse effect on our trade revenues and results from operations.
The Company's assembly and test facilities, a wafer fabrication facility,
as well as certain subcontractors for wafer fabrication and assembly and test
services, are located in Southeast Asia, Korea and Japan. Reliance on these
facilities, as well as subcontractors located in this region of the world,
entails certain risk, both political and economic, including political
instability, asset seizures or not experienced any significant disruptions in
its operations in that part of the world, no assurance can be given that such
continued economic and political instability would not result in an adverse
effect on our operations or financial condition.
YEAR 2000 COMPLIANCE
In the fourth quarter of Fiscal 1997, the Company 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 the Company'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 over the next twelve months. 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.
The Company'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
33
<PAGE> 35
systems throughout the Company, including those systems embedded in the
Company'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. The Company is
also reviewing the year 2000 readiness and compliance of its principal suppliers
of products and services, in order to identify and assess any negative impacts
that such non-compliances could have on Fairchild International. In addition,
the Company is working with its customers to identify potential year 2000 issues
with its products. The Company has completed its assessments. The Company does
not believe there are any year 2000 problems with its products. No year 2000
issues were noted with its key suppliers which in the Company'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
Stub Year 1999. Although we believe the Company's systems will be year 2000
compliant, the failure of the Company's suppliers and customers to address the
year 2000 issue could result in disruption to the Company's operations and have
a significant adverse impact on its results of operations, the extent of which
Fairchild International has not yet estimated. The Company 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. The Company, in the ordinary course of business, seeks to
expand its customer base to lessen dependence on any one customer for a
significant portion of its revenues, and seeks second sources of supply for its
key products and services where appropriate.
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 International 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
International is presently analyzing SFAS No. 133, and has not yet determined
its impact on Fairchild International's consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Quantitative and Qualitative Disclosures about Market Risk" included
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
34
<PAGE> 36
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 36
Consolidated Balance Sheets at May 30, 1999 and May 31,
1998...................................................... 37
Consolidated Statements of Operations for each of the years
in the three-year period ended
May 30, 1999.............................................. 38
Consolidated Statements of Cash Flows for the years ended
May 30, 1999 and May 31, 1998............................. 39
Consolidated Statements of Stockholders' Equity (Deficit)
for each of the years in the three-year period ended May
30, 1999.................................................. 40
Notes to Consolidated Financial Statements.................. 41
</TABLE>
35
<PAGE> 37
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 30,
1999 and May 31, 1998, 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 30, 1999 and May 31, 1998. 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 30, 1999 and May 31, 1998, 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 30, 1999 and May 31, 1998, 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 1999 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
36
<PAGE> 38
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 30, MAY 31,
1999 1998
--------- --------
(IN MILLIONS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 62.4 $ 6.5
Accounts receivable, net of allowances of $9.2 and $14.2
at May 30, 1999 and May 31, 1998, respectively......... 129.7 75.0
Inventories............................................... 148.6 108.0
Other current assets...................................... 65.7 20.0
-------- ------
Total current assets................................... 406.4 209.5
Property, plant and equipment, net.......................... 360.2 342.9
Deferred income taxes, net.................................. 2.8 20.0
Intangible assets, net of accumulated amortization of $9.9
and $1.4 at May 30, 1999 and May 31, 1998, respectively... 278.5 31.5
Other assets................................................ 47.8 30.4
-------- ------
Total assets........................................... $1,095.7 $634.3
======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt......................... $ 14.1 $ 13.2
Accounts payable.......................................... 99.6 74.0
Accrued expenses and other current liabilities............ 85.0 55.9
-------- ------
Total current liabilities.............................. 198.7 143.1
Long-term debt, less current portion........................ 1,045.9 526.7
Other liabilities........................................... 1.4 0.6
-------- ------
Total liabilities...................................... 1,246.0 670.4
-------- ------
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 30, 1999 and May 31, 1998............................. 90.1 80.5
Commitments and contingencies
Stockholders' equity (deficit):
Class A common stock, $.01 par value, voting; 80,000,000
shares authorized, 29,591,440 and 29,238,800 shares
issued and outstanding at May 30, 1999 and May 31,
1998, respectively..................................... 0.3 0.3
Class B common stock, $.01 par value, nonvoting;
80,000,000 shares authorized, 33,376,000 and 33,635,520
shares issued and outstanding at May 30, 1999 and May
31, 1998, respectively................................. 0.3 0.3
Additional paid-in capital................................ 9.6 9.5
Accumulated deficit....................................... (250.6) (126.7)
-------- ------
Total stockholders' equity (deficit)................... (240.4) (116.6)
-------- ------
Total liabilities and stockholders' equity (deficit)... $1,095.7 $634.3
======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 39
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
MAY 30, MAY 31, MAY 25,
1999 1998 1997
------- ------- -------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Revenue:
Net sales -- trade........................................ $ 654.1 $635.8 $587.8
Contract manufacturing -- National Semiconductor.......... 81.0 153.4 104.2
------- ------ ------
Total revenue.......................................... 735.1 789.2 692.0
Operating expenses:
Cost of sales............................................. 518.4 441.6 442.1
Cost of contract manufacturing -- National
Semiconductor.......................................... 64.4 117.1 97.4
Research and development.................................. 39.3 35.7 18.9
Selling, general and administrative....................... 105.1 92.0 96.4
Purchased in-process research and development............. 34.0 15.5 --
Restructuring and impairments............................. 21.3 -- 5.3
------- ------ ------
Total operating expenses............................... 782.5 701.9 660.1
------- ------ ------
Operating income (loss)..................................... (47.4) 87.3 31.9
Interest expense, net....................................... 71.8 54.5 11.2
Other expense, net.......................................... -- -- 1.4
Income (loss) before income taxes........................... (119.2) 32.8 19.3
------- ------ ------
Provision (benefit) for income taxes........................ (5.1) 10.7 3.8
------- ------ ------
Income (loss) before cumulative effect of change in
accounting principle...................................... (114.1) 22.1 15.5
Cumulative effect of change in accounting principle, net of
tax effect of
$0.8 million.............................................. -- (1.5) --
------- ------ ------
Net income (loss)........................................... $(114.1) $ 20.6 $ 15.5
======= ====== ======
Net income (loss) applicable to common stockholders......... $(123.9) $ 11.9
======= ======
Basic earnings (loss) per common share:
Income before cumulative effect of change in accounting
principle.............................................. $ (1.97) $ 0.21
Cumulative effect of change in accounting principle....... -- (0.02)
------- ------
$ (1.97) $ 0.19
======= ======
Diluted earnings (loss) per common share: $ (1.97) $ 0.20
Income before cumulative effect of change in accounting
principle.............................................. -- (0.02)
------- ------
Cumulative effect of change in accounting principle....... $ (1.97) $ 0.18
======= ======
Weighted average common shares:
Basic..................................................... 62.9 62.8
======= ======
Diluted................................................... 62.9 65.0
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 40
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 30, MAY 31,
1999 1998
------- -------
(IN MILLIONS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(114.1) $ 20.6
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.......................... 103.7 84.6
Loss on disposal of fixed assets....................... 0.3 0.9
Non-cash interest expense.............................. 19.8 12.5
Purchased in-process research and development.......... 34.0 15.5
Deferred income taxes.................................. (2.4) (0.4)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable.................................... (53.2) 18.6
Inventories............................................ 8.5 (21.3)
Other current assets................................... 2.3 (1.6)
Accounts payable....................................... 21.4 (6.5)
Accrued expenses and other current liabilities......... 12.5 13.7
Other assets and liabilities, net...................... (6.0) (2.2)
------- -------
Cash provided by operating activities................ 44.1 136.1
------- -------
Cash flows from investing activities:
Capital expenditures...................................... (46.2) (78.0)
Proceeds from sale of property, plant and equipment....... 31.2 --
Purchase of molds and tooling............................. (3.8) (5.7)
Refundable payment of value added tax associated with
acquisitions........................................... (40.9) --
Acquisitions, net of cash acquired........................ (414.9) (116.8)
------- -------
Cash used by investing activities.................... (474.6) (200.5)
------- -------
Cash flows from financing activities:
Repayment of long-term debt............................... (151.3) (58.7)
Issuance of long-term debt................................ 660.0 90.0
Debt issuance costs....................................... (22.3) (1.1)
------- -------
Cash provided by financing activities................ 486.4 30.2
------- -------
Net change in cash and cash equivalents..................... 55.9 (34.2)
Cash and cash equivalents at beginning of period............ 6.5 40.7
------- -------
Cash and cash equivalents at end of period.................. $ 62.4 $ 6.5
======= =======
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes........................................... $ -- $ 8.9
======= =======
Interest............................................... $ 46.6 $ 43.8
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 41
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<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)
------- ------- ------- ------- ---------- ----------- -------- -------------
(IN MILLIONS)
<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.
40
<PAGE> 42
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'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 17.
Basis of Presentation
The consolidated financial statements at May 30, 1999 and May 31, 1998 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 estimates are not
necessarily indicative of the costs that would have resulted if the Business had
been operated on a stand alone basis.
41
<PAGE> 43
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ended May 30, 1999, May 31, 1998
and May 25, 1997 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.
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.
42
<PAGE> 44
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1999, 1998 and 1997, except as discussed in Note 11.
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
43
<PAGE> 45
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 30, 1999 and May 31, 1998 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
44
<PAGE> 46
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 30, MAY 31,
1999 1998
------- -------
(IN MILLIONS)
<S> <C> <C>
Basic weighted average common shares outstanding............ 62.9 62.8
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.......... 62.9 65.0
======= =====
Net income (loss)........................................... $(114.1) $20.6
Dividends on redeemable preferred stock..................... 9.8 8.7
------- -----
Net income (loss) applicable to common stockholders......... $(123.9) $11.9
======= =====
</TABLE>
Options to purchase 4,282,570 and 750,000 shares of common stock were
outstanding at May 30, 1999 and May 31, 1998, 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 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 1998 and 1997 amounts have been reclassified to conform with
the current year presentation.
NOTE 3 -- FINANCIAL STATEMENT DETAILS
<TABLE>
<CAPTION>
MAY 30, MAY 31,
1999 1998
------- -------
(IN MILLIONS)
<S> <C> <C>
Inventories(1)
Raw materials............................................. $ 13.6 $ 13.0
Work in process........................................... 93.1 69.5
Finished goods............................................ 41.9 25.5
------ ------
$148.6 $108.0
====== ======
</TABLE>
45
<PAGE> 47
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MAY 30, MAY 31,
1999 1998
------- -------
(IN MILLIONS)
<S> <C> <C>
Other current assets
Refundable payment of value added tax associated with
acquisitions........................................... $ 40.9 $ --
Non-trade receivable from manufacturing subcontractor..... 4.5 12.7
Deferred income taxes..................................... 7.6 1.6
Prepaid and other current assets.......................... 12.7 5.7
------ ------
$ 65.7 $ 20.0
====== ======
Property, plant and equipment(1)
Land...................................................... $ 19.0 $ 23.5
Buildings and improvements................................ 177.0 154.7
Machinery and equipment................................... 681.7 575.1
Construction in progress.................................. 18.1 46.5
------ ------
Total property, plant and equipment............... 895.8 799.8
Less accumulated depreciation............................. 535.6 456.9
------ ------
$360.2 $342.9
====== ======
</TABLE>
<TABLE>
<CAPTION>
PERIOD OF MAY 30, MAY 31,
AMORTIZATION 1999 1998
------------ ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Intangible assets(1)
Developed technology............................... 15 years $169.7 $28.8
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 8.9 4.1
------ -----
Total intangible assets......................... 288.4 32.9
Less accumulated amortization...................... (9.9) (1.4)
------ -----
$278.5 $31.5
====== =====
Accrued expenses(1)
Payroll and employee related accruals.............. $ 29.3 $23.4
Accrued interest................................... 13.5 8.1
Restructuring and related allowances............... 12.5 --
Income taxes payable............................... 0.3 3.2
Other.............................................. 29.4 21.2
------ -----
$ 85.0 $55.9
====== =====
</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 and
contribute to the growth in each respective account in fiscal 1999.
46
<PAGE> 48
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
MAY 30, MAY 31,
1999 1998
-------- -------
(IN MILLIONS)
<S> <C> <C>
Term Loans Payable:
Tranche A................................................... $ 100.0 $ 62.5
Tranche B................................................... 210.0 --
Tranche C................................................... -- 88.8
Senior subordinated notes payable........................... 600.0 300.0
PIK note payable............................................ 99.2 88.6
CMP note payable............................................ 50.8 --
-------- ------
Total long-term debt................................... 1,060.0 539.9
Less current portion........................................ 14.1 13.2
-------- ------
Long-term portion...................................... $1,045.9 $526.7
======== ======
</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 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
47
<PAGE> 49
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 Notes 10 and 20.
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.
48
<PAGE> 50
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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....................................... 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.
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.
The provision (benefit) for income taxes included in the accompanying
consolidated statements of operations for Fiscal Years 1999, 1998 and 1997,
consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 11,
------------------ 1997
MAY 30, MAY 31, TO MAY 25,
1999 1998 1997
------- ------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S....................................................... $(103.7) $14.6 $7.2
Foreign................................................... (15.5) 18.2 2.5
------- ----- ----
$(119.2) $32.8 $9.7
======= ===== ====
</TABLE>
49
<PAGE> 51
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 11,
------------------ 1997
MAY 30, MAY 31, TO MAY 25,
1999 1998 1997
------- ------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Income tax provision (benefit):
Current:
U.S. federal........................................... $ (4.8) $ 7.1 $ --
U.S. state and local................................... -- 1.5 --
Foreign................................................ 2.1 3.3 1.4
------- ----- ----
(2.7) 11.9 1.4
Deferred:
U.S. federal........................................... (2.5) (2.0) 1.9
U.S. state and local................................... 0.1 (0.4) 0.5
Foreign................................................ -- 1.2 --
------- ----- ----
(2.4) (1.2) 2.4
Total income tax provision (benefit):
U.S. federal........................................... (7.3) 5.1 1.9
U.S. state and local................................... 0.1 1.1 0.5
Foreign................................................ 2.1 4.5 1.4
------- ----- ----
$ (5.1) $10.7 $3.8
======= ===== ====
</TABLE>
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
MAY 30, MAY 31, TO MAY 25,
1999 1998 1997
------- ------- ----------
<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.......... 1.4% 3.3% 4.1%
Tax differential related to foreign income.................. (8.6)% (5.7)% --
Change in valuation allowance............................... (23.5)% -- --
----- ---- ----
4.3% 32.6% 39.1%
===== ==== ====
</TABLE>
50
<PAGE> 52
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 30,
1999 and May 31, 1998 are presented below:
<TABLE>
<CAPTION>
MAY 30, MAY 31,
1999 1998
------- -------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards......................... $ 34.0 $ --
Reserves and accruals..................................... 26.5 15.9
Plant and equipment....................................... 3.5 2.8
Intangibles, primarily intellectual property and
software............................................... 22.7 31.2
Tax credit carryovers..................................... 1.4 3.8
------ ------
Total gross deferred tax assets........................ 88.1 53.7
Valuation allowance....................................... (62.7) (30.7)
------ ------
Net deferred tax assets................................ 25.4 23.0
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......................... (15.0) (1.4)
------ ------
Net deferred tax assets..................................... $ 10.4 $ 21.6
====== ======
</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
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 $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
51
<PAGE> 53
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 123, the Company would have reported net income (loss) of ($114.3) million,
$20.6 million and $15.5 million, respectively, in fiscal years 1999, 1998 and
1997, 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected volatility......................................... 49% -- --
Dividend yield.............................................. -- -- --
Risk-free interest rate..................................... 4.43% 5.88% 6.17%
Expected life, in years..................................... 3.4 2.9 2.6
</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.
A summary of the status of the Company's stock option plan as of May 30,
1999, May 31, 1998 and May 25, 1997, and changes during the years then ended are
presented in the table below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
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... 3,584 $ 2.20 2,029 $0.13 -- $ --
Granted............................ 972 10.00 1,777 4.29 2,097 0.13
Exercised.......................... (93) 0.13 (142) 0.13 -- --
Canceled........................... (180) 6.83 (80) 0.13 (68) 0.13
----- ----- -----
Outstanding at end of year......... 4,283 $ 3.82 3,584 $2.20 2,029 $0.13
===== ===== =====
Exercisable at end of year......... 1,612 $ 1.82 798 $0.13 -- $ --
Weighted average fair value of
options granted.................. $ 0.09 $0.22 $0.02
</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
------------------------------------------------- -----------------------------
(000'S) WEIGHTED-AVERAGE WEIGHTED- (000'S) WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE 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>
52
<PAGE> 54
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 $3.5 million, $3.4 million
and $1.1 million for the years ended May 30, 1999, May 31, 1998 and May 25,
1997, 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 30, 1999, May 31, 1998
and May 25, 1997 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 $12.5 million, $9.5 million, and $5.0 million for fiscal years 1999,
1998 and 1997, respectively.
Future minimum lease payments under noncancelable operating leases as of
May 30, 1999 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN MILLIONS)
- ----------- -------------
<S> <C>
2000........................................... $11.2
2001........................................... 7.3
2002........................................... 3.6
2003........................................... 1.9
2004........................................... 1.7
Thereafter..................................... 4.6
-----
$30.3
=====
</TABLE>
53
<PAGE> 55
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 30, 1999 and May
31, 1998, 70,000 shares were issued and outstanding. The total liquidation value
of the shares outstanding at May 30, 1999 and May 31, 1998, in the amounts of
$90.1 million and $80.5 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.
54
<PAGE> 56
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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. See Note 20.
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 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 approxi-
55
<PAGE> 57
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
mately 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.
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
</TABLE>
56
<PAGE> 58
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
ASSET SEVERANCE EXIT
IMPAIRMENTS BENEFITS COSTS TOTAL
----------- --------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
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.
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>
YEAR YEAR PERIOD FROM PERIOD FROM
ENDED ENDED MARCH 11, 1997 MAY 27, 1996
MAY 30, MAY 31, THROUGH THROUGH
1999 1998 MAY 25, 1997 MARCH 10, 1997
------- ------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Manufacturing services performed by National
Semiconductor plants or purchased from
third parties.............................. $ 5.6 $14.0 $ 2.8 $34.3
Headquarters, freight, duty, warehousing and
other elements of cost of sales............ 4.4 17.9 3.7 41.8
----- ----- ----- -----
$10.0 $31.9 $ 6.5 $76.1
===== ===== ===== =====
Cost of business support services provided by
National Semiconductor..................... $10.7 $28.7 $11.6 $ --
===== ===== ===== =====
Operating costs allocated to the Business by
National Semiconductor..................... $ -- $ -- $ -- $63.9
===== ===== ===== =====
Operating costs allocated to National
Semiconductor by the Business.............. $ -- $ -- $ -- $ 9.6
===== ===== ===== =====
</TABLE>
57
<PAGE> 59
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts receivable from National Semiconductor, included in accounts
receivable, totaled $12.0 million and $12.4 million at May 30, 1999 and May 31,
1998, respectively. Amounts payable to National Semiconductor, included in
accounts payable, totaled $0.4 million and $5.3 million at May 30, 1999 and May
31, 1998, 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 1999, 1998 and 1997.
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 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 1999, 1998 and 1997.
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
58
<PAGE> 60
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 30, 1999 and May 31, 1998. 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 30, 1999, and May 31, 1998. 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 losses on
the underlying exposures will depend on actual market conditions during the
remaining life of the instruments.
<TABLE>
<CAPTION>
MAY 30, 1999 MAY 31, 1998
----------------------------------- -----------------------------------
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............ 32.1 -- -- 31.7 0.8 0.6
</TABLE>
Fair Value of Financial Instruments
A summary table of estimated fair values of financial instruments follows:
<TABLE>
<CAPTION>
MAY 30, 1999 MAY 31, 1998
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Long Term Debt
Senior Subordinated Debt......................... $600.0 $603.0 $300.0 $310.5
Term Loans....................................... 310.0 310.0 151.3 151.3
PIK Note......................................... 99.2 94.2 88.6 87.7
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 1998 and 1997 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,
59
<PAGE> 61
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 30, MAY 31, MAY 25,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
REVENUE AND OPERATING INCOME (LOSS):
Analog and Mixed Products Division
Trade revenue.......................................... $ 64.1 $ 32.0 $ --
Operating income (loss)................................ (2.4) 2.2 --
------ ------ ------
Discrete Power and Signal Technologies Group
Trade revenue.......................................... $180.3 $187.3 $164.5
Contract manufacturing revenue......................... 9.1 34.5 15.1
Operating income....................................... 4.8 44.9 21.7
------ ------ ------
Logic Products Group
Trade revenue.......................................... $267.6 $303.0 $285.3
Contract manufacturing revenue......................... 71.9 118.9 89.1
Operating income....................................... 35.7 70.0 21.3
------ ------ ------
Non-Volatile Memory Division
Trade revenue.......................................... $ 73.4 $113.5 $138.0
Operating income (loss)................................ (26.4) (14.2) 5.0
------ ------ ------
Power Device Products Group
Trade revenue.......................................... $ 74.2 $ -- $ --
Operating income....................................... 12.7 -- --
------ ------ ------
Other(1)
Revenue................................................ $ (5.5) $ -- $ --
Operating income (loss)................................ (71.8) (15.6) (16.1)
------ ------ ------
</TABLE>
60
<PAGE> 62
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 30, MAY 31, MAY 25,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Total Consolidated
Trade revenue.......................................... $654.1 $635.8 $587.8
Contract manufacturing revenue......................... 81.0 153.4 104.2
Operating income (loss)................................ (47.4) 87.3 31.9
</TABLE>
- ---------------
(1) Other includes in fiscal year 1999, $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. In fiscal 1998, such amounts represent purchased
in-process research and development. For fiscal 1997, such charges include
$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.
Property, plant and equipment (including molds and tooling) and
depreciation and amortization by reportable operating segment as of and for the
years ended May 30, 1999 and May 31, 1998 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 30, MAY 31,
1999 1998
------- -------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT(1) AND DEPRECIATION AND
AMORTIZATION
Analog and Mixed Signal Products Division
Property, plant and equipment............................. $ 8.3 $ 49.1
Depreciation and amortization............................. 8.9 3.3
------ ------
Discrete Power and Signal Technologies Group
Property, plant and equipment............................. $ 94.7 $114.8
Depreciation and amortization............................. 24.6 20.8
------ ------
Logic Products Group
Property, plant and equipment............................. $151.2 $172.5
Depreciation and amortization............................. 53.2 51.7
------ ------
Non-Volatile Memory Division
Property, plant and equipment............................. $ -- $ --
Depreciation and amortization............................. 9.9 8.8
------ ------
Power Device Products Group
Property, plant and equipment............................. $100.1 $ --
Depreciation and amortization............................. 7.1 --
------ ------
Other
Property, plant and equipment............................. $ 5.9 $ 6.5
Depreciation and amortization............................. -- --
------ ------
</TABLE>
61
<PAGE> 63
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 30, MAY 31,
1999 1998
------- -------
<S> <C> <C>
Total Consolidated
Property, plant and equipment............................. $360.2 $342.9
Depreciation and amortization............................. 103.7 84.6
</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 30, MAY 31, MAY 25,
1999 1998 1997
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
TOTAL REVENUES:
United States.................................... $299.5 $395.7 $326.9
Asia............................................. 324.3 260.9 247.5
Europe........................................... 111.3 132.6 117.6
------ ------ ------
Total....................................... $735.1 $789.2 $692.0
====== ====== ======
</TABLE>
In fiscal years 1999, 1998 and 1997, National Semiconductor accounted for
11.0%, 19.4% and 15.1% of the Company's total revenues.
Geographic property, plant and equipment balances as of May 30, 1999 and
May 31, 1998 are based on the physical locations within the indicated geographic
areas and are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 30, MAY 31,
1999 1998
------- -------
(IN MILLIONS)
<S> <C> <C>
PROPERTY, PLANT & EQUIPMENT:
United States............................................. $174.4 $257.0
Korea..................................................... 100.1 --
Philippines............................................... 40.5 36.8
Malaysia.................................................. 39.7 47.4
All Others................................................ 5.5 1.7
------ ------
Total................................................ $360.2 $342.9
====== ======
</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
62
<PAGE> 64
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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)
-------
Financing activities:
Issurance 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 fiscal 1999 and 1998 and for the period from March 11 through May
25, 1997, the Company accumulated dividends
63
<PAGE> 65
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on the redeemable preferred stock of approximately $9.8 million, $8.6 million
and $1.8 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 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.
64
<PAGE> 66
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 30, MAY 31,
1999 1998
---------- ----------
(IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $1,111.9 $1,300.7
Net income (loss)........................................... (155.9) 20.6
Net income (loss) applicable to common stockholders......... (165.7) 11.9
Net earnings (loss) per share:
Basic..................................................... $ (2.63) $ 0.19
Diluted................................................... $ (2.63) $ 0.18
</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 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.
65
<PAGE> 67
NOTE 19 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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:
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
<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.
------------------- -------------- ---------- ------------ ------------ -------------------
(IN MILLIONS)
<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>
66
<PAGE> 68
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
<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.
------------------- -------------- ---------- ------------ ------------ -------------------
(IN MILLIONS)
<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>
67
<PAGE> 69
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
<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.
------------------- -------------- ---------- ------------ -------------------
(IN MILLIONS)
<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 affilliate........ (50.0) 50.0 -- -- --
Net intercomany 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>
68
<PAGE> 70
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
<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.
------------------- -------------- ---------- ------------ ------------ -------------------
(IN MILLIONS)
<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>
69
<PAGE> 71
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
<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.
------------------- -------------- ---------- ------------ ------------ -------------------
(IN MILLIONS)
<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>
70
<PAGE> 72
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1998
--------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ -------------------
(IN MILLIONS)
<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>
The 10 3/8% Senior Subordinated Notes Due 2007 are fully and
unconditionally guaranteed by the guarantor subsidiary, Fairchild Semiconductor
Corporation of California. The guarantor subsidiary is a wholly-owned subsidiary
of Fairchild. Separate financial statements and other disclosures concerning the
guarantor subsidiary are not presented because management has determined that
they are not material to investors.
NOTE 20 -- SUBSEQUENT EVENT
On August 9, 1999, the Company 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 Executive Vice President, Worldwide Sales and Marketing
David A. Henry....................... 38 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.
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.
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<PAGE> 74
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
International, 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, Executive Vice President, Worldwide Sales and
Marketing. Mr. Mayeux has been Executive 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 International 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 Semiconductor Corporation. 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 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
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<PAGE> 75
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
Two of our non-employee directors receive cash compensation for their
services as a director. 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. We reimburse all our directors for expenses incurred in attending our
board meetings.
In connection with our initial public offering, on June 24, 1999 our Board
of Directors authorized a directors' option program, under our Amended and
Restated Stock Option Plan, pursuant to which non-employee directors will
receive options to purchase 7,000 shares of Class A Common Stock 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 board authorized grants to each non-employee director of options
to purchase 10,000 shares of Class A Common Stock, 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
Semiconductor Corporation. See "Certain Relationships and Related Transactions"
elsewhere in this Form 10-K.
ITEM 11. 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:
<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
</TABLE>
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<PAGE> 76
<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>
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 our company. 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 the Company 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 the Company's defined contribution retirement plans and
the value of insurance premiums paid by National Semiconductor and/or the
Company 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 our 12% Series A Cumulative Compounding Preferred
Stock pursuant to the Fairchild NSC Deferred Compensation Plan. Those shares
of stock were converted into Class A Common Stock and distributed by the
trust to participants in the plan in connection with our initial public
offering.
(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 the
Company.
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.
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<PAGE> 77
(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 the Company 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 the Company 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 has elected that specific
portions of the earnings on his deferrals will be measured based on the
performance of our company's previously issued 12% Series A Cumulative
Compounding Preferred Stock and common stock, and that a portion of the earnings
on his deferrals will be measured based on short-term U.S. Treasury obligations.
Amounts credited to a Deferred Compensation Plan participant's account also
will be paid based on the participant's election. Each participant has elected
that the portion of his account on which earnings are measured based on shares
of our company's stock will be paid when such shares, if actually held, would be
redeemed, automatically or upon the request by our company, to the extent that
all restrictions on the transfer of such shares have lapsed. Payments will be
made in all events (1) upon liquidation or dissolution of Fairchild; (2) upon a
sale of fifty percent (50%) or more of the equity interests in Fairchild
International or Fairchild, consolidation or merger of Fairchild with or into
another entity, or sale of all or substantially all of Fairchild International's
assets; (3) to the participant's beneficiary upon his death; and (4) upon the
mandatory redemption of 12% Series A Cumulative Compounding Preferred Stock. No
cash payments will be made in connection with the conversion of the 12% Series A
Cumulative Compounding Preferred Stock into shares of our Class A Common Stock.
Payments pursuant to items (2) through (4) of the portion of any account the
earnings on which are measured based on the performance of our company stock
will only be made, however, to the extent that shares of such stock, if actually
held, would be redeemed at that time upon request. Payment to a participant may
be accelerated if the participant suffers an unforeseeable financial emergency
or severe hardship.
In March 1997, Fairchild International 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 Semiconductor Corporation. The trust agreement
establishing the trust provides that such amount will be invested in specific
amounts of 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.
Following the completion of the Company'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 to the extent the earnings on his
deferrals tracked the performance of the 12% Series A Cumulative Compounding
Preferred Stock or common stock. In connection with the initial public offering,
the Company 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 received in the conversion of the 12%
Series A Cumulative
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<PAGE> 78
Compounding Preferred Stock. Following the consummation of the initial public
offering, the trust distributed 346,933 shares of Class A Common Stock, equal in
aggregate value to approximately $6.4 million (based on the initial offering
price to the public). We filed a registration statement to enable the plan
participants to sell these shares of common stock beginning immediately upon
consummation of the offering, in part to pay income taxes due as a result of the
distribution of the common stock by the trust.
The Fairchild NSC Deferred Compensation Plan Trust continues to hold
435,520 shares of Class A Common Stock attributable to one participant in the
plan who elected to have earnings on his deferrals measured against the
performance of our Class A Common Stock. The plan's trust holds no other assets.
EMPLOYMENT AGREEMENTS
In March 1997, Fairchild International 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.
Mr. Pond is employed as Chairman of the Board of Directors and as Chief
Executive Officer of the Company. 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 International 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
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 International'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
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<PAGE> 79
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 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 each account annually
with deferred payments, as well as interest at a rate equal to a commonly
reported rate for long-term "A"-rated 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 (as amended,
the "Stock Option Plan"). We have authorized for grant to regular salaried
officers, directors and key employees of Fairchild International and Fairchild
Semiconductor Corporation options for up to 8,507,666 shares of Class A Common
Stock under the Stock Option Plan, as amended. The Stock Option Plan was amended
and restated in connection with the Company's initial public offering to give
effect to the increase in the number of shares
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available for grant from 6,084,000 shares to 8,507,666 shares. The plan
authorizes the Company 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 Stock Option Plan, our board of
directors 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 our board of
directors, 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. As of August 12, 1999,
7,079,660 shares of common stock were subject to issuance upon the exercise of
outstanding options. This includes grants of options to purchase a total of
575,000 shares of Class A Common Stock authorized by the board of directors on
June 24, 1999, 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 an exercise
price equal to the fair market value on the date of grant.
EMPLOYEE STOCK PURCHASE SAVINGS PLAN
In connection with our initial public offering, on June 24, 1999 the board
of directors authorized a new employee stock purchase plan, pursuant to which
U.S. employees of Fairchild International and its U.S. subsidiaries will have an
opportunity to purchase shares of our Class A Common Stock 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 also approved on June 24, 1999 a stock purchase plan
which will cover foreign employees of our 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.
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<PAGE> 81
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 shares of
Fairchild International's previously authorized and issued 12% Series A
Cumulative Compounding Preferred Stock into shares of Class A Common Stock in
connection with the initial public offering.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK(1) COMMON STOCK(2) PERCENT OF
--------------------- --------------------- ALL COMMON
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT STOCK(3)
- ------------------------ ---------- ------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Sterling Holding Company, LLC... 18,233,419 30.9% 28,396,000 95.8% 52.6%
c/o Fairchild Semiconductor
Corporation
333 Western Avenue
South Portland,
Maine 04106(4)(5)
National Semiconductor
Corporation................... 5,998,360 10.2% 1,245,000 4.2% 8.2%
2900 Semiconductor Drive
Santa Clara, California
95052(6)
Joseph R. Martin................ 1,474,752 2.5% -- -- 1.7%
c/o Fairchild Semiconductor
Corporation
333 Western Avenue
South Portland, Maine 04106(7)
Kirk P. Pond.................... 1,407,028 2.4% -- -- 1.6%
c/o Fairchild Semiconductor
Corporation
333 Western Avenue
South Portland, Maine 04106(7)
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>
- ---------------
(1) Does not include shares of Class A Common Stock issuable upon conversion of
Class B Common Stock. A holder of Class B Common Stock may convert any or
all of such holder's shares into an equal number of shares of Class A Common
Stock, 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
which would be held after giving effect to the conversion.
(2) Does not include shares of Class B Common Stock issuable upon conversion of
Class A Common Stock. A holder of Class A Common Stock may convert any or
all of such holder's shares into an equal number of shares of Class B Common
Stock.
(3) Represents the percentage of the total number of shares of Class A Common
Stock and Class B Common Stock combined.
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<PAGE> 82
(4) William N. Stout, who is one of our directors, is affiliated with Sterling
in the capacities described under "Directors and Executive Officers of the
Registrant." 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
"Directors and Executive Officers of the Registrant" 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 and an
additional 19.3% of Class B Common Stock 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 the Company in exchange for the 12.5% Subordinated Note
Due 2008 and a warrant to purchase 3,538,228 shares of our common stock. We
contributed such $50.0 million to Fairchild as a capital contribution. The
12.5% Subordinated Note Due 2008 was repaid in full in connection with our
initial public offering, upon which event the warrant became no longer
exercisable.
(6) Brian L. Halla, who is one of our directors, is affiliated with National
Semiconductor in the capacities described under "Directors and Executive
Officers of the Registrant". 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 held
by the trust. See "Deferred Compensation Agreements," "Executive
Compensation" and specifically note 3 of the Summary Compensation Table.
(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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During the period covered by this Annual Report on Form 10-K, the
registrant did not have a class of equity securities registered pursuant to
Section 12 of the Exchange Act and therefore its directors, officers and 10%
stockholders were not subject during such period to Section 16(a) of the
Exchange Act.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 Fairchild Semiconductor
Corporation -- which was at that time newly formed in connection with the
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 the capital
stock of Fairchild Semiconductor Corporation.
- National Semiconductor transferred all of the capital stock of Fairchild
Semiconductor Corporation and approximately $12.8 million in cash to the
Company -- also newly formed at that time in connection with the
Recapitalization -- in exchange for shares of our common and preferred
stock and the 11.74% Subordinated Note due 2008 in the principal amount
of $77.0 million.
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<PAGE> 83
- We issued common and preferred stock to Sterling Holding Company, LLC for
approximately $58.5 million in cash.
- We issued common and preferred stock to Kirk P. Pond, Joseph R. Martin
and other key employees of the Company for a total of $6.5 million in
cash.
- We contributed cash in the amount of approximately $77.8 million to the
capital of Fairchild.
- Fairchild 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.
- Fairchild 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 our
common stock (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 our
preferred stock.
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 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,
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<PAGE> 84
(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.
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 30, 1999, May 31, 1998 and May 25, 1997,
Fairchild incurred costs of $5.6 million, $14.0 million and $2.8 million,
respectively, for manufacturing services provided by National Semiconductor
under the National Foundry Services Agreement and the National Assembly Services
Agreement and $15.1 million, $46.6 million and $15.3 million, respectively, for
business support services provided by National Semiconductor under the
Transition Services Agreement. In addition, during the fiscal years ended May
30, 1999, May 31, 1998 and May 25, 1997, Fairchild generated revenues of $62.9
million, $124.5 million and $20.9 million, respectively, for manufacturing
services provided by Fairchild under the Fairchild Foundry Services Agreement
and the Mil/Aero Wafer and Services Agreement, and $18.1 million, $28.9 million
and $7.6 million, respectively, for manufacturing services provided under the
Fairchild Assembly Services Agreement. On a combined basis during the fiscal
years ended May 30, 1999, May 31, 1998 and May 25, 1997, Fairchild generated
revenues of $81.0 million, $153.4 million and $28.5 million, respectively, for
manufacturing services provided by Fairchild under the letter agreement dated
March 11, 1997.
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<PAGE> 85
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.
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 the Company in
exchange for a 12.5% Subordinated Note Due 2008 and a warrant to purchase
3,538,228 shares of our common stock. We contributed the $50.0 million from
Citicorp Mezzanine Partners, L.P. to Fairchild as a capital contribution. The
12.5% Subordinated Note was repaid in full in connection with our initial public
offering, upon which event the warrant became no longer exercisable.
In connection with the Recapitalization, the existing stockholders of the
Company entered into the Stockholders' Agreement containing agreements among
such stockholders with respect to the capital stock and corporate governance of
both Fairchild International and Fairchild. 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
the Company. 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 our
initial public offering. We have 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). The amounts forgiven, including amounts paid to discharge such
executive officers' tax liabilities are as follows: Kirk P. Pond -- $2,812,886;
Joseph R. Martin -- $1,406,446; Daniel E. Boxer -- $578,964; Darrell
Mayeux -- $578,964; W. Wayne Carlson -- $578,964; and Jerry M.
Baker -- $592,898.
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 six months after our initial public offering of our company's stock or, 60
days after Mr. Jackson ceases to be employed by Fairchild.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements. The Index to Financial Statements of the
Company appears at page 35 of this Annual Report.
(2) Financial Statement Schedules. Financial statement schedules are
listed under Item 14(c) in this Annual Report.
(3) List of Exhibits. See the Exhibit Index beginning on page 88 in this
Annual Report.
(b) Reports on Form 8-K: On April 27, 1999, Fairchild Semiconductor
International, Inc. filed a Current Report on Form 8-K to disclose that its
wholly-owned subsidiary, Fairchild Semiconductor Corporation, had completed the
acquisition of the Power Device Business of Samsung Electronics Co., Ltd.
On June 28, 1999, Fairchild Semiconductor International, Inc. filed an
amendment to the April 27, 1999 Form 8-K for the purpose of including financial
statements and pro forma information.
(c) Financial Statement Schedules. Schedule II -- Valuation and Qualifying
Accounts
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<PAGE> 86
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 30, 1999 and May 31, 1998, 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 30, 1999
and May 31, 1998. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule listed in Item 14(c). 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
85
<PAGE> 87
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.
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<PAGE> 88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FAIRCHILD SEMICONDUCTOR INTERNATIONAL,
INC.
By: /s/ KIRK P. POND
------------------------------------
Kirk P. Pond
President and Chief Executive
Officer
Date: August 23, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ KIRK P. POND Chairman of the Board of August 23, 1999
- --------------------------------------------------- Directors, President and
Kirk P. Pond Chief Executive Officer
(Principal Executive
Officer)
/s/ JOSEPH R. MARTIN Executive Vice President, August 23, 1999
- --------------------------------------------------- Chief Financial Officer and
Joseph R. Martin Director (Principal
Financial and Accounting
Officer)
/s/ DAVID A. HENRY Vice President, Corporate August 23, 1999
- --------------------------------------------------- Controller (Principal
David A. Henry Accounting Officer)
/s/ BRIAN L. HALLA Director August 25, 1999
- ---------------------------------------------------
Brian L. Halla
/s/ WILLIAM N. STOUT Director August 25, 1999
- ---------------------------------------------------
William N. Stout
/s/ RICHARD M. CASHIN, JR. Director August 23, 1999
- ---------------------------------------------------
Richard M. Cashin, Jr.
/s/ PAUL C. SCHORR, IV Director August 23, 1999
- ---------------------------------------------------
Paul C. Schorr, IV
/s/ RONALD W. SHELLY Director August 24, 1999
- ---------------------------------------------------
Ronald W. Shelly
</TABLE>
87
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
2.01 Agreement and Plan of Recapitalization dated January 24,
1997 between Sterling and National Semiconductor(1)
2.02 Asset Purchase Agreement dated as of March 11, 1997 between
Fairchild Semiconductor and National Semiconductor(1)
2.03 Acquisition Agreement dated November 25, 1997 between
Fairchild Semiconductor Corporation and Raytheon Company(2)
2.04 Amendment No. 1 to Acquisition Agreement dated December 29,
1997 between Fairchild Semiconductor Corporation and
Raytheon Company(2)
2.05 Business Transfer Agreement dated December 20, 1998 between
Samsung Electronics and Fairchild Semiconductor
Corporation(3)
2.06 Closing Agreement dated April 13, 1999 among Samsung
Electronics, Fairchild Korea Semiconductor Ltd. and
Fairchild Semiconductor Corporation(3)
3.01 Restated Certificate of Incorporation of Fairchild
International
3.02 Bylaws of Fairchild International(1)
4.01 Indenture dated April 7, 1999 among Fairchild Semiconductor
Corporation, Fairchild International, as Guarantor,
Fairchild Semiconductor Corporation of California, as
Guarantor, and the United States Trust Company of New
York(4)
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
Fairchild Semiconductor Corporation, Fairchild
International, as Guarantor, Fairchild Semiconductor
Corporation of California, as Guarantor, Credit Suisse First
Boston Corporation, Morgan Stanley & Co. Incorporated,
Salomon Smith Barney Inc. and Fleet Securities, Inc.(4)
4.04 Securities Purchase and Holders Agreement dated as of March
11, 1997 among Fairchild International, Sterling, National
Semiconductor and Management Investors(4)
4.05 Amendment to Securities Purchase and Holders Agreement dated
May 29, 1998(7)
4.06 Registration Rights Agreement dated March 11, 1997 among
Fairchild International, Sterling, National Semiconductor
and certain investors(4)
10.01 Indenture dated as of March 11, 1997 among Fairchild
Semiconductor Corporation, Fairchild International, as
Guarantor and United States Trust Company of New York, as
Trustee relating to Fairchild's 10 1/8% Senior Subordinated
Notes(1)
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 Fairchild
Semiconductor Corporation(5)
10.04 Transition Services Agreement dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor
Corporation(1)
10.05 Fairchild Foundry Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation(5)
10.06 Revenue Side Letter dated March 11, 1997 between National
Semiconductor and Fairchild Semiconductor Corporation(5)
10.07 Fairchild Assembly Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation(5)
10.08 National Foundry Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation(5)
10.09 National Assembly Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation(5)
10.10 Mil/Aero Wafer and Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation(5)
10.11 Shared Services Agreement (South Portland) dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor Corporation(5)
10.12 Corporate Agreement dated February 20, 1992 between Torex
Semiconductor Ltd. and National Semiconductor(5)
</TABLE>
88
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.13 Assembly/Test Subcontract Agreement dated August 13, 1998
between NS Electronics Bangkok (1993) Ltd. and Fairchild
Semiconductor Corporation(6)
10.14 Supply Agreement dated January 20, 1996 between National
Semiconductor and Dynacraft Industries Sdn. Bhd.(5)
10.15 Licensing and Manufacturing Agreement dated April 27, 1990
between National Semiconductor and Waferscale Integration,
Inc.(5)
10.16 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.(1)
10.17 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(1)
10.18 Lease for Santa Clara Facilities dated as of March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation(1)
10.19 Shared Facilities Agreement (South Portland) dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor Corporation(1)
10.20 Environmental Side Letter dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor
Corporation(1)
10.21 Master Sublease Agreement dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor
Corporation and Master Lease Agreement dated December 13,
1994 between General Electric Capital Corporation and
National Semiconductor(1)
10.22 Fairchild NSC Deferred Compensation Plan Trust established
effective March 11, 1997(1)
10.23 Fairchild NSC Deferred Compensation Plan assumed and
continued, effective March 11, 1997 (included as Schedule A
to Exhibit 10.23)
10.24 Fairchild Benefit Restoration Plan(1)
10.25 Fairchild Incentive Plan(1)
10.26 FSC Semiconductor Corporation Executive Officer Incentive
Plan(1)
10.27 Fairchild Semiconductor International, Inc. Amended and
Restated Stock Option Plan
10.28 Employment Agreement dated March 11, 1997 among Fairchild
Semiconductor Corporation, Fairchild International, Sterling
and Kirk P. Pond(1)
10.29 Employment Agreement dated March 11, 1997 among Fairchild
Semiconductor Corporation, Fairchild International, Sterling
and Joseph R. Martin(1)
10.30 Fairchild Revocable Savings Plan Trust, dated February 20,
1998, executed by Fleet Bank of Maine, as trustee
10.31 Form of Promissory Note between Fairchild Semiconductor
Corporation and Management Investors dated June 3, 1998(6)
10.32 Transitional Services Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea Semiconductor
Ltd.(4)
10.33 Product Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea Semiconductor
Ltd.(4)
10.34 Foundry Sale Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea Semiconductor Ltd.(4)
10.35 Intellectual Property License Agreement dated April 13, 1999
Between Samsung Electronics and Fairchild Korea
Semiconductor Ltd.(4)
10.36 Trademark License Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea Semiconductor
Ltd.(4)
10.37 Assembly and Test Services Agreement (Onyang) dated April
13, 1999 between Samsung Electronics and Fairchild Korea
Semiconductor Ltd.(4)
10.38 Assembly and Test Services Agreement (Suzhou) dated April
13, 1999 between SESS Electronics Suzhou Semiconductor Co.,
Ltd. and Fairchild Korea Semiconductor Ltd.(4)
10.39 EPI Services Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea Semiconductor Ltd.(4)
</TABLE>
89
<PAGE> 91
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.40 Photo Mask Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea Semiconductor
Ltd.(4)
10.41 Credit Agreement dated April 14, 1999 among Fairchild
Semiconductor Corporation, 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(4)
10.42 Employment Agreement dated March 28, 1999 between Fairchild
International and Deok-Jung Kim(4)
10.43 Employment Agreement dated as of April 23, 1999 between
Fairchild Semiconductor Corporation and Kyoung-Soo Kim(4)
10.44 Sublease Agreement dated April 23, 1999 between Veritas
Software Corporation and Fairchild Semiconductor Corporation
of California(4)
10.45 Fairchild Executive Incentive Plan, as amended and restated,
effective June 1, 1998(4)
10.46 Intellectual Property Assignment and License Agreement dated
December 29, 1997 between Raytheon Semiconductor, Inc. and
Raytheon Company(3)
21.01 Subsidiaries of Fairchild International
23.01 Consent of KPMG LLP
27.01 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference from Fairchild Semiconductor Corporation's
Registration Statement on Form S-4 filed May 12, 1997 (File No. 333-26897).
(2) Incorporated by reference from Fairchild International's Current Report on
Form 8-K dated December 31, 1997, filed January 13, 1998.
(3) Incorporated by reference from Fairchild International's Current Report on
Form 8-K dated April 13, 1999, filed April 27, 1999.
(4) 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) Incorporated by reference from Amendment No. 3 to Fairchild Semiconductor
Corporation's Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-28697).
(6) Incorporated by reference from Fairchild International's Annual Report on
Form 10-K for the fiscal year ended May 31, 1998, filed August 27, 1998.
(7) Incorporated by reference from Fairchild International's Quarterly Report on
Form 10-Q for the quarterly period ended March 1, 1998, filed April 13,
1998.
90
<PAGE> 1
EXHIBIT 3.01
RESTATED CERTIFICATE OF INCORPORATION
OF
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
1. NAME. The name of the Corporation is Fairchild Semiconductor
International, Inc.
2. REGISTERED OFFICE AND AGENT. The address of the Corporation's
registered office in the State of Delaware is 1013 Centre Road, in the City of
Wilmington, County of New Castle. The name of the Corporation's registered agent
at such address is Corporation Service Company.
3. PURPOSE. The purposes for which the Corporation is formed are to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware ("DGCL") and to
possess and exercise all of the powers and privileges granted by such law and
any other law of Delaware.
4. CONVERSION OF PREFERRED STOCK INTO COMMON STOCK. Upon the filing
and effectiveness of this Restated Certificate of Incorporation, each share of
capital stock of the Corporation consisting of 12% Series A Cumulative
Compounding Preferred Stock, par value $.01 per share, which shall have been
issued and outstanding immediately prior thereto ("Former Series A Preferred
Stock"), shall be automatically reclassified and converted into 75.714571 fully
paid and nonassessable shares of Class A Common Stock authorized hereby, with
any fractional shares rounded up to the nearest whole share. Upon receipt of a
stock certificate representing shares of Former Series A Preferred Stock, the
Secretary of the Corporation shall cancel or cause to be canceled such
certificate and issue or cause to be issued to the stockholder in whose name
such certificate appears a certificate or certificates representing shares of
Class A Common Stock in accordance with the foregoing conversion ratio.
5. AUTHORIZED CAPITAL. The aggregate number of shares of stock which
the Corporation shall have authority to issue is 220,100,000 shares, divided
into three classes consisting of 100,000 shares of Preferred Stock, par value
$.01 per share ("Preferred Stock"); 110,000,000 shares of Class A Common Stock,
par value $.01 per share ("Class A Common Stock"); and 110,000,000 shares of
Class B Common Stock, par value $.01 per share ("Class B Common Stock"). Class A
Common Stock and Class B Common Stock are hereinafter sometimes individually or
collectively referred to as "Common Stock."
The following is a statement of the designations, preferences,
qualifications, limitations, restrictions and the special or relative rights
granted to or imposed upon the shares of each such class.
A. PREFERRED STOCK
(a) Subject to Section 9 below, the board of directors is
authorized to provide for the issuance of shares of Preferred
Stock in one or more series with such designations, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof as are stated
and expressed in the resolution or resolutions providing for the
issue thereof adopted by the board of directors (as such
resolutions may be amended by a resolution or resolutions
subsequently adopted by the board of directors), and as are not
stated and expressed in this Restated Certificate of
Incorporation including, but not limited to, determination of any
of the following:
<PAGE> 2
i. The distinctive designation of the series and the
number of shares which will constitute the series,
which number may be increased or decreased (but not
below the number of shares then outstanding) from time
to time by action of the board of directors;
ii. The dividend rate and the times of payment of
dividends on the shares of the series, whether
dividends will be cumulative, and if so, from what date
or dates;
iii. The price or prices at which, and the terms and
conditions on which, the shares of the series may be
redeemed at the option of the Corporation;
iv. Whether or not the shares of the series will be
entitled to the benefit of a retirement or sinking fund
to be applied to the purchase or redemption of such
shares and, if so entitled, the amount of such fund and
the terms and provisions relative to the operation
thereof;
v. Whether or not the shares of the series will be
convertible into, or exchangeable for, any other shares
of stock of the Corporation or other securities, and if
so convertible or exchangeable, the conversion price or
prices, or the rates of exchange, and any adjustments
thereof, at which such conversion or exchange may be
made, and any other terms and conditions of such
conversion or exchange;
vi. The rights of the shares of the series in the
event of voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
vii. Whether or not the shares of the series will have
priority over or be on a parity with or be junior to
the shares of any other series or class in any respect
or will be entitled to the benefit of limitations
restricting the issuance of shares of any other series
or class having priority over or being on a parity with
the shares of such series in any respect, or
restricting the payment of dividends on or the making
of other distributions in respect of shares of any
other series or class ranking junior to the shares of
the series as to dividends or assets, or restricting
the purchase or redemption of the shares of any such
junior series or class, and the terms of any such
restriction;
viii. Whether the series will have voting rights, in
addition to any voting rights provided by law, and, if
so, the terms of such voting rights; and
ix. Any other preferences, qualifications, privileges,
options and other relative or special rights and
limitations of that series.
-2-
<PAGE> 3
(b) DIVIDENDS. Holders of Preferred Stock shall be entitled
to receive, when and as declared by the board of directors, out
of funds legally available for the payment thereof, dividends at
the rates fixed by the board of directors for the respective
series, and no more, before any dividends shall be declared and
paid, or set apart for payment, on Common Stock with respect to
the same dividend period.
(c) PREFERENCE ON LIQUIDATION. In the event of the
voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, holders of each series of Preferred Stock
will be entitled to receive the amount fixed for such series
plus, in the case of any series on which dividends will have been
determined by the board of directors to be cumulative, an amount
equal to all dividends accumulated and unpaid thereon to the date
of final distribution whether or not earned or declared before
any distribution shall be paid, or set aside for payment, to
holders of Common Stock. If the assets of the Corporation are not
sufficient to pay such amounts in full, holders of all shares of
Preferred Stock will participate in the distribution of assets
ratably in proportion to the full amounts to which they are
entitled or in such order or priority, if any, as will have been
fixed in the resolution or resolutions providing for the issue of
the series of Preferred Stock. Neither the merger nor
consolidation of the Corporation into or with any other
corporation, nor a sale, transfer or lease of all or part of its
assets, will be deemed a liquidation, dissolution or winding up
of the Corporation within the meaning of this paragraph except to
the extent specifically provided for herein.
(d) REDEMPTION. The Corporation, at the option of the board
of directors, may redeem all or part of the shares of any series
of Preferred Stock on the terms and conditions fixed for such
series.
(e) VOTING RIGHTS. Except as otherwise required by law, as
otherwise provided herein or as otherwise determined by the board
of directors as to the shares of any series of Preferred Stock
prior to the issuance of any such shares, the holders of
Preferred Stock shall have no voting rights and shall not be
entitled to any notice of meeting of stockholders.
B. CLASS A AND CLASS B COMMON STOCK
Except as otherwise provided herein, all shares of Class A Common
Stock and Class B Common Stock shall be identical and shall entitle the holders
thereof to the same rights and privileges.
(a) DIVIDENDS. Holders of Common Stock shall be entitled to
receive ratably on a per share basis such dividends as may be
declared by the board of directors, provided that if dividends
are declared which are payable in shares of Class A Common Stock
or Class B Common Stock, dividends shall be declared which are
payable at the same rate on each class of Common Stock and the
dividends payable in shares of Class A Common Stock shall be
payable to holders of Class A Common Stock and the dividends
payable in shares of Class B Common Stock shall be payable to
holders of Class B Common Stock.
(b) CONVERSION. Each record holder of Class A Common Stock
will be entitled to convert any or all of such holder's Class A
Common Stock into the same number of shares of Class B Common
Stock and each record holder of Class B Common Stock will be
entitled to convert any or all of the shares of such holder's
Class B Common Stock into the same number of shares of Class A
Common Stock; provided, however, that at the time of conversion
of shares of Class B Common Stock into shares of Class A Common
Stock such holder certifies to the Corporation in writing that
such holder would be permitted, pursuant to applicable law, to
hold the total number of shares
-3-
<PAGE> 4
of Class A Common Stock which such holder would hold after giving
effect to such conversion.
Each conversion of shares of one class of Common Stock
into shares of another class of Common Stock shall be effected by
the surrender of the certificate or certificates representing the
shares to be converted at the principal office of the Corporation
at any time during normal business hours, together with a written
notice by the holder of such shares stating the number of shares
that any such holder desires to convert into the other class of
Common Stock. Such conversion shall be deemed to have been
effected immediately upon the receipt of the written notice by
the Corporation if the notice so provides, or otherwise as of the
close of business on the date on which such certificate or
certificates have been surrendered and such notice has been
received by the Corporation, and at such time the rights of any
such holder with respect to the converted class of Common Stock
shall cease and the Person or Persons in whose name or names the
certificate or certificates for shares of the other class of
Common Stock are to be issued upon such conversion shall be
deemed to have become the holder or holders of record of the
shares of such other class of Common Stock represented thereby.
Promptly after such surrender and the receipt by the
Corporation of the written notice from the holder hereinbefore
referred to, the Corporation shall issue and deliver in
accordance with the surrendering holder's instructions the
certificate or certificates for the other class of Common Stock
issuable upon such conversion and a certificate representing any
shares of Common Stock which were represented by the certificate
or certificates delivered to the Corporation in connection with
such conversion but which were not converted. The issuance of
certificates for the other class of Common Stock upon conversion
shall be made without charge to the holder or holders of such
shares for any issuance tax (except stock transfer taxes) in
respect thereof or other cost incurred by the Corporation in
connection with such conversion.
(c) TRANSFERS. The Corporation shall not close its books
against the transfer of any share of Common Stock, or of any
share of Common Stock issued or issuable upon conversion of
shares of the other class of Common Stock, in any manner that
would interfere with the timely conversion of such shares of
Common Stock.
(d) SUBDIVISION AND COMBINATIONS OF SHARES. If the
Corporation in any manner subdivides or combines the outstanding
shares of any class of Common Stock, the outstanding shares of
the other class of Common Stock shall be proportionately
subdivided or combined.
(e) RESERVATION OF SHARES FOR CONVERSION. So long as any
shares of any class of Common Stock are outstanding, the
Corporation shall at all times reserve and keep available out of
its authorized but unissued shares of Class A Common Stock and
Class B Common Stock (or any shares of Class A Common Stock or
Class B Common Stock which are held as treasury shares), the
number of shares sufficient for issuance upon conversion of the
outstanding shares of Common Stock.
(f) DISTRIBUTION OF ASSETS. In the event of the voluntary
or involuntary liquidation, dissolution or winding up of the
Corporation, holders of Common Stock shall be entitled to receive
all of the remaining assets of the Corporation available for
distribution to its stockholders.
(g) VOTING RIGHTS. The holders of Class A Common Stock
shall have the general right to vote for all purposes as provided
by law. Each holder of Class A Common Stock shall be entitled (i)
at all elections of directors, to as many votes as shall
-4-
<PAGE> 5
equal the number of shares of Class A Common Stock held by such
holder multiplied by the number of directors to be elected, and
such holder may cast all of such votes for a single director or
may distribute them among the number to be voted for, or for any
two or more of them as such holder may see fit, and (ii) to one
vote for each share upon all other matters. Except as otherwise
required by law, the holders of Class B Common Stock shall have
no voting rights.
(h) MERGER, ETC. In connection with any merger,
consolidation, or recapitalization in which holders of Class A
Common Stock generally receive, or are given the opportunity to
receive, consideration for their shares, all holders of Class B
Common Stock shall receive or be given the same opportunity to
receive, as the case may be, the same form of consideration for
their shares in the same amount per share as is received by
holders of Class A Common Stock.
6. SECTION 203 NOT APPLICABLE. The Corporation shall not be governed
by the provisions of Section 203 of the DGCL.
7. BOARD OF DIRECTORS. The board of directors of the Corporation
shall be comprised of not fewer than seven and not more than nine members,
provided that if the death, incapacity or resignation of a director results in
the board of directors being comprised of fewer than seven members, actions of
the board of directors which are otherwise valid and taken between the time of
such death, incapacity or resignation and the next meeting of stockholders at
which a director is elected to fill such vacancy shall nevertheless be valid.
Directors of the Corporation shall not be divided into classes. The term of each
director shall expire at each annual meeting of stockholders. Elections of
directors need not be by written ballot unless and except to the extent the
bylaws of the Corporation shall so provide.
8. ACTION BY STOCKHOLDERS IN LIEU OF A MEETING. Any action required
by the DGCL to be taken at any annual or special meeting of the stockholders of
the Corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voting and shall be delivered to the Corporation by delivery to
its registered office in Delaware, the Corporation's principal place of
business, or an officer or agent of the Corporation having custody of the book
in which proceedings of meetings of stockholders are recorded. Delivery made to
the Corporation's registered office shall be by hand, certified or registered
mail, return receipt requested or facsimile transmission.
9. CLASSES OF STOCK; SERIES OF PREFERRED STOCK. The board of
directors shall not have the authority to establish classes of capital stock of
the Corporation. The board of directors shall have the authority to fix by
resolution or resolutions any of the designations, powers, preferences, rights,
qualifications, limitations, and restrictions of any series of Preferred Stock,
provided, that such authority may be exercised only in connection with the
approval or adoption of a Rights Plan (as defined in Section 10) in accordance
with Section 10.
10. RIGHTS PLANS. Without (i) the affirmative vote of the holders of
at least a majority of the outstanding shares of Class A Common Stock or (ii)
(A) if Sterling Holding Company, LLC ("Sterling"), Citicorp Venture Capital Ltd.
("CVC") and their Affiliates (as defined in Section 13) Beneficially Own (as
defined in Section 13) in the aggregate 15% or more of the outstanding Common
Stock, the unanimous consent of the board of directors or (B) if Sterling, CVC
and their Affiliates Beneficially Own in the aggregate less than 15% of the
outstanding Common Stock, the consent of a majority of the board of directors,
the Corporation shall not authorize or establish any Rights Plan. For purposes
of this Restated Certificate of Incorporation, a "Rights Plan" shall mean any
plan or arrangement of the sort commonly referred to as a "stockholder rights
plan" or "shareholder rights plan" including, without limitation, any issuance
of securities or other distribution to stockholders of the Corporation, whether
or not pursuant to any plan, that includes conversion rights, exchange rights,
warrants, options or any other rights of any kind, any of which would entitle
the holders thereof to acquire, or provides for
-5-
<PAGE> 6
the holders thereof to receive, any securities of the Corporation either (i) at
an exercise, option, conversion or exchange price that is less than the Fair
Market Value (as defined below) of the underlying securities on the date of
grant or (ii) at an exercise, option, conversion or exchange price that is
determined by reference to the Fair Market Value of the underlying securities at
the time of exercise and which either explicitly or implicitly by its terms
would entitle the holders thereof to acquire, or provide for the holder thereof
to receive, the underlying securities at a price other than the Fair Market
Value of such securities on the date of grant. For purposes of this paragraph,
"Fair Market Value" means (i) as to any class of securities traded on a national
securities exchange or quoted on the recognized over-the-counter market, or any
class of securities convertible by its terms into such securities, the last
closing price on such exchange or last sale price so reported, in each case as
to such traded or reported class of securities on the date nearest preceding the
date of determination of the Fair Market Value and (ii) as to all other
securities, the fair market value determined by the board of directors of the
Corporation in the exercise of its good-faith and reasonable best judgment.
11. BYLAWS. In furtherance and not in limitation of the powers
conferred by law, the board of directors of the Corporation is authorized to
adopt, amend or repeal the bylaws of the Corporation, except as otherwise
specifically provided therein, subject to the powers of the stockholders of the
Corporation to amend or repeal any bylaws adopted by the board of directors.
12. LIMITATION ON LIABILITY. The directors of the Corporation shall
be entitled to the benefits of all limitations on the liability of directors
generally that are now or hereafter become available under the DGCL. Without
limiting the generality of the foregoing, to the fullest extent permitted by the
DGCL, as it exists on the date hereof or as it may hereafter be amended, no
director of the Corporation shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. Any repeal or modification of this Section
12 or any adoption of any provision of this Certificate of Incorporation
inconsistent with this Section 12 shall be prospective only, and shall not
affect, to the detriment of any director, any limitation on the personal
liability of a director of the Corporation existing at the time of such repeal,
modification or adoption.
13. AMENDMENT. Sections 6, 7, 8, 9, 10 and 13 of this Restated
Certificate of Incorporation shall not be amended or repealed without the
affirmative vote of the holders of at least 75% of the outstanding shares of
Class A Common Stock, except that (i) after the occurrence of a Change of
Control (as defined below), the affirmative vote of the holders of at least a
majority of the shares of outstanding Class A Common Stock shall be required to
amend or repeal such sections and (ii) after any transfer by Sterling, CVC or
their respective Affiliates resulting in Sterling, CVC and their Affiliates
being collectively the Beneficial Owner of less than 15% of the outstanding
shares of Common Stock, then the affirmative vote of the holders of a majority
of the shares of outstanding Class A Common Stock shall be required to amend or
repeal such sections.
As used herein, the following terms shall have the following meanings:
"Affiliate" shall have the meaning ascribed to such term in Rule 12b-2
under the Exchange Act.
"Beneficial Owner" and "Beneficially Own" when used with respect to
any securities shall mean a Person that, individually or with or through any of
its Affiliates,
A. is the beneficial owner of such securities, within the
meanings ascribed to the term beneficial owner in Rule 13d-3
and Rule 13d-5 under the Exchange Act;
B. has (1) the right to acquire such securities (whether such
right is exercisable immediately or only after the passage
of time) pursuant to any agreement, arrangement or
understanding, or upon the exercise of conversion rights,
exchange rights, warrants or options, or otherwise,
provided, however, that a
-6-
<PAGE> 7
Person shall not be deemed the Beneficial Owner of
securities tendered pursuant to a tender or exchange offer
made by such Person or any of such Person's Affiliates until
such tendered securities are accepted for purchase or
exchange; or (2) the right to vote such securities pursuant
to any agreement, arrangement or understanding, provided,
however, that a Person shall not be deemed the Beneficial
Owner of any securities because of such Person's right to
vote such securities if the agreement, arrangement or
understanding to vote such securities arises solely from a
revocable proxy or consent given in response to a proxy or
consent solicitation made to 10 or more Persons; or
C. has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting (except voting
pursuant to a revocable proxy or consent as described in
item (2) of clause (B) of this definition), or disposing of
such securities with any other Person that Beneficially
Owns, or whose Affiliates Beneficially Own, directly or
indirectly, such securities.
Securities that are "Beneficially Owned" by any Person shall mean all
such securities of which such Person is the Beneficial Owner. The Corporation
shall be permitted to conclusively rely upon its stock transfer ledger, public
filings with regulatory agencies, such as Schedules 13D, or certificates of its
stockholders in determining the Beneficial Ownership of any Person and its
Affiliates.
"Change in Control" shall mean the acquisition by any Person and the
Affiliates of such Person, other than Sterling, CVC or the executive officers of
the Corporation and their Affiliates, of more than 40% of the shares of Class A
Common Stock.
"Exchange Act" means the Securities Exchange Act of 1934, as in effect
on the date that this Restated Certificate of Incorporation becomes effective.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, estate, trust, association, organization or
other entity.
-7-
<PAGE> 1
EXHIBIT 10.27
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
AMENDED AND RESTATED
STOCK OPTION PLAN
1. TITLE OF PLAN
The title of this Plan is the Fairchild Semiconductor International,
Inc. Amended and Restated Stock Option Plan, hereinafter referred to as the
"Plan".
2. PURPOSE
Fairchild Semiconductor International, Inc. established the Fairchild
Semiconductor International, Inc. Stock Option Plan effective as of March
10, 1997. The Plan was amended and restated, effective January 5, 1998.
This amendment and restatement of the Plan is effective as of June 24,
1999.
The Plan is intended to align the interests of eligible key employees
of Fairchild Semiconductor International, Inc. (hereinafter called the
"Corporation") and its subsidiaries (as hereinafter defined) and of the
non-employee directors of the Corporation with the interests of the
stockholders of the Corporation and to provide incentives for such
employees and directors to exert maximum efforts for the success of the
Corporation. By extending to key employees and directors the opportunity to
acquire proprietary interests in the Corporation and to participate in its
success, the Plan may be expected to benefit the Corporation and its
stockholders by making it possible for the Corporation to attract and
retain the best available talent and by rewarding key management and
technical personnel for their part in increasing the value of the
Corporation's shares. It is further intended that options granted pursuant
to this Plan may be incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or may be options
which are not incentive stock options (hereafter called "non-qualified
stock options").
The purpose of the amendments made by this amendment and restatement
of the Plan is (i) to authorize the granting of non-qualified stock options
to non-employee directors of the Corporation and (ii) to increase the
number of shares of the Corporation's Class A Common Stock available under
the Plan from 6,084,000 to 8,507,666.
3. STOCK SUBJECT TO THE PLAN
There will be reserved for issue upon the exercise of options granted
under the Plan 8,507,666 shares of the Corporation's Class A Common Stock,
par value $.01 per share, subject to adjustment as provided in Paragraph 8,
which may be unissued shares, reacquired shares, or shares bought on the
market. Notwithstanding the foregoing, none of the additional 2,423,666
shares of the Corporation's Class A Common Stock made available under the
Plan by this amendment and restatement may be made subject to incentive
stock options. If any option, which shall have been granted, shall expire
or terminate for any reason without having been exercised in full, the
unpurchased shares shall again become available for the purposes of the
Plan (unless the Plan shall have been terminated).
4. ADMINISTRATION
The Plan shall be administered by a committee of the Board of
Directors of the Corporation (the "Committee"), consisting of two or more
members of the Board of Directors. The Committee shall be constituted to
permit the Plan to comply with (i) Rule l6b3 promulgated under the
Securities Exchange Act of 1934
<PAGE> 2
("Exchange Act") and any successor rule and (ii) IRS regulations issued
under Section 162(m) of the Code.
(a) The Committee shall have the plenary power, subject to and within the
limits of the express provisions of the Plan:
(i) To determine from time to time which of the eligible persons shall be
granted options under the Plan; the time or times (during the term of the
option) within which all or portions of each option may be exercised and
the number of shares for which an option or options shall be granted to
each of them.
(ii) To construe and interpret the Plan and options granted under it, and to
establish, amend, and revoke rules and regulations for its administration.
The Committee, in the exercise of this power, shall generally determine all
questions of policy and expediency that may arise, may correct any defect,
or supply any omission or reconcile any inconsistency in the Plan or in any
option agreement in a manner and to the extent it shall deem necessary or
expedient to make the Plan fully effective.
(iii) To prescribe the terms and provisions of each option granted (which need
not be identical).
(iv) To determine whether options granted shall be incentive stock options or
non-qualified stock options.
(v) To determine whether options granted shall be transferable without
consideration to immediate family members or family trusts for the benefit
of optionee's immediate family members. As used herein, "immediate family"
means parents, spouses and children.
(b) The Committee shall not have the authority to grant new options in exchange
for the cancellation of stock options previously granted under the Plan or
under any other stock option plan of the Corporation.
5. ELIGIBILITY
Options may be granted only to regular salaried officers and key
employees of the Corporation and its subsidiaries and to members of the
Board of Directors of the Corporation who are not also employees of the
Corporation. However, only employees of the Corporation shall be eligible
to receive incentive stock options. The term "subsidiary" corporation shall
mean any corporation in which the Corporation controls, directly or
indirectly, fifty percent (50%) or more of the combined voting power of all
classes of stock.
6. TERMS OF OPTION AND OPTION AGREEMENTS
Each option shall be evidenced by a written Stock Option Agreement
which shall expressly identify the options as incentive stock options or as
non-qualified stock options, and be in such form and contain such
provisions as the Committee shall from time to time deem appropriate;
provided, however, that the grant of a non-qualified option pursuant to
this Plan shall in no way be construed to be an alternative to the right of
an employee to purchase stock pursuant to any incentive stock option
heretofore or hereafter granted to an employee pursuant to any stock option
plans now in existence or hereafter adopted by the Corporation. The terms
of the option agreements need not be identical, but each option agreement
shall include, by appropriate language, or be subject to, the substance of
all of the applicable following provisions:
<PAGE> 3
(a) The purchase price under each option granted shall be as determined by the
Committee but shall in no instance be less than 100% of fair market value
on the date of grant. The fair market value on the date of grant shall be
determined by the Committee; provided, however, that (i) if the Common
Stock is admitted to quotation on the National Association of Securities
Dealers Automated Quotation System on the date the option is granted, fair
market value shall not be less than the average of the highest bid and
lowest asked prices of the Common Stock on such System on such date or the
last date preceding such date on which a sale was reported, or (ii) if the
Common Stock is admitted to trading on a national securities exchange on
the date the option is granted, fair market value shall not be less than
the last sale price reported for the Common Stock on such exchange on such
date or, if there was no sale on such date, the last date preceding such
date on which a sale was reported.
(b) The maximum term of any incentive stock option shall be ten years from the
date it was granted.
(c) The maximum term of any non-qualified stock option shall be ten years and
one day from the date it was granted.
(d) An option may not be exercised to any extent, either by the person to whom
it was granted or by the grantee's transferee, or by any person after the
grantee's death, unless the person to whom the option was granted has
remained in the continuous employ of the Corporation, or of a subsidiary,
for not less than six months from the date when the option was granted.
Otherwise, each option shall be exercisable as determined by the Committee.
(e) The Corporation, during the terms of options granted under the Plan, at all
times will keep available the number of shares of stock required to satisfy
such options.
(f) The Corporation will seek to obtain from each regulatory commission or
agency having jurisdiction such authority as may be required to issue and
sell shares of stock to satisfy such options. Inability of the Corporation
to obtain from any such regulatory commission or agency authority which
counsel for the Corporation deems necessary for the lawful issuance and
sale of its stock to satisfy such options shall relieve the Corporation
from any liability for failure to issue and sell stock to satisfy such
options pending the time when such authority is obtained or is obtainable.
(g) Neither a person to whom an option is granted nor his or her transferee,
legal representative, heir, legatee, or distributes, shall be deemed to be
the holder of, or to have any of the rights of a holder with respect to,
any shares subject to such option unless and until he or she has exercised
his or her option pursuant to the terms thereof.
(h) No incentive stock option may be transferable except by will or by the laws
of descent or distribution. During the lifetime of the person to whom an
incentive stock option is granted, he or she alone may exercise such
option.
(i) An option shall terminate and may not be exercised if the person to whom it
is granted ceases to be continuously employed by the Corporation, or by a
subsidiary of the Corporation, or to serve as a director of the
Corporation, except (subject nevertheless to the last sentence of this
subparagraph (i)): (1) if the grantee's continuous employment or other
service is terminated for any reason other than (i) retirement, (ii)
permanent disability, or (iii) death, the grantee or the grantee's
transferee may exercise the option to the extent that the grantee was
entitled to exercise such option at the date of such termination at any
time within a period of three (3) months following the date of such
termination, or if the grantee shall die within the period of three (3)
months following the date of such termination without having exercised such
option, the option may be exercised within a period of one year following
the grantee's death by the grantee's transferee or the person or persons to
whom the grantee's rights under the option pass by will or by the laws of
descent or distribution but only to the extent exercisable at the date
<PAGE> 4
of such termination; (2) if the grantee's continuous employment or other
service is terminated by (i) retirement, (ii) permanent disability, or
(iii) death, the option may be exercised in accordance with its terms and
conditions at any time within a period of five (5) years following the date
of such termination by the grantee or the grantee's transferee, or in the
event of the grantee's death, by the persons to whom the grantee's rights
under the option shall pass by will or by the laws of descent or
distribution; (3) if the grantee's continuous employment is terminated and
within a period of ninety (90) days thereafter the grantee is recalled to
the active payroll, the Committee may reinstate any portion of the option
previously granted but not exercised. Nothing contained in this
subparagraph (i) is intended to extend the stated term of the option and in
no event may an option be exercised by anyone after the expiration of its
stated term. With respect to non-qualified stock options, termination of
employment or service as an employee or director shall not be treated as a
termination of employment or service for purposes of this Section 6(i) if
the grantee continues without interruption to serve thereafter in another
such capacity for the Corporation.
(j) Option agreements evidencing incentive stock options shall contain such
terms and provisions as may be necessary to render them incentive stock
options pursuant to Section 422 of the Code and the income tax regulations
thereunder, as the same or any successor statute or regulations may at the
time be in effect.
(k) Nothing in this Plan or in any option granted hereunder shall confer on any
optionee any right to continue in the employ or other service of the
Corporation or any of its subsidiaries, or to interfere in any way with the
right of the Corporation or any of its subsidiaries to terminate his or her
employment or other service at any time.
7. TIME OF GRANTING OPTION
The Committee shall determine the date on which options are granted
under the Plan. All options granted must be approved at a meeting of the
Committee by a majority of the members of the Committee. If an option
agreement is not executed by an employee and returned to the Corporation on
or prior to ninety (90) days after the date the option agreement is
received by the employee (or such earlier date as the Committee may
specify), such option shall terminate.
8. ADJUSTMENT IN NUMBER OF SHARES AND IN OPTION PRICE
In the event there is any change in the shares of the Corporation
through the declaration of stock dividends or a stock split-up, or through
recapitalization resulting in share split-ups, or combinations or exchanges
of shares, or otherwise, the number of shares available for option, as well
as the shares subject to any option and the option price thereof, shall be
appropriately adjusted by the Committee.
9. PAYMENT OF PURCHASE PRICE AND WITHHOLDING TAXES
(a) The purchase price for all shares purchased pursuant to options exercised
must be either paid in full in cash, or paid in full, with the consent of
the Committee, in Common Stock of the Corporation valued at fair market
value on the date of exercise or a combination of cash and Common Stock.
Fair market value on the date of exercise shall be determined in the same
manner as provided in Section 6(a) hereof.
(b) The Committee may permit the payment of all or part of the applicable
withholding taxes due upon exercise of an option, up to the highest
marginal rates then in effect, by the withholding of shares otherwise
issuable upon exercise of the option. Option shares withheld in payment of
such taxes shall be valued at the fair market value of the Corporation's
Common Stock on the date of exercise as provided in Section 6(a) hereof.
<PAGE> 5
10. CHANGE IN CONTROL
In the event the Corporation is merged into or acquired by another
entity in a transaction involving a change in control, the Committee shall
have the complete authority and discretion, but not the obligation, to
accelerate the vesting of any outstanding options granted hereunder. The
Committee may also ask the Board of Directors to negotiate, as part of any
agreement involving a sale or merger of the Corporation, a sale of
substantially all the Corporation's assets or similar transaction, terms
providing protection for employees holding options under the Plan.
11. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN
(a) The Board may amend, modify, suspend or terminate the Plan for the purpose
of meeting or addressing any changes in legal requirements or for any other
purpose permitted by law. The Board will seek stockholder approval of an
amendment if determined to be required by or advisable under regulations of
the Securities and Exchange Commission or the Internal Revenue Service, the
rules of any stock exchange on which the Corporation's stock is listed, or
other applicable law or regulation.
(b) The Plan shall continue in effect until all shares available for issuance
under the Plan have been issued. An option may not be granted while the
Plan is suspended or after it is terminated.
(c) The rights and obligations under any options granted while the Plan is in
effect shall not be altered or impaired by amendment, suspension or
termination of the Plan, except with the consent of the person to whom the
option was granted or the grantee's transferee or the person to whom rights
under an option shall have passed by will or by the laws of descent and
distribution.
12. EFFECTIVE DATE
The Plan was originally established effective on March 10, 1997, as a
result of the reorganization of the three Fairchild divisions of National
Semiconductor Corporation (the Discrete, Logic and Memory divisions) and
was approved by the stockholders of the Corporation within twelve (12)
months after said date. The 1998 amendment and restatement of the Plan was
effective January 5, 1998, and applied to any option grant made on or after
that date prior to June 24, 1999. This amendment and restatement of the
Plan is effective as of June 24, 1999, and applies to any option grant made
on after such date.
* * *
To record the adoption of the Plan, Fairchild Semiconductor
International, Inc. has caused its authorized officers to affix its
corporate name and seal this ____ day of August, 1999.
[CORPORATE SEAL] FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
<PAGE> 6
Attest: ____________________ By:______________________________
Secretary Title:
<PAGE> 1
EXHIBIT 10.30
FAIRCHILD REVOCABLE SAVINGS PLAN TRUST
THIS DECLARATION OF TRUST, made this 20th day of February, 1998, having
FLEET BANK OF MAINE, a corporation organized under the laws of the State of
Maine and having its principal office in Portland, Maine, as trustee
(hereinafter referred to as the "Trustee");
W I T N E S S E T H, T H A T :
WHEREAS, FSC Semiconductor Corporation, of South Portland, Maine, desires
to provide a means for eligible employees of FSC Semiconductor Corporation (or
of a direct or indirect subsidiary thereof) to save and to accumulate funds to
enable such an employee, at the employee's discretion and in accordance with the
Fairchild Semiconductor Corporation Employee Stock Purchase Savings Plan, as
amended from time to time (the "Plan"), to participate in any initial public
offering of the stock of said FSC Semiconductor Corporation or Fairchild
Semiconductor Corporation; and
WHEREAS, no employee is obligated to participate in any such initial public
offering and, accordingly, as more fully provided in the Plan, at any time an
eligible employee may add (exclusively through payroll deduction) property to or
withdraw all such employee's property from this trust;
NOW, THEREFORE, Fleet Bank of Maine, as Trustee, and its successors in
office, will hold, administer and dispose of all property that is transferred to
this trust from time to time by such employees in a trust, to be known as the
"Fairchild Revocable Savings Plan Trust", as follows:
ARTICLE I
Disposition of Trust Funds
A. During the continuance of this trust, the Trustee may receive property
from employees of FSC Semiconductor Corporation (or any direct or indirect
subsidiary thereof) from payroll deduction and in accordance with the Plan. The
property so transferred by an employee to the Trust shall be held in a separate
trust for the benefit of such employee, with each such employee's separate trust
to be known by the name of such employee followed by the word "Trust".
B. While an employee's separate trust continues, the Trustee shall
accumulate the net income of such separate trust and annually shall add it to
trust principal; provided, however, that if a licensed physician certifies in
writing to the Trustee that the employee in respect of whom such separate trust
is established is incapacitated, the Trustee shall continue to accumulate the
net income of such trust unless otherwise directed in writing by such employee's
legal representative.
ARTICLE II
Termination
A separate employee's trust hereunder shall terminate upon the earlier to
occur of (1) termination of such employee's eligibility to participate in the
Plan, (2) such employee's withdrawal from the participation in the Plan, (3) an
initial public offering of the stock of said FSC Semiconductor Corporation or of
said Fairchild Semiconductor Corporation, as defined in paragraph 5 of the Plan,
or other termination of the Plan in accordance with its terms. Upon termination
of a separate trust established hereunder, the Trustee shall distribute all of
the then remaining assets of such separate trust to the employee in respect of
whom such trust was established or to such employee's agent (designated by such
employee in writing). If, however, an employee's separate trust terminates as a
result of such employee's death, then the Trustee shall distribute all of the
then remaining assets of such trust to the personal representative of such
employee's estate to be disposed of as a part of that estate.
<PAGE> 2
ARTICLE III
Trustees
A. The Trustee may resign at any time by providing thirty (30) days
written notice to FSC Semiconductor Corporation. If a vacancy occurs in the
office of Trustee hereunder, the person or persons, bank or trust company
appointed in a written instrument executed by the President of FSC Semiconductor
Corporation, or of its then successor in interest, shall become a Trustee or
Trustees hereunder.
B. No Trustee serving hereunder shall be required to furnish any bond or,
if bond is required by law, no surety on such bond shall be required. The
Trustee is excused from filing any inventory with, and accounting to, any court.
C. During the continuance of this trust, the Trustee shall be paid such
reasonable compensation as shall from time to time be agreed upon by FSC
Semiconductor Corporation and the Trustee. FSC Semiconductor Corporation shall
pay such compensation and all reasonable costs, charges, and expenses incurred
by the Trustee in connection with the administration of this trust, including
counsel, investment and administrative fees. If not so paid by FSC Semiconductor
Corporation, the same shall be paid from this trust.
D. The Trustee shall be fully protected in acting upon any written
instruction, instrument, certificate or other document believed by the Trustee
to be genuine and to be signed or presented by the proper person or persons, and
the Trustee shall be under no duty to make any investigation or inquiry as to
any statement contained in any such writing, but may accept the same as
conclusive evidence of the truth and accuracy contained therein.
E. The Trustee shall not be liable hereunder for any loss or diminution
of this trust resulting from any reasonable action taken or refrained from being
taken in accordance with the fiduciary obligations imposed on trustees by
applicable law.
F. The Trustee is entitled to indemnification, to the extent permitted by
law, and to be held harmless from and against any and all claims or liabilities,
losses, costs or expenses (including, without limitation, reasonable attorneys'
fees and expenses) of whatever kind that may be asserted against or incurred by
the Trustee by reason of its taking or refraining from taking any action
hereunder, except to the extent due to the Trustee's gross negligence or willful
misconduct.
ARTICLE IV
Administrative Powers
A. In extension of and not in limitation of the powers given trustees by
applicable law and the other provisions of this instrument, the Trustee shall
have the following powers with respect to the trust and its property, in each
case to be exercised from time to time in the sole discretion of the Trustee and
without authorization or license of any court of probate or any other authority
whatsoever and without giving bond therefor:
1. To invest the assets of this trust wholly in cash or cash
equivalents (including without limitation the Galaxy Government Money Market
Fund or other similar fund irrespective of such fund's affiliation with the
Trustee) without regard to further diversification of the trust assets, and
notwithstanding the fact that any or all of the investments made or retained are
of a character or size which but for this express authority would not be
considered proper for fiduciaries.
2. To employee and compensate agents, including, without limitation,
administrators, attorneys, investment advisors, custodians, brokers and
accountants, each of whose compensation shall be determined and paid
independently of any compensation paid to the Trustee or to any other such agent
and each of whom may be employed regardless of any connection between any such
<PAGE> 3
agent and the Trustee, and to delegate to such agents or any of them, or to
another Trustee, if any, temporarily or permanently, such discretionary powers
of such time as the Trustee may consider advisable; provided, however, that
nothing in this Subsection shall be construed to permit any Trustee to delegate
to any other person all of his, her or its powers and duties.
3. To receive, pursuant to the Plan, from employees of said FSC
Semiconductor Corporation (or a direct or indirect subsidiary thereof) during
the continuance of this trust additions to it exclusively through payroll
deduction in accordance with the provisions of the Plan; and to hold and
administer the same under the provisions hereof.
4. To mingle the trust property of the separate trusts administered
under this instrument, allotting to each separate trust an undivided interest in
the mingled funds that shall always be equal to that trust's proportionate
contribution (as adjusted from time to time as a result of accumulations of
income, payments of principal and additions to principal) to the mingled funds.
ARTICLE V
Governing Law
The trust established under this instrument is a Maine trust, made in that
State, and is to be governed, construed, and administered according to its laws
and shall continue to be so governed, construed and administered even though
administered elsewhere within the United States or abroad.
IN WITNESS WHEREOF, said FLEET BANK OF MAINE, in acceptance of the terms of
this trust and the office of Trustee hereunder, has caused this instrument to be
signed in its corporate name and sealed with its corporate seal by its officer
thereunto duly authorized, all the day and year first above written.
FLEET BANK OF MAINE, Trustee
/s/ Andrea Lutz By: /s/ David J. Parker
-------------------------------------------------
Witness
<PAGE> 1
EXHIBIT 21.01
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
Worldwide Subsidiary List
<TABLE>
<CAPTION>
State/Country of
Incorporation
----------------
<S> <C>
Fairchild Semiconductor Corporation Delaware
Fairchild Semiconductor Corporation of California Delaware
Fairchild Korea Semiconductor Ltd. South Korea
Fairchild Semiconductor Ltd. England
Fairchild Semiconductor GmbH Germany
Fairchild Semiconductor S.r.l. Italy
Fairchild Semiconductor Japan Ltd. Japan
Fairchild Semiconductor Hong Kong Ltd. Hong Kong
Fairchild Semiconductor Hong Kong (Holdings) Ltd. Hong Kong
Fairchild Semiconductor Asia Pacific Pta. Ltd. Singapore
Fairchild Semiconductor (Malaysia) Sdn. Shd. Malaysia
Fairchild Semiconductora de Mexico F. de R.L. de C.V. Mexico
</TABLE>
<PAGE> 1
EXHIBIT 23.01
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Fairchild Semiconductor International, Inc.
We consent to incorporation by reference in the registration statements (Nos.
333-84439 and 333-84747) on Form S-8 of Fairchild Semiconductor International,
Inc. of our reports dated June 30, 1999, except as to Note 20, which is as of
August 9, 1999, relating to the consolidated balance sheets of Fairchild
Semiconductor International, Inc. and subsidiaries as of May 30, 1999 and May
31, 1998, the related consolidated statements of operations and stockholders'
equity (deficit) for each of the years in the three-year period ended May 30,
1999, the related consolidated statements of cash flows for the years ended May
30, 1999 and May 31, 1998, and the related schedule, which reports appear in the
1999 annual report on Form 10-K of Fairchild Semiconductor International, Inc.
Our report refers to a change in the method of accounting for business
reengineering costs as a result of the Company adopting the provisions of the
Emerging Issues Task Force Issue 97-13, "Accounting for Business Process
Reengineering Costs."
KPMG LLP
Boston, Massachusetts
August 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001036960
<NAME> FAIRCHILD SEMICONDUCTOR CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-30-1999
<PERIOD-START> JUN-01-1999
<PERIOD-END> MAY-30-1999
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<SECURITIES> 0
<RECEIVABLES> 139
<ALLOWANCES> 9
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<CURRENT-ASSETS> 406
<PP&E> 896
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<TOTAL-ASSETS> 1,096
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90
0
<COMMON> 1
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<TOTAL-LIABILITY-AND-EQUITY> 1,096
<SALES> 735
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