<PAGE> 1
As filed with the Securities and Exchange Commission on May 14, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
FSC Semiconductor Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3674 77-0449095
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
333 WESTERN AVENUE, MAIL STOP 01-00
SOUTH PORTLAND, MAINE 04106
(207) 775-8100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
DANIEL E. BOXER, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
FSC SEMICONDUCTOR CORPORATION
333 WESTERN AVENUE, MAIL STOP 01-00
SOUTH PORTLAND, MAINE 04106
(207) 775-8100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-------------------------
WITH COPIES TO:
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NINA P. GRAYSON, ESQ. KRIS F. HEINZELMAN, ESQ.
DECHERT PRICE & RHOADS CRAVATH, SWAINE & MOORE
30 ROCKEFELLER PLAZA WORLDWIDE PLAZA
NEW YORK, NEW YORK 10112 825 EIGHTH AVENUE
(212) 698-3500 NEW YORK, NEW YORK 10019
(212) 474-1000
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] .
---------------
If this form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] .
---------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] .
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Class A Common Stock, $0.01 par value per share............. $350,000,000 $97,300
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933. The proposed
maximum aggregate offering price includes amounts attributable to shares
that may be purchased by the Underwriters to cover over-allotments, if any.
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 14, 1999
Shares
FSC SEMICONDUCTOR CORPORATION
Class A Common Stock
------------------
We are selling shares of our Class A Common Stock. The underwriters
have an option to purchase a maximum of additional shares to cover
over-allotments of shares.
Prior to this offering, there has been no public market for our Class A
Common Stock. The initial public offering price is expected to be between
$ and $ per share. We have applied to list our Class A Common
Stock on under the symbol " ."
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
STARTING ON PAGE 11.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND FSC
PUBLIC COMMISSIONS SEMICONDUCTOR
------------ ------------- -------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total........................................ $ $ $
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Delivery of the shares of Class A Common Stock will be made on or about
, 1999.
Neither the Securities and Exchange Commission nor any state commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
CREDIT SUISSE FIRST BOSTON
The date of this prospectus is , 1999.
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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FORWARD-LOOKING STATEMENTS............ ii
PROSPECTUS SUMMARY.................... 1
RISK FACTORS.......................... 11
DEBT REPAYMENT AND PREFERRED STOCK
REPURCHASE TRANSACTIONS............. 21
USE OF PROCEEDS....................... 22
DIVIDEND POLICY....................... 22
CAPITALIZATION........................ 23
DILUTION.............................. 25
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS AND UNAUDITED
SUPPLEMENTAL DATA................... 27
SELECTED CONSOLIDATED FINANCIAL DATA
OF FAIRCHILD........................ 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF FAIRCHILD.......... 42
SELECTED HISTORICAL FINANCIAL DATA OF
THE POWER DEVICE BUSINESS........... 54
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE POWER DEVICE
BUSINESS............................ 55
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INDUSTRY OVERVIEW..................... 60
BUSINESS.............................. 64
THE TRANSACTIONS...................... 79
MANAGEMENT............................ 83
PRINCIPAL STOCKHOLDERS................ 92
DESCRIPTION OF CAPITAL STOCK.......... 94
DESCRIPTION OF CERTAIN INDEBTEDNESS... 97
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................ 100
SHARES ELIGIBLE FOR FUTURE SALE....... 101
UNITED STATES TAX CONSEQUENCES TO
NON-UNITED STATES HOLDERS........... 103
UNDERWRITING.......................... 106
NOTICE TO CANADIAN RESIDENTS.......... 108
LEGAL MATTERS......................... 109
EXPERTS............................... 109
WHERE YOU CAN FIND MORE INFORMATION... 109
GLOSSARY.............................. 111
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
---------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS MAY BE USED ONLY WHERE IT IS
LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE
ACCURATE ON THE DATE OF THIS PROSPECTUS.
-------------------------
As used in this prospectus, the terms "we," "Fairchild," "the Company" and
"our company" refer to FSC Semiconductor Corporation and its subsidiaries after
consummation of the acquisition of the power device business, which we refer to
as the Power Device Business, of Samsung Electronics Co., Ltd., unless the
context requires otherwise. We refer to this acquisition as the Acquisition.
------------------------------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN OUR CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-------------------------
i
<PAGE> 4
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies.
These forward-looking statements are identified by their use of terms and
phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained in
sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Fairchild,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Power Device Business," "Business" and other sections of this
prospectus.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, but are not limited to, the following: the
integration of the acquired Power Device Business without disruption to
manufacturing, marketing and distribution activities; changes in general
economic and business conditions; changes in current pricing levels; changes in
political, social and economic conditions and local regulations; foreign
currency fluctuations; reductions in sales to any significant customers; changes
in sales mix; industry capacity; competition; disruptions of established supply
channels; manufacturing capacity constraints; the availability, terms and
deployment of capital; and our ability to accurately estimate the cost of
systems preparation and successfully implement for Year 2000 compliance. Our
risks are more specifically described in the "Risk Factors" section of this
prospectus. If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, our actual results may vary materially
from those expected, estimated or projected.
We do not undertake to update our forward-looking statements or risk
factors to reflect future events or circumstances.
ii
<PAGE> 5
PROSPECTUS SUMMARY
This summary may not contain all of the information that may be important
to you. You should read the entire prospectus, including the financial data and
related notes, before making an investment decision. Fairchild's fiscal year is
comprised of a twelve-month period ending on the Sunday on or immediately
preceding May 31 of each year. The Power Device Business reports on a calendar
year basis. See "Glossary" for a description of certain other terms.
THE COMPANY
Fairchild is the largest independent semiconductor company focused solely
on multi-market products. We design, develop and market, analog, discrete, logic
and non-volatile memory semiconductors. Established over 35 years ago, the
Fairchild brand name is one of the most well-known in the industry. 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 telecommunication equipment to
household appliances. Our current portfolio of approximately 10,000 products is
sold to over 50,000 customers worldwide. Our recent Acquisition of the Power
Device Business from Samsung Electronics in April 1999 added significantly to
our capabilities in our power discrete and analog businesses, and we believe it
will allow us to offer more products, reach new customers and broaden our
geographic coverage. We have wafer fabrication plants in California, Maine, Utah
and South Korea, and assembly facilities in Malaysia and the Philippines. Our
customers include industry leaders Compaq, Dell, Ericsson, IBM, Intel, Lucent,
Nokia, Nortel Networks, Samsung Electronics, Siemens and Solectron. For Fiscal
1998, we generated pro forma total revenues of $1.3 billion.
We believe Fairchild is well positioned to capture significant growth
opportunities, while generating a more stable earnings stream than many other
semiconductor manufacturers. We are well positioned for growth as a result of:
- NEW PRODUCT PIPELINE. Our continual development and design of new
products and the enhancement of current product portfolios, which
increase our unit volume and pricing and augment our growth.
- ANALOG AND DISCRETE PRODUCT STRENGTH. Our full line of analog and power
discrete products, which have attractive growth and margin
characteristics.
- NEW REVENUE SYNERGIES. Our enhanced competitive profile, broader
coverage of geographic markets and cross-selling opportunities following
our Acquisition of the Power Device Business.
- CONSOLIDATION OPPORTUNITIES. The fragmentation of many of the markets in
which we compete and the focus of large companies on non-multi-market
product lines, which offer us acquisition opportunities. Since 1997, our
management has established Fairchild as a stand-alone entity and has
purchased Raytheon Semiconductor Inc., which we refer to as Raytheon, and
the Power Device Business.
- NEW FABRICATION FACILITIES. Our capacity for growth resulting from
capital expenditures during Fiscal 1994 to 1996 of approximately $355.0
million to build a new wafer fabrication plant and to upgrade existing
facilities and the Power Device Business' investment in 1996 of
approximately $118.1 million primarily to expand capacity and retool its
facilities.
- FAVORABLE MARKET TRENDS. The increasing level of semiconductor content
in electronic products, the increasing demand for portability of
electronic devices and the continuing growth in our end user markets,
such as personal computer, industrial, telecommunications, consumer
electronics and automotive markets.
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<PAGE> 6
Although the semiconductor industry is subject to volatility, industry
cycles have less impact on our business as a result of:
- LOW RESEARCH AND DEVELOPMENT AND CAPITAL EXPENDITURE REQUIREMENTS. The
nature of our products as building block components -- requiring less
research and development and capital investment than high impact new
products, such as high-end microprocessors that have relatively short
life cycles.
- LONG PRODUCT LIFE CYCLES. The long life of our products, which average
approximately 10 years and can extend up to 30 years.
- END USER MARKET DIVERSIFICATION. The breadth of our end user markets,
including the personal computer, industrial, telecommunications, consumer
electronics and automotive markets.
Worldwide semiconductor market revenues were approximately $125.6 billion
during 1998 according to the reports of Worldwide Semiconductor Trade Statistics
published by the Semiconductor Industry Association. Since 1990, the global
semiconductor market has expanded at a compounded annual growth rate of
approximately 12.0%. We operate primarily in the approximately $55.3 billion
moving and shaping segment of the semiconductor market. We believe that the
markets we operate in provide us with attractive growth opportunities. The
analog and discrete markets are expected to grow over the next three years at
compounded annual growth rates of 13% and 8%, respectively, according to
Worldwide Semiconductor Trade Statistics. Additionally, we focus on one of the
fastest growing segments of the logic industry, low voltage CMOS, which is
expected by Insight/Onsite to grow over the next five years at a compounded
annual growth rate of 11%. We do not compete in the microprocessor,
microcontroller, volatile memory or complex system-on-a-chip markets.
THE ACQUISITION
On April 13, 1999, we purchased the Power Device Business from Samsung
Electronics for approximately $406.8 million, net of certain purchase price
adjustments. 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 not only
enhances our analog and power discrete product offerings, but also provides us
with a greater market presence in South Korea. The Acquisition 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 pursuant to 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
pursuant to a foundry sale agreement. The agreement is designed to
provide us certain levels of profitability for each of the three years.
In connection with the Acquisition, we have obtained a full income tax
holiday for a period of seven years in South Korea. The Power Device Business
added approximately 1,455 employees, most of whom work at its wafer fabrication
facilities in South Korea, to Fairchild's existing work force of approximately
6,500. In 1998, the Power Device Business had revenues of $386.5 million.
2
<PAGE> 7
COMPANY STRENGTHS
We believe our core strengths are the following:
BREADTH OF PRODUCT PORTFOLIO. We provide our customers with one of the
largest product offerings in the industry for analog, discrete, logic and
non-volatile memory devices. Our analog device portfolio comprises over 2,300
products, including offerings in 92 of the top 100 best-selling analog product
types by volume. Our discrete device portfolio comprises over 4,000 products and
we believe it is one of the most comprehensive power device portfolios in the
industry. We develop products for a wide range of market applications, reducing
our dependence on any single product, application or market. In addition, we
believe that our ability to provide our customers with multiple products meets a
growing need for a single source of supply among our end users.
LEADERSHIP IN POWER SOLUTIONS. We believe there is an increasing demand
for a combination of sophisticated computing and communication capabilities,
frequently in the form of portable devices. We are a leader in providing
solutions for managing the power required to operate such devices. Our combined
analog and discrete offering provides a complete solution for power management:
- Analog: We provide specific solutions for power conversion, temperature
sensing, management functions, battery chargers and motor controls.
- Power Discrete: We provide comprehensive solutions for managing power
from the original power source to end products such as computers,
cellular phones and network devices. Our portfolio of products includes
low-voltage products, such as power and signal MOSFETs and bipolar
devices, and high-voltage products, such as high-power MOSFETs, IGBTs,
Smart Power Switches and high-power bipolar transistors.
HIGH QUALITY CUSTOMER SERVICE. Our customers recognize us for our high
quality of service. They require a reliable source of supply, often in high
volumes and with short lead times, demand quick responses to technical questions
and seek support in designing new applications which use our products. Because
we are an independent company focused solely on multi-market products, all of
our service and support efforts are tailored to meet these customer needs. As a
result of our efforts, we have recently received numerous customer and industry
awards, including supplier awards from Compaq Computer Corp., Siemens AG and
Acer Inc. and the European Mid-Size Vendor of the Year award from Dataquest.
HISTORY OF PRODUCT INNOVATION. Our success in introducing new products has
been an important source of our growth and profitability. We have been a
significant innovator in the multi-market segment of the semiconductor industry
with several leading edge technologies and industry firsts, including our
introduction of High Speed CMOS in the late 1970s, FAST(R) and FACT(TM) in the
1980s and Low Voltage Logic products, DMOS Power MOSFETs using trench technology
and IGBT using silicon bonding technology in the 1990s. Since June 1997, we have
introduced approximately 300 new products.
DIVERSE AND BLUE-CHIP CUSTOMER BASE. Our diverse customer base, which
spans a wide spectrum of end user markets, enables us to avoid some of the
volatility that may be encountered in specific semiconductor markets. We serve
more than 50,000 customers worldwide, with no single customer, other than
National Semiconductor and Samsung Electronics, providing more than 5% of our
pro forma Fiscal 1998 total revenue. Customers in our end user markets include
industry leaders Compaq, Dell, Ericsson, IBM, Intel, Lucent, Nokia, Nortel
Networks, Samsung Electronics, Siemens and Solectron.
EXPERIENCED MANAGEMENT. Our senior management team consists of seven
individuals who have on average approximately 25 years of experience in the
semiconductor industry and includes:
- Kirk P. Pond (Chief Executive Officer): Mr. Pond, with over 30 years of
experience in the semiconductor industry, has held various senior
management positions at Texas Instruments Incorporated and was the Chief
Operating Officer of National Semiconductor.
3
<PAGE> 8
- Joseph R. Martin (Chief Financial Officer): Mr. Martin, with over 20
years of experience in the semiconductor industry, has held various
senior financial positions with National Semiconductor, including Vice
President of Finance, Worldwide Operations.
In March 1997, Mr. Pond, Mr. Martin and certain other key employees of
Fairchild made an aggregate cash investment of $6.8 million in our company. Such
individuals currently own approximately 17.1% of our outstanding common stock.
------------------
Our principal executive offices are located at 333 Western Avenue, Mail
Stop 01-00, South Portland, Maine 04106, and our telephone number is (207)
775-8100.
4
<PAGE> 9
THE OFFERING
Class A Common Stock offered
(1)........................... shares offered by Fairchild
Common Stock to be outstanding
after this offering(1)(2)... shares of Class A Common Stock
shares of Class B Common Stock
---------
Total....................... shares of common stock
=========
Voting Rights................. Holders of Class A Common Stock are entitled to
one vote per share on all matters submitted to
a vote of the stockholders. Holders of Class B
Common Stock have no voting rights.
Other Rights.................. Except as to voting and conversion rights, each
class of common stock has the same rights.
Shares of each class of common stock are
convertible on a one-to-one basis into shares
of the other class of common stock at the
option of the holder.
Use of Proceeds............... We intend to use the net proceeds of this
offering to:
- repay amounts under our Senior Credit
Facilities;
- repay all outstanding amounts under our
11.74% Subordinated PIK Note Due 2008 and our
12.5% Subordinated PIK Note Due 2008; and
- pay fees and expenses of this offering.
- -------------------------
(1) Excludes shares of Class A Common Stock that may be issued to
cover over-allotment of shares.
(2) Excludes shares of Class A Common Stock issuable upon exercise of
outstanding stock options and shares of Class A Common Stock issuable in
connection with the termination of the Employee Stock Purchase Savings Plan.
Includes shares of Class A Common Stock that we will issue in
connection with the exchange of 12% Series A Cumulative Compounding
Preferred Stock for Class A Common Stock. See "Debt Repayment and Preferred
Stock Repurchase Transactions."
5
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SUMMARY HISTORICAL, PRO FORMA AND SUPPLEMENTAL DATA
FAIRCHILD
We present below summary historical, pro forma as adjusted and certain
supplemental data of Fairchild. We derived the historical financial data as of
and for the years ended May 26, 1996, May 25, 1997 and May 31, 1998, from
Fairchild's audited Consolidated Financial Statements and related notes, which
are included elsewhere in this prospectus. We derived the historical financial
data as of and for the nine months ended February 28, 1999 from Fairchild's
unaudited Consolidated Financial Statements and related notes which are included
elsewhere in this prospectus. We derived the historical financial data as of and
for the years ended May 29, 1994 and May 28, 1995 from Fairchild's unaudited
consolidated financial statements that we prepared on the same basis as
Fairchild's audited Consolidated Financial Statements. In our opinion, the
unaudited financial data include all adjustments (consisting of normal recurring
adjustments) that we consider necessary for a fair presentation of the data.
The unaudited pro forma as adjusted statement of operations data presented
below are based upon unaudited pro forma financial statements for the nine
months ended February 28, 1999 for Fairchild after giving effect to the
transactions described below as if they had occurred on May 26, 1997, this
offering and the application of the proceeds of this offering as described in
"Use of Proceeds." The unaudited pro forma as adjusted balance sheet data
presented are based on certain assumptions that we believe accurately represent
the effect of the transactions described below, this offering and the
application of the proceeds of this offering as described in "Use of Proceeds"
as if they had occurred on February 28, 1999.
THE POWER DEVICE BUSINESS
We present below summary historical data of the Power Device Business. We
derived the historical financial data for the years ended December 31, 1996,
1997 and 1998 from the Power Device Business' audited Financial Statements and
related notes, which are included elsewhere in this prospectus. We derived the
historical financial data for the nine months ended December 31, 1998 from the
Power Device Business' unaudited financial statements and related notes, which
are not included in this prospectus.
The unaudited pro forma data presented below are based upon unaudited
financial statements for the nine months ended December 31, 1998 for the Power
Device Business and are adjusted to give pro forma effect to the contracts we
entered into with Samsung Electronics in connection with the Acquisition, and to
eliminate certain liabilities that we did not assume, the historical expenses
related to those liabilities, and the related income tax effect of all pro forma
adjustments.
The financial statements for the three years ended December 31, 1998 have
been translated from South Korean Won into U.S. Dollars based on the provisions
of Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency
Translation, and are presented in accordance with U.S. GAAP. For historical
financial information, assets and liabilities have been translated at the
exchange rate on the balance sheet date, and income statement amounts have been
translated using the weighted average of the exchange rates in effect during the
period. The income statement of the Power Device Business has been translated
from Won into U.S. Dollars at the weighted average exchange rates of 805 Won,
951 Won, 1,399 Won and 1,334 Won to one U.S. Dollar for 1996, 1997, 1998 and the
nine months ended December 31, 1998, respectively. On May 13, 1999, the noon
buying rate as reported by the Federal Reserve Board of New York was 1,207 Won
to one U.S. Dollar.
GENERAL
In the tables below, we present unaudited pro forma financial data for
informational purposes only. We do not suggest that the data indicate what our
results of operations would actually have been had the transactions described
below, this offering and the application of the proceeds of this offering as
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described in "Use of Proceeds," been completed on the assumed dates. It is
important to remember that this information is hypothetical and does not
necessarily reflect our actual or future financial performance upon consummation
of the transactions described below, this offering and the application of the
proceeds of this offering as described in "Use of Proceeds." Since the
information in the tables is a summary, you should read the following tables in
conjunction with other information contained under the caption "Unaudited Pro
Forma Combined Condensed Financial Statements and Unaudited Supplemental Data,"
and with Fairchild's, the Power Device Business' and Raytheon's financial
statements and related notes and the other financial information contained
elsewhere in this prospectus.
THE TRANSACTIONS
In order to finance the Acquisition, Fairchild completed the following
financings (together with the Acquisition, the application of the proceeds
therefrom and payment of related fees and expenses, the "Transactions"):
- We entered into the Senior Credit Facilities, which provided us up to
$410.0 million in financing, consisting of a $100.0 million Revolving
Credit Facility and $310.0 million of Senior Term Facilities.
- Citicorp Mezzanine Partners, L.P. contributed $50.0 million in cash to us
in exchange for a promissory note (the "12.5% Subordinated PIK Note Due
2008") and a warrant to purchase 3,538,228 shares of our common stock.
The warrant is currently not exercisable and, assuming prepayment in full
of the note in connection with this offering, the warrant will never
become exercisable. We contributed the $50.0 million from Citicorp
Mezzanine Partners, L.P. to our subsidiary, Fairchild Semiconductor
Corporation, as a capital contribution.
- Fairchild Semiconductor issued the $300.0 million 10 3/8% Senior
Subordinated Notes Due 2007.
7
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FSC SEMICONDUCTOR CORPORATION
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NINE MONTHS ENDED
FEBRUARY 28, 1999
FISCAL YEAR ENDED MAY ------------------------
----------------------------------------------- PRO FORMA
1994 1995 1996 1997 1998 HISTORICAL AS ADJUSTED
------ ------ ---------- ------- ------ ---------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:(1)
Revenue:
Analog............................ $ -- $ -- $ -- $ -- $ 32.0 $ 49.7 $172.1
Discrete.......................... 80.0 116.4 175.0 164.5 187.3 131.6 317.7
Logic............................. 393.8 327.7 339.5 285.3 303.0 194.2 194.2
Memory............................ 185.1 185.5 174.2 138.0 113.5 58.6 58.6
Contract manufacturing services... 57.7 50.7 87.6 104.2 153.4 54.5 78.7
------ ------ ------ ------ ------ ------ ------
Total revenue....................... $716.6 $680.3 $776.3 $692.0 $789.2 $488.6 $821.3
====== ====== ====== ====== ====== ====== ======
Gross profit........................ $248.3 $203.8 $216.8 $152.5 $230.5 $107.0 $218.8
Research and development............ 27.4 31.0 30.3 18.9 35.7 27.9 39.4
Selling, general and
administrative.................... 97.3 100.3 114.4 96.4 92.0 68.5 119.5
Litigation settlement expense(2).... -- -- -- -- -- -- 58.0
Restructuring and other
non-recurring charges(3).......... -- -- -- 5.3 15.5 7.2 7.2
------ ------ ------ ------ ------ ------ ------
Operating income (loss)........... $123.6 $ 72.5 $ 72.1 $ 31.9 $ 87.3 $ 3.4 $ (5.3)
Interest, net....................... -- -- -- 11.2 54.5 44.7 57.2
Other expense (income), net......... (1.9) (1.8) (0.2) 1.4 -- -- (0.3)
Provision (benefit) for income
taxes............................. -- -- -- 3.8 10.7 (4.1) (7.6)
------ ------ ------ ------ ------ ------ ------
Income (loss) before cumulative
effect of change in accounting
principle(4).................... $125.5 $ 74.3 $ 72.3 $ 15.5 $ 22.1 $(37.2) $(54.6)
====== ====== ====== ====== ====== ====== ======
Net income (loss) applicable to
common stockholders before
cumulative effect of change in
accounting principle.................................................... $ 13.4 $(44.4) $(54.6)
====== ====== ======
EARNINGS PER COMMON SHARE(5):
Basic..................................................................... $ 0.21 $(0.71)
Diluted................................................................... $ 0.20 $(0.71)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic..................................................................... 62.8 62.9
Diluted................................................................... 65.0 62.9
OTHER FINANCIAL DATA:
Amortization of intangibles(6)...... $ -- $ -- $ -- $ -- $ 1.4 $ 2.6 $ 22.3
Depreciation and other
amortization...................... 38.7 44.7 64.2 77.1 83.2 69.5 90.0
Capital expenditures................ 88.2 112.9 153.9 47.1 78.0 31.5 37.8
SUPPLEMENTAL DATA:
Adjusted EBITDA(7).................. $162.3 $117.2 $136.3 $128.4 $187.4 $ 82.7 $172.2
Adjusted net income (loss)(8)....... 125.5 74.3 72.3 34.9 33.5 (28.4) 30.0
</TABLE>
8
<PAGE> 13
<TABLE>
<CAPTION>
AS OF FEBRUARY 28, 1999
-------------------------
HISTORICAL
---------- PRO FORMA
AS ADJUSTED
-----------
<S> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents................................... $ 5.4 $ 64.6
Accounts receivable, net.................................... 101.5 128.1
Inventories................................................. 105.6 145.0
Total assets................................................ 623.5 1,102.0
Long-term debt, including current portion................... 560.0 730.4
Total stockholders' equity (deficit)........................ (161.0) 204.9(9)(10)
</TABLE>
POWER DEVICE BUSINESS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, 1998
-------------------------- --------------------------
1996 1997 1998 HISTORICAL PRO FORMA(11)
------ ------ ------ ---------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................................... $471.8 $478.1 $386.5 $294.9 $332.7
Gross profit.................................... $ 56.5 $131.0 $137.3 $ 92.1 $114.8
Research and development........................ 18.6 19.2 15.2 11.5 11.5
Selling, general and administrative............. 29.0 34.3 33.8 27.9 31.3
Litigation settlement expense(2)................ -- -- 58.0 58.0 58.0
------ ------ ------ ------ ------
Operating income (loss)......................... $ 8.9 $ 77.5 $ 30.3 $ (5.3) $ 14.0
====== ====== ====== ====== ======
OTHER FINANCIAL DATA:
Adjusted EBITDA(7).............................. $ 57.9 $116.3 $110.6 $ 70.2 $ 89.5
Capital expenditures............................ 118.1 10.9 8.6 6.3 6.3
</TABLE>
- -------------------------
(1) For the fiscal years ended May 1997 and prior, statement of operations data
includes the direct and allocated expense of the Fairchild Semiconductor
business of National Semiconductor. Such amounts may not be comparable to
data for Fiscal 1998 and the historical and pro forma nine months ended
February 28, 1999.
(2) Represents a one-time charge for settlement by Samsung Electronics of a
patent infringement lawsuit attributable to the Power Device Business. The
associated liability is being retained by Samsung Electronics.
(3) In Fiscal 1997, restructuring and other non-recurring charges consisted of
severance and other costs related to lay-offs that occurred in the first
quarter of Fiscal 1997. In Fiscal 1998, such charges consisted of
in-process research and development associated with the acquisition of
Raytheon. For the historical and pro forma nine months ended February 28,
1999, such charges consisted of $7.2 million related to severance and other
costs that occurred in the first and third quarters of Fiscal 1999.
(4) Excludes a charge for the cumulative effect of change in accounting
principle of $1.5 million, net of a related tax benefit of $0.8 million, in
Fiscal 1998.
(5) Earnings per common share is calculated using net income (loss) applicable
to common stockholders and excludes the effect of a $1.5 million cumulative
effect of change in accounting principle in Fiscal 1998, which amount would
reduce both basic and diluted earnings per common share by $0.02.
(6) Amortization of intangibles primarily represents the amortization of
indentifiable acquisition-related intangible assets.
(7) Adjusted EBITDA is defined as operating income before other (income)
expense, interest expense, taxes, depreciation, amortization and, in the
case of Fairchild, (a) restructuring and other non-recurring charges and
(b) $14.1 million of one-time retention bonuses in 1997 associated with the
recapitalization of National Semiconductor and, in the case of the Power
Device Business, a one-time charge of $58.0 million for litigation
9
<PAGE> 14
settlement expense. Adjusted EBITDA is presented because we believe that
EBITDA it is a widely accepted financial indicator of an entity's ability
to incur and service debt. Adjusted EBITDA should not be considered by an
investor as an alternative to net income or income from operations, as an
indicator of our operating performance or other combined operations or cash
flow data prepared in accordance with generally accepted accounting
principles, or as an alternative to cash flows as a measure of liquidity.
Our computation of Adjusted EBITDA may differ from similarly titled
computations of other companies.
(8) Adjusted net income (loss) represents net income (loss) before litigation
expense, restructuring and other nonrecurring charges, cumulative effect of
change in accounting principle and amortization of intangibles. For Fiscal
1997, adjusted net income also excludes $14.1 million of one-time retention
bonuses associated with the recapitalization of Fairchild Semiconductor.
(9) The excess of the aggregate purchase price over the historical net book
value of the Power Device Business' assets acquired and liabilities assumed
as of December 31, 1998 has been allocated to inventory, property, plant
and equipment, and various intangible assets for illustrative purposes in
the pro forma financial statements only. Actual allocations will be based
on fair values as of the acquisition date (April 13, 1999). Included in the
allocation to intangible assets is an estimated allocation to in-process
research and development of $31.2 million, which amount was immediately
expensed on consummation of the Acquisition. This expense has been deducted
from stockholders' equity in the pro forma balance sheet data as of
February 28, 1999.
(10) Pro forma stockholders' equity as adjusted for the offering will be reduced
by $7.6 million for a one-time write-off, net of tax benefit, of a
receivable from the management investors to pay their federal and state
individual income tax liabilities resulting from the lapse of certain risks
of forfeiture with respect to their stock ownership. Such receivables will
be cancelled as a result of a public offering of the Company's common
stock. Additionally, we will expense amounts to discharge their individual
tax liabilities associated with the cancellation. Pro forma stockholders'
equity as adjusted for the offering has also been reduced by $5.0 million
for the one-time write-off, net of tax benefit, of unamortized debt
issuance costs associated with the debt being repaid. The expenses will
reduce stockholders' equity, but will not have any effect on Adjusted
EBITDA.
(11) Pro forma data for the nine months ended December 31, 1998 has been
presented to be consistent with the pro forma nine months ended February
28, 1999 data presented for Fairchild.
10
<PAGE> 15
RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus before deciding to invest in shares of our Class A Common
Stock.
SUBSTANTIAL LEVERAGE -- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND LIMIT OUR ABILITY TO GROW AND COMPETE.
On a pro forma basis after giving effect to the Transactions, this offering
and the application of the proceeds of this offering as described in "Use of
Proceeds," as of February 28, 1999, we would have had total indebtedness of
$730.4 million, stockholders' equity of $204.9 million and a pro forma ratio of
debt to equity of 3.6 to 1.0. In addition, we and our subsidiaries may be able
to incur substantial additional indebtedness in the future.
Our substantial indebtedness:
- require us to dedicate a substantial portion of our cash flow from
operations to 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;
- increase the amount of our interest expense, because certain of our
borrowings are at variable rates of interest, which, if interest rates
increase, could result in higher interest expense;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- restrict us from making strategic acquisitions, introducing new
technologies or exploiting business opportunities;
- place us at a competitive disadvantage compared to our competitors that
have less debt; and
- limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional funds,
dispose of assets or pay cash dividends. Failing to comply with those
covenants could result in an event of default which, if not cured or
waived, could have a material adverse effect on our company.
See "Capitalization," "Unaudited Pro Forma Combined Condensed Financial
Statements and Unaudited Supplemental Data" and "Description of Certain
Indebtedness."
ABILITY TO SERVICE DEBT -- TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS
BEYOND OUR CONTROL.
On a pro forma basis after giving effect to the Transactions, this offering
and the application of the proceeds of this offering as described in "Use of
Proceeds," interest expense for Fiscal 1998 and for the nine months ended
February 28, 1999 would have been $77.9 million and $57.2 million, respectively.
On a pro forma basis after giving effect to the Transactions, this offering and
the application of the proceeds of this offering as described in "Use of
Proceeds," our ratio of earnings to fixed charges would have been only 1.7x for
Fiscal 1998, and for the nine months ended February 28, 1999, our fixed charges
would have exceeded our earnings by $62.2 million. On a historical basis, our
ratio of earnings to fixed charges would have been 1.6x for Fiscal 1998, while
our fixed charges would have exceeded our earnings by $41.3 million for the nine
months ended February 28, 1999. Our historical financial results have been, and
our future financial results are anticipated to be, subject to substantial
fluctuations. Our ability to improve our results is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control.
11
<PAGE> 16
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 that future borrowings will be
available to us under the Senior Credit Facilities in an amount sufficient to
enable us to pay our indebtedness or to fund our other liquidity needs. We may
need to refinance all or a portion of our indebtedness on or before maturity. We
cannot assure you that we will be able to refinance any of our indebtedness on
commercially reasonable terms or at all.
See "-- Cyclical Industry," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Fairchild" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Power Device Business."
RESTRICTIONS AND COVENANTS IN OUR DEBT INSTRUMENTS -- RESTRICTIONS IMPOSED BY
OUR DEBT INSTRUMENTS LIMIT OUR ABILITY TO TAKE CERTAIN ACTIONS.
We cannot assure you that the operating and financial restrictions and
covenants in or applicable to our debt instruments will not adversely affect 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 that may be in our interest. 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 elect to declare all
borrowings outstanding, together with accrued interest and other fees, to be due
and payable. 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 and its subsidiary guarantors. If the indebtedness under
our debt instruments were to be accelerated, we cannot assure you that such
assets would be sufficient to repay such indebtedness in full.
See "Description of Certain Indebtedness."
HOLDING COMPANY STRUCTURE -- WE ARE A HOLDING COMPANY THAT DEPENDS ON DIVIDENDS
TO MEET OUR CASH REQUIREMENTS OR, SHOULD WE SO CHOOSE, PAY DIVIDENDS.
We are a holding company with no business operations. Our only significant
asset is the outstanding capital stock of our subsidiaries, through which we
conduct all our business operations. We intend to use substantially all the net
proceeds from this offering to repay our indebtedness or the indebtedness of our
subsidiaries. We will rely on payments from our subsidiaries to be able to meet
our obligations. We will not be able to pay cash dividends on our Class A Common
Stock without receiving dividends or other distributions from Fairchild
Semiconductor or the Power Device Business. We currently expect that the
earnings and cash flow of our subsidiaries will be retained and used by such
subsidiaries in their operations, including by Fairchild Semiconductor to
service its debt obligations. Even if we determined to pay a dividend on or make
a distribution in respect of our Class A Common Stock, we cannot assure you that
our subsidiaries will generate sufficient cash flow to pay a dividend or
distribute funds to us or that applicable state law and contractual restrictions
will permit such dividends or distributions. Furthermore, Fairchild
Semiconductor is restricted by its debt instruments on paying dividends or
making distributions to us. In addition, Fairchild Semiconductor is permitted
under the terms of its existing debt instruments to incur additional
indebtedness that also may restrict or prohibit distributions, dividends or
loans to us. See "-- Substantial Leverage," "-- Restrictions and Covenants in
Our Debt Instruments" and "Description of Certain Indebtedness."
12
<PAGE> 17
CYCLICAL INDUSTRY -- DOWNTURNS IN THE BUSINESS CYCLE COULD ADVERSELY AFFECT US.
The semiconductor industry is highly cyclical. During the latter half of
Fiscal 1998 and the beginning of Fiscal 1999, we 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 declines 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 operating profit margins as a result of
variations in sales, changes in product mix, price competition for orders and
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. We cannot assure
you that these end user markets will not experience changes in demand that will
adversely affect our prospects.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE -- OUR INABILITY TO INTRODUCE
NEW PRODUCTS COULD ADVERSELY AFFECT US, AND NEW TECHNOLOGIES COULD REDUCE THE
DEMAND FOR OUR PRODUCTS.
Rapidly changing technologies and industry standards, along with frequent
new product introductions, characterize the semiconductor industry. Our
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. 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 us.
COMPETITION -- OUR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD
ADVERSELY AFFECT US.
The semiconductor industry, and the multi-market semiconductor product
markets in particular, is highly competitive. Competition is based on price,
product performance, quality, reliability and customer service. The gross profit
margins realizable in our markets can differ across regions, depending on the
economic strength of end-product markets in those regions. 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 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.
CURRENCY EXCHANGE RATE FLUCTUATIONS -- FLUCTUATIONS IN THE EXCHANGE RATE OF THE
U.S. DOLLAR AND THE WON COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
PERFORMANCE AND RESULTS OF OPERATIONS.
The Power Device Business' sales are denominated primarily in U.S. Dollars
while its costs of goods sold and its operating expenses are denominated
primarily in Won. As a result, 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.
THE POWER DEVICE BUSINESS' LACK OF INDEPENDENT OPERATING HISTORY -- THE COSTS TO
OPERATE THE POWER DEVICE BUSINESS MAY INCREASE AFTER THE ACQUISITION;
ASSUMPTIONS USED TO ESTIMATE FUTURE OPERATING RESULTS MAY BE INCORRECT.
Prior to the Acquisition, 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
13
<PAGE> 18
by the Power Device Business and charges allocated to it by Samsung Electronics.
Following consummation of the Acquisition, the Power Device Business obtains
many of these services on an arm's length basis. However, to provide certain of
these services for a transition period after the Acquisition, we entered into a
Transitional Services Agreement with Samsung Electronics pursuant to which the
Power Device Business continues to obtain certain of these services. The pro
forma financial information contained herein assumes that the Power Device
Business would have obtained certain of these services from Samsung Electronics
under the Transitional Services Agreement or otherwise. We cannot assure you
that charges under the Transitional Services Agreement will not exceed our
assumptions or that upon termination of the Transitional Services Agreement, we
will be able to obtain similar services on comparable terms. 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.
The Power Device Business has historically provided manufacturing services
to Samsung Electronics at cost. As a result of the Acquisition, the Power Device
Business will provide contract manufacturing services to Samsung Electronics for
a period of three years under various agreements at rates designed to generate
certain levels of Won-denominated profitability. The pro forma data contained in
this prospectus are based on our estimates as to expenses on a stand-alone
basis, including the effect of the Transitional Services Agreement with Samsung
Electronics, and contract manufacturing revenue under the manufacturing
agreements with Samsung Electronics. We cannot assure you that such estimates
are accurate or will reflect the actual expenses or revenues of the Power Device
Business.
See "The Transactions" and "-- Dependence on Samsung Electronics."
DEPENDENCE ON SAMSUNG ELECTRONICS -- THE FAILURE OF SAMSUNG ELECTRONICS TO
MAINTAIN ITS PURCHASE REQUIREMENTS OR MEET ITS CONTRACTUAL OBLIGATIONS COULD
ADVERSELY AFFECT US. FURTHERMORE, WE MAY NOT BE ABLE TO CONTINUE THE HISTORICAL
SALES TO AFFILIATED SAMSUNG COMPANIES.
As a result of the Acquisition, we have the benefit of numerous
arrangements with Samsung Electronics relating to product sales, designation as
a vendor to affiliated Samsung companies and certain 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 us. 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
change of terms and conditions of the agreements between us and Samsung
Electronics if it concludes that Samsung Electronics has provided us with undue
support or discriminated against our competitors.
See "The Transactions."
RISKS ASSOCIATED WITH DOING BUSINESS IN KOREA -- OUR POWER DEVICE BUSINESS
SUBJECTS OUR COMPANY TO RISKS INHERENT IN DOING BUSINESS IN KOREA.
As a result of the Acquisition of the Power Device Business, we have
operations in South Korea and are subject to certain risks. In addition to the
risks specified under "-- Risks Associated with 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, have caused the level of
tension between the two countries to increase. Incidents affecting relations
between North Korea and South Korea continually occur. No assurance can be given
14
<PAGE> 19
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 business.
KOREAN VALUE ADDED TAX IN CONNECTION WITH THE ACQUISITION -- WE ARE REQUIRED TO
PAY A SIGNIFICANT AMOUNT OF KOREAN VALUE ADDED TAX IN CONNECTION WITH THE
ACQUISITION FOR WHICH WE MAY NOT RECEIVE A REFUND.
We are required to pay approximately $41.0 million in Korean value added
tax in connection with the Acquisition. We intend to utilize the post-closing
purchase price adjustment payments in connection with the Acquisition and
existing cash to pay the amount of the value added tax. We believe that we will
be entitled to a full refund within approximately 15 days of such payment. We
cannot assure you that we will obtain such refund.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS -- OUR INTERNATIONAL OPERATIONS
SUBJECT US TO RISKS INHERENT IN DOING BUSINESS ON AN INTERNATIONAL LEVEL.
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, and Penang, Malaysia. As a
result of the Acquisition of the Power Device Business, we have significant
operations in South Korea. The following are certain 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.
FORMATION OF FOREIGN SUBSIDIARIES -- WE COULD SUFFER ADVERSE TAX AND OTHER
FINANCIAL CONSEQUENCES OR LOSE THE BENEFITS ANTICIPATED FROM OUR TRANSACTION
STRUCTURE.
In connection with the Transactions, we formed a foreign subsidiary,
Fairchild Korea Semiconductor Ltd., a Korean corporation. We contributed a
portion of the proceeds of the Transactions to a wholly-owned subsidiary which
contributed such proceeds to Fairchild Korea as an equity contribution. We also
lent a portion of the proceeds to Fairchild Korea in exchange for corporate
bonds issued to us by Fairchild Korea. Fairchild Korea used the proceeds of the
loan and equity contribution to acquire the Power Device Business. See "The
Transactions -- General" and "Description of Certain Indebtedness -- Senior
Credit Facilities."
The transaction structure is based on certain assumptions about the various
tax laws, including withholding tax, and other relevant laws of foreign
jurisdictions. We cannot assure you that foreign taxing authorities will agree
with our assumptions or that they will reach the same conclusion. If our
assumptions are incorrect, or if such foreign jurisdictions were to change or
modify the relevant laws, we could suffer adverse tax and other financial
consequences or lose the benefits anticipated from our transaction structure.
DEPENDENCE ON KEY CUSTOMERS -- THE LOSS OF KEY CUSTOMERS COULD ADVERSELY AFFECT
US.
In addition to National Semiconductor and Samsung Electronics, we have
several other large customers. Many of our key customers operate in cyclical
businesses and have in the past varied, and
15
<PAGE> 20
may in the future vary, order levels significantly from period to period. The
loss of one or more of such customers, or a declining market in which such
customers reduce orders or request reduced prices, could have a material adverse
effect on us.
DEPENDENCE ON CERTAIN SOURCES OF SUPPLY -- THE LOSS OF CERTAIN SOURCES OF SUPPLY
COULD ADVERSELY AFFECT US.
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. Our manufacturing operations depend upon
obtaining adequate supplies of raw materials on a timely basis. We purchase raw
materials such as silicon wafers, lead frames, mold compound, ceramic packages
and chemicals and gases from a 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
certain of our wafer fabrication and assembly and test operations to other
manufacturers, including Torex, NS Electronics Ltd., Samsung Electronics and
National Semiconductor. Our operations could be adversely affected if our
relationships with these subcontractors were disrupted or terminated.
MANUFACTURING RISKS -- WE MAY NOT BE ABLE TO MAINTAIN MANUFACTURING EFFICIENCY
OR AVOID MANUFACTURING DIFFICULTIES.
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. 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.
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. There can be no
assurance that we will not 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.
DEPENDENCE ON NATIONAL SEMICONDUCTOR -- THE FAILURE OF NATIONAL SEMICONDUCTOR TO
MAINTAIN ITS PURCHASE REQUIREMENTS OR MEET ITS CONTRACTUAL OBLIGATIONS COULD
ADVERSELY AFFECT US.
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, which expires on June 11, 2000, could have a material
adverse effect on us.
In the fourth quarter of Fiscal 1998, National Semiconductor informed us
that its demand would be significantly lower in Fiscal 1999 than in Fiscal 1998.
This has resulted in significantly lower contract manufacturing revenues in the
first nine months of Fiscal 1999 as compared to the first nine months of Fiscal
1998 and will result in substantially lower contract manufacturing revenues
throughout Fiscal 1999 as compared to Fiscal 1998. Such reduced demand has and
will continue to negatively impact our factory
16
<PAGE> 21
utilization. Furthermore, upon expiration of the foundry services agreement on
June 11, 2000, we cannot assure you that National Semiconductor will purchase
any of our products or services.
DEPENDENCE ON KEY PERSONNEL -- OUR SUCCESS WILL CONTINUE TO DEPEND TO A
SIGNIFICANT EXTENT ON OUR EXECUTIVES AND OTHER KEY PERSONNEL.
Our success depends to a significant degree upon the continued
contributions of key management, engineering, sales and marketing, finance and
manufacturing personnel, certain of whom would be difficult to replace. The loss
of the services of certain of these executives could have an adverse effect on
us. We cannot assure you that the services of such personnel will continue to be
made available.
See "Management."
OWNERSHIP OF OUR COMPANY -- A LIMITED NUMBER OF PERSONS CONTROLS OUR COMPANY.
Upon completion of this offering, Sterling Holding Company, LLC and certain
key employees of our company will own shares, or approximately %,
of the outstanding Class A Common Stock, our only class of voting stock, and
shares of Class B Common Stock which are convertible into shares of
Class A Common Stock on a one-to-one basis. By virtue of such stock ownership,
such persons have the power to direct our affairs and are able to determine the
outcome of matters required to be submitted to stockholders for approval,
including the election of a majority of our directors and amendment of our
Certificate of Incorporation. We cannot assure you that such persons will not
exercise their control over us in a manner detrimental to your interests.
See "Principal Stockholders."
DEPENDENCE ON INTELLECTUAL PROPERTY -- WE USE A SIGNIFICANT AMOUNT OF
INTELLECTUAL PROPERTY IN OUR BUSINESS. IF WE ARE UNABLE TO PROTECT THIS
INTELLECTUAL PROPERTY, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
Our future success and competitive position depend in part upon our ability
to obtain and maintain certain proprietary technologies used in our principal
products. 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 National Semiconductor, Raytheon and Samsung Electronics
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.
Further, we cannot assure you that others will not develop technologies
that are similar or superior to our technologies, duplicate our technologies or
design around our patents. In addition, effective patent, trademark, copyright
and trade secret protection may be unavailable, limited or not applied for in
certain foreign countries. Certain of our technologies have been licensed on a
non-exclusive basis from National Semiconductor which may, after a five-year
period, license such technologies to others, including our competitors. 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. We cannot assure you that steps taken by us to protect our
technologies will prevent misappropriation of such technologies.
Vigorous protection and pursuit of intellectual property rights or
positions characterize the semiconductor industry. Such vigor and pursuit have
resulted in significant and often protracted and expensive litigation.
Currently, no material intellectual property litigation is pending against us;
however, we may from time to time be notified of claims that we may be
infringing third party patents or other
17
<PAGE> 22
intellectual property rights. If necessary or desirable, we may seek licenses
under such patents or intellectual property rights. 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. 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 in
any such litigation, we may be required to:
- pay substantial damages;
- cease the manufacture, use, sale or importation of infringing products;
- expend significant resources to develop or acquire non-infringing
technologies;
- discontinue the use of certain 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 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.
RISKS RELATING TO FUTURE ACQUISITIONS -- WE MAY NOT BE ABLE TO CONSUMMATE FUTURE
ACQUISITIONS, AND CERTAIN CONSEQUENCES OF THOSE ACQUISITIONS WHICH WE DO
COMPLETE MAY ADVERSELY AFFECT US.
We plan to continue to pursue additional acquisitions of related
businesses. We cannot assure you that we will be able to identify or finance
additional acquisitions or that, if consummated, we will realize any anticipated
benefits from such acquisitions. 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. 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.
ENVIRONMENTAL LIABILITIES; OTHER GOVERNMENTAL REGULATIONS -- REGULATORY MATTERS
COULD ADVERSELY AFFECT OUR ABILITY TO CONDUCT OUR BUSINESS.
We are subject to various federal, state, local and foreign environmental
laws and regulations relating to the management, disposal and, under certain
circumstances, remediation of toxic and hazardous materials and the discharge of
pollutants into the air and water. Laws and regulations relating to workplace
safety and worker health which, among other things, regulate employee exposure
to hazardous substances in the workplace, also govern our operations. The nature
of our operations expose us to the risk of liabilities or claims by governments,
our employees or other third parties with respect to environmental matters,
including those relating to the on- and off-site disposal and release of
hazardous materials as well as with respect to health and safety matters, and we
cannot assure you that material costs will not be incurred in connection with
such liabilities or claims.
Based on our experience, we believe that the future cost of compliance with
existing environmental and health and safety laws and regulations (and liability
for known environmental conditions) will not
18
<PAGE> 23
have a material adverse effect on our business, financial condition or results
of operations. However, we cannot predict:
- what environmental or health and safety legislation or regulations will
be enacted in the future;
- how existing or future laws or regulations will be enforced, administered
or interpreted; or
- the amount of future expenditures which may be required to comply with
these environmental or health and safety laws or regulations or to
respond to environmental claims.
See "Business -- Environmental Matters."
SHARES OF CLASS A COMMON STOCK ELIGIBLE FOR FUTURE SALE -- FUTURE SALES BY
EXISTING STOCKHOLDERS COULD DEPRESS THE MARKET PRICE OF THE CLASS A COMMON
STOCK.
Immediately after this offering, the public market for the Class A Common
Stock will include only the shares that we are selling in this
offering, assuming the over-allotment option is not exercised. At that time,
there will be an additional shares of Class A Common Stock
outstanding, including the shares of Class A Common Stock issued in connection
with the 12% Series A Cumulative Compounding Preferred Stock repurchase
transaction, and shares of Class B Common Stock outstanding, which are
convertible on a one-to-one basis into Class A Common Stock. Certain shares held
by our existing stockholders are subject to "lock-up" agreements that prohibit
existing stockholders from selling their shares of Class A Common Stock in the
public market for 180 days after the date of this prospectus. When the 180-day
"lock-up" period expires, or if Credit Suisse First Boston consents, in its sole
discretion, to an earlier sale, our existing stockholders will be able to sell
their shares in the public market, subject to certain legal restrictions. If our
existing stockholders sell a large number of shares, the market price of shares
of Class A Common Stock could decline dramatically. Moreover, the perception in
the public market that these stockholders might sell shares of Class A Common
Stock could depress the market price of the Class A Common Stock. Furthermore,
our existing stockholders have the right to require us to register their shares,
which may facilitate their sale of shares in the public market.
NO PRIOR PUBLIC MARKET -- INVESTORS WILL PAY A PRICE FOR SHARES OF CLASS A
COMMON STOCK THAT WAS NOT ESTABLISHED IN A COMPETITIVE MARKET AND THE PRICE THAT
PREVAILS IN THE MARKET MAY BE LOWER.
Prior to this offering, there has been no public market for the Class A
Common Stock. We have applied to list the Class A Common Stock for trading on
. After this offering, an active trading market might
not develop or continue. If you purchase shares of Class A Common Stock in this
offering, you will pay a price that was not established in a competitive market.
Rather, you will pay a price that we negotiated with our underwriter, which is
substantially greater than the price paid by our existing stockholders. The
price of the Class A Common Stock that will prevail in the market after this
offering may be higher or lower than the price you pay. For a description of the
factors we will consider in negotiating the public offering price, see
"Underwriting."
DILUTION -- THE VALUE OF YOUR INVESTMENT IN OUR CLASS A COMMON STOCK WILL BE
DILUTED.
If you purchase Class A Common Stock in this offering, you will pay more
for your shares than the amount paid by existing stockholders or individuals or
companies which acquired shares by exercising options granted before this
offering. As a result, the value of your investment based on the value of our
net tangible assets, as recorded on our books, will be less than the amount you
pay for shares of Class A Common Stock in this offering. In addition, the total
amount of our capital will be less than what it would have been had you and all
of the existing stockholders and optionees paid the same amount per share of
Class A Common Stock as you will pay in this offering. See "Dilution" for a more
complete
19
<PAGE> 24
description of how the value of your investment in our Class A Common Stock will
be diluted upon the completion of this offering.
YEAR 2000 COMPLIANCE -- WE COULD BE ADVERSELY AFFECTED IF YEAR 2000 PROBLEMS ARE
SIGNIFICANT.
Although based on efforts to date, we believe all of our products and
facilities will be Year 2000 compliant, any inability to remedy unforeseen Year
2000 problems or the failure of third parties to do so may cause business
interruptions or shutdown, financial loss, regulatory actions, reputational harm
or legal liability. We cannot assure you that our Year 2000 program or the
programs of third parties who do business with us will be effective, that our
estimate about the timing and cost of completing our program will be accurate or
that all remediation will be complete by the Year 2000.
We are dependent on business systems, which include our information
technology systems and non-information technology devices with embedded
microprocessors, in operating our business. We also depend on the proper
functioning of business systems of third parties, such as our vendors and
customers. The failure of any of these systems to interpret properly the
upcoming calendar year 2000 could have a material adverse effect on our
financial condition, results of operations, cash flow and business prospects. We
are currently identifying, testing and correcting Year 2000 problems in systems
throughout our operations, including those systems embedded in our machinery and
equipment. We are also reviewing the Year 2000 readiness and compliance of our
principal suppliers of products and services, in order to identify and assess
any negative impacts that non-compliance could have on us. In addition, we are
working with our customers to identify potential Year 2000 issues with our
products.
In connection with the Acquisition, we entered into arrangements with
Samsung Electronics and Samsung SDS Co., Ltd. with respect to the provision of a
number of business support services. We cannot assure you that Samsung
Electronics and Samsung SDS Co., Ltd. will be Year 2000 compliant.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Fairchild -- Year 2000 Compliance" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Power Device Business -- Year 2000 Compliance."
RISKS ASSOCIATED WITH THE CONVERSION BY CERTAIN EU MEMBER STATES TO THE
"EURO" -- THE CONVERSION TO THE EURO MAY ADVERSELY AFFECT US.
We may be exposed to certain risks as a result of the conversion by certain
European Union member states of their respective currencies to the "Euro" as
their legal currency on January 1, 1999. The conversion rates between such
member states' currencies and the Euro have been fixed by the Council of the
European Union. Risks related to the conversion to the Euro could include, among
other things:
- effects on pricing due to increased cross-border price transparency;
- costs of modifying information systems, including both software and
hardware;
- costs of relying on third parties whose systems also require
modification;
- changes in the conduct of business and in the principal markets for our
products and services; and
- changes in the currency exchange rate risk.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Fairchild -- Liquidity and Capital Resources."
20
<PAGE> 25
DEBT REPAYMENT AND PREFERRED STOCK REPURCHASE TRANSACTIONS
DEBT REPAYMENT
A portion of the proceeds of this offering will be used to repay a portion
of amounts due under our Senior Credit Facilities and to repay all outstanding
amounts due under our 12.5% Subordinated PIK Note Due 2008 and our 11.74%
Subordinated PIK Note Due 2008. The terms of the Senior Credit Facilities
require Fairchild Semiconductor to apply 50% of the net proceeds of this
offering in excess of $50.0 million to the repayment of loans under the Senior
Credit Facilities. The terms of the 12.5% Subordinated PIK Note Due 2008 require
that all net cash proceeds of this offering be used to repay outstanding amounts
due under that note, except to the extent such proceeds are required to be used
to repay amounts due under the Senior Credit Facilities or are voluntarily used
to repay debt that is senior to that note. In addition, because the 12.5%
Subordinated PIK Note Due 2008 will be repaid prior to 18 months after its
issuance, the warrant to purchase Class A Common Stock issued in connection with
the 12.5% Subordinated PIK Note Due 2008 will not become exercisable according
to its terms. The terms of the 11.74% Subordinated PIK Note Due 2008 require
that the first $50.0 million in net cash proceeds from this offering be used to
redeem debt senior to that note, to the extent such debt requires such
redemption. In addition, the 11.74% Subordinated PIK Note Due 2008 requires that
50% of the net cash proceeds from this offering in excess of $50.0 million must
be used to redeem amounts due under that note. After complying with all of the
foregoing requirements, and assuming we completed this offering on February 28,
1999, we would have repaid $179.6 million in amounts due under the Senior Credit
Facilities, $50.0 million in amounts due under the 12.5% Subordinated PIK Note
Due 2008 and $96.4 million in amounts due under the 11.74% Subordinated PIK Note
Due 2008. See "Use of Proceeds."
REPURCHASE OF PREFERRED STOCK
We expect to receive commitments from all holders of our 12% Series A
Cumulative Compounding Preferred Stock to sell all their outstanding shares of
preferred stock to us in exchange for shares of Class A Common Stock. Each
participating preferred stockholder will receive shares of Class A Common Stock
equal in value to $1,000 per share of preferred stock plus accumulated and
unpaid dividends. The number of shares of Class A Common Stock received by each
preferred stockholder will be determined based on the amount per share received
by us for shares of Class A Common Stock sold in this offering. Assuming we
complete this offering on July 31, 1999 at $ per share (the mid-point
of the range shown on the cover of this prospectus, less assumed underwriting
discounts and commissions), a total of shares of Class A Common Stock
will be exchanged for all outstanding shares of our 12% Series A Cumulative
Compounding Preferred Stock. See "Use of Proceeds."
21
<PAGE> 26
USE OF PROCEEDS
The net proceeds from this offering, after deducting underwriting discounts
and commissions and estimated offering expenses, based on the assumed initial
public offering price of $ per share, are estimated to be approximately
$ ($ if the underwriters' over-allotment option is exercised in full).
The net proceeds from this offering will be used as set forth below. The
following table assumes that the Transactions were consummated on February 28,
1999 and sets forth the estimated sources and uses of funds for the transactions
described above as of such date:
<TABLE>
<CAPTION>
AMOUNT
------------
(DOLLARS
IN MILLIONS)
<S> <C>
Sources:
Net Offering Proceeds............... $350.0
Preferred Stock converted to
Common............................. 87.7
------------
Total Sources........................ $437.7
============
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
------------
(DOLLARS
IN MILLIONS)
<S> <C>
Uses:
Repay Senior Credit Facilities(1)... $179.6
Repay 12.5% Subordinated PIK Note... 50.0
Repay 11.74% Subordinated PIK
Note............................... 96.4
Repurchase Preferred Stock.......... 87.7
Fees and Expenses................... 24.0
------------
Total Uses........................... $437.7
============
</TABLE>
- ------------------------
(1) Includes repayment of $100.0 million of Tranche A Term Loan and $79.6
million of Tranche B Term Loan. The actual amount repaid will be reduced by
accrued interest and prepayment premium, if any, on the 12.5% Subordinated
PIK Note Due 2008, accrued interest on the 11.74% Subordinated PIK Note Due
2008, and accrued dividends on the 12% Series A Cumulative Compounding
Preferred Stock, in each case accruing prior to the date of closing of this
offering.
DIVIDEND POLICY
We have never paid a cash dividend and do not anticipate declaring or
paying any cash dividends on shares of our common stock in the foreseeable
future. In addition, any determination to declare and pay dividends will be made
by our board of directors in light of our earnings, financial position, capital
requirements, contractual limitations contained in our debt instruments and such
other factors as the board of directors deems relevant. See "Description of
Indebtedness" and "Description of Capital Stock."
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<PAGE> 27
CAPITALIZATION
The following table sets forth the capitalization of our company as of
February 28, 1999 (i) on an actual basis, (ii) pro forma to give effect to the
Transactions and (iii) as adjusted to give pro forma effect to this offering,
the repurchase of the Series A Cumulative Compounding Preferred Stock in
exchange for shares of Class A Common Stock and application of the proceeds of
such offering and repurchase as described under "Use of Proceeds." This table
should be read in conjunction with "Unaudited Pro Forma Combined Condensed
Financial Statements and Unaudited Supplemental Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Fairchild,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Power Device Business" and the financial statements of
Fairchild and the Power Device Business included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF FEBRUARY 28, 1999
----------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
ACTUAL FOR TRANSACTIONS FOR OFFERING
------ ---------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 5.4 $ 64.6 $ 64.6
====== ======== ======
Long-term debt, including current portion:
Former Senior Credit Facilities :......................... $163.6 $ -- $ --
Senior Credit Facilities:
Revolving Credit Facility(1)........................... -- -- --
Tranche A Facility..................................... -- 100.0 --
Tranche B Facility..................................... -- 210.0 130.4
10 1/8% Senior Subordinated Notes Due 2007................ 300.0 300.0 300.0
10 3/8% Senior Subordinated Notes Due 2007................ -- 300.0 300.0
12.5% Subordinated PIK Note Due 2008...................... -- 50.0 --
11.74% Subordinated PIK Note Due 2008..................... 96.4 96.4 --
------ -------- ------
Total long-term debt, including current portion...... 560.0 1,056.4 730.4
------ -------- ------
12% Series A Cumulative Compounding Redeemable
Preferred Stock(2)........................................ 87.7 87.7 --
Stockholders' Equity:
Class A Common Stock $.01 par value: 80,000,000 shares
authorized; 29,559,920 shares issued and outstanding,
actual; 29,559,920 shares issued and outstanding, pro
forma for the Transactions; shares issued and
outstanding, pro forma as adjusted for this
offering............................................. 0.3 0.3 0.3
Class B Common Stock $.01 par value: 80,000,000 shares
authorized; 33,376,000 shares issued and outstanding,
actual; 33,376,000 shares issued and outstanding, pro
forma as adjusted for the Transactions; shares
issued and outstanding, pro forma as adjusted for
this offering........................................ 0.3 0.3 0.3
Additional paid-in capital............................. 9.5 9.5 423.2
Accumulated deficit.................................... (171.1) (206.3) (218.9)
------ -------- ------
Total stockholders' equity (deficit)(3)(4)........... (161.0) (196.2) 204.9
------ -------- ------
Total capitalization.............................. $486.7 $ 947.9 $935.3
====== ======== ======
</TABLE>
- -------------------------
(1) Borrowings of up to $100.0 million under the Revolving Credit Facility are
available for working capital and general corporate purposes.
(2) Assumes all of the outstanding shares of the 12% Series A Cumulative
Compounding Preferred Stock are being repurchased by us at $1,000 per share
plus accumulated and unpaid dividends in exchange for shares of Class A
Common Stock based on the per share amount we will receive in this offering.
(3) The excess of the aggregate purchase price over the historical net book
value of the Power Device Business' assets acquired and liabilities assumed
as of December 31, 1998 has been allocated to inventory, property, plant and
equipment, and various intangible assets, for illustrative purposes in the
pro forma financial statements only. Actual allocations will be based on
fair values as of the Acquisition date (April 13, 1999). Included in the
allocation to intangible assets is an estimated allocation to in-process
research and development of $31.2 million, which amount was expensed on
consummation of the Acquisition. This expense has been deducted from
stockholders' equity in the pro forma balance sheet as of February 28, 1999.
23
<PAGE> 28
(4) Pro forma stockholders' equity as adjusted for the offering has been reduced
by $7.6 million for a one-time write-off, net of tax benefit, of a
receivable from the management investors to pay their federal and state
individual income tax liabilities resulting from the lapse of certain risks
of forfeiture with respect to their stock ownership. Such receivables will
be cancelled as a result of this offering. Additionally, we will expense
amounts to discharge their individual tax liabilities associated with the
cancellation. Pro forma stockholders' equity as adjusted for the offering
has also been reduced by $5.0 million for the one-time write-off, net of tax
benefit, of unamortized debt issuance costs associated with the debt being
repaid. These expenses will reduce stockholders' equity, but will not have
any effect on Adjusted EBITDA.
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<PAGE> 29
DILUTION
Purchasers of the Class A Common Stock offered by this prospectus will
suffer an immediate and substantial dilution in the net tangible book value per
share. Dilution is the amount by which the initial public offering price paid by
the purchasers of the shares of Class A Common Stock will exceed the net
tangible book value per share of common stock after the offering. The net
tangible book value per share of common stock is determined by subtracting total
liabilities from the total book value of the tangible assets and dividing the
difference by the number of shares of common stock deemed to be outstanding on
the date the book value is determined. As of February 28, 1999, Fairchild had a
negative pro forma tangible book value of $362.1 million or $5.75 per share
after giving effect to the Transactions. Assuming the sale of
shares at an initial public offering price of $ per share and deducting the
underwriters' discounts and commissions and estimated offering expenses,
Fairchild's pro forma tangible book value as of February 28, 1999 would have
been $ or $ per share. This represents an immediate increase in pro
forma net tangible book value to existing stockholders of $ per share and an
immediate dilution to new investors of $ per share. The following table
illustrates this per share dilution:
<TABLE>
<CAPTION>
PER
SHARE
------
<S> <C> <C>
Assumed initial public offering price....................... $
Pro forma net tangible book value before this offering.... $(5.75)
-------
Increase in net tangible book value per share attributable
to this offering.......................................
-------
Pro forma net tangible book value after this offering.......
------
Dilution to new investors................................... $
======
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of
February 28, 1999, the number of shares of common stock purchased from
Fairchild, the estimated value of the total consideration paid for or attributed
to such common stock, and the average price per share paid by or attributable to
(i) existing stockholders, (ii) stockholders exchanging the 12% Series A
Cumulative Compounding Preferred Stock for shares of Class A Common Stock and
(iii) new investors purchasing shares in this offering at an assumed initial
offering price of $ per share.
<TABLE>
<CAPTION>
SHARES OF COMMON TOTAL CASH
STOCK CONSIDERATION AVERAGE
PURCHASED OR ------------------ PRICE PER
EXCHANGED SHARE OF
--------------------- ($ MILLIONS) COMMON
NUMBER PERCENT AMOUNT PERCENT STOCK
---------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 62,935,920 % $ 7.8 % $ 0.12
Exchanging preferred stockholders...... % $ 87.7 % $
New investors.......................... 326.0
---------- ----- ------- ----- -------
Total............................. 100.0% $ 421.5 100.0% $
========== ===== ======= ===== =======
</TABLE>
If the underwriters exercise their over-allotment option in full, the pro
forma net tangible book value per share of common stock as of February 28, 1999
would have been $ per share, which would result in dilution to the new
investors of $ per share, and the number of shares held by the new investors
will increase to , or % of the total number of shares to be
outstanding after this offering. The existing stockholders will hold
shares, or % of the total number of shares outstanding after
this offering and the stockholders exchanging the 12% Series A Cumulative
Compounding Preferred Stock into shares of Class A Common Stock will hold
shares, or % of the total number of shares outstanding after
this offering.
The foregoing tables assume no exercise of any outstanding stock options to
purchase Class A Common Stock under our 1997 Stock Option Plan. In addition, the
foregoing tables assume no exercise of any purchase rights to be granted in
conjunction with this offering to purchase Class A Common Stock in connection
with the contemplated termination of the Employee Stock Purchase Savings Plan.
As of
25
<PAGE> 30
February 28, 1999, there were outstanding options to purchase an additional
4,288,020 shares of Class A Common Stock at an average exercise price of $3.69
per share and there were outstanding purchase rights to purchase
shares of Class A Common Stock. To the extent these options or purchase rights
are exercised, there may be further dilution to new investors.
26
<PAGE> 31
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS AND UNAUDITED SUPPLEMENTAL DATA
The following unaudited pro forma combined condensed financial statements
are based on the historical financial statements of Fairchild, the Power Device
Business and Raytheon which are included elsewhere in this prospectus. The
acquisition of Raytheon was consummated on December 31, 1997, and, accordingly,
Fairchild's historical consolidated statements of operations include the results
of operations of Raytheon beginning January 1, 1998.
The Unaudited Pro Forma Combined Condensed Statements of Operations give
effect to the Raytheon acquisition, the Transactions, this offering and the
application of the proceeds of this offering as described in "Use of Proceeds"
as if they were consummated on May 26, 1997. The Unaudited Pro Forma Combined
Condensed Balance Sheet gives effect to the Transactions, this offering and the
application of the proceeds of this offering as described in "Use of Proceeds,"
as if they were consummated on February 28, 1999. All of the pro forma
adjustments are described more fully in the accompanying notes. The pro forma
adjustments are based upon preliminary estimates and certain assumptions that we
believe are reasonable in the circumstances. In our opinion, all adjustments
have been made that are necessary to present fairly the pro forma data. Final
amounts could differ from those set forth below.
The Unaudited Pro Forma Combined Condensed Statements of Operations for the
fiscal year ended May 31, 1998 and the nine months ended February 28, 1999
include the historical statements of operations of the Power Device Business for
the twelve months ended June 30, 1998 and the nine months ended December 31,
1998, respectively. The Unaudited Pro Forma Combined Condensed Balance Sheet as
of February 28, 1999 includes the historical balance sheet of the Power Device
Business as of December 31, 1998. The results of operations of the Power Device
Business for the period from April 1, 1998 through June 30, 1998 have been
included in both the Unaudited Pro Forma Combined Condensed Statements of
Operations for the fiscal year ended May 31, 1998 and the nine months ended
February 29, 1999. Power Device Business revenue and loss for this period was
$101.5 million and $34.1 million, respectively.
The Power Device Business' historical financial information reflected in
the Pro Forma Financial Statements represents the accounts and operations of
Samsung Electronics with respect to the Power Device Business. During the period
covered by the Power Device Business' Financial Statements, the Power Device
Business was conducted as a part of Samsung Electronics' overall operations, and
separate financial statements were not prepared. Fairchild has been advised by
Samsung Electronics that the Power Device Business' Financial Statements were
prepared from the historical accounting records of Samsung Electronics and
include various allocations for costs and expenses. Therefore, the statements of
operations of the Power Device Business may not be indicative of the results of
operations that would have resulted if the Power Device Business had operated on
a stand-alone basis. Fairchild has been advised by Samsung Electronics that all
of the allocations and estimates reflected in the Power Device Business'
Financial Statements are based on assumptions that Samsung Electronics believes
are reasonable under the circumstances.
The Pro Forma Financial Statements are presented for informational purposes
only and do not purport to be indicative of the results of operations that
actually would have been achieved had such transactions been consummated on the
date or for the periods indicated and do not purport to be indicative of the
balance sheet data or results of operations as of any future date or for any
future period. The Pro Forma Financial Statements should be read in conjunction
with the accompanying notes, the financial statements and notes thereto of
Fairchild, the Power Device Business and Raytheon which are included elsewhere
in this prospectus, "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Fairchild" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Power Device
Business."
27
<PAGE> 32
The acquisition of Raytheon and the Acquisition of the Power Device
Business were accounted for using the purchase method of accounting. The
purchase method of accounting allocates the aggregate purchase price to the
assets acquired and liabilities assumed based upon their respective fair values.
For purposes of the Pro Forma Financial Statements, the excess of the aggregate
purchase price over the historical net book value of the Power Device Business'
assets acquired and liabilities assumed as of December 31, 1998 has been
allocated to inventory, property, plant and equipment, and various intangible
assets, and is for illustrative purposes in the pro forma financial statements
only. Actual allocations will be based on fair values as of the Acquisition date
(April 13, 1999).
28
<PAGE> 33
FSC SEMICONDUCTOR CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31, 1998
--------------------------------------------------------
POWER
POWER DEVICE
DEVICE BUSINESS
BUSINESS PRO FORMA FAIRCHILD RAYTHEON
HISTORICAL ADJUSTMENTS HISTORICAL(4) HISTORICAL(4)
---------- ----------- ------------- -------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue
Net sales-trade........ $400.2 $ 7.5 1a $635.8 $47.3
6.1 1b
Contract
manufacturing........ 27.6 22.8 1c 153.4 --
------ ------ ------ -----
427.8 36.4 789.2 47.3
Cost of sales
Cost of sales-trade.... 240.6 (2.7)1a 441.6 26.7
9.9 1d
1.4 1e
1.3 1f
(0.7)1g
Cost of contract
manufacturing........ 27.6 -- 117.1 --
------ ------ ------ -----
268.2 9.2 558.7 26.7
------ ------ ------ -----
Gross profit............. 159.6 27.2 230.5 20.6
Research and
development............ 15.4 -- 35.7 6.9
Selling, general and
administrative......... 32.5 15.5 1a 92.0 6.4
(8.7)1d
(5.4)1h
Litigation settlement
expense................ 58.0 -- -- --
Restructuring and other
non-recurring
charges................ -- -- 15.5 --
------ ------ ------ -----
Operating income......... 53.7 25.8 87.3 7.3
Non-cash interest
expense................ -- -- 2.8 --
Cash interest expense,
net.................... 9.9 (9.9)1i 51.7 --
Foreign currency losses,
net.................... 7.5 -- -- --
------ ------ ------ -----
Income before income
taxes.................. 36.3 35.7 32.8 7.3
Income taxes............. 11.1 (11.1)1j 10.7 2.6
------ ------ ------ -----
Net income(5)............ $ 25.2 $ 46.8 $ 22.1 $ 4.7
====== ====== ====== =====
Net income applicable to
common stockholders.............................. $ 13.4
======
EARNINGS PER COMMON
SHARE:
Basic............................................ $ 0.21
======
Diluted.......................................... $ 0.20
======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic............................................ 62.8
======
Diluted.......................................... 65.0
======
<CAPTION>
FISCAL YEAR ENDED MAY 31, 1998
----------------------------------------------------
PRO FORMA
ADJUSTMENTS
FOR THE COMPANY OFFERING PRO FORMA
TRANSACTIONS PRO FORMA ADJUSTMENTS AS ADJUSTED
------------ --------- ----------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue
Net sales-trade........ $ -- $1,096.9 $ $1,096.9
Contract
manufacturing........ -- 203.8 203.8
------ -------- ------ --------
-- 1,300.7 1,300.7
Cost of sales
Cost of sales-trade.... 3.9 2a 722.0 722.0
Cost of contract
manufacturing........ -- 144.7 144.7
------ -------- ------ --------
3.9 866.7 866.7
------ -------- ------ --------
Gross profit............. (3.9) 434.0 434.0
Research and
development............ -- 58.0 58.0
Selling, general and
administrative......... 28.4 2a 160.7 160.7
Litigation settlement
expense................ -- 58.0 58.0
Restructuring and other
non-recurring
charges................ -- 15.5 15.5
------ -------- ------ --------
Operating income......... (32.3) 141.8 141.8
Non-cash interest
expense................ 2.2 2b 5.0 (1.0)3a 4.0
Cash interest expense,
net.................... 52.4 2c 104.1 (30.2)3b 73.9
Foreign currency losses,
net.................... -- 7.5 -- 7.5
------ -------- ------ --------
Income before income
taxes.................. 86.9 25.2 31.2 56.4
Income taxes............. (8.7)2d 4.6 3.1 3c 7.7
------ -------- ------ --------
Net income(5)............ $(78.2) $ 20.6 $ 28.1 $ 48.7
====== ======== ====== ========
Net income applicable to
common stockholders.... $ 11.9 $ 48.7
======== ========
EARNINGS PER COMMON
SHARE:
Basic.................. $ 0.19
======== ========
Diluted................ $ 0.18
======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic.................. 62.8
======== ========
Diluted................ 65.0
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
29
<PAGE> 34
FSC SEMICONDUCTOR CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED FEBRUARY 28, 1999
---------------------------------------------------------------------------------------------
POWER
POWER DEVICE PRO FORMA
DEVICE BUSINESS ADJUSTMENTS
BUSINESS PRO FORMA FAIRCHILD FOR THE COMPANY OFFERING PRO FORMA
HISTORICAL ADJUSTMENTS HISTORICAL TRANSACTIONS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ----------- ---------- ------------ --------- ----------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Net sales-trade................. $282.4 $18.4 1a $434.1 $ -- $742.6 $ -- $742.6
7.7 1b
Contract manufacturing.......... 12.5 11.7 1c 54.5 -- 78.7 -- 78.7
------ ----- ------ ------ ------ ------ ------
294.9 37.8 488.6 -- 821.3 -- 821.3
Cost of sales
Cost of sales-trade............. 190.3 6.9 1a 336.2 3.0 2a 544.6 -- 544.6
5.1 1d
1.4 1e
0.9 1f
0.8 1g
Cost of contract
manufacturing................. 12.5 -- 45.4 -- 57.9 -- 57.9
------ ----- ------ ------ ------ ------ ------
202.8 15.1 381.6 3.0 602.5 -- 602.5
------ ----- ------ ------ ------ ------ ------
Gross profit...................... 92.1 22.7 107.0 (3.0) 218.8 -- 218.8
Research and development.......... 11.5 -- 27.9 -- 39.4 -- 39.4
Selling, general and
administrative.................. 27.9 10.2 1a 68.5 19.7 2a 119.5 -- 119.5
(2.7)1d
0.4 1e
(4.5)1h
Litigation settlement expense..... 58.0 -- -- -- 58.0 -- 58.0
Restructuring and other
non-recurring
charges......................... -- -- 7.2 -- 7.2 -- 7.2
------ ----- ------ ------ ------ ------ ------
Operating income (loss)........... (5.3) 19.3 3.4 (22.7) (5.3) -- (5.3)
Non-cash interest expense......... -- -- 2.3 1.5 2b 3.8 (0.8)3a 3.0
Cash interest expense, net........ 2.6 (2.6)1i 42.4 34.8 2c 77.2 (23.0)3b 54.2
Foreign currency gains, net....... (0.3) -- -- -- (0.3) -- (0.3)
------ ----- ------ ------ ------ ------ ------
Income (loss) before income
taxes........................... (7.6) 21.9 (41.3) (59.0) (86.0) 23.8 (62.2)
Income taxes...................... 8.6 (8.6)1j (4.1) (5.9)2d (10.0) 2.4 3c (7.6)
------ ----- ------ ------ ------ ------ ------
Net income (loss)................. $(16.2) $30.5 $(37.2) $(53.1) $(76.0) $ 21.4 $(54.6)
====== ===== ====== ====== ====== ====== ======
Net income (loss) applicable to
common
stockholders.............................................. $(44.4) $(83.2) $(54.6)
====== ====== ======
EARNINGS PER COMMON SHARE:
Basic..................................................... $(0.71) $(1.32) $
====== ====== ======
Diluted................................................... $(0.71) $(1.32) $
====== ====== ======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic..................................................... 62.9 62.9
====== ====== ======
Diluted................................................... 62.9 62.9
====== ====== ======
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
30
<PAGE> 35
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS
THE UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS GIVE
EFFECT TO THE FOLLOWING PRO FORMA ADJUSTMENTS:
1. PRO FORMA ADJUSTMENTS TO THE HISTORICAL RESULTS OF THE POWER DEVICE
BUSINESS.
(a) Historically, the Power Device Business has recognized revenue for sales to
Samsung Electronics' foreign sales subsidiaries (the "Sales Subsidiaries")
at the time of shipment to the Sales Subsidiaries. The pro forma adjustment
to net sales eliminates the sales to the Sales Subsidiaries from the
revenue of the Power Device Business and replaces them with the sales of
the Sales Subsidiaries to the ultimate third parties. Cost of sales is also
adjusted to reflect the change in the inventory held by the Sales
Subsidiaries. Historically, the selling expenses incurred by the Sales
Subsidiaries in connection with their sales to third parties have been
recorded by the Sales Subsidiaries. The Power Device Business' selling,
general and administrative ("SG&A") expenses have been adjusted to give
effect to the provisions of the Overseas Sales Support Agreement, which
provides for commissions to be paid to the Sales Subsidiaries to provide
certain sales services to the Power Device Business.
The pro forma increases (decreases) to net sales, cost of sales and SG&A
expenses are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
MAY 31, 1998 FEBRUARY 28, 1999
------------ -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Net sales -- trade................................... $ 7.5 $18.4
Cost of sales -- trade............................... (2.7) 6.9
SG&A................................................. 15.5 10.2
</TABLE>
(b) Historically, the Power Device Business has sold its products to Samsung
Electronics at intercompany transfer prices. Under the terms of the Product
Supply Agreement, the Power Device Business will sell its products to
Samsung Electronics at guaranteed minimum annual levels based on historical
volumes and at prices designed to reflect market prices, subject to certain
adjustments to reflect changes in market prices as published by Worldwide
Semiconductor Trade Statistics. In order to give effect to the minimum
contractual volumes over historical levels and the pricing structure under
the Product Supply Agreement, the pro forma net sales are increased by $6.1
million and $7.7 million for the fiscal year ended May 31, 1998 and the
nine months ended February 28, 1999, respectively.
(c) The pro forma adjustment to contract manufacturing revenue is $22.8 million
and $11.7 million for the fiscal year ended May 31, 1998 and the nine
months ended February 28, 1999, respectively. These amounts reflect the
increase in contract manufacturing revenue that will be required to
generate the minimum profit level guaranteed by Samsung Electronics under
the Foundry Sale Agreement of W53,700 million during the first three years
following consummation of the Acquisition (W27,700 million, W17,300 million
and W8,700 million for the first, second and third years, respectively).
Historically, the Power Device Business has provided these contract
manufacturing services, consisting of wafer fabrication services, to
Samsung Electronics at cost. The U.S. Dollar-denominated pro forma
adjustments have been recorded using weighted average exchange rates of
1,260 Won and 1,334 Won to one U.S. Dollar for the fiscal year ended May
31, 1998 and the nine months ended February 28, 1999, respectively.
(d) Historically, the Power Device Business has been charged at cost for
epitaxial fabrication services, assembly and test services and photo mask
supply services provided by Samsung Electronics'
31
<PAGE> 36
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS -- (CONTINUED)
plants located in Onyang and Kiheung, South Korea. Under the terms of the
EPI Services Agreement, the Onyang Assembly and Test Services Agreement and
the Photo Mask Supply Agreement, Samsung Electronics has agreed to provide
the Power Device Business with the above services for a three-year period
following consummation of the Acquisition at agreed-upon prices denominated
in U.S. Dollars in accordance with the terms of the above agreements. In
the case of the Onyang Assembly and Test Services Agreement, the agreement
provides for a 5% annual price decrease. The pro forma adjustments reflect
the effects of (i) replacing the actual historical costs of these services
with the negotiated costs of these services, which negotiated costs include
recovery of general and administrative and interest costs attributable to
these plants recorded in SG&A for the Power Device Business, based on
historical product volumes and (ii) eliminating the portion of historically
allocated SG&A expenses to be included in such negotiated costs.
The pro forma increases (decreases) to cost of sales and SG&A expenses are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
MAY 31, 1998 FEBRUARY 28, 1999
------------ -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cost of sales -- trade............................... $ 9.9 $ 5.1
SG&A................................................. (8.7) (2.7)
</TABLE>
(e) Historically, the Power Device Business has been allocated charges for
information technology services, logistics and other general and
administrative services which were provided by Samsung Electronics. Under
the terms of the Transitional Services Agreement, Samsung Electronics has
agreed to provide to the Power Device Business logistics and other general
and administrative services for a three-year period, at the fixed annual
price of $5.3 million. Information technology services are provided under a
separate agreement with Samsung SDS Co., Ltd. at the fixed annual price of
$3.8 million. The pro forma adjustments to cost of sales and SG&A expenses
reflect the effects of replacing the historical charges for such services
with the fixed prices included in the Transitional Services Agreement and
the agreement with Samsung SDS Co., Ltd. In addition, the pro forma
adjustment includes the effect of a fixed 1,200 Won to one U.S. Dollar
exchange rate used to translate the fixed charges included in the
Transitional Services Agreement and the agreement with Samsung SDS Co.,
Ltd.
The pro forma increases to cost of sales relating to information technology
services and SG&A expenses relating to logistics and other general and
administrative services are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
MAY 31, 1998 FEBRUARY 28, 1999
------------ -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cost of sales -- trade............................... $1.4 $1.4
SG&A................................................. -- 0.4
</TABLE>
(f) Sales of certain Power Device Business products will be subject to
royalties arising from Fairchild's existing license agreement with another
semiconductor corporation. The pro forma increases to cost of sales to
give effect to such royalties are $1.3 million and $0.9 million for the
fiscal year ended May 31, 1998 and the nine months ended February 28,
1999, respectively.
32
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS -- (CONTINUED)
(g) Historically, the Power Device Business has been charged at cost for
assembly and test services provided by Samsung Electronics' plant located
in Suzhou, China. Under the terms of the Suzhou Assembly and Test Services
Agreement, Samsung Electronics has agreed to provide the Power Device
Business with assembly and test services for a three-year period following
consummation of the Acquisition at agreed-upon prices denominated in U.S.
Dollars. The pro forma adjustments reflect the effects of replacing the
actual historical costs of these services with the negotiated costs of
these services based on historical product volumes. Although the Suzhou
Assembly and Test Services Agreement provides for annual price adjustments
based upon the percentage change in the U.S. Consumer Price Index, the pro
forma adjustments do not give effect to such price adjustments. The pro
forma increases (decreases) to cost of sales are $(0.7) million and $0.8
million for the fiscal year ended May 31, 1998 and the nine months ended
February 28, 1999, respectively.
(h) Represents the elimination of royalty expense incurred by Samsung
Electronics attributable to the Power Device Business which arises from
certain license agreements that were not transferred to Fairchild. This
results in a decrease to SG&A expenses of $5.4 million and $4.5 million for
the fiscal year ended May 31, 1998 and the nine months ended February 28,
1999, respectively.
(i) The pro forma adjustment to cash interest expense is $9.9 million and $2.6
million for the fiscal year ended May 31, 1998 and the nine months ended
February 28, 1999, respectively. These amounts represent the elimination
of interest expense on bank borrowings, capital lease obligations and
corporate borrowings of Samsung Electronics allocated to the Power Device
Business that were not transferred to Fairchild.
(j) The pro forma adjustment for the elimination of income taxes is $11.1
million and $8.6 million for the fiscal year ended May 31, 1998 and the
nine months ended February 28, 1999, respectively. As a result of the
Acquisition, the Power Device Business is 100% exempt from Korean income
taxes for seven years beginning with the first year in which taxable
Korean income is generated.
2. PRO FORMA ADJUSTMENTS TO THE COMBINED RESULTS OF FAIRCHILD, THE POWER DEVICE
BUSINESS AND RAYTHEON.
(a) On April 13, 1999, Fairchild completed the acquisition of the Power Device
Business for approximately $406.8 million, net of post-closing adjustments
for working capital and an income payment aggregating $48.2 million. The
purchase includes all of the worldwide operations and assets of the Power
Device Business, which are comprised in part of a high volume wafer
fabrication plant in Bucheon, South Korea, design and development
operations in Bucheon, South Korea, secured services for high volume
assembly and test operations and worldwide sales and marketing operations.
The transaction is being accounted for as a purchase.
The following table represents the estimated allocation of the purchase
price over the historical net book value of the Power Device Business'
assets acquired and liabilities assumed as of December 31, 1998, and is for
illustrative purposes in the pro forma financial statements only. Actual
allocations will be based on fair values as of the acquisition date (April
13, 1999). Also presented are the estimated periods of amortization for
each of the identifiable intangible assets for purposes of calculating the
pro forma adjustments to amortization expense in the accompanying pro forma
condensed consolidated statements of operations. All intangible assets will
be amortized on a straight-line basis. The amount allocated to in-process
research and development will be charged to expense in our fourth fiscal
quarter ended May 30, 1999. This expense has been excluded from the
accompanying pro forma combined condensed statements of operations.
33
<PAGE> 38
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS -- (CONTINUED)
Assuming the Transactions occurred on February 28, 1999, the allocation
would have included the following intangible assets (in millions):
<TABLE>
<CAPTION>
PERIOD OF
INTANGIBLE ASSETS AMOUNT AMORTIZATION
----------------- ------ ------------
<S> <C> <C>
Developed technology........................................ $124.1 15 years
Customer base............................................... 47.0 8 years
In-process research and development......................... 31.2 --
Covenant not to compete..................................... 26.9 5 years
Trademarks and tradenames................................... 21.9 4 years
Assembled workforce......................................... 3.8 3 years
------
Total.................................................. $254.9
======
</TABLE>
In connection with Fairchild's acquisition of Raytheon on December 31,
1997, intangible assets were recorded for developed technologies and an
assembled workforce. These assets are being amortized on a straight line
basis over periods of 3 to 15 years.
Pro forma adjustments for depreciation and amortization of fixed assets and
other intangible assets are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
MAY 31, 1998 FEBRUARY 28, 1999
------------ -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Intangibles -- Power Device Business................. $26.3 $19.7
Intangibles -- Raytheon.............................. 2.1 --
----- -----
Total recorded in SG&A.......................... $28.4 $19.7
===== =====
Fixed assets -- Power Device Business recorded in
cost of sales-trade................................ $ 3.9 $ 3.0
</TABLE>
(b) In connection with the Transactions, the Company incurred debt issuance
costs of approximately $22.3 million associated with the Senior Credit
Facilities and the 10 3/8% Senior Subordinated Notes. These costs are
comprised primarily of financing costs and other professional fees that
will be deferred and amortized over the term of the related debt, which
ranges from 5 to 8 1/2 years. The pro forma adjustments to non-cash
interest expense represent the incremental amortization of these debt
issuance costs in the amount of $2.2 million and $1.5 million for the
fiscal year ended May 31, 1998 and the nine months ended February 28, 1999,
respectively. Unamortized debt issuance costs of $4.0 million, net of the
related tax benefit of $0.4 million, associated with the existing senior
credit facilities was charged to interest expense concurrent with the
Transactions. The non-recurring charge has been excluded from the pro forma
combined condensed statements of operations.
(c) In connection with the Transactions, the Company entered into the Senior
Credit Facilities, which provided up to $410.0 million in financing,
consisting of a $100.0 million Revolving Credit Facility (under which no
amounts were drawn at closing of the Acquisition) and $310.0 million of
Senior Term Facilities. The Company also issued $300.0 million of 10 3/8%
Senior Subordinated Notes and a $50.0 million 12.5% Subordinated PIK Note.
Since a portion of the purchase price for the
34
<PAGE> 39
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS -- (CONTINUED)
acquisition of Raytheon was paid from existing cash, interest income that
corresponds to the interest on such cash and which would not have been
earned during the period from May 26, 1997 through the date of the
acquisition has been eliminated.
The pro forma increases (decreases) to cash interest expense are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
MAY 31, 1998 FEBRUARY 28, 1999
------------ -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Senior Term Facilities -- Tranche A Facility
(7.75%)............................................ $ 7.5 $ 4.9
Senior Term Facilities -- Tranche B Facility
(8.25%)............................................ 17.3 12.8
Notes (10.375%)...................................... 31.1 23.4
12.5% Subordinated PIK Note (12.5%).................. 6.4 5.4
Income lost -- Raytheon.............................. 1.6 --
Interest expense on debt refinanced.................. (11.5) (11.7)
------ ------
Total........................................... $ 52.4 $ 34.8
====== ======
</TABLE>
The Senior Term Facilities bear interest at adjustable rates based on a
spread over LIBOR. An increase of 0.125% in the rate applicable to the
Senior Term Facilities will increase interest expense and reduce net income
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
MAY 31, 1998 FEBRUARY 28, 1999
------------ -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Interest expense..................................... $ 0.4 $ 0.3
===== =====
Net income........................................... $(0.3) $(0.2)
===== =====
</TABLE>
(d) The pro forma adjustment for income tax benefit is $8.7 million and $5.9
million for the fiscal year ended May 31, 1998 and the nine months ended
February 28, 1999, respectively. These amounts represent the benefit for
income taxes on the loss before income tax resulting from the pro forma
adjustments made to the combined results of the Company. The benefit for
income taxes was calculated using a rate of 10%, the Company's current
effective tax rate.
3. PRO FORMA ADJUSTMENTS MADE TO THE COMBINED RESULTS OF FAIRCHILD AND THE
POWER DEVICE BUSINESS TO GIVE EFFECT TO THE OFFERING.
(a) Represents the elimination of the amortization of deferred financing costs
associated with the debt being repaid. Such amounts were $1.0 million and
$0.8 million for the fiscal year ended May 31, 1998 and the nine months
ended February 28, 1999, respectively. In connection with the offering, the
Company is required to write-off unamortized debt issuance costs associated
with debt being repaid. Approximately $5.0 million, net of the related tax
benefit of $0.6 million, will be written off concurrent with the offering.
This non-recurring charge has been excluded from the pro forma combined
condensed statements operations.
35
<PAGE> 40
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS -- (CONTINUED)
(b) Represents the elimination of interest expense associated with debt to be
repaid with the proceeds of the offering. Such amounts were $30.2 million
and $23.0 million for the fiscal year ended May 31, 1998 and the nine months
ended February 28, 1999, respectively.
(c) Represents the pro forma adjustment for income tax expense related to the
pro forma adjustments made to give effect to the offering. Such amounts were
$3.1 million and $2.4 million for the fiscal year ended May 31, 1998 and the
nine months ended February 28, 1999, respectively.
4. For the fiscal year ended May 31, 1998, historical Fairchild amounts include
the results of operations of Raytheon after December 31, 1997, the date of
its acquisition, and historical Raytheon amounts include the results of
operations of Raytheon from June 1, 1997 to December 31, 1997.
5. Net income excludes a charge for the cumulative effect of change in
accounting principle of $1.5 million, net of a related tax benefit of $0.8
million, in fiscal year ended May 31, 1998.
36
<PAGE> 41
FSC SEMICONDUCTOR CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
AT FEBRUARY 28, 1999
---------------------------------------------------------------------------------------------
POWER
POWER DEVICE PRO FORMA
DEVICE BUSINESS ADJUSTMENTS
BUSINESS PRO FORMA FAIRCHILD FOR THE COMPANY OFFERING PRO FORMA
HISTORICAL ADJUSTMENTS HISTORICAL TRANSACTIONS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ----------- ---------- ------------ --------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ -- $ -- $ 5.4 $ 59.2 2a $ 64.6 $ -- $ 64.6
Receivables, net................ 26.6 -- 101.5 -- 128.1 -- 128.1
Inventories..................... 44.0 -- 105.6 (4.6)2b 145.0 -- 145.0
Deferred income taxes........... 1.2 (1.2)1a -- -- -- -- --
Other current assets............ 3.8 (1.4)1b 19.7 -- 22.1 (0.7)3a 21.4
------ ------- ------ ------ -------- ------ --------
Total current assets.......... 75.6 (2.6) 232.2 54.6 359.8 -- 359.1
Property, plant and equipment,
net............................. 91.0 -- 305.9 24.2 2b 421.1 -- 421.1
Deferred income taxes............. -- -- 25.3 -- 25.3 -- 25.3
Goodwill, net..................... -- -- -- -- -- --
Intangible assets, net............ 0.9 -- 29.0 223.7 2b 253.6 -- 253.6
Other assets...................... 2.8 -- 31.1 18.3 2c 52.2 (4.3)3a 42.9
(5.0)3b
------ ------- ------ ------ -------- ------ --------
Total assets.................. $170.3 $ (2.6) $623.5 $320.8 $1,112.0 $(10.0) $1,102.0
====== ======= ====== ====== ======== ====== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings and
current portion of long-term
debt.......................... $ 20.7 $ (20.7)1c $ 35.5 $(21.4)2d $ 14.1 $(12.0)3c $ 2.1
Income tax payable.............. 13.0 (13.0)1a -- -- -- -- --
Accounts payable................ 13.7 -- 79.1 -- 92.8 -- 92.8
Accrued expenses and other
current liabilities........... 70.6 (5.5)1b 56.0 -- 63.1 2.6 3a 65.7
(58.0)1d
------ ------- ------ ------ -------- ------ --------
Total current liabilities..... 118.0 (97.2) 170.6 (21.4) 170.0 (9.4) 160.6
Long term debt, less current
portion......................... 55.7 (55.7)1c 524.5 517.8 2e 1,042.3 (314.0)3d 728.3
Deferred income taxes............. 1.9 (1.9)1a -- -- -- -- --
Other liabilities................. 6.5 -- 1.7 -- 8.2 -- 8.2
------ ------- ------ ------ -------- ------ --------
Total liabilities............. 182.1 (154.8) 696.8 496.4 1,220.5 (323.4) 897.1
------ ------- ------ ------ -------- ------ --------
Redeemable preferred stock........ -- -- 87.7 -- 87.7 (87.7)3e
Commitments and contingencies
Stockholders' equity (deficit):
Class A common stock............ -- -- 0.3 -- 0.3 -- [0.3]
Class B common stock............ -- -- 0.3 -- 0.3 -- [0.3]
Additional paid-in capital...... -- -- 9.5 -- 9.5 87.7 3e [423.2]
326.0 3f
Business equity................. 0.3 152.2 -- (152.5)2f --
Cumulative translation
adjustment.................... (12.1) -- -- 12.1 2f --
Accumulated deficit............. -- -- (171.1) (31.2)2b (206.3) (7.6)3a (218.9)
(4.0)2c (5.0)3b
------ ------- ------ ------ -------- ------ --------
Total stockholders' equity
(deficit)................... (11.8) 152.2 (161.0) (175.6) (196.2) 401.1 204.9
------ ------- ------ ------ -------- ------ --------
Total liabilities and
stockholders' equity
(deficit)................... $170.3 $ (2.6) $623.5 $320.8 $1,112.0 $(10.0) $1,102.0
====== ======= ====== ====== ======== ====== ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed balance sheet.
37
<PAGE> 42
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
THE UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET GIVES EFFECT TO THE
FOLLOWING PRO FORMA ADJUSTMENTS:
1. PRO FORMA ADJUSTMENTS TO THE HISTORICAL RESULTS OF THE POWER DEVICE
BUSINESS.
(a) Reflects the elimination of deferred income tax assets of $1.2 million,
deferred income tax liabilities of $1.9 million and income taxes payable of
$13.0 million that were not transferred to Fairchild.
(b) Reflects the elimination of prepaid royalties of $1.4 million and accrued
royalties of $5.5 million arising from certain license agreements that were
not transferred to Fairchild.
(c) Reflects the elimination of bank borrowings, capital lease obligations and
corporate borrowings of Samsung Electronics allocated to the Power Device
Business in an aggregate amount of $76.4 million that were not transferred
to Fairchild.
(d) Reflects the elimination of accrued expense of $58.0 million for patent
litigation settlement costs that will be paid by Samsung Electronics.
2. PRO FORMA ADJUSTMENTS TO THE COMBINED RESULTS OF FAIRCHILD AND THE POWER
DEVICE BUSINESS.
(a) Represents the amount of excess cash that was provided in connection with
the Transactions.
(b) The following table represents the estimated allocation of the purchase
price over the historical net book value of the Power Device Business'
assets acquired and liabilities assumed as of December 31, 1998, and is for
illustrative purposes in the pro forma financial statements only. Actual
allocations will be based on fair values as of the acquisition date (April
13, 1999). The amount allocated to in-process research and development will
be charged to expense in our fourth fiscal quarter ended May 30, 1999. This
expense has been excluded from the accompanying pro forma condensed
consolidated statements of operations. Assuming the Transactions occurred
on February 28, 1999, the purchase price allocation, including acquisition
related expenses of $8.1 million, would have been as follows (in millions):
<TABLE>
<S> <C>
Working capital............................................. $ 47.6
Property, plant and equipment............................... 115.2
Other assets................................................ 3.7
Long-term liabilities....................................... (6.5)
Developed technology........................................ 124.1
Customer base............................................... 47.0
In-process research and development......................... 31.2
Covenant not to compete..................................... 26.9
Trademarks and tradenames................................... 21.9
Assembled workforce......................................... 3.8
------
Total.................................................. $414.9
======
</TABLE>
In-process research and development of $31.2 million will be charged to
operations in the Company's fourth fiscal quarter ending May 30, 1999. This
non-recurring charge has been excluded from the unaudited pro forma
statement of operations data presented in this prospectus. For pro forma
balance sheet purposes, intangible assets have been reduced by $31.2
million with a corresponding charge to accumulated deficit.
38
<PAGE> 43
(c) Represents deferred debt issuance costs primarily comprised of financing
costs and professional fees of $22.3 million associated with the 10 3/8%
Senior Subordinated Notes and the Senior Credit Facilities offset by the
write-off of $4.0 million, net of the related tax benefit of $0.4 million,
of unamortized debt issuance costs associated with the existing senior
credit facilities being repaid.
(d) Represents the repayment of the short-term portion of the existing senior
credit facilities in an aggregate amount of $35.5 million, offset by the
current portion of the Term Loan Facilities in an aggregate amount of $14.1
million.
(e) Represents the repayment of the long-term portion of the existing senior
credit facilities in an aggregate amount of $128.1 million offset by the
Term Loan Facilities, the 12.5% Subordinated PIK Note and the 10 3/8%
Senior Subordinated Notes in an aggregate amount of $645.9 million.
(f) Represents the elimination of the equity of the Power Device Business at
the Acquisition date in an aggregate amount of $140.4 million.
3. PRO FORMA ADJUSTMENTS MADE TO THE COMBINED RESULTS OF FAIRCHILD AND THE
POWER DEVICE BUSINESS TO GIVE EFFECT TO THE OFFERING.
(a) Loans aggregating $5.0 million were made by the Company to management
investors to pay their federal and state individual income tax liabilities
resulting from the lapse of certain risks of forfeiture with respect to
their stock ownership. These loans will be cancelled as a result of the
public offering of the Company's common stock and the Company will pay to
such management investors amounts sufficient to enable them to discharge
all tax liabilities arising out of such cancellation. The net effect of
the above transaction is a charge to retained earnings of $7.6 million.
(b) Represents the write-off of approximately $5.0 million, net of the related
tax benefit of $0.6 million, of unamortized debt issuance costs associated
with debt being repaid.
(c) Represents the repayment of the short-term portion of the Tranche A Senior
Credit Facility.
(d) Represents the repayment of the following components of long-term debt (in
millions):
<TABLE>
<S> <C>
Long-term portion of Tranche A.............................. $ 88.0
Long-term portion of Tranche B.............................. 79.6
11.74% Subordinated PIK Note................................ 96.4
12.50% Subordinated PIK Note................................ 50.0
------
$314.0
------
</TABLE>
(e) Represents the conversion of the Redeemable Preferred Stock.
(f) Represents the estimated net proceeds of this offering.
39
<PAGE> 44
SELECTED CONSOLIDATED FINANCIAL DATA OF FAIRCHILD
The following table sets forth selected historical consolidated financial
data of Fairchild. The historical consolidated financial data as of and for the
fiscal years ended May 26, 1996, May 25, 1997 and May 31, 1998 are derived
directly from the audited Consolidated Financial Statements of Fairchild
included elsewhere in this prospectus. The historical consolidated financial
data as of February 28, 1999 and for the nine months ended March 1, 1998 and
February 28, 1999 are derived directly from the unaudited Consolidated Financial
Statements of Fairchild included elsewhere in this prospectus. The historical
consolidated financial data as of and for the fiscal years ended May 29, 1994
and May 28, 1995, and the historical balance sheet data as of March 1, 1998, are
derived from unaudited consolidated financial statements of Fairchild that are
not included in this prospectus. We believe that such unaudited consolidated
financial statements include all adjustments necessary for the fair presentation
of the financial condition and the results of operations of Fairchild for such
periods and as of such dates. Operating results for the nine months ended
February 28, 1999 are not necessarily indicative of the results of operations
that may be expected for Fiscal 1999. This information should be read in
conjunction with the Consolidated Financial Statements of Fairchild included
elsewhere in this prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Fairchild."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED MAY ------------------------
---------------------------------------------- MARCH 1, FEBRUARY 28,
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ -------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS DATA:(1)
Revenue.............................................. $716.6 $680.3 $776.3 $692.0 $789.2 $601.9 $488.6
Gross profit......................................... $248.3 $203.8 $216.8 $152.5 $230.5 $180.2 $107.0
Research and development............................. 27.4 31.0 30.3 18.9 35.7 24.7 27.9
Selling, general and administrative.................. 97.3 100.3 114.4 96.4 92.0 66.6 68.5
Restructuring and other non-recurring charges(2)..... -- -- -- 5.3 15.5 15.5 7.2
------ ------ ------ ------ ------ ------ ------
Operating income................................... 123.6 72.5 72.1 31.9 87.3 73.4 3.4
Interest, net........................................ -- -- -- 11.2 54.5 41.1 44.7
Other expense (income) net........................... (1.9) (1.8) (0.2) 1.4 -- -- --
------ ------ ------ ------ ------ ------ ------
Income before income
taxes............................................ 125.5 74.3 72.3 19.3 32.8 32.3 (41.3)
Provision (benefit) for income taxes................. -- -- -- 3.8 10.7 10.4 (4.1)
------ ------ ------ ------ ------ ------ ------
Income (loss) before cumulative effect of change in
accounting principle............................. 125.5 74.3 72.3 15.5 22.1 21.9 (37.2)
Cumulative effect of change in accounting
principle.......................................... -- -- -- -- (1.5) (1.5) --
------ ------ ------ ------ ------ ------ ------
Net income (loss).................................. $125.5 $ 74.3 $ 72.3 $ 15.5 20.6 20.4 (37.2)
====== ====== ====== ======
Dividends on preferred stock............................................................... (8.7) (6.5) (7.2)
Net income (loss) applicable to common stockholders...................................... $ 11.9 $ 13.9 $(44.4)
====== ====== ======
Basic earnings (loss) per common share
Income before cumulative effect of change in accounting principle........................ $ 0.21 $ 0.24 $(0.71)
------ ------ ------
Cumulative effect of change in accounting principle...................................... (0.02) (0.02) --
------ ------ ------
$ 0.19 $ 0.22 $(0.71)
====== ====== ======
Diluted earnings (loss) per common share
Income before cumulative effect of change in accounting principle........................ $ 0.20 $ 0.23 $(0.71)
Cumulative effect of change in accounting principle...................................... (0.02) (0.02) --
------ ------ ------
$ 0.18 $ 0.21 $(0.71)
====== ====== ======
Weighted average common shares outstanding
Basic.................................................................................... 62.8 62.8 62.9
====== ====== ======
Diluted.................................................................................. 65.0 65.2 62.9
====== ====== ======
OTHER FINANCIAL DATA:
Revenue:
Analog............................................. $ -- $ -- $ -- $ -- $ 32.0 $ 11.9 $ 49.7
Discrete........................................... 80.0 116.4 175.0 164.5 187.3 144.8 131.6
Logic.............................................. 393.8 327.7 339.5 285.3 303.0 234.3 194.2
Memory............................................. 185.1 185.5 174.2 138.0 113.5 88.1 58.6
Contract manufacturing services.................... 57.7 50.7 87.6 104.2 153.4 122.8 54.5
------ ------ ------ ------ ------ ------ ------
Total revenue........................................ $716.6 $680.3 $776.3 $692.0 $789.2 $601.9 $488.6
====== ====== ====== ====== ====== ====== ======
</TABLE>
40
<PAGE> 45
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED MAY ------------------------
---------------------------------------------- MARCH 1, FEBRUARY 28,
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ -------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Adjusted EBITDA(3)................................... $162.3 $117.2 $136.3 $128.4 $187.4 $151.4 $ 82.7
Adjusted net income (loss)(4)........................ 125.5 74.3 72.3 34.9 33.5 (36.9) (28.4)
Depreciation and amortization........................ 38.7 44.7 64.2 77.1 84.6 62.5 72.1
Amortization of intangibles(5)....................... -- -- -- -- 1.4 2.6 22.3
Capital expenditures................................. 88.2 112.9 153.9 47.1 78.0 49.3 31.5
HISTORICAL BALANCE SHEET DATA (END OF PERIOD):
Inventories.......................................... $ 60.9 $ 68.8 $ 93.1 $ 73.1 $108.0 $ 99.6 $105.6
Total assets......................................... 233.0 323.2 432.7 555.0 635.7 632.4 623.5
Long-term debt, excluding current portion............ -- -- -- 487.9 526.7 528.2 524.5
Total stockholders' equity (deficit)................. 161.1 233.2 349.2 (133.3) (116.6) (117.0) (161.0)
</TABLE>
- -------------------------
(1) For the fiscal years ended May 1997 and prior, statement of operations data
includes the direct and allocated expense of the Fairchild Semiconductor
Business of National Semiconductor. Such amounts may not be comparable to
data for Fiscal 1998 and the historical and pro forma nine months ended
February 28, 1999.
(2) In Fiscal 1997, restructuring and other non-recurring charges consisted of
severance and other costs related to lay-offs that occurred in the first
quarter of Fiscal 1997. In Fiscal 1998, such charges consisted of $15.5
million for in-process research and development associated with the
acquisition of Raytheon. For the nine months ended February 28, 1999, such
charges consisted of severance and other costs related to lay-offs in the
first and third quarters of Fiscal 1999.
(3) Adjusted EBITDA is defined as operating income before other (income)
expense, interest expense, taxes, depreciation, amortization, restructuring
and other non-recurring charges and $14.1 million of one-time retention
bonuses in 1997 associated with the recapitalization of National
Semiconductor. Adjusted EBITDA is presented because we believe that EBITDA
is a widely accepted financial indicator of an entity's ability to incur and
service debt. Adjusted EBITDA should not be considered by an investor as an
alternative to net income or income from operations, as an indicator or our
operating performance or other combined operations or cash flow data
prepared in accordance with generally accepted accounting principles or as
an alternative to cash flows as a measure of liquidity. Our computation of
Adjusted EBITDA may differ from similarly titled computations of other
companies.
(4) Adjusted net income represents net income before litigation expense,
restructuring and other nonrecurring charges, cumulative effect of change in
accounting principle and amortization of intangibles. For Fiscal 1997,
excludes $14.1 million of one-time retention bonuses associated with the
recapitalization of Fairchild Semiconductor.
(5) Amortization of intangibles primarily represents the amortization of
indentifiable acquisition-related intangible assets.
41
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF FAIRCHILD
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto of Fairchild included
elsewhere in this prospectus. For the purposes of this section only, we refer to
FSC Semiconductor Corporation and its subsidiaries prior to the consummation of
the Acquisition as the Company, unless the context requires otherwise.
OVERVIEW
Fairchild is a leading designer, manufacturer and supplier of
high-performance logic, non-volatile memory, discrete power and signal
technology and analog and mixed signal semiconductors, serving the personal
computer, industrial, telecommunications, consumer electronics and automotive
markets. The predecessor to Fairchild was renowned as one of the pioneering
companies of the semiconductor industry. Fairchild invented the planar process
of manufacturing semiconductors, regarded as one of the most significant
achievements in the semiconductor industry since the invention of the
transistor. These early innovations form the base of a rich company history.
Acquired in 1979 by Schlumberger, Fairchild continued to innovate, introducing
logic products such as FAST(R) (Fairchild Advanced Schottky Technology) and
FACT(TM) (Fairchild Advanced CMOS Technology), which remain industry standard
products today. In 1987, Fairchild was acquired by National Semiconductor and
integrated into its operations. Certain of the assets of Fairchild were spun-off
from National Semiconductor on March 11, 1997 pursuant to an Agreement and Plan
of Recapitalization (the "Recapitalization") and began operating as a
stand-alone entity. At that time, Fairchild's business consisted of the Logic
Products Group, historically a core business of Fairchild, and the Discrete
Products Group and the Non-Volatile Memory Products Group, historically
multi-market businesses of National Semiconductor. On December 31, 1997, 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. Similar to Fairchild's business, Raytheon operates in the moving and
shaping segment of the semiconductor market. 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.
Fairchild Semiconductor Corporation of California was combined with the
Non-Volatile Memory Products Group and is being operated as the Analog, Mixed
Signal and Non-Volatile Memory Products Group. 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. The results of operations in
Fiscal 1997 for the period prior to March 11, 1997 reflect the operating results
of the Fairchild Semiconductor Business of National Semiconductor, and are not
necessarily indicative of the results that would have been obtained as a
stand-alone company during that time. This is due in part to the fact that
National Semiconductor allocated to the Fairchild Semiconductor Business certain
corporate and other overhead costs at levels higher than those experienced as a
stand-alone company. In addition, the Fairchild Semiconductor Business, prior to
the establishment of 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, National
Semiconductor 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.
42
<PAGE> 47
The following table sets forth the composition of revenue by product group
and contract manufacturing services, as a percentage of total revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Logic................................................... 43.7% 41.2% 38.4%
Discrete................................................ 22.6 23.8 23.7
Analog, Mixed Signal and Non-Volatile Memory............ 22.5 19.9 18.5
Contract Manufacturing Services......................... 11.2 15.1 19.4
----- ----- -----
Total.............................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
QUARTERLY RESULTS
The following table sets forth the unaudited historical quarterly trade
sales and trade gross profits (losses) of Fairchild's product groups:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998 FISCAL 1999
--------------------------------- --------------------------------- ------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TRADE SALES:
Logic......................... $ 66.8 $ 74.7 $ 69.2 $ 74.6 $ 78.9 $ 79.8 $ 75.6 $ 68.7 $ 60.9 $ 67.7 $ 65.6
Discrete...................... 35.9 39.7 42.7 46.2 48.2 47.0 49.6 42.5 38.9 45.7 47.0
Memory........................ 30.2 39.6 35.6 32.6 31.6 28.5 28.0 25.4 18.4 20.9 19.3
Analog........................ -- -- -- -- -- -- 11.9 20.1 16.9 17.7 15.1
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total..................... $132.9 $154.0 $147.5 $153.4 $158.7 $155.3 $165.1 $156.7 $135.1 $152.0 $147.0
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
GROSS PROFIT (LOSS):
Logic......................... $ 12.2 $ 18.7 $ 15.7 $ 21.0 $ 25.9 $ 29.7 $ 25.6 $ 21.3 $ 14.8 $ 17.7 $ 20.4
Discrete...................... 10.7 11.2 13.4 15.8 18.9 17.9 17.3 12.8 8.9 10.5 10.7
Memory........................ 7.1 6.6 6.8 6.5 5.9 2.3 1.3 3.2 (0.8) (2.0) (0.8)
Analog........................ -- -- -- -- -- -- 4.9 7.2 5.9 7.4 5.2
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total..................... $ 30.0 $ 36.5 $ 35.9 $ 43.3 $ 50.7 $ 49.9 $ 49.1 $ 44.5 $ 28.8 $ 33.6 $ 35.5
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
GROSS PROFIT (LOSS) PERCENTAGE:
Logic......................... 18.3% 25.0% 22.7% 28.2% 32.8% 37.2% 33.9% 31.0% 24.3% 26.1% 31.1%
Discrete...................... 29.8 28.2 31.4 34.2 39.2 38.1 34.9 30.1 22.9 23.0 22.8
Memory........................ 23.5 16.7 19.1 19.9 18.7 8.1 4.6 12.6 (4.3) (9.6) (4.1)
Analog........................ -- -- -- -- -- -- 41.2 35.8 34.9 41.8 34.4
Total..................... 22.6 23.7 24.3 28.2 31.9 32.1 29.7 28.4 21.3 22.1 24.1
</TABLE>
NINE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO NINE MONTHS ENDED MARCH 1, 1998
RESULTS OF OPERATIONS. The Company incurred net losses of $37.2 million
for the first nine months of Fiscal 1999, compared to net income of $20.4
million in the corresponding period last year. Net losses for the first nine
months of Fiscal 1999 include pre-tax restructuring charges of $7.2 million. The
corresponding period in Fiscal 1998 includes both a non-recurring pre-tax charge
of $15.5 million for the write-off of purchased in-process research and
development associated with the acquisition of Raytheon Semiconductor, Inc.
("Analog") in December 1997 and an after-tax charge of $1.5 million for the
cumulative effect of a change in accounting principle.
43
<PAGE> 48
Operating income was $3.4 million in the first nine months of Fiscal 1999,
compared to $73.4 million in the first nine months of Fiscal 1998. Excluding
restructuring and other non-recurring charges, the Company had operating income
of $10.6 million and $88.9 million for the first nine months of Fiscal 1999 and
1998, respectively. Operating income for the first nine months of Fiscal 1999
includes operating losses of $0.3 million for Analog. The decrease in
profitability in the first nine months of Fiscal 1999 over the comparable period
last year is primarily attributable to lower trade revenues and corresponding
deterioration in margins resulting from soft market conditions worldwide in the
industry, due to excess personal computer inventories in the sales channels and
adverse effects on semiconductor demand driven by economic uncertainty in
Southeast Asia, and lower contract manufacturing profits due to significantly
reduced demand from National Semiconductor.
Excluding depreciation and amortization of $72.1 million in the first nine
months of Fiscal 1999 and $62.5 million in the comparable period of Fiscal 1998,
and restructuring and other non-recurring charges, earnings before interest,
taxes and depreciation and amortization, which we refer to as EBITDA, were $82.7
million in the first nine months of Fiscal 1999 compared to $151.4 million in
the comparable period of Fiscal 1998. EBITDA is presented because the Company
believes that it is a widely accepted financial indicator of an entity's ability
to incur and service debt. EBITDA should not be considered as an alternative to
net income, operating income, or other consolidated operations and cash flow
data prepared in accordance with generally accepted accounting principles, as an
indicator of the operating performance of the Company, or as an alternative to
cash flows as a measure of liquidity.
Revenues. The Company's revenues consist of trade sales to unaffiliated
customers (88.8% of total revenues in the first nine months of Fiscal 1999 and
79.6% in the comparable period of Fiscal 1998) and revenues from contract
manufacturing services provided to National Semiconductor (11.2% of total
revenues in the first nine months of Fiscal 1999, and 20.4% in the comparable
period of Fiscal 1998). Trade sales decreased 9.4% to $434.1 million compared to
$479.1 million for the comparable period of Fiscal 1998. Trade sales for the
first nine months of Fiscal 1999 include those of Analog, while the comparable
period in Fiscal 1998 includes only two months. Excluding Analog's trade sales
for the non-comparable periods, trade sales decreased 17.5% for the nine month
period ending February 28, 1999 over the same period a year ago. Sales declines
impacted all product groups. For the first nine months of Fiscal 1999, Logic,
Discrete and Memory trade sales decreased by 17.2%, 9.1% and 33.3%,
respectively, over the comparable period a year ago.
Geographically, 35%, 20% and 45% of trade sales were derived from North
America, Europe and Asia/Pacific, respectively, in the first nine months of
Fiscal 1999, compared to 36%, 21% and 43% in the first nine months of Fiscal
1998. Trade sales were down in all regions in the first nine months of Fiscal
1999 compared to a year ago. Trade sales decreased by 17.4%, 25.1% and 11.6% in
North America, Europe and Asia/Pacific, respectively.
Contract manufacturing revenues decreased to $54.5 million, from $122.8
million for the comparable period in Fiscal 1998. Contract manufacturing revenue
includes $15.8 million of billings, recorded in the first nine months of Fiscal
1999, under the fixed cost recovery and guaranteed annual revenue provisions of
the Company's manufacturing agreements with National Semiconductor. The
aforementioned decrease is reflective of greatly reduced demand from National
Semiconductor.
Gross Profit. Gross profit decreased 40.6% to $107.0 million, compared to
$180.2 million in the first nine months of Fiscal 1998. As a percentage of trade
sales, gross trade profit for the first nine months of Fiscal 1999 was 22.6%
compared to 31.2% in the same period of Fiscal 1998. The decrease in the first
nine months of Fiscal 1999 over the comparable period of Fiscal 1998 is due to
lower average selling prices and decreased factory utilization, particularly in
the first half of Fiscal 1999, resulting from soft market conditions. The
Company also experienced inefficiencies, particularly in the second quarter of
Fiscal 1999, due to the start-up of its own shipping and logistics systems
(independent of National Semiconductor's), part of its ongoing enterprise system
implementation.
44
<PAGE> 49
Contract manufacturing gross profit decreased 70.2% in the first nine
months of Fiscal 1999, over the corresponding period in the prior year. As a
percentage of contract manufacturing revenue, gross contract manufacturing
profits were 16.7% in the first nine months of Fiscal 1999 compared to 24.8% in
the comparable period of Fiscal 1998. The decreases in contract manufacturing
gross profits as a percent of contract manufacturing revenues result from
factory under-utilization driven by reduced demand from National Semiconductor.
Research and Development. Research and development expenses were $27.9
million, or 6.4% of trade sales, compared to $24.7 million, or 5.2% of trade
sales, for the comparable period of Fiscal 1998. The increase in year-to-date
R&D expenditures is driven by R&D costs incurred by Analog in Fiscal 1999. Only
two months of R&D for Analog were recorded in the first nine months of Fiscal
1998. R&D efforts are focused on the Company's growth products: CMOS Logic,
DMOS, EEPROM and Analog. In the first nine months of Fiscal 1999, R&D
expenditures were 9.0% of trade sales, for these growth products. R&D
expenditures for the Company's mature products (Bipolar Logic, Bipolar Discretes
and EPROM) were less than 1% of trade sales for the first nine months of Fiscal
1999.
Selling, General and Administrative. Selling, general and administrative
expenses were $68.5 million, or 15.8% of trade sales, compared to $66.6 million,
or 13.9% of trade sales for the comparable period of Fiscal 1998. The increase
in year-to-date SG&A expenses is primarily the result of the incremental SG&A
expenses of Analog. Only two months of SG&A expenses for Analog were recorded in
the comparable period of Fiscal 1998.
Restructuring. The nine months ended February 28, 1999 included a pre-tax
restructuring charge of approximately $4.5 million in the first quarter of
Fiscal 1999 in connection with management's plan to reduce costs and improve
operating efficiencies. The charge consisted of $0.8 million related to non-cash
asset impairments and $3.7 million of employee separation costs. The nine months
ended February 28, 1999 also included a charge of $2.7 million in the third
quarter of Fiscal 1999 in connection with the transfer of all assembly and test
activities related to its Analog and Mixed Signal product lines from its
Mountain View, California facility to its Penang, Malaysia facility or to
subcontractors. The charge consisted of $1.9 million of non-cash asset
write-offs and $0.8 million of employee separation costs that were substantially
paid during the third quarter of Fiscal 1999.
Interest, Net. Interest, net was $44.7 million in the first nine months of
Fiscal 1999 compared to $41.1 million in the comparable period of Fiscal 1998.
The increase is principally the result of indebtedness incurred to fund the
Raytheon acquisition, which occurred in the third quarter of Fiscal 1998.
Income Taxes. Income tax expense (benefit) was $(4.1) million for the
first nine months of Fiscal 1999, compared to $10.4 million in the first nine
months of Fiscal 1998. The effective tax rate for the first nine months of
Fiscal 1999 was 10% compared to 32% in the comparable period last year. The
reduction in the Company's effective tax rate primarily results from the
Company's year-to-date loss and its inability to carry-back current year net
operating losses due to the short time the Company has operated as a stand-alone
entity.
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 one-time 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 certain 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 one-time pre-tax
charges related to payment of retention bonuses ($14.1 million) and a
restructuring charge ($5.3
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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 Fairchild Semiconductor Business did not
incur these costs.
Operating income, excluding one-time 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. 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 effect of currency devaluations in Southeast Asia on manufacturing
costs. Excluding one-time 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.
Logic trade sales increased 6.2% in Fiscal 1998 over Fiscal 1997. The
increase was driven by higher unit volume, which offset a decrease in average
selling prices. In Fiscal 1998, CMOS trade sales increased 14.3% over Fiscal
1997, offsetting a decrease of 2.8% in Bipolar trade sales. The increase in CMOS
trade sales was across all product lines, including VHC, LCX, FACT(TM) and
HCMOS. The decrease in Bipolar trade sales is reflective of the general market
trend toward lower power consuming CMOS products.
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 the Company's Trench
technology, which offset price erosion in some of the more mature DMOS products.
The decrease in Bipolar trade sales was driven by a combination of lower sales
volume and slightly lower average selling prices. Reflective of the Company's
growth strategy, trade sales of DMOS products in Fiscal 1998 exceeded trade
sales in Bipolar products for the first time.
Analog, Mixed Signal and Non-Volatile Memory trade sales increased 5.4% in
Fiscal 1998 over Fiscal 1997. The increase was due entirely to the acquisition
of Raytheon. Excluding Analog and Mixed Signal Products, Non-volatile Memory
trade sales decreased 17.7% in Fiscal 1998 over Fiscal 1997. The decrease was
driven by lower prices impacting all memory product lines due to competitive
pressures, partially offset by higher volume, particularly in EEPROM. EEPROM,
which is the Company's long-
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term focus in the non-volatile memory market, had increased trade sales of 4.7%
in Fiscal 1998 over Fiscal 1997. In a declining market, EPROM trade sales
decreased 46.2% in Fiscal 1998 over Fiscal 1997, as EPROMs are being rapidly
phased out by FLASH memory products in the marketplace.
Geographically, 38%, 21% and 41% of trade sales were derived in North
America, Europe and Asia/Pacific, 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%, North America increased 8.8% and Asia/
Pacific increased 5.4%, despite soft economic conditions in the region.
Asia/Pacific 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 in Fiscal 1997, these revenues were
recorded at cost. Gross trade profit excluding contract manufacturing increased
33.3% in Fiscal 1998 over Fiscal 1997. As a percentage of trade sales, gross
trade profits were 30.5% and 24.8% in Fiscal 1998 and 1997, respectively. The
increase in gross trade profit as a percentage of trade sales was due to
increased factory utilization due to improved market conditions and 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 the Company's manufacturing costs and
the acquisition of Raytheon, which increased the Company's portfolio of
higher-margin products.
Research and Development. R&D expenses were $35.7 million, excluding a
$15.5 million pre-tax charge for purchased in-process R&D expenses associated
with the acquisition of Raytheon, or 5.6% of trade sales in Fiscal 1998,
compared to $18.9 million, or 3.2% of trade sales in Fiscal 1997. The increase
in R&D expenses is driven by higher spending to support new product development,
reflecting 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 the Company's growth
products: CMOS Logic, DMOS, EEPROM and Analog. In Fiscal 1998, R&D expenditures
were 8.9% of trade sales for these growth products, and 0.5% of trade sales for
the Company's 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
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<PAGE> 52
compared to Fiscal 1997, which reflects nine months of direct and allocated
expenses of the Fairchild Semiconductor Business while operated by National
Semiconductor.
Restructuring. Fiscal 1997 included a one-time restructuring charge of
$5.3 million, incurred in the first quarter, for severance and other costs
directly attributable to a workforce reduction.
Interest, Net. Interest, 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, 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 third quarter of Fiscal 1998. Prior to the Recapitalization in Fiscal 1997,
the Fairchild Semiconductor Business was allocated net interest expense from
National Semiconductor. This amount is included in other expense.
Other Expenses. Other expense was $1.4 million in Fiscal 1997, consisting
primarily of net interest expense allocated to the Fairchild Semiconductor
Business by National Semiconductor. There were no comparable amounts incurred in
Fiscal 1998.
In the third quarter of Fiscal 1998, 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 certain
costs associated with the Company's enterprise software system implementation.
The enterprise software system implementation costs, relating to activities to
assess the system's capabilities in light of the Company's current business
processes, were previously capitalized as part of the cost of the software.
Emerging Issues Task Force Issue 97-13, dated November 20, 1997, requires
companies to expense such costs as incurred.
Income Taxes. Income taxes were $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, 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 Fairchild Semiconductor Business did not record a tax
provision or pay income taxes as it operated as a division of National
Semiconductor.
YEAR ENDED MAY 25, 1997 COMPARED TO YEAR ENDED MAY 26, 1996
RESULTS OF OPERATIONS. Net income decreased 78.6% to $15.5 million in
Fiscal 1997 from $72.3 million in Fiscal 1996. Fiscal 1997 includes interest
expense and income taxes of $11.2 million and $3.8 million, respectively,
incurred subsequent to the Recapitalization. No such amounts were incurred in
Fiscal 1996. Operating income was $31.9 million in Fiscal 1997, a 55.8% decrease
from the prior year. This decrease was attributable to a combination of lower
trade sales driven by industry-wide adverse market conditions that impacted much
of Fiscal 1997, lower gross profits as a result of factory underutilization
caused by an inventory reduction initiative in Fiscal 1997, one-time retention
bonuses of $14.1 million and a one-time restructuring charge of $5.3 million in
Fiscal 1997 related to the Company's workforce reductions in the first quarter
of Fiscal 1997, partially offset by gross profit on contract manufacturing
services in Fiscal 1997 subsequent to the Recapitalization. Prior to the
Recapitalization, these revenues were recorded at cost. Excluding interest
expense and one-time charges in Fiscal 1997 and other (income) expense of $1.4
million and $(0.2) million in Fiscal 1997 and 1996, respectively, EBITDA was
$128.4 million in Fiscal 1997, compared to $136.3 million in Fiscal 1996.
Revenues. The Company's revenues consist of trade sales to unaffiliated
customers (84.9% and 88.7% of total revenues in Fiscal 1997 and 1996,
respectively) and revenues from contract manufacturing
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<PAGE> 53
services provided to National Semiconductor (15.1% and 11.3% of total revenues
in Fiscal 1997 and 1996, respectively).
Trade sales decreased 14.7% to $587.8 million in Fiscal 1997 from $688.7
million in Fiscal 1996. The decrease in trade sales impacted all product groups
and was due primarily to industry-wide adverse market conditions which impacted
order rates starting in the second half of Fiscal 1996 and continued through the
first half of Fiscal 1997, after which order rates recovered moderately. Trade
sales were down 23.7% in the first half of Fiscal 1997 over the first half of
Fiscal 1996, but were down only 3.7% in the second half of Fiscal 1997 over the
second half of Fiscal 1996, reflecting improvement in orders as market
conditions improved.
Logic trade sales decreased 16.0% in Fiscal 1997 over Fiscal 1996. The
decline in Logic trade sales was almost entirely unit price driven, as volumes
were flat year over year. The majority of Logic's trade sales decline was in the
mature Bipolar products, which declined 22.1% in Fiscal 1997 over Fiscal 1996.
CMOS trade sales declined 9.5% in Fiscal 1997 over Fiscal 1996. Reflective of
the Company's growth strategy, CMOS trade sales in Fiscal 1997 exceeded Bipolar
trade sales for the first time.
Discrete trade sales decreased 6.0% in Fiscal 1997 over Fiscal 1996. The
decline in Discrete trade sales was due to lower volume in Bipolar products,
whose trade sales decreased 27.7% in Fiscal 1997 over Fiscal 1996, offset by
strong growth in higher-priced DMOS products, the focus of the Discrete Products
Group's growth strategy, whose trade sales increased 54.2% in Fiscal 1997 over
Fiscal 1996.
Non-Volatile Memory trade sales decreased 20.8% in Fiscal 1997 over Fiscal
1996. The decline in Non-Volatile Memory trade sales was driven by a significant
decline in EPROM sales volume, whose trade sales decreased 40.8% year over year,
offset by continued growth in EEPROM trade sales, which increased 6.2% in Fiscal
1997 over Fiscal 1996. Additionally, EEPROM trade sales exceeded EPROM trade
sales in Fiscal 1997 for the first time.
Geographically, 38%, 20% and 42% of trade sales were derived in North
America, Europe and Asia/ Pacific, respectively, in Fiscal 1997, as compared to
38%, 23% and 39% in Fiscal 1996. All regions experienced declines in trade sales
in Fiscal 1997 as compared to Fiscal 1996. Trade sales in North America declined
14%, Europe 27% and Asia/Pacific 7%. Overall, exchange rates had a minimal
effect on trade sales as the majority of the Company's sales are U.S.
Dollar-denominated.
Contract manufacturing revenues increased 19.0% to $104.2 million in Fiscal
1997 from $87.6 million in Fiscal 1996. This increase, when normalized for
higher prices to include a markup in Fiscal 1997 subsequent to the
Recapitalization, was due to greater demand in Fiscal 1997 from National
Semiconductor, particularly for products manufactured in the Company's 6-inch
wafer fabrication plant in South Portland, Maine.
Gross Profit. Gross profit decreased 29.7% to $152.5 million in Fiscal
1997 from $216.8 million in Fiscal 1996. Included in the Fiscal 1997 amount is
$6.8 million of gross profit attributable to contract manufacturing services
provided to National Semiconductor subsequent to the Recapitalization. Prior to
the Recapitalization, these revenues were recorded at cost. Under the
manufacturing agreements with National Semiconductor, prices for contract
manufacturing services were designed to generate a 20% gross profit for the
Company. For the period subsequent to the Recapitalization, the Company was
achieving this level of gross profit with respect to contract manufacturing
revenues. As a percentage of trade sales, gross trade profits were 24.8% and
31.5% in Fiscal 1997 and 1996, respectively. The decline in gross trade profit
as a percentage of trade sales was due to lower prices, particularly in Logic,
and lower factory utilization, particularly in the first half of Fiscal 1997,
due to adverse market conditions and an inventory reduction initiative. The
Company reduced inventories by $20.0 million, or 21.5%, in Fiscal 1997 over
Fiscal 1996. In response to declining gross profit, we enacted cost reduction
programs, which included headcount reductions, in the first quarter of Fiscal
1997. Gross trade profit as a percent of trade sales was 23.2% in the first half
of Fiscal 1997, reflecting slow order rates and low factory utilization.
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Gross trade profit as a percent of trade sales increased to 26.3% in the second
half of Fiscal 1997, reflecting increased order rates, improved factory
utilization and the beneficial effects of the cost reduction programs enacted in
the first half of Fiscal 1997.
Research and Development. R&D expenses were $18.9 million, or 3.2% of
trade sales in Fiscal 1997, compared to $30.3 million, or 4.4% of trade sales,
in Fiscal 1996. The decrease in R&D expenses relates primarily to reduced
allocations from National Semiconductor in Fiscal 1997 prior to the
Recapitalization as a result of the refocus of its strategic direction away from
Fairchild's markets, as well as the elimination of allocations from National
Semiconductor subsequent to the Recapitalization.
Selling, General and Administrative. SG&A expenses were $96.4 million, or
16.4% of trade sales, in Fiscal 1997, compared to $114.4 million, or 16.6% of
trade sales, in Fiscal 1996. The decrease in SG&A expenses is attributable to
reduced allocations from National Semiconductor in Fiscal 1997 prior to the
Recapitalization, reflecting the reduced consumption of corporate services, and
the favorable effect of lower charges under the Transition Services Agreement
with National Semiconductor subsequent to the Recapitalization as compared to
the allocations for those same services for the comparable period in Fiscal
1996, offset by one-time retention and incentive bonuses ($14.1 million) paid in
Fiscal 1997 concurrently with the Recapitalization.
Restructuring. Fiscal 1997 included a restructuring charge of $5.3 million
for severance and other costs directly attributable to a workforce reduction
undertaken in the first quarter of Fiscal 1997.
Interest, Net. Interest, net was $11.2 million in Fiscal 1997, as a result
of indebtedness incurred concurrently with the Recapitalization. In Fiscal 1997
prior to the Recapitalization, and in Fiscal 1996, the Company was allocated net
interest income from National Semiconductor. This amount is included in other
(income) expense.
Other (Income) Expense. Other expense was $1.4 million in Fiscal 1997,
compared to other income of $0.2 million in Fiscal 1996. The increase in other
expense was primarily due to higher net interest expense allocated from National
Semiconductor in Fiscal 1997.
Income Taxes. Income taxes were $3.8 million in Fiscal 1997. The provision
for income taxes was recorded only for the period subsequent to the
Recapitalization. Prior to the Recapitalization, the Company did not pay income
taxes or file income tax returns as it operated as a division of National
Semiconductor. The effective tax rate on income generated subsequent to the
Recapitalization is 39.1%.
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. The Company
did not draw upon the Revolving Credit Facility in connection with the
Transactions. The Company is required to pay an approximately $41.0 million
Korean value added tax in connection with the Acquisition. The Company intends
to utilize the post-closing purchase price adjustments in connection with the
Acquisition and existing cash to pay the full amount of the value added tax due
and payable. The Company believes that it will be entitled to a full refund of
the value added tax within approximately 15 days of such payment. The Company
cannot be assured of the refund, however.
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 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.
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As of February 28, 1999, the Company's cash and cash equivalents balance
was $5.4 million, a decrease of $1.1 million from May 31, 1998. On a pro forma
basis, after giving effect to the Transactions, the Company's cash and cash
equivalents as of February 28, 1999 was $64.6 million.
During the nine months ended February 28, 1999, the Company's operations
generated $20.0 million in cash compared to $108.7 million generated in the
first nine months of Fiscal 1998. The decrease in cash provided by operating
activities reflects a decrease in net income adjusted for noncash items of $64.9
million as well as a decrease in cash flows from changes in operating assets and
liabilities of $23.8 million. Cash used in investing activities during the first
nine months of Fiscal 1999 totaled $33.4 million compared to $170.3 million in
the first nine months of Fiscal 1998. Capital expenditures in the first nine
months of Fiscal 1999 and Fiscal 1998, respectively, 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 $12.3 million for the first nine months of Fiscal
1999 was the result of net proceeds from the Company's Revolving Credit Facility
of $21.6 million and repayments of long-term debt of $9.3 million. Cash provided
by financing activities of $33.3 million for the first nine months of Fiscal
1998 was primarily the result of borrowings used to fund the acquisition offset
by repayments of long-term debt.
During Fiscal 1998, the Company generated sufficient cash from operations
to fund its research and development, capital expenditure and debt service
requirements. The Company also used approximately $75.0 million of its existing
cash to fund in part the acquisition of Raytheon. Concurrent with the
acquisition, the Company borrowed $90.0 million under a new tranche C term loan
under its existing senior credit facilities, the proceeds from which were used
in part to repay the remaining principal on its tranche B term loan under its
existing senior credit facilities. Research and development expenditures are
made primarily to fund new product development. Capital expenditures in Fiscal
1998, and those anticipated for the remainder of Fiscal 1999, are being 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 Fiscal 1999 are expected to be approximately $50.0
million.
The Company utilizes financial instruments to hedge its overall exposure to
the effects of foreign currency and interest rate fluctuations. The Company may
utilize short-term forward and option contracts to hedge currency exposure when
deemed necessary for expenses denominated in Malaysian ringgit and Philippine
peso, as well as revenues denominated in Japanese yen and the major European
currencies. Deferred gains and losses from hedging transactions were immaterial
to the Company's operating results in all periods presented. Fairchild does not
speculate in these financial instruments.
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.
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 certain of the Company's products and
services until June 11, 2000 under a foundry services agreement. In Fiscal 1998,
such sale of products and services to National Semiconductor accounted for
approximately 19% of the Company's revenues. Second, National Semiconductor has
agreed to provide certain administrative
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services to the Company under a transition services agreement. Third, National
Semiconductor has agreed to indemnify the Company against certain losses
relating to infringement of intellectual property rights of third parties under
a technology licensing and transfer agreement.
In the fourth quarter of Fiscal 1998, National Semiconductor informed the
Company that its demand would be significantly lower in Fiscal 1999 than in
Fiscal 1998. This has resulted in significantly lower contract manufacturing
revenues in the first half of Fiscal 1999 as compared to the first half of
Fiscal 1998 and will result in substantially lower contract manufacturing
revenues throughout Fiscal 1999 as compared to Fiscal 1998. Such reduced demand
has and will continue to negatively impact factory utilization, particularly in
the 6-inch wafer fabrication plant in South Portland, Maine. National
Semiconductor, under the terms of the Asset Purchase Agreement with Fairchild,
is obligated to purchase an aggregate of $330.0 million of contract
manufacturing services during the 39-month period which began March 11, 1997,
including a minimum of $90.0 million and $80.0 million of contract manufacturing
services in Fiscal 1999 and Fiscal 2000, respectively. 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
in Fiscal 1999. For the six-months ended November 29, 1998, the Company has
billed National Semiconductor $11.6 million for committed fixed cost absorption
under the Asset Purchase Agreement. Despite recent indications that demand from
National Semiconductor will increase in the second half of Fiscal 1999, the
Company does not believe National Semiconductor will meet its revenue commitment
in Fiscal 1999. In this event, the Asset Purchase Agreement requires National
Semiconductor to reimburse the Company for unabsorbed fixed costs and lost
profit on the revenue shortfall. National Semiconductor has reaffirmed its
commitment to remain in compliance with the terms of the Asset Purchase
Agreement.
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 throughout Fiscal 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 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. The Company is also reviewing the year 2000 readiness and
compliance of its principal suppliers of products and services, in order to
identify and assess any negative impacts that such non-compliances could have on
the Company. In addition, the Company is working with its customers to identify
potential year 2000 issues with its products. To date, no issues have been
identified. We expect that our assessments will be completed by June 30, 1999.
During the first nine months of 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 $1.0 million, the majority of which
should be incurred before the end of the second quarter of Fiscal 2000. 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 the Company has not yet
estimated. The Company is not actively engaged in preparing contingency plans in
the event that key suppliers or customers fail to become year 2000 compliant.
However, the Company, in the ordinary course of business, seeks to expand its
customer base to lessen dependence on any one customer for a significant portion
of its revenues, and seeks second sources of supply for its key products and
services where appropriate.
52
<PAGE> 57
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
During and subsequent to Fiscal 1998, the Financial Accounting Standards
Board issued several new statements. SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, establishes standards for reporting
information about operating segments in annual and interim financial statements.
This statement also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997, but is not required in
interim periods in the first year of adoption. SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, amends certain
provisions of SFAS Nos. 87, 88 and 106. It revises employers' disclosures about
pension and other postretirement benefit plans. This statement is effective for
fiscal years beginning after December 15, 1997. SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, 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, 1999.
The AICPA issued two new Statements of Position ("SOP") in Fiscal 1998. 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.
The Company intends to adopt SFAS No. 131 and SFAS No. 132 effective for
its consolidated financial statements for the fiscal year ending May 30, 1999
and will retroactively adopt the provisions of SFAS No. 131 for the year ended
May 31, 1998. The Company intends to adopt SOP 98-1 and SOP 98-5 in Fiscal 2000
and SFAS No. 133 in Fiscal 2001. Adoption of SFAS No. 131 will only result in
added disclosure and adoption of SOP 98-1 and SOP 98-5 is not expected to have a
material effect on the consolidated financial statements. The Company is
presently analyzing SFAS No. 132 and SFAS No. 133, and has not yet determined
their impact on the Company's consolidated financial statements.
53
<PAGE> 58
SELECTED HISTORICAL FINANCIAL DATA OF THE POWER DEVICE BUSINESS
The following table sets forth selected historical financial data of the
Power Device Business. The historical financial data as of and for the years
ended December 31, 1996, 1997 and 1998 are derived directly from the audited
Financial Statements of the Power Device Business included elsewhere in this
prospectus. This information should be read in conjunction with the Financial
Statements of the Power Device Business included elsewhere in this prospectus
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Power Device Business."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $471.8 $478.1 $386.5
Gross profit................................................ $ 56.5 $131.0 $137.3
Research and development.................................... 18.6 19.2 15.2
Selling, general and administrative......................... 29.0 34.3 33.8
Litigation settlement expense............................... -- -- 58.0
------ ------ ------
Operating income............................................ $ 8.9 $ 77.5 $ 30.3
====== ====== ======
OTHER FINANCIAL DATA:
Revenue:
Discrete.................................................. $300.7 $286.4 $224.6
Analog.................................................... 117.4 154.3 145.3
Contract manufacturing services........................... 53.7 37.4 16.6
------ ------ ------
Total revenue............................................... $471.8 $478.1 $386.5
====== ====== ======
Depreciation and amortization............................... $ 49.0 $ 38.8 $ 22.3
Capital expenditures........................................ 118.1 10.9 8.6
HISTORICAL BALANCE SHEET DATA (END OF PERIOD):
Inventories................................................. $ 79.2 $ 50.5 $ 44.0
Total assets................................................ 340.1 188.6 170.3
Business equity............................................. 51.9 37.3 0.3
Cumulative translation adjustments.......................... (4.1) (18.6) (12.1)
</TABLE>
54
<PAGE> 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE POWER DEVICE BUSINESS
The following discussion should be read in conjunction with the Financial
Statements and notes thereto of the Power Device Business included elsewhere in
this prospectus.
OVERVIEW
The Power Device Business designs, manufactures and markets power discrete
semiconductors and standard analog integrated circuits serving the personal
computer, industrial, telecommunications and consumer electronics markets. On
April 13, 1999, Samsung Electronics sold the Power Device Business to Fairchild
for approximately $406.8 million in cash, net of certain purchase price
adjustments. The Power Device Business is headquartered in Bucheon, South Korea.
For all periods presented, the Power Device Business has been operated as part
of the System LSI Division of Samsung Electronics. The operating results of the
Power Device Business are not necessarily indicative of the results that would
have been obtained on a stand-alone basis. See Notes to Unaudited Pro Forma
Combined Condensed Financial Statements and Unaudited Supplemental Data.
The functional currency of the Power Device Business is the Won. The
financial statements for the three years ended December 31, 1998, have been
translated into U.S. Dollars based on the provisions of SFAS No. 52, and are
presented in accordance with U.S. GAAP. The income statement of the Power Device
Business has been translated into U.S. Dollars at the weighted average rates of
805 Won, 951 Won, and 1,399 Won to one U.S. Dollar for 1996, 1997 and 1998,
respectively.
The following table summarizes the composition of the revenues of the Power
Device Business as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Trade sales to unaffiliated customers....................... 38.1% 40.9% 48.0%
Trade sales to Samsung Electronics and affiliated Samsung
companies................................................. 19.9 19.7 25.3
Trade sales to Sales Subsidiaries of Samsung Electronics.... 30.6 31.6 22.4
----- ----- -----
Total product sales......................................... 88.6 92.2 95.7
Contract manufacturing revenues -- Samsung Electronics...... 11.4 7.8 4.3
----- ----- -----
Total.................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
As part of the Acquisition, Fairchild negotiated a Product Supply Agreement
with Samsung Electronics, which provides for guaranteed annual minimum levels of
product purchases at historical volumes and market prices for three years. In
addition, the Product Supply Agreement stipulates that Samsung Electronics will
undertake its best efforts to assure that Fairchild is established as a
preferred vendor of affiliated Samsung companies to the extent permissible under
applicable laws and regulations. The Sales Subsidiaries re-sell products of the
Power Device Business to third party customers in Asia, North America, Europe
and Japan. As part of the Acquisition, Fairchild negotiated continued sales
support by the Sales Subsidiaries under a Transitional Services Agreement for a
period of three years. The Power Device Business provides wafer fabrication
services to Samsung Electronics. Historically, contract manufacturing revenues
have been recorded at cost. As part of the Acquisition, Fairchild negotiated a
Foundry Sale Agreement with Samsung Electronics which is designed to generate
Won-denominated profits equivalent to $44.8 million over the next three years
(assuming an exchange rate of 1,200 Won to one U.S. Dollar).
55
<PAGE> 60
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS. Net income was $15.7 million for 1998, compared to
$42.9 million for 1997. Net income for 1998 includes a one-time charge for a
settlement of a patent infringement lawsuit of $58.0 million which did not occur
in 1997. Excluding this one-time charge which will remain with Samsung
Electronics, net income was $73.7 million, an increase of 71.8% from 1997.
Operating income, excluding the one-time charge, was $88.3 million in 1998,
compared to $77.5 million in 1997, an increase of 13.9%. The increase in
operating income is due primarily to increased gross profit as a result of the
devaluation of the Won, lower depreciation and a full year's benefit of the
impact of cost reduction actions in 1998, which were undertaken during 1997.
Excluding the one-time charge, foreign currency gains and losses and
depreciation and amortization of $22.3 million and $38.8 million in 1998 and
1997, respectively, EBITDA was $110.6 million in 1998 as compared to $116.3
million in 1997. EBITDA is presented because we believe that it is a widely
accepted indicator of an entity's ability to incur and service debt. EBITDA
should not be considered as an alternative to net income, operating income, or
other consolidated operations and cash flow data prepared in accordance with
generally accepted accounting principles, as an indicator of the operating
performance of the Power Device Business, or as an alternative to cash flows as
a measure of liquidity.
Revenues. The revenues of the Power Device Business are comprised of
product sales to third parties, Samsung Electronics and affiliated Samsung
companies and Sales Subsidiaries of Samsung Electronics (95.7% and 92.2% of
total revenues in 1998 and 1997, respectively) and revenues from contract
manufacturing services provided to Samsung Electronics (4.3% and 7.8% of total
revenues in 1998 and 1997, respectively). Product sales decreased 16.1% to
$369.9 million in 1998 from $440.7 million in 1997, driven by soft market
conditions in the semiconductor industry and the devaluation of the Won. The
decrease in product sales was driven by falling average selling prices, offset
by an increase in unit sales volume of 3.0% year over year. The decrease in
average selling prices is the result of price competition driven by excess
capacity in the semiconductor industry.
Sales of discrete products, representing 60.7% and 65.0% of 1998 and 1997
product sales, respectively, decreased 21.6% in 1998 from 1997. The decrease was
due entirely to lower average selling prices, which declined approximately 24%
in 1998 due in part to the devaluation of the Won, offset by slightly higher
volumes. Sales of analog products, representing 39.3% and 35.0% of 1998 and 1997
product sales, respectively, decreased 5.8% in 1998 from 1997. The decrease was
entirely due to lower average selling prices, which declined approximately 11%
in 1998 due in part to the devaluation of the Won, offset by higher volumes.
Geographically, 87.5%, 6.6% and 5.9% of product sales were derived in Asia,
North America and Europe in 1998, respectively, compared to 85.9%, 8.1% and 6.0%
in 1997. Product sales fell in all regions in 1998 from 1997. Product sales
decreased 14.5%, 31.8% and 17.4% in Asia, North America and Europe,
respectively, in 1998 as compared to 1997. The Power Device Business' product
sales are primarily denominated in U.S. Dollars.
Contract manufacturing revenues decreased 55.6% to $16.6 million in 1998
from $37.4 million in 1997. Contract manufacturing revenues are recorded at
cost. The decrease in 1998 from 1997 was driven by lower demand from Samsung
Electronics.
Gross Profit. Despite lower revenues, gross profit increased 4.8% to
$137.3 million in 1998 from $131.0 million in 1997. As a percentage of product
sales, gross profits were 37.1% in 1998, compared to 29.7% in 1997. The increase
in gross profit as a percentage of product sales was driven by the devaluation
of the Won against the U.S. Dollar, as the Power Device Business' manufacturing
cost structure is primarily Won-based, while revenues are predominately U.S.
Dollar-denominated. The Won devalued 47.1% against the U.S. Dollar in 1998. As a
result of the Acquisition, Fairchild is seeking to minimize its exposure to
fluctuations in the Won to U.S. Dollar exchange rate. Actions to reduce such
exposure
56
<PAGE> 61
include increasing revenues denominated in Won and decreasing costs denominated
in Won per the terms of certain agreements with Samsung Electronics. Other
actions include negotiating U.S. Dollar prices and payment terms with certain
subcontractors and hedging activities. In addition, gross profit as a percentage
of product sales was enhanced by a full-year's benefit of cost reduction
actions, including efficiencies realized from the transfer of certain wafer
fabrication and assembly and test activities to other Samsung Electronics'
facilities, which was completed during 1997, offset by the negative effect of
falling average selling prices and reduced factory utilization in the second
half of 1998 as the Power Device Business slowed production in an effort to
reduce inventories.
Research and Development. R&D expenses decreased 20.8% to $15.2 million or
4.1% of product sales in 1998, compared to $19.2 million or 4.4% of product
sales in 1997. The decrease in R&D expenses is due primarily to the devaluation
of the Won against the U.S. Dollar, as R&D expenses are primarily denominated in
Won. In Won, R&D expenses increased approximately 16% in 1998 from 1997 due to
increased headcount and expenses related to the operation of a pilot assembly
line for package development in 1998 which the Power Device Business did not
incur in 1997.
Selling, General and Administrative. SG&A expenses decreased 1.5% to $33.8
million or 9.1% of product sales in 1998, from $34.3 million or 7.8% of product
sales in 1997. The decrease in SG&A expenses is due to the devaluation of the
Won, offset by higher Won-based allocations.
Litigation Settlement. The Power Device Business incurred litigation
settlement costs, payable by Samsung Electronics, of $58.0 million in 1998
resulting from the settlement of a patent infringement lawsuit. No such amounts
were incurred in 1997.
Interest Expense, Net. Interest expense, net was $4.2 million and $10.1
million in 1998 and 1997, respectively. Interest is recorded on the allocated
portion of corporate borrowings by Samsung Electronics and on the amortization
of capital lease obligations on assets held by the Power Device Business. The
reduction in interest in 1998 from 1997 is due primarily to lower corporate
borrowings allocated to the Power Device Business in 1998. Both the allocated
corporate borrowings and the capital lease obligations were retained by Samsung
Electronics as part of the Acquisition.
Foreign Currency Losses, Net. The Power Device Business experienced
foreign currency losses of $0.9 million in 1998, compared to $5.9 million in
1997. The decreased loss in 1998 is due to moderating foreign exchange losses in
1998 over 1997. In late 1997, the Power Device Business suffered large foreign
exchange transaction losses on accounts payable denominated in U.S. Dollars,
resulting from the sudden devaluation of the Won. Accounts receivable
denominated in U.S. Dollars are not similarly exposed due to one to two day
settlements under letter of credit arrangements. Such transaction losses
moderated during 1998 as the Won strengthened against the U.S. Dollar during the
year.
Income Taxes. Income tax expense was $9.5 million and $18.5 million in
1998 and 1997, respectively. The effective tax rate was 37.8% in 1998, compared
to 30.2% in 1997. The increase in the effective rate is due to the translation
of the patent infringement settlement at the 1998 year ending exchange rate for
purposes of calculating Won-based income tax expense, as opposed to the weighted
average exchange rate for translating U.S. Dollar income tax expense, in
accordance with SFAS No. 52.
The effective tax rates on a Won-denominated basis were 28.8% and 30.2% in
1998 and 1997, respectively.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS. Net income was $42.9 million for 1997, compared to
$2.8 million for 1996. Operating income was $77.5 million in 1997, compared to
$8.9 million in 1996. The increase in operating income is due primarily to
increased gross profit as a result of the devaluation of the Won, particularly
in the second half of 1997, lower depreciation and the favorable effect of cost
reduction actions undertaken during 1997. Excluding foreign currency gains and
losses and depreciation and amortization of $38.8
57
<PAGE> 62
million and $49.0 million in 1997 and 1996, respectively, EBITDA was $116.3
million in 1997, compared to $57.9 million in 1996.
Revenues. The revenues of the Power Device Business are comprised of
product sales to third parties, Samsung Electronics and affiliated Samsung
companies and Sales Subsidiaries of Samsung Electronics (92.2% and 88.6% of
total revenues in 1997 and 1996, respectively) and revenues from contract
manufacturing services provided to Samsung Electronics (7.8% and 11.4% of total
revenues in 1997 and 1996, respectively). Product sales increased 5.4% to $440.7
million in 1997 from $418.0 million in 1996. The increase in product sales was
driven by a 7.4% increase in unit shipments, offset by a slight decrease in
average selling prices.
Sales of discrete products, representing 65.0% and 71.9% of 1997 and 1996
product sales, respectively, decreased 4.7% in 1997 from 1996. The decrease was
due to lower average selling prices, which offset a 4% increase in sales
volumes. Sales of analog products, representing 35.0% and 28.1% of 1997 and 1996
product sales, respectively, increased 31.4% in 1997 from 1996. The increase was
due to higher sales volume across all product families and the sales ramp for
the proprietary Samsung Power Switch, offset by slightly lower average selling
prices.
Geographically, 85.9%, 8.1% and 6.0% of product sales were derived in Asia,
North America and Europe in 1997, respectively, compared to 86.4%, 7.7% and 5.9%
in 1996. Product sales increased in all regions in 1997 from 1996. Product sales
increased 4.8%, 11.4% and 6.1% in Asia, North America and Europe, respectively,
in 1997 compared to 1996. The Power Device Business' product sales are
denominated primarily in U.S. Dollars.
Contract manufacturing revenues decreased 30.4% to $37.4 million in 1997
from $53.7 million in 1996. Contract manufacturing revenues are recorded at
cost. The decrease in 1997 from 1996 was driven by lower demand from Samsung
Electronics.
Gross Profit. Gross profit increased 132.2% to $131.0 million in 1997 from
$56.5 million in 1996. As a percentage of product sales, gross profits were
29.7% in 1997, compared to 13.5% in 1996. The increase in gross profit as a
percentage of product sales was driven primarily by the effect of a full-year's
benefit of cost reduction actions, including efficiencies realized from the
transfer of certain wafer fabrication and assembly and test activities to other
Samsung Electronics' facilities, which was completed during 1997. In addition,
gross profit was negatively impacted by the devaluation of the Won against the
U.S. Dollar, particularly in the second half of 1997, as the Power Device
Business' manufacturing cost structure is primarily Won-based. The Won devalued
18.1% against the U.S. Dollar in 1997.
Research and Development. R&D expenses increased 3.2% to $19.2 million, or
4.4% of product sales in 1997 compared to $18.6 million or 4.4% of product sales
in 1996. The increase in R&D expenses is primarily due to increased headcount to
support new product and process development activities.
Selling, General and Administrative. SG&A expenses increased 18.4% to
$34.3 million or 7.8% of product sales in 1997, from $29.0 million or 6.9% of
product sales in 1996. The increase in SG&A expenses is due primarily to
increased allocations from Samsung Electronics.
Interest Expense, Net. Interest expense, net was $10.1 million and $10.4
million in 1997 and 1996, respectively. Interest is recorded on the allocated
portion of corporate borrowings by Samsung Electronics and on the amortization
of capital lease obligations on assets held by the Power Device Business. The
reduction in interest in 1997 from 1996 is due primarily to lower corporate
borrowings allocated to the Power Device Business in 1997. Neither the allocated
corporate borrowings nor the capital lease obligations were assumed by Fairchild
as part of the Acquisition.
Foreign Currency Losses, Net. The Power Device Business experienced
foreign currency losses of $5.9 million in 1997, compared to $0.5 million in
1996. The increased loss is due to large foreign
58
<PAGE> 63
exchange losses on accounts payable denominated in U.S. Dollars in late 1997,
resulting from the sudden devaluation of the Won. Accounts receivable
denominated in U.S. Dollars are not similarly exposed due to one to two day
settlements under letter of credit arrangements. Such a devaluation did not
occur in 1996.
Income Taxes. Income tax expense was $18.5 million in 1997, as compared to
an income tax benefit of $4.8 million in 1996. The effective tax rate was 30.2%
in 1997. The effective tax rate for 1996 is not meaningful as the Power Device
Business incurred a net loss before income taxes. Income tax benefits incurred
in 1996 represent an increase in deferred tax assets due to net operating losses
and R&D tax credits that will be utilized to offset future taxable income.
YEAR 2000 COMPLIANCE
The Power Device Business is dependent upon the information systems of
Samsung Electronics. Under the terms of an agreement with Samsung SDS Co., Ltd.
("Samsung Data Systems") entered into in connection with the Acquisition,
Samsung Data Systems has agreed to provide certain information technology
services to the Power Device Business and to support the use of its information
systems by the Power Device Business for a three-year period following
consummation of the Acquisition. See "The Transactions -- Transitional Services
Agreement." The terms of the agreement with Samsung Data Systems require them to
insure the systems utilized by the Power Device Business are year 2000
compliant.
The Power Device Business has deployed internal resources to identify, test
and correct year 2000 problems in other systems it employs, including those
embedded in its machinery and equipment. The Power Device Business is also
reviewing the year 2000 readiness and compliance of its principal suppliers of
products and services, in order to identify and assess any negative impacts that
such non-compliances could have on the Power Device Business. In addition, the
Power Device Business is working with its customers to identify potential year
2000 problems with its products. To date, none have been identified. The Power
Device Business expects to remedy all year 2000 problems with its other systems
by November 1999, and complete its assessments of its key suppliers' readiness
by October 1999. For 1998, 1997 and 1996, incremental amounts incurred and
charged to expense to identify, test and correct year 2000 problems were
immaterial to the financial statements. Future amounts expected to be incurred
are also believed to be immaterial. Although the Power Device Business expects
its other systems will be year 2000 compliant, either the failure of Samsung
Electronics to make its systems year 2000 compliant or the failure of its key
suppliers and customers to address the year 2000 issue could result in
disruption to the operations of the Power Device Business and have a significant
adverse effect on its results of operations, the extent of which cannot be
estimated. The Power Device Business is in the process of developing contingency
plans in the event that certain or all of Samsung Electronics' systems fail to
become year 2000 compliant, or the operations of key suppliers or customers
become disrupted. Such contingency plans are expected to be completed by June
1999.
59
<PAGE> 64
INDUSTRY OVERVIEW
Semiconductors are the critical components used to create an increasing
variety of electronic products and systems. Since the invention of the
transistor in 1948, continuous improvements in semiconductor process and design
technologies have led to smaller, more complex and more reliable devices at a
lower cost per function. As performance has increased and size and cost have
decreased, semiconductors have expanded beyond their original primary
applications in computer systems to applications in telecommunications systems,
automotive products, consumer products and industrial automation and control
systems. In addition, system users and designers have demanded systems with
increased functionality, higher levels of performance, greater reliability and
shorter design cycle times, all in smaller packages at lower costs. These
demands have resulted in increased semiconductor content as a percentage of the
system costs of electronic products. The demand for electronic systems has also
expanded geographically with the emergence of new markets, particularly in the
Asia/Pacific region.
Historically, changes in production capacity in the semiconductor industry
and, to a lesser extent, demand for electronic systems have resulted in
pronounced fluctuations in prices and margins. However, we believe that the
following factors may limit the severity of future cyclical variations: the
development of new semiconductor applications, the increased semiconductor
content as a percentage of total system cost, the trend towards consolidation in
the industry, more moderate capital spending on production capacity and the
increased customer use of just-in-time supply systems that have reduced
inventory levels.
Additionally, these trends have helped build demand for multi-market
companies that can provide a wide range of building block semiconductors as a
single-source supplier. Utilizing a single supplier with a sufficiently broad
product portfolio contributes to a manufacturer's overall cost reduction, and
helps to simplify the production of electronic products and systems.
Since 1990, the semiconductor market has expanded at a compounded annual
growth rate of approximately 12.0%, primarily as a result of two factors. The
first is the rapidly expanding end-user demand for faster, smaller and more
efficient electronic devices, with a greater range of functionality and
reliability, at lower costs. The second is the increasing value of
semiconductors as a percentage of the cost of electronic systems. According to
Worldwide Semiconductor Trade Statistics, the worldwide semiconductor total
available market declined to $125.6 billion in 1998 from $137.2 billion in 1997.
The decline was due primarily to an industry-wide drop in average selling prices
due to industry overcapacity. In addition, during the same period, total
available market for the DRAM segment of the semiconductor market declined by
29.3%, compared to a decline of 4.9% for all other segments in the aggregate.
60
<PAGE> 65
SEMICONDUCTOR CLASSIFICATIONS
The following table sets forth the worldwide semiconductor total available
market in each of the three product functions of the semiconductor industry:
<TABLE>
<CAPTION>
WORLDWIDE SEMICONDUCTOR TOTAL AVAILABLE MARKET(1)
------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 CAGR(2)
----- ----- ----- ----- ------ ------ ------ ------ ------ -------
(DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Micro components............. $ 9.2 $11.4 $13.9 $19.1 $ 23.8 $ 33.4 $ 39.8 $ 47.8 $ 47.3 22.7%
Memory:
Volatile................... 8.7 9.1 11.4 16.4 27.2 46.9 29.9 23.6 17.9
Non-volatile............... 3.1 3.1 3.4 4.8 5.3 6.6 6.1 5.7 5.1
----- ----- ----- ----- ------ ------ ------ ------ ------
Total memory............. 11.8 12.2 14.8 21.3 32.5 53.5 36.0 29.3 23.0 8.7
Moving/Shaping............... 29.6 31.0 31.1 37.0 45.6 57.5 56.1 60.1 55.3 8.1
----- ----- ----- ----- ------ ------ ------ ------ ------
Total.................... $50.5 $54.6 $59.9 $77.3 $101.9 $144.4 $132.0 $137.2 $125.6 12.0
===== ===== ===== ===== ====== ====== ====== ====== ======
</TABLE>
- -------------------------
(1) According to Worldwide Semiconductor Trade Statistics. Due to rounding, some
totals are not arithmetically correct sums of their component figures.
(2) Compounded annual growth rate. Represents the compounded annual growth rate
for the semiconductor industry since 1990.
The semiconductor industry can be divided into three product functions:
microcomponents, memory and moving and shaping. Microcomponents include
microprocessors and microcontrollers that process data according to instruction
sets embedded within the semiconductors themselves. These are considered the
"brains" of the electronic system and are at the center of the system
architecture. Memory includes two types of memory devices, volatile and
non-volatile, that store data and instructions. Volatile memory devices, which
need continual application of electricity to retain data, can be segmented into
DRAM (dynamic random access memory), SRAM (static random access memory) and VRAM
(video random access memory). Non-volatile devices, which retain data after
power to the device has been shut off, can be segmented into ROM (read-only
memory), EPROM, EEPROM and FLASH (memories that enable high speed electrical
reprogramming). Moving and shaping includes the moving of commands and the
shaping of signals to enable electronic devices to perform intended functions,
including moving information into memory or from one sub-system to another, or
allowing microprocessors to process data.
Semiconductors are either analog/mixed signal, where electronic signals are
not viewed as "one" and "zero," or digital integrated circuits, such as logic
devices, that do rely on ones and zeroes to control the operation of electronic
systems. Furthermore, semiconductors are classified as either standard
components or application-specific components. Multi-market standard components
are used by a large group of systems designers for a broad range of
applications, while application-specific components are designed to perform
specific functions in specific applications.
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<PAGE> 66
FAIRCHILD MARKETS
The following table sets forth information with respect to worldwide
semiconductor sales by product family and process technology in which we
participate:
<TABLE>
<CAPTION>
WORLDWIDE SEMICONDUCTOR SALES(1)
----------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ----- ----- ----- ----- -----
(DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MOVING & SHAPING:
ANALOG
Standard Linear.............. $3.0 $3.0 $3.1 $ 3.8 $ 4.7 $ 5.7 $ 5.5 $ 6.2
Mixed Signal................. 4.8 5.3 5.6 6.9 8.9 10.9 11.5 13.6
---- ---- ---- ----- ----- ----- ----- -----
Total..................... $7.8 $8.3 $8.7 $10.7 $13.6 $17.6 $17.0 $19.8
==== ==== ==== ===== ===== ===== ===== =====
DISCRETE
DMOS Power................... $0.6 $0.7 $0.8 $ 1.1 $ 1.4 $ 2.1 $ 2.2 $ 2.2
Bipolar...................... 4.2 4.2 4.1 4.6 5.5 7.1 6.2 6.1
IGBT......................... -- -- -- -- -- 0.5 0.6 0.6
---- ---- ---- ----- ----- ----- ----- -----
Total..................... $4.8 $4.9 $4.9 $ 5.7 $ 6.9 $ 9.7 $ 9.0 $ 8.9
==== ==== ==== ===== ===== ===== ===== =====
LOGIC
Bipolar...................... $1.5 $1.4 $1.3 $ 1.5 $ 1.3 $ 1.3 $ 0.9 $ 0.9
CMOS/BiCMOS.................. 1.1 1.1 1.0 1.4 1.8 2.3 2.1 2.4
---- ---- ---- ----- ----- ----- ----- -----
Total..................... $2.6 $2.5 $2.3 $ 2.9 $ 3.1 $ 3.6 $ 3.0 $ 3.3
==== ==== ==== ===== ===== ===== ===== =====
MEMORY:
NON-VOLATILE MEMORY
EPROM........................ $1.6 $1.4 $1.2 $ 1.3 $ 1.4 $ 1.4 $ 1.1 $ 0.7
EEPROM(2).................... 0.2 0.2 0.5 0.7 0.7 0.9 0.9 0.9
---- ---- ---- ----- ----- ----- ----- -----
Total..................... $1.8 $1.6 $1.7 $ 2.0 $ 2.1 $ 2.3 $ 2.0 $ 1.6
==== ==== ==== ===== ===== ===== ===== =====
</TABLE>
- -------------------------
(1) All data other than data for EEPROM, according to Worldwide Semiconductor
Trade Statistics. Due to rounding, some totals are not arithmetically
correct sums of their component figures. In addition, 1998 data are not yet
available.
(2) According to ICE Corporation.
MOVING AND SHAPING MARKETS
Analog Market. Analog products are used to shape or condition electrical
signals, to amplify electrical signal strength, to convert electrical signals to
and from digital "one or zero" levels, to regulate voltage levels and to provide
interfaces between other products within an electrical system. The analog market
is split into two major segments: Standard Linear and Mixed Signal. The Standard
Linear market is comprised of building block products such as amplifiers,
voltage regulators, data conversion, interface circuits, and comparators. These
products are used in all end systems, from computers and telecommunications, to
industrial, automotive and consumer applications. The Mixed Signal market
consists of more complex analog products, which also contain some digital
circuitry for timing, information control and data flow. Mixed Signal products
are often developed for specific applications, such as video encoding,
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hard disk drive control, data transmission, motor control and power supply
control. We compete in both the Standard Linear and Mixed Signal markets.
Discrete Market. The discrete business, unlike logic and memory, is highly
fragmented and composed of dozens of middle market players. Discrete devices
consist of individual diodes or transistors, whereas integrated circuits (such
as memory or logic devices) combine millions of functions into a "single chip"
of silicon to form a more complex circuit. Discrete products are differentiated
almost entirely on the basis of performance, as opposed to on the basis of
function as in the integrated circuit market. We participate in both the power
and small signal discrete markets, manufacturing devices that condition power or
signals for use by other devices. While small signal discrete markets have
generally grown at slower, but more stable, rates than integrated circuit
markets, the power discrete market is rapidly growing due to the increasing
importance of power management, particularly in portable applications (e.g.,
pagers and notebook computers).
Standard Logic Market. Logic devices are integrated circuits that control
the operation of electronic systems and move data. The standard logic market is
fully digital and has five major participants, of which we are one of the
leaders. Standard logic products are fabricated through three primary process
technologies: Bipolar, CMOS and BiCMOS. Bipolar technology is targeted for high
speed applications while CMOS technology allows the manufacturer to create a
denser chip, consuming less power and generating less heat. BiCMOS is a hybrid
of Bipolar and CMOS. While Bipolar semiconductors were once used extensively in
large computer systems, CMOS has become the most prevalent technology,
particularly for devices used in portable personal computer systems. Given the
growing demand for portability, use of CMOS technology is expected to continue
to expand; however, the demand for Bipolar is expected to continue as a result
of its lower cost and suitability for particular applications.
MEMORY MARKET
Non-Volatile Memory Market. The memory market is comprised of volatile
memory devices (DRAM, SRAM and VRAM) and non-volatile memory devices (ROM,
EPROM, EEPROM and FLASH). Volatile memory devices need continual application of
electricity to retain data, while non-volatile memory retains data after the
power to the device has been turned off. Most of the historic economic
cyclicality in the semiconductor industry has been attributable to the volatile
memory market, as evidenced by a 29.3% decline in 1998 market sales versus a
4.9% decrease for the microcomponents, moving & shaping and non-volatile memory
markets.
We produce standard EPROM and EEPROM products, but also fabricate
application-specific EEPROM devices. We have standardized the
application-specific nature of the EEPROM process, having designed it to perform
functions in a specific application, but not be proprietary for any single
customer. EEPROMs are being used extensively due to their ease of
programmability, and the demand for these products is growing rapidly. The
EEPROM market has grown at a compounded annual growth rate of 24.0% from 1990 to
1997, ahead of the overall semiconductor market growth. EEPROMs are somewhat
isolated from FLASH products, as they serve different market needs.
Reprogrammable EEPROMs are used in many products to store frequently used phone
numbers (fax machines), store accumulated phone time (cellular phones) and
change authorization codes (keyless security systems). EPROMs have been losing
market share to FLASH products because FLASH memories are easily programmable
and have higher data densities. However, there is a level of EPROM demand that
is not economically served by FLASH. As a result, EPROMs are still utilized in
virtually all segments of the low-end consumer electronic market (e.g.,
answering machines, garage door openers and washing machines), where storage of
the instruction set for the microcontrollers require less than 2 Mb.
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BUSINESS
GENERAL
Fairchild is the largest independent semiconductor company 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 Semiconductor's
predecessors were among the original founders of the semiconductor industry. The
original Fairchild Semiconductor was established in 1959 as a provider of memory
and logic semiconductors. Fairchild Semiconductor was acquired by Schlumberger
in 1979. National Semiconductor acquired Fairchild Semiconductor from
Schlumberger in 1987, and fully integrated it into its operations. Under the
Recapitalization, National Semiconductor spun-off certain of the assets of
Fairchild Semiconductor as an independent company on March 11, 1997. At the time
of the Recapitalization, Fairchild Semiconductor consisted of the discrete,
logic and non-volatile memory businesses of National Semiconductor. On December
31, 1997, Fairchild Semiconductor acquired Raytheon Semiconductor, Inc., a
wholly owned subsidiary of Raytheon Company, for approximately $117.0 million in
cash. Raytheon Semiconductor designs, manufactures and markets high-performance
analog and mixed signal semiconductors for the personal computer,
communications, broadcast video and industrial markets. Raytheon Semiconductor
was combined with the Non-Volatile Memory Products Group to form the Analog,
Mixed Signal and Non-Volatile Memory Products Group. Fairchild's other product
groups include the Discrete Power and Signal Technologies Group and the Logic
Products Group.
On April 13, 1999, we purchased the Power Device Business from Samsung
Electronics for approximately $406.8 million, net of certain purchase price
adjustments. 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 not only
enhances our analog and power discrete product offerings, but also provides us
with a greater market presence in South Korea. The Acquisition 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 pursuant to 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
pursuant to a foundry sale agreement. The agreement is designed to
provide us certain levels of profitability for each of the three years.
In connection with the Acquisition, we have obtained a full income tax
holiday for a period of seven years in South Korea. The Power Device Business
added approximately 1,455 employees, most of whom work at its wafer fabrication
facilities in South Korea, to Fairchild's existing work force of approximately
6,500.
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GROWTH STRATEGY
Our objective is to be the leading supplier of multi-market semiconductors
to the worldwide personal computer, industrial, telecommunications, consumer
electronics and automotive industries. Our business strategy emphasizes the
following key elements:
MAINTAIN HIGH QUALITY SERVICE. We seek to distinguish our service by
providing the industry's best support services, including electronic order
entry, just-in-time delivery and a full range of Internet services that provide
device specifications and order entry for samples. Since 1997, we have invested
in a number of innovative programs in order to deliver superior customer service
including:
- developing and maintaining four customer response centers staffed with
experienced employees to provide a link between customers and our design
engineers, manufacturing operations and sales personnel;
- creating a vice president of customer service position and establishing
customer focus teams and field application engineering teams;
- installing a state-of-the-art company-wide PeopleSoft enterprise software
system which provides a fully integrated order management, inventory and
manufacturing system;
- centralizing and consolidating our finished goods warehouse functions to
a primary site in Penang, Malaysia. This site, together with a Federal
Express shipment arrangement, facilitates timely movement of products
worldwide to end customers.
INTRODUCE NEW PRODUCTS. We are focused on expanding our customer base and
increasing our market share by continuing to develop new products and enhance
our current product portfolio to capitalize on industry trends. In Fiscal 1998,
our first full year as a stand-alone company, Fairchild introduced over 200 new
products, approximately twice the number of new products introduced in Fiscal
1997. In 1998, the Power Device Business introduced approximately 85 new
products.
INCREASE MARKET PENETRATION OF EXISTING PRODUCTS. We are uniquely
positioned, as the only global semiconductor company focused solely on
multi-market semiconductors, to dedicate our sales and marketing efforts toward
expanding our market share of existing products. Our internal sales force,
authorized representatives and distributors continue to expand customer
information programs, including technical specifications, application notes and
on-line services, and augment our trade advertising and comprehensive customer
support efforts which facilitate the incorporation of our products into our
customers' designs.
MAKE SELECTED SYNERGISTIC ACQUISITIONS. We intend to pursue strategic
acquisitions of companies that will complement our existing business by
expanding our product offerings, research and development capabilities and
market share. In addition to the Acquisition of the Power Device Business, we
acquired Raytheon Semiconductor, Inc. from Raytheon Company in December 1997.
That acquisition provided us with the opportunity to enter the approximately
$19.0 billion analog market.
CONTINUE TO IMPROVE MANUFACTURING EFFICIENCY. We have made significant
capital expenditures to increase capacity and improve manufacturing efficiency.
Although we believe that our wafer fabrication plants and assembly and test
facilities are among the most productive and efficient in the industry, we will
continue to invest in our people and assets in order to increase productivity
and enhance process efficiency. We are currently in the process of transferring
our analog wafer fabrication plants from our Mountain View, California facility
to our South Portland, Maine facility, which is expected to reduce our wafer
costs by two-thirds.
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COMPANY STRENGTHS
We believe our core strengths are the following:
BREADTH OF PRODUCT PORTFOLIO. We provide our customers with one of the
largest product offerings in the industry for analog, discrete, logic and
non-volatile memory devices. Our analog device portfolio comprises over 2,300
products, including offerings in 92 of the top 100 best-selling analog product
types by volume. Our discrete device portfolio comprises over 4,000 products and
we believe it is one of the most comprehensive power device portfolios in the
industry. We develop products for a wide range of market applications, reducing
our dependence on any single product, application or market. In addition, we
believe that our ability to provide our customers with multiple products meets a
growing need for a single source of supply among our end users.
LEADERSHIP IN POWER SOLUTIONS. We believe there is an increasing demand
for a combination of sophisticated computing and communication capabilities,
frequently in the form of portable devices. We are a leader in providing
solutions for managing the power required to operate such devices. Our combined
analog and discrete offering provides a complete solution for power management:
- Analog: We provide specific solutions for power conversion, temperature
sensing, management functions, battery chargers and motor controls.
- Power Discrete: We provide a comprehensive solutions for managing power
from the original source to end products such as computers, cellular
phones and network devices. Our portfolio of products includes
low-voltage products, such as power and signal MOSFETs and bipolar
devices, and high-voltage products, such as high-power MOSFETs, IGBTs,
Smart Power Switches and high-power bipolar transistors.
HIGH QUALITY CUSTOMER SERVICE. Our customers recognize us for our high
quality of service. They require a reliable source of supply, often in high
volumes and with short lead times, demand quick responses to technical questions
and seek support in designing new applications which use our products. Because
we are an independent company focused solely on multi-market products, all of
our service and support efforts are tailored to meet these customer needs. As a
result of our efforts, we have recently received numerous customer and industry
awards, including supplier awards from Compaq Computer Corp., Siemens AG and
Acer Inc. and the European Mid-Size Vendor of the Year award from Dataquest.
HISTORY OF PRODUCT INNOVATION. Our success in introducing new products has
been an important source of our growth and profitability. We have been a
significant innovator in the multi-market segment of the semiconductor industry
with several leading edge technologies and industry firsts, including our
introduction of High Speed CMOS in the late 1970s, FAST(R) and FACT(TM) in the
1980s and Low Voltage Logic products, DMOS Power MOSFETs using trench technology
and IGBT using silicon bonding technology in the 1990s. Since June 1997, we have
introduced approximately 300 new products.
DIVERSE AND BLUE-CHIP CUSTOMER BASE. Our diverse customer base, which
spans a wide spectrum of end user markets, enables us to avoid some of the
volatility that may be encountered in specific semiconductor markets. We serve
more than 50,000 customers worldwide, with no single customer, other than
National Semiconductor and Samsung Electronics, providing more than 5% of our
pro forma Fiscal 1998 total revenue. Customers in our end user markets include
industry leaders including Nokia, Compaq, Dell, Ericsson, IBM, Intel, Lucent,
Nortel Networks, Samsung Electronics, Siemens and Solectron.
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EXPERIENCED MANAGEMENT. Our senior management team consists of seven
individuals who have on average approximately 25 years of experience in the
semiconductor industry and includes:
- Kirk P. Pond (Chief Executive Officer): Mr. Pond, with over 30 years of
experience in the semiconductor industry, has held various senior
management positions at Texas Instruments Incorporated and was the Chief
Operating Officer of National Semiconductor.
- Joseph R. Martin (Chief Financial Officer): Mr. Martin, with over 20
years of experience in the semiconductor industry, has held various
senior financial positions with National Semiconductor, including Vice
President of Finance, Worldwide Operations.
In March 1997, Mr. Pond, Mr. Martin and certain other key employees of
Fairchild made an aggregate cash investment of $6.8 million in our company. Such
individuals currently own approximately 17.1% of our outstanding common stock.
CUSTOMERS AND APPLICATIONS
Fairchild designs, develops and manufactures products that it supplies to
more than 50,000 customers. As a result of the Acquisition, we provide a wide
range of more than 10,000 analog, discrete, logic and non-volatile memory
products to our diverse customer base. Our position as a strategic supplier of
basic and essential semiconductor products fosters close relationships with
customers. These relationships result in additional growth opportunities for
sales of existing products as well as early knowledge of customers' evolving
requirements and opportunities arising from the related development of their new
products.
The following table sets forth our principal end-user markets, the
percentage of pro forma trade revenue generated from each end-user market,
certain applications for our products and certain of our customers. Products
from each of our businesses are used throughout each of the major end-user
markets set forth below.
<TABLE>
<CAPTION>
CONSUMER
PERSONAL COMPUTERS INDUSTRIAL AND OTHER TELECOMMUNICATIONS ELECTRONICS AUTOMOTIVE
END MARKETS: -------------- ------------------ -------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
PERCENTAGE OF THE COMPANY'S 40% 25% 15% 16% 4%
TRADE REVENUE(1):
- -------------------------------------------------------------------------------------------------------------------------------
APPLICATIONS: Chips for Industrial Central office Cable television Airbags
smartcards automation and switching systems systems Antiskid braking
Disk drives control Data Network Compact disc kits
Internet hardware Intelligent power equipment players Automotive
Monitors switches Cellular telephones Home security entertainment
Network Lighting systems ISDN controllers systems systems
controllers Motor controllers Modems Household Central locking
Optical scanners Power supplies PBX systems appliances systems
Printers Smartcard readers Set-top boxes Pay television Fuel injection
PC motherboards decoders circuits
Satellite Ignition Circuits
receiver Transmission
decoding circuits control circuits
VCR
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
CONSUMER
PERSONAL COMPUTERS INDUSTRIAL AND OTHER TELECOMMUNICATIONS ELECTRONICS AUTOMOTIVE
END MARKETS: -------------- ------------------ -------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
CUSTOMERS: Apple Allen Bradley AT&T Canon Bosch
Compaq American Power Alcatel Creative Design Chrysler
Dell Honeywell Ericsson Daewood Delco Electronics
Gateway Reliance Lucent Technologies LG Electronics Ford
Hewlett-Packard Siemens Nokia Motorola Mitsubishi
IBM Tektronics Nortel Networks Samsung Electronics Teves
Intel Teradyne Samsung Electronics Sony Toyota
NEC Siemens Thompson Consumer
Samsung Electronics Zenith
Seagate Technology
Toshiba
- -------------------------------------------------------------------------------------------------------------------------------
EXAMPLE OF PRODUCT Computer Electric phone Portable phone VCR Engine control
APPLICATION: assembly
control
- -------------------------------------------------------------------------------------------------------------------------------
INPUT: Turn on computer Start motor assembly Turn on phone Program VCR to Start car
conveyor record
- -------------------------------------------------------------------------------------------------------------------------------
WHAT THE PRODUCT DOES: Boot up program Analog device to Power is routed EEPROM memory is Program in EPROM
moves from EPROM detect ground from battery to programmed to memory directs
to main memory faults active circuits start VCR fuel mixture
via logic chip; by a discrete
logic chips DMOS transistor
communicate
between main
memory and
processor
- -------------------------------------------------------------------------------------------------------------------------------
RESULT: Spreadsheet Potential electrical A phone call is Program is Car runs smoothly
application is hazard is made recorded with fewer
accessed eliminated emissions
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1998 combined trade revenues include those of Fairchild for the twelve-month
period ended November 29, 1998 and those of the Power Device Business for
the twelve-months ended December 31, 1998 and are presented to be consistent
with the data reported by Worldwide Semiconductor Trade Statistics.
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.
ANALOG, MIXED SIGNAL AND NON-VOLATILE MEMORY PRODUCTS GROUP
ANALOG AND MIXED SIGNAL PRODUCTS
This product line designs, manufactures and markets high-performance analog
and mixed signal integrated circuits for the personal computer, industrial,
consumer electronics and broadcast video markets. These products are
manufactured using leading-edge CMOS, BiCMOS, DMOS and bipolar technologies.
Analog and mixed signal products represent a significant long-term growth area
of the semiconductor industry. The increasing demand to integrate high
performance microprocessor-based electronics in equipment ranging from personal
computers to scientific instrumentation, telecommunications and data
communications networks has led analog and mixed signal semiconductor suppliers
to create designs that have higher levels of integration to reduce space and
power requirements and provide greater functionality, all at lower cost. We
offer over 2,300 analog device products, including offerings in
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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,
Harris, Motorola, 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.
Fairchild also offers 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. Fairchild's mixed signal offerings include
analog to digital converters, digital to analog converters and market-leading
digital video encoders and decoders sold to manufacturers of high-end video
equipment and set top boxes.
We believe our Analog product portfolio is further enhanced by a wide
variety of packaging solutions that we have developed. These solutions include
surface mount and tiny packages.
NON-VOLATILE MEMORY PRODUCTS
Fairchild designs, manufactures and markets non-volatile memory circuits
which retain data after power to the device has been shut off. Fairchild offers
an extensive portfolio of high performance serial EEPROM and EPROM products.
Fairchild does 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 of the growth products in the
group and a focus of non-volatile memory research and development expenditures.
Fairchild serves the serial EEPROM product with product offerings in (i)
standard EEPROM and (ii) Application Specific Standard Products. Fairchild's
standard EEPROM products serve each of the three bus interface protocols used
with all industry standard microcontrollers. Fairchild's Application Specific
Standard Products are individually developed for specific applications and
combine Fairchild's core EEPROM competencies with logic capabilities. The
Company's 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. Since Fairchild
Semiconductor's spin-off from National Semiconductor, Fairchild Semiconductor's
market share in the growing Serial EEPROM market ($910 million total available
market) has grown by 10.2%.
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
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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, Fairchild is
incurring minimal research and development expenditures in this product line.
Fairchild currently sells EPROMs in densities ranging from 64K to 4Mb. In Fiscal
1998, Fairchild had a market share of 4.4% in the EPROM market ($740 million
total available market).
DISCRETE POWER AND SIGNAL TECHNOLOGIES GROUP
Discrete devices are individual diodes or transistors that perform basic
signal amplification and switching functions in electronic circuits. Driving the
long-term growth of discretes is the increasing importance of power management,
particularly in portable applications (e.g., pagers and notebook computers).
Fairchild participates in both the power and small signal discrete markets using
its DMOS and Bipolar technologies, manufacturing semiconductors that condition
(or shape) power or signals for use by other devices. The Acquisition 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, Motorola
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. Fairchild offers 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. Fairchild is
focusing on DMOS as its 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 Fairchild's research and development
expenditures. These expenditures have been directed primarily toward the
development of Fairchild's 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 Fairchild's leading edge Trench Technology.
The combination of leading edge wafer fabrication processes and new packaging
technology continues to allow Fairchild's Low Voltage DMOS product families to
set new standards for low resistance and high current performance in miniature
surface mount power packaging. Our Low Voltage DMOS products are commonly found
in portable computers and peripherals, portable telephones, automobiles and
battery-powered devices.
High Voltage MOSFET. This product line offers a wide variety of HV MOSFET
devices designed for high voltage applications (200V to 900V) over a wide range
of performance characteristics, power handling capabilities and package options.
The product portfolio includes both N channel and P channel devices using
proprietary HDMOS process technology. These products are commonly found in power
system applications including flyback and forward converters and power factor
correction in switch-mode power supplies (SMPS).
IGBT. This product line offers very high voltage devices (600V to 1500V)
in a variety of package options. A proprietary silicon bonding process is being
used in the production of this family of products. Typical applications for
these devices are motor control, inverters, robotics, servo controls, power
supply and lamp ballast. IGBT will be a focused growth product line as more
industrial applications are designing products using this technology.
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Bipolar. Fairchild manufactures and sells 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
Fairchild designs, develops and manufactures standard logic devices
utilizing three wafer fabrication processes: CMOS, BiCMOS and Bipolar. Within
each of these production processes, Fairchild manufactures 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, Fairchild
continues to generate significant revenues from its 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, Fairchild continues to invest in new products to
generate future revenue growth. In addition, many of these investments have
established our logic devices as key components for the personal computer and
telecommunications markets, particularly in the internet and networking sector
and cellular communications sector. Internet appliances and internet
infrastructure equipment (e.g. LAN and WAN switches, hubs, routers, and servers)
require high speed, high drive and low noise characteristics. We offer logic
devices using CMOS, BiCMOS and Bipolar processes that are required to achieve
these characteristics. Our ABT, LVT, ECL and GTL logic devices have all
successfully penetrated the internet hardware market. In addition, cellular
communications equipment such as cellular phones, pagers and base stations
requires low power and noise generation in very small packages. Our Tiny Logic,
VHC, LCX and FST technology have established our logic products as a leader in
addressing these requirements. Major competitors include Texas Instruments,
Motorola 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. Fairchild's CMOS offerings include mature
products such as FACT(TM), HCMOS, and CD4K, and new products such as LCX, VHC,
GTL, Switches and TinyLogic.
Bipolar. Bipolar devices typically operate at high speeds, require more
power, are less costly than CMOS devices and are used in many applications that
do not require CMOS solutions. Fairchild supplies 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. Fairchild's Bipolar offerings
include FAST(R), ALS, LS, ECL and TTL.
BiCMOS. BiCMOS is a hybrid of CMOS and Bipolar technologies developed to
combine the high speed and high drive characteristics of bipolar technologies
with the low power consumption and high integration of CMOS technologies. BiCMOS
is an emerging technology which requires complex manufacturing processes and is
used in niche applications, primarily in the telecommunications market.
Fairchild's BiCMOS offerings include ABT and LVT.
According to reports issued by Insight/Onsite, a market research firm,
Fairchild was the third largest supplier of standard logic products in the world
in 1997. In the Low Voltage CMOS Logic market ($175.0 million total available
market in 1997), the fastest growing portion of the CMOS Logic market,
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Fairchild held a No. 2 share position in 1997 behind the leader, Texas
Instruments. Fairchild held a strong No. 2 position in 1997 in the TTL Bipolar
market as well with a 24% market share.
SALES, MARKETING AND DISTRIBUTION
In Fiscal 1998, Fairchild derived approximately 55% of its trade sales from
original equipment manufacturer customers through its regional sales
organizations and 45% of its trade sales through distributors. Fairchild
operates regional sales organizations in Europe, headquartered in Swindon,
England, the Americas, headquartered in Sunnyvale, California, the Asia/Pacific
region, with offices in Kowloon, Hong Kong and the Japan region with its office
in Tokyo, Japan. Each of the four regional sales organizations is supported by
logistics organizations which manage independently-operated free-on-board
warehouses. Product orders flow to Fairchild's manufacturing facilities, where
the product is made. Products are then shipped either directly to the customer
or indirectly to the customer via independently-operated warehouses in
Singapore, the United States and the United Kingdom.
Fairchild has dedicated direct sales organizations operating in Europe, the
Americas, Asia/Pacific and Japan that serve its major original equipment
manufacturer customers. Fairchild also has a large network of distributors and
manufacturer's representatives to distribute its products around the world. We
believe that maintaining a small, highly focused, direct sales force selling
products for each of Fairchild's businesses, combined with an extensive network
of distributors and manufacturer's representatives, is the most efficient way to
serve our multi-market customer base. Fairchild also maintains a dedicated
marketing organization, which consists of marketing organizations in each
product group, including tactical and strategic marketing and applications, as
well as marketing personnel located in each of the sales regions.
Typically, distributors handle a wide variety of products, including
products that compete with Fairchild products, and fill orders for many
customers. Some of Fairchild's sales to distributors are made under agreements
allowing for market price fluctuations and/or the right of return on certain
unsold merchandise. Virtually all distribution agreements contain a standard
stock rotation provision allowing for minimum levels of inventory returns. In
Fairchild's experience, these inventory returns can usually be resold.
Manufacturer's representatives generally do not offer products that compete
directly with Fairchild's products, but may carry complementary items
manufactured by others. Manufacturer's representatives do not maintain a product
inventory; instead, their customers place large quantity orders directly with
Fairchild and are referred to distributors for smaller orders.
In 1998, the Power Device Business derived approximately 73% of its trade
sales from third party original equipment manufacturer customers and Samsung
Electronics and affiliated Samsung companies and 27% of its trade sales through
distributors. The Power Device Business has been historically supported by sales
organizations in Korea and in foreign sales subsidiaries of Samsung Electronics
throughout the world. Product orders flow to the Power Device Business'
manufacturing facility, in Bucheon, South Korea, where silicon wafers are
fabricated. Products are assembled and tested by either independently operated
subcontractors or manufacturing entities of Samsung Electronics. Finished
products are warehoused in a Samsung Electronics facility in Onyang, South
Korea. From there they are shipped either directly to customers, distributors or
sales agents or first to Samsung Electronics' Sales Subsidiaries and then to
customers. As a result of the Acquisition, assembly and testing services are
provided under the Assembly and Test Services Agreements, warehousing is
provided under the Transitional Services Agreement, and sales and distribution
services are provided under an Overseas Sales Services Agreement between
Fairchild Korea and each of the Sales Subsidiaries. See "The Transactions."
The sales organizations in each of the Sales Subsidiaries of Samsung
Electronics and its dedicated marketing personnel have been integrated into
Fairchild's sales and marketing organizations.
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RESEARCH AND DEVELOPMENT
Fairchild's expenditures for research and development in Fiscal 1996, 1997
and 1998 were $30.3 million, $18.9 million and $35.7 million (excluding a $15.5
million pre-tax charge for purchased in-process research and development
associated with the acquisition of Raytheon), respectively. Such expenditures
represented 4.4%, 3.2% and 5.6% of trade sales in Fiscal 1996, 1997 and 1998,
respectively. Manufacturing technology is a key determinant in the improvement
of semiconductor products. Each new generation of process technology has
resulted in products with higher speed and greater performance produced at lower
cost. Infrastructure investments made in recent years will enable Fairchild to
continue to achieve high volume, high reliability and low-cost production using
leading edge process technology. Fairchild's research and development efforts
are focused on new product development and improvements in process technology in
Fairchild's growth areas: CMOS logic, DMOS power discretes, EEPROMs and analog
and mixed signal products.
Each of Fairchild's product groups maintain independent research and
development organizations. Fairchild works closely with its major customers in
many research and development situations, in order to increase the likelihood
that Fairchild's products will be designed directly into the customers' products
and achieve rapid and lasting market acceptance.
The Power Device Business' expenditures for research and development in
1996, 1997 and 1998 were $18.6 million, $19.2 million and $15.2 million,
respectively. The Power Device Business' research and development efforts are
focused on IGBT and HV MOSFET process and product development, Motor Control
integrated circuit and Samsung Power Switch product development and BCDMOS
process development.
The Power Device Business' research and development team at the Bucheon
facility consists of design, application, process and package engineers. The
Power Device Business ensures early adoption of its new products by engaging
application engineers to work side-by-side with design engineers and customers
during product definition and design phase to ensure customers' ease of
incorporating our products into their designs. Following the Acquisition,
research and development for Power Device Business products continues to be
conducted by a research and development team at the Bucheon facility.
MANUFACTURING
We operate six manufacturing facilities, four of which are front-end wafer
fabrication plants located in the United States and South Korea and two of which
are back-end assembly and test facilities in the Asia/Pacific region. 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.
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The table below sets forth certain information with respect to our
manufacturing facilities, products and technologies.
MANUFACTURING FACILITIES
<TABLE>
<CAPTION>
LOCATION PRODUCTS TECHNOLOGIES
-------- -------- ------------
<S> <C> <C>
FRONT-END FACILITIES:
South Portland, Maine Bipolar, CMOS and BiCMOS logic 4-inch fab -- 5.0/3.0 micron
products Bipolar and CMOS
5-inch fab -- 3.0/1.5 micron
Bipolar and CMOS
National Semiconductor contract 6-inch fab -- 1.5/0.5 micron
manufacturing CMOS and BiCMOS
Salt Lake City, Utah EPROMs, EEPROMs, ACE and USB 6-inch fab -- 1.0/0.65 micron
CMOS EPROM
Discrete power -- 2.0/0.8 micron CMOS
National Semiconductor contract EPROM -- 2.0 micron DMOS
manufacturing
Mountain View, California(1) Standard Linear products 4-inch fab -- 5.0/3.0 micron
Op Amps, Ground Fault Bipolar and CMOS
Interruptors
Bucheon, South Korea Power discrete semiconductors, 4-inch fab -- 5.0/4.0 micron
Standard analog integrated Bipolar
circuits 5-inch fab -- 2.0/0.8 micron
Bipolar and DMOS
BACK-END FACILITIES:
Penang, Malaysia Bipolar, CMOS and BiCMOS logic MDIP, SOIC, EIAJ, TSSOP, SSOP,
products 8-56 Pins
National Semiconductor assembly
and test services
Cebu, the Philippines Power and small signal discrete TO92, SOT-23, Super SOT,
National Semiconductor assembly SOT-223, TO220, TO263
and test services
</TABLE>
- -------------------------
(1) We are currently in the process of transferring our analog wafer fabrication
plant from our Mountain View, California facility to our South Portland,
Maine facility. On April 23, 1999, we sold our Mountain View property for
$35.0 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 will be 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, we have entered into an arrangement to lease back the property
until the transfer of our facility from the property is completed. We pay
monthly rent of $125,000 under the lease, which expires on December 31,
2000.
Fairchild's strategy is to have its manufacturing facilities dedicated to
its product groups. The South Portland, Maine, wafer fabrication plant and
Penang, Malaysia assembly and test facility primarily support the Logic Products
Group. The Salt Lake City, Utah wafer fabrication plant and Cebu, the
Philippines assembly and test facility primarily support the Discrete Power and
Signal Technologies Group. The Mountain View, California facility supports the
Analog and Mixed Signal Products Group. Fairchild also subcontracts out
fabrication of wafers, primarily to Tower Semiconductor, Chartered Semiconductor
and Torex Semiconductor. Certain back-end assembly and testing operations are
also subcontracted out. Primary subcontractors include Carsem, NS Electronics
(Bangkok) Ltd. and New Japan Radio Corporation.
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The Power Device Business' wafer fabrication plant in Bucheon, South Korea,
supports the entire operations of the Power Device Business. The Power Device
Business subcontracts out nearly all of its assembly and test operations to
third party vendors, primarily to Korea Micro Industry, AUK and Woosuk
Electronic Company. The Power Device Business also subcontracts certain
manufacturing services from Samsung Electronics. As a result of the Acquisition,
these services are provided under other manufacturing agreements with Samsung
Electronics.
Our manufacturing processes use many raw materials, including silicon
wafers, copper lead frames, mold compound, ceramic packages and various
chemicals and gases. We obtain our raw materials and supplies from a large
number of sources on a just-in-time basis. Although supplies for the raw
materials used by us are currently adequate, shortages could occur in various
essential materials due to interruption of supply or increased demand in the
industry.
BACKLOG
Our trade sales are made primarily pursuant to standard purchase orders
that are generally booked from one to twelve months in advance of delivery.
Backlog is influenced by several factors including market demand, pricing and
customer order patterns in reaction to product lead times. Quantities actually
purchased by customers, as well as prices, are subject to variations between
booking and delivery to reflect changes in customer needs or industry
conditions.
Fairchild sells certain products to key customers pursuant to contracts.
Contracts are annual fixed-price agreements with customers setting forth the
terms of purchase and sale of specific products. These contracts allow Fairchild
to schedule production capacity in advance and allow customers to manage their
inventory levels consistent with just-in-time principles while shortening the
cycle times required to produce ordered products. However, quantity and price
agreements under these contracts are, as a matter of industry practice,
difficult to maintain and implement. Fairchild recognizes revenue from contract
manufacturing services but does not account for these revenues on a backlog
basis. For these reasons, Fairchild believes that the amount of backlog at a
particular date is not meaningful and is not necessarily a relevant indicator of
future revenues.
The Power Device Business historically did not track backlog, but rather
negotiated pricing and delivery agreements with its customers from time to time
based on current market conditions. However, we intend to manage the backlog of
the Power Device Business in a manner consistent with the historic management of
Fairchild's backlog.
SEASONALITY
Generally, Fairchild is affected by the seasonal trends of the
semiconductor and related industries. As a result of these trends, Fairchild
typically experiences lower revenue in the third fiscal quarter, primarily due
to customer demand adjustments as a result of holiday seasons around the world.
Revenue usually has a seasonal peak in Fairchild's fourth fiscal quarter. In
Fiscal 1998, Fairchild did not experience the typical seasonality in the fourth
quarter due to decreasing customer demand primarily as a result of the Asian
financial crisis and softness in the personal computer market due to excess
inventories in the sales channels.
The Power Device Business is also affected by the seasonal trends of the
semiconductor and related industries. The Power Device Business typically
experiences lower revenues in its fourth quarter. Revenue usually has a seasonal
peak in the third quarter. In 1998, the Power Device Business did not experience
the typical seasonality in the third quarter due to market softness in the
semiconductor industry.
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COMPETITION
Markets for our products are highly competitive. Although only a few
companies compete with us in all of our product lines, we face significant
competition within each of our product lines from major international
semiconductor companies. Some of our competitors may have substantially greater
financial and other resources with which to pursue engineering, manufacturing,
marketing and distribution of their products. Competitors include manufacturers
of standard semiconductors, application-specific integrated circuits and fully
customized integrated circuits, as well as customers who develop their own
integrated circuit products.
We compete in different product lines to various degrees on the basis of
price, technical performance, product features, product system compatibility,
customized design, availability, quality and sales and technical support. Our
ability to compete successfully depends on elements both within and outside of
our control, including successful and timely development of new products and
manufacturing processes, product performance and quality, manufacturing yields
and product availability, customer service, pricing, industry trends and general
economic trends.
TRADEMARKS AND PATENTS
Fairchild owns rights to a number of trademarks and patents that are
important to its business. Among others, we consider Fairchild, FACT(TM) and
FAST(R) to be trademarks that are material to Fairchild's operations.
Fairchild's corporate policy is to protect proprietary products by
obtaining patents for such products when practicable. Under a technology
licensing and transfer agreement with National Semiconductor entered into in
connection with the Recapitalization, Fairchild has acquired approximately 150
U.S. patents and obtained perpetual, royalty free non-exclusive licenses on
approximately 250 of National Semiconductor's patents. Pursuant to an
acquisition agreement with Raytheon Company, Fairchild acquired over 100 patents
owned by Raytheon Semiconductor, Inc., as well as licensing rights (similar to
those granted to Fairchild by National Semiconductor in the Recapitalization)
for other semiconductor-related intellectual property of Raytheon Company not
directly owned by Raytheon Semiconductor, Inc. We believe that we have the right
to use all technology used in the production of our products.
Similarly, Fairchild acquired from Samsung Electronics a significant number
of licenses and patents (granted, applied for and under review for application).
Approximately 125 U.S. patents and over 1,000 Korean patents were transferred
pursuant to the Acquisition. Fairchild also received the rights to use all
relevant trademarks. See "The Transactions -- Intellectual Property and
Trademark License Agreements."
ENVIRONMENTAL MATTERS
Our operations are subject to environmental laws and regulations in the
countries in which we operate that regulate, among other things, air and water
emissions and discharges at or from our manufacturing facilities; the
generation, storage, treatment, transportation and disposal of hazardous
materials by our company; the investigation and remediation of environmental
contamination; and the release of hazardous materials into the environment at or
from properties operated by our company and at other sites. As with other
companies engaged in like businesses, the nature of our operations exposes our
company to the risk of liabilities and claims with respect to such matters. We
believe, however, that our operations are in substantial compliance with
applicable environmental laws and regulations. Fairchild's costs to comply with
environmental regulations were immaterial in Fiscal 1996, 1997 and 1998, as were
the Power Device Business' environmental compliance costs for 1996, 1997 and
1998.
Fairchild's facilities in South Portland, Maine, and, to a lesser extent,
Salt Lake City, Utah, have ongoing remediation projects to respond to certain
releases of hazardous materials that occurred prior to
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the consummation of the Recapitalization. Under the Asset Purchase Agreement, as
supplemented by certain ancillary agreements entered into in conjunction with
the Recapitalization, National Semiconductor has agreed to indemnify Fairchild
for the cost of these projects subject to certain limitations. Based on the
historical costs of these projects, we do not believe that future remediation
costs will be material, even without the indemnity.
Fairchild's Mountain View, California, facility is listed on the National
Priorities List under the Comprehensive Environmental Response, Compensation,
and Liability Act. Under the terms of the Acquisition Agreement with Raytheon
Company, dated December 31, 1997, Raytheon Company has retained responsibility
for, and has agreed to indemnify us with respect to, certain remediation costs
or other liabilities related to pre-acquisition contamination subject to certain
limitations.
Although we believe that the Power Device Business has no significant
environmental liabilities, Samsung Electronics has agreed to indemnify Fairchild
for certain environmental liabilities arising out of the Bucheon, South Korea
plant or the Power Device Business subject to certain limitations.
Future laws or regulations and changes in existing environmental laws or
regulations may subject our operations to different, additional or more
stringent standards. While historically the cost of compliance with
environmental laws has not had a material adverse effect on our results of
operations, business or financial condition, we cannot predict with certainty
our future costs of compliance because of changing standards and requirements.
We cannot assure you that material costs will not be incurred in connection with
the future compliance with environmental laws.
EMPLOYEES
Fairchild's worldwide workforce consisted of 6,450 full- and part-time
employees as of February 28, 1999, none of whom were represented by collective
bargaining arrangements. Of the total number of employees, 5,460 were engaged in
manufacturing and information services, 232 were engaged in marketing and sales,
528 were engaged in administration and 230 were engaged in research and
development. Of the total number of employees, 3,201 or 50% were employed in the
Logic Products Group, 2,624 or 41% were employed in the Discrete Power and
Signal Technologies Group, 371 or 5% were employed in the Analog, Mixed Signal
and Non-Volatile Memory Products Group and 254 or 4% were employed in corporate
or centralized sales and marketing activities. Fairchild believes that its
relations with its employees are satisfactory.
The Power Device Business' worldwide workforce consisted of approximately
1,455 full- and part-time employees as of February 28, 1999, none of whom were
represented by collective bargaining arrangements. Of the total number of
employees, 910 were engaged in production, 65 were engaged in marketing and
sales, 264 were engaged in administration and 216 were engaged in research and
development. In connection with the Acquisition, we retained all of the
employees of the Power Device Business.
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 the Act Regarding Promotion
of Employee Participation and Cooperation, is recognized as a representative of
the workforce for the purposes of consultation and cooperation only. The Labor
Council therefore has no right to take a work action or to strike and is not
party to any labor or collective bargaining agreements with Fairchild Korea.
Management of the Power Device Business believes that its relations with its
employees and the Labor Council are satisfactory.
PROPERTIES
In the United States, Fairchild's corporate headquarters as well as certain
manufacturing and warehouse operations are located in approximately 240,000
square feet of space in properties owned by
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Fairchild in South Portland, Maine. Additional manufacturing, warehouse and
office facilities are housed in approximately 300,000 square feet and 120,000
square feet of space in properties in Salt Lake City, Utah, which Fairchild
owns, and Mountain View, California, which Fairchild leases, respectively.
Additional office and manufacturing space is located in leased facilities in
Sunnyvale, California and San Diego, California.
Fairchild is currently in the process of transferring its analog wafer
fabrication plant from its Mountain View, California facility to its South
Portland, Maine facility. On April 23, 1999, Fairchild sold its Mountain View
property for approximately $35.0 million. The sale price is subject to (1) a
$3.5 million holdback which will be paid to Fairchild unless the city council
rejects the buyer's application to increase its building density from 35% to
50%; and (2) a $500,000 deposit which will be placed into an escrow account and
will be released to Fairchild upon the demolition of the existing structures on
the Mountain View property. In connection with the sale of the Mountain View
property, Fairchild has entered into an agreement to lease back the property
until the transfer of its facility from the property is completed. We pay
monthly rent of $125,000 under the lease, which expires on December 31, 2000.
In Asia, Fairchild owns or leases approximately 397,000 square feet and
170,000 square feet of manufacturing and warehouse space in Penang, Malaysia,
and Cebu, the Philippines, respectively. Leases affecting the facilities in
Penang, Malaysia, and Cebu, the Philippines, are generally in the form of
long-term ground leases, with Fairchild owning improvements on the land. The
initial terms of these leases will expire beginning in 2014. In some cases
Fairchild has the option to renew the lease term, while in others Fairchild has
the option to purchase the leased premises. We lease additional warehouse space
in Singapore.
We maintain regional sales offices in leased space in Swindon, England,
Kowloon, Hong Kong, and Tokyo, Japan. In addition, we maintain smaller sales
offices in leased space around the world.
The Power Device Business' corporate headquarters as well as certain
manufacturing operations are located in approximately 766,000 square feet of
space in properties owned by the Power Device Business in Bucheon, South Korea.
See "-- Manufacturing."
We believe that our facilities around the world, whether owned or leased,
are well-maintained. Our manufacturing facilities contain sufficient productive
capacity to meet its needs for the foreseeable future.
LEGAL PROCEEDINGS
From time to time we are involved in legal proceedings arising in the
ordinary course of business. We believe there is no litigation pending that
could have, individually or in the aggregate, a material adverse effect on our
business, financial condition, results of operations or cash flows.
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THE TRANSACTIONS
The following contains summaries of certain agreements which we entered
into in connection with the Acquisition. The descriptions in the summaries of
the terms and provisions of the agreements is not complete, and you should read
the agreements themselves, copies of which have been filed as exhibits to, or
incorporated by reference in, the Registration Statement of which this
prospectus is a part.
BUSINESS TRANSFER AGREEMENT
The Business Transfer Agreement provided for the sale from Samsung
Electronics to Fairchild Korea, an indirect wholly owned subsidiary of Fairchild
Semiconductor, of substantially all of the assets and the assumption of certain
of the liabilities of the Power Device Business for a purchase price of
approximately $406.8 million, net of purchase price adjustments based on the
working capital of the Power Device Business upon consummation of the
Acquisition and an income payment Samsung Electronics made to Fairchild Korea
upon consummation of the Acquisition.
The assets purchased by Fairchild Korea include, among other things, land,
a manufacturing plant and other buildings in Bucheon, South Korea, as well as,
with some exceptions and limitations, all of the manufacturing equipment,
inventory, motor vehicles, contractual rights and obligations, governmental
permits and licenses and all other assets used to conduct the Power Device
Business. In addition, the purchased assets included all of the patents,
trademarks, mask works, copyrights and other intellectual property used
primarily in the Power Device Business. Samsung retained a co-ownership interest
in certain assembly and test patents. Intellectual property which is used in
connection with the Power Device Business, but which is also used by other
affiliated Samsung companies, is licensed to Fairchild Korea by Samsung
Electronics. See "-- Intellectual Property and Trademark License Agreements."
Fairchild Korea did not assume liabilities incurred by or relating to the
Power Device Business on or prior to consummation of the Acquisition, except for
liabilities that arise in the ordinary course of business and certain income tax
liabilities as discussed below. The agreement provides that Samsung Electronics
will indemnify Fairchild Korea for those and certain other excluded liabilities
as well as for environmental liabilities of the Power Device Business. Samsung
Electronics' liability under the environmental indemnity, together with certain
other indemnification claims under the agreement, is limited to $150.0 million.
Samsung Electronics will also indemnify Fairchild Korea, for a period of three
years after consummation of the Acquisition, for damages that result from
certain third-party claims that the products of the Power Device Business
infringe patents owned by those third parties that were issued before
consummation of the Acquisition. This separate patent infringement indemnity is
subject to certain limitations and conditions. For example, it does not apply if
the infringement claim would have been avoided were it not for a post-closing
product design change by Fairchild Korea. Samsung Electronics' liability under
the patent indemnity provision is limited to $40.0 million.
The agreement provides that the economic benefit or detriment of the Power
Device Business inure to Fairchild Korea as of January 1, 1999. In connection
with this provision, Samsung Electronics agreed to pay Fairchild Korea an amount
equal to the net income before income taxes of the Power Device Business from
January 1, 1999 to March 15, 1999, and half the net income before income taxes
from March 15, 1999 to the date the Acquisition was consummated. Accordingly,
the agreement provides that Fairchild Korea assume liabilities for income taxes
of the Power Device Business, with respect to amounts received, for the same
period.
Under the agreement, Fairchild Korea agreed to offer employment to all
Power Device Business employees in South Korea and to provide, either itself or
through the Transitional Services Agreement, employee benefits comparable to
those provided by Samsung Electronics at the time of consummation of the
Acquisition. The agreement also contains a provision that forbids Samsung
Electronics, subject to certain limitations, from competing with the Power
Device Business for a period of five years after
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consummation of the Acquisition. In addition, both Samsung Electronics and
Fairchild Korea have agreed that, for one year following consummation of the
Acquisition, neither of them will solicit any director, officer or employee of
the other party to terminate his or her employment with the other party. In case
an employee of either party seeks employment with the other without
solicitation, Samsung Electronics and Fairchild Korea have agreed to consult one
another before making a hiring decision.
As required by the Business Transfer Agreement, Samsung Electronics and
Fairchild Korea have entered into the Intellectual Property License Agreement,
the Transitional Services Agreement, the Assembly and Test Services Agreements,
the Trademark License Agreement, the Foundry Sale Agreement, the Product Supply
Agreement, the EPI Services Agreement, the Photo Mask Supply Agreement and an
employment agreement with Dr. Deok J. Kim, Vice President and General Manager of
the Power Device Business.
In connection with the consummation of the Acquisition, Fairchild
Semiconductor, Fairchild Korea and Samsung Electronics entered into a closing
agreement providing, among other things, for certain post-consummation filings,
mechanisms for determining purchase price adjustments and confirming the
agreed-upon schedules to the Business Transfer Agreement.
INTELLECTUAL PROPERTY AND TRADEMARK LICENSE AGREEMENTS
Under the Intellectual Property License Agreement, Samsung Electronics
non-exclusively licensed to Fairchild Korea certain patent, copyright and mask
work rights that are used in connection with the Power Device Business, but that
were not transferred to Fairchild Korea under the Business Transfer Agreement.
The licensed rights include certain rights to intellectual property of Samsung
Electronics as well as rights to certain intellectual property used in the Power
Device Business under licenses granted by third parties, in each case to the
extent Samsung Electronics has the right to grant a license without obligation
or accounting to others. Licensed patent rights include rights to design,
develop, make, have made, use, offer for sale, import, package, sell or modify
any product of the Power Device Business that is under design or development or
being manufactured or sold by the Power Device Business on the date of the
Acquisition, as well as similar rights with respect to derivative products that
are designed for the Power Device Business and embody technologies assigned or
licensed to Fairchild Korea in the Acquisition. Samsung Electronics also
sublicensed to Fairchild Korea rights to certain software necessary for the
operation of the Power Device Business, for the life of Samsung Electronics'
license for that software.
For patents and other intellectual property that were transferred to
Fairchild Korea under the Business Transfer Agreement, Fairchild Korea has
non-exclusively licensed back to Samsung Electronics certain rights to such
intellectual property, to the extent Samsung Electronics needs such rights to
fulfill obligations to third parties under existing agreements, or to prosecute
or defend infringement and other claims of third parties arising in connection
with the Power Device Business prior to the Acquisition.
Under the Trademark License Agreement, Samsung Electronics has licensed
Fairchild Korea to continue to use certain of Samsung Electronics' trademarks on
Power Device Business products, and to use part numbers and other proprietary
identification systems in the Power Device Business as long as necessary for up
to ten years to avoid retooling, requalification of existing products or
customer disruption. Fairchild Korea has agreed to use its good faith efforts to
discontinue using Samsung Electronics' trademarks and to replace them with
Fairchild's trademarks and identification numbers. As Fairchild Korea's use of
Samsung Electronics trademarks is discontinued, its rights under the Trademark
License Agreement will terminate.
TRANSITIONAL SERVICES AGREEMENT
Under the Transitional Services Agreement, Samsung Electronics has agreed
to provide a number of business support services to Fairchild Korea that assist
the Power Device Business' conversion into an
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indirect subsidiary of Fairchild. The agreement requires Samsung Electronics to
provide Fairchild Korea, for up to three years following the Acquisition,
logistics, purchasing, sales, personnel, financial services, intellectual
property administration and other services that have been provided to the Power
Device Business by Samsung Electronics or its sales subsidiaries and that were
necessary to operate the Power Device Business during calendar year 1998.
Information technology services are provided under a separate agreement between
Fairchild Korea and Samsung Data Systems. The Transitional Services Agreement
requires services to be provided at a cost per service consistent with costs
charged to the Power Device Business during calendar year 1998, subject to
adjustments for inflation and before accounting for the effects of currency
exchange rate changes. Fairchild Korea has the right to terminate any given
service under the Transitional Services Agreement upon 90 days' notice. Under
the Transitional Services Agreement, Samsung Electronics bears any costs of
Fairchild Korea separating from the provided services, except for the costs of
any third-party assistance, which will be shared equally by Samsung Electronics
and Fairchild Korea, and costs of Fairchild Semiconductor or our company's
personnel, which will be borne by Fairchild. Samsung Electronics will invoice
Fairchild Korea monthly for services provided under the Transitional Services
Agreement.
MANUFACTURING AGREEMENTS
Samsung Electronics and Fairchild Korea have entered into several
manufacturing agreements, including a Product Supply Agreement pursuant to which
Fairchild Korea has agreed to supply products to Samsung Electronics, a Foundry
Sale Agreement pursuant to which Fairchild Korea has agreed to provide foundry
manufacturing services for Samsung Electronics, Assembly and Test Services
Agreements pursuant to which Samsung Electronics and one of its subsidiaries
have agreed to provide assembly and test services to Fairchild Korea, a Photo
Mask Supply Agreement pursuant to which Samsung Electronics has agreed to
provide mask work services for Fairchild Korea, and an EPI Services Agreement
pursuant to which Samsung Electronics has agreed to provide certain wafer
fabrication services for Fairchild Korea.
Under the Product Supply Agreement, Samsung Electronics has agreed that for
three years it will purchase Power Device Business products from Fairchild Korea
at a volume level equal to 701,941,000 units per year, the average of its
purchases from the Power Device Business during 1996, 1997 and 1998. Prices
charged to Samsung Electronics under the Product Supply Agreement will be based
on prices paid by Samsung Electronics during the Power Device Business' fourth
quarter of 1998, subject to quarterly adjustment and reconciliation to reflect
changes in the worldwide market price for such products. Samsung Electronics has
also agreed that for three years it will provide Fairchild Korea with an
opportunity to match quotes of other suppliers with respect to Samsung
Electronics' needs for products manufactured by the Power Device Business, to
the extent such needs exceed Samsung Electronics' committed volume of purchases
under the agreement. Samsung Electronics' purchase commitments are conditioned
on Fairchild Korea's ability to satisfy Samsung Electronics' quality and other
specifications for the Power Device Business products. Samsung Electronics also
agreed to use its best efforts to cause affiliated Samsung companies to
designate Fairchild Korea as a preferred supplier of Power Device Business
products to the extent permissible under applicable laws and regulations.
Under the Foundry Sale Agreement, Fairchild Korea has agreed to provide
semiconductor wafer manufacturing services for Samsung Electronics for a
three-year period following consummation of the Acquisition. The agreement is
structured to provide that Fairchild Korea will earn a profit from foundry sales
to Samsung Electronics equal to 27.7 billion Won, 17.3 billion Won and 8.7
billion Won in each of the respective years of the agreement. Profits earned in
excess of each annual minimum amount will be counted toward the next year's
minimum profit amount.
Under the Assembly and Test Services Agreements, Samsung Electronics has
agreed to provide assembly and test services for Fairchild Korea at Samsung
Electronics' Onyang, South Korea facility and
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a subsidiary of Samsung Electronics has agreed to provide such services at
facilities in Suzhou, China for three years following consummation of the
Acquisition. Under separate agreements for services to be provided at each
location, the costs charged for such services should be consistent (before
accounting for the effects of currency exchange rate changes) with historical
costs charged to the Power Device Business, subject to adjustments for inflation
in the case of Suzhou and 5% annual price decreases, in the case of Onyang.
Fairchild Korea has the right to terminate the Suzhou agreement at any time, and
the Onyang agreement after its second anniversary, in either case upon 90 days'
notice. Each agreement also provides that Samsung Electronics in the case of
Onyang, or its subsidiary in the case of Suzhou, and Fairchild Korea will enter
into good-faith negotiations to allow Fairchild Korea the opportunity to own or
have an interest in the assembly and test facilities at Onyang and Suzhou.
Under the Photo Mask Supply Agreement, Samsung Electronics has agreed to
supply masks, which are used in semiconductor wafer manufacturing, to Fairchild
Korea for three years following consummation of the Acquisition at costs
consistent (before accounting for the effects of currency exchange rate changes)
with costs historically charged to the Power Device Business. Under the EPI
Services Agreement, Samsung Electronics has agreed to provide epitaxial
fabrication, an intermediate step in wafer manufacturing, for three years
following consummation of the Acquisition at costs consistent (before accounting
for the effects of currency exchange rate changes) with historical costs charged
to the Power Device Business, plus a 10% markup.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain 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......................... 54 Chairman of the Board of Directors, President and
Chief Executive Officer
Joseph R. Martin..................... 51 Executive Vice President and Chief Financial Officer
and Director
Daniel E. Boxer...................... 53 Executive Vice President and Chief Administrative
Officer, General Counsel and Secretary
Jerry M. Baker....................... 47 Executive Vice President and General Manager, Discrete
Power and Signal Technologies Group
W. Wayne Carlson..................... 57 Executive Vice President and General Manager, Logic
Products Group
Keith Jackson........................ 43 Executive Vice President and General Manager, Analog,
Mixed Signal and Non-Volatile Memory Products Group
Darrell Mayeux....................... 56 Senior Vice President, Worldwide Sales and Marketing
David A. Henry....................... 37 Vice President, Corporate Controller
Matthew W. Towse..................... 36 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 the 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 the 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 the 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 the Company, on business,
governmental, legal compliance and environmental issues. He was most recently a
senior partner and Chairman of the firm's Management Committee.
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Jerry M. Baker, Executive Vice President and General Manager, Discrete
Power and Signal Technologies Group. Mr. Baker has been Executive Vice
President and General Manager, Discrete Power and Signal Technologies Group,
since December 1996. He has spent more than 24 years in a variety of engineering
and management positions within National Semiconductor, most recently as Vice
President and General Manager, Discrete Products Divisions.
W. Wayne Carlson, Executive Vice President and General Manager, Logic
Products Group. Mr. Carlson has been Executive Vice President and General
Manager, Logic Products Group, since June 1996. He has 32 years of prior
engineering and management experience with National Semiconductor and Fairchild,
most recently as Vice President and General Manager, Data Management Division.
Keith Jackson, Executive Vice President and General Manager, Analog, Mixed
Signal and Non-Volatile Memory Products Group. Mr. Jackson joined the Company
in March 1998. He has over 20 years of semiconductor industry experience. Most
recently, Mr. Jackson was President of TriTech Microelectronics in Singapore, a
manufacturer of analog and mixed signal products, which he joined in 1996. Prior
to that, he worked for National Semiconductor for 10 years, most recently as
Vice President and General Manager of the Analog and Mixed Signal division. He
has also held various marketing and engineering positions at National
Semiconductor and Texas Instruments.
Darrell Mayeux, Senior Vice President, Worldwide Sales and Marketing. Mr.
Mayeux has been Senior Vice President, Worldwide Sales and Marketing since
November 1996. He had been with National Semiconductor since 1992 as Vice
President of Sales and Marketing for Logic Products Group. He previously held
engineering, marketing and general management positions with Texas Instruments
and Philips.
David A. Henry, Vice President, Corporate Controller. Mr. Henry has been
Corporate Controller since December 1996. Previously, he had been with National
Semiconductor for eight years, and held various financial management positions,
most recently as Director of Financial Planning and Analysis for the Fairchild
Business of National Semiconductor. Mr. Henry previously worked for Amfac, Inc.
as well as Ernst and Whinney, and is a Certified Public Accountant.
Matthew W. Towse, Vice President, Treasurer. Mr. Towse became Treasurer in
March 1997. He had been with National Semiconductor for six years and has held
various financial management positions, most recently as Controller for the
Fairchild plant in South Portland, Maine. Mr. Towse previously worked for Ernst
& Young and is a Certified Public Accountant.
Brian L. Halla, Director. Mr. Halla became a Director upon consummation of
the Recapitalization. He had been employed by National Semiconductor since 1996,
serving as Chairman of the Board, President and Chief Executive Officer. From
1988 to 1996, he was employed by LSI Logic Corporation, where he was (in reverse
chronological order) Executive Vice President, LSI Logic Products; Senior Vice
President and General Manager, Microprocessor/DSP Products Group; and Vice
President, General Manager, Microprocessor Products Group.
William N. Stout, Director. Mr. Stout became a Director in March 1997. He
has been Chairman and Chief Executive Officer of Sterling Holding Company LLC
and Sterling's subsidiaries since 1988. Sterling is engaged, through
subsidiaries including Trompeter Electronics Inc. and Semflex, Inc. in the
manufacture and sale of coaxial connectors, coaxial cable and coaxial cable
assemblies. From 1985 to 1988, Mr. Stout was a private investor and consultant.
From 1979 to 1985, Mr. Stout was President and Chief Executive Officer of Lundy
Electronics & Systems, which manufactured electronic products and systems.
Richard M. Cashin, Jr., Director. Mr. Cashin became a Director in March
1997. He has been employed by Citicorp Venture Capital Ltd. since 1980, and has
been President since 1994. Mr. Cashin is
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a director of Lifestyle Furnishings International, Euramax International plc,
Delco Remy International, Gerber Childrenswear, MSX International, IPC
Information Systems and Titan Wheel International.
Paul C. Schorr IV, Director. Mr. Schorr became a Director in March 1997.
He has been employed by and been a Vice President of Citicorp Venture Capital
Ltd. since 1996. Prior to joining Citicorp Venture Capital Ltd., Mr. Schorr was
employed by McKinsey & Company, Inc. from 1993 to 1996 (in reverse chronological
order) as an engagement manager and an associate. He is a director of KEMET
Corporation and Sybron Chemical.
Ronald W. Shelly, Director. Mr. Shelly became a Director in June 1998.
Until January 31, 1999, he was employed by Solectron Texas, an electronic
manufacturing services company, where he served as its President from April 1996
until April 1999 when he retired. He currently serves as a consultant to
Solectron. Mr. Shelly has more than 30 years experience in the semiconductor
industry. Prior to joining Solectron, he was employed by Texas Instruments for
30 years, most recently as Executive Vice President, Custom Manufacturing
Services.
DIRECTOR COMPENSATION AND ARRANGEMENTS
Certain of our non-employee directors receive cash compensation for their
services as a director. Messrs. Stout and Shelly receive $15,000 per year, plus
$1,000 for meetings attended in person and $500 for meetings attended by
teleconference. Messrs. Halla, Cashin and Schorr are not compensated 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.
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EXECUTIVE COMPENSATION
The following table sets forth certain 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 1998, 1997 and 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- --------------
NUMBER OF
FISCAL STOCK OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (IN SHARES)(1) COMPENSATION(2)
- --------------------------- ------ -------- -------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Kirk P. Pond(3).............................. 1998 $449,994 $435,969 -- $ 39,844
Chairman of the Board of Directors, 1997 424,624 594,382 100,000 3,018,314
President and Chief Executive 1996 414,521 146,300 18,000 34,292
Officer
Joseph R. Martin............................. 1998 262,024 152,240 -- 19,818
Executive Vice President and Chief 1997 201,614 147,385 9,000 1,251,476
Financial Officer and Director 1996 181,466 68,875 7,500 7,114
Daniel E. Boxer.............................. 1998 262,024 152,240 -- 254,283
Executive Vice President and Chief 1997 52,885 -- -- --
Administrative Officer, 1996 -- -- -- --
General Counsel and Secretary
W. Wayne Carlson............................. 1998 250,004 138,406 -- 17,081
Executive Vice President and 1997 245,862 198,582 10,000 801,614
General Manager, Logic 1996 234,125 64,815 7,000 8,895
Products Group
Jerry M. Baker............................... 1998 250,009 138,406 -- 12,598
Executive Vice President and 1997 204,864 241,269 10,000 602,782
General Manager, Discrete Power 1996 169,370 54,744 10,200 6,906
and Signal Technologies
</TABLE>
- -------------------------
(1) 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.
(2) Amounts shown reflect contributions and allocations to National
Semiconductor and/or Fairchild defined contribution retirement plans and the
value of insurance premiums paid by National Semiconductor and/or Fairchild
for term life insurance and disability insurance as follows: for Fiscal
1998, all amounts shown except $238,262 for Mr. Boxer representing a
one-time signing bonus. For Fiscal 1997, $18,314 for Mr. Pond; $4,289 for
Mr. Martin; $4,500 for Mr. Baker; and $4,542 for Mr. Carlson. For Fiscal
1996, all amounts shown. 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; $1,247,187 to Mr. Martin; $598,282 to
Mr. Baker; and $797,072 to Mr. Carlson.
(3) In addition to the amounts disclosed in the table, Mr. Pond received, as
long-term compensation from National Semiconductor in Fiscal 1996, $311,190
in long-term incentive plan payoffs pursuant to National Semiconductor's
Performance Award Plan and, in Fiscal 1997, a severance payment from
National Semiconductor of $742,757. National Semiconductor's obligations
under the Performance Award Plan were not assumed by Fairchild.
The following table provides information with respect to the named
executive officers concerning the exercise of National Semiconductor options
during Fiscal 1998, and unexercised National Semicon-
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ductor options held as of the end of Fiscal 1998. 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.......................... 94,000 $1,586,716 80,000(3) $75,000(3)(4)
Joseph R. Martin...................... 22,750 176,156 -- --
Daniel E. Boxer....................... -- -- -- --
W. Wayne Carlson...................... 22,375 207,063 -- --
Jerry M. Baker........................ -- -- -- --
</TABLE>
- -------------------------
(1) Options exercised were for National Semiconductor common stock. The table
excludes any shares acquired under the National Semiconductor Employees
Stock Purchase Plan.
(2) Equals the market value of the underlying shares (based on the opening price
of National Semiconductor on the date of exercise) minus the exercise price.
(3) All options held by Mr. Pond were exercisable at the end of Fiscal 1998.
(4) Represents the difference between $16.875, the market price per share of
National Semiconductor common stock at fiscal year end, and the exercise
price.
DEFERRED COMPENSATION AGREEMENTS
National Semiconductor adopted the National Semiconductor Corporation
Deferred Compensation Plan shortly before the establishment of Fairchild
Semiconductor 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 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 certain payments
related to the establishment of Fairchild Semiconductor as an independent
entity. In March 1997, Fairchild Semiconductor 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.
Amounts a Deferred Compensation Plan participant deferred 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 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 request, by our company to the extent that all
restrictions on the transfer of such shares have lapsed. Generally, all payments
under the Deferred Compensation Plan will be made in cash. Payments will be made
in all events (1) upon liquidation or dissolution of Fairchild Semiconductor;
(2) upon a sale of fifty percent (50%) or more of the equity interests in our
company or Fairchild Semiconductor, consolidation or merger of Fairchild
Semiconductor with or into another
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entity, or sale of all or substantially all of Fairchild'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. 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 established a grantor trust to which National
Semiconductor and Fairchild together 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. 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.
EMPLOYMENT AGREEMENTS
In March 1997, Fairchild and Sterling entered into an employment agreement
with each of Kirk P. Pond and Joseph R. Martin. Mr. Pond is employed as Chairman
of the Board of Directors and as Chief Executive Officer of Fairchild
Semiconductor. Mr. Martin is employed as Executive Vice President and Chief
Financial Officer, and serves as a member of our Board of Directors. The
respective agreements provide for an annual base salary of $450,000 for Mr. Pond
and $250,000 for Mr. Martin (which was subsequently increased to $285,000),
subject in each case to increases at the discretion of the Board of Directors
and to annual performance bonuses in accordance with the FSC Semiconductor
Corporation 1997 Executive Officer Incentive Plan. Each agreement also provides
for the Executive to receive standard Fairchild benefits. The term of each
agreement is three years subject to automatic renewal for up to two consecutive
one-year terms unless, in each case, either we or the Executive gives prior
notice of non-renewal. Under each agreement, either we or the Executive may
terminate the agreement with or without cause. If we terminate without cause or
the Executive terminates with cause, each agreement requires us to pay the
Executive monthly severance payments (approximately equal to his salary at the
time of termination plus an amount equal to incentive awards payable in the
fiscal year prior to termination) until the end of the term of the agreement or
for 24 months if longer. Each Executive is subject to a non-competition covenant
during the term of his agreement and for a period of at least 24 months
following termination or expiration of the agreement.
PERSONAL SAVINGS AND RETIREMENT PLAN
We have adopted a Personal Savings and Retirement Plan, which we refer to
as the Retirement Plan, for all eligible employees who are not foreign nationals
or contract employees. The Retirement Plan includes a cash or deferred
arrangement under Section 401(k) of the Internal Revenue Code and matching
contributions under Section 401(m) of the Internal Revenue Code. Under the
401(k) plan, participants may elect to defer from 1% to 15% of their
compensation on an after-tax basis, directing the investment of these elective
deferrals among several mutual funds. We will make quarterly matching
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, certain of our employees are eligible (i) to defer on
a before-tax basis amounts over and above those they are permitted by law to
defer under Fairchild's Retirement Plan and (ii) to receive matching
contributions from our company equal to the difference between matching
contributions received under the Retirement Plan and the matching contributions
they would have received under the Retirement
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Plan but for statutory limits applicable to such contributions. Deferral and
matching contributions are credited to accounts established and maintained by
our company. Interest at a rate equal to a commonly reported rate for long-term
"A"-rated corporate bonds is credited to participants' accounts at such times as
determined by the Board of Directors which administers the Fairchild Benefit
Restoration Plan. The Fairchild Benefit Restoration Plan is an unfunded plan of
deferred compensation, and amounts payable thereunder are paid out of our
general corporate assets and are subject to the claims of our general creditors.
FAIRCHILD INCENTIVE PROGRAM
We have adopted the Fairchild Incentive Program. Under the Fairchild
Incentive Program, all of our regular full-and part-time employees (with certain
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 certain
management-level employees. Payment awards range from 0% to 250% of the Target
Award, depending on whether we achieve certain pre-established earnings goals.
Certain participants in the Fairchild Incentive Program are eligible to defer
awards, and to the extent that the deferral option applies only to certain
Fairchild Incentive Program participants, it constitutes a separate unfunded
plan known as the Fairchild Select Employee Incentive Deferral Plan. For
participants who elect deferral, we will establish and maintain book-entry
accounts to which we shall credit deferred payments and interest equal to a
commonly reported rate for long-term "A"-rated corporate bonds. We pay deferred
amounts and accrued interest to participants upon termination or on the date
pre-selected by the participant according to the terms of the Deferral Plan. The
Compensation Committee, which is presently comprised of the entire Board of
Directors, administers the Fairchild Incentive Program and reserves the right,
among other things, not to make award payments, and to modify or amend the
Fairchild Incentive Program. The Deferral Plan is an unfunded plan of deferred
compensation, and benefits payable thereunder are paid out of our general
corporate assets and are subject to the claims of our general creditors.
FSC SEMICONDUCTOR CORPORATION 1997 EXECUTIVE OFFICER INCENTIVE PLAN
We adopted the FSC Semiconductor Corporation 1997 Executive Officer
Incentive Plan on March 11, 1997 and subsequently amended and restated it on
June 1, 1998. Under the Executive Officer Incentive Plan, certain of our
executive officers 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 certain pre-established
earnings goals. Participants may elect to defer all or any portion of an award
payment. For participants who elect deferral, we will establish and maintain
book-entry accounts, and credit cash account annually with deferred payments, as
well as interest at a rate equal to a commonly reported rate for long-term
A-rated 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 Holdings has adopted the 1997 Stock Option Plan. We may grant to
regular salaried officers and key employees of our company and Fairchild
Semiconductor options for up to 6,084,000
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shares of Class A Common Stock under the 1997 Stock Option Plan, as amended. The
plan authorizes our 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 1997 Stock Option Plan, the board of
directors of our company shall determine the exercise price of each option
granted. 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 are exercisable at the
determination of the board of directors of our company, and the 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.
Following this offering, we intend to amend the 1997 Stock Option Plan to,
among other things, (i) increase the number of shares of Class A Common Stock
available for grant under the plan, (ii) increase the number of shares of Class
A Common Stock permitted to be granted to any employee within any one-year
period, (iii) set the maximum exercise price of each option granted at the then
current market price and (iv) permit the grant of options to regular salaried
officers and key employees of Fairchild Korea. In addition, we intend to file a
registration statement on Form S-8 under the Securities Act to register shares
of Class A Common Stock reserved or to be available for issuance pursuant to the
1997 Stock Option Plan.
EMPLOYEE STOCK PURCHASE SAVINGS PLAN
We adopted the Employee Stock Purchase Savings Plan (the "Savings Plan"),
pursuant to which participating employees contribute a portion of their salary,
through payroll deductions, to the Savings Plan and in return obtain an interest
in the Savings Plan. The contributions to the Savings Plan are held in trust for
the benefit of the participating employees and are invested in one or more
money-market funds. In addition, participating employees become eligible to use
funds contributed to the Savings Plan to purchase, if they so choose, shares of
Class A Common Stock concurrently and in connection with an initial public
offering of such stock. Upon an initial public offering of our company Class A
Common Stock registered with the SEC, the Savings Plan authorizes our company to
issue to participating employees up to the lesser of (i) shares of such stock
having an aggregate sales price of $5.0 million and (ii) shares of such stock
representing 2.5% of the total number of shares issuable pursuant to such
initial public offering. Such shares will be offered to participating employees
at a price equal to or less than the price at which shares of Class A Common
Stock are offered to the public generally in such public offering.
In conjunction with this offering, we intend to terminate the Savings Plan.
When the Savings Plan is terminated, each participating employee will receive in
a lump sum all of the employee's contributions to the Savings Plan plus accrued
interest. Each employee will have the option to keep the funds or use them to
purchase shares of Class A Common Stock at the price per share in this offering.
Had we terminated the Savings Plan on May 13, 1999, participating employees
would have been entitled to receive payments totalling $1,744,615 and
shares of Class A Common Stock would have been issuable if participating
employees had chosen to use all such funds to purchase shares of Class A Common
Stock as described above.
POWER DEVICE BUSINESS EMPLOYMENT AGREEMENTS AND BENEFIT PLANS
In connection with the Acquisition, 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. These plans consist of all legally
mandated and nationally-sponsored benefits plans such as national
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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.
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. 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 certain 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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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of each holder of 5% or more of the outstanding shares of Class A
Common Stock (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 March 31, 1999 and as adjusted to give effect to this
offering, but without giving effect to the exercise of the underwriter's
over-allotment option.
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON
STOCK(1) STOCK(2)
---------------------------------------------- --------------------
NUMBER NUMBER PERCENT OF
OF SHARES PERCENT OF SHARES PERCENT COMMON
PRIOR TO PRIOR TO AFTER AFTER NUMBER STOCK
NAME OF BENEFICIAL OWNER OFFERING OFFERING OFFERING OFFERING OF SHARES PERCENT AFTER OFFERING
- ------------------------ ----------- -------- ---------- -------- ---------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sterling Holding Company, LLC
c/o Fairchild Semiconductor
Corporation
333 Western Avenue
South Portland, Maine
04106(3)(4)(7)................. 14,212,000 48.1% % 28,396,000 85.1%
National Semiconductor
Corporation
2900 Semiconductor Drive
Santa Clara, California
95052(5)(7).................... 4,380,000 14.8% % 4,980,000 14.9%
Kirk P. Pond
c/o Fairchild Semiconductor
Corporation
333 Western Avenue
South Portland, Maine 04106.... 3,275,836 11.1% 3,275,836 % -- --
Joseph R. Martin
c/o Fairchild Semiconductor
Corporation
333 Western Avenue
South Portland, Maine 04106.... 1,637,920 5.5% 1,637,920 % -- --
H.M. Payson & Co., Trustee
of the Fairchild NSC Deferred
Compensation Plan Trust
P.O. Box 31
Portland, Maine 04112(7)....... 435,520 1.5% % -- --
Daniel E. Boxer................ 668,208 2.3% 668,208 % -- --
Jerry M. Baker................. 668,208 2.3% 668,208 % -- --
W. Wayne Carlson............... 668,208 2.3% 668,208 % -- --
Brian L. Halla(5).............. -- -- -- -- -- --
William N. Stout(3)............ -- -- -- -- -- --
Richard M. Cashin.............. -- -- -- -- -- --
Paul C. Schorr IV.............. -- -- -- -- -- --
Ronald W. Shelly............... -- -- -- -- -- --
All directors and executive
officers as a group (11
persons)(6)(7)............... 7,670,108 25.9% % -- --
</TABLE>
- -------------------------
(1) Does not include shares of Fairchild Holdings Class A Common Stock upon
conversion of Fairchild Holdings Class B Common Stock.
(2) Does not include shares of Fairchild Holdings Class B Common Stock issuable
upon conversion of Fairchild Holdings Class A Common Stock.
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<PAGE> 97
(3) William N. Stout, who is one of our directors, is affiliated with Sterling,
in the capacities described under "Management -- Directors and Executive
Officers." In those capacities he may be deemed to beneficially own the
shares held of record by Sterling. Mr. Stout disclaims ownership of such
shares.
(4) 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 our company
in exchange for a 12.5% Subordinated PIK 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 us as a capital
contribution. The 12.5% Subordinated PIK Note is being repaid in full in
connection with this offering, upon which event the warrant is no longer
exercisable.
(5) Brian L. Halla, who is one of our directors, is affiliated with National
Semiconductor in the capacities described under "Management -- Directors and
Executive Officers." In those capacities he may be deemed to beneficially
own the shares held of record by National Semiconductor. Mr. Halla disclaims
ownership of such shares.
(6) Does not include shares held for the benefit of executive officers by H.M.
Payson & Co., trustee of the Fairchild Semiconductor Corporation Deferred
Compensation Plan Trust. Under the terms of that trust, the executive
officers do not beneficially own the shares held for their benefit under the
meaning of the Securities Act. See "Deferred Compensation Agreements."
(7) The following table sets forth certain information with respect to the
security ownership of the 12% Series A Cumulative Compounding Preferred
Stock. All of the outstanding shares of the 12% Series A Cumulative
Compounding Preferred Stock are being converted into shares of Class A
Common Stock in connection with this offering at the assumed initial public
offering price of $ per share. The net proceeds from the
conversion will be used as described under "Use of Proceeds."
<TABLE>
<CAPTION>
12% SERIES A SHARES OF CLASS A
CUMULATIVE COMMON STOCK
COMPOUNDING RECEIVED UPON
PREFERRED STOCK CONVERSION
----------------- -----------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER
- ------------------------ ------ ------- -----------------
<S> <C> <C> <C>
Sterling Holding Company, LLC............................... 53,113 75.9%
National Semiconductor Corporation.......................... 11,667 16.7%
H.M. Payson & Co., Trustee of the Fairchild NSC Deferred
Compensation Plan Trust................................... 4,582 6.5%
All directors and executive officers as a group (11
persons).................................................. 332 0.5%
Other management employees.................................. 306 0.4%
</TABLE>
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<PAGE> 98
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock gives effect to this
offering and the conversion of all outstanding shares of 12% Series A Cumulative
Compounding Preferred Stock into Class A Common Stock, which will occur prior to
or simultaneously with this offering. Our capital stock consists of (1)
160,000,000 authorized shares of common stock, par value $.01 per share, divided
into two classes consisting of (a) 80,000,000 shares of Class A Common Stock, of
which shares are outstanding ( shares assuming the underwriters'
over-allotment option is exercised) and (b) 80,000,000 shares of Class B Common
Stock, of which shares are outstanding, and (2) 70,000 authorized shares
of 12% Series A Cumulative Compounding Preferred Stock, par value $.01 per
share, none of which are outstanding. On January 5, 1998, our 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.
The following description of the terms and provisions of our capital stock
is not complete, and you should read our Certificate of Incorporation and
By-Laws which have been filed as exhibits to, or incorporated by reference in,
the Registration Statement of which this prospectus is a part.
CLASS A COMMON STOCK
The holders of Class A Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. The
holders of Class A Common Stock will be entitled to such dividends as may be
declared at the discretion of our Board of Directors out of funds legally
available for that purpose. The holders of Class A Common Stock will be entitled
to share ratably with holders of Class B Common Stock in the net assets of our
company upon liquidation after payment or provision for all liabilities. A
holder of Class A Common Stock may convert any or all of his shares into an
equal number of shares of Class B Common Stock. We have never paid and we do not
anticipate declaring or paying any cash dividends on shares of our Class A
Common Stock in the foreseeable future. See "Dividend Policy."
CLASS B COMMON STOCK
Except as required by law, the holders of Class B Common Stock have no
voting rights. The holders of Class B Common Stock will be entitled to such
dividends as may be declared at the discretion of our Board of Directors out of
funds legally available for that purpose. The holders of Class B Common Stock
will be entitled to share ratably with holders of Class A Common Stock in the
net assets of our company upon liquidation after payment or provision for all
liabilities. A holder of Class B Common Stock may convert any or all of his
shares into an equal number of shares of Class A Common Stock, 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. We have never paid and we do not anticipate declaring or paying any
cash dividends on shares of our Class B Common Stock in the foreseeable future.
12% SERIES A CUMULATIVE COMPOUNDING PREFERRED STOCK
The 12% Series A Cumulative Compounding 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. We expect all
outstanding shares of 12% Series A Cumulative Compounding Preferred Stock will
be exchanged for shares of Class A Common Stock in connection with this
offering. See "Debt Repayment and Preferred Stock Repurchase Transactions."
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STOCKHOLDERS' AGREEMENT
The existing stockholders of our company entered into a Securities Purchase
and Holders Agreement, which we refer to as the Stockholders' Agreement,
containing certain agreements among such stockholders with respect to the
capital stock and corporate governance of our company and Fairchild
Semiconductor. The following is a summary description of the principal terms of
the Stockholders' Agreement.
Pursuant to the Stockholders' Agreement, the boards of directors of our
company and Fairchild Semiconductor will be composed at all times of seven
directors as follows: Mr. Pond, so long as he continues to own shares of our
company Common Stock or 12% Series A Cumulative Compounding Preferred Stock; Mr.
Martin, so long as he continues to own shares of common stock or 12% Series A
Cumulative Compounding Preferred Stock; the President of Fairchild Semiconductor
if either of Messrs. Pond or Martin is no longer serving on the board of
directors; if National Semiconductor so chooses, so long as National
Semiconductor continues to own shares of common stock or 12% Series A Cumulative
Compounding Preferred Stock, one individual designated by National
Semiconductor, provided that such person shall be an executive officer of
National Semiconductor reasonably acceptable to the remaining directors; two
individuals designated by Sterling; and the remaining directors shall be such
independent directors as shall be designated by Sterling, to the extent
permitted by applicable law as determined by Sterling in its sole discretion,
subject to the right of the Chief Executive Officer of Fairchild Semiconductor
to veto the election of any such independent director, provided that in the
event that Sterling concludes that it is unable to designate, or elects not to
designate for any reason, one or more of such independent directors or the
election of any such independent director is not approved by the holders of a
majority of the outstanding shares of Class A Common Stock, such directorship or
directorships shall not be filled by the remaining members of the Board of
Directors but shall remain vacant until the election of a director designated by
Sterling to fill such vacancy in accordance with the Stockholders' Agreement.
Pursuant to the terms of the Stockholders' Agreement, the foregoing board
composition and designation agreements will be terminated in connection with
this offering.
The Stockholders' Agreement contains certain provisions which, with certain
exceptions, restrict the ability of the stockholders to transfer any common
stock or 12% Series A Cumulative Compounding Preferred Stock except pursuant to
the terms of the Stockholders' Agreement. Neither Sterling nor any of its
affiliates, as such term is defined in the Stockholders' Agreement, may sell any
of their shares of our Common Stock to us or any of our affiliates without
offering the other stockholders a pro rata opportunity to participate in such
sale. In addition, with certain exceptions, the Stockholders' Agreement
restricts certain transactions between our company and Fairchild Semiconductor,
on the one hand, and owners of 15% or more of the common stock and their
affiliates, on the other hand.
Certain amendments to the Stockholders' Agreement, which were effected on
May 29, 1998, resulted in the lapse of certain risks of forfeiture by our
executive officers with respect to their stock in our company. The lapse of such
restrictions resulted in the incurrence by such executive officers of liability
for federal and state income tax. We made loans to such executive officers in
June 1998 to enable such officers to fund such tax liabilities. 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, will be cancelled upon the occurrence of this 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. Any such executive
officer whose employment terminates prior to the completion of the offering will
be required to repay any uncancelled amounts immediately.
It is anticipated that the amounts payable by our company with respect to
such executive officers' tax liabilities (assuming no repayment obligation on
the part of any executive officer) are as follows:
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<PAGE> 100
Kirk P. Pond -- $1,811,523; Joseph R. Martin -- $905,763; Daniel E.
Boxer -- $372,858; Darrell Mayeux -- $372,858; W. Wayne Carlson -- $372,858; and
Jerry M. Baker -- $384,287.
REGISTRATION RIGHTS AGREEMENT
In connection with the entry by the existing stockholders of our company
into the Stockholders' Agreement, our company, Sterling, certain of our key
employees of Fairchild, National Semiconductor and such stockholders entered
into a Registration Rights Agreement. Pursuant to the Registration Rights
Agreement, upon the written request of Sterling or National Semiconductor, we
will prepare and file a registration statement with the Securities and Exchange
Commission concerning the distribution of all or part of the shares held by
Sterling or National Semiconductor and use its best efforts to cause such
registration statement to become effective. If at any time our company files a
registration statement for the common stock pursuant to a request by Sterling,
National Semiconductor or otherwise (other than a registration statement on Form
S-8, Form S-4 or any similar form, a registration statement filed in connection
with a share exchange or an offering solely to our company's employees or
existing stockholders, or a registration statement registering a unit offering
(as defined)) (a "Qualifying Offering"), we will use our best efforts to allow
the other parties to the Registration Rights Agreement to have their shares of
Fairchild Holdings Common Stock (or a portion of their shares under certain
circumstances) included in such offering of common stock. Registration expenses
of the selling stockholders (other than underwriting fees, brokerage fees and
transfer taxes applicable to the shares sold by such stockholders or in certain
cases the fees and expenses of any accountants or other representatives retained
by a selling stockholder) will be paid by our company.
TRANSFER AGENT AND REGISTRAR
We expect the Transfer Agent and Registrar for the Class A Common Stock to
be BancBoston, N.A.
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<PAGE> 101
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of certain indebtedness of our company and
Fairchild Semiconductor that will be outstanding following consummation of this
offering. To the extent such summary contains descriptions of documents
governing our indebtedness, such descriptions do not purport to be complete and
are qualified in their entirety by reference to such documents, which we will
provide you upon request.
SENIOR CREDIT FACILITIES
GENERAL. In connection with the Transactions, we entered into the Senior
Credit Facilities with a syndicate of certain financial institutions, as
lenders, Credit Suisse First Boston, New York Branch, as the Administrative
Agent, Salomon Brothers Holding Company Inc, as Syndication Agent, and ABN Amro
Bank, N.V. and Fleet National Bank, as Documentation Agents.
The Senior Credit Facilities provide for up to $410.0 million of aggregate
borrowing capacity for Fairchild Semiconductor consisting of:
- a secured $100.0 million funded tranche A term loan, which we refer to as
the Tranche A Facility;
- a secured $210.0 million funded tranche B term loan, which we refer to as
the Tranche B Facility; and
- a secured $100.0 million revolving line of credit, which we refer to as
the Revolving Credit Facility, including up to $10.0 million of swingline
loans.
GUARANTEES; SECURITY. Fairchild Semiconductor's obligations under the
Senior Credit Facilities are unconditionally guaranteed, jointly and severally,
by our company and certain of Fairchild Semiconductor's existing and
subsequently acquired or organized domestic, and, to the extent no adverse tax
consequences will result, foreign, subsidiaries. Fairchild Semiconductor's
obligations and those of such guarantors under the Senior Credit Facilities are
secured by a pledge of all of Fairchild Semiconductor's capital stock and by
substantially all of the assets of our company, Fairchild Semiconductor and
certain of Fairchild Semiconductor's existing and subsequently acquired or
organized domestic, and, to the extent no adverse tax consequences will result,
foreign, subsidiaries. None of Fairchild Semiconductor's foreign subsidiaries
guarantee the Senior Credit Facilities, and the Senior Credit Facilities are not
secured by a pledge of the intercompany debt obligation of Fairchild Korea. Less
than two-thirds of the capital stock of Fairchild Korea has been pledged to
secure the Senior Credit Facilities.
AMORTIZATION; INTEREST; FEES; MATURITY. The Tranche A Facility is subject
to certain specified amortization payments required to be made in quarterly
installments which commence on September 30, 1999 until final payment is made on
March 31, 2004. The Tranche B Facility is subject to certain specified
amortization payments required to be made in quarterly installments which
commence on September 30, 1999 until final payment is made on December 15, 2004.
The Revolving Credit Facility is available until March 31, 2004 unless
terminated earlier under certain circumstances.
Borrowings under the Tranche A Facility, Tranche B Facility and Revolving
Credit Facility portions of the Senior Credit Facilities bear interest at a rate
equal to, at Fairchild Semiconductor's option, either (i) the base rate which is
based on the prime rate most recently announced by the Administrative Agent or
the Federal Funds rate plus one-half of 1% or (ii) the applicable London
interbank offered rate, in each case plus an applicable margin determined by
reference to the ratio of Total Indebtedness to EBITDA (as defined in the Senior
Credit Facilities). In addition, the Senior Credit Facilities are subject to a
commitment fee of 0.50% per annum of the undrawn portion of the Revolving Credit
Facility, and letter of credit fees with respect to each letter of credit
outstanding under the Senior Credit Facilities equal to (i) the spread over
Adjusted LIBOR (as defined in the Senior Credit Facilities) in effect for
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loans under the Revolving Credit Facility and (ii) 0.25% per annum on the face
amount of all outstanding letters of credit.
PREPAYMENTS. The loans under the Senior Credit Facilities are required to
be prepaid with certain asset and capital stock sales and dispositions, certain
incurrences of indebtedness, certain offerings of common equity securities and
by certain percentages of Fairchild Semiconductor's annual Excess Cash Flow (as
defined in the Senior Credit Facilities). Voluntary prepayments may be made in
whole or in part without premium or penalty.
COVENANTS AND EVENTS OF DEFAULT. The Senior Credit Facilities contain,
among other things, covenants restricting Fairchild Semiconductor's ability and
its subsidiaries' ability to dispose of assets, merge, pay dividends, repurchase
or redeem capital stock and indebtedness, including the 10 3/8% Senior
Subordinated Notes, incur indebtedness and guarantees, create liens, enter into
agreements with negative pledge clauses, make certain investments or
acquisitions, enter into sale and leaseback transactions, enter into
transactions with affiliates, change its business or make fundamental changes,
and otherwise restrict corporate actions. The Senior Credit Facilities also
contain a number of financial maintenance covenants.
The Senior Credit Facilities also include events of default usual for these
types of credit facilities and transactions, including but not limited to
nonpayment of principal or interest, violation of covenants, incorrectness of
representations and warranties, cross defaults and cross acceleration,
bankruptcy, material judgments, ERISA, actual or asserted invalidity of the
guarantees or the security documents and certain changes of control of our
company. The occurrence of any event of default could result in the acceleration
of the Company's and the guarantors' obligations under the Senior Credit
Facilities, which could materially and adversely affect you.
10 1/8% SENIOR SUBORDINATED NOTES DUE 2007
Fairchild Semiconductor is the primary obligor on $300,000,000 in aggregate
principal amount of 10 1/8% Senior Subordinated Notes. The 10 1/8% Senior
Subordinated Notes bear interest at a rate of 10 1/8% per annum, payable
semi-annually on March 15 and September 15 of each year.
Fairchild Semiconductor is required to redeem $150.0 million principal
amount of 10 1/8% Senior Subordinated Notes on March 15, 2005 and $75.0 million
principal amount of 10 1/8% Senior Subordinated Notes on March 15, 2006, in each
case at a redemption price of 100% of the principal amount plus accrued interest
to the date of redemption, subject to its right to credit against any such
redemption 10 1/8% Senior Subordinated Notes acquired by Fairchild Semiconductor
otherwise than through any such redemption. The 10 1/8% Senior Subordinated
Notes are not otherwise redeemable prior to March 15, 2002, except that, until
March 15, 2000, Fairchild Semiconductor may redeem, at its option, up to an
aggregate of $105.0 million of the principal amount of the 10 1/8% Senior
Subordinated Notes at the redemption price set forth in the indenture governing
the 10 1/8% Senior Subordinated Notes plus accrued interest to the date of
redemption with the net proceeds of one or more Public Equity Offerings (as
defined under the indenture governing the 10 1/8% Senior Subordinated Notes) if
at least $150.0 million of the principal amount of the 10 1/8% Senior
Subordinated Notes remains outstanding after each such redemption. On or after
March 15, 2002, the 10 1/8% Senior Subordinated Notes are redeemable at
Fairchild Semiconductor's option, in whole or in part, at the redemption prices
set forth in the indenture governing the 10 1/8% Senior Subordinated Notes plus
accrued interest to the date of redemption.
Upon a "Change of Control" under the indenture governing the 10 1/8% Senior
Subordinated Notes and subject to certain conditions, each holder of the 10 1/8%
Senior Subordinated Notes may require Fairchild Semiconductor to repurchase the
10 1/8% Senior Subordinated Notes held by such holder at 101% of the principal
amount thereof plus accrued interest to the date of repurchase.
The 10 1/8% Senior Subordinated Notes are unsecured senior subordinated
obligations of Fairchild Semiconductor and are subordinated in right of payment
to all existing and future Senior Indebtedness,
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as defined under the indenture governing the 10 1/8% Senior Subordinated Notes,
of Fairchild Semiconductor. The 10 1/8% Senior Subordinated Notes rank pari
passu in right of payment with all senior subordinated indebtedness of Fairchild
Semiconductor and senior to any other subordinated indebtedness of Fairchild
Semiconductor.
The payment of principal, premium, if any, and interest on the 10 1/8%
Senior Subordinated Notes is fully and unconditionally guaranteed on a senior
subordinated basis by our company and the subsidiary guarantors. The guaranties
by our company and the subsidiary guarantors are subordinated to all existing
and future Senior Indebtedness of such parties, including our company's and the
subsidiary guarantors' guaranties of Fairchild Semiconductor's obligations under
the Senior Credit Facilities. Our company currently conducts no business and has
no significant assets other than the capital stock of Fairchild Semiconductor,
all of which has been pledged to secure our company's obligations under the
Senior Credit Facilities. The guaranty of our company or a subsidiary guarantor,
as the case may be, may be released upon a sale of our company or a subsidiary
guarantor, as the case may be, or upon repayment or defeasance of the 10 1/8%
Senior Subordinated Notes in each case as permitted by the indenture governing
the 10 1/8% Senior Subordinated Notes.
The indenture governing the 10 1/8% Senior Subordinated Notes contains
restrictive covenants substantially identical to those contained in the
indenture governing the 10 3/8% Senior Subordinated Notes, including covenants
that limit, among other things, (i) the incurrence of additional debt by
Fairchild Semiconductor and its subsidiaries, (ii) the payment of dividends on
Fairchild Semiconductor's capital stock and the purchase, redemption or
retirement of capital stock or subordinated indebtedness, (iii) investments,
(iv) certain transactions with affiliates, (v) sales of assets, including
capital stock of subsidiaries and (vi) certain consolidations, mergers and
transfers of assets. The indenture governing the 10 1/8% Senior Subordinated
Notes also prohibits certain restrictions on distributions from subsidiaries.
10 3/8% SENIOR SUBORDINATED NOTES DUE 2007
Fairchild Semiconductor is the primary obligor on $300,000,000 in aggregate
principal amount of 10 3/8% Senior Subordinated Notes. The 10 3/8% Senior
Subordinated Notes bear interest at a rate of 10 3/8% per annum, payable
semi-annually on April 1 and October 1 of each year.
Fairchild Semiconductor cannot redeem the 10 3/8% Senior Subordinated Notes
prior to April 1, 2003, except as discussed below. Until April 1, 2002,
Fairchild Semiconductor can choose to redeem the 10 3/8% Senior Subordinated
Notes in an amount not to exceed 35% of the sum of the original principal amount
of the 10 3/8% Senior Subordinated Notes and the original principal amount of
any other notes issued under the same indenture, with money it raises in certain
equity offerings, as long as:
- Fairchild Semiconductor pays the holders of the 10 3/8% Senior
Subordinated Notes and any such other notes redeemed a redemption price
of 110 3/8% of the principal amount of the 10 3/8% Senior Subordinated
Notes and any such other notes Fairchild Semiconductor redeems, plus
accrued interest to the date of redemption; and
- at least 65% of the original aggregate principal amount of the 10 3/8%
Senior Subordinated Notes and any such other notes remains outstanding
after each such redemption.
On or after April 1, 2003, Fairchild Semiconductor can redeem some or all
of the 10 3/8% Senior Subordinated Notes at the redemption prices set forth in
the indenture governing the 10 3/8% Senior Subordinated Notes plus accrued
interest to the date of redemption.
Upon a "Change of Control" under the indenture governing the 10 3/8% Senior
Subordinated Notes and subject to certain conditions, each holder of the 10 3/8%
Senior Subordinated Notes may require Fairchild Semiconductor to repurchase the
10 3/8% Senior Subordinated Notes held by such holder at 101% of the principal
amount thereof plus accrued interest to the date of repurchase.
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The 10 3/8% Senior Subordinated Notes are unsecured senior subordinated
obligations of Fairchild Semiconductor and are subordinated in right of payment
to all existing and future Senior Indebtedness (as defined under the indenture
governing the 10 3/8% Senior Subordinated Notes) of Fairchild Semiconductor. The
10 3/8% Senior Subordinated Notes rank pari passu in right of payment with all
senior subordinated indebtedness of Fairchild Semiconductor and senior to any
other subordinated indebtedness of Fairchild Semiconductor.
The payment of principal, premium, if any, and interest on the 10 3/8%
Senior Subordinated Notes is fully and unconditionally guaranteed on a senior
subordinated basis by our company and Fairchild Semiconductor's principal
domestic subsidiaries. The guaranties by our company and Fairchild
Semiconductor's principal domestic subsidiaries are subordinated to all existing
and future senior indebtedness of such parties, including our company's and
Fairchild Semiconductor's principal domestic subsidiaries' guaranties of
Fairchild Semiconductor's obligations under the Senior Credit Facilities. Our
company currently conducts no business and has no significant assets other than
Fairchild Semiconductor's capital stock, all of which will be pledged to secure
our company's obligations under the Senior Credit Facilities. The guaranty of
our company or a subsidiary guarantor, as the case may be, may be released upon
a sale of our company or a subsidiary guarantor, as the case may be, or upon
repayment or defeasance of the 10 3/8% Senior Subordinated Notes in each case as
permitted by the indenture governing the 10 3/8% Senior Subordinated Notes.
The indenture governing the 10 3/8% Senior Subordinated Notes contains
restrictive covenants substantially identical to those contained in the
indenture governing the 10 1/8% Senior Subordinated Notes, including covenants
that limit, among other things, (i) the incurrence of additional debt by
Fairchild Semiconductor and its subsidiaries, (ii) the payment of dividends on
Fairchild Semiconductor's capital stock and the purchase, redemption or
retirement of capital stock or subordinated indebtedness, (iii) investments,
(iv) certain transactions with affiliates, (v) sales of assets, including
capital stock of subsidiaries and (vi) certain consolidations, mergers and
transfers of assets. The indenture governing the 10 3/8% Senior Subordinated
Notes also prohibits certain restrictions on distributions from subsidiaries.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Recapitalization, the existing stockholders of our
company entered into the Stockholders' Agreement containing certain agreements
among such stockholders with respect to the capital stock and corporate
governance of our company and Fairchild Semiconductor. Certain amendments to the
Stockholders' Agreement, which were effected on May 29, 1998, resulted in the
lapse of certain risks of forfeiture by executive officers of Fairchild
Semiconductor with respect to their stock in our company. The lapse of such
restrictions resulted in the incurrence by such executive officers of liability
for federal and state income tax. Fairchild Semiconductor 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) will be canceled upon the
occurrence of this 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). Any such executive officer whose employment terminates prior to
the completion of this offering will be required to repay any uncanceled amounts
immediately.
It is anticipated that the amounts payable by Fairchild Semiconductor with
respect to such executive officers' tax liabilities (assuming no repayment
obligation on the part of any executive officer and cancellation in full after 4
years) are as follows: Kirk P. Pond -- $1,811,523; Joseph R. Martin --
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<PAGE> 105
$905,763; Daniel E. Boxer -- $372,858; Darrell Mayeux -- $372,858; W. Wayne
Carlson -- $372,858; and Jerry M. Baker -- $384,287.
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 Semiconductor on April 15, 1998 in order to assist him in
covering the costs of relocating to take this position. Such loan bears interest
at a rate of 6% per annum, with all accrued interest payable on each April 15,
beginning April 15, 1999. The outstanding principal of the loan is payable in
full upon the earlier of (a) six months after any initial public offering of
[our company's] stock, (b) 60 days after Mr. Jackson ceases to be employed by
Fairchild Semiconductor or (c) April 15, 2003.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, shares of Class A Common
Stock will be outstanding ( shares if the underwriters exercise
their over-allotment option in full), and shares of Class B
Common Stock will be outstanding, each of which is convertible into the other on
a one-to-one basis. shares of Class A Common Stock, assuming the
underwriters exercise their over-allotment option in full, sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, unless held by an "affiliate" of our company as that term is
defined in Rule 144. All of the shares of Class A Common Stock outstanding prior
to this offering are "restricted securities," as such term is defined under Rule
144. These shares are restricted securities because they were issued in private
transactions not involving a public offering and may not be sold in the absence
of registration other than in accordance with Rule 144 or Rule 701 promulgated
under the Securities Act or another exemption from registration. This prospectus
may not be used in connection with any resale of shares of Class A Common Stock
acquired in this offering by our affiliates.
Each of our company, our directors and executive officers and, with respect
to certain shares, our existing stockholders has agreed not to offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act relating to, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus. The
restrictions set forth in the previous sentence do not apply to grants of
employee stock options pursuant to the terms of our stock option plans,
issuances of securities pursuant to the exercise of such options outstanding on
the date hereof or the exercise of any other stock options outstanding on the
date hereof.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person (or
persons whose shares of Class A Common Stock are aggregated), including persons
who may be deemed our affiliates, would be entitled to sell within any
three-month period a number of shares of Class A Common Stock that does not
exceed the greater of
(1) one percent of the then-outstanding shares of Class A Common Stock,
which equals approximately shares immediately after this offering, or
(2) the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission.
Sales under Rule 144 are also subject to certain restrictions as to the
manner of sale, notice requirements and the availability of current public
information about our company. In addition, under Rule 144(k), if a period of at
least two years has elapsed since the later of the date restricted securities
were acquired from our company or the date they were acquired from an affiliate
of our company, a stockholder who is not an affiliate of our company at the time
of sale and who has not been a an affiliate of our company for at least three
months prior to the sale would be entitled to sell shares of Class A
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<PAGE> 106
Common Stock in the public market immediately without compliance with the
foregoing requirements under Rule 144. Rule 144 does not require the same person
to have held the securities for the applicable periods. The foregoing summary of
Rule 144 is not intended to be a complete description thereof.
In addition, any employee, director or officer of, or consultant to our
company who acquired shares pursuant to a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701 of the Securities
Act, which permits non-affiliates to sell their Rule 701 shares without having
to comply with the public information, holding period, volume limitation or
notice provisions of Rule 144, and permits our affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions of Rule
144, in each case, commencing 90 days after the date of this prospectus.
Immediately following the offering, none of the "restricted
securities" will be available for immediate sale in the public market pursuant
to Rule 144(k). Beginning 90 days after the date of this prospectus, and without
consideration of the contractual restrictions described above, [ ]
shares either issued under the [1997 Stock Option Plan] or acquired upon
exercise of options issued under the [1997 Stock Option Plan] will be
outstanding and eligible for sale in reliance upon Rule 701. Additional shares
may be available if options are exercised in the 180-day period following the
date of this prospectus.
We have an effective registration statement on Form S-8 under the
Securities Act with respect to 821,000 shares of Class A Common Stock reserved
or to be available for issuance pursuant to the 1997 Stock Option Plan. We
intend to file a registration statement on Form S-8 to register an additional
5,263,000 shares of Class A Common Stock issuable upon exercise of options
granted under the 1997 Stock Option Plan prior to the date of this offering.
Shares of Class A Common Stock issued pursuant to the 1997 Stock Option Plan
generally will be available for sale in the open market by holders who are not
our affiliates and, subject to the volume and other applicable limitations of
Rule 144, by holders who are our affiliates, unless such shares are subject to
vesting restrictions or the contractual restrictions described above.
Prior to this offering, there has been no public market for the Class A
Common Stock. No information is currently available and we cannot predict the
timing or amount of future sales of shares, or the effect, if any, that future
sales of shares, or the availability of shares for future sale, will have on the
market price of the Class A Common Stock prevailing from time to time. Sales of
substantial amounts of the Class A Common Stock, including shares issuable upon
the exercise of stock options, in the public market after the lapse of the
restrictions described above, or the perception that such sales may occur, could
materially adversely affect the prevailing market prices for the Class A Common
Stock and the ability of our company to raise equity capital in the future. See
"Risk Factors -- Shares of Class A Common Stock Eligible for Future Sale."
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UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of the Class
A Common Stock applicable to Non-United States Holders of such Class A Common
Stock. A "Non-United States Holder" is any holder that for United States federal
income tax purposes is not a United States person. For purposes of this
discussion, the term "United States person" means: (i) a citizen or resident of
the United States; (ii) a corporation or other entity taxable as a corporation
created or organized in the United States or under the laws of the United States
or of any political subdivision thereof; (iii) an estate the income of which is
included in gross income for United States federal income tax purposes
regardless of its source; or (iv) a trust if its administration is subject to
the primary supervision of a United States court and one or more United States
persons have the authority to control all substantial decisions of the trust. In
the case of a partnership that holds our Class A Common Stock, any partner
described in any of (i) through (iv) above is also a United States person.
This discussion does not address all aspects of United States federal
income and estate taxation that may be relevant in light of such Non-United
States Holder's particular facts and circumstances (such as being a U.S.
expatriate) and does not address any tax consequences arising under the laws of
any state, local or non-United States taxing jurisdiction. Furthermore, the
following discussion is based on current provisions of the Internal Revenue Code
of 1986, as amended (the "Code") and administrative and judicial interpretations
thereof, all as in effect on the date hereof, and all of which are subject to
change, possibly with retroactive effect.
We have not and will not seek a ruling from the Internal Revenue Service
("the IRS") with respect to the United States federal income and estate tax
consequences described below, and as a result, there can be no assurance that
the IRS will not disagree with or challenge any of the conclusions set forth in
this discussion.
DIVIDENDS
We have never paid, and do not anticipate that we will pay, cash dividends
on our Class A Common Stock. Should we ever pay a cash dividend, any dividend
paid to a Non-United States Holder of Class A Common Stock generally would be
subject to United States withholding tax at the then-effective U.S. withholding
tax rate (currently 30% of the gross amount of the dividend) or such lower rate
as may be specified by an applicable tax treaty. Dividends received by a
Non-United States Holder that are effectively connected with a United States
trade or business conducted by such Non-United States Holder or, if a tax treaty
applies, attributable to a United States permanent establishment of such Non-
United States Holder would be exempt from such withholding tax, provided such
Non-United States Holder complies with applicable certification and disclosure
requirements. However, any such effectively connected or attributable dividends,
net of certain deductions and credits, would be taxed at the same graduated
rates that apply to United States persons.
Dividends may be subject to backup withholding at the rate of 31% unless
the Non-United States Holder certifies to certain required information in
accordance with United States Treasury Regulations applicable to withholding and
information reporting. Currently, backup withholding does not apply to dividends
paid to a Non-United States Holder at an address outside the United States.
However, under final regulations regarding withholding and information reporting
(the "Final Regulations"), which will generally be effective for payments made
after December 31, 2000, payment of dividends to a Non-United States Holder at
an address outside the United States may be subject to backup withholding unless
such Non-United States Holder satisfies applicable certification requirements.
Backup withholding, if applied, is not an additional tax. Rather, the tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
be obtained, provided that the required information is furnished to the IRS.
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Generally, we must report annually to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make such reports available to tax authorities in the
recipient's country of residence.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
its common stock unless: (i) such gain is effectively connected with a United
States trade or business of the Non-United States Holder (all or a portion of
which gain, in the case of a corporate Non-United States Holder, may be subject
to the branch profits tax at the rate of 30% (or lower treaty rate, if
applicable)), (ii) the Non-United States Holder is an individual who holds such
common stock as a capital asset (within the meaning of Section 1221 of the Code)
and who is present in the United States for a period or periods aggregating 183
days or more during the taxable year in which such sale or disposition occurs
and certain other conditions are met; or (iii) we are or have been a "United
States real property holding corporation" for United States federal income tax
purposes at any time within the shorter of the five-year period preceding such
disposition or such Non-United States Holder's holding period of its common
stock. We have determined that we are not and do not believe that we are likely
to become a "United States real property holding corporation" for United States
federal income tax purposes. However, no assurance can be provided that we will
not become a United States real property holding corporation. If we were to
become a United States real property holding corporation, gains realized by a
Non-United States Holder which did not directly or indirectly own more than 5%
of our common stock at any time during the shorter of the five-year period
preceding such disposition or such Holder's holding period generally would not
be subject to United States federal income tax as a result of the status of our
company as a United States real property holding corporation, provided that our
common stock was regularly traded on an established securities market.
The payment of the proceeds of a sale of common stock to or through the
United States office of a broker is currently subject to both information
reporting and backup withholding at the rate of 31% unless the Non-United States
Holder certifies its non-United States status under penalties of perjury or
otherwise establishes an exemption. Generally, the payment of proceeds of a
disposition by a Non-United States Holder of common stock outside the United
States to or through a foreign office of a broker will not be subject to backup
withholding. However, such payments will be subject to information reporting if
the broker is: (i) a United States person; (ii) a "controlled foreign
corporation" for United States tax purposes; (iii) a foreign person 50% or more
of whose gross income for a specified three-year period is effectively connected
with a United States trade or business or (iv) with respect to payments made
after December 31, 2000, a foreign partnership, if at any time during its
taxable year, one or more of its partners are United States persons who in the
aggregate hold more than 50% of the income or capital interest in the
partnership or if, at any time during its taxable year, such foreign partnership
is engaged in a United States trade or business, unless the Non-United States
Holder establishes an exemption in accordance with the current United States
Treasury Regulations regarding withholding and information reporting or the
Final Regulations, as applicable.
The Final Regulations unify current certification procedures and forms and
clarify reliance standards. Except as noted above with respect to foreign
brokers that are partnerships, the Final Regulations generally do not
significantly alter the substantive withholding and information reporting
requirements but do alter the procedures for claiming the benefits of an income
tax treaty and change the certification procedures relating to the receipt by
intermediaries of payments on behalf of the beneficial owner of shares of common
stock. Non-United States Holders should consult their own tax advisors regarding
the effect, if any, of the Final Regulations on their particular situations.
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ESTATE TAX
Common stock owned or treated as owned at the time of death by an
individual who is not a citizen or resident of the United States for federal
estate tax purposes will be included in such individual's estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
applies other rules, and as a result may be subject to United States federal
estate tax.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL UNITED STATES
FEDERAL INCOME AND ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER
DISPOSITION OF OUR COMMON STOCK BY NON-UNITED STATES HOLDERS. ACCORDINGLY,
INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE INCOME
TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK, INCLUDING
THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER
TAXING JURISDICTION.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation
("CSFBC") is acting as representative, the following respective number of shares
of Class A Common Stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
--------
Total..................................................
========
</TABLE>
The underwriting agreement provides that the underwriters will be obligated
to purchase all of the shares of Class A Common Stock offered in this offering
if any are purchased, other than those shares covered by the over-allotment
option described below. The underwriting agreement also provides that, in the
event of a default, purchase commitments may be increased or the underwriting
agreement may be terminated.
We have granted to the underwriters a 30-day option exercisable by CSFBC to
purchase up to additional shares of Class A Common Stock at the
initial public offering price, less the underwriting discounts and commissions.
This option may be exercised only to cover any over-allotments of Class A Common
Stock.
The underwriters will offer the Class A Common Stock initially at the
public offering price set forth on the cover page of this prospectus and to
selling group members at such price less a concession of $ per share. The
underwriters may reallow a discount of $ per share on sales to certain other
broker/dealers. After the initial offering, the offering price, concession and
discount may be changed only by the representative.
The following table summarizes the discounts and commissions and estimated
expenses payable by us.
<TABLE>
<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions........... $ $ $
Expenses payable by us........................... $ $ $
</TABLE>
We, our officers and directors, and with respect to certain of their
shares, our existing stockholders have agreed not to offer, sell, contract to
sell, announce their intention to sell, pledge or otherwise dispose of, directly
or indirectly, or file with the Securities and Exchange Commission a
registration statement under the Securities Act relating to, any additional
shares of our Class A Common Stock or securities convertible into or
exchangeable or exercisable for any shares of our Class A Common Stock without
the prior written consent of CSFBC for a period of 180 days after the date of
this prospectus, except in our case for grants of employee stock options
pursuant to the terms of a plan in effect on the date hereof, issuances of
securities pursuant to the exercise of employee stock options outstanding on the
date hereof or the exercise of any other stock options outstanding on the date
hereof.
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We have agreed to indemnify the underwriters against certain liabilities
described in the underwriting agreement. In addition, we have agreed to
contribute to payments which the underwriters may be required to make relating
to such liabilities.
We intend to apply to list our Class A Common Stock on .
Prior to this offering, there has been no public market for our Class A
Common Stock. The initial public offering price for the Class A Common Stock
will be determined by negotiation between us and CSFBC, and does not reflect the
market price for the Class A Common Stock following the offering. Among the
principal factors considered in determining the initial public offering price
will be:
- the information set forth in this prospectus and otherwise available to
CSFBC;
- market conditions for initial public offerings;
- the history of and prospects for the industry in which we are competing;
- our past and present operations;
- our past and present earnings and current financial position;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the ability of our management;
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies;
- the general condition of the securities markets at the time of this
offering; and
- other relevant factors.
We cannot assure you that the initial public offering price will correspond
to the price at which the Class A Common Stock will trade in the public market
subsequent to the offering or that an active trading market for the Class A
Common Stock will develop and continue after the offering.
CSFBC may engage in over-allotment, stabilizing transactions, syndicate
covering transactions and penalty bids in accordance with Regulation M under the
Securities Exchange Act of 1934, as amended. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase shares of the common stock so
long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchases of the common stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when common stock originally sold by such
syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of our Class A Common Stock to
be higher than it would otherwise be in the absence of such transactions. These
transactions may be effected on or otherwise and, if commenced,
may be discontinued at any time.
We intend to use more than 10% of the net proceeds of the sale of our Class
A Common Stock to repay indebtedness under our existing credit facilities owed
by us to a banking affiliate of CSFBC, one of the underwriters. Accordingly, the
offering is being made in compliance with the requirements of Rule 2710(c)(8) of
the National Association of Securities Dealers, Inc. Conduct Rules. This rule
provides generally that if more than 10% of the net proceeds from the sale of
our Class A Common Stock, not including underwriting compensation, is paid to
the underwriters or their affiliates, the initial public offering price of the
stock may not be higher than that recommended by a "qualified independent
underwriter" meeting certain standards. Accordingly, is assuming the
responsibilities of acting
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as the qualified independent underwriter in pricing the offering and conducting
due diligence. The initial public offering price of the shares of our Class A
Common Stock will be no higher than the price recommended by .
The underwriters and their affiliates have provided and will in the future
continue to provide investment banking and other financial services, including
the provision of credit facilities, for us and certain of our respective
affiliates in the ordinary course of business for which they have received and
will receive customary compensation.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Class A Common Stock in Canada is being made only
on a private placement basis exempt from the requirement that we prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of Class A Common Stock are effected. Accordingly, any resale of
the Class A Common Stock in Canada must be made in accordance with applicable
securities laws which will vary depending on the relevant jurisdiction, and
which may require resales to be made in accordance with available statutory
exemptions or pursuant to a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the Class A Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Class A Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (1) such purchaser is entitled under
applicable provincial securities laws to purchase such Class A Common Stock
without the benefit of a prospectus qualified under such securities laws, (2)
where required by law, that such purchaser is purchasing as principal and not as
agent and (3) such purchaser has reviewed the text above under "Resale
restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Section 32 of the Regulation under the Ontario Securities Law. As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers, as well as the experts named
herein, may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada upon
the issuer or such persons. All or a substantial portion of the assets of the
issuer and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or such persons in
Canada or to enforce a judgment obtained in Canadian courts against such issuer
or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Class A Common Stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Class A Common Stock acquired by such purchaser pursuant to this
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offering. Such report must be in the form attached to British Columbia
Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained
from us. Only one such report must be filed in respect of Class A Common Stock
acquired on the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Class A Common Stock should consult their own legal
and tax advisors with respect to the tax consequences of an investment in the
Class A Common Stock in their particular circumstances and with respect to the
eligibility of the Class A Common Stock for investment by the purchaser under
relevant Canadian legislation.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon
for us by Dechert Price & Rhoads, New York, New York. The underwriters have been
represented by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements of FSC Semiconductor Corporation as
of May 31, 1998 and May 25, 1997, and for each of the years in the three-year
period ended May 31, 1998, have been included in this prospectus and
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, which report is included elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The report of KPMG LLP covering the May 31, 1998 consolidated financial
statements of FSC Semiconductor Corporation contains an explanatory paragraph
that states that the Company changed its method of accounting for business
process reengineering costs in 1998 to adopt the provisions of the Emerging
Issues Task Force Issue 97-13, "Accounting for Business Process Reengineering
Costs."
The audited Financial Statements of the Power Device Business included in
this prospectus have been audited by Samil Accounting Corporation, independent
certified public accountants, to the extent and for the periods indicated in
their report thereon. Such financial statements have been included in reliance
upon the report of Samil Accounting Corporation.
The financial statements of Raytheon Semiconductor, Inc. as of December 31,
1997 and for the year then ended, have been included in this prospectus and
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, which report is included elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended, and, in accordance therewith, file annual, quarterly and
special reports and other information with the Securities and Exchange
Commission. You may read and copy any reports or other information filed by us
at the Securities and Exchange Commission's public reference room at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's
regional offices located at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, IL 60661 and Seven World Trade Center, 13th Floor, New
York, NY 10048. Copies of such material can be obtained from the Public
Reference Section of the SEC upon payment of certain fees prescribed by the SEC.
You may call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information contained in the public reference room. Our filings with the
Securities and Exchange Commission are also available to
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the public from commercial document retrieval services and at the Securities and
Exchange Commission's Web site at "http://www.sec.gov."
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933, covering the Class A Common Stock to be offered pursuant
to this prospectus (File No. 333- ). This prospectus, which is a part of the
registration statement, does not contain all of the information included in the
registration statement. Any statement made in this prospectus concerning the
contents of any contract, agreement or other document is not necessarily
complete. For further information with respect to Fairchild and the Class A
Common Stock offered hereby, please reference the registration statement,
including its exhibits. If we have filed any contract, agreement or other
document as an exhibit to the registration statement, you should read the
exhibit for a more complete understanding of the document or matter involved.
Copies of the registration statement, including all related exhibits and
schedules, may be inspected without charge at the public reference facilities
maintained by the SEC, or obtained at prescribed rates from the Public Reference
Section of the SEC at the address set forth above. In addition, you may request
a copy of any of these filings, at no cost, by writing or telephoning us at the
following address or phone number:
FSC Semiconductor Corporation
333 Western Avenue
South Portland, Maine 04106
Attention: General Counsel
(207) 775-8100
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GLOSSARY
ABT........................ Advanced BiCMOS Technology.
ALS........................ Advanced Low Power Schottky.
Application Specific
Standard Product........... A standard integrated circuit designed for a
specific product or application, such as a VCR,
stereo or microwave.
BiCMOS..................... BiCMOS is a hybrid of CMOS and bipolar technologies
developed to combine the high speed characteristics
of bipolar technologies with the low power
consumption and high integration of CMOS
technologies.
Bipolar.................... A manufacturing process that uses two opposite
electrical poles to build semiconductors.
CD4K....................... Metal Gate Logic.
CMOS....................... Complementary Metal Oxide Semiconductor. Currently
the most common integrated circuit fabrication
process technology, CMOS is one of the latest
fabrication techniques to use metal oxide
semiconductor transistors.
Die........................ A piece of a semiconductor wafer containing the
circuitry of a single chip.
Diode...................... An electronic device that allows current to flow in
only one direction.
Discrete................... A single individually packaged component.
DMOS....................... Diffused Metal Oxide Semiconductor. A process
technology used in power discrete fabrication.
ECL........................ Emitter Coupled Logic.
EEPROM..................... Electrically Erasable and Programmable Read-Only
Memory. A form of non-volatile memory that can be
erased electronically before being reprogrammed.
EPROM...................... Electrically Programmable Read-Only Memory.
Non-volatile memory which may be erased by exposure
to ultraviolet light and which can be reprogrammed
only by an external programming unit.
Fab........................ The facility that fabricates the wafer.
FACT(TM)................... Fairchild Advanced CMOS Technology.
FAST(R).................... Fairchild Advanced Schottky Technology.
FET........................ Field Effect Transistor.
Flash Memory............... A type of non-volatile memory, similar to an EEPROM
in that it is erasable and reprogrammable. The
difference is that it must be erased and
reprogrammed in sectors, not individual bits.
Foundry.................... A wafer fabrication plant that manufactures silicon
for another business.
GFI........................ Ground Fault Interruptors.
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GTL........................ Gunning Transceiver Logic.
HV MOSFET.................. High Voltage MOSFET.
IGBT....................... Insulated Gate Bipolar Transistor.
Integrated Circuit......... A combination of two or more transistors on a base
material, usually silicon. All semiconductor chips,
including memory chips and logic chips, are just
very complicated integrated circuits with thousands
of transistors.
Lead Frames................ A conductive frame that brings the electrical
signals to and from the die.
Logic Product.............. A product that contains digital integrated circuits
that move and shape, rather than store,
information.
LS......................... Low Power Schottky.
LVT........................ Low Voltage Technology.
Mask....................... A piece of glass on which an integrated circuit's
circuitry design is laid out. Integrated circuits
may require up to 20 different layers of design,
each with its own mask. In the integrated circuit
production process, a light shines through the mask
leaving an image of the design on the wafer. Also
known as a reticle.
Mb......................... Mega Bit. One million (or 1,048,576) bits as a unit
of data size or memory capacity.
Memory..................... A group of integrated circuits that a computer uses
to store data and programs, such as ROM, RAM, DRAM,
SRAM, EEPROM and EPROM.
Micron..................... 1/25,000 of an inch. Circuity on an integrated
circuit typically follows lines that are less than
one micron wide.
MOS........................ Metal Oxide Semiconductor.
MOSFET..................... Metal Oxide Semiconductor FET.
Motherboard................ The main piece of circuitry inside a PC.
Non-volatile Memory........ Memory products which retain their data content
without the need for constant power supply.
Op Amp..................... Operational Amplifier.
Package.................... A protective case that surrounds the die,
consisting of a plastic housing and a lead frame.
PC......................... Personal Computer.
Planar Technology.......... By the later 1950s, transistors were made in
batches through a simple photolithographic
technique known as the mesa process. This process,
which led directly to the creation of the
commercially viable integrated circuit, is a form
of contact printing.
A cross section of a typical mesa transistor
resembles a mesa of silicon squatting on top of a
foundation of silicon. The three essential parts of
a transistor are all there: the base is the mesa,
the collector is
112
<PAGE> 117
the foundation, and the emitter is a tiny piece of
doped silicon embedded in the base. To fabricate a
mesa transistor, a flat wafer of silicon was doped
with either positive ions or electrons, covered
with a photomask (a photographic plate), exposed to
ultraviolet light and then immersed in an acid
bath, which etched away the exposed area around the
mesa.
For all the manufacturing benefits brought about by
the mesa process, it had two major drawbacks: the
mesa was susceptible to both physical harm and
contamination, and the process did not lend itself
to the making of resistors. Then Jean Hoerni, a
Swiss physicist and one of Fairchild
Semiconductor's founders, invented an ingenious way
around these obstacles by creating a flat, or
planar, transistor.
Instead of mounting the mesa, or base, on top of a
foundation of silicon, he diffused it into the
foundation, which served as the collector. Next he
diffused the emittor into the base. (The base was
composed of negatively doped silicon, the collector
and emitor of positively doped silicon; the first
planar device was thus a pnp transistor.) Then he
covered the whole thing with a protective coating
of silicon dioxide, an insulator, leaving certain
areas in the base and the emitter uncovered. He
diffused a thin layer of aluminum into these areas,
thereby creating "wires" that hooked the device up
to the outside (this was the idea of his colleague
and Fairchild Semiconductor's co-founder, Robert
Noyce). The result was a durable and reliable
transistor, and the all-important breakthrough that
made commercial production of integrated circuits
possible.
Plug and Play.............. A protocol that supports automated configuration of
add on cards.
Power Discrete............. A discrete device that converts, switches or
conditions electricity.
PROM....................... Programmable Read-Only Memory. Similar to ROM in
that once programmed it can be "read only" and not
changed. Programmable ROM means that customers can
program the integrated circuits themselves, so that
the integrated circuit need not be programmed when
it is manufactured. The programming is possible
because of a series of fuses in the circuitry that
can be selectively blown to create a unique type of
data.
RAM........................ Random Access Memory. A type of volatile memory,
forming the main memory of a computer where
applications and files are run.
ROM........................ Read-Only Memory. Memory that is programmed by the
manufacturer and cannot be changed. Typically, ROM
is used to provide start-up data when a computer
is first turned on.
Semiconductor.............. A material with electrical conducting properties in
between those of metals and insulators. (Metals
always conduct and insulators never conduct, but
semiconductors sometimes conduct.) Essentially,
semiconductors transmit electricity only under
certain circumstances, such as when given a
positive or negative electric charge. Therefore, a
semiconductor's ability to conduct can be turned on
or off by manipulating those charges and this
allows the semiconductor to act as an electric
switch. The most common semiconductor material is
113
<PAGE> 118
silicon, used as the base of most semiconductor
chips today because it is relatively inexpensive
and easy to create.
Silicon bonding............ A manufacturing process used to bond together two
silicon wafers, allowing higher resistivity in one
layer and lower resistivity in the other to help
conduct current.
Sort....................... The process of evaluating die into different
grades, good/bad or speed grades.
SPD........................ Serial Presence Detect.
Transistor................. An individual circuit that can amplify or switch
electric current. This is the building block of all
integrated circuits and semiconductors.
Trench technology.......... A manufacturing process used to etch trenches into
silicon wafers, allowing the transistor to be
placed both on the sides of the trenches and on the
surface of the wafer to enable transistors to be
condensed into a smaller area.
TTL........................ Transistor Transistor Logic.
VHC........................ Very High Speed CMOS.
Volatile Memory............ Memory products which lose their data content when
the power supply is switched off.
Wafer...................... Thin, round, flat piece of silicon that is the base
of most integrated circuits.
114
<PAGE> 119
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FSC SEMICONDUCTOR CORPORATION
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at May 31, 1998 and May 25,
1997...................................................... F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended May 31, 1998............... F-4
Consolidated Statement of Cash Flows for the year ended May
31, 1998.................................................. F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for each of the years in the three-year period ended May
31, 1998.................................................. F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Statements of Operations (Unaudited)
for the Nine Months Ended February 28, 1999 and March 1,
1998...................................................... F-29
Condensed Consolidated Balance Sheet as of February 28, 1999
(Unaudited)............................................... F-30
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended February 28, 1999 and March 1,
1998...................................................... F-31
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-32
POWER DEVICE BUSINESS
Independent Auditors' Report................................ F-34
Statements of Net Assets (Liabilities) as of December 31,
1998 and 1997............................................. F-35
Statements of Operations and Comprehensive Income (Loss) for
each of the years in the three-year period ended December
31, 1998.................................................. F-36
Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1998................. F-37
Notes to Financial Statements............................... F-38
RAYTHEON SEMICONDUCTOR, INC.
Independent Auditors' Report................................ F-54
Balance Sheet as of December 31, 1997....................... F-55
Statement of Income for the year ended December 31, 1997.... F-56
Statement of Stockholders' Equity for the year ended
December 31, 1997......................................... F-57
Statement of Cash Flows for the year ended December 31,
1997...................................................... F-58
Notes to Financial Statements............................... F-59
</TABLE>
F-1
<PAGE> 120
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FSC Semiconductor Corporation:
We have audited the accompanying balance sheets of FSC Semiconductor
Corporation (the "Company") as of May 31, 1998 and May 25, 1997, the related
consolidated and combined statements of operations and stockholders' equity
(deficit) for each of the years in the three-year period ended May 31, 1998, and
the related consolidated statement of cash flows for the year ended May 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements were prepared on the basis of
presentation as described in Note 1. Prior to March 11, 1997, the statements
present the combined business equity and the related combined revenues less
direct expenses before taxes of the Fairchild Semiconductor Business of National
Semiconductor Corporation (the Business), and are not intended to be a complete
presentation of the Business' financial position, results of operations or cash
flows. The results of operations before taxes are not necessarily indicative of
the results of operations before taxes that would have been recorded by the
Company on a stand-alone basis.
In our opinion, the accompanying financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
May 31, 1998 and May 25, 1997, the results of operations for each of the years
in the three year period ended May 31, 1998, and the results of cash flows for
the year ended 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 1998 to
adopt the provisions of the Emerging Issues Task Force Issue 97-13, "Accounting
for Business Process Reengineering Costs".
KPMG PEAT MARWICK LLP
Boston, Massachusetts
June 16, 1998, except as to Note 19, which is as of July 20, 1998
F-2
<PAGE> 121
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 31, MAY 25,
1998 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6.5 $ 40.7
Accounts receivable, net of allowances of $14.2 and $15.9
at May 31, 1998 and May 25, 1997, respectively......... 75.0 79.6
Inventories............................................... 108.0 73.1
Other current assets...................................... 20.0 18.7
------- -------
Total current assets................................... 209.5 212.1
Property, plant and equipment, net.......................... 342.9 295.0
Deferred income taxes....................................... 21.4 18.5
Intangible assets, net of accumulated amortization of $1.4
at May 31, 1998........................................... 31.5 --
Other assets................................................ 30.4 29.4
------- -------
Total assets........................................... $ 635.7 $ 555.0
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt......................... $ 13.2 $ 11.0
Accounts payable.......................................... 75.4 77.1
Accrued expenses and other current liabilities............ 55.9 40.1
------- -------
Total current liabilities.............................. 144.5 128.2
Long-term debt, less current portion........................ 526.7 487.9
Other liabilities........................................... 0.6 0.4
------- -------
Total liabilities...................................... 671.8 616.5
------- -------
Redeemable preferred stock--12% Series A cumulative
compounding preferred stock, $.01 par value, $1,000 stated
value; 70,000 shares authorized, issued and outstanding at
May 31, 1998 and May 25, 1997............................. 80.5 71.8
Commitments and contingencies
Stockholders' equity (deficit):
Class A common stock, $.01 par value, voting; 80,000,000
shares authorized, 29,238,800 and 28,764,480 shares
issued and outstanding at May 31, 1998 and May 25,
1997, respectively..................................... 0.3 0.1
Class B common stock, $.01 par value, nonvoting;
80,000,000 shares authorized, 33,635,520 shares issued
and outstanding at May 31, 1998 and May 25, 1997,
respectively........................................... 0.3 0.1
Additional paid-in capital.................................. 9.5 7.6
Accumulated deficit......................................... (126.7) (141.1)
------- -------
Total stockholders' equity (deficit)................... (116.6) (133.3)
------- -------
Total liabilities and stockholders' equity (deficit)... $ 635.7 $ 555.0
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 122
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 31, MAY 25, MAY 26,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenue:
Net sales -- trade........................................ $635.8 $587.8 $688.7
Contract manufacturing -- National Semiconductor.......... 153.4 104.2 87.6
------ ------ ------
Total revenue.......................................... 789.2 692.0 776.3
------ ------ ------
Operating expenses:
Cost of sales............................................. 441.6 442.1 471.9
Cost of contract manufacturing -- National
Semiconductor.......................................... 117.1 97.4 87.6
Research and development.................................. 35.7 18.9 30.3
Selling, general and administrative....................... 92.0 96.4 114.4
Purchased in-process research and development............. 15.5 -- --
Restructuring............................................. -- 5.3 --
------ ------ ------
Total operating expenses............................... 701.9 660.1 704.2
------ ------ ------
Operating Income............................................ 87.3 31.9 72.1
Interest, net............................................... 54.5 11.2 --
Other (income) expense, net................................. -- 1.4 (0.2)
------ ------ ------
Income before income taxes.................................. 32.8 19.3 72.3
Income taxes................................................ 10.7 3.8 --
------ ------ ------
Income before cumulative effect of change in accounting
principle................................................. 22.1 15.5 72.3
Cumulative effect of change in accounting principle, net of
tax effect of $0.8 million................................ (1.5) -- --
------ ------ ------
Net income.................................................. $ 20.6 $ 15.5 $ 72.3
====== ====== ======
Net income applicable to common stockholders (note 2)....... $ 11.9
======
Basic earnings (loss) per common share
Income before cumulative effect of change in accounting
principle................................................. $ 0.21
Cumulative effect of change in accounting principle....... (0.02)
------
$ 0.19
======
Diluted earnings (loss) per common share
Income before cumulative effect of change in accounting
principle................................................. $ 0.20
Cumulative effect of change in accounting principle....... (0.02)
------
$ 0.18
======
Weighted average common shares outstanding
Basic..................................................... 62.6
======
Diluted................................................... 64.8
======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 123
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
MAY 31,
1998
----------
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 20.6
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of deferred compensation.................. 0.2
Cumulative effect of change in accounting principle,
net................................................... 1.5
Depreciation and amortization.......................... 84.6
Loss on disposal of fixed assets....................... 0.9
Non-cash interest expense.............................. 9.7
Purchased in-process research and development.......... 15.5
Deferred income taxes.................................. (0.4)
Changes in operating assets and liabilities, net of effect
of acquisition:
Accounts receivable.................................... 18.6
Inventories............................................ (21.3)
Other current assets................................... (1.6)
Accounts payable....................................... (6.5)
Accrued expenses and other current liabilities......... 13.7
Other assets and liabilities, net...................... 0.6
-------
Cash provided by operating activities................ 136.1
-------
Cash flows from investing activities:
Capital expenditures...................................... (78.0)
Purchase of molds and tooling............................. (5.7)
Purchase of Raytheon Semiconductor, Inc., net of cash
acquired............................................... (116.8)
-------
Cash used by investing activities.................... (200.5)
-------
Cash flows from financing activities:
Repayment of long-term debt............................... (58.7)
Issuance of long-term debt................................ 90.0
Debt issuance costs....................................... (1.1)
-------
Cash provided by financing activities................ 30.2
-------
Net change in cash and cash equivalents..................... (34.2)
Cash and cash equivalents at beginning of period............ 40.7
-------
Cash and cash equivalents at end of period.................. $ 6.5
=======
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes........................................... $ 8.9
=======
Interest............................................... $ 43.8
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 124
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------
CLASS A CLASS B ADDITIONAL TOTAL
CLASS A CLASS B PAR PAR PAID-IN ACCUMULATED BUSINESS EQUITY
SHARES SHARES VALUE VALUE CAPITAL DEFICIT EQUITY (DEFICIT)
------- ------- ------- ------- ---------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at May 28, 1995........ -- -- $ -- $ -- $ -- $ -- $ 233.2 $ 233.2
Revenues less expenses........ -- -- -- -- -- -- 72.3 72.3
Net intercompany activity..... -- -- -- -- -- -- 43.7 43.7
---- ---- ---- ---- ----- ------- ------- -------
Balances at May 25, 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)
==== ==== ==== ==== ===== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 125
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
FSC Semiconductor Corporation ("Fairchild Holdings" or the "Company") 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 Holdings in exchange for shares
of Fairchild Holdings' 12% Series A Cumulative Compounding Preferred Stock,
Fairchild Holdings' 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 the Company assumed the historical operating
results of the Business. Fairchild is a leading global designer, developer and
manufacturer of high performance multi-market semiconductors. The Company'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, and
Penang, Malaysia.
BASIS OF PRESENTATION
The consolidated financial statements at May 31, 1998 and for the fiscal
year then ended, as well as at May 25, 1997, 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 do 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 years ended May 25, 1997
and May 26, 1996 (See Note 16). The financial condition and 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.
F-7
<PAGE> 126
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION -- (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 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.
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
respective stages of production, defined as wafer fabrication, sort, assembly
and test.
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 provides a number of business support services to Fairchild.
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'
F-8
<PAGE> 127
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
plants to National Semiconductor product lines on a basis which is considered to
fairly and reasonably reflect the utilization of the services provided to, or
benefit obtained by, the business receiving the charge. National Semiconductor
had net interest income on a consolidated basis for all periods presented prior
to the Recapitalization. Although not material, these amounts have been
allocated to the Business prior to the Recapitalization on the basis of net
assets and are included in other (income) expense (See Note 12).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is generally
depreciated based upon the following estimated useful lives: buildings and
improvements ten to thirty years, and machinery and equipment three to five
years. Depreciation is computed using the straight-line method.
INTANGIBLE ASSETS
Intangible assets were recorded as part of the Raytheon acquisition 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 includes 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 1998, 1997 and 1996.
F-9
<PAGE> 128
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
CURRENCIES
The Company's functional currency for all operations worldwide is the U.S.
dollar. Accordingly, gains and losses from translation of foreign currency
financial statements are included in current results. In addition, cash
conversion of foreign currency and foreign currency transactions are also
included in current results.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company utilizes various off-balance sheet financial instruments to
manage market risks associated with the fluctuations in certain interest rates
and foreign currency exchange rates. It is the Company's policy to use
derivative financial instruments to protect against market risk arising from the
normal course of business. Gains and losses on financial instruments that are
intended to hedge an identifiable firm commitment are deferred and included in
the measurement of the underlying transaction. Gains and losses on hedges of
anticipated transactions are deferred until such time as the underlying
transactions are recognized or immediately when the transaction is no longer
expected to occur. 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,
currency forward contracts and currency options are based on quoted market
prices or pricing models using prevailing financial market information as of May
31, 1998.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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 and for the year ended May 26, 1996. 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
F-10
<PAGE> 129
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 year ended 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
applicable to common stockholders by the weighted average number of shares of
common stock outstanding. Diluted income (loss) per share also gives effect to
all dilutive potential common shares outstanding, consisting solely of
outstanding stock options.
The following table reconciles net income to net income applicable to
common stockholders and basic weighted average shares to diluted weighted
average shares outstanding.
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Basic weighted average common shares outstanding............ 62.6
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.......... 64.8
=====
Net income.................................................. $20.6
Dividends on redeemable preferred stock..................... (8.7)
Net income applicable to common stockholders................ $11.9
=====
</TABLE>
Options to purchase 750,000 shares of common stock at $10.00 per share were
outstanding during fiscal 1998 but were not included in the computation of
diluted EPS 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 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 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 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 amounts in Fiscal Years 1997 and 1996 have been reclassified to
conform with the current year presentation.
F-11
<PAGE> 130
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- FINANCIAL STATEMENT DETAILS
<TABLE>
<CAPTION>
MAY 31, MAY 25,
1998 1997
------- -------
(IN MILLIONS)
<S> <C> <C>
Inventories(1)
Raw materials............................................. $ 13.0 $ 8.8
Work in process........................................... 69.5 43.4
Finished goods............................................ 25.5 20.9
------ ------
$108.0 $ 73.1
====== ======
Other current assets
Non-trade receivable from manufacturing subcontractor..... $ 12.7 $ 14.8
Prepaid and other current assets.......................... 7.3 3.9
------ ------
$ 20.0 $ 18.7
====== ======
Property, plant and equipment(1)
Land...................................................... $ 23.5 $ 1.2
Buildings and improvements................................ 154.7 140.2
Machinery and equipment................................... 575.1 526.8
Construction in progress.................................. 46.5 20.2
------ ------
Total property, plant and equipment.................... 799.8 688.4
Less accumulated depreciation............................. 456.9 393.4
------ ------
$342.9 $295.0
====== ======
Accrued expenses(1)
Payroll and employee related accruals..................... $ 23.4 $ 14.9
Accrued interest.......................................... 8.1 8.9
Income taxes payable...................................... 3.2 2.0
Other..................................................... 21.2 14.3
------ ------
$ 55.9 $ 40.1
====== ======
</TABLE>
- -------------------------
(1) Approximately $13.6 million of inventory, $49.9 million of property, plant
and equipment, and $4.1 million in accrued liabilities were obtained through
the Raytheon acquisition and contribute to the growth in each respective
account in Fiscal Year 1998.
F-12
<PAGE> 131
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
MAY 31, MAY 25,
1998 1997
------- -------
(IN MILLIONS)
<S> <C> <C>
Tranche A term loan payable................................. $ 62.5 $ 75.0
Tranche B term loan payable................................. -- 45.0
Tranche C term loan payable................................. 88.8 --
Senior subordinated notes payable........................... 300.0 300.0
------ ------
Subtotal............................................... 451.3 420.0
PIK note payable............................................ 88.6 78.9
------ ------
Total long-term debt................................... 539.9 498.9
Less current portion........................................ 13.2 11.0
------ ------
Long-term portion...................................... $526.7 $487.9
====== ======
</TABLE>
On March 11, 1997, the Company entered into a Senior Credit Facilities
agreement ("Credit Agreement") with a syndicate of financial institutions. On
December 31, 1997, the Credit Agreement was amended and restated ("Amended
Credit Agreement") in order to permit the acquisition of Raytheon Semiconductor,
Inc. (See Note 17).
Borrowings under the Amended Credit Agreement are segregated into two
tranches: $75.0 million Tranche A Term Loans and $90.0 million Tranche C Term
Loans. A portion of the proceeds from the Tranche C Term Loans was used to repay
in full the outstanding borrowings of the Tranche B Term Loans under the
original Credit Agreement. The Tranche A Term Loans are scheduled to mature on
March 11, 2002 and are subject to quarterly principal payments ranging from $2.5
million to $6.5 million, commencing May 30, 1997. The Tranche C Term Loans are
scheduled to mature on March 11, 2003 and are subject to quarterly principal
payments of $0.6 million each through February 2002, commencing February 28,
1998, with an additional four quarterly payments of $20.0 million each due
through March 11, 2003, commencing May 31, 2002. The Amended Credit Agreement
also includes a Revolving Credit Facility of $130.0 million. The Revolving
Credit Facility is scheduled to mature on March 11, 2002. No amounts were
outstanding under the Revolving Credit Facility as of May 31, 1998 and May 25,
1997.
The Senior Credit Facilities accrue interest based on either the bank's
base rate or the Eurodollar rate, at the option of the Company. The interest
rate was 8.2% for the Tranche A term loan and 8.1% for the Tranche C term loan
at May 31, 1998. The Company pays a commitment fee of 0.5% per annum of the
unutilized commitments under the Revolving Credit Agreement. Borrowings are
secured by substantially all assets of the Company.
On March 11, 1997, Fairchild issued $300.0 million of 10 1/8% Senior
Subordinated Notes (the "Notes") at face value. The Notes pay interest on March
15 and September 15 of each year commencing September 15, 1997. The Notes are
unsecured and are subordinated to all existing and future senior indebtedness of
the Company. The Notes are redeemable by the Company, in whole or in part, on or
after March 15, 2002 at redemption prices ranging from 100% to approximately
105% of the principal amount. The Company is required to redeem $150.0 million
principal amount of Notes on
F-13
<PAGE> 132
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT -- (CONTINUED)
March 15, 2005 and $75.0 million principal amount of 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 Senior Credit Facilities and
the Notes is fully and unconditionally guaranteed by Fairchild Holdings.
Fairchild Holdings currently conducts no business and has no significant assets
other than the capital stock of the Company. No subsidiaries of Fairchild
Holdings are guarantors on either the Senior Credit Facilities or the Notes.
Included in the accompanying consolidated balance sheets at May 31, 1998 and May
25, 1997 are approximately $93.6 million and $76.2 million of net assets,
respectively, related to the Company's foreign subsidiaries.
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 Holdings senior indebtedness
prohibits Fairchild Holdings 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 Senior Credit Facilities and the indenture under which the Notes were
issued, and the PIK Notes contain certain restrictive financial and operating
covenants, including limitations on the payment of dividends and stock
repurchases, with which the Company was in compliance at May 31, 1998.
Aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
1999........................................................ $ 13.2
2000........................................................ 16.2
2001........................................................ 20.9
2002........................................................ 41.2
2003........................................................ 59.8
Thereafter.................................................. 388.6
------
$539.9
======
</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. 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 is $151.3 million and $60.0
million at May 31, 1998 and May 25, 1997, respectively (See Note 14). The swap
agreement covering $60.0 million of the Senior Credit Facility is cancelable
without penalty at the option of the Company after May 26, 1999.
F-14
<PAGE> 133
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT -- (CONTINUED)
The Company is exposed to credit loss in the event of nonperformance by the
other party to the interest rate swap agreement; however, the Company does not
anticipate nonperformance under the agreement.
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 ended March 10, 1997 and for the year ended May 26,
1996. The provision for income taxes included in the accompanying consolidated
statements of operations for Fiscal Year 1998 and for the period from March 11,
1997 to May 25, 1997, consisted of the following:
<TABLE>
<CAPTION>
MARCH 11,
YEAR ENDED 1997 TO
MAY 31, MAY 25,
1998 1997
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Income before income taxes:
U.S....................................................... $14.6 $7.2
Non-U.S................................................... 18.2 2.5
----- ----
$32.8 $9.7
===== ====
Income taxes:
Current:
U.S. federal........................................... $ 7.1 $ --
U.S. state and local................................... 1.5 --
Non-U.S................................................ 3.3 1.4
----- ----
11.9 1.4
Deferred:
U.S. federal........................................... (2.0) 1.9
U.S. state and local................................... (0.4) 0.5
Non-U.S................................................ 1.2 --
----- ----
(1.2) 2.4
Total income taxes:
U.S. federal........................................... 5.1 1.9
U.S. state and local................................... 1.1 0.5
Non-U.S................................................ 4.5 1.4
----- ----
$10.7 $3.8
===== ====
</TABLE>
F-15
<PAGE> 134
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES -- (CONTINUED)
The reconciliation between the income tax rate computed by applying the
U.S. federal statutory rate and the reported worldwide tax rate follows:
<TABLE>
<CAPTION>
MARCH 11,
YEAR ENDED 1997 TO
MAY 31, MAY 25,
1998 1997
---------- ---------
(IN MILLIONS)
<S> <C> <C>
U.S. federal statutory rate................................. 35.0% 35.0%
U.S. state and local taxes, net of federal benefit.......... 3.3% 4.1%
Tax differential related to non-U.S. income................. (5.7)% --
---- ----
32.6% 39.1%
==== ====
</TABLE>
As discussed in Note 1, the Recapitalization was accounted for as a
leveraged recapitalization whereby the Company retained the carrying value of
assets and liabilities of the Business. For income tax reporting purposes, the
Recapitalization was treated as a taxable transaction resulting in a step up of
the assets and liabilities to fair value at March 11, 1997. As such, gross
deferred tax assets of $53.7 million and a related valuation allowance of $30.7
million were established on March 11, 1997 with an offsetting credit to Business
equity.
The tax effects of temporary differences in the recognition of income and
expense for tax and financial reporting purposes that give rise to significant
portions of the deferred tax assets and the deferred tax liabilities at May 31,
1998 and May 25, 1997 are presented below:
<TABLE>
<CAPTION>
MAY 31, MAY 25,
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals..................................... $ 15.8 $ 6.1
Plant and equipment....................................... 2.8 19.9
Intangibles, primarily intellectual property and
software............................................... 31.2 25.3
AMT tax credit carryovers................................. 3.8 --
------ ------
Total gross deferred assets............................ 53.6 51.3
Valuation allowance....................................... (30.7) (30.7)
------ ------
Net deferred tax assets................................ 22.9 20.6
Deferred tax liabilities:
Capital allowance -- foreign.............................. (1.4) (0.3)
------ ------
Net deferred tax assets..................................... $ 21.5 $ 20.3
====== ======
</TABLE>
In assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some portion or all of the
deferred tax assets will 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.
F-16
<PAGE> 135
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES -- (CONTINUED)
Deferred income taxes have not been provided for the undistributed earnings
of the Company's foreign subsidiaries which aggregated approximately $15.1
million at May 31, 1998. The Company plans to reinvest all such earnings for
future expansion. If such earnings were distributed, taxes would be increased by
approximately $1.2 million.
NOTE 6 -- STOCK BASED COMPENSATION
At May 31, 1998, the Company has one stock-based compensation plan, the
1997 Stock Option Plan, as amended, (the "Plan") which is described below.
Fairchild Holdings accounts for its stock option plan in accordance with the
provisions of APB 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. Had compensation cost for the Company's stock option plan been
determined consistent with FASB Statement No. 123, the Company's net income
would have approximated reported net income of $20.6 million and $15.5 million,
respectively, in Fiscal Years 1998 and 1997.
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>
1998 1997
---- ----
<S> <C> <C>
Expected volatility......................................... -- --
Dividend yield.............................................. -- --
Risk-free interest rate..................................... 5.88% 6.17%
Expected life, in years..................................... 2.9 2.6
</TABLE>
Under the Plan, the Company may grant options for up to 5,084,000 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 officers and key employees of the Company and its
subsidiaries.
The exercise price of each option granted under the Plan shall be as
determined by the Board of Directors (the "Board"). The maximum term of any
option shall be ten years from the date of grant for incentive stock options and
ten years and one day from the date of grant for non-qualified stock options.
Options granted under the Plan are exercisable at the determination of the
Board, currently vesting ratably over approximately 4 years. Employees receiving
options under the Plan may not receive in any one year period options to
purchase more than 200,000 shares of common stock.
F-17
<PAGE> 136
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- STOCK BASED COMPENSATION -- (CONTINUED)
A summary of the status of the Company's stock option plan as of May 31,
1998 and May 25, 1997, and changes during the years then ended are presented in
the table below:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year................. 2,029 $0.13 -- $ --
Granted.......................................... 1,777 4.29 2,097 0.13
Exercised........................................ (142) 0.13 -- --
Canceled......................................... (80) 0.13 (68) 0.13
----- -----
Outstanding at end of year....................... 3,584 $2.20 2,029 $0.13
===== =====
Exercisable at end of year....................... 798 $0.13 -- $ --
Weighted average fair value of options granted... $0.22 $0.02
</TABLE>
Information with respect to stock options outstanding and stock options
exercisable at May 31, 1998, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
(000'S) REMAINING AVERAGE (000'S) AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ .13........................ 2,834 8.95 $ 0.13 798 $0.13
$10.00........................ 750 9.94 10.00 -- --
----- ---
3,584 9.16 $ 2.20 798 $0.13
===== ===
</TABLE>
NOTE 7 -- RETIREMENT PLANS
Effective March 11, 1997, the Company sponsors the Fairchild Personal
Savings and Retirement Plan (the "Retirement Plan"), a 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. Total expense recognized under these plans was $3.4 and $1.1
million for the years ended May 31, 1998 and May 25, 1997.
F-18
<PAGE> 137
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- RETIREMENT PLANS -- (CONTINUED)
Employees in Malaysia participate in a defined contribution plan. The
Company has funded accruals for this plan in accordance with statutory
regulations in Malaysia. The net pension cost for the years ended May 31, 1998
and May 25, 1997 and the accrued pension cost at May 31, 1998 and May 25, 1997
are not material to the financial statements.
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 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 $9.5 million, $5.0 million, and $4.8 million for the fiscal years
ended 1998, 1997 and 1996, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
1999........................................................ $10.7
2000........................................................ 8.8
2001........................................................ 4.8
2002........................................................ 2.0
2003........................................................ 1.4
Thereafter.................................................. 3.5
-----
$31.2
=====
</TABLE>
NOTE 9 -- REDEEMABLE PREFERRED STOCK
Concurrent with the Recapitalization, the Company authorized 70,000 shares
of redeemable preferred stock at a par value of $.01, all of which are
designated as 12% Series A cumulative compounding preferred stock (the
"Redeemable Preferred Stock"). The Redeemable Preferred Stock has a stated value
of $1,000 per share and is entitled to annual dividends when, as and if
declared, which dividends will be cumulative, whether or not earned or declared,
and will accrue at a rate of 12%, compounding annually. At May 31, 1998 and May
25, 1997, 70,000 shares were issued and outstanding. The total liquidation value
of the shares outstanding at May 31, 1998 and May 25, 1997, in the amounts of
$80.5 million and $71.8 million, respectively, is classified in the Company's
balance sheet as Redeemable Preferred Stock. See Note 10.
F-19
<PAGE> 138
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- REDEEMABLE PREFERRED STOCK -- (CONTINUED)
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 amount 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 as
described in Note 2.
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.
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
F-20
<PAGE> 139
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
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. As of May 25, 1997, 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.
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
In June 1996, National Semiconductor announced a restructuring of its
operations and the intent to pursue a sale or partial financing of the Business.
In connection with the restructuring, the Business recorded a $5.3 million
nonrecurring charge related to work force reductions. During the year ended May
25, 1997, $5.3 million of severance was paid to terminated employees.
F-21
<PAGE> 140
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- RELATED PARTY TRANSACTIONS
Related party activity between the Company and National Semiconductor is
summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MARCH 11, MAY 27,
YEAR 1997 1996 YEAR
ENDED THROUGH THROUGH ENDED
MAY 31, MAY 25, MARCH 10, MAY 26,
1998 1997 1997 1996
------- ------------- ----------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Manufacturing services performed by
National Semiconductor plants or
purchased from third parties............. $14.0 $ 2.8 $34.3 $ 73.9
Headquarters, freight, duty, warehousing
and other elements of cost of sales...... 17.9 3.7 41.8 58.5
----- ----- ----- ------
$31.9 $ 6.5 $76.1 $132.4
===== ===== ===== ======
Cost of business support services provided
by National Semiconductor................ $28.7 $11.6 $ -- $ --
===== ===== ===== ======
Operating costs allocated to the Business
by National Semiconductor................ $ -- $ -- $63.9 $108.6
===== ===== ===== ======
Operating costs allocated to National
Semiconductor by the Business............ $ -- $ -- $ 9.6 $ 27.1
===== ===== ===== ======
</TABLE>
Amounts receivable from National Semiconductor, included in accounts
receivable, totaled $12.4 million and $19.9 million at May 31, 1998 and May 25,
1997, respectively. Amounts payable to National Semiconductor, included in
accounts payable, totaled $5.3 million and $22.6 million at May 31, 1998 and May
25, 1997, 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 combined financial statements of the Business during Fiscal Years 1997 and
1996.
The Company's 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
F-22
<PAGE> 141
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- CONTINGENCIES -- (CONTINUED)
liability or financial impact with respect to these matters at May 31, 1998. 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, or 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 commitment and anticipatory exposures. These exposures
are primarily comprised of non- U.S. dollar sales and manufacturing costs. 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. Net gains and losses from foreign currency transactions
were not material for fiscal years 1998, 1997 and 1996.
INTEREST RATE DERIVATIVES
The Company utilizes interest rate swap agreements to exchange the variable
interest rate of certain long-term, U.S. dollar debt for fixed interest rates.
The variable rates on swaps are based primarily on U.S. dollar LIBOR and reset
on a quarterly basis. These agreements have maturities of up to two years. The
differential between fixed and variable rates to be paid or received is accrued
as interest rates change in accordance with the agreements and is included in
current interest expense.
FAIR VALUE AND NOTIONAL PRINCIPAL OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The table below shows the fair value and notional principal of the
Company's off-balance sheet instruments as of May 31, 1998 and May 25, 1997. The
notional principal amounts for off-balance sheet instruments provide one measure
of the transaction volume outstanding as of year end and do not represent the
amount of the Company's exposure to credit or market loss. The estimates of fair
value are based on applicable and commonly used pricing models using prevailing
financial market information as of May 31, 1998, and May 25, 1997. Although the
following table reflects the notional principal and fair value of amounts of
off-balance sheet instruments, it does not reflect the gains or losses
associated with the exposures and transactions that the off-balance sheet
instruments are intended to hedge. The amounts ultimately realized upon
settlement of these financial instruments, together with the gains and
F-23
<PAGE> 142
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- FINANCIAL INSTRUMENTS -- (CONTINUED)
losses on the underlying exposures, will depend on actual market conditions
during the remaining life of the instruments.
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 25, 1997
----------------------- -----------------------
NOTIONAL ESTIMATED NOTIONAL ESTIMATED
PRINCIPAL FAIR VALUE PRINCIPAL FAIR VALUE
--------- ---------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest Rate Instruments
Swaps..................................... $151.3 $(0.5) $60.0 $(0.2)
Foreign Exchange Instruments
Purchased Options......................... $ 31.7 $ 0.6 $ -- $ --
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary table of estimated fair values of financial instruments at Fiscal
Year end follows:
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 25, 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Long Term Debt
Senior Subordinated Debt................... $300.0 $310.5 $300.0 $311.3
PIK Note................................... 88.6 87.7 78.9 78.1
Credit Facility............................ 151.3 151.3 120.0 120.0
Currency Options............................. 0.8 0.6 -- --
</TABLE>
The Company has outstanding foreign currency options denominated in
Japanese yen. All foreign currency options expire within one quarter. Unrealized
gains and losses on these option contracts are deferred and recognized in income
in the same period as the hedged transactions. Unrealized gains and losses as of
May 31, 1998 are not material to the consolidated financial statements.
Premiums, if any, on purchased foreign exchange option contracts are amortized
over the life of the option.
NOTE 15 -- INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
The Company operates in one industry segment and is engaged in the design,
development, manufacture and marketing of a wide variety of semiconductor
products for the semiconductor industry and original equipment manufacturers.
The Company operates in three main geographic areas. In the information that
follows, sales include local sales and exports made by operations within each
area. To control costs, a substantial portion of the Company's products are
transported between various facilities in the Americas, Asia and Europe in the
process of being manufactured and sold. Accordingly, it is not meaningful to
present interlocation transfers between the Company's facilities on a stand
alone basis. Sales to unaffiliated customers have little correlation with the
location of manufacture. It is, therefore, not meaningful to present operating
profit by geographic area.
F-24
<PAGE> 143
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION -- (CONTINUED)
The Company conducts a substantial portion of its operations outside of the
U.S. and is subject to risks associated with non-U.S. operations, such as
political risks, currency controls and fluctuations, tariffs, import controls
and air transportation.
<TABLE>
<CAPTION>
AMERICAS EUROPE ASIA CONSOLIDATED
-------- ------ ------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1998:
Sales to unaffiliated customers............. $242.3 $132.6 $260.9 $635.8
====== ====== ====== ======
Total assets................................ $420.5 $ 12.2 $203.0 $635.7
====== ====== ====== ======
1997:
Sales to unaffiliated customers............. $222.7 $117.6 $247.5 $587.8
====== ====== ====== ======
Total assets................................ $345.5 $ 14.9 $194.6 $555.0
====== ====== ====== ======
1996:
Sales to unaffiliated customers............. $260.3 $161.9 $266.5 $688.7
====== ====== ====== ======
Total assets................................ $248.4 $ 0.8 $183.5 $432.7
====== ====== ====== ======
</TABLE>
F-25
<PAGE> 144
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- SUPPLEMENTAL CASH FLOW INFORMATION
As described in Note 1, National Semiconductor's cash management system was
not designed to trace centralized cash and related financing transactions to the
specific cash requirements of the Business. In addition, National
Semiconductor's corporate transaction systems are not designed to track
receivables and certain liabilities and cash receipts and payments on a business
specific basis. Given these constraints, the following data are presented to
facilitate analysis of key components of cash flow activity for Fiscal Years
1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 25, MAY 26,
1997 1996
------- -------
(IN MILLIONS)
<S> <C> <C>
Operating activities:
Revenues less expenses.................................... $ 15.5 $ 72.3
Depreciation and amortization............................. 77.1 64.2
Deferred taxes............................................ (20.3) --
Loss on disposal of equipment, molds and tooling.......... 1.0 2.0
Non-cash interest expense................................. 1.9 --
Increase in accounts receivable........................... (79.6) --
Decrease (increase) in inventories........................ 20.0 (24.3)
Decrease (increase) in prepaid expenses and other current
assets................................................. (5.8) 11.1
Increase in other assets.................................. 0.9 --
Increase (decrease) in accounts payable................... 12.2 (5.2)
Increase (decrease) in accrued expenses and other
liabilities............................................ 21.6 (1.3)
Net financing provided from (to) National
Semiconductor*......................................... (25.4) 43.7
------- -------
Cash provided by operating activities.................. 19.1 162.5
------- -------
Investing activities:
Capital expenditures...................................... (47.1) (153.9)
Purchase of molds and tooling............................. (7.2) (8.6)
------- -------
Cash used by investing activities...................... (54.3) (162.5)
------- -------
Financing activities:
Issuance of long-term debt................................ 420.0 --
-------
Debt acquisition costs.................................... (20.3) --
-------
Issuance of common stock.................................. 7.8 --
-------
Issuance of preferred stock............................... 70.0 --
-------
Distribution to National Semiconductor.................... (401.6) --
------- -------
Cash provided by financing activities.................. 75.9 --
------- -------
Net change in cash and cash equivalents..................... 40.7 --
-------
Cash and cash equivalents at beginning of year.............. -- --
------- -------
Cash and cash equivalents at end of year.................... $ 40.7 $ --
======= =======
</TABLE>
- -------------------------
* Net financing provided from (to) National Semiconductor does not necessarily
represent the cash flows of the Business, or the timing of such cash flows,
had it operated on a stand alone basis.
F-26
<PAGE> 145
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- SUPPLEMENTAL CASH FLOW INFORMATION -- (CONTINUED)
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 for any period presented above.
During the year ended May 25, 1997, the Company issued a note to National
Semiconductor in the principal amount of approximately $77.0 million as
additional purchase consideration for the capital stock of Fairchild. The
Company recorded the note as an increase to long-term debt and accumulated
deficit. For the period from March 11 through May 25, 1997, the Company
accumulated dividends on the redeemable preferred stock of approximately $1.8
million. The Company recorded the accumulated dividends as an increase to the
carrying value of the redeemable preferred stock and accumulated deficit.
NOTE 17 -- ACQUISITIONS
On December 31, 1997, Fairchild Semiconductor Corporation, a wholly-owned
subsidiary of the Company acquired all of the outstanding common stock of
Raytheon Semiconductor, Inc. ("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 purchase price was financed through a combination of
existing cash and borrowings under the Tranche C Term Loan.
The acquisition was accounted for as a purchase as of December 31, 1997,
and the results of operations of Raytheon have been included since that date.
The purchase price exceeded the fair value of the net tangible assets by $48.4
million, of which $32.9 million was allocated to various intangible assets and
$15.5 million to in-process research and development. The in-process research
and development was expensed to operations concurrent with the acquisition.
The unaudited pro forma combined historical results, as if Raytheon had
been acquired at the beginning of Fiscal Years 1998 and 1997, respectively, are
estimated to be:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN MILLIONS)
<S> <C> <C>
Net sales................................................... $836.5 $762.6
Net income.................................................. $ 20.9 $ 11.4
</TABLE>
The pro forma results include amortization of the intangibles presented
above and interest expense on debt assumed issued to finance the purchase. The
pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been completed as of the beginning of each of
the fiscal years presented, nor are they necessarily indicative of future
consolidated results.
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 implementa-
F-27
<PAGE> 146
FSC SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- CHANGE IN ACCOUNTING PRINCIPLE -- (CONTINUED)
tion project. The Issue requires companies to write-off these costs in the
quarter that contains November 20, 1997.
The cumulative effect of adoption of this Issue resulted in a charge of
$1.5 million, net of taxes of $0.8 million for the year ended May 31, 1998. Of
the pre-tax write-off, $1.6 million applies to costs incurred in Fiscal Year
1998, while $0.7 million applies to costs incurred in Fiscal Year 1997. The
charge relates specifically to costs incurred to assess the system's
capabilities in light of the Company's current business processes, which under
prior guidance was capitalizable to the cost of the software.
NOTE 19 -- SUBSEQUENT EVENT -- WORKFORCE REDUCTION
On July 20, 1998, the Company announced a restructuring of its operations,
consisting of a reduction of approximately 10% of its payroll, which will
primarily affect its operations in the United States. The Company will take a
nonrecurring charge of approximately $4.5 million, primarily for severance costs
during the first quarter of Fiscal Year 1999.
F-28
<PAGE> 147
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
FEBRUARY 28, MARCH 1,
1999 1998
------------ --------
(IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenue:
Net sales -- trade........................................ $434.1 $479.1
Contract manufacturing -- National Semiconductor.......... 54.5 122.8
------ ------
Total revenue.......................................... 488.6 601.9
Operating expenses:
Cost of sales............................................. 336.2 329.4
Cost of contract manufacturing -- National
Semiconductor.......................................... 45.4 92.3
Research and development.................................. 27.9 24.7
Selling, general and administrative....................... 68.5 66.6
Purchased in-process research and development............. -- 15.5
Restructuring............................................. 7.2 --
------ ------
Total operating expenses............................... 485.2 528.5
------ ------
Operating income............................................ 3.4 73.4
Interest, net............................................... 44.7 41.1
------ ------
Income (loss) before income taxes........................... (41.3) 32.3
Provision (benefit) for income taxes........................ (4.1) 10.4
------ ------
Income (loss) before cumulative effect of change in
accounting principle...................................... (37.2) 21.9
Cumulative effect of change in accounting principle, net of
tax effect of $0.8 million................................ -- (1.5)
------ ------
Net income (loss)........................................... $(37.2) $ 20.4
====== ======
Net income (loss) applicable to common stockholders......... $(44.4) $ 13.9
====== ======
Basic earnings (loss) per common share
Income before cumulative effect of change in accounting
principle.............................................. $(0.71) $ 0.24
Cumulative effect of change in accounting principle....... -- (0.02)
------ ------
$(0.71) $ 0.22
====== ======
Diluted earnings (loss) per common share
Income before cumulative effect of change in accounting
principle.............................................. $(0.71) $ 0.23
Cumulative effect of change in accounting principle....... -- (0.02)
------ ------
$(0.71) $ 0.21
====== ======
Weighted average common shares outstanding
Basic..................................................... 62.9 62.5
====== ======
Diluted................................................... 62.9 65.0
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-29
<PAGE> 148
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
FEBRUARY 28,
1999
-------------
(IN MILLIONS)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5.4
Receivables, net.......................................... 101.5
Inventories............................................... 105.6
Other current assets...................................... 19.7
-------
Total current assets................................... 232.2
Property, plant and equipment, net.......................... 305.9
Deferred income taxes....................................... 25.3
Intangible assets, net...................................... 29.0
Other assets................................................ 31.1
-------
Total assets........................................... $ 623.5
=======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings and current portion of long-term
debt................................................... $ 35.5
Accounts payable.......................................... 79.1
Accrued expenses and other current liabilities............ 56.0
-------
Total current liabilities.............................. 170.6
Long-term debt, less current portion........................ 524.5
Other liabilities........................................... 1.7
-------
Total liabilities...................................... 696.8
Redeemable preferred stock.................................. 87.7
Commitments and contingencies
Stockholders' equity (deficit):
Class A common stock...................................... 0.3
Class B common stock...................................... 0.3
Additional paid-in capital................................ 9.5
Accumulated deficit....................................... (171.1)
-------
Total stockholders' equity (deficit)................... (161.0)
-------
Total liabilities and stockholders' equity (deficit)... $ 623.5
=======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-30
<PAGE> 149
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
FEBRUARY 28, MARCH 1,
1999 1998
------------ --------
(IN MILLIONS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(37.2) $ 20.4
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Cumulative effect of change in accounting principle.... -- 1.5
Depreciation and amortization.......................... 72.1 62.5
Restructing charges, net of cash expended.............. 3.3 --
Non-cash interest expense.............................. 7.8 7.3
Purchased in-process research and development.......... -- 15.5
Loss on disposal of property, plant and equipment...... 0.2 0.7
Deferred income taxes.................................. (4.0) (0.8)
Changes in operating assets and liabilities, net:
Accounts receivable.................................... (26.5) 6.9
Inventories............................................ 2.4 (12.9)
Prepaid expenses and other current assets.............. 0.4 2.5
Current liabilities.................................... 3.2 5.0
Other assets and liabilities........................... (1.7) 0.1
------ -------
Cash provided by operating activities................ 20.0 108.7
------ -------
Cash flows from investing activities:
Capital expenditures................................... (31.5) (49.3)
Proceeds from sale of property, plant and equipment.... 1.0 --
Purchase of molds and tooling.......................... (2.9) (4.2)
Purchase of Raytheon Semiconductor, Inc., net of cash
acquired.............................................. -- (116.8)
------ -------
Cash used in investing activities...................... (33.4) (170.3)
------ -------
Cash flows from financing activities:
Proceeds from revolving credit facility, net........... 21.6 --
Issuance of long-term debt............................. -- 90.0
Repayment of long-term debt............................ (9.3) (55.6)
Debt issuance costs.................................... -- (1.1)
------ -------
Cash provided by financing activities.................. 12.3 33.3
------ -------
Net change in cash and cash equivalents..................... (1.1) (28.3)
Cash and cash equivalents at beginning of period............ 6.5 40.7
------ -------
Cash and cash equivalents at end of period.................. $ 5.4 $ 12.4
====== =======
Supplemental cash flow information:
Cash paid for:
Income taxes........................................... $ 2.1 $ 8.3
====== =======
Interest............................................... $ 27.9 $ 24.5
====== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-31
<PAGE> 150
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheet of FSC Semiconductor Corporation
(the "Company") as of February 28, 1999, the Condensed Consolidated Statements
of Operations for the nine-month periods ended February 28, 1999 and March 1,
1998 and the Condensed Consolidated Statements of Cash Flows for the nine-month
periods ended February 28, 1999 and March 1, 1998 were prepared by the Company.
In the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring items)
necessary to present fairly the financial position and results of operations of
the Company. Interim results of operations are not necessarily indicative of the
results to be expected for the full year. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the fiscal year ended May 31, 1998, included
elsewhere in this Prospectus.
Certain prior period amounts have been reclassified to conform to their
current presentation.
NOTE 2 -- INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
1999
-------------
(IN MILLIONS)
<S> <C>
Raw materials............................................... $ 8.6
Work in process............................................. 75.3
Finished goods.............................................. 21.7
------
Total inventories...................................... $105.6
======
</TABLE>
NOTE 3 -- 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 charge for employee separation
arrangements provided for the termination and other severance costs associated
with the approximately 600 salaried, hourly and temporary employees severed as a
result of this action, a reduction of approximately 10% of the Company's
payroll.
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 write-offs and $0.8 million primarily for severance and other
benefits for 54 employees terminated as a result of the transfer.
NOTE 4 -- SUBSEQUENT EVENT -- FACILITY CLOSURE
On March 31, 1999, the Company agreed to sell its Mountain View, California
facility for approximately $35.0 million. The sale price is subject to (i) a
$1.0 million deposit, which is nonrefundable if the sale of the property is not
consummated by April 19, 1999 for reasons other than a
F-32
<PAGE> 151
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 4 -- SUBSEQUENT EVENT -- FACILITY CLOSURE -- (CONTINUED)
title defect; (ii) a $3.5 million holdback which will be paid to the Company
unless the city council rejects the buyer's application to increase its building
density from 35% to 50%; and (iii) a $0.5 million deposit which will be placed
into an escrow account and will be released to the Company upon the demolition
of the existing structures on the property. At closing, the Company received
approximately $30.7 million (excluding the $0.5 million in escrow) after
deducting closing costs, contingency holdbacks, commissions and other fees and
expenses.
In connection with the sale of the Mountain View facility, on April 2, 1999
the Company announced a transfer of all wafer production to its South Portland,
Maine facility. The transfer is expected to be complete by the end of the 1999
calendar year. Net of a gain on the sale of land and building of approximately
$1.6 million, the Company will record a one-time charge for severance, equipment
disposals and other costs related to the closing of the Mountain View facility
of approximately $11.9 million in the fourth quarter of fiscal 1999.
NOTE 5 -- SUBSEQUENT EVENT -- ACQUISITION
On April 13, 1999, the Company completed its acquisition of the Power
Device Business of Samsung Electronics Co., Ltd., for approximately $406.8
million, net of certain purchase price adjustments. The purchase includes
substantially all of the worldwide business and assets of the Power Device
Business, comprising high volume wafer fabs in Bucheon, South Korea, design and
development personnel in Bucheon, and secured services for high volume assembly
and test operations for the Power Device Business, and worldwide sales and
marketing personnel. The transaction will be accounted for as a purchase.
On April 13, 1999 the Company refinanced all of its existing senior credit
facilities with the proceeds from new senior term facilities of $310.0 million.
The excess proceeds, together with the net proceeds from the Company's $300.0
million senior subordinated notes issued on April 7, 1999 and a $50.0 million
subordinated PIK note from Citicorp Mezzanine Partners, L.P., were used to
finance the purchase price and related fees and expenses of the acquisition.
F-33
<PAGE> 152
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Samsung Electronics Co., Ltd.
In our opinion, the accompanying statements of net assets (liabilities) and
the related statements of operations and comprehensive income (loss) and cash
flows present fairly, in all material respects, the financial position of the
Power Device Business of Samsung Electronics Co., Ltd. (the "Business") at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Business' management, our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 11 to the financial statements, the operations of the
Business, and those of similar companies in the Republic of Korea, have been
significantly affected, and will continue to be affected for the foreseeable
future, by the country's unstable economy caused in part by the currency
volatility in the Asia Pacific region.
The Business is an operating unit of Samsung Electronics Co., Ltd. and, as
discussed in Notes 3, 7 and 15, has engaged in various transactions with Samsung
Electronics Co., Ltd.
Samil Accounting Corporation
Seoul, Korea
February 24, 1999
F-34
<PAGE> 153
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
STATEMENTS OF NET ASSETS (LIABILITIES)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
1997 1998
---------- ----------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18 $ 37
Trade accounts and notes receivable, net.................. 28,445 26,605
Inventories............................................... 50,469 43,977
Deferred tax assets....................................... 909 1,184
Prepaid expenses and other current assets................. 2,317 3,750
-------- --------
Total current assets................................... 82,158 75,553
Advances to employees....................................... 5,398 2,632
Property, plant and equipment, net.......................... 93,166 90,955
Deposit for deferred employee compensation.................. 6,272 --
Intangible assets, net...................................... 1,182 887
Other assets................................................ 419 262
-------- --------
Total assets........................................... 188,595 170,289
-------- --------
LIABILITIES
Current liabilities:
Corporate borrowings...................................... 9,750 12,641
Current portion of capital lease obligation............... 12,706 8,086
Trade accounts and notes payable.......................... 11,086 13,729
Income taxes payable to Samsung........................... 6,394 12,947
Accrued expenses and other accounts payable............... 6,621 70,594
-------- --------
Total current liabilities.............................. 46,557 117,997
Corporate borrowings........................................ 92,032 46,065
Capital lease obligation.................................... 15,151 9,667
Deferred employee compensation.............................. 13,004 6,471
Deferred tax liabilities.................................... 3,173 1,914
-------- --------
Total liabilities...................................... 169,917 182,114
-------- --------
Commitments and contingencies
NET ASSETS (LIABILITIES)
Business equity............................................. 37,301 272
Accumulated other comprehensive loss --
Cumulative translation adjustments........................ (18,623) (12,097)
-------- --------
Total net assets (liabilities)......................... $ 18,678 $(11,825)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE> 154
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
Revenues:
Net sales............................................ $418,047 $440,700 $369,899
Contract manufacturing -- Samsung Electronics........ 53,735 37,428 16,620
-------- -------- --------
Total revenue........................................ 471,782 478,128 386,519
-------- -------- --------
Operating expenses:
Cost of sales........................................ 361,624 309,712 232,562
Cost of contract manufacturing -- Samsung
Electronics....................................... 53,735 37,428 16,620
Research and development............................. 18,579 19,205 15,224
Selling, general and administrative.................. 28,950 34,280 33,812
Litigation settlement................................ -- -- 58,000
-------- -------- --------
Total operating expenses.......................... 462,888 400,625 356,218
-------- -------- --------
Operating income....................................... 8,894 77,503 30,301
Interest expense, net.................................. 10,384 10,076 4,205
Foreign currency losses, net........................... 497 5,933 923
-------- -------- --------
Income (loss) before income taxes...................... (1,987) 61,494 25,173
Income tax benefit (provision)......................... 4,754 (18,549) (9,519)
-------- -------- --------
Net income............................................. 2,767 42,945 15,654
-------- -------- --------
Other comprehensive income (loss):
Net foreign currency translation adjustments...... (4,837) (14,491) 6,526
-------- -------- --------
Comprehensive income (loss)............................ $ (2,070) $ 28,454 $ 22,180
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 155
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income................................................ $ 2,767 $ 42,945 $ 15,654
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 48,965 38,792 22,289
Provision for (recovery of) doubtful accounts........... (6) 93 7
Provision for (reversal of) inventory reserve........... (216) (3,713) 1,016
Accrual for litigation settlement....................... -- -- 58,000
Loss on disposition of property, plant and equipment.... 1,545 423 498
Deferred employee compensation.......................... 1,407 (8,623) 3,745
Deferred income taxes................................... (4,365) 8,648 (1,534)
Changes in operating assets and liabilities:
Trade accounts and notes receivable..................... 3,283 (28,329) 5,817
Inventories............................................. 13,092 (3,166) 12,617
Prepaid expenses and other current assets............... 2,629 720 (894)
Advances to employees................................... (1,208) 1,702 3,188
Deposit for deferred employee compensation.............. (1,036) 4,057 6,345
Other assets............................................ 1,463 516 198
Trade accounts and notes payable........................ (2,942) 1,008 638
Income taxes payable to Samsung......................... (4,966) 6,394 6,553
Accrued expenses and other accounts payable............. (12,388) 19,152 4,232
Payment of deferred employee compensation............... (8,642) (6,299) (10,278)
--------- --------- ---------
Net cash provided by operating activities............... 39,382 74,320 128,091
--------- --------- ---------
Cash Flows From Investing Activities:
Acquisition of property, plant and equipment............ (118,005) (10,259) (7,671)
Proceeds from sale of property, plant and equipment..... 30,644 10,593 2,297
Acquisition of intangible assets........................ (1,134) (454) (319)
--------- --------- ---------
Net cash used in investing activities................... (88,495) (120) (5,693)
--------- --------- ---------
Cash Flows from Financing Activities:
Corporate borrowing, net................................ 54,223 (75,678) (43,076)
Capital lease payment................................... (9,335) (23,819) (11,046)
Net capital distribution................................ (16,867) (57,593) (52,683)
--------- --------- ---------
Net cash provided by (used in) financing activities..... 28,021 (157,090) (106,805)
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 21,092 82,907 (15,574)
--------- --------- ---------
Net increase in cash and cash equivalents................... -- 17 19
Cash and cash equivalents, beginning of period.............. 1 1 18
--------- --------- ---------
Cash and cash equivalents, end of period.................... $ 1 $ 18 $ 37
========= ========= =========
Supplemental disclosure of cash flows information:
Interest paid........................................... $ 396 $ 252 $ 9
========= ========= =========
Machinery and equipment acquired under capital lease.... $ 103 $ 673 $ 942
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 156
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION:
BUSINESS
The Power Device Business (the "Business") was established in 1985 as an
operating unit of Samsung Electronics Co., Ltd. ("Samsung"). The Business is not
a distinct legal entity. The Business designs, develops and manufactures
discrete and standard analog semiconductors. These products are used in major
market worldwide sectors including computers, computer peripherals, office
equipment, consumer electronics, lighting, communications, and industrial
equipment. The Business is located in Bucheon, the Republic of Korea ("Korea")
and shares the Samsung Bucheon factory with Samsung's Multimedia Business.
On December 20, 1998, Samsung entered into a Business Transfer Agreement
(the "Agreement") with Fairchild Semiconductor Corporation ("Fairchild"). Under
terms of the Agreement, Fairchild shall purchase substantially all of the assets
including allocated notes receivable and prepaid expenses and assume certain
liabilities of the Business in exchange for $455,000 thousand in cash, subject
to certain conditions and adjustments. In conjunction with the transfer of the
Business, Samsung intends to pay an employee bonus to the employees staying with
the Business to the closing date.
BASIS OF PRESENTATION
The Securities and Exchange Commission, in Staff Accounting Bulletin Number
55, requires that historical financial statements of a subsidiary, division, or
lesser business component of another entity include certain expenses incurred by
the parent on its behalf. These expenses generally include, but are not limited
to, officer and employee salaries, rent, depreciation, advertising, accounting
and legal services, other selling, general and administrative expenses and other
such expenses. These financial statements include such expenses and services.
These financial statements present the assets, liabilities, results of
operations and cash flows of the Business. Because the Business did not
previously prepare separate financial statements, these financial statements
were derived by extracting the assets, liabilities and results of operations of
the Business from the corresponding Samsung accounts. As a result, the carved
out financial statements contain allocations of certain Samsung assets,
liabilities, revenues and expenses attributable to the Business deemed
reasonable by management to present the Business on a stand-alone basis.
Although the Business' management is unable to estimate the actual benefits
which would have been realized and costs which would have been incurred had the
respective transactions been executed with independent third parties, the
allocation methodologies described below and within the respective notes to
financial statements, where appropriate, are considered reasonable by
management. The financial position and results of operations of the Business
may, however, differ from the results which may have been achieved had the
Business operated as an independent legal entity. Additionally, future expenses
incurred as an independent entity may not be comparable to the historical
levels.
The carved out financial statements are presented in accordance with
generally accepted accounting principles of the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies followed by the Business in the
preparation of its financial statements are summarized below.
F-38
<PAGE> 157
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
RELATED PARTY ACTIVITY AND ALLOCATIONS
The financial statements reflect the assets, liabilities, revenue and
expenses that were directly related to the Business as it operated within
Samsung. In cases involving assets and liabilities not specifically identifiable
to any particular facility, a portion of such items were allocated to the
Business based on assumptions that management considers reasonable in the
circumstances.
Samsung uses a centralized approach to cash management and the financing of
its operations. These systems did not track cash balances, notes receivable
balances and bank borrowings on a business specific basis. Accordingly, notes
receivable and debt not specifically identifiable to the operations of any
particular facility were allocated annually to the Business based on the
customer sales ratio and fixed asset ratio of the Business, respectively, as a
percentage of Samsung for each respective period. Interest expense on allocated
debt was determined by applying the average interest rates of Samsung during the
respective periods. Management believes the debt allocation basis is reasonable
as the Business operates in a highly capital intensive industry and capital
expenditures are financed through bank borrowings.
Manufacturing costs were generally apportioned between the Business and
Samsung's other product lines based upon actual factory production loading.
Certain manufacturing costs (e.g., material costs) that were specifically
identifiable with a particular product line were charged directly.
Other operating units of Samsung also performed manufacturing services for
the Business and incurred other elements of cost of sales on behalf of the
Business, including freight, duty, warehousing, and purchased manufacturing
services from third party vendors. Costs of these services are specifically
identified as they relate to the Business. Also, the Business has performed
contract manufacturing related to wafer foundry services for Samsung. The
revenues for these services are reflected at cost in the accompanying statements
of operations. These costs include manufacturing costs incurred within the
Samsung Bucheon factory and do not include cost of raw materials and/or
processing costs incurred outside of the Samsung Bucheon factory.
Shared or common costs, including certain general and administrative, sales
and marketing, and research and development expenses, have been allocated from
Samsung's corporate office, selling and marketing locations, and manufacturing
sites to the Business on a basis which is considered by management to reasonably
reflect the utilization of such services by the operating unit receiving the
charge. These allocations were based on sales revenues, the number of employees
and working hours. Research and development (R&D) expenses represent the actual
costs incurred by the Bucheon factory plus R&D expenses specifically incurred by
Samsung on behalf of the Business.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
revenues and expenses in the financial statements and accompanying notes.
Significant estimates made by management include those related to the useful
lives of property, plant and equipment, allowances for doubtful accounts and
customer returns, inventory realizability, contingent liabilities and allocated
expenses. Actual results could differ from those estimates, and such differences
may be material to the financial statements.
F-39
<PAGE> 158
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and cash in bank accounts,
with original maturities of three months or less.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Business provides an allowance for doubtful accounts and notes
receivable to reduce such receivables to their probable estimated collectable
amounts.
INVENTORIES
Inventories are stated at the lower of cost or market, using the weighted
average method, except for materials in-transit, for which cost is determined
using the specific identification method.
INTANGIBLE ASSETS
Intangible assets, principally patent rights, are stated at cost and
amortized on a straight-line basis over their estimated useful lives of 10 years
which does not exceed the patent period.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as set forth below:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
-------------
<S> <C>
Buildings................................................... 15 - 40 years
Building related structures................................. 7 - 40 years
Machinery and equipment..................................... 5 years
Tools....................................................... 5 years
Furniture and fixtures...................................... 5 years
Vehicles.................................................... 5 years
</TABLE>
Assets under capital leases and leasehold improvements are amortized over
the shorter of the asset life or the remaining lease term. Amortization of
assets under capital leases is included within depreciation expense.
Upon retirement or other disposal of fixed assets, the costs and related
accumulated depreciation or amortization are eliminated from the accounts, and
any resulting gain or loss is reflected in income for the period. Routine
maintenance and repairs are charged to expense as incurred. Expenditures which
enhance the value or significantly extend the useful lives of the related assets
are capitalized.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Business adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of". In accordance
with this standard, management periodically evaluates the carrying value of
long-lived assets to be held and used, when events and circumstances warrant
such a review. The
F-40
<PAGE> 159
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
carrying value of long-lived assets is considered impaired when the anticipated
undiscounted cash flows is separately identifiable and is less than the carrying
value of the assets. In that event, a loss is recognized based on the amount by
which the carrying value exceeds the fair market value of the long-lived assets.
Fair market value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. The adoption of this
new accounting standard did not have a material effect on the Business'
operating results or financial position.
WARRANTIES
The Business' products are generally warranted for up to one year from
customer receipt. Estimated future costs of repair, replacement, or customer
accommodations are reflected in income for the period of the related sales.
RECOGNITION OF REVENUES
Revenues from the sale of products are recognized on the transfer of
ownership upon shipment. The Business provides a reserve for product returns
from all customers at the time revenue is recognized. Contract manufacturing
revenues are recognized based on completion of respective stages of production,
defined as wafer fabrication and electronic die sorting.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
The Business receives, under the terms of specific legislation, research
and development grants for projects selected by the government. Such grants,
collectively insignificant, are recorded as liabilities since the grant monies
must be repaid upon conclusion of the project.
INCOME TAXES
The Business is not a separate taxable entity for Korean or international
tax purposes and has not filed separate income tax returns, but rather was
included in the income tax returns filed by Samsung. Accordingly, income tax
expense in the carved out financial statements has been calculated as if filed
on a separate tax return basis. The Business accounts for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS 109 requires
an asset and liability approach for financial accounting and reporting for
income tax purposes. Under the asset and liability method, deferred income taxes
are recognized for temporary differences, net operating loss carryforwards and
credits by applying enacted statutory tax rates applicable to future years.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
Investment R&D tax credits are accounted for by the flow-through method
whereby they reduce income taxes in the period the assets giving rise to such
credits are placed in service. To the extent such credits are not currently
utilized, deferred tax assets, subject to considerations about the need for a
valuation allowance, are recognized for the carryforward account.
F-41
<PAGE> 160
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
DEFERRED EMPLOYEE COMPENSATION
In accordance with statutory regulations in Korea, employees and directors
with one year or more of service are entitled to receive a lump-sum payment upon
termination of their employment with the Business, based on years of service and
rate of pay at the time of termination. The accrual for deferred compensation
approximates the amount required if all employees were to terminate employment
at the balance sheet date.
The annual provision for deferred compensation charged to operations is
calculated based on the net change in the deferred compensation amount, assuming
the termination of all eligible employees and directors as of the beginning and
end of the period, plus the actual payments made during the period.
Under the National Pension Fund Law of Korea, the Business is required to
pay a certain percentage of employee retirement benefits to the National Pension
Fund in exchange for a reduction in their severance pay. Contributed amounts
shall be refunded from the National Pension Plan to employees on their
retirement. This amount has been offset against deferred compensation except for
the portion related to employees with less than one year of service which is
included in current assets.
Deferred employee compensation is partially funded through a group
severance insurance plan with Samsung Life Insurance Co., Ltd., an affiliate of
Samsung. The amounts deposited under this insurance plan are classified as
noncurrent assets and may only be withdrawn for the actual payment of deferred
compensation.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in currencies other than the Korean won
have been translated at the rate of exchange on the balance sheet date. Gains
and losses resulting from the translation are reflected in income for the
period.
The Business' functional currency is the Korean won, the primary currency
in which business is conducted, and its official accounting records are
maintained in Korean won. The accompanying financial statements are reported in
US dollars pursuant to SFAS No. 52, "Foreign Currency Translation." Assets and
liabilities are translated at the exchange rate as of the balance sheet date.
All revenue and expense accounts are translated at a weighted-average exchange
rate in effect during the respective period.
Resulting translation adjustments are recorded in a separate component of
net assets entitled "Cumulative Translation Adjustment." All amounts in these
financial statements have been presented in thousands of US dollars, unless
otherwise stated.
The exchange rates used to translate the financial statements are as
follows:
<TABLE>
<CAPTION>
EXCHANGE RATES USED
-------------------------------------
BALANCE SHEET REVENUE AND EXPENSE
ACCOUNTS ACCOUNTS
-------------- -------------------
<S> <C> <C>
1996................................................ US$1 = 844.20 US$1 = 804.78
1997................................................ US$1 = 1415.20 US$1 = 951.11
1998................................................ US$1 = 1207.80 US$1 = 1398.88
</TABLE>
F-42
<PAGE> 161
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
COMPREHENSIVE INCOME
Effective January 1, 1996, the Business retroactively adopted SFAS No. 130,
"Reporting Comprehensive Income". SFAS 130 establishes standards for the
reporting and display of comprehensive income. The components of comprehensive
income (loss) include net income and foreign currency translation adjustments.
There is no tax effect on the foreign currency translation adjustments.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Business to a
concentration of credit risk consist primarily of cash and cash equivalents and
trade accounts and notes receivable.
The Business deposits its cash with a major Korean bank. Deposits in this
bank may exceed the amount of insurance provided on such deposits. However, the
Business is exposed to loss only to the extent of the amount of cash reflected
on its statements of net assets. The Business has not experienced losses on its
bank cash deposits.
The Business performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral for domestic
customers on accounts or notes receivable. The Business maintains reserves for
potential credit losses, but historically has not experienced significant losses
related to individual customers or groups of customers in any particular
industry or geographic area. The Business derives a substantial portion of its
revenues from export sales through Samsung's foreign subsidiaries in Asia, North
America and Europe.
A substantial portion of the components necessary for the manufacture and
operation of many of the Business' products are obtained from the other
operating units of Samsung and its affiliates. The disruption or termination of
any of these sources could have a material adverse effect on the Business'
operating results and financial condition.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, trade accounts and notes
receivable, trade accounts and notes payable, and accrued expenses and other
accounts payable approximates fair value due to the short-term nature of these
instruments.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The provisions
of the statement require the recognition of all derivatives as either assets or
liabilities in the financial statements and the measurement of those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This statement is effective for fiscal years beginning after June 15, 1999. The
Business is currently not separately engaged in any derivatives or hedging
activities.
In 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which provides guidance
concerning recognition and measurement of costs associated with developing or
acquiring software for internal use. In 1998, the AICPA also issued Statement of
Position
F-43
<PAGE> 162
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
98-5, "Reporting on the Costs of Start-Up Activities", which provides guidance
concerning the costs of start-up activities. For accounting purposes, start-up
activities are defined as one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory or
with a new class of customer, initiating a new process in an existing facility,
or commencing some new operation. Both pronouncements are effective for
financial statements of years beginning after December 15, 1998, with earlier
application encouraged. Management does not believe that adoption of these
pronouncements will have a material impact on the financial statements of the
Business.
3. TRADE ACCOUNTS AND NOTES RECEIVABLE:
Trade accounts and notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Trade accounts receivable
Due from third parties.................................... $10,820 $ 9,198
Due from Samsung subsidiaries and affiliates.............. 9,173 2,338
------- -------
19,993 11,536
Trade notes receivable
Due from third parties.................................... 8,205 7,516
Due from Samsung subsidiaries and affiliates.............. 353 7,666
------- -------
8,558 15,182
Allowance for doubtful accounts............................. (106) (113)
$28,445 $26,605
======= =======
</TABLE>
At December 31, 1997 and 1998, trade accounts receivable of $17,992
thousand and $6,148 thousand, respectively, are denominated in foreign
currencies, primarily US dollars. Trade notes receivable represents amounts due
from domestic customers maturing generally within 90 to 120 days with no
interest charge.
F-44
<PAGE> 163
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Finished products........................................... $15,606 $21,482
Work-in-process............................................. 25,395 19,632
Raw materials and supplies.................................. 10,444 6,411
Materials in-transit........................................ 1,757 201
------- -------
53,202 47,726
Allowance for obsolete and excess inventory................. (2,733) (3,749)
------- -------
$50,469 $43,977
======= =======
</TABLE>
At December 31, 1998, substantially all of the Business' inventories are
insured against fire and other casualty losses.
At December 31, 1998, a portion of the Business' inventory up to a maximum
amount of $27,654 thousand is pledged as collateral for a bank loan of Samsung.
At December 31, 1998, a total of approximately $9,136 thousand of raw materials
and work-in-process inventories was held by the Business' subcontractors
including Samsung plants in Korea and China. Also, at December 31, 1998, all
finished goods inventories were held by the Samsung Onyang plant in Korea for
warehousing.
5. ADVANCES TO EMPLOYEES:
The Business provides advances to its employees primarily for the purchase
or lease of residential properties. Advances to employees are provided for
periods of up to 7 years and earn interest at a maximum annual rate not to
exceed 4%.
F-45
<PAGE> 164
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Buildings................................................... $ 38,666 $ 44,948
Building related structures................................. 6,124 7,175
Machinery and equipment..................................... 165,362 190,421
Tools....................................................... 3,046 2,894
Furniture and fixtures...................................... 7,737 8,757
Vehicles.................................................... 497 466
--------- ---------
221,432 254,661
Accumulated depreciation.................................... (137,891) (172,685)
--------- ---------
83,541 81,976
Land........................................................ 8,973 8,563
Construction in progress.................................... 510 247
Machinery in transit........................................ -- 4
Other....................................................... 142 165
--------- ---------
$ 93,166 $ 90,955
========= =========
</TABLE>
At December 31, 1998, substantially all of the Business' property, plant
and equipment, other than land and certain construction in progress, are insured
against fire and other casualty losses. A substantial portion of the Business'
property, plant and equipment at December 31, 1998 is pledged as collateral for
various bank loans of Samsung.
Depreciation expense for property, plant and equipment was $48,812
thousand, $38,564 thousand and $21,540 thousand for the years ended December 31,
1996, 1997, and 1998, respectively.
At December 31, 1998, approximately $6,132 thousand of the Business'
manufacturing machinery and equipment was held by its subcontractors, primarily
in Korea.
Property, plant and equipment under capital leases, which include primarily
machinery and equipment, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Cost........................................................ $ 40,114 $ 40,325
Accumulated amortization.................................... (30,387) (33,658)
-------- --------
$ 9,727 $ 6,667
======== ========
</TABLE>
Amortization expense for assets under capital leases for the years ended
December 31, 1996, 1997 and 1998 is $15,026 thousand, $9,350 thousand and $4,002
thousand, respectively.
F-46
<PAGE> 165
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. TRADE ACCOUNTS AND NOTES PAYABLE:
Trade accounts and notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Trade accounts payable
Due to third parties...................................... $ 9,091 $11,035
Due to Samsung subsidiary and affiliates.................. 1,283 2,203
------- -------
10,374 13,238
Trade notes payable
Due to third parties...................................... 712 409
Due to Samsung subsidiary and affiliates.................. -- 82
------- -------
712 491
------- -------
$11,086 $13,729
======= =======
</TABLE>
At December 31, 1997 and 1998, trade accounts payable of $10,204 thousand
and $12,925 thousand, respectively, are denominated in foreign currencies,
primarily US dollars.
8. CORPORATE BORROWINGS:
The Business does not undertake its own financing but has been able to
benefit from the financing obtained by Samsung. Corporate borrowings have been
allocated based on the methodology described in Note 2. The interest expense on
the allocated corporate borrowings has been calculated using average interest
rates of 6.48%, 7.30%, and 9.69% for the years ended December 31, 1996, 1997,
and 1998, respectively.
Samsung has entered into various types of short-term financing arrangements
including usance financing and bank overdrafts. The Business does not have its
own usance letter of credit but benefits from such letter of credit of Samsung
when needed. At December 31, 1998, no borrowings existed from such short-term
financing arrangements. The Business does not have any debt sharing or other
arrangements with Samsung. Consequently, corporate borrowings have been
classified as current and long-term based on the expected maturities of the
contractual obligations into which Samsung has entered.
F-47
<PAGE> 166
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. DEFERRED EMPLOYEE COMPENSATION:
Changes in deferred employee compensation are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1997 1998
------- --------
<S> <C> <C>
Beginning balance........................................... $27,926 $ 13,004
Provision................................................... (8,623) 3,745
Payments.................................................... (6,299) (10,278)
------- --------
Ending balance.............................................. $13,004 $ 6,471
======= ========
</TABLE>
During 1998, certain employees elected to take early settlement of deferred
compensation. As a result, the Business paid approximately $2,436 thousand in
cash from the deferred employee compensation balance, net of advances due from
employees of $2,751 thousand.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
On December 30, 1998, a settlement agreement was reached resolving a patent
infringement lawsuit. Under the terms of this settlement, Samsung shall pay the
principal sum of $58,000 thousand. The litigation settlement has been accrued in
the financial statements of the Business as of December 31, 1998 and for the
year then ended.
Samsung is also alleged, in the United States, to have infringed a method
claimed by a patent owned by Northern Telecom ("NT"), in the production of its
memory devices. The patent expired in 1994 and hence NT's claim is limited to
past damages based on a reasonable royalty accrued between February 1989 and
June 1994, and prejudgment interest thereon. In September 1998, the District
Court granted Samsung's motion for summary judgment, finding the patent invalid
and dismissed the case. NT filed a motion to set aside the judgment which was
denied on December 10, 1998. Additionally, NT has brought an action against
Samsung alleging an infringement of a patent in Germany. The German patent is a
counterpart of the patent being litigated in the United States. In May 1997, the
court allowed the action but did not fix the amount of damages to be paid and
Samsung appealed against this decision. The proceedings are currently pending
and the next hearing is scheduled for March 1999. Similar to the case in the
United States, the German patent expired in 1995 and potential liability is
limited to past damages. While it is not feasible to predict or determine the
final outcome of these proceedings at the present time, management does not
believe that they will result in a materially adverse effect on the financial
position or results of operations of Samsung or the Business.
LICENSING AND SUBCONTRACT AGREEMENTS
Samsung has entered into various licensing agreements, some of which relate
to Power Device products either directly or indirectly. Royalty expense incurred
by or allocated to the Business was $636 thousand, $5,922 thousand, and $6,004
thousand for the years ended December 31, 1996, 1997, and 1998, respectively.
The allocation was made based on the relative sales value for the respective
period.
The Business has long-term subcontract agreements with Usha HBB (India)
Ltd. ("Usha") and Psi Technologies, Inc. ("Psi"), third party subcontractors, in
connection with the manufacture of certain
F-48
<PAGE> 167
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
products. Subject to the subcontractors' quality and performance, total
commitments remaining under these agreements approximated $32,657 thousand as of
December 31, 1998. The agreements with Usha and Psi expire in July 2001 and July
2005, respectively.
GUARANTEE PROVIDED
In relation to the Business, Samsung has guaranteed payment of principal
and interest on a bank loan provided to Korea Microsystems, Inc., a third-party
subcontractor of the Business, up to $2,070 thousand due in April 2002.
CAPITAL LEASE
With respect to the Business, Samsung leases machinery and equipment under
capital lease arrangements. The future minimum lease payments under the capital
leases are as follows:
<TABLE>
<CAPTION>
MINIMUM
LEASE
FOR THE YEAR ENDING DECEMBER 31, PAYMENTS
- -------------------------------- --------
<S> <C>
1999........................................................ $ 8,086
2000........................................................ 6,467
2001........................................................ 3,177
2002........................................................ 1,475
Thereafter.................................................. 226
-------
Total.................................................. 19,431
Less: amount representing interest.......................... (1,678)
-------
Present value of minimum lease payments..................... 17,753
Less: current portion....................................... (8,086)
-------
Total capital lease obligation, non-current portion......... $ 9,667
=======
</TABLE>
11. UNSTABLE ECONOMIC ENVIRONMENT:
The operations of the Business, and those of similar companies in Korea,
have been affected, and may continue to be affected for the foreseeable future,
by the unstable economic conditions in Korea and the Asia Pacific region.
Specific factors that impact these companies include volatility in the value of
the Korean won and interest rates and the general deterioration of the economies
of countries in the Asia Pacific region.
F-49
<PAGE> 168
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. BUSINESS EQUITY:
Business equity represents Samsung's ownership interest in the recorded net
assets (liabilities) of the Business. A summary of activity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Beginning balance...................................... $ 66,049 $ 51,949 $ 37,301
Net income............................................. 2,767 42,945 15,654
Net capital distribution............................... (16,867) (57,593) (52,683)
-------- -------- --------
Ending balance......................................... $ 51,949 $ 37,301 $ 272
======== ======== ========
</TABLE>
13. INCOME TAXES:
As discussed in Note 2, the Business did not pay income taxes directly or
file separate income tax returns. The Business incurs income tax liabilities in
Korean won and based on taxable income determined in accordance with generally
accepted accounting principles and tax laws of Korea. The tax provision
(benefit) included in these financial statements reflects current tax expense
and the impact of accounting for deferred taxes under the asset and liability
method, including the impact of foreign currency translation of such deferred
tax amounts.
The income tax provision (benefit) for 1996, 1997 and 1998 consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Current................................................... -- $ 9,515 $11,178
Deferred.................................................. $(4,754) 9,034 (1,659)
------- ------- -------
Income tax provision (benefit)............................ $(4,754) $18,549 $ 9,519
======= ======= =======
</TABLE>
The deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the Business' ability to generate taxable
income within the period which the temporary differences reverse, the outlook of
the Korean economic environment and the overall future industry outlook.
Management has considered these factors in reaching its conclusion as to the
need for a valuation allowance for financial reporting purposes.
The Business does not have any formalized tax sharing agreement with
Samsung.
F-50
<PAGE> 169
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES: -- (CONTINUED)
The income tax effect of temporary differences comprising the deferred tax
assets and deferred tax liabilities as of December 31, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets -- current:
Inventory reserve......................................... $ 842 $ 1,154
Other..................................................... 67 30
------- -------
909 1,184
------- -------
Deferred tax assets (liabilities) -- non-current:
Provision for deferred employee compensation.............. -- 783
Excess depreciation....................................... (3,173) (2,697)
------- -------
(3,173) (1,914)
------- -------
Net deferred tax liabilities................................ $(2,264) $ (730)
======= =======
</TABLE>
Realization of deferred tax assets is dependent upon taxable income within
carry forward periods available under the tax laws. Management has concluded
that it is "more likely than not" that the Business will realize the full
benefit of deferred tax assets.
The statutory income tax rate, including tax surcharges, applicable to the
Business for 1996, 1997 and 1998 is approximately 30.8%. The reconciliation from
income taxes calculated at the statutory tax rate to the effective income tax
amount for each of the periods is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ------- ------
<S> <C> <C> <C>
Taxes at Korean statutory tax rate......................... $ (612) $18,940 $7,753
R&D tax credit............................................. (4,375) (391) (675)
Effect of tax rate change on beginning cumulative temporary
differences.............................................. 233 -- --
Effect of exchange rate changes............................ -- -- 2,441
------- ------- ------
Effective income tax amounts............................... $(4,754) $18,549 $9,519
======= ======= ======
</TABLE>
The current and deferred income tax provisions were computed on a Korean
won basis, the functional currency of the Business, and translated into US
dollars using the weighted average exchange rate. The effect of exchange rate
changes in the amount of $2,441 thousand reflects the impact of translating the
litigation settlement discussed in Note 10, using the rate at which such
transaction was recognized for financial reporting purposes.
14. OTHER COMPREHENSIVE INCOME (LOSS):
For the years ended December 31, 1996, 1997 and 1998, foreign currency
translation adjustments are the only components of other comprehensive income.
F-51
<PAGE> 170
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. OTHER COMPREHENSIVE INCOME (LOSS): -- (CONTINUED)
There are no related tax effects allocated to foreign currency translation
adjustments due to the fact that the Business' functional currency is Korean
won.
A summary of cumulative translation adjustments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Cumulative translation adjustments:
Beginning balance..................................... $ 705 $ (4,132) $(18,623)
Current-period change................................. (4,837) (14,491) 6,526
------- -------- --------
Ending balance........................................ $(4,132) $(18,623) $(12,097)
======= ======== ========
</TABLE>
15. RELATED PARTY TRANSACTIONS:
Related party activity between the Business and Samsung (including
subsidiaries and affiliates of Samsung) is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Product sales to other operating units of Samsung...... $ 66,834 $ 68,472 $ 56,126
Product sales to foreign sales subsidiaries of
Samsung.............................................. 144,338 150,943 86,552
Product sales to other Samsung subsidiaries and
affiliates........................................... 27,032 25,503 41,691
-------- -------- --------
Total sales....................................... $238,204 $244,918 $184,369
======== ======== ========
Manufacturing services performed by other operating
units of Samsung..................................... $ 81,151 $ 75,962 $ 49,775
Manufacturing services performed by a Chinese
subsidiary of Samsung................................ 5,149 22,086 16,352
Purchase of raw materials from Samsung affiliates...... 15,966 20,797 10,626
-------- -------- --------
Total manufacturing costs......................... $102,266 $118,845 $ 76,753
======== ======== ========
Selling, general and administrative expenses allocated
from Samsung......................................... $ 26,891 $ 27,880 $ 27,536
======== ======== ========
Sales of manufacturing equipment to other operating
units of Samsung..................................... $ 12,590 $ 6,945 $ 56
======== ======== ========
Purchase of manufacturing equipment from other
operating units of Samsung........................... $ 20,937 $ 1,088 $ 2,355
======== ======== ========
</TABLE>
F-52
<PAGE> 171
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
16. GEOGRAPHIC INFORMATION:
The Business is engaged in one industry segment, namely the development,
manufacture and marketing of power semiconductors. Sales data, summarized by
geographic area, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Korea.................................................. $178,321 $171,058 $137,111
Asia................................................... 182,839 207,602 186,668
North America.......................................... 32,001 35,638 24,308
Europe................................................. 24,886 26,402 21,812
-------- -------- --------
Total............................................. $418,047 $440,700 $369,899
======== ======== ========
</TABLE>
Substantially all of the Business' assets are located in Korea.
F-53
<PAGE> 172
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Raytheon Semiconductor, Inc:
We have audited the accompanying balance sheet of Raytheon Semiconductor,
Inc. (a wholly owned subsidiary of Thornwood Trust) (the Company) as of December
31, 1997, and the related statements of income, stockholder's equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Raytheon Semiconductor, Inc.
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Mountain View, California
February 27, 1998
F-54
<PAGE> 173
RAYTHEON SEMICONDUCTOR, INC.
(A WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 186
Accounts receivable, net of allowances of $2,073.......... 11,414
Inventories............................................... 18,125
Prepaid expenses and other................................ 262
-------
Total current assets................................... 29,987
Property, plant, and equipment, net......................... 21,532
-------
Total assets........................................... $51,519
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,711
Accrued compensation...................................... 2,575
Accrued liabilities....................................... 1,062
-------
Total current liabilities.............................. 7,348
Commitments and contingencies
Stockholder's equity
Common stock, $0.01 par value; 2,500 authorized, issued,
and outstanding........................................ --
Additional paid-in-capital................................ 44,171
-------
Total liabilities and stockholder's equity............. $51,519
=======
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE> 174
RAYTHEON SEMICONDUCTOR, INC.
(A WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Net sales................................................... $78,369
Cost of sales............................................... 44,815
-------
Gross profit........................................... 33,554
Operating expenses:
Research and development.................................. 12,128
Selling, general, and administrative...................... 10,064
-------
Total operating expenses............................... 22,192
-------
Operating Income....................................... 11,362
Other Expense............................................... 88
-------
Income before income taxes............................. 11,274
Provision for income tax expense............................ 4,395
-------
Net income............................................. $ 6,879
=======
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE> 175
RAYTHEON SEMICONDUCTOR, INC.
(A WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------
PARENT COMMON STOCK ADDITIONAL TOTAL
COMPANY --------------- PAID-IN- STOCKHOLDERS'
INVESTMENT SHARES AMOUNT CAPITAL EQUITY
---------- ------ ------ ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balances at beginning of year........ $ 54,874 -- $-- $ -- $ 54,874
Net income........................... 6,879 -- -- -- 6,879
Net transfers to parent.............. (17,582) -- -- -- (17,582)
Incorporation of Company on December
31, 1997........................... (44,171) 2,500 -- 44,171 --
-------- ----- -- ------- --------
Balances at end of year.............. $ -- 2,500 $-- $44,171 $ 44,171
======== ===== == ======= ========
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE> 176
RAYTHEON SEMICONDUCTOR, INC.
(A WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 6,879
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 6,397
Changes in operating assets and liabilities:
Accounts receivable.................................. (2,112)
Inventory............................................ 2,977
Prepaid expenses and other........................... (76)
Accounts payable..................................... (221)
Accrued expenses..................................... (595)
--------
Net cash provided by operating activities......... 13,249
--------
Cash flows from investing activities -- additions to
property, plant and equipment............................. (2,718)
--------
Cash flows from financing activities -- transfers to Parent
Company Investment........................................ (10,570)
--------
Net decrease in cash........................................ (39)
Cash, beginning of year..................................... 225
--------
Cash, end of year........................................... $ 186
========
Supplemental disclosure of cash flow information:
Deferred taxes transferred to Parent Company Investment per
terms of the Acquisition Agreement........................ $ 7,012
========
</TABLE>
See accompanying notes to financial statements.
F-58
<PAGE> 177
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) BACKGROUND AND BASIS OF PRESENTATION
Raytheon Semiconductor Inc. (the Company) is a wholly owned subsidiary of
Thornwood Trust (Thornwood) which is a wholly owned unit of Raytheon Company
(Raytheon). The Company's Multimedia Business Unit, based in San Diego,
California, designs and manufactures digital and mixed-signal integrated
circuits (IC) for use in broadcast video, computer graphics, multimedia, imaging
and communications applications. The Analog and High Speed Communications
Business Units, both based in Mountain View, California, manufacture DC-DC
converters, voltage regulator modules and IC's used by customers in high
performance microprocessors and networking applications. The Company sells
mainly through distributors in North America, Asia, and Europe.
Fairchild Semiconductor Corporation (Fairchild) acquired all the
outstanding shares of the Company subsequent to the close of business on
December 31, 1997 (see Note 10). Prior to this transaction, the net assets of
the Company represented an operating division of Raytheon. These financial
statements report the operating results of the Company as a division of
Raytheon. As a division of Raytheon, certain costs included in the income
statement were determined on the basis of allocations from Corporate
Headquarters and represent management's best estimate of the cost that would
have been incurred had the division operated independently. As a result, the
financial statements presented may not reflect the financial position or results
of operations which would have been realized had the Company operated as a
nonaffiliated entity for the year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk principally consist of trade accounts receivable.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral on accounts receivable, as the majority of the
Company's customers are large, well established companies. The Company maintains
reserves for potential credit losses, but historically has not experienced any
significant losses related to individual customers or groups of customers in any
particular industry or geographic area.
REVENUE RECOGNITION
Revenue is primarily recognized at the time product is shipped. The Company
provides for estimated returns of products sold to distributors under various
sales incentive programs and for general product returns from all customers.
Reductions of net sales revenue under these programs are recorded at the time
products are shipped.
F-59
<PAGE> 178
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost, or net realizable value. Cost is determined on a first-in,
first-out basis.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation is
generally provided on the double declining balance (buildings), or sum-of-years
digits method based on the following estimated useful lives:
<TABLE>
<S> <C>
Buildings................................................... 20 to 45 years
Machinery and equipment..................................... 3 to 10 years
Computer software and other assets.......................... 7 years
</TABLE>
Leasehold improvements are amortized over the lesser of the remaining term
of the lease or the estimated useful life of the improvement.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards of the Company. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded using the intrinsic value-based method. The Company adopted
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, on January 1, 1996, which permits entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
PARENT COMPANY INVESTMENT
As a division of Raytheon, the Company's operating cash requirements have
been met with transfers from Raytheon as required. Cash balances of the Company
not required for operations have been transferred to Raytheon, and all cash
receipts and disbursements and intercompany charges related to the Company's
operations have been credited to or charged against Parent Company Investment.
F-60
<PAGE> 179
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) CORPORATE ALLOCATIONS
The accompanying statement of income includes charges allocated by Raytheon
representing the Company's share of certain costs incurred by Raytheon in
support of the Company's operations. Services provided by Raytheon in 1997 were
primarily financial, legal and administrative in nature. Costs have been
allocated to the Company based on the proportion of Raytheon expenses
represented by Company expenses. In all cases, the corporate charges assessed
approximate the amounts which would have been incurred by the Company if it had
operated on a standalone basis during the year.
The total amounts allocated to the Company for the year ended December 31,
1997 and included in the statement of income are as follows (in thousands):
<TABLE>
<S> <C>
Cost of sales............................................... $3,647
Research and development.................................... 1,059
Selling, general and administrative......................... 1,715
------
$6,421
======
</TABLE>
Additionally, in 1997, substantially all employees of the Company
participated in the defined benefit pension plans of Raytheon. Under the plans,
benefits are generally based on years of service and the employee's compensation
during the years before retirement. Total expense allocated to the Company for
1997 was $572.
Subject to certain age and service requirements, substantially all
employees of the Company in 1997 were eligible to participate in Raytheon's
defined contribution plans. Employees participating in the Raytheon Savings and
Investment Plan could contribute up to 17% of their pay subject to prescribed
Internal Revenue Code ("IRC") limits. Raytheon matched 50% of the employees'
contributions, up to a maximum of 3% of each participating individual's
compensation. Total expense charged to the Company for this plan in 1997 was
$458. For employees participating in the Raytheon Employee Stock Ownership Plan,
the Company's annual contribution was approximately one half of one percent of
salary, as limited by the IRC. Total expense charged to the Company for this
plan in 1997 was $105.
Raytheon allocated charges for the employee benefit plans based primarily
on headcount and eligible payroll. Management has reviewed the allocations made
by Raytheon in respect of employee benefit plans and believes them to be
reasonable.
Subject to the Acquisition Agreement with Fairchild, substantial changes to
the Company's pension and benefit plans are expected for 1998. See Note 10.
(4) INVENTORIES
Inventories as of December 31, 1997, consisted of the following (in
thousands):
<TABLE>
<S> <C>
Finished goods.............................................. $ 6,012
Work in process............................................. 10,419
Raw materials............................................... 1,694
-------
$18,125
=======
</TABLE>
F-61
<PAGE> 180
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment as of December 31, 1997, consisted of the
following (in thousands):
<TABLE>
<S> <C>
Land........................................................ $ 616
Buildings and leasehold improvements........................ 22,802
Machinery and equipment..................................... 61,159
Computer software........................................... 2,898
Construction in progress.................................... 427
-------
87,902
Less accumulated depreciation and amortization.............. 66,370
-------
Property, plant, and equipment, net......................... $21,532
=======
</TABLE>
(6) FEDERAL INCOME TAXES
The provision for income taxes for the year ended December 31, 1997, was
(in thousands):
<TABLE>
<S> <C>
Current income tax expense:
Federal................................................... $2,299
State..................................................... 473
------
2,772
------
Deferred income tax expense:
Federal................................................... 1,247
State..................................................... 376
------
1,623
Total tax expense................................. $4,395
======
</TABLE>
F-62
<PAGE> 181
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) FEDERAL INCOME TAXES -- (CONTINUED)
The provision for income taxes for 1997 differs from the U.S. statutory
rate due to the following (in thousands):
<TABLE>
<S> <C>
Computed expected tax expense............................... $3,833
State income tax, net of federal tax benefit................ 562
------
$4,395
======
</TABLE>
Current income tax expense is included as a transfer to Raytheon in the
Parent Company Investment account. The sources and tax effects of temporary
differences which give rise to deferred income tax balances are as follows (in
thousands):
<TABLE>
<S> <C>
Current deferred tax assets:
Inventory reserves........................................ $2,196
Accounts receivables allowances........................... 829
Accrued expenses.......................................... 801
------
3,826
Noncurrent deferred tax assets:
Depreciation and amortization............................. 1,568
------
$5,394
======
</TABLE>
Under the terms of the Acquisition Agreement with Fairchild, the deferred
tax assets will not be transferred to Fairchild and accordingly are included as
a transfer to Raytheon as of December 31, 1997. See Note 10.
(7) EMPLOYEE STOCK PLANS
STOCK BASED COMPENSATION
The Company's employees participate in the Raytheon Stock Option Plan (the
Plan) which provides for the grant of incentive stock options and nonqualified
stock options to employees, directors and consultants of the Company at the fair
market value of Raytheon's common stock on the date of grant.
The vesting and exercise provisions of the option grants under the Plan are
determined by the Board of Directors. Options generally vest ratably over a
four-year period commencing from the date of grant, subject to one year of
employment and generally expire in 10 years from the date of grant.
The Company has elected to use the intrinsic value-based method to account
for all of its stock-based employee compensation plans. Accordingly, no
compensation cost has been recognized for its stock options in the accompanying
financial statements because the fair value of the underlying common stock
equals the exercise price of the stock options at the date of grant. Pursuant to
SFAS No. 123, Accounting for Stock Based Compensation, the Company is required
to disclose the pro forma effects on the net income of the Company as if the
Company had elected to use the fair value approach to account for its
stock-based employee compensation plan.
F-63
<PAGE> 182
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) EMPLOYEE STOCK PLANS -- (CONTINUED)
Had compensation cost for the Company's plans been determined consistent
with the fair value approach under SFAS No. 123, the Company's 1997 net income
would have been $6,476.
The fair value of each option is estimated using a Black-Scholes option
pricing model with the following weighted average assumptions: risk-free
interest rate of 6.5%, an expected life of 5 years, and volatility of 24%. No
dividend impact was considered as Raytheon has never declared, and does not have
plans to declare, any future dividends. No option or equity instruments were
issued to nonemployees.
The following table summarizes activity under the plan as of December 31,
1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------ ---------
<S> <C> <C>
Outstanding at beginning of year............................ 67,320 $39.25
Options granted............................................. 32,500 51.13
Options exercised........................................... (8,900) 31.02
Options canceled............................................ -- --
------
Outstanding at end of year.................................. 90,920 44.30
======
Options vested at year-end.................................. 58,420 $40.60
======
Weighted-average fair value of options granted during the
year...................................................... $13.98
</TABLE>
F-64
<PAGE> 183
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) EMPLOYEE STOCK PLANS -- (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
- -------------------------------------- -----------
WEIGHTED-
AVERAGE
EXERCISE OPTIONS REMAINING OPTIONS
PRICE OUTSTANDING LIFE IN YEARS EXERCISABLE
- -------- ----------- ------------- -----------
<S> <C> <C> <C>
1$6.95.. 2,000 1.96 years 2,000
21.80 1,000 4.06 1,000
31.91 2,020 5.65 2,020
31.47 5,000 5.73 5,000
32.53 10,000 6.48 10,000
32.88 3,000 6.65 3,000
39.03 14,000 7.49 14,000
52.56 20,400 8.44 20,400
51.75 1,000 8.66 1,000
47.13 4,000 9.15 --
51.69 28,500 9.50 --
------ ------
44.30 90,920 58,420
====== ====== ======
</TABLE>
Pursuant to the Acquisition Agreement with Fairchild (see Note 10), all
unvested outstanding options at December 31, 1997 are canceled.
(8) COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company had commitments under long-term operating
leases requiring approximate annual rentals as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 812
1999........................................................ 844
2000........................................................ 439
2001........................................................ --
2002........................................................ --
Thereafter.................................................. --
------
$2,095
======
</TABLE>
Rental expense for 1997 amounted to $533.
The Company's Mountain View facility is located on a contaminated site
under the Comprehensive Environmental Liability Act (the "Act"). During the year
the Company paid $2,164 for remediation
F-65
<PAGE> 184
RAYTHEON SEMICONDUCTOR, INC.
(WHOLLY OWNED SUBSIDIARY OF THORNWOOD TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
costs which were reimbursed by Raytheon. Under the terms of the Acquisition
Agreement executed on December 31, 1997(see Note 10), future responsibility for
these costs will be assumed by Raytheon. All other environmental costs are
immaterial to the Company and have been expensed as incurred.
The Company is subject to various claims and legal proceedings in the
normal course of business. None of the claims or potential claims outstanding at
December 31, 1997 are anticipated to have a material impact on the financial
position, cash flows, or results of operations of the Company after taking into
consideration provisions already recorded.
(9) RELATED PARTY TRANSACTIONS, AND GEOGRAPHIC INFORMATION
In 1997, the Company had $2,134 of net sales to affiliate companies of
Raytheon; the related cost of sales amounted to $1,126. There were no other
transactions with affiliate companies of Raytheon during 1997.
The Company's export sales for the year ended December 31, 1997 was $24,810
principally to customers Europe and Asia.
(10) SUBSEQUENT EVENT
As discussed in Note 1, prior to the formation of the Company on December
31, 1997, the Company operated as a division of Raytheon. On December 31, 1997,
the Company was incorporated as a wholly-owned subsidiary of Thornwood Trust
(Thornwood), a Massachusetts Business Trust and wholly-owned unit of Raytheon.
Subsequent to the close of business on December 31, 1997, Fairchild
acquired 100% of the outstanding shares of common stock of the Company from
Thornwood for approximately $117 million. Upon closing of the acquisition, the
Company became a business unit of Fairchild.
Pursuant to the Acquisition Agreement, Raytheon will retain and be
responsible for liabilities accrued by employees of the Company through December
31, 1997 under any defined benefit pension plan or other employee-related
benefit plans. In addition, Raytheon will retain all liability and
responsibility for the disposition of interests under the Raytheon Savings and
Investment Plan and the Raytheon Stock Ownership Plan with respect to all
employees of the Company who were participants in either of the plans as of
December 31, 1997.
Raytheon will also retain and be responsible for all liabilities related to
environmental remediation activities, including those required by the United
States Environmental Protection Agency, at the Company's Mountain View,
California facility which arose prior to December 31, 1997 or were created by
the release of hazardous substances that first occurred prior to December 31,
1997.
F-66
<PAGE> 185
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTIONS
The following table sets forth the estimated expenses to be incurred in
connection with the issuance and distribution of the securities being
registered, other than underwriting discounts and commissions, to be paid by
Fairchild.
<TABLE>
<S> <C>
SEC registration fee....................................... $ 97,300
Printing and engraving fees................................ *
Legal fees and expenses.................................... *
Accounting fees and expenses............................... *
Blue Sky fees and expenses................................. *
Directors' and Officers' Insurance......................... *
Filing fee................................................. *
Miscellaneous.............................................. *
-----------
Total............................................ $24,000,000
===========
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides in relevant
part that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such person's conduct was unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the
II-1
<PAGE> 186
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
Section 145 also provides that to the extent a director, officer, employee
or agent of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to above, or defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Furthermore, Section 145 provides that nothing in the above-described
provisions shall be deemed exclusive of any other rights to indemnification or
advancement of expenses to which any person may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise.
Our Bylaws provide for the indemnification of any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding") by reason of the fact that such person is or was
a director or officer of the Company or a constituent corporation absorbed in a
consolidation or merger, or is or was serving at the request of the Company or a
constituent corporation absorbed in a consolidation or merger, as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, or is or was a director or officer of the Company serving at its
request as an administrator, trustee or other fiduciary of one or more of the
employee benefit plans of the Company or other enterprise, against expenses
(including attorneys' fees), liability and loss actually and reasonably incurred
or suffered by such person in connection with such proceeding, whether or not
the indemnified liability arises or arose from any threatened, pending or
completed proceeding by or in the right of the Company, except to the extent
that such indemnification is prohibited by applicable law. Our Bylaws also
provide that such indemnification shall not be deemed exclusive of any other
rights to which those indemnified may be entitled as a matter of law or under
any bylaw, agreement, vote of stockholders or otherwise.
Section 102(b)(7) of the Delaware General Corporation Law provides that a
corporation may in its certificate of incorporation eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director except for
liability: for any breach of the director's duty of loyalty to the corporation
or its stockholders; for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; under Section 174 of the
Delaware General Corporation Law (pertaining to certain prohibited acts
including unlawful payment of dividends or unlawful purchase or redemption of
the corporation's capital stock); or for any transaction from which the director
derived an improper personal benefit. The Certificate of Incorporation of the
Company contains a provision so limiting the personal liability of directors of
the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On March 11, 1997, Fairchild issued approximately 28,764,480 shares of
Class A Common Stock, 33,635,520 shares of Class B Common Stock, $70.0 million
(aggregate principal amount) of 12% Series A Cumulative Compounding Preferred
Stock and an 11.74% Subordinated Note Due March 14, 2008 in an original
principal amount of approximately $77.0 million in connection with the
Recapitalization. These securities were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act.
On April 13, 1999, Fairchild issued a 12.5% Subordinated PIK Note Due 2008
in the original principal amount of $50.0 million in connection with the
Transactions. This note was issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act.
II-2
<PAGE> 187
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
2.01 Agreement and Plan of Recapitalization dated January 24,
1997 between Sterling and National Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).*
2.02 Asset Purchase Agreement dated as of March 11, 1997 between
Fairchild Semiconductor and National Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
2.03 Acquisition Agreement dated November 25, 1997 between
Fairchild Semiconductor and Raytheon Company (incorporated
by reference from Fairchild Semiconductor's Current Report
on Form 8-K dated January 13, 1998).
2.04 Amendment No. 1 to Acquisition Agreement dated December 29,
1997 between Fairchild Semiconductor and Raytheon Company
(incorporated by reference from Fairchild Semiconductor's
Current Report on Form 8-K dated January 13, 1998).
2.05 Exhibit 3.14 to Acquisition Agreement dated December 29,
1997 between Fairchild Semiconductor and Raytheon Company
(incorporated by reference from Fairchild Semiconductor's
Current Report on Form 8-K dated January 13, 1998).
2.06 Business Transfer Agreement dated December 20, 1998 between
Samsung Electronics and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Current Report on Form 8-K dated April 13, 1999).*
2.07 Closing Agreement dated April 13, 1999 among Samsung
Electronics, Fairchild Korea and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Current Report on Form 8-K dated April 13, 1999).*
3.01 Certificate of Incorporation of FSC Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
3.02 Bylaws of FSC Semiconductor (incorporated by reference from
Fairchild Semiconductor's Registration Statement on Form S-4
dated July 9, 1997 (File No. 333-26897)).
3.03 Certificate of Amendment to Certificate of Incorporation of
FSC Semiconductor (incorporated by reference from FSC
Semiconductor's Registration Statement on Form S-8 dated
June 25, 1998 (File No. 333-58603)).
4.01 Indenture dated as of March 11, 1997 among Fairchild
Semiconductor, FSC Semiconductor, as Guarantor and United
States Trust Company of New York, as Trustee (incorporated
by reference from Fairchild Semiconductor's Registration
Statement on Form S-4 dated July 9, 1997 (File No.
333-26897)).
4.02 Form of 10 1/8% Senior Subordinated Notes Due 2007 (included
in Exhibit 4.01).
4.03 Indenture dated April 7, 1999 among Fairchild Semiconductor,
FSC Semiconductor, as Guarantor, Fairchild Semiconductor
Corporation of California, as Guarantor, and the United
States Trust Company of New York.**
</TABLE>
II-3
<PAGE> 188
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
4.04 Registration Rights Agreement dated March 30, 1999 among
Fairchild Semiconductor, FSC Semiconductor, as Guarantor,
Fairchild California, as Guarantor, Credit Suisse First
Boston Corporation, Morgan Stanley & Co. Incorporated,
Salomon Smith Barney Inc. and Fleet Securities, Inc.**
4.05 Form of 10 3/8% Senior Subordinated Notes Due 2007 (included
in Exhibit 4.03).
5.01 Opinion of Dechert Price & Rhoads.**
10.01 Technology Licensing and Transfer Agreement dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
10.02 Transition Services Agreement dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.03 Fairchild Foundry Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.04 Revenue Side Letter dated March 11, 1997 between National
Semiconductor and Fairchild Semiconductor (incorporated by
reference from Fairchild Semiconductor's Registration
Statement on Form S-4 dated July 9, 1997 (File No.
333-26897)).
10.05 Fairchild Assembly Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.06 National Foundry Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.07 National Assembly Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.08 Mil/Aero Wafer and Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.09 Shared Services Agreement (South Portland) dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
10.10 Credit Agreement dated March 11, 1997 among Fairchild
Semiconductor, FSC Semiconductor, Various Banks, Bankers
Trust Company, Credit Suisse First Boston Corporation and
Canadian Imperial Bank of Commerce (incorporated by
reference from Fairchild Semiconductor's Registration
Statement on Form S-4 dated July 9, 1997 (File No.
333-26897)).
</TABLE>
II-4
<PAGE> 189
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.11 Corporate Agreement dated February 20, 1992 between Torex
Semiconductor Ltd. and National Semiconductor (incorporated
by reference from Fairchild Semiconductor's Registration
Statement on Form S-4 dated July 9, 1997 (File No.
333-26897)).
10.12 Assembly/Test Subcontract Agreement dated August 13, 1998
between NS Electronics Bangkok (1993) Ltd. and Fairchild
Semiconductor (incorporated by reference from Fairchild
Semiconductor's Annual Report on Form 10-K dated May 31,
1998).
10.13 Supply Agreement dated January 20, 1996 between National
Semiconductor and Dynacraft Industries Sdn. Bhd.
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.14 Licensing and Manufacturing Agreement dated April 27, 1990
between National Semiconductor and Waferscale Integration,
Inc. (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
10.15 Qualified Titles Corresponding to Registry Title Nos. 19, 44
and 3400-Mk 12 from the State of Penang, Malaysia and
corresponding Sale and Purchase Agreements, each dated March
11, 1997, between National Semiconductor Sdn. Bhd. and
Fairchild Semiconductor Sdn. Bhd. (incorporated by reference
from Fairchild Semiconductor's Registration Statement on
Form S-4 dated July 9, 1997 (File No. 333-26897)).
10.16 Lease Agreement dated October 10, 1979 between Export
Processing Zone Authority and Fairchild Semiconductor (Hong
Kong) Limited, and Supplemental Agreements thereto dated May
1, 1982; December 12, 1983; August 17, 1984; March 10, 1987;
February 16, 1990; August 25, 1994; May 29, 1995; June 7,
1995; November 9, 1995; and October 24, 1996 (incorporated
by reference from Fairchild Semiconductor's Registration
Statement on Form S-4 dated July 9, 1997 (File No.
333-26897)).
10.17 Lease for Santa Clara Facilities dated as of March 11, 1997
between National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.18 Shared Facilities Agreement (South Portland) dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
10.19 Environmental Side Letter dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.20 Master Sublease Agreement dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor and
Master Lease Agreement dated December 13, 1994 between
General Electric Capital Corporation and National
Semiconductor (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
10.21 Fairchild NSC Deferred Compensation Plan Trust established
effective March 11, 1997 (incorporated by reference from
Fairchild Semiconductor's Registration Statement on Form S-4
dated July 9, 1997 (File No. 333-26897)).
10.22 Fairchild NSC Deferred Compensation Plan assumed and
continued, effective March 11, 1997 (included as Schedule A
to Exhibit 10.21).
</TABLE>
II-5
<PAGE> 190
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.23 Fairchild Benefit Restoration Plan (incorporated by
reference from Fairchild Semiconductor's Registration
Statement on Form S-4 dated July 9, 1997 (File No.
333-26897)).
10.24 Fairchild Incentive Plan (incorporated by reference from
Fairchild Semiconductor's Registration Statement on Form S-4
dated July 9, 1997 (File No. 333-26897)).
10.25 FSC Semiconductor Corporation Executive Officer Incentive
Plan (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
10.26 FSC Semiconductor Corporation Stock Option Plan
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.27 Employment Agreement dated March 11, 1997 among Fairchild
Semiconductor, FSC Semiconductor, Sterling and Kirk P. Pond
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.28 Employment Agreement dated March 11, 1997 among Fairchild
Semiconductor, FSC Semiconductor, Sterling and Joseph R.
Martin (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
10.29 Credit Agreement -- Amended and Restated as of December 31,
1997 (incorporated by reference from Fairchild
Semiconductor's Current Report on Form 10-Q dated April 13,
1998).
10.30 Employee Stock Purchase Savings Plan, as amended as of June
25, 1998 (incorporated by reference from Fairchild
Semiconductor's Annual Report on Form 10-K dated May 31,
1998).
10.31 Fairchild Revocable Savings Plan Trust, dated February 20,
1998, executed by Fleet Bank of Maine, as trustee
(incorporated by reference from Fairchild Holding's
Registration Statement on Form S-8 dated June 25, 1998 (File
No. 333-58603)).
10.32 Amendment to Securities Purchase and Holders Agreement dated
May 29, 1998 (incorporated by reference from Fairchild
Semiconductor's Annual Report on Form 10-K dated May 31,
1998).
10.33 Form of Promissory Note between Fairchild Semiconductor and
Management Investors dated June 3, 1998 (incorporated by
reference from Fairchild Semiconductor's Annual Report on
Form 10-K dated May 31, 1998).
10.34 Second Amendment to Amended and Restated Credit Agreement
dated August 25, 1998 among FSC Semiconductor, Fairchild
Semiconductor, the lenders party to the Credit Agreement
dated March 11, 1997, Bankers Trust Company, Credit Suisse
First Boston Corporation and Canadian Imperial Bank of
Commerce (incorporated by reference from Fairchild
Semiconductor's Current Report on Form 10-Q dated August 30,
1998).
10.35 Purchase Agreement dated March 30, 1999 among Fairchild
Semiconductor, FSC Semiconductor, Fairchild California,
Credit Suisse First Boston Corporation, Morgan Stanley & Co.
Incorporated, Salomon Smith Barney Inc. and Fleet
Securities, Inc.**
10.36 Transitional Services Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea.**
</TABLE>
II-6
<PAGE> 191
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.37 Product Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea.**
10.38 Foundry Sale Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea.**
10.39 Intellectual Property License Agreement dated April 13, 1999
between Samsung Electronics and Fairchild Korea.**
10.40 Trademark License Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea.**
10.41 Assembly and Test Services Agreement (Onyang) dated April
13, 1999 between Samsung Electronics and Fairchild Korea.**
10.42 Assembly and Test Services Agreement (Suzhou) dated April
13, 1999 between SESS Electronics Suzhou Semiconductor Co.,
Ltd. and Fairchild Korea.**
10.43 EPI Services Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea.**
10.44 Photo Mask Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea.**
10.45 Credit Agreement dated April 14, 1999 among Fairchild
Semiconductor, FSC Semiconductor 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.**
10.46 Employment Agreement dated March 28, 1999 between FSC
Semiconductor and Deok-Jung Kim.**
10.47 Employment Agreement dated as of April 23, 1999 between
Fairchild Semiconductor and Kyoung-Soo Kim.**
10.48 Sublease Agreement dated April 23, 1999 between Veritas
Software Corporation and Fairchild California.**
21.1 Subsidiaries of FSC Semiconductor.
23.01 Consent of Dechert Price & Rhoads (included in the opinion
filed as Exhibit 5.01).
23.02 Consent of Samil Accounting Corporation.
23.03 Consent of KPMG LLP.
23.04 Consent of KPMG LLP.
24.01 Power of Attorney (included on the signature page).
</TABLE>
- -------------------------
* Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to this Agreement
are omitted. The Exhibit contains a list identifying the contents of all
schedules and the Registrant agrees to furnish supplementally copies of such
schedules to the Commission upon request.
** To be supplied by amendment.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event
II-7
<PAGE> 192
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424 (b) (1) or
(4) or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-8
<PAGE> 193
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
below-named Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
South Portland, State of Maine, on the 14th day of May 1999.
FSC SEMICONDUCTOR CORPORATION
By: /s/ KIRK P. POND
-----------------------------------------
Chairman of the Board of Directors,
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below appoints Joseph R. Martin, Daniel
E. Boxer and Paul C. Schorr IV, any of whom may act without the joinder of
either of the others, as his true and lawful attorneys-in-fact and agents with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this Registration Statement and all additional
registration statements relating to the same offering of securities as this
Registration Statement that are filed pursuant to Rule 462(b) of the Securities
Act, and to file the same, with all exhibits thereto and all other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or their substitute or
substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities at the above-named Registrant on May , 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ KIRK P. POND Chairman of the Board of Directors,
- --------------------------------------------------- President and Chief Executive Officer
Kirk P. Pond (principal executive officer)
/s/ JOSEPH R. MARTIN Executive Vice President, Chief Financial
- --------------------------------------------------- Officer and Director (principal financial
Joseph R. Martin and accounting officer)
/s/ BRIAN L. HALLA Director
- ---------------------------------------------------
Brian L. Halla
/s/ WILLIAM N. STOUT Director
- ---------------------------------------------------
William N. Stout
</TABLE>
II-9
<PAGE> 194
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ RICHARD M. CASHIN, JR. Director
- ---------------------------------------------------
Richard M. Cashin, Jr.
/s/ PAUL C. SCHORR IV Director
- ---------------------------------------------------
Paul C. Schorr IV
/s/ RONALD W. SHELLY Director
- ---------------------------------------------------
Ronald W. Shelly
</TABLE>
II-10
<PAGE> 195
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
2.01 Agreement and Plan of Recapitalization dated January 24,
1997 between Sterling and National Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).*
2.02 Asset Purchase Agreement dated as of March 11, 1997 between
Fairchild Semiconductor and National Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
2.03 Acquisition Agreement dated November 25, 1997 between
Fairchild Semiconductor and Raytheon Company (incorporated
by reference from Fairchild Semiconductor's Current Report
on Form 8-K dated January 13, 1998).
2.04 Amendment No. 1 to Acquisition Agreement dated December 29,
1997 between Fairchild Semiconductor and Raytheon Company
(incorporated by reference from Fairchild Semiconductor's
Current Report on Form 8-K dated January 13, 1998).
2.05 Exhibit 3.14 to Acquisition Agreement dated December 29,
1997 between Fairchild Semiconductor and Raytheon Company
(incorporated by reference from Fairchild Semiconductor's
Current Report on Form 8-K dated January 13, 1998).
2.06 Business Transfer Agreement dated December 20, 1998 between
Samsung Electronics and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Current Report on Form 8-K dated April 13, 1999).*
2.07 Closing Agreement dated April 13, 1999 among Samsung
Electronics, Fairchild Korea and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Current Report on Form 8-K dated April 13, 1999).*
3.01 Certificate of Incorporation of FSC Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
3.02 Bylaws of FSC Semiconductor (incorporated by reference from
Fairchild Semiconductor's Registration Statement on Form S-4
dated July 9, 1997 (File No. 333-26897)).
3.03 Certificate of Amendment to Certificate of Incorporation of
FSC Semiconductor (incorporated by reference from FSC
Semiconductor's Registration Statement on Form S-8 dated
June 25, 1998 (File No. 333-58603)).
4.01 Indenture dated as of March 11, 1997 among Fairchild
Semiconductor, FSC Semiconductor, as Guarantor and United
States Trust Company of New York, as Trustee (incorporated
by reference from Fairchild Semiconductor's Registration
Statement on Form S-4 dated July 9, 1997 (File No.
333-26897)).
4.02 Form of 10 1/8% Senior Subordinated Notes Due 2007 (included
in Exhibit 4.01).
</TABLE>
<PAGE> 196
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
4.03 Indenture dated April 7, 1999 among Fairchild Semiconductor,
FSC Semiconductor, as Guarantor, Fairchild Semiconductor
Corporation of California, as Guarantor, and the United
States Trust Company of New York.**
4.04 Registration Rights Agreement dated March 30, 1999 among
Fairchild Semiconductor, FSC Semiconductor, as Guarantor,
Fairchild California, as Guarantor, Credit Suisse First
Boston Corporation, Morgan Stanley & Co. Incorporated,
Salomon Smith Barney Inc. and Fleet Securities, Inc.**
4.05 Form of 10 3/8% Senior Subordinated Notes Due 2007 (included
in Exhibit 4.03).
5.01 Opinion of Dechert Price & Rhoads.**
10.01 Technology Licensing and Transfer Agreement dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
10.02 Transition Services Agreement dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.03 Fairchild Foundry Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.04 Revenue Side Letter dated March 11, 1997 between National
Semiconductor and Fairchild Semiconductor (incorporated by
reference from Fairchild Semiconductor's Registration
Statement on Form S-4 dated July 9, 1997 (File No.
333-26897)).
10.05 Fairchild Assembly Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.06 National Foundry Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.07 National Assembly Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.08 Mil/Aero Wafer and Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
</TABLE>
<PAGE> 197
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
10.09 Shared Services Agreement (South Portland) dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
10.10 Credit Agreement dated March 11, 1997 among Fairchild
Semiconductor, FSC Semiconductor, Various Banks, Bankers
Trust Company, Credit Suisse First Boston Corporation and
Canadian Imperial Bank of Commerce (incorporated by
reference from Fairchild Semiconductor's Registration
Statement on Form S-4 dated July 9, 1997 (File No.
333-26897)).
10.11 Corporate Agreement dated February 20, 1992 between Torex
Semiconductor Ltd. and National Semiconductor (incorporated
by reference from Fairchild Semiconductor's Registration
Statement on Form S-4 dated July 9, 1997 (File No.
333-26897)).
10.12 Assembly/Test Subcontract Agreement dated August 13, 1998
between NS Electronics Bangkok (1993) Ltd. and Fairchild
Semiconductor (incorporated by reference from Fairchild
Semiconductor's Annual Report on Form 10-K dated May 31,
1998).
10.13 Supply Agreement dated January 20, 1996 between National
Semiconductor and Dynacraft Industries Sdn. Bhd.
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.14 Licensing and Manufacturing Agreement dated April 27, 1990
between National Semiconductor and Waferscale Integration,
Inc. (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
10.15 Qualified Titles Corresponding to Registry Title Nos. 19, 44
and 3400-Mk 12 from the State of Penang, Malaysia and
corresponding Sale and Purchase Agreements, each dated March
11, 1997, between National Semiconductor Sdn. Bhd. and
Fairchild Semiconductor Sdn. Bhd. (incorporated by reference
from Fairchild Semiconductor's Registration Statement on
Form S-4 dated July 9, 1997 (File No. 333-26897)).
10.16 Lease Agreement dated October 10, 1979 between Export
Processing Zone Authority and Fairchild Semiconductor (Hong
Kong) Limited, and Supplemental Agreements thereto dated May
1, 1982; December 12, 1983; August 17, 1984; March 10, 1987;
February 16, 1990; August 25, 1994; May 29, 1995; June 7,
1995; November 9, 1995; and October 24, 1996 (incorporated
by reference from Fairchild Semiconductor's Registration
Statement on Form S-4 dated July 9, 1997 (File No.
333-26897)).
10.17 Lease for Santa Clara Facilities dated as of March 11, 1997
between National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.18 Shared Facilities Agreement (South Portland) dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
</TABLE>
<PAGE> 198
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
10.19 Environmental Side Letter dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.20 Master Sublease Agreement dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor and
Master Lease Agreement dated December 13, 1994 between
General Electric Capital Corporation and National
Semiconductor (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
10.21 Fairchild NSC Deferred Compensation Plan Trust established
effective March 11, 1997 (incorporated by reference from
Fairchild Semiconductor's Registration Statement on Form S-4
dated July 9, 1997 (File No. 333-26897)).
10.22 Fairchild NSC Deferred Compensation Plan assumed and
continued, effective March 11, 1997 (included as Schedule A
to Exhibit 10.21).
10.23 Fairchild Benefit Restoration Plan (incorporated by
reference from Fairchild Semiconductor's Registration
Statement on Form S-4 dated July 9, 1997 (File No.
333-26897)).
10.24 Fairchild Incentive Plan (incorporated by reference from
Fairchild Semiconductor's Registration Statement on Form S-4
dated July 9, 1997 (File No. 333-26897)).
10.25 FSC Semiconductor Corporation Executive Officer Incentive
Plan (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
10.26 FSC Semiconductor Corporation Stock Option Plan
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.27 Employment Agreement dated March 11, 1997 among Fairchild
Semiconductor, FSC Semiconductor, Sterling and Kirk P. Pond
(incorporated by reference from Fairchild Semiconductor's
Registration Statement on Form S-4 dated July 9, 1997 (File
No. 333-26897)).
10.28 Employment Agreement dated March 11, 1997 among Fairchild
Semiconductor, FSC Semiconductor, Sterling and Joseph R.
Martin (incorporated by reference from Fairchild
Semiconductor's Registration Statement on Form S-4 dated
July 9, 1997 (File No. 333-26897)).
10.29 Credit Agreement -- Amended and Restated as of December 31,
1997 (incorporated by reference from Fairchild
Semiconductor's Current Report on Form 10-Q dated April 13,
1998).
10.30 Employee Stock Purchase Savings Plan, as amended as of June
25, 1998 (incorporated by reference from Fairchild
Semiconductor's Annual Report on Form 10-K dated May 31,
1998).
10.31 Fairchild Revocable Savings Plan Trust, dated February 20,
1998, executed by Fleet Bank of Maine, as trustee
(incorporated by reference from Fairchild Holding's
Registration Statement on Form S-8 dated June 25, 1998 (File
No. 333-58603)).
</TABLE>
<PAGE> 199
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
10.32 Amendment to Securities Purchase and Holders Agreement dated
May 29, 1998 (incorporated by reference from Fairchild
Semiconductor's Annual Report on Form 10-K dated May 31,
1998).
10.33 Form of Promissory Note between Fairchild Semiconductor and
Management Investors dated June 3, 1998 (incorporated by
reference from Fairchild Semiconductor's Annual Report on
Form 10-K dated May 31, 1998).
10.34 Second Amendment to Amended and Restated Credit Agreement
dated August 25, 1998 among FSC Semiconductor, Fairchild
Semiconductor, the lenders party to the Credit Agreement
dated March 11, 1997, Bankers Trust Company, Credit Suisse
First Boston Corporation and Canadian Imperial Bank of
Commerce (incorporated by reference from Fairchild
Semiconductor's Current Report on Form 10-Q dated August 30,
1998).
10.35 Purchase Agreement dated March 30, 1999 among Fairchild
Semiconductor, FSC Semiconductor, Fairchild California,
Credit Suisse First Boston Corporation, Morgan Stanley & Co.
Incorporated, Salomon Smith Barney Inc. and Fleet
Securities, Inc.**
10.36 Transitional Services Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea.**
10.37 Product Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea.**
10.38 Foundry Sale Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea.**
10.39 Intellectual Property License Agreement dated April 13, 1999
between Samsung Electronics and Fairchild Korea.**
10.40 Trademark License Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea.**
10.41 Assembly and Test Services Agreement (Onyang) dated April
13, 1999 between Samsung Electronics and Fairchild Korea.**
10.42 Assembly and Test Services Agreement (Suzhou) dated April
13, 1999 between SESS Electronics Suzhou Semiconductor Co.,
Ltd. and Fairchild Korea.**
10.43 EPI Services Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea.**
10.44 Photo Mask Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea.**
10.45 Credit Agreement dated April 14, 1999 among Fairchild
Semiconductor, FSC Semiconductor, 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.**
10.46 Employment Agreement dated March 28, 1999 between FSC
Semiconductor and Deok-Jung Kim.**
10.47 Employment Agreement dated as of April 23, 1999 between
Fairchild Semiconductor and Kyoung-Soo Kim.**
</TABLE>
<PAGE> 200
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
10.48 Sublease Agreement dated April 23, 1999 between Veritas
Software Corporation and Fairchild California.(**)
21.1 Subsidiaries of Fairchild Holdings.
23.01 Consent of Dechert Price & Rhoads (included in the opinion
filed as Exhibit 5.01).
23.02 Consent of Samil Accounting Corporation.
23.03 Consent of KPMG LLP.
23.04 Consent of KPMG LLP.
24.01 Power of Attorney (included on the signature page).
</TABLE>
- -------------------------
* Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to this Agreement
are omitted. The Exhibit contains a list identifying the contents of all
schedules and the Registrant agrees to furnish supplementally copies of such
schedules to the Commission upon request.
** To be supplied by amendment.
<PAGE> 1
EXHIBIT 21.1
FSC SEMICONDUCTOR CORPORATION
Worldwide Subsidiary List
<TABLE>
State/Country of
Incorporation
----------------
<S> <C>
Fairchild Semiconductor Corporation Delaware
Fairchild Semiconductor Corporation of California Delaware
Fairchild Semiconductor Limited England
Fairchild Semiconductor OmbE Germany
Fairchild Semiconductor Srl Italy
Fairchild Semiconductor Japan K.K. Japan
Fairchild Semiconductor Hong Kong Limited Hong Kong
Fairchild Semiconductor Hong Kong (Holdings) Limited Hong Kong
Fairchild Semiconductor Asia Pacific Pte. Ltd. Singapore
Fairchild Semiconductor (Malaysia) Sdn. Bhd. Malaysia
Fairchild Semiconductors de Mexico S. de R.L. de C.V. Mexico
Fairchild Korea Semiconductor Ltd. South Korea
</TABLE>
<PAGE> 1
Exhibit 23.02
[SAMIL ACCOUNTING CORPORATION LETTERHEAD]
May 14 , 1999
The Board of Directors of
Fairchild Semiconductor Corporation
333 Western Avenue
South Portland, ME 04106
Credit Suisse First Boston
11 Madison Avenue
New York, NY 10010
We consent to the use of our report dated February 24, 1999, relating to the
financial statements of the Power Device Business of Samsung Electronics Co.,
Ltd. included in this Registration Statement and in the Prospectus included
within this Registration Statement and to the reference to our firm under the
heading "Experts" in the Prospectus.
/s/ Samil Accounting Corporation
Samil Accounting Corporation
<PAGE> 1
Exhibit 23.03
The Board of Directors
FSC Semiconductor Corporation:
We consent to the inclusion of our reports dated June 16, 1998, except as to
Note 19, which is as of July 20, 1998, with respect to the consolidated balance
sheets of FSC Semiconductor Corporation as of May 31, 1998 and May 25, 1997,
and the related consolidated and combined statements of operations and
stockholders' equity (deficit) for each of the years in the three-year period
ended May 31, 1998, and the related consolidated statement of cash flows for
the year ended May 31, 1998, and the related schedule, which reports appear in
this Registration Statement, and to the reference to our firm under the heading
"Experts" in this Registration Statement on Form S-1.
As discussed in Note 18 to the financial statements, the Company changed its
method of accounting for business process reengineering costs in 1998 to adopt
the provisions of the Emerging Issues Task Force Issue 97-13, "Accounting for
Business Process Reengineering Costs."
/s/ KPMG LLP
Boston, Massachusetts
May 13, 1999
<PAGE> 1
Exhibit 23.04
The Board of Directors
Fairchild Semiconductor Corporation of California
(formerly known as Raytheon Semiconductor, Inc.):
We consent to the inclusion of our report dated February 27, 1998, with respect
to the balance sheet of Raytheon Semiconductor, Inc. (a wholly owned subsidiary
of Thornwood Trust) as of December 31, 1997, and the related statements of
income, stockholder's equity, and cash flows for the year then ended, which
report appears in this Registration Statement, and to the reference to our firm
under the heading "Experts" in this Registration Statement on Form S-1.
/s/ KPMG LLP
Mountain View, California
May 13, 1999
