<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 19, 2000.
REGISTRATION NO. 333-92941
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 04-3363001
(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
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
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:
<TABLE>
<S> <C>
GERALDINE A. SINATRA, ESQ. KRIS F. HEINZELMAN, ESQ.
DECHERT PRICE & RHOADS CRAVATH, SWAINE & MOORE
4000 BELL ATLANTIC TOWER WORLDWIDE PLAZA
1717 ARCH STREET 825 EIGHTH AVENUE
PHILADELPHIA, PENNSYLVANIA 19103 NEW YORK, NEW YORK 10019
(215) 994-4000 (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. [ ]
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 JANUARY 19, 2000
[FAIRCHILD SEMICONDUCTOR LOGO] 23,500,000 Shares
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
Class A Common Stock
------------------
We are selling 6,140,880 shares and the selling stockholders named under
"Principal and Selling Stockholders" are selling 17,359,120 shares of our Class
A Common Stock. We will not receive any of the proceeds from shares of our Class
A Common Stock sold by the selling stockholders. We have granted the
underwriters an option to purchase a maximum of 1,410,000 additional shares and
one of the selling stockholders has granted the underwriters an option to
purchase a maximum of 2,115,000 additional shares to cover over-allotments of
shares, if any.
Our Class A Common Stock is listed on The New York Stock Exchange under the
symbol "FCS." The last reported sale price of our Class A Common Stock on
January 3, 2000 was $27.625 per share.
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
STARTING ON PAGE 9.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO PROCEEDS TO
PRICE TO DISCOUNTS AND FAIRCHILD SELLING
PUBLIC COMMISSIONS INTERNATIONAL STOCKHOLDERS
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Per Share............................................ $ $ $ $
Total................................................ $ $ $ $
</TABLE>
Delivery of the shares of Class A Common Stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
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 SALOMON SMITH BARNEY
DEUTSCHE BANC ALEX. BROWN
MERRILL LYNCH & CO.
ROBERTSON STEPHENS
The date of this prospectus is , 2000.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY..................... 1
RISK FACTORS........................... 9
FORWARD-LOOKING STATEMENTS............. 17
USE OF PROCEEDS........................ 18
DIVIDEND POLICY........................ 18
PRICE RANGE OF COMMON STOCK............ 18
CAPITALIZATION......................... 19
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENT AND UNAUDITED
SUPPLEMENTAL DATA.................... 20
SELECTED CONSOLIDATED FINANCIAL DATA OF
FAIRCHILD INTERNATIONAL.............. 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF FAIRCHILD
INTERNATIONAL........................ 29
SELECTED HISTORICAL FINANCIAL DATA OF
THE POWER DEVICE BUSINESS............ 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE POWER DEVICE
BUSINESS............................. 51
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDUSTRY OVERVIEW...................... 57
BUSINESS............................... 61
MANAGEMENT............................. 75
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS......................... 83
PRINCIPAL AND SELLING STOCKHOLDERS..... 90
DESCRIPTION OF CAPITAL STOCK........... 92
SHARES ELIGIBLE FOR FUTURE SALE........ 96
UNITED STATES TAX CONSEQUENCES TO
NON-UNITED STATES HOLDERS............ 98
UNDERWRITING........................... 101
NOTICE TO CANADIAN RESIDENTS........... 103
LEGAL MATTERS.......................... 104
EXPERTS................................ 104
WHERE YOU CAN FIND MORE INFORMATION.... 104
GLOSSARY............................... 106
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.
------------------------------------
i
<PAGE> 4
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. We have changed our fiscal
year-end from the last Sunday in May to the last Sunday in December. Our first
full fiscal year following this change will be the year ending December 31,
2000. We refer to the seven-month transition period ending December 26, 1999 as
stub year 1999. This prospectus includes financial information for our fiscal
years ended May 1997, 1998 and 1999 and for the six-month period ended November
28, 1999. The power device business, which we purchased on April 13, 1999 from
Samsung Electronics Co., Ltd., reported on a calendar year basis. See "Glossary"
for a description of other terms.
FAIRCHILD INTERNATIONAL
Fairchild International is the second-largest independent semiconductor
company, based on pro forma Fiscal 1999 revenues, focused solely on multi-market
products. Multi-market products are building block components that can be used
in a wide range of applications and are found in virtually all electronic
devices. While other semiconductor companies may generate greater revenues from
the sale of multi-market products, these companies derive more of their revenues
from the sale of other products than from multi-market products. We design,
develop and market analog, discrete, logic and non-volatile memory
semiconductors. Analog semiconductors are used to amplify electric signals and
control power, light, color and sound functions in electronic devices. Discrete
semiconductors perform basic signal amplification and switching functions. Logic
semiconductors utilize ones and zeros, the basic digital language, to provide
decision making functions in electronic circuits, such as turning an electronic
switch on or off. Non-volatile memory semiconductors are used to retain data
after an electrical device has been turned off. We supply customers in a diverse
range of end markets, including the computer, industrial, telecommunications,
consumer electronics and automotive industries. We are particularly strong in
providing discrete and analog power management products, which address the
growing requirement for portability and long battery life for computing and
communication devices.
Our business strategy is designed to maintain our multi-market product
leadership and to focus on value-added products for our customers that leverage
our strengths. Those strengths include developing and manufacturing devices for
managing power in electrical devices and converting physical data such as color,
light and sound into a digital format usable by electronic devices.
Additionally, we believe that we are competitive in our development of
technologies which allow for faster switching of voltages and technologies to
allow circuit boards and peripherals to communicate with one another and in the
design of ultra-small packages. We believe that we are well positioned for
growth as a result of the new products that we are developing, the devices we
have recently introduced, our strength in analog and discrete products and the
increasing semiconductor content of electronic products. We have wafer
fabrication plants in Maine, Utah and South Korea, and assembly facilities in
Malaysia and the Philippines.
Worldwide semiconductor market revenues were approximately $125.6 billion
during 1998 according to the reports of Worldwide Semiconductor Trade Statistics
published by the Semiconductor Industry Association. Since 1990, global
semiconductor market revenues have expanded at a compounded annual growth rate
of approximately 12.0%. We operate primarily in the approximately $55.3 billion
segment of the semiconductor market relating to products that move and shape
electrical signals and which includes analog, discrete and logic products. We
believe that the markets we operate in provide us with attractive growth
opportunities. Revenues for analog and discrete markets are expected to grow
from 1998 to 2001 at compounded annual growth rates of 15.7% and 9.9%,
respectively, according to the Semiconductor Industry Association. Additionally,
we focus on low-voltage CMOS (Complementary Metal Oxide Semiconductor)
fabrication, one of the fastest growing
1
<PAGE> 5
segments of the logic industry. CMOS is one of the most common integrated
circuit fabrication technologies. The low voltage segment of CMOS in which we
compete is expected by Insight/Onsite to grow over the next five years at a
compounded annual growth rate of 13% in terms of revenues. We do not produce
microcontrollers, microprocessors or the complex system-on-a-chip
semiconductors. We also do not produce semiconductors that do not retain data
after an electric device has been turned off, which we refer to as volatile
memory semiconductors.
COMPANY STRENGTHS
We believe our core strengths are the following:
BREADTH OF PRODUCT PORTFOLIO. We provide our customers with one of the
largest product offerings in the industry for analog, discrete, logic and
non-volatile memory devices. Our analog device portfolio comprises over 2,300
products, including offerings in 92 of the top 100 best-selling analog product
types by volume. Our discrete device portfolio comprises over 4,000 products and
we believe it is one of the most comprehensive power device portfolios in the
industry. We develop products for a wide range of market applications, reducing
our dependence on any single product, application or market. In addition, we
believe that our ability to provide our customers with multiple products meets a
growing need among our end users for a single source of supply.
LEADERSHIP IN POWER SOLUTIONS. We believe there is an increasing demand
for a combination of sophisticated computing and communication capabilities,
frequently in the form of portable devices. We are a leader in providing
solutions for managing the power required to operate such devices. Our combined
analog and discrete offering provides a complete solution for power management:
Analog: We provide specific solutions for power conversion, temperature
sensing, management functions, battery chargers and motor controls.
Power Discrete: We provide comprehensive solutions for managing power from
the original power source to end products such as computers, cellular
phones and network devices.
HIGH QUALITY CUSTOMER SERVICE. Our customers recognize us for our high
quality of service. They require a reliable source of supply, often in high
volumes and with short lead times, demand quick responses to technical questions
and seek support in designing new applications which use our products. Because
we are an independent company focused solely on multi-market products, all of
our service and support efforts are tailored to meet these customer needs. As a
result of our efforts, we have received numerous customer and industry awards,
including supplier awards from Compaq Computer Corp., Siemens AG and Acer Inc.
and the European Mid-Size Vendor of the Year award from Dataquest.
HISTORY OF PRODUCT INNOVATION. Our success in introducing new products has
been an important source of our growth and profitability. We have been a
significant innovator in the multi-market segment of the semiconductor industry
with several leading edge technologies and industry firsts, including our
introduction of many new power management solutions over the past three decades
which set new standards for speed and efficiency. Since June 1997, we have
designed and introduced over 500 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 1999 total revenue. Customers in our end user markets include
industry leaders such as Compaq, Ericsson, Lucent, Nortel Networks, Samsung
Electronics and Siemens.
2
<PAGE> 6
EXPERIENCED MANAGEMENT. Our senior management team consists of seven
individuals who have on average approximately 25 years of experience in the
semiconductor industry. Our chief executive officer, Kirk P. Pond, has over 30
years of experience in the industry and has held senior management positions at
Texas Instruments and National Semiconductor. At National Semiconductor, Mr.
Pond was executive vice president and chief operating officer prior to his
current position at Fairchild International.
------------------
We are a holding company with no significant assets other than the stock of
our subsidiary, Fairchild Semiconductor Corporation, all of which is pledged to
secure debt obligations issued by Fairchild Semiconductor Corporation and
guaranteed by us.
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.
3
<PAGE> 7
THE OFFERING
Class A Common Stock offered
(1)........................... 6,140,880 shares by us 17,359,120 shares by the
selling stockholders
Common stock to be outstanding
after this offering(2)...... 66,436,224 shares of Class A Common Stock
28,396,000 shares of Class B Common Stock
--------------------------------------------
Total....................... 94,832,224 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. Our Restated
Certificate of Incorporation provides for
cumulative voting in elections of directors.
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 will not receive any of the proceeds from
the sale of shares by the selling stockholders.
We intend to use the net proceeds from the sale
of shares by us to undertake the first phase of
a multi-year capital investment program. This
investment will be made to increase production
capacity in support of power management and
interface products.
NYSE symbol................... FCS
- -------------------------
(1) Excludes 1,410,000 shares of Class A Common Stock that the underwriters may
purchase from us and 2,115,000 shares of Class A Common Stock that the
underwriters may purchase from one of the selling stockholders to cover
over-allotments of shares, if any.
(2) Based on shares outstanding at November 28, 1999 and excluding 6,968,695
shares of Class A Common Stock reserved for issuance upon exercise of
outstanding stock options after November 28, 1999.
4
<PAGE> 8
SUMMARY HISTORICAL, PRO FORMA AND SUPPLEMENTAL DATA
In the tables below, we present unaudited pro forma financial data for
informational purposes only. Since the information in the tables is a summary,
you should read the following tables in conjunction with other information
contained under the caption "Unaudited Pro Forma Combined Condensed Financial
Statements and Unaudited Supplemental Data," and with the financial statements
and related notes and the other financial information contained elsewhere in
this prospectus.
We present below summary historical, pro forma and supplemental data of
Fairchild International and the power device business. We derived the historical
balance sheet data as of November 28, 1999 and the historical statement of
operations data for the six months ended November 29, 1998 and November 28, 1999
from the unaudited condensed consolidated financial statements included
elsewhere in this prospectus. We derived the historical statement of operations
data for the years ended May 25, 1997, May 31, 1998 and May 30, 1999 from
Fairchild International's audited consolidated financial statements and related
notes, which are included elsewhere in this prospectus. 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 Fairchild International unaudited pro forma statement of operations
data presented below are based upon unaudited pro forma financial statements for
the year ended May 30, 1999 for Fairchild International after giving effect to
the acquisition of the power device business, our initial public offering
consummated on August 9, 1999, and the application of the proceeds from our
initial public offering, as if they had occurred on June 1, 1998. We have not
presented unaudited pro forma statement of operations data for the six months
ended November 28, 1999 because the operating results of the power device
business are included in the historical financial statements for the entire
period, and because this offering has no pro forma effect on income (loss)
applicable to common stockholders. The unaudited balance sheet data, as adjusted
for this offering, are based on assumptions that we believe accurately represent
the effect of this offering and the application of the proceeds of this offering
as described in "Use of Proceeds" as if they had occurred on November 28, 1999.
We derived the historical financial data of the power device business 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 of the power device
business for the twelve months ended March 31, 1999 from the power device
business' unaudited financial statements and related notes, which are not
included in this prospectus. The unaudited pro forma data of the power device
business presented below are based upon unaudited financial statements for the
twelve months ended March 31, 1999 for the power device business and are
adjusted to give pro forma effect to the contracts we entered into with Samsung
Electronics in connection with the acquisition of the power device business, and
to eliminate the historical expenses related to the liabilities that we did not
assume, and the related income tax effect of all pro forma adjustments. The
financial statements of the power device business for the three years ended
December 31, 1998 and the twelve months ended March 31, 1999 have been
translated from South Korean Won into U.S. Dollars, and are presented in
accordance with U.S. GAAP as described in "Selected Historical Financial Data of
the Power Device Business."
5
<PAGE> 9
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MAY 30, 1999 SIX MONTHS
FISCAL YEAR ENDED MAY ---------------------- ENDED NOVEMBER
---------------------- PRO FORMA -------------------
1997 1998 HISTORICAL (1)(2) 1998 1999
-------- -------- ---------- --------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(3)
Revenue:
Analog......................................... $ -- $ 32.0 $ 95.8 $ 228.9 $ 34.6 $ 151.3
Discrete....................................... 164.5 187.3 222.8 428.9 84.5 277.6
Logic.......................................... 285.3 303.0 267.6 267.6 128.7 156.7
Memory(4)...................................... 138.0 113.5 67.9 67.9 39.3 33.9
Contract manufacturing services................ 104.2 153.4 81.0 118.6 32.1 61.8
------- ------- ------- -------- -------- --------
Total revenue.................................... $ 692.0 $ 789.2 $ 735.1 $1,111.9 $ 319.2 $ 681.3
======= ======= ======= ======== ======== ========
Gross profit(4).................................. $ 152.5 $ 230.5 $ 152.3 $ 279.5 $ 66.0 $ 208.8
Research and development......................... 18.9 35.7 39.3 52.4 18.3 29.7
Selling, general and administrative(5)........... 96.4 92.0 105.1 161.5 46.2 109.7
Litigation settlement expense(6)................. -- -- -- 58.0 -- --
Restructuring, impairments and other
charges(7)..................................... 5.3 15.5 55.3 55.3 4.5 --
------- ------- ------- -------- -------- --------
Operating income (loss)........................ 31.9 87.3 (47.4) (47.7) (3.0) 69.4
Interest expense, net(8)......................... 11.2 54.5 71.8 79.9 29.6 50.8
Other expense (income), net...................... 1.4 -- -- (0.1) -- --
Provision (benefit) for income taxes............. 3.8 10.7 (5.1) (5.1) (6.5) 4.1
------- ------- ------- -------- -------- --------
Income (loss) before cumulative effect of
change in accounting principle(9)............ $ 15.5 $ 22.1 $(114.1) $ (122.4) $ (26.1) $ 14.5
======= ======= ======= ======== ======== ========
Net income (loss) applicable to common stock-
holders before cumulative effect of change in
accounting principle.................................... $ 13.4 $(123.9) $ (122.4) $ (30.8) $ 12.5
======= ======= ======== ======== ========
EARNINGS PER COMMON SHARE(10):
Basic..................................................... $ 0.21 $ (1.97) $ (1.39) $ (0.49) $ 0.16
Diluted................................................... $ 0.20 $ (1.97) $ (1.39) $ (0.49) $ 0.15
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (IN MILLIONS):
Basic..................................................... 62.8 62.9 88.1 62.9 78.7
Diluted................................................... 65.0 62.9 88.1 62.9 82.0
OTHER FINANCIAL DATA:(1)
Amortization of intangibles(11).................. $ -- $ 1.4 $ 8.4 $ 33.5 $ 1.6 $ 16.9
Depreciation and other amortization.............. 77.1 83.2 95.3 117.6 45.8 54.1
Capital expenditures............................. 47.1 78.0 46.2 52.5 19.4 53.8
</TABLE>
6
<PAGE> 10
<TABLE>
<CAPTION>
AS OF NOVEMBER 28, 1999
-------------------------------
AS ADJUSTED
HISTORICAL FOR THIS OFFERING
---------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents................................... $ 123.6 $ 284.6
Accounts receivable, net.................................... 145.9 145.9
Inventories................................................. 162.4 162.4
Total assets................................................ 1,115.2 1,276.2
Long-term debt, including current portion................... 718.6 718.6
Total stockholders' equity.................................. 205.4 366.4
</TABLE>
POWER DEVICE BUSINESS
<TABLE>
<CAPTION>
YEAR ENDED TWELVE MONTHS ENDED
DECEMBER 31, MARCH 31, 1999
-------------------------- --------------------------
1996 1997 1998 HISTORICAL PRO FORMA(12)
------ ------ ------ ---------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................................... $471.8 $478.1 $386.5 $406.7 $451.0
Gross profit.................................... $ 56.5 $131.0 $137.3 $129.0 $153.4
Research and development........................ 18.6 19.2 15.2 14.8 14.8
Selling, general and administrative............. 29.0 34.3 33.8 36.1 36.5
Litigation settlement expense(6)................ -- -- 58.0 58.0 58.0
------ ------ ------ ------ ------
Operating income................................ $ 8.9 $ 77.5 $ 30.3 $ 20.1 $ 44.1
====== ====== ====== ====== ======
OTHER FINANCIAL DATA:
Capital expenditures............................ 118.1 10.9 8.6 7.1 7.1
</TABLE>
- -------------------------
(1) The pro forma combined financial data includes the pro forma results of
operations for the power device business for the twelve months ended March
31, 1999. The pro forma combined financial data excludes the actual results
of our Power Device Products Group for the period from April 14, 1999 to
May 30, 1999. For the period from April 14, 1999 to May 30, 1999,
amortization of intangibles, depreciation and amortization and capital
expenditures for our Power Device Products Group were $5.0 million, $2.1
million and $0.8 million, respectively. See "Unaudited Pro Forma Combined
Condensed Financial Statement and Unaudited Supplemental Data."
(2) Pro forma combined financial data is provided to adjust for the effect of
Fairchild International's initial public offering, consummated on August 9,
1999. See "Unaudited Pro Forma Combined Condensed Financial Statement and
Unaudited Supplemental Data."
(3) For the fiscal year ended May 1997, statement of operations data includes
the direct expense of the Fairchild Semiconductor business of National
Semiconductor and allocated expenses from National Semiconductor. Such
amounts may not be comparable to data for Fiscal 1998 or to the historical
and pro forma data for Fiscal 1999.
(4) Revenues and gross profit in Fiscal 1999 were negatively impacted by $5.5
million and $15.4 million, respectively, due to one-time write-offs for
additional sales and inventory reserves as a result of our Memory division
restructuring. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Fairchild
International -- Restructuring."
(5) For the six months ended November 1999, selling, general and administrative
expenses include $8.3 million for a one-time write-off of receivables from
the management investors to pay their federal and state individual income
tax liabilities resulting from the lapse of risks of forfeiture with
respect to their stock ownership. Such receivables were cancelled as a
result of our initial public offering. This write-off includes amounts to
discharge the individual tax liabilities associated with the cancellation.
(6) Represents a one-time charge for settlement by Samsung Electronics of a
patent infringement lawsuit attributable to the power device business. The
associated liability was retained by Samsung Electronics.
7
<PAGE> 11
(7) In Fiscal 1997, restructuring, impairments and other charges consisted of
severance and other costs related to lay-offs that occurred in the first
quarter of Fiscal 1997. In Fiscal 1998, such charges consisted of
in-process research and development associated with the acquisition of the
Raytheon Semiconductor business. In Fiscal 1999, such charges consisted of
$34.0 million of in-process research and development associated with the
acquisition of the power device business and $21.3 million related to
various restructuring actions. For the six months ended November 1998, such
charges consisted of severance and other costs associated with a workforce
reduction. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Fairchild International -- Restructuring."
(8) For the six months ended November 1999, interest expense includes $7.2
million for the write-off of unamortized debt issuance costs associated
with debt repaid and $0.3 million for a prepayment premium on a 12.5%
Subordinated Note Due 2008 repaid as a result of Fairchild International's
initial public offering consummated on August 9, 1999.
(9) 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.
(10) 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.
(11) Amortization of intangibles primarily represents the amortization of
identifiable acquisition-related intangible assets.
(12) Pro forma data for the twelve months ended March 31, 1999 has been
presented to be consistent with the pro forma data for Fiscal 1999
presented for Fairchild International. See "Unaudited Pro Forma Combined
Condensed Financial Statement and Unaudited Supplemental Data."
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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.
FOLLOWING THIS OFFERING, WE WILL HAVE $718.6 MILLION OF TOTAL INDEBTEDNESS AND A
DEBT TO EQUITY RATIO OF 2.0 TO 1.0, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL
HEALTH AND LIMIT OUR ABILITY TO GROW AND COMPETE.
After giving effect to this offering and the application of the proceeds of
this offering as described in "Use of Proceeds," as of November 28, 1999, we
would have had total indebtedness of $718.6 million, stockholders' equity of
$366.4 million and a ratio of debt to equity of 2.0 to 1.0. In addition, we and
our subsidiaries may be able to incur substantial additional indebtedness in the
future, which would increase our leverage.
Our substantial indebtedness:
- would have required us to dedicate, on a pro forma basis, approximately
$70.9 million of our cash flow to interest payments on our indebtedness
in Fiscal 1999, thereby reducing the availability of our cash flow to
fund working capital, capital expenditures, research and development
efforts and other general corporate purposes;
- increases our vulnerability to general adverse economic and industry
conditions;
- limits our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- restricts us from making strategic acquisitions, introducing new
technologies or exploiting business opportunities; and
- places us at a competitive disadvantage compared to our competitors that
have less debt.
See "Capitalization" and "Unaudited Pro Forma Combined Condensed Financial
Statement and Unaudited Supplemental Data."
WE MAY NOT BE ABLE TO GENERATE THE NECESSARY AMOUNT OF CASH TO SERVICE OUR
EXISTING DEBT, WHICH MAY REQUIRE US TO REFINANCE OUR DEBT OR DEFAULT ON OUR
SCHEDULED DEBT PAYMENTS.
On a pro forma basis after giving effect to the acquisition of the power
device business, the financings in connection with the acquisition and the
application of the proceeds of such financings, interest expense for Fiscal 1999
would have been $79.9 million. On a pro forma basis after giving effect to the
acquisition of the power device business, the financings in connection with the
acquisition and the application of the proceeds of such financings, our fixed
charges for Fiscal 1999 exceeded our earnings by $127.5 million. On a historical
basis, our fixed charges for Fiscal 1999 exceeded our earnings by $119.2
million. Our historical financial results have been, and we expect our future
financial results will be, subject to substantial fluctuations.
We cannot assure you that our business will generate sufficient cash flow
from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule or at all or that future borrowings
will be available to us under the senior credit facilities in an amount
sufficient to enable us to pay our indebtedness or to fund our other liquidity
needs. In addition, because our senior credit facilities, which represented
approximately 16.5% of our indebtedness as of November 28, 1999, have variable
interest rates, the cost of those borrowings will increase if market interest
rates increase. If we are unable to service our indebtedness, we may need to
refinance all or a portion of our indebtedness on or before maturity. We cannot
assure you that we would be able to refinance any of our indebtedness on
commercially reasonable terms or at all, which could cause us to default on our
obligations and impair our liquidity.
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See "-- Cyclical Industry," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Fairchild International" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Power Device Business."
OUR DEBT INSTRUMENTS RESTRICT OR PROHIBIT OUR ABILITY TO ENGAGE IN OR ENTER INTO
BUSINESS, OPERATING AND FINANCING ARRANGEMENTS, WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO TAKE ADVANTAGE OF POTENTIALLY PROFITABLE BUSINESS OPPORTUNITIES.
The operating and financial restrictions and covenants in our debt
instruments may limit our ability to finance our future operations or capital
needs or engage in other business activities that may be in our interest. Our
debt instruments impose significant operating and financial restrictions on us,
affecting our ability to incur additional indebtedness or create liens on our
assets, pay dividends, sell assets, engage in mergers or acquisitions, make
investments or engage in other business activities, which could place us at a
disadvantage relative to competitors not subject to such limitations. Failure to
comply with any such restrictions could result in a default under the terms of
our debt instruments. In the event of any such default, our debtholders could
demand payment of all borrowings outstanding, including accrued interest and
other fees. In addition, if we were unable to repay any borrowings under our
senior credit facilities when due, the lenders could proceed against their
collateral, which consists of substantially all of the assets of our company,
Fairchild Semiconductor Corporation and its subsidiary guarantors. If the
indebtedness under our debt instruments were to be accelerated, the value of our
common stock would likely decrease significantly.
AS A HOLDING COMPANY, WE ARE TOTALLY DEPENDENT ON DIVIDENDS FROM OUR OPERATING
SUBSIDIARIES TO PAY DIVIDENDS.
We expect our subsidiaries to retain substantially all of their earnings to
meet their own obligations. As a result, and because our subsidiary, Fairchild
Semiconductor Corporation, is prohibited by terms in its debt instruments from
making payments to us, it is unlikely that we will be able to make dividend
payments in the near future. We are a holding company with no business
operations, and our only significant asset is the outstanding capital stock of
our subsidiaries. As we intend to contribute substantially all of the net
proceeds that we receive from this offering to our wholly owned subsidiary,
Fairchild Semiconductor Corporation, for its capital expenditures and general
corporate purposes, we will rely on payments from our subsidiaries to meet our
future obligations. Absent such payments, we will not be able to pay cash
dividends on our Class A Common Stock. We currently expect that the earnings and
cash flow of our subsidiaries will be retained and used by them in their
operations, including by Fairchild Semiconductor Corporation to service its debt
obligations. Even if we decided 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, including
restrictions in Fairchild Semiconductor Corporation's debt instruments, will
permit such dividends or distributions.
See "-- Substantial Leverage" and "-- Restrictions and Covenants in Our
Debt Instruments."
DOWNTURNS IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY OR CHANGES IN END USER
MARKET DEMANDS COULD REDUCE THE VALUE OF OUR BUSINESS.
The semiconductor industry is highly cyclical and the value of our business
may decline during the "down" portion of these cycles. During the latter half of
Fiscal 1998 and most of Fiscal 1999, we, as well as many others in our industry,
experienced significant declines in the pricing of our products as customers
reduced demand forecasts and manufacturers reduced prices to keep capacity
utilization high. We believe these trends were due primarily to the Asian
financial crisis and excess personal computer inventories. Although markets for
semiconductors have improved, we cannot assure you
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that they will continue to improve or that our markets will not experience
renewed, possibly more severe and prolonged, downturns in the future. In
addition, we may experience significant changes in our profitability as a result
of variations in sales, changes in product mix, price competition for orders and
the costs associated with the introduction of new products. The markets for our
products depend on continued demand for personal computer, industrial,
telecommunications, consumer electronics and automotive goods, and these end
user markets may experience changes in demand that will adversely affect our
prospects.
NEW TECHNOLOGIES COULD RESULT IN THE DEVELOPMENT OF NEW PRODUCTS AND A DECREASE
IN DEMAND FOR OUR PRODUCTS, AND WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS TO
SATISFY CHANGES IN CONSUMER DEMANDS.
Our failure to develop new technologies, or react to changes in existing
technologies, could materially delay our development of new products, which
could result in decreased revenues and a loss of market share to our
competitors. Rapidly changing technologies and industry standards, along with
frequent new product introductions, characterize the semiconductor industry. Our
financial performance depends on our ability to design, develop, manufacture,
assemble, test, market and support new products and enhancements on a timely and
cost-effective basis. For example, because we do not have a Flash Memory product
which is becoming a more significant product in the memory market, our revenues
from the memory segment of our business have decreased. We cannot assure you
that we will successfully identify new product opportunities and develop and
bring new products to market in a timely and cost-effective manner, or that
products or technologies developed by others will not render our products or
technologies obsolete or noncompetitive. A fundamental shift in technologies in
our product markets could have a material adverse effect on our competitive
position within the industry.
THE SEMICONDUCTOR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD
REDUCE THE VALUE OF AN INVESTMENT IN OUR COMPANY.
The semiconductor industry, and the multi-market semiconductor product
markets in particular, is highly competitive. Competition is based on price,
product performance, quality, reliability and customer service. In addition,
even in strong markets, price pressures may emerge as competitors attempt to
gain a greater market share by lowering prices. Competition in the various
markets in which we participate comes from companies of various sizes, many of
which are larger and have greater financial and other resources than we have and
thus are better able to pursue acquisition candidates and can better withstand
adverse economic or market conditions. In addition, companies not currently in
direct competition with us may introduce competing products in the future.
BECAUSE THE POWER DEVICE BUSINESS PREVIOUSLY OPERATED AS A DIVISION OF SAMSUNG
ELECTRONICS, THE COSTS OF OPERATING THIS BUSINESS AS AN INDEPENDENT ENTITY MAY
BE SIGNIFICANTLY GREATER THAN INITIALLY ESTIMATED.
The operation of the power device business as an independent entity may
result in our incurring operating costs and expenses significantly greater than
we anticipated prior to the acquisition of the power device business. Prior to
our purchase, the power device business was operated as a division of Samsung
Electronics. During 1998, the power device business incurred costs for research
and development, sales and marketing and general and administrative activities.
These costs represent expenses incurred directly by the power device business
and charges allocated to it by Samsung Electronics. The power device business
now obtains many of these services on an arm's length basis. However, to provide
these services for a transition period after the acquisition of the power device
business, we entered into a Transitional Services Agreement with Samsung
Electronics under which the power device business continues to obtain a number
of these services. We cannot assure you that upon termination of the
Transitional Services Agreement, we will be able to obtain similar services on
comparable terms. The pro forma data contained in this prospectus are based on
our estimates as to
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expenses on a stand-alone basis, including the effect of the Transitional
Services Agreement with Samsung Electronics, and contract manufacturing revenue
under our manufacturing agreements with Samsung Electronics. We cannot assure
you that such estimates are accurate or will reflect the actual expenses or
revenues of the power device business.
See "Certain Relationships and Related Transactions."
WE ENTERED INTO A NUMBER OF LONG-TERM SUPPLY AND SUPPORT CONTRACTS WITH SAMSUNG
ELECTRONICS IN CONNECTION WITH THE ACQUISITION OF THE POWER DEVICE BUSINESS, AND
ANY DECREASE IN THE PURCHASE REQUIREMENTS OF SAMSUNG ELECTRONICS OR THE
INABILITY OF SAMSUNG ELECTRONICS TO MEET ITS CONTRACTUAL OBLIGATIONS COULD
SUBSTANTIALLY REDUCE THE FINANCIAL PERFORMANCE OF OUR KOREAN SUBSIDIARY.
As a result of the acquisition of the power device business, we have
numerous arrangements with Samsung Electronics, including arrangements relating
to product sales, designation as a vendor to affiliated Samsung companies and
other services. Any material adverse change in the purchase requirements of
Samsung Electronics, in its ability to supply the agreed-upon services or in its
ability to fulfill its other obligations could have a material adverse effect on
our Korean subsidiary. Although historically the power device business generated
significant revenues from the sale of products to affiliated Samsung companies,
we cannot assure you that we will be able to sell any products to affiliated
Samsung companies or that the designation of the power device business as a
vendor to those affiliated Samsung companies will generate any revenues for our
company. Furthermore, under the Korean Fair Trade Law, the Fair Trade Commission
may issue an order requiring a change in the terms and conditions of the
agreements between us and Samsung Electronics if it concludes that Samsung
Electronics has provided us with undue support or discriminated against our
competitors.
See "Certain Relationships and Related Transactions."
THE POWER DEVICE BUSINESS SUBJECTS OUR COMPANY TO RISKS INHERENT IN DOING
BUSINESS IN KOREA, INCLUDING LABOR RISK, POLITICAL RISK AND CURRENCY RISK.
As a result of the acquisition of the power device business, we have
significant operations in South Korea and are subject to risks associated with
doing business in that country.
- In addition to other risks disclosed relating to international
operations, some businesses in South Korea are subject to labor unrest.
Also, relations between South Korea and North Korea have been tense over
most of South Korea's history. Events involving, among other things,
North Korea's refusal to comply with the Nuclear Non-Proliferation Treaty
and several naval confrontations, have caused the level of tension
between the two countries to increase. We cannot assure you as to whether
or when this situation will be resolved or change abruptly as a result of
current or future events. An adverse change in economic or political
conditions in South Korea or in its relations with North Korea could have
a material adverse effect on our Korean subsidiary.
- The power device business' sales are denominated primarily in U.S.
Dollars while a significant portion of its costs of goods sold and its
operating expenses are denominated in South Korean Won. Although we have
taken steps to fix the costs subject to currency fluctuations and to
balance U.S. Dollar vs. Won costs, a significant decrease in the value of
the U.S. Dollar relative to the Won could have a material adverse effect
on our financial performance and results of operations.
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A CHANGE IN FOREIGN TAX LAWS OR A DIFFERENCE IN THE CONSTRUCTION OF CURRENT
FOREIGN TAX LAWS BY RELEVANT FOREIGN AUTHORITIES COULD RESULT IN OUR NOT
RECOGNIZING THE BENEFITS WE ANTICIPATED IN CONNECTION WITH THE TRANSACTION
STRUCTURE USED TO CONSUMMATE THE ACQUISITION OF THE POWER DEVICE BUSINESS.
The transaction structure we utilized for the acquisition of the power
device business is based on assumptions about the various tax laws, including
withholding tax, and other relevant laws of foreign jurisdictions. In addition,
Fairchild Korea Semiconductor Ltd., our wholly owned subsidiary which owns the
power device business, has been granted a ten year tax holiday. The first seven
years are tax-free, followed by three years of income taxes at 50% of the
statutory rate. If our assumptions about tax and other relevant laws are
incorrect, or if foreign taxing jurisdictions were to change or modify the
relevant laws, or if Fairchild Korea Semiconductor Ltd. were to lose its tax
holiday, we could suffer adverse tax and other financial consequences or lose
the benefits anticipated from our transaction structure.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS NOT FACED BY DOMESTIC
COMPETITORS.
We cannot assure you that we will be successful in overcoming the risks
related to or arising from operating in international markets. We maintain
significant operations in Cebu, the Philippines, Penang, Malaysia and, through
the power device business, in South Korea. The following are risks inherent in
doing business on an international level:
- changes in import duties;
- trade restrictions;
- transportation delays;
- work stoppages;
- economic and political instability;
- foreign currency fluctuations; and
- the laws, including tax laws, and policies of the United States and of
the countries in which we manufacture our products.
PRODUCTION TIME AND THE OVERALL COST OF OUR PRODUCTS COULD INCREASE IF WE WERE
TO LOSE ONE OF OUR PRIMARY SUPPLIERS OR IF A PRIMARY SUPPLIER INCREASED THE
PRICES OF RAW MATERIALS.
Our manufacturing operations depend upon obtaining adequate supplies of raw
materials on a timely basis, and our results of operations could be adversely
affected if we were unable to obtain adequate supplies of raw materials in a
timely manner or if the costs of raw materials increased significantly. We
purchase raw materials such as silicon wafers, lead frames, mold compound,
ceramic packages and chemicals and gases from a limited number of suppliers on a
just-in-time basis. From time to time, suppliers may extend lead times, limit
supplies or increase prices due to capacity constraints or other factors. In
addition, we subcontract a minority of our wafer fabrication and assembly and
test operations to other manufacturers, including Torex, NS Electronics Ltd.,
Samsung Electronics and National Semiconductor. Our operations and ability to
satisfy customer obligations could be adversely affected if our relationships
with these subcontractors were disrupted or terminated.
DELAYS IN BEGINNING PRODUCTION AT NEW FACILITIES, IMPLEMENTING NEW PRODUCTION
TECHNIQUES, OR IN CURING PROBLEMS ASSOCIATED WITH TECHNICAL EQUIPMENT
MALFUNCTIONS ALL COULD ADVERSELY AFFECT OUR MANUFACTURING EFFICIENCIES.
Our manufacturing efficiency will be an important factor in our future
profitability, and we cannot assure you that we will be able to maintain our
manufacturing efficiency or increase manufacturing efficiency to the same extent
as our competitors. Our manufacturing processes are highly complex, require
advanced and costly equipment and are continuously being modified in an effort
to improve yields and product performance. Impurities or other difficulties in
the manufacturing process can lower yields.
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In addition, as is common in the semiconductor industry, we have from time
to time experienced difficulty in beginning production at new facilities or in
effecting transitions to new manufacturing processes. As a consequence, we have
suffered delays in product deliveries or reduced yields. We may experience
manufacturing problems in achieving acceptable yields or experience product
delivery delays in the future as a result of, among other things, capacity
constraints, construction delays, upgrading or expanding existing facilities or
changing our process technologies, any of which could result in a loss of future
revenues. Our operating results could also be adversely affected by the increase
in fixed costs and operating expenses related to increases in production
capacity if revenues do not increase proportionately.
THE FAILURE OF NATIONAL SEMICONDUCTOR TO MAINTAIN ITS PURCHASE REQUIREMENTS OR
MEET ITS CONTRACTUAL OBLIGATIONS COULD ADVERSELY AFFECT OUR CAPACITY UTILIZATION
AND PROFITABILITY.
We have several arrangements with National Semiconductor relating to the
provision of our services and the sale of our products. Any material adverse
change in the arrangements, such as National Semiconductor's ability to provide
the agreed-upon services, its ability to fulfill its intellectual property
indemnity obligations or its ability to fulfill its other obligations, could
have a material adverse effect on us. In addition, any material adverse change
in the purchase requirements of National Semiconductor under the foundry
services agreement, or failure to continue making purchases after expiration of
the agreement on June 11, 2000, could adversely affect our factory utilization
and profitability.
BECAUSE A LIMITED NUMBER OF PERSONS, INCLUDING MEMBERS OF OUR MANAGEMENT TEAM,
OWN A SUBSTANTIAL NUMBER OF OUR SHARES, DECISIONS MAY BE MADE BY THEM THAT MAY
BE DETRIMENTAL TO YOUR INTERESTS.
Upon completion of this offering, Sterling Holding Company, LLC and our
directors and executive officers will own 10,280,494 shares (excluding shares
underlying vested options), or approximately 15.5%, of the outstanding Class A
Common Stock, our only class of voting stock, and 28,396,000 shares, or 100%, of
the outstanding 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 significantly influence our affairs and are able to
influence the outcome of matters required to be submitted to stockholders for
approval, including the election of our directors and amendment of our
Certificate of Incorporation. We cannot assure you that such persons will not
exercise their influence over us in a manner detrimental to your interests.
See "Principal and Selling Stockholders."
BECAUSE MUCH OF OUR SUCCESS AND VALUE LIES IN OUR OWNERSHIP AND USE OF
INTELLECTUAL PROPERTY, OUR FAILURE TO PROTECT THAT PROPERTY COULD ADVERSELY
AFFECT OUR FUTURE GROWTH AND CONTINUED SUCCESS.
Failure to protect our existing intellectual property rights may result in
our losing valuable technologies or having to pay others for infringing on their
intellectual property rights. We rely on patent, trade secret, trademark and
copyright law to protect such technologies. Some of our technologies are not
covered by any patent or patent application, and we cannot assure you that:
- any of the more than 250 U.S. patents owned by us or numerous other
patents which third parties license to us will not be invalidated,
circumvented, challenged or licensed to others; or
- any of our pending or future patent applications will be issued within
the scope of the claims sought by us, if at all.
In addition, effective patent, trademark, copyright and trade secret
protection may be unavailable, limited or not applied for in certain foreign
countries.
We also seek to protect our proprietary technologies, including
technologies that may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventors' rights agreements with our
collaborators, advisors, employees and consultants. We cannot assure you that
these agreements will not be breached, that we will have adequate remedies for
any breach or that
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such persons or institutions will not assert rights to intellectual property
arising out of such research. Certain of our technologies have been licensed on
a non-exclusive basis from National Semiconductor which may license such
technologies to others, including, commencing on March 11, 2002, our
competitors. In addition, under a technology licensing and transfer agreement,
National Semiconductor has limited royalty-free, worldwide license rights
(without right to sublicense) to some of our technologies. If necessary or
desirable, we may seek licenses under patents or intellectual property rights
claimed by others. However, we cannot assure you that we will obtain such
licenses or that the terms of any offered licenses will be acceptable to us. The
failure to obtain a license from a third party for technologies we use could
cause us to incur substantial liabilities and to suspend the manufacture or
shipment of products or our use of processes requiring the technologies.
OUR FAILURE TO OBTAIN OR MAINTAIN THE RIGHT TO USE CERTAIN TECHNOLOGIES MAY
NEGATIVELY AFFECT OUR FINANCIAL RESULTS.
Our future success and competitive position depend in part upon our ability
to obtain or maintain certain proprietary technologies used in our principal
products, which is achieved in part by defending claims by our competitors of
intellectual property infringement. While we are not currently engaged in
intellectual property litigation that we believe will have a material adverse
effect, we are involved in lawsuits, and could become subject to other lawsuits,
in which it is alleged that we have infringed upon the intellectual property
rights of others. See "Business -- Legal Proceedings." Our involvement in
existing and future intellectual property litigation could result in significant
expense to us, adversely affecting sales of the challenged product or
technologies and diverting the efforts of our technical and management
personnel, whether or not such litigation is resolved in our favor. In the event
of an adverse outcome as a defendant in any such litigation, we may be required
to:
- pay substantial damages;
- cease the manufacture, use, sale or importation of infringing products;
- expend significant resources to develop or acquire non-infringing
technologies;
- discontinue processes; or
- obtain licenses to the infringing technologies.
We cannot assure you that we would be successful in such development or
acquisition or that such licenses would be available under reasonable terms. Any
such development, acquisition or license could require the expenditure of
substantial time and other resources.
WE MAY NOT BE ABLE TO CONSUMMATE FUTURE ACQUISITIONS, AND CONSEQUENCES OF THOSE
ACQUISITIONS WHICH WE DO COMPLETE MAY ADVERSELY AFFECT US.
We plan to continue to pursue additional acquisitions of related
businesses. The expense incurred in consummating the future acquisition of
related businesses, or our failure or inability to integrate such businesses
successfully into our existing business, could result in our incurring
unanticipated expenses and losses. We plan to continue to pursue additional
acquisitions of related businesses in the future. We cannot assure you, however,
that we will be able to identify or finance additional acquisitions or that, if
consummated, we will realize any anticipated benefits from such acquisitions.
Should we successfully acquire another business, the process of integrating
acquired operations into our existing operations may result in unforeseen
operating difficulties and may require significant financial resources that
would otherwise be available for the ongoing development or expansion of our
existing operations. In addition, although Samsung Electronics assists us in
integrating the operations of the power device business into our operations
pursuant to the Transitional Services Agreement, we may encounter unforeseen
obstacles or costs in such integration. Possible future acquisitions could
result in the incurrence of additional debt, contingent liabilities and
amortization expenses related to
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goodwill and other intangible assets, all of which could have a material adverse
effect on our financial condition and operating results.
47,332,465, OR 49.9%, OF OUR TOTAL OUTSTANDING SHARES OF COMMON STOCK (AFTER
GIVING EFFECT TO THIS OFFERING) MAY BE SOLD INTO THE MARKET IN THE NEAR FUTURE;
FUTURE SALES OF THOSE SHARES COULD DEPRESS THE MARKET PRICE OF OUR CLASS A
COMMON STOCK.
Immediately after this offering, the public market for our Class A Common
Stock will include the 23,500,000 shares of Class A Common Stock that we and the
selling stockholders are selling in this offering, assuming the over-allotment
option is not exercised, and the 23,000,000 shares of Class A Common Stock
previously sold in our initial public offering (excluding shares issued or
issuable in connection with employee benefit plans and subsequently sold into
the public market). At that time, an additional 18,936,465 unregistered shares
of Class A Common Stock will be outstanding and 28,396,000 unregistered shares
of Class B Common Stock will be outstanding. Shares of Class A Common Stock and
Class B Common Stock are convertible into shares of each other on a one-to-one
basis. All unregistered shares of common stock will be eligible for sale into
the public market immediately following this offering, except for 10,219,270
shares of Class A Common Stock (and all shares of Class A Common Stock issued
upon conversion of Shares of Class B Common Stock) held by our affiliates
(excluding shares underlying vested options), which will be eligible for sale
into the public market subject only to the limitations under Rule 144 under the
Securities Act of 1933 (except the holding period limitation), or unless
otherwise restricted. We expect that 38,632,570 shares of Class A Common Stock
and Class B Common Stock (or 40.7% of the total number of shares of common stock
outstanding) held by some of our existing stockholders will be subject to
"lock-up" agreements that will prohibit such stockholders from selling such
shares for 90 days after the consummation of this offering. When the 90-day
"lock-up" period expires, or if Credit Suisse First Boston Corporation consents,
in its sole discretion, to an earlier sale, the existing stockholders subject to
those agreements will be able to sell their shares in the public market, subject
to the limitations under Rule 144 under the Securities Act of 1933 (except the
holding period limitation). If our existing stockholders sell a large number of
shares, the market price of shares of Class A Common Stock could decline, as
such sales may be viewed by the public as an indication of an upcoming or
recently occurring shortfall in the financial performance of our company.
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, some of our existing stockholders have the right to
require us to register their shares, which may facilitate their sale of shares
in the public market. See "Shares Eligible for Future Sale."
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933. 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
International," "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 are based upon or 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; significant litigation 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.
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USE OF PROCEEDS
The sale of Class A Common Stock in this offering by the selling
stockholders will be for their own accounts and we will not receive any of the
proceeds from such sale. The net proceeds received by us from the sale of Class
A Common Stock by us in this offering, assuming the underwriters do not exercise
their over-allotment option, and after deducting underwriting discounts and
commissions and estimated offering expenses of $8.6 million, will be
approximately $161.0 million, at an assumed offering price of $27.625 per share
(the last reported sale price on the New York Stock Exchange on January 3,
2000). The net proceeds received by us from the sale of Class A Common Stock by
us in this offering will be used to undertake the first phase of a multi-year
capital investment program. Prior to such use, the net proceeds will be invested
in accordance with our usual cash management practices.
Fairchild International's senior credit facilities contain provisions
requiring the repayment of senior debt with a portion of the net proceeds from
this offering and annual restrictions on the amount of our capital expenditures.
We are currently seeking waivers of these provisions.
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
Capital Stock."
PRICE RANGE OF COMMON STOCK
Our Class A Common Stock has been traded on the New York Stock Exchange
since August 4, 1999 under the symbol "FCS." Prior to that time, there was no
public market for our common stock, and there is currently no public market for
our Class B Common Stock. The following table sets forth, for the periods
indicated, the high and low prices per share of our Class A Common Stock as
reported in composite New York Stock Exchange trading.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
First quarter of stub year 1999 (from August 4 to August 29,
1999)..................................................... $28.50 $18.50
Second quarter of stub year 1999 (from August 30 to November
28, 1999)................................................... $32.00 $19.50
</TABLE>
On January 3, 2000, the last reported sale price for our Class A Common
Stock was $27.625 per share. As of November 28, 1999, there were approximately
777 holders of record of our Class A Common Stock.
18
<PAGE> 22
CAPITALIZATION
The following table sets forth the capitalization of our company as of
November 28, 1999 (i) on an actual basis and (ii) as adjusted to give pro forma
effect to this offering and the application of the proceeds of this offering as
described under "Use of Proceeds." This table should be read in conjunction with
"Unaudited Pro Forma Combined Condensed Financial Statement and Unaudited
Supplemental Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Fairchild International," "Management's Discussion
and Analysis of Financial Condition and Results of Operations of the Power
Device Business" and the financial statements of Fairchild International and the
power device business included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF NOVEMBER 28, 1999
------------------------
AS ADJUSTED
FOR THIS
ACTUAL OFFERING
-------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents................................... $ 123.6 $ 284.6
======= =========
Long-term debt, including current portion:
Senior Credit Facilities:
Revolving Credit Facility(1)........................... $ -- $ --
Tranche B Facility(2).................................. 118.6 118.6
10 1/8% Senior Subordinated Notes Due 2007................ 300.0 300.0
10 3/8% Senior Subordinated Notes Due 2007................ 300.0 300.0
------- ---------
Total long-term debt, including current portion...... 718.6 718.6
------- ---------
Stockholders' Equity:
Class A Common Stock, $.01 par value per share:
110,000,000 shares authorized, 60,295,344 shares
issued and outstanding, actual; 110,000,000 shares
authorized, 66,436,224 shares issued and outstanding,
as adjusted for this offering......................... 0.6 0.7
Class B Common Stock, $.01 par value per share:
110,000,000 shares authorized, 28,396,000 shares
issued and outstanding, actual and as adjusted for
this offering......................................... 0.3 0.3
Additional paid-in capital............................. 448.6 609.5
Accumulated deficit.................................... (238.2) (238.2)
Treasury stock (at cost)............................... (5.9) (5.9)
------- ---------
Total stockholders' equity........................... 205.4 366.4
------- ---------
Total capitalization.............................. $ 924.0 $ 1,085.0
======= =========
</TABLE>
- -------------------------
(1) Borrowings of up to $100.0 million under the revolving credit facility are
available for working capital and general corporate purposes.
(2) At November 28, 1999, the weighted average interest rate with respect to the
tranche B term loan was approximately 8.38% per annum.
19
<PAGE> 23
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENT AND UNAUDITED SUPPLEMENTAL DATA
The following unaudited pro forma combined condensed financial statement is
based on the historical financial statements of Fairchild International, which
are included elsewhere in this prospectus, and historical unaudited financial
statements of the power device business, which are not included in this
prospectus. The acquisition of the power device business was consummated on
April 13, 1999 and, accordingly, Fairchild International's historical
consolidated statements of operations include the results of operations of the
power device business beginning April 14, 1999.
The Unaudited Pro Forma Combined Condensed Statement of Operations gives
effect to the acquisition of the power device business, the financings in
connection with the acquisition, the application of the proceeds of such
financings, Fairchild International's initial public offering consummated on
August 9, 1999 and the application of the proceeds of the initial public
offering, as if they were consummated on June 1, 1998. All of the pro forma
adjustments are described more fully in the accompanying notes. The pro forma
adjustments are based upon preliminary estimates and assumptions that we believe
are reasonable under the circumstances. In our opinion, all adjustments have
been made that are necessary to present fairly the pro forma data. Final amounts
could differ from those set forth below.
The Unaudited Pro Forma Combined Condensed Statement of Operations for the
fiscal year ended May 30, 1999 includes the historical statement of operations
of the power device business for the twelve months ended March 31, 1999.
Accordingly, the post-acquisition results of operations of our Power Device
Products Group for the period from April 14, 1999 through May 30, 1999 have been
excluded in the Unaudited Pro Forma Combined Condensed Statement of Operations
for the fiscal year ended May 30, 1999.
The power device business' historical financial information reflected in
the pro forma financial 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 International 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 International has been
advised by Samsung Electronics that all of the allocations and estimates
reflected in the power device business' financial statements are based on
assumptions that Samsung Electronics believes are reasonable under the
circumstances.
The pro forma financial statement is presented for informational purposes
only and does not purport to be indicative of the results of operations that
actually would have been achieved had such transactions been consummated on the
dates or for the period indicated, or results of operations as of any future
date or for any future period. The pro forma financial statement should be read
in conjunction with the accompanying notes, the financial statements and notes
thereto of Fairchild International and the power device business which are
included elsewhere in this prospectus, "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Fairchild International" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Power Device Business."
20
<PAGE> 24
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 30, 1999
------------------------------------------------------------------
HISTORICAL
POWER POWER
POWER DEVICE POWER DEVICE
DEVICE BUSINESS DEVICE FAIRCHILD BUSINESS
BUSINESS PRO FORMA BUSINESS INTERNATIONAL POST-
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ACQUISITION
---------- ----------- --------- ------------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue
Net sales-trade.......... $390.4 $12.21a $413.4 $ 654.1 $ (74.2)
10.81b
Contract manufacturing... 16.3 21.31c 37.6 81.0 --
------ ----- ------ ------- -------
406.7 44.3 451.0 735.1 (74.2)
Cost of sales
Cost of sales-trade...... 261.4 6.91a 281.3 518.4 (49.7)
10.01d
1.71e
1.21f
0.11g
Cost of contract
manufacturing.......... 16.3 -- 16.3 64.4 --
------ ----- ------ ------- -------
277.7 19.9 297.6 582.8 (49.7)
------ ----- ------ ------- -------
Gross profit............... 129.0 24.4 153.4 152.3 (24.5)
Research and development... 14.8 -- 14.8 39.3 (1.7)
Selling, general and
administrative........... 36.1 13.01a 36.5 105.1 (10.2)
(7.3)1d
0.41e
(5.7)1h
Litigation settlement
expense.................. 58.0 -- 58.0 -- --
Restructuring, impairments
and other charges........ -- -- -- 55.3 --
------ ----- ------ ------- -------
Operating income (loss).... 20.1 24.0 44.1 (47.4) (12.6)
Non-cash interest
expense.................. -- -- -- 8.3 --
Cash interest expense,
net...................... 4.0 (4.0)1i -- 63.5 (7.1)
Foreign currency gains,
net...................... (0.1) -- (0.1) -- --
------ ----- ------ ------- -------
Income (loss) before income
taxes.................... 16.2 28.0 44.2 (119.2) (5.5)
Income taxes (benefits).... 15.7 (15.7)1j -- (5.1) --
------ ----- ------ ------- -------
Net income (loss).......... $ 0.5 $43.7 $ 44.2 $(114.1) $ (5.5)
====== ===== ====== ======= =======
Loss applicable to common stockholders........................... $(123.9)
=======
LOSS PER COMMON SHARE:
Basic.......................................................... $ (1.97)
=======
Diluted........................................................ $ (1.97)
=======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (IN
MILLIONS):
Basic.......................................................... 62.9
=======
Diluted........................................................ 62.9
=======
<CAPTION>
FISCAL YEAR ENDED MAY 30, 1999
---------------------------------------------------------
FAIRCHILD
INTERNATIONAL
PRO FORMA
BEFORE INITIAL
INITIAL PUBLIC
PRO FORMA PUBLIC OFFERING
ADJUSTMENTS OFFERING ADJUSTMENTS PRO FORMA
------------ ------------- ----------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue
Net sales-trade.......... $ -- $ 993.3 $ -- $ 993.3
Contract manufacturing... -- 118.6 -- 118.6
------ -------- ------ --------
-- 1,111.9 -- 1,111.9
Cost of sales
Cost of sales-trade...... 1.72a 751.7 -- 751.7
Cost of contract
manufacturing.......... -- 80.7 -- 80.7
------ -------- ------ --------
1.7 832.4 -- 832.4
------ -------- ------ --------
Gross profit............... (1.7) 279.5 -- 279.5
Research and development... -- 52.4 -- 52.4
Selling, general and
administrative........... 30.12a 161.5 -- 161.5
Litigation settlement
expense.................. -- 58.0 -- 58.0
Restructuring, impairments
and other charges........ -- 55.3 -- 55.3
------ -------- ------ --------
Operating income (loss).... (31.8) (47.7) -- (47.7)
Non-cash interest
expense.................. 1.82b 10.1 (1.1)3a 9.0
Cash interest expense,
net...................... 46.92c 103.3 (32.4)3b 70.9
Foreign currency gains,
net...................... -- (0.1) -- (0.1)
------ -------- ------ --------
Income (loss) before income
taxes.................... (80.5) (161.0) 33.5 (127.5)
Income taxes (benefits).... --2d (5.1) --2d (5.1)
------ -------- ------ --------
Net income (loss).......... $(80.5) $ (155.9) $ 33.5 $ (122.4)
====== ======== ====== ========
Loss applicable to common s $ (165.7) $ (122.4)
======== ========
LOSS PER COMMON SHARE:
Basic.................... $ (2.63) $ (1.39)
======== ========
Diluted.................. $ (2.63) $ (1.39)
======== ========
WEIGHTED AVERAGE COMMON SHA
MILLIONS):
Basic.................... 62.9 88.1
======== ========
Diluted.................. 62.9 88.1
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
21
<PAGE> 25
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
THE UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS GIVES
EFFECT TO THE FOLLOWING PRO FORMA ADJUSTMENTS:
1. PRO FORMA ADJUSTMENTS TO THE HISTORICAL RESULTS OF THE POWER DEVICE
BUSINESS.
(a) Historically, the power device business has recognized revenue for sales to
Samsung Electronics' foreign sales subsidiaries at the time of shipment to
such subsidiaries. The pro forma adjustment to net sales eliminates the
sales to the foreign sales subsidiaries of Samsung Electronics from the
revenue of the power device business and replaces them with the sales of
such subsidiaries to the ultimate third parties. Cost of sales is also
adjusted to reflect the change in the inventory held by the foreign sales
subsidiaries of Samsung Electronics. Historically, the selling expenses
incurred by the foreign sales subsidiaries of Samsung Electronics in
connection with their sales to third parties have been recorded by such
subsidiaries. The power device business' selling, general and
administrative expenses have been adjusted to give effect to the provisions
of the Overseas Sales Support Agreement, which provides for commissions to
be paid to the foreign sales subsidiaries of Samsung Electronics to provide
sales services to the power device business.
The pro forma increases to net sales, cost of sales and SG&A expenses are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MAY 30, 1999
------------
(IN MILLIONS)
<S> <C>
Net sales -- trade.......................................... $12.2
Cost of sales -- trade...................................... 6.9
SG&A........................................................ 13.0
</TABLE>
(b) Historically, the power device business has sold its products to Samsung
Electronics at intercompany transfer prices. Under the terms of the Product
Supply Agreement, the power device business will sell its products to
Samsung Electronics at guaranteed minimum annual levels based on historical
volumes and at prices designed to reflect market prices, subject to
adjustments to reflect changes in market prices as published by Worldwide
Semiconductor Trade Statistics. In order to give effect to the minimum
contractual volumes over historical levels and the pricing structure under
the Product Supply Agreement, the pro forma net sales are increased by
$10.8 million for the fiscal year ended May 30, 1999.
(c) The pro forma adjustment to contract manufacturing revenue is $21.3 million
for the fiscal year ended May 30, 1999. This amount reflects the increase
in contract manufacturing revenue that will be required to generate the
minimum profit level guaranteed by Samsung Electronics under the Foundry
Sale Agreement of W53,700 million during the first three years following
consummation of the acquisition of the power device business (W27,700
million, W17,300 million and W8,700 million for the first, second and third
years, respectively). Historically, the power device business has provided
these contract manufacturing services, consisting of wafer fabrication
services, to Samsung Electronics at cost. The U.S. Dollar-denominated pro
forma adjustment has been recorded using the weighted average exchange rate
of 1,300 Won to one U.S. Dollar for the fiscal year ended May 30, 1999.
(d) Historically, the power device business has been charged at cost for
epitaxial fabrication services, assembly and test services and photo mask
supply services provided by Samsung Electronics' plants located in Onyang
and Kiheung, South Korea. Under the terms of the EPI
22
<PAGE> 26
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS -- (CONTINUED)
Services Agreement, the Onyang Assembly and Test Services Agreement and the
Photo Mask Supply Agreement, Samsung Electronics has agreed to provide the
power device business with these services for a three-year period following
consummation of the acquisition of the power device business at agreed-upon
prices denominated in U.S. Dollars in accordance with the terms of the
above agreements. In the case of the Onyang Assembly and Test Services
Agreement, the agreement provides for a 5% annual price decrease. The pro
forma adjustment reflects the effects of (i) replacing the actual
historical costs of these services with the negotiated costs of these
services, which negotiated costs include recovery of general and
administrative and interest costs attributable to these plants recorded in
SG&A for the power device business, based on historical product volumes and
(ii) eliminating the portion of historically allocated SG&A expenses to be
included in such negotiated costs.
The pro forma increases (decreases) to cost of sales and SG&A expenses are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MAY 30, 1999
---------------------
(IN MILLIONS)
<S> <C>
Cost of sales -- trade...................................... $10.0
SG&A........................................................ (7.3)
</TABLE>
(e) Historically, the power device business has been allocated charges for
information technology services, logistics and other general and
administrative services which were provided by Samsung Electronics. Under
the terms of the Transitional Services Agreement, Samsung Electronics has
agreed to provide to the power device business logistics and other general
and administrative services for a three-year period, at the fixed annual
price of $5.3 million. Information technology services are provided under a
separate agreement with Samsung SDS Co., Ltd. at the fixed annual price of
$3.8 million. The pro forma adjustments to cost of sales and SG&A expenses
reflect the effects of replacing the historical charges for such services
with the fixed prices included in the Transitional Services Agreement and
the agreement with Samsung SDS Co., Ltd. In addition, the pro forma
adjustment includes the effect of a fixed 1,200 Won to one U.S. Dollar
exchange rate used to translate the fixed charges included in the
Transitional Services Agreement and the agreement with Samsung SDS Co.,
Ltd.
The pro forma increases to cost of sales relating to information technology
services and SG&A expenses relating to logistics and other general and
administrative services are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MAY 30, 1999
---------------------
(IN MILLIONS)
<S> <C>
Cost of sales -- trade...................................... $1.7
SG&A........................................................ 0.4
</TABLE>
(f) Sales of particular MOSFET products, which are produced by the power
device business, will be subject to royalties arising from Fairchild
International's existing license agreement with another semiconductor
corporation. The pro forma increase to cost of sales to give effect to
such royalties is $1.2 million for the fiscal year ended May 30, 1999.
23
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT 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 of the power device business at agreed-upon
prices denominated in U.S. Dollars. The pro forma adjustments reflect the
effects of replacing the actual historical costs of these services with the
negotiated costs of these services based on historical product volumes.
Although the Suzhou Assembly and Test Services Agreement provides for
annual price adjustments based upon the percentage change in the U.S.
Consumer Price Index, the pro forma adjustments do not give effect to such
price adjustments. The pro forma increase to cost of sales is $0.1 million
for the fiscal year ended May 30, 1999.
(h) Represents the elimination of royalty expense incurred by Samsung
Electronics attributable to the power device business which arises from
license agreements that were not transferred to Fairchild International.
This results in a decrease to SG&A expense of $5.7 million for the fiscal
year ended May 30, 1999.
(i) The pro forma adjustment to cash interest expense is $4.0 million for the
fiscal year ended May 30, 1999. This amount represents the elimination of
interest expense on bank borrowings, capital lease obligations and
corporate borrowings of Samsung Electronics allocated to the power device
business that were not transferred to Fairchild International.
(j) The pro forma adjustment for the elimination of income taxes is $15.7
million for the fiscal year ended May 30, 1999. As a result of the
acquisition of the power device business, the power device business is
100% exempt from Korean income taxes for seven years beginning with the
first year in which taxable Korean income is generated.
2. PRO FORMA ADJUSTMENTS TO THE COMBINED RESULTS OF FAIRCHILD INTERNATIONAL AND
THE POWER DEVICE BUSINESS.
(a) On April 13, 1999, Fairchild International completed the acquisition of the
power device business for approximately $414.9 million. The purchase
includes all of the worldwide operations and assets of the power device
business, which are comprised in part of a high volume wafer fabrication
plant in Puchon, South Korea, design and development operations in Puchon,
South Korea, secured services for high volume assembly and test operations
and worldwide sales and marketing operations. The transaction is being
accounted for as a purchase.
The following table represents the allocation of the purchase price over
the historical net book value of the power device business' assets acquired
and liabilities assumed as of April 13, 1999. Also presented are the
amortization periods for each of the identifiable intangible assets for
purposes of calculating the pro forma adjustments to amortization expense
in the accompanying pro forma condensed consolidated statement of
operations. All intangible assets are being
24
<PAGE> 28
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS -- (CONTINUED)
amortized on a straight-line basis. The amount allocated to in-process
research and development was charged to expense in our fourth fiscal
quarter ended May 30, 1999.
<TABLE>
<CAPTION>
PERIOD OF
INTANGIBLE ASSETS AMOUNT AMORTIZATION
----------------- ------------- ------------
(IN MILLIONS)
<S> <C> <C>
Developed technology....................................... $140.9 15 years
Customer base.............................................. 53.9 8 years
In-process research and development........................ 34.0 --
Covenant not to compete.................................... 30.8 5 years
Trademarks and tradenames.................................. 25.1 4 years
Assembled workforce........................................ 4.8 3 years
------
Total................................................. $289.5
======
</TABLE>
Pro forma adjustments for depreciation and amortization of fixed assets and
other intangible assets are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MAY 30, 1999
-------------
(IN MILLIONS)
<S> <C>
Intangibles -- recorded in SG&A............................. $30.1
Fixed assets -- recorded in cost of sales-trade............. 1.7
</TABLE>
(b) In connection with the acquisition of the power device business, the
financings in connection with the acquisition and the application of the
proceeds of such financings, we incurred debt issuance costs of
approximately $22.3 million associated with the senior credit facilities
and the 10 3/8% Senior Subordinated Notes. These costs are comprised
primarily of financing costs and other professional fees that will be
deferred and amortized over the term of the related debt, which ranges from
5 to 8 1/2 years. The pro forma adjustment to non-cash interest expense
represents the incremental amortization of these debt issuance costs in the
amount of $1.8 million for the fiscal year ended May 30, 1999.
(c) In connection with the acquisition of the power device business, we entered
into the senior credit facilities, which provided up to $410.0 million in
financing, consisting of a $100.0 million revolving credit facility (under
which no amounts were drawn at closing of the acquisition of the power
device business) and $310.0 million of senior term facilities. We also
issued $300.0 million of 10 3/8% Senior Subordinated Notes Due 2007 and a
$50.0 million 12.5% Subordinated Note Due 2008.
25
<PAGE> 29
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS -- (CONTINUED)
The pro forma increase to cash interest expense is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MAY 30, 1999
-------------
(IN MILLIONS)
<S> <C>
Senior Term Facilities -- Tranche A Facility (7.75%)........ $ 7.5
Senior Term Facilities -- Tranche B Facility (8.25%)........ 17.3
10 3/8% Senior Subordinated Notes (10.375%)................. 31.1
12.5% Subordinated Note (12.5%)............................. 6.4
Interest expense on debt refinanced......................... (15.4)
------
Total.................................................. $ 46.9
======
</TABLE>
The senior term facilities bear interest at adjustable rates based on a
spread over LIBOR. An increase of 0.125% in the rate applicable to the
senior term facilities will increase interest expense and reduce net income
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MAY 30, 1999
-------------
(IN MILLIONS)
<S> <C>
Interest expense............................................ $ 0.4
=====
Net income.................................................. $(0.3)
=====
</TABLE>
(d) There is no pro forma adjustment for income taxes, as Fairchild
International has a net operating loss and has fully reserved net operating
loss carryforwards.
3. PRO FORMA ADJUSTMENTS MADE TO THE COMBINED RESULTS OF FAIRCHILD
INTERNATIONAL AND THE POWER DEVICE BUSINESS TO GIVE EFFECT TO THE INITIAL
PUBLIC OFFERING.
(a) Represents the elimination of the amortization of deferred financing costs
associated with the debt being repaid. The pro forma reduction to interest
expense is $1.1 million for the fiscal year ended May 30, 1999. In
connection with the initial public offering, we were required to write-off
unamortized debt issuance costs associated with debt being repaid.
Approximately $7.2 million was written off concurrent with the offering.
This non-recurring charge has been excluded from the pro forma combined
condensed statement of operations.
(b) Represents the elimination of interest expense of $32.4 million associated
with the debt repaid with the proceeds of the initial public offering.
26
<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL DATA OF FAIRCHILD INTERNATIONAL
The following table sets forth selected historical consolidated financial
data of Fairchild International. The historical consolidated financial data as
of November 28, 1999, and as of and for the six months ended November 29, 1998
and November 28, 1999 are derived from the unaudited condensed consolidated
financial statements of Fairchild International included elsewhere in this
prospectus. The historical consolidated financial data as of May 31, 1998 and
May 30, 1999 and for the fiscal years ended May 25, 1997, May 31, 1998 and May
30, 1999 are derived from the audited consolidated financial statements of
Fairchild International included elsewhere in this prospectus. The historical
consolidated financial data as of May 26, 1996 and May 25, 1997 and for the
fiscal year ended May 26, 1996 are derived from audited consolidated financial
statements of Fairchild International not included in this prospectus. The
historical consolidated financial data as of and for the fiscal year ended May
28, 1995 and as of November 29, 1998 are derived from unaudited consolidated
financial statements of Fairchild International 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 International for such
periods and as of such dates. This information should be read in conjunction
with the consolidated financial statements of Fairchild International included
elsewhere in this prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Fairchild International."
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED MAY NOVEMBER
-------------------------------------------- ----------------
1995 1996 1997 1998 1999 1998 1999
------ ------ ------ ------ -------- ------ -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS DATA:(1)
Revenue(2).................................................. $680.3 $776.3 $692.0 $789.2 $ 735.1 $319.2 $ 681.3
Gross profit(2)............................................. $203.8 $216.8 $152.5 $230.5 $ 152.3 $ 66.0 $ 208.8
Research and development.................................... 31.0 30.3 18.9 35.7 39.3 18.3 29.7
Selling, general and administrative(3)...................... 100.3 114.4 96.4 92.0 105.1 46.2 109.7
Restructuring, impairments and other charges(4)............. -- -- 5.3 15.5 55.3 4.5 --
------ ------ ------ ------ -------- ------ -------
Operating income (loss)................................... 72.5 72.1 31.9 87.3 (47.4) (3.0) 69.4
Interest expense, net(5).................................... -- -- 11.2 54.5 71.8 29.6 50.8
Other expense (income) net.................................. (1.8) (0.2) 1.4 -- -- -- --
------ ------ ------ ------ -------- ------ -------
Income (loss) before income taxes......................... 74.3 72.3 19.3 32.8 (119.2) (32.6) 18.6
Provision (benefit) for income taxes........................ -- -- 3.8 10.7 (5.1) (6.5) 4.1
------ ------ ------ ------ -------- ------ -------
Income (loss) before cumulative effect of change in
accounting principle.................................... 74.3 72.3 15.5 22.1 (114.1) (26.1) 14.5
Cumulative effect of change in accounting principle......... -- -- -- (1.5) -- -- --
------ ------ ------ ------ -------- ------ -------
Net income (loss)......................................... $ 74.3 $ 72.3 $ 15.5 20.6 (114.1) (26.1) 14.5
====== ====== ======
Dividends on preferred stock.......................................................... (8.7) (9.8) (4.7) (2.0)
------ -------- ------ -------
Net income (loss) applicable to common stockholders................................. $ 11.9 $ (123.9) $(30.8) $ 12.5
====== ======== ====== =======
Basic earnings (loss) per common share:
Income before cumulative effect of change in accounting principle................... $ 0.21 $ (1.97) $(0.49) $ 0.16
Cumulative effect of change in accounting principle................................. (0.02) -- -- --
------ -------- ------ -------
$ 0.19 $ (1.97) $(0.49) $ 0.16
====== ======== ====== =======
Diluted earnings (loss) per common share:
Income before cumulative effect of change in accounting principle................... $ 0.20 $ (1.97) $(0.49) $ 0.15
Cumulative effect of change in accounting principle................................. (0.02) -- -- --
------ -------- ------ -------
$ 0.18 $ (1.97) $(0.49) $ 0.15
====== ======== ====== =======
Weighted average common shares outstanding (in millions):
Basic............................................................................... 62.8 62.9 62.9 78.7
====== ======== ====== =======
Diluted............................................................................. 65.0 62.9 62.9 82.0
====== ======== ====== =======
</TABLE>
27
<PAGE> 31
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED MAY NOVEMBER
-------------------------------------------- ----------------
1995 1996 1997 1998 1999 1998 1999
------ ------ ------ ------ -------- ------ -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Revenue:
Analog.................................................... $ -- $ -- $ -- $ 32.0 $ 95.8 $ 34.6 $ 151.3
Discrete.................................................. 116.4 175.0 164.5 187.3 222.8 84.5 277.6
Logic..................................................... 327.7 339.5 285.3 303.0 267.6 128.7 156.7
Memory(2)................................................. 185.5 174.2 138.0 113.5 67.9 39.3 33.9
Contract manufacturing services........................... 50.7 87.6 104.2 153.4 81.0 32.1 61.8
------ ------ ------ ------ -------- ------ -------
Total revenue............................................... $680.3 $776.3 $692.0 $789.2 $ 735.1 $319.2 $ 681.3
====== ====== ====== ====== ======== ====== =======
Depreciation and amortization............................... $ 44.7 $ 64.2 $ 77.1 $ 83.2 $ 95.3 $ 45.8 $ 54.1
Amortization of intangibles(6).............................. -- -- -- 1.4 8.4 1.6 16.9
Capital expenditures........................................ 112.9 153.9 47.1 78.0 46.2 19.4 53.8
HISTORICAL BALANCE SHEET DATA (END OF PERIOD):
Inventories................................................. $ 68.8 $ 93.1 $ 73.1 $108.0 $ 148.6 $101.4 $ 162.4
Total assets................................................ 323.2 432.7 555.0 634.3 1,095.7 625.1 1,115.2
Long-term debt, excluding current portion................... -- -- 487.9 526.7 1,045.9 528.0 717.2
Total stockholders' equity (deficit)........................ 233.2 349.2 (133.3) (116.6) (240.4) (147.4) 205.4
</TABLE>
- -------------------------
(1) For the fiscal years ended May 1997 and prior, statement of operations data
includes the direct expense of the Fairchild Semiconductor business of
National Semiconductor and allocated expenses from National Semiconductor.
Such amounts may not be comparable to data for Fiscal 1998 and 1999.
(2) Revenues and gross profit in Fiscal 1999 were negatively impacted by $5.5
million and $15.4 million, respectively, due to one-time write-offs for
additional sales and inventory reserves as a result of our Memory division
restructuring. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Fairchild
International -- Restructuring."
(3) For the six months ended November 1999, selling, general and administrative
expenses include $8.3 million for a one-time write-off of receivables from
the management investors to pay their federal and state individual income
tax liabilities resulting from the lapse of risks of forfeiture with respect
to their stock ownership. Such receivables were cancelled as a result of our
initial public offering consummated on August 9, 1999. This write-off
includes amounts to discharge the individual tax liabilities associated with
the cancellation.
(4) In Fiscal 1997, restructuring, impairments and other charges consisted of
severance and other costs related to lay-offs that occurred in the first
quarter of Fiscal 1997. In Fiscal 1998, such charges consisted of in-process
research and development associated with the acquisition of Raytheon. In
Fiscal 1999, such charges consisted of $34.0 million of in-process research
and development associated with the acquisition of the power device
business, and $21.3 million related to various restructuring actions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Fairchild International -- Restructuring."
(5) For the six months ended November 1999, interest expense includes $7.2
million for the write-off of unamortized debt issuance costs associated with
debt repaid and $0.3 million for a prepayment premium on a 12.5%
Subordinated Note Due 2008 repaid with a portion of the proceeds of
Fairchild International's initial public offering consummated on August 9,
1999.
(6) Amortization of intangibles primarily represents the amortization of
identifiable acquisition-related intangible assets.
28
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF FAIRCHILD INTERNATIONAL
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto of Fairchild International
included elsewhere in this prospectus.
OVERVIEW
Fairchild International is a leading designer, manufacturer and supplier of
high-performance logic, non-volatile memory, discrete power and signal
technology and analog and mixed signal semiconductors, serving the personal
computer, industrial, telecommunications, consumer electronics and automotive
markets. The predecessor to Fairchild Semiconductor Corporation, a wholly-owned
subsidiary of Fairchild International, was renowned as one of the pioneering
companies of the semiconductor industry. Fairchild Semiconductor Corporation
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 Semiconductor
Corporation 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
Semiconductor Corporation was acquired by National Semiconductor and integrated
into its operations. The assets of Fairchild Semiconductor Corporation were
separated from National Semiconductor on March 11, 1997 pursuant to an Agreement
and Plan of Recapitalization and Fairchild Semiconductor Corporation began
operating as a stand-alone entity. At that time, Fairchild Semiconductor
Corporation's business consisted of the Logic Products Group, historically a
core business of Fairchild Semiconductor Corporation, the Discrete Products
Group and the Non-Volatile Memory Products Group, historically multi-market
businesses of National Semiconductor. On December 31, 1997, Fairchild
Semiconductor Corporation acquired all of the outstanding common stock of
Raytheon for approximately $117.0 million in cash. Raytheon designs,
manufactures and markets high-performance analog and mixed signal semiconductors
with long product lives for the personal computer, communications, broadcast
video and industrial markets. Immediately prior to the closing of the
transaction, Raytheon was renamed Fairchild Semiconductor Corporation of
California and, upon closing, became a wholly-owned subsidiary of Fairchild
Semiconductor Corporation. The transaction was accounted for as a purchase.
Accordingly, Fairchild International's operating results in Fiscal 1998 include
the operating results of Fairchild Semiconductor Corporation of California as of
the date of the acquisition. On April 13, 1999, Fairchild International acquired
the power device business of Samsung Electronics for $414.9 million in cash,
including fees and expenses. The power device business designs, manufactures and
markets power discrete semiconductors and standard analog integrated circuits
serving the personal computer, industrial, telecommunications and consumer
electronics markets. The transaction was accounted for as a purchase.
Accordingly, Fairchild International's operating results in Fiscal 1999 include
the operating results of the power device business, as of the date of the
acquisition. The results of operations in Fiscal 1997 for the period prior to
March 11, 1997 reflect the operating results of the Fairchild Semiconductor
Business of National Semiconductor, and are not necessarily indicative of the
results that would have been obtained as a stand-alone company during that time.
This is due in part to the fact that National Semiconductor allocated to the
Fairchild Semiconductor Business corporate and other overhead costs at levels
higher than those experienced as a stand-alone company. In addition, the
Fairchild Semiconductor Business, prior to the establishment of Fairchild
International, provided contract manufacturing services to National
Semiconductor at cost and now provides such services at higher prices. Under
manufacturing agreements with National Semiconductor, it is required to purchase
not less than $330.0 million of contract manufacturing services from
29
<PAGE> 33
Fairchild International during the first 39 months after consummation of the
recapitalization of Fairchild Semiconductor Corporation.
Fairchild International has defined four reportable segments: the Analog
and Mixed Signal Products Division, which we refer to as Analog; the Discrete
Power and Signal Technologies Products Group, which we refer to as Discrete; the
Interface and Logic Products Group, which we refer to as Logic; and the
Non-Volatile Memory Division, which we refer to as Memory. Power device business
products, which were previously reported as a separate segment, are now included
in the Analog and Discrete segments. The following table sets forth the
composition of trade revenue by reportable segments and contract manufacturing
services, as a percentage of total revenues excluding one-time charges of $5.5
million in the Memory segment in Fiscal 1999:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Analog.................................................. --% 4.1% 13.0%
Discrete................................................ 23.8 23.7 30.1
Logic................................................... 41.2 38.4 36.1
Memory.................................................. 19.9 14.4 9.9
----- ----- -----
Subtotal trade sales............................... 84.9 80.6 89.1
Contract Manufacturing Services......................... 15.1 19.4 10.9
----- ----- -----
Total.............................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
We have changed our fiscal year-end from the last Sunday in May to the last
Sunday in December. We refer to the seven-month transition period from May 31,
1999 to December 26, 1999 as stub year 1999. In the following discussion, we
refer to the six months ended November 28, 1999 as the first six months of stub
year 1999.
QUARTERLY RESULTS
The following table sets forth the unaudited historical quarterly trade
sales and trade gross profits (losses) by Fairchild International's reportable
segments:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998 FISCAL 1999
--------------- --------------------------------- ---------------
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TRADE SALES:
Analog........................... $ -- $ -- $ -- $ -- $ 11.9 $ 20.1 $ 16.9 $ 17.7
Discrete......................... 42.7 46.2 48.2 47.0 49.6 42.5 38.9 45.7
Logic............................ 69.2 74.6 78.9 79.8 75.6 68.7 60.9 67.7
Memory........................... 35.6 32.6 31.6 28.5 28.0 25.4 18.4 20.9
------ ------ ------ ------ ------ ------ ------ ------
Total........................ $147.5 $153.4 $158.7 $155.3 $165.1 $156.7 $135.1 $152.0
====== ====== ====== ====== ====== ====== ====== ======
GROSS PROFIT (LOSS):
Analog........................... $ -- $ -- $ -- $ -- $ 4.9 $ 7.2 $ 5.9 $ 7.4
Discrete......................... 13.4 15.8 18.9 17.9 17.3 12.8 8.9 10.5
Logic............................ 15.7 21.0 25.9 29.7 25.6 21.3 14.8 17.7
Memory........................... 6.8 6.5 5.9 2.3 1.3 3.2 (0.8) (2.0)
------ ------ ------ ------ ------ ------ ------ ------
Total........................ $ 35.9 $ 43.3 $ 50.7 $ 49.9 $ 49.1 $ 44.5 $ 28.8 $ 33.6
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
STUB YEAR
FISCAL 1999 1999
--------------- ---------------
Q3 Q4 Q1 Q2
------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
TRADE SALES:
Analog........................... $ 15.1 $ 46.1 $ 71.6 $ 79.7
Discrete......................... 47.0 91.2 130.5 147.1
Logic............................ 65.6 73.4 72.7 84.0
Memory........................... 19.3 14.8(1) 16.6 17.3
------ ------ ------ ------
Total........................ $147.0 $225.5 $291.4 $328.1
====== ====== ====== ======
GROSS PROFIT (LOSS):
Analog........................... $ 5.2 $ 20.0 $ 27.1 $ 28.1
Discrete......................... 10.7 14.7 36.0 43.8
Logic............................ 20.4 20.6 21.2 29.6
Memory........................... (0.8) (2.1)(1) 2.1 3.5
------ ------ ------ ------
Total........................ $ 35.5 $ 53.2 $ 86.4 $105.0
====== ====== ====== ======
</TABLE>
30
<PAGE> 34
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998 FISCAL 1999
--------------- --------------------------------- ---------------
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROSS PROFIT (LOSS) PERCENTAGE:
Analog........................... --% --% --% --% 41.2% 35.8% 34.9% 41.8%
Discrete......................... 31.4 34.2 39.2 38.1 34.9 30.1 22.9 23.0
Logic............................ 22.7 28.2 32.8 37.2 33.9 31.0 24.3 26.1
Memory........................... 19.1 19.9 18.7 8.1 4.6 12.6 (4.3) (9.6)
Total........................ 24.3 28.2 31.9 32.1 29.7 28.4 21.3 22.1
<CAPTION>
STUB YEAR
FISCAL 1999 1999
--------------- ---------------
Q3 Q4 Q1 Q2
------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
GROSS PROFIT (LOSS) PERCENTAGE:
Analog........................... 34.4% 43.4% 37.8% 35.3%
Discrete......................... 22.8 16.1 27.6 29.8
Logic............................ 31.1 28.1 29.2 35.2
Memory........................... (4.1) (14.2) 12.7 20.2
Total........................ 24.1 23.6 29.7 32.0
</TABLE>
- -------------------------
(1) Excludes charges of $5.5 million and $15.4 million in trade sales and gross
profit, respectively.
SIX MONTHS ENDED NOVEMBER 28, 1999 COMPARED TO SIX MONTHS ENDED NOVEMBER 29,
1998
Results of Operations. Fairchild International generated net income of
$14.5 million in the first six months of stub year 1999, compared to a net loss
of $26.1 million in the first six months of Fiscal 1999. Excluding unusual
charges and amortization of acquisition-related intangibles of $15.5 million and
$16.9 million, respectively, in the first six months of stub year 1999, and $4.5
million and $1.6 million, respectively, in the first six months of Fiscal 1999,
net of tax effect, Fairchild International had adjusted net income of $46.9
million for the first six months of stub year 1999 compared to an adjusted net
loss of $21.2 million in the first six months of Fiscal 1999. Unusual charges in
the first six months of stub year 1999 included initial public offering-related
charges of $8.3 million, recorded in selling, general and administrative
expenses ("SG&A"), for the forgiveness of certain loans made to Fairchild
International's management investors for payment of individual income tax
liabilities resulting from their ownership of Fairchild International's common
stock, and $7.2 million, recorded in interest expense, for the write-off of
deferred financing fees associated with the debt repaid with the proceeds from
the initial public offering. Unusual charges in the first six months of Fiscal
1999 were due to restructuring charges as a result of a workforce reduction.
Operating income was $69.4 million in the first six months of stub year 1999,
compared to an operating loss of $3.0 million in the first six months of Fiscal
1999. Excluding unusual charges, operating income was $77.7 million in the first
six months of stub year 1999, compared to $1.5 million in the first six months
of Fiscal 1999. The increase in operating income is due to the acquisition of
the power device business from Samsung Electronics and higher revenues and gross
profits due to new product introductions and improved business conditions,
resulting in higher factory utilization in the first six months of stub year
1999 as compared to the first six months of Fiscal 1999.
All operating segments reported improved operating results in the first six
months of stub year 1999 as compared to the first six months of Fiscal 1999.
Analog had operating income of $20.9 million in the first six months of stub
year 1999 as compared to $0.7 million in the first six months of Fiscal 1999.
Excluding analog power device products, Analog had an operating loss of $5.9
million in the first six months of stub year 1999. The increase in Analog's
operating loss (excluding analog power device products) was due to an
unfavorable sales mix and increased inventory valuation reserves in anticipation
of the closure of the Mountain View, California wafer fab, which occurred in the
second quarter of stub year 1999. Discrete had operating income of $32.0 million
in the first six months of stub year 1999 as compared to $4.4 million in the
first six months of Fiscal 1999. Excluding discrete power device products,
Discrete had operating income of $10.2 million in the first six months of stub
year 1999. Logic had operating income of $24.6 million in the first six months
of stub year 1999, compared to $9.8 million in the first six months of Fiscal
1999. The increases in Discrete and Logic operating income were due to higher
revenues and improved gross profits due to
31
<PAGE> 35
improved factory utilization and, in the case of Discrete, higher average
selling prices. Memory had operating income of $0.2 million in the first six
months of stub year 1999 as compared to a loss of $13.4 million in the first six
months of Fiscal 1999. The decrease in the Memory operating loss was due to the
benefit from the implementation of the Memory restructuring plan in the fourth
quarter of Fiscal 1999.
Excluding depreciation and amortization of $71.0 million and $47.4 million
in the first six months of stub year 1999 and the first six months of Fiscal
1999, respectively, and unusual charges, earnings before interest, taxes,
depreciation and amortization ("EBITDA") were $148.7 million in the first six
months of stub year 1999 compared to $48.9 million in the first six months of
Fiscal 1999. EBITDA is presented because Fairchild International 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 Fairchild International, or as an alternative to
cash flows as a measure of liquidity.
Revenues. Fairchild International's revenues consist of trade sales to
unaffiliated customers (90.9% and 89.9% of total revenues in the first six
months of stub year 1999 and Fiscal 1999, respectively) and revenues from
contract manufacturing services provided to National Semiconductor and Samsung
Electronics (9.1% and 10.1% of total revenues in the first six months of stub
year 1999 and Fiscal 1999, respectively).
Trade sales increased 115.8% to $619.5 million in the first six months of
stub year 1999 compared with $287.1 million in the first six months of Fiscal
1999. Trade sales for the first six months of stub year 1999 include those of
sales from the power device business. Excluding sales from the power device
business, trade sales increased 23.6% in the first six months of stub year 1999
over the first six months of Fiscal 1999, as higher sales volume offset lower
average selling prices. The increase in trade sales is attributable to improved
demand due to strength in end-markets such as personal computers and
telecommunications and an economic recovery in the Asia/Pacific region. Sales
growth was observed across all segments except Memory, whose sales declined as a
result of exiting certain unprofitable product lines. Excluding power device
products, Analog, Discrete and Logic sales were up 9.2%, 49.7% and 21.8%,
respectively, in the first six months of stub year 1999 over the first six
months of Fiscal 1999.
Approximately 69.2% of Fairchild International's trade revenues were
generated from Analog, Discrete and Power Device products in the first six
months of stub year 1999.
Geographically, 22.2%, 12.2%, 44.6% and 21.0% of trade sales were derived
from North America, Europe, Asia/Pacific and Korea, respectively, in the first
six months of stub year 1999. Excluding sales from the power device business,
32.1%, 17.1% and 50.8% of trade sales were derived from North America, Europe
and Asia/Pacific (including Korea), respectively, in the first six months of
stub year 1999, compared to 40.4%, 18.5% and 41.1%, respectively, in the first
six months of Fiscal 1999. Excluding sales from the power device business, the
Asia/Pacific and European regions saw increases in trade sales in the first six
months of stub year 1999 compared to the first six months of Fiscal 1999 of
53.0% and 14.2%, respectively, while North American revenues decreased 2.0%. The
increase in the Asia/Pacific region is due to strength in the consumer and
personal computer markets, as well as improved economic conditions. The increase
in Europe is due to an improved telecommunications, consumer and distribution
markets. The decrease in North America is due mainly to the continued move of
contract manufacturers to locations outside North America.
Contract manufacturing revenues increased 92.5% to $61.8 million in the
first six months of stub year 1999 compared to $32.1 million in the first six
months of Fiscal 1999. Excluding contract manufacturing services provided to
Samsung Electronics, contract manufacturing revenues increased
32
<PAGE> 36
45.5% in the first six months of stub year 1999 as compared to the first six
months of Fiscal 1999, reflecting increased demand from National Semiconductor.
Gross Profit. Gross profit increased 216.4% to $208.8 million in the first
six months of stub year 1999 compared to $66.0 million in the first six months
of Fiscal 1999. Excluding the gross profit derived from power device products,
gross profit increased 62.4% in the first six months of stub year 1999 over the
first six months of Fiscal 1999. As a percentage of trade sales, gross trade
profits were 30.9% in the first six months of stub year 1999. Excluding the
power device business, gross trade profits as a percentage of trade sales were
27.7% in the first six months of stub year 1999 compared to 21.7% in the first
six months of Fiscal 1999. The increase in gross trade profit as a percentage of
trade sales was due to the favorable effect of increased factory utilization and
the full benefit of cost reduction actions undertaken in Fiscal 1999, offset by
lower average selling prices. Average selling prices for the first six months of
stub year 1999 were lower than the first six months of Fiscal 1999, despite
higher average selling prices in the second quarter of stub year 1999 over the
first quarter of stub year 1999, particularly for Discrete and Logic products.
Contract manufacturing gross profit increased 383.3% to $17.4 million in the
first six months of stub year 1999 compared to $3.6 million in the first six
months of Fiscal 1999. The increase in contract manufacturing gross profit is
due to incremental business with Samsung Electronics as a result of the
acquisition of the power device business and greater demand from National
Semiconductor reflective of improved market conditions. Contract manufacturing
gross profit for the first six months of Fiscal 1999 included $11.6 million of
fixed cost reimbursement under Fairchild International's manufacturing
agreements with National Semiconductor.
Research and Development. Research and development expenses ("R&D") were
$29.7 million, or 4.8% of trade sales, in the first six months of stub year
1999, compared to $18.3 million, or 6.4% of trade sales, in the first six months
of Fiscal 1999. The increase in R&D expenses is driven by the dedicated R&D
costs incurred by the power device business in the first six months of stub year
1999 which Fairchild International did not incur in Fiscal 1999. R&D efforts are
focused on Fairchild International's growth products (Analog, DMOS power and
CMOS logic). R&D expenditures for these growth products were 5.5% and 9.2% of
trade sales in the first six months of stub year 1999 and Fiscal 1999,
respectively. R&D expenditures for Fairchild International's mature products
(Bipolar Logic, Bipolar Discretes and EPROM) were less than 1% of trade sales
for both the first six months of stub year 1999 and the first six months of
Fiscal 1999. The decrease in R&D expenditures for growth products as a
percentage of trade sales is due to the relatively small R&D requirements of the
power device business as a percentage of sales.
Selling, General and Administrative. SG&A expenses were $109.7 million, or
17.7% of trade sales, in the first six months of stub year 1999, compared to
$46.2 million, or 16.1% of trade sales, in the first six months of Fiscal 1999.
SG&A expenses in the first six months of stub year 1999 include an unusual
charge of $8.3 million for the forgiveness of certain loans made to Fairchild
International's management investors for payment of individual income tax
liabilities resulting from their ownership of Fairchild International's common
stock. Excluding this unusual charge, SG&A was $101.4 million, or 16.4% of trade
sales, in the first six months of stub year 1999. The increase in SG&A expenses
(excluding the unusual charge) is primarily the result of the incremental SG&A
expenses of the power device business which Fairchild International did not
incur in the first six months of Fiscal 1999, including amortization of
acquisition-related intangibles, and increased selling expenses for the
pre-existing business due to higher sales volume.
Restructuring. Fairchild International incurred a pre-tax restructuring
charge of approximately $4.5 million in the first quarter of Fiscal 1999. The
charge consisted of $0.8 million related to non-cash asset impairments and $3.7
million of employee separation costs related to the reduction of approximately
600 salaried, hourly and temporary positions, then representing approximately
10% of
33
<PAGE> 37
Fairchild International's payroll. Substantially all amounts have been expended
with respect to Fairchild International's Fiscal 1999 restructuring actions with
the exception of the Analog wafer production transfer to South Portland, Maine.
Approximately $3.8 million was expended in the first six months of stub year
1999 for this transfer with an estimated $2.8 million of accrued liabilities
expected to be expended by the end of the first quarter of 2000.
Interest Expense, Net. Interest expense, net was $50.8 million in the first
six months of stub year 1999, compared to $29.6 million in the first six months
of Fiscal 1999. Interest expense, net in the first six months of stub year 1999
includes an unusual charge of $7.2 million for the write-off of deferred
financing fees associated with debt retired with the proceeds from the initial
public offering. Excluding this charge, interest expense, net was $43.6 million
in the first six months of stub year 1999. The increase, excluding the unusual
charges, is principally the result of indebtedness incurred to finance the power
device business acquisition, which occurred in the fourth quarter of Fiscal
1999.
Income Taxes. Income tax expense was $4.1 million for the first six months
of stub year 1999, compared to a tax benefit of $6.5 million in the first six
months of Fiscal 1999. The effective tax rates for the first six months of stub
year 1999 and the first six months of Fiscal 1999 on book pre-tax income were
22.0% and 19.9%, respectively. In the first six months of stub year 1999, the
tax provision is based on income generated from Fairchild International's
foreign operations, excluding Korea where Fairchild International benefits from
a tax holiday. The decrease in the tax benefit is due to profits earned in stub
year 1999 and Fairchild International's limited ability to recognize the future
benefit of U.S. net operating loss carryforwards.
Purchased In-Process Research and Development. In connection with its
acquisitions of the power device business and the Raytheon Semiconductor
business completed in Fiscal 1999 and Fiscal 1998, respectively, Fairchild
International allocated a portion of the purchase price for each acquisition to
in-process research and development projects. This allocation represented the
estimated fair value based on risk-adjusted cash flows related to the incomplete
products. At the date of each of the acquisitions, the development of these
projects had no alternative future uses. Accordingly, these costs were expensed
as of each respective acquisition date.
The financial results of the power device business to date have been
consistent, in all material respects, with the assumptions of Fairchild
International at the time of the acquisition as they relate to the value of the
purchased in-process research and development. Actual results to date on
Raytheon Semiconductor business products have fallen short of expectations due
to unfavorable market conditions during the recent industry downturn and higher
than expected costs on certain projects. Fairchild International has addressed
the cost issues in the restructuring of its Mountain View facility and expects
improvement in demand for these products as market conditions continue to
improve. The weaker cash flows from these projects have not had, nor are they
expected to have, any material adverse impact on the results of Fairchild
International or its financial position, including the recoverability of
intangible assets.
YEAR ENDED MAY 30, 1999 COMPARED TO YEAR ENDED MAY 31, 1998
Results of Operations. Fairchild International incurred a net loss of
$114.1 million in Fiscal 1999, compared to net income of $20.6 million in Fiscal
1998. The net loss in Fiscal 1999 includes pre-tax charges totaling $75.9
million for in-process research and development ($34.0 million) and the
write-off of deferred financing fees in connection with a refinancing of
Fairchild International's senior credit facilities ($5.2 million) as part of the
acquisition of the power device business of Samsung Electronics in April 1999,
and restructuring and related charges totaling $36.7 million. The Fiscal 1999
restructuring charges pertain to a workforce reduction undertaken in the first
quarter ($4.5 million), the transfer of Analog assembly and test operations in
the third quarter ($2.7 million), the closure of the Mountain View facility
($10.0 million) recorded in the fourth
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<PAGE> 38
quarter and the restructuring of the Memory business ($19.5 million), also in
the fourth quarter. The charge for the Memory restructuring includes $5.5
million and $9.9 million recorded as a reduction to revenue and an increase to
cost of sales, respectively, for additional sales and inventory reserves
associated with the restructuring. Net income in Fiscal 1998 includes pre-tax
charges of $15.5 million for in-process research and development associated with
the acquisition of Raytheon and an after-tax charge of $1.5 million for the
cumulative effect of a change in accounting principle. Excluding unusual
charges, net of tax effect, and amortization of acquisition-related intangibles
of $8.4 million and $1.4 million in Fiscal 1999 and Fiscal 1998, respectively,
Fairchild International incurred a net loss of $33.4 million in Fiscal 1999,
compared to net income of $33.5 million in Fiscal 1998. The decrease is due
primarily to soft market conditions in the semiconductor industry that persisted
for much of Fiscal 1999, which resulted in severe price competition and factory
underutilization, particularly in the first half of Fiscal 1999, which
negatively impacted gross profit.
Fairchild International incurred an operating loss of $47.4 million in
Fiscal 1999, compared to operating income of $87.3 million in Fiscal 1998.
Excluding unusual charges, operating income was $23.3 million in Fiscal 1999,
compared to $102.8 million in Fiscal 1998. Excluding unusual charges and
depreciation and amortization of $103.7 million and $84.6 million in Fiscal 1999
and Fiscal 1998, respectively, earnings before interest, taxes and depreciation
and amortization, which we refer to as EBITDA, was $127.0 million in Fiscal
1999, compared to $187.4 million in Fiscal 1998. EBITDA is presented because
Fairchild International believes that it is a widely accepted financial
indicator of an entity's ability to incur or service debt. EBITDA should not be
considered as an alternative to net income, operating income, or other
consolidated operations or cash flow data prepared in accordance with generally
accepted accounting principles, as an indicator of the operating performance of
Fairchild International, or as an alternative to cash flows as a measure of
liquidity.
Revenues. Fairchild International's revenues consist of trade sales to
unaffiliated customers (89.0% and 80.6% of total revenues in Fiscal 1999 and
Fiscal 1998, respectively) and contract manufacturing services to National
Semiconductor (11.0% and 19.4% of total revenues in Fiscal 1999 and Fiscal 1998,
respectively). Trade sales increased 2.9% to $654.1 million in Fiscal 1999 from
$635.8 million in Fiscal 1998. Trade sales in Fiscal 1999 include those of the
power device business since the acquisition date of April 13, 1999, and a
full-year of Analog. Additionally, trade sales have been reduced by $5.5 million
in Fiscal 1999 for one-time charges for additional sales reserves as a result of
the Memory restructuring. Trade sales in Fiscal 1998 include those of Analog
since the acquisition date of December 31, 1997. Excluding Power Device
revenues, one time charges and normalizing Analog sales for the non-comparable
periods, trade sales decreased 14.0% in Fiscal 1999 from Fiscal 1998. All
segments reported trade sales decreases from the prior year, due to industry-
wide soft market conditions that were prevalent for much of Fiscal 1999. These
soft market conditions, caused by the Asian financial crisis and excess capacity
in the semiconductor industry as a whole, resulted in severe price pressures,
which accounted for the majority of the revenue shortfall on a comparable basis.
Unit volume was flat for Fiscal 1999 as compared to Fiscal 1998.
Geographically, 33%, 17% and 50% of Fairchild International's trade sales
in Fiscal 1999 were generated in the United States, Europe and Asia,
respectively, compared to 38%, 21% and 41%, respectively, in Fiscal 1998. Soft
market conditions prevalent in Fiscal 1999 negatively impacted all geographic
regions. Trade sales in the United States decreased 9.8% in Fiscal 1999 from
Fiscal 1998. Excluding one time charges, trade sales decreased 7.6%. Trade sales
in Europe decreased 16.1% in Fiscal 1999 from Fiscal 1998. Trade sales in Asia
increased 24.3% in Fiscal 1999 over Fiscal 1998. Asia sales include those in
Southeast Asia, Korea and Japan. The increase in trade sales is due entirely to
the acquisition of the power device business. Excluding the power device
business, Asia trade sales decreased 2.1% in Fiscal 1999 from Fiscal 1998.
Contract manufacturing revenues decreased 47.2% to $81.0 million in Fiscal 1999,
compared to $153.4 million in Fiscal 1998. Contract manufacturing revenues in
Fiscal 1999 include $18.7 million of billings under the guaranteed annual
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<PAGE> 39
revenue and fixed cost recovery provisions of the manufacturing agreements with
National Semiconductor. The decrease was due to reduced demand from National
Semiconductor.
Gross Profit. Gross profit decreased 33.9% to $152.3 million in Fiscal
1999 from $230.5 million in Fiscal 1998. Gross trade profit in Fiscal 1999 was
negatively impacted by one-time charges of $15.4 million for additional sales
and inventory reserves as a result of the Memory restructuring action. Excluding
one-time charges, gross profit decreased 27.2% to $167.7 million in Fiscal 1999.
Gross profit includes $16.6 million and $36.3 million in Fiscal 1999 and Fiscal
1998, respectively, attributable to contract manufacturing services provided to
National Semiconductor. As a percentage of trade sales, gross trade profit,
which excludes contract manufacturing, was 20.7% in Fiscal 1999 compared to
30.5% in Fiscal 1998. Excluding one-time charges, gross trade profit as a
percentage of trade sales was 22.9% in Fiscal 1999. The decrease in gross trade
profits as a percentage of sales in Fiscal 1999 from Fiscal 1998 was due to
lower average trade selling prices and the negative effects of significantly
decreased demand from National Semiconductor.
Contract manufacturing gross profit decreased 54.3% in Fiscal 1999 from
Fiscal 1998. As a percentage of contract manufacturing revenue, contract
manufacturing gross profit was 20.5% in Fiscal 1999, compared to 23.7% in Fiscal
1998. The decrease in contract manufacturing gross profit as a percent of
contract manufacturing revenues is due to the negative effects of lower factory
utilization due to reduced demand from National Semiconductor and an unfavorable
sales mix toward ABiC wafers produced in Fairchild International's six-inch fab
in South Portland, Maine.
Research and Development. R&D expenses were $39.3 million, or 6.0% of
trade sales in Fiscal 1999, compared to $35.7 million, or 5.6% of trade sales in
Fiscal 1998. The increase in R&D expenses is due to the addition of the R&D
expenses of the power device business and a full year of Analog R&D expenses in
Fiscal 1999, as compared to five months of Analog R&D expenses recorded in
Fiscal 1998. R&D efforts are focused on Fairchild International's growth
products (CMOS logic, DMOS, Analog and the power device business products). In
Fiscal 1999, R&D expenditures were 7.7% of trade sales for these growth
products, and 3.0% of trade sales for all other products. In Fiscal 1998, R&D
expenditures were 8.7% and 2.7% for growth and all other products, respectively.
The decrease in R&D expenditures for growth products as a percentage of trade
sales is due to the relatively small R&D requirements of the power device
business as a percentage of sales.
Selling, General and Administrative. SG&A expenses were $105.1 million, or
16.1% of trade sales in Fiscal 1999, compared to $92.0 million or 14.5% of trade
sales in Fiscal 1998. The increase in SG&A expenses is due to the addition of
the SG&A expenses of the power device business, a full year of Analog SG&A
expenses in Fiscal 1999, as compared to five months of Analog SG&A expenses
recorded in Fiscal 1998, and amortization of acquisition-related intangibles,
including a full year of amortization of intangibles related to the Raytheon
acquisition in Fiscal 1999 as compared to five months in Fiscal 1998.
Restructuring. Fiscal 1999 included restructuring charges of $21.3
million, as Fairchild International took several actions during Fiscal 1999 to
reduce costs and improve profitability in a number of areas. In the fourth
quarter of Fiscal 1999, Fairchild International took a pre-tax charge of $4.1
million for actions to improve the profitability of the Memory Products Group.
These actions include transferring wafer fabrication activities in Salt Lake
City, Utah to third-party subcontractors and obsoleting Memory product lines.
The charge consists of $3.9 million for non-cash asset impairments at Fairchild
International's facilities in Salt Lake City, Utah and Sunnyvale, California,
and $0.2 million for severance and employee separation costs. In addition,
Fairchild International took charges of $5.5 million and $9.9 million recorded
to revenue and cost of sales, respectively, for additional sales and inventory
reserves. Including these charges, the total charge for the Memory restructuring
was $19.5 million.
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<PAGE> 40
In the fourth quarter of Fiscal 1999, Fairchild International took a
pre-tax charge of $10.0 million for the closure of its Mountain View facility,
which supports the Analog Products Group. Fairchild International is
transferring Analog wafer fabrication activities to its facility in South
Portland, Maine. As a result of this transfer, Fairchild International expects a
substantial reduction in Analog wafer costs and improved gross profit. The
charge consists of $4.0 million for severance and employee separation costs,
$4.5 million for non-cash asset impairments, including a one-time loss for the
sale of the Mountain View facility of $1.9 million and $1.5 million in other
exit costs. In March 1999, Fairchild International sold the facility for $30.2
million, net of closing costs, $0.5 million in escrow to cover demolition costs,
and a $3.5 million holdback, payment of which is contingent upon either
favorable action or no action within one year of the sale date by the City of
Mountain View with respect to the buyer's application to increase the building
density on the site. Fairchild International views the holdback as a contingent
gain, and as such did not record this amount in its Statement of Operations.
Fairchild International expects, however, that a favorable ruling will be
granted which will enable Fairchild International to record a one-time gain from
receipt of the holdback in a subsequent period. In the third quarter of Fiscal
1999, Fairchild International took a pre-tax charge of $2.7 million for the
transfer of Analog assembly and test activities from its Mountain View facility
to Fairchild International's facility in Penang, Malaysia and various third-
party subcontractors. The charge consisted of $1.9 million for non-cash asset
impairments and $0.8 million for severance and employee separation costs. Total
charges for Analog restructuring activities, including the loss on sale of the
Mountain View facility, were $12.7 million in Fiscal 1999.
In the first quarter of Fiscal 1999, Fairchild International took a pre-tax
restructuring charge of $4.5 million in connection with a plan to reduce costs
and improve operating efficiencies. The charge consisted of $3.7 million for
severance and employee separation costs related to the reduction of
approximately 600 salaried, hourly and temporary positions in the United States
and Cebu, the Philippines, representing approximately 10% of Fairchild
International's payroll. In addition, $0.8 million was recorded for the
write-off of various idle assets in Fairchild International's Mountain View and
Salt Lake City facilities.
Interest expense, net. Interest expense, net was $71.8 million in Fiscal
1999, compared to $54.5 million in Fiscal 1998. The increase was due to the
write-off of deferred financing fees of $5.2 million in connection with the
refinancing of its senior credit facilities as part of the acquisition of the
power device business, incremental interest expense as a result of additional
indebtedness incurred to finance the acquisition, a full year of interest
expense on borrowings to finance the Raytheon acquisition, as compared to five
months in Fiscal 1998 and interest expense on short-term borrowings in Fiscal
1999 which did not occur in Fiscal 1998.
Income Taxes. Income tax expense (benefit) was a benefit of $(5.1) million
in Fiscal 1999, compared to income tax expense of $10.7 million in Fiscal 1998.
The effective tax rate for Fiscal 1999 was 4.3%, compared to 32.6% in Fiscal
1998. The decrease in the effective rate is due to the inability of Fairchild
International to carry back its Fiscal 1999 operating loss due to the short time
Fairchild International has operated as a stand-alone entity and a tax holiday
for income generated by Fairchild International's Korean subsidiary, Fairchild
Korea Semiconductor Ltd., formed as a result of the acquisition of the power
device business. Fairchild Korea Semiconductor Ltd. has been granted a ten year
tax holiday. The first seven years are tax-free, followed by three years of
income taxes at 50% of the statutory rate.
Effective for the fiscal year ended May 30, 1999, Fairchild International
adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. In accordance with the provisions of SFAS No. 131, comparative
disclosures of selected operating results of Fairchild International's
reportable segments have been included for Fiscal 1998 and 1997.
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<PAGE> 41
Analog and Mixed Signal Products Division. Fairchild International formed
the Analog and Mixed Signal Products Division upon completion of the acquisition
of Raytheon. This division has expanded due to the inclusion of the analog
products of the power device business. Its product offerings include standard
linear products such as operational amplifiers, low drop out regulators and
ground fault interrupters, motor control integrated circuits, smart power
switches and D/C to D/C converters. Analog revenues increased 199.4% to $95.8
million in Fiscal 1999 from $32.0 million in Fiscal 1998. Fiscal 1999 includes
the analog revenues of the power device business since the date of acquisition.
Fiscal 1998 includes revenues of Analog from the acquisition date of Raytheon.
Normalized to exclude power device products and the non-comparable period of
Analog sales in Fiscal 1999, Analog revenues were $25.5 million in Fiscal 1999,
a decrease of 20.3% from Fiscal 1998. The decrease for the comparable period in
Fiscal 1999 from Fiscal 1998 is due to revenue decreases in its mature products,
combined with lower than anticipated new product revenues.
Analog generated operating income of $8.1 million in Fiscal 1999 excluding
restructuring charges, compared to $2.2 million in Fiscal 1998. Excluding the
effect of the power device business and normalized for the non-comparable period
of Analog operating results in Fiscal 1999, Analog generated an operating loss
of $2.7 million in Fiscal 1999. The decrease in operating income is primarily
driven by the decline in revenues.
Discrete Power and Signal Technologies Products Group. Discrete designs,
manufactures and markets a broad line of DMOS power MOSFETs, for both high and
low-voltage applications, IGBT, bipolar power transistors, small signal
transistors and diodes. This group has expanded due to the inclusion of the
discrete products of the power device business. An increasing volume of DMOS
power MOSFETs are manufactured using Fairchild International's leading edge
Trench technology. Discrete revenues increased 19.0% to $222.8 million in Fiscal
1999, compared to $187.3 million in Fiscal 1998. Fiscal 1999 includes the
discrete revenues of the power device business since the date of acquisition.
Excluding discrete power device products, Discrete revenues decreased 3.7% in
Fiscal 1999 from Fiscal 1998. The decrease is attributable to lower revenues for
its mature Bipolar products, which decreased 18.1% from Fiscal 1998, partially
offset by higher revenues for its DMOS products, which increased 7.9% from
Fiscal 1998.
Discrete generated operating income of $7.0 million in Fiscal 1999,
compared to operating income of $44.9 million in Fiscal 1998. Excluding the
effect of the power device business, Discrete generated operating income of $4.8
million in fiscal 1999. The decrease was due primarily to lower gross profit as
a result of lower contract manufacturing profits, unfavorable sales mix, the
negative effect of underutilization of the Salt Lake City fab, driven by lower
contract manufacturing and Memory volumes, and inventory write-downs in the
Cebu, the Philippines assembly and test facility.
Interface and Logic Products Group. Logic designs, manufactures and
markets a broad line of high-performance interface and standard logic products.
Its interface products include building block products such as FST and GTL, and
standards-specific products such as dual inline memory drivers and Universal
Serial Bus. Its logic products focus on the growing CMOS logic market, from
industry standard FACT and HCMOS to new products such as TinyLogic, LCX and LVT.
Its products also include mature bipolar logic products such as FAST, LS and
TTL. Price competition was particularly intense in Logic in Fiscal 1999. Logic
revenues decreased 11.7% to $267.6 million in Fiscal 1999, compared to $303.0
million in Fiscal 1998. Revenues for interface products grew 573% in Fiscal 1999
over Fiscal 1998, due to success of new product introductions. This increase was
more than offset by a 14.4% decrease in logic products revenues. The decrease in
logic products revenues is primarily attributable to lower bipolar logic
revenues, which decreased 29.4% from Fiscal 1998. CMOS revenues decreased 2.9%
in Fiscal 1999 over Fiscal 1998. Overall, new product revenues doubled in Fiscal
1999 over Fiscal 1998.
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<PAGE> 42
Logic generated operating income of $35.7 million in Fiscal 1999, compared
to $70.0 million in Fiscal 1998. The decrease in operating income is
attributable to lower average selling prices due to soft market conditions in
Fiscal 1999 and lower contract manufacturing profits.
Non-Volatile Memory Division. Memory designs, manufactures and markets a
broad line of serial EEPROM, EPROM and applications-specific standard products,
including microcontrollers. In order to improve the profitability of Memory,
Fairchild International took a charge of $19.5 million in Fiscal 1999. Actions
include transferring wafer fabrication activities in Salt Lake City, Utah to
third-party subcontractors and obsoleting Memory product lines. Excluding a
charge of $5.5 million recorded as a reduction to revenue in the form of
increased sales reserves as part of the restructuring, Memory revenues decreased
35.3% to $73.4 million from $113.5 million in Fiscal 1998. The revenue decrease
was across all product lines. EEPROM revenues decreased 30.7% in Fiscal 1999
from Fiscal 1998, and EPROM revenues decreased 46.6% in Fiscal 1999 from Fiscal
1998. The decreases are due to lower average selling prices, lower volumes due
to soft market conditions, and in the case of EPROM, a rapidly shrinking market,
which is being replaced by FLASH memory.
Memory generated an operating loss of $26.4 million in Fiscal 1999,
excluding the restructuring charge, compared to an operating loss of $14.2
million in Fiscal 1998. The increase in the operating loss is due primarily to
lower average selling prices as a result of soft market conditions in Fiscal
1999.
YEAR ENDED MAY 31, 1998 COMPARED TO YEAR ENDED MAY 25, 1997
RESULTS OF OPERATIONS. Net income increased 32.9% to $20.6 million in
Fiscal 1998, as compared to $15.5 million in Fiscal 1997. Net income in Fiscal
1998 includes a pre-tax charge for in-process research and development
associated with the acquisition of Raytheon ($15.5 million) and an after-tax
charge for the cumulative effect of a change in accounting principle pertaining
to business process reengineering costs associated with Fairchild
International's enterprise software system implementation ($1.5 million) which
had been previously capitalized. Net income in Fiscal 1997 includes pre-tax
charges related to payment of retention bonuses ($14.1 million) and a
restructuring charge ($5.3 million) related to workforce reductions. In
addition, Fiscal 1998 net income includes a full year of interest expense and
income taxes, while Fiscal 1997 includes these charges only for the period
subsequent to the recapitalization of Fairchild Semiconductor Corporation. Prior
to the recapitalization, the Fairchild Semiconductor Business did not incur
these costs. Excluding unusual charges and amortization of acquisition-related
intangibles of $1.4 million in Fiscal 1998, net of tax effect, net income was
$33.5 million and $34.9 million in Fiscal 1998 and Fiscal 1997, respectively.
Operating income, excluding unusual charges, increased 100.4% to $102.8
million in Fiscal 1998 from $51.3 million in Fiscal 1997. Included in operating
income is $36.3 million and $6.8 million of gross profit on contract
manufacturing services in Fiscal 1998 and 1997, respectively, under
manufacturing agreements with National Semiconductor. Gross profit on contract
manufacturing services in Fiscal 1997 was generated subsequent to the
recapitalization of Fairchild Semiconductor Corporation. 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
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<PAGE> 43
currency devaluations in Southeast Asia on manufacturing costs. The following
table depicts operating income for Fairchild International's reportable
segments:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED MAY
----------------------
1997 1998
-------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Analog...................................................... $ -- $ 2.2
Discrete.................................................... 21.7 44.9
Logic....................................................... 21.3 70.0
Memory...................................................... 5.0 (14.2)
</TABLE>
Analog was formed upon the completion of the acquisition of Raytheon. Its
results are consolidated with those of Fairchild International as of the date of
acquisition. Discrete and Logic operating profits increased 106.9% and 228.6%,
respectively, in Fiscal 1998 from Fiscal 1997. Memory suffered an operating loss
in Fiscal 1998, due primarily to lower revenues and gross profits as a result of
intense price competition.
Excluding unusual charges, depreciation and amortization of $84.6 million
and $77.1 million in Fiscal 1998 and 1997, respectively, and other expense of
$1.4 million in Fiscal 1997, EBITDA increased 46.0% to $187.4 million in Fiscal
1998 from $128.4 million in Fiscal 1997.
Fairchild International's results for the fiscal year ended May 31, 1998
consist of 53 weeks of activity, compared to 52 weeks for the fiscal years ended
May 25, 1997 and May 26, 1996.
Revenues. Fairchild International's revenues consist of trade sales to
unaffiliated customers (80.6% and 84.9% of total revenues in Fiscal 1998 and
1997, respectively) and revenues from contract manufacturing services provided
to National Semiconductor (19.4% and 15.1% of total revenues in Fiscal 1998 and
1997, respectively).
Trade sales increased 8.2% to $635.8 million in Fiscal 1998 compared to
$587.8 million in Fiscal 1997. Trade sales for Fiscal 1998 include those of
Raytheon since the acquisition. Excluding Raytheon, trade sales increased 2.7%
in Fiscal 1998 over Fiscal 1997. The increase in trade sales was driven
primarily by increased unit volume, as average selling prices were flat. Average
selling prices increased year over year for the first three quarters in Fiscal
1998, but decreased significantly in the fourth quarter as industry-wide market
conditions softened.
Discrete trade sales increased 13.9% in Fiscal 1998 over Fiscal 1997. The
increase was due to higher average selling prices, driven by new product
introductions and a favorable sales mix, and slightly higher unit volume. DMOS
trade sales increased 39.9% in Fiscal 1998 over Fiscal 1997, offsetting a
decrease of 7.6% in Bipolar trade sales. The increase in DMOS trade sales was
due to higher sales volume of new products featuring Fairchild International's
Trench technology, which offset price erosion in some of the more mature DMOS
products. The decrease in Bipolar trade sales was driven by a combination of
lower sales volume and slightly lower average selling prices. Reflective of
Fairchild International's growth strategy, trade sales of DMOS products in
Fiscal 1998 exceeded trade sales in Bipolar products for the first time.
Logic trade sales increased 6.2% in Fiscal 1998 over Fiscal 1997. The
increase was driven by higher unit volume, which offset a decrease in average
selling prices. In Fiscal 1998, CMOS trade sales increased 14.3% over Fiscal
1997, offsetting a decrease of 2.8% in Bipolar trade sales. The increase in CMOS
trade sales was across all product lines, including VHC, LCX, FACT(TM) and
HCMOS. The decrease in Bipolar trade sales is reflective of the general market
trend toward lower power consuming CMOS products.
Memory trade sales decreased 17.7% in Fiscal 1998 over Fiscal 1997. The
decrease was driven by lower prices impacting all memory product lines due to
competitive pressures, partially offset by
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<PAGE> 44
higher volume, particularly in EEPROM. EEPROM, which is Fairchild
International's long-term focus in the non-volatile memory market, had increased
trade sales of 4.7% in Fiscal 1998 over Fiscal 1997. In a declining market,
EPROM trade sales decreased 46.2% in Fiscal 1998 over Fiscal 1997, as EPROMs are
being rapidly phased out by FLASH memory products in the marketplace.
Geographically, 38%, 21% and 41% of trade sales were derived in the United
States, Europe and Asia, respectively, in Fiscal 1998, compared to 38%, 20% and
42% in Fiscal 1997. Trade sales in all regions grew over Fiscal 1997 levels.
Europe increased 12.7%, the United States increased 8.8% and Asia increased
5.4%, despite soft economic conditions in the region. Asia trade sales were
influenced by strong growth in Southeast Asia, which offset a year over year
decline in Japan.
Contract manufacturing revenues increased 47.2% to $153.4 million in Fiscal
1998 compared to $104.2 million in Fiscal 1997. This increase, when normalized
for higher prices to include a markup for all of Fiscal 1998, reflects greater
demand from National Semiconductor, particularly in the first nine months of
Fiscal 1998. During the fourth quarter, foundry revenues decreased 26.1% from
the third quarter as National Semiconductor sharply cut back its demand in
response to its own publicly-announced restructuring created by soft market
conditions in the industry.
Gross Profit. Gross profit increased 51.2% to $230.5 million in Fiscal
1998, compared to $152.5 million in Fiscal 1997. Included in gross profit in
Fiscal 1998 and 1997 is $36.3 million and $6.8 million, respectively,
attributable to contract manufacturing services provided to National
Semiconductor. Prior to the recapitalization of Fairchild Semiconductor
Corporation in Fiscal 1997, these revenues were recorded at cost. Gross trade
profit excluding contract manufacturing increased 33.3% in Fiscal 1998 over
Fiscal 1997. As a percentage of trade sales, gross trade profits were 30.5% and
24.8% in Fiscal 1998 and 1997, respectively. The increase in gross trade profit
as a percentage of trade sales was due to increased factory utilization due to
improved market conditions that existed through the third quarter of Fiscal
1998, the favorable effect on fixed cost absorption of increased demand from
National Semiconductor in the first nine months of Fiscal 1998, the favorable
effects of currency devaluations in Southeast Asia on Fairchild International's
manufacturing costs and the acquisition of Raytheon, which increased Fairchild
International's portfolio of higher-margin products.
Research and Development. R&D expenses were $35.7 million, excluding a
$15.5 million pre-tax charge for purchased in-process R&D expenses associated
with the acquisition of Raytheon, or 5.6% of trade sales in Fiscal 1998,
compared to $18.9 million, or 3.2% of trade sales in Fiscal 1997. The increase
in R&D expenses is driven by higher spending to support new product development,
reflecting Fairchild International's renewed emphasis on R&D efforts as a
stand-alone company following the recapitalization of Fairchild Semiconductor
Corporation. Prior to the recapitalization, R&D expenditures of the business
primarily consisted of allocations from National Semiconductor. Reflective of
increased R&D efforts, Fairchild International approximately doubled the number
of new products introduced in Fiscal 1998 from Fiscal 1997. In addition,
Fairchild International is spending higher levels of R&D expenses for its Analog
and Mixed Signal products, reflecting its strategy to focus on and grow this
segment of its business. R&D efforts are focused on Fairchild International's
growth products: CMOS Logic, DMOS, EEPROM and Analog. In Fiscal 1998, R&D
expenditures were 8.9% of trade sales for these growth products, and 0.5% of
trade sales for Fairchild International's mature products (Bipolar Logic,
Bipolar Discretes and EPROM). Comparison of the above to Fiscal 1997 is not
meaningful as Fairchild International 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
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<PAGE> 45
agreements with National Semiconductor, and in the second half of Fiscal 1998
due to the integration of the Raytheon sales force into Fairchild International.
The increase in selling and marketing expenses was partially offset by a
decrease in general and administrative expenses due to lower expenses incurred
as a stand-alone entity in Fiscal 1998 compared to Fiscal 1997, which reflects
nine months of direct and allocated expenses of the Fairchild Semiconductor
Business while operated by National Semiconductor.
Restructuring. Fiscal 1997 included a restructuring charge of $5.3
million, incurred in the first quarter, for severance and other costs directly
attributable to a workforce reduction.
Interest Expense, Net. Interest expense, net was $54.5 million and $11.2
million in Fiscal 1998 and 1997, respectively. Fiscal 1998 includes a full year
of interest expense on indebtedness incurred to finance the recapitalization of
Fairchild Semiconductor Corporation, while Fiscal 1997 contains approximately
one quarter of such interest expense. In addition, Fairchild International
incurred additional indebtedness due to the purchase of Raytheon in the third
quarter of Fiscal 1998. Prior to the recapitalization in Fiscal 1997 of
Fairchild Semiconductor Corporation, the Fairchild Semiconductor Business was
allocated net interest expense from National Semiconductor. This amount is
included in other expense.
Other Expenses. Other expense was $1.4 million in Fiscal 1997, consisting
primarily of net interest expense allocated to the Fairchild Semiconductor
Business by National Semiconductor. There were no comparable amounts incurred in
Fiscal 1998.
In the third quarter of Fiscal 1998, Fairchild International took a pre-tax
charge of $15.5 million for purchased in-process research and development in
conjunction with the acquisition of Raytheon and an after-tax charge of $1.5
million for the cumulative effect of an accounting charge pertaining to
treatment of business process reengineering costs associated with Fairchild
International's enterprise software system implementation. The enterprise
software system implementation costs, relating to activities to assess the
system's capabilities in light of Fairchild International'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 of Fairchild Semiconductor
Corporation, at an effective rate of 39.1%. The lower tax rate in Fiscal 1998 is
due to a higher proportion of taxable income in lower tax countries as compared
to Fiscal 1997. Prior to the recapitalization of Fairchild Semiconductor
Corporation, the Fairchild Semiconductor Business did not record a tax provision
or pay income taxes as it operated as a division of National Semiconductor.
ACQUISITION OF THE POWER DEVICE BUSINESS
In connection with the acquisition of the power device business, Fairchild
International allocated $34.0 million of the purchase price to in-process
research and development projects. This allocation represents the estimated fair
value based on risk-adjusted cash flows related to the incomplete products. At
the date of acquisition, the development of these projects had not yet reached
technological feasibility and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date.
Fairchild International's management assessed and allocated values to the
in-process research and development. The value assigned to these assets was
determined by identifying significant research projects for which technological
feasibility had not been established, including development, engineering and
testing activities associated with the introduction of the power device
business' next generation products. A discussion of the most significant
projects follows.
Smart Power Switch ("SPS"). This product line combines a Power Discrete
MOSFET and an analog IC in a single package to provide customers with low cost,
high functionality, high reliability
42
<PAGE> 46
and high productivity solutions. These products are used in power chargers, and
power supplies for PCs, TVs, VCRs, and monitors. Research and development is
focused on cost reduction and further reliability improvement of existing
products. Long-term research and development is focused on proprietary
chip-on-chip assembly technology as well as developing a one-chip solution.
Motor IC. This product line specializes in IC products that control
various motor drives. These products are used for driving motors in automotive,
camera, CD-ROM, CD player, floppy disk drive, hard disk drive, and video
recorder applications. Current research and development is focused on adding
more channels as well as adding more intelligence/functionality onto the IC
chips.
Integrated Gate Bipolar Transistor ("IGBT"). This product line uses a
proprietary silicon bonding process to fabricate devices for very high voltage
applications. Industrial segment applications include power supplies, welding
machines, robotics, ignition controls, and battery chargers. Consumer segment
applications include lighting ballasts, camera strobes, induction heaters,
microwave ovens, and washing machines. Research and development is focused on
developing IGBTs that will work with products that operate at higher frequency
ranges as well as higher voltages and higher currents.
The fair values assigned to each of the significant projects and estimated
time to complete are reported below. The estimated costs to complete for these
projects, which are estimated to be $4.7 million, are expected to be spent
evenly for the remainder of their respective development cycles.
<TABLE>
<CAPTION>
MAN-
FAIR VALUE MONTHS
PRODUCT (IN MILLIONS) TO COMPLETE
- ------- ------------- -----------
<S> <C> <C>
Smart Power Switch................................... $ 13.9 57
Motor IC............................................. 8.2 131
IGBT................................................. 6.5 25
All Others........................................... 5.4 147
------ ----
Total........................................... $ 34.0 360
====== ====
</TABLE>
As of November 28, 1999, there were no significant changes from the
original estimates of time and cost to complete.
The material risks associated with the successful completion of the
in-process technology are associated with the power device business' ability to
successfully finish the creation of viable prototypes and successful design of
the chips and masks required. Fairchild International expects to benefit from
the in-process projects as the individual products that contain the in-process
technology are put into production and sold to end-users. The release dates for
each of the products within the product families are varied. The initial benefit
received from the significant in-process technologies occurred during the second
half of calendar year 1999.
The methodology used to assign value to purchased in-process research and
development was the income approach, which included an analysis of the markets,
cash flows, and risks associated with achieving such cash flows. Significant
assumptions that had to be made using this approach included revenue and
operating margin projections and determination of the applicable discount rate.
The forecast for the in-process project related products relied on sales
projections that were based on targeted market share and pricing estimates over
the expected product life cycles. In the model used to value the in-process
research and development projects, total projected revenues were expected to
exceed $200.0 million by 2003. Operating expenses for these products included
cost of goods sold and selling, general, and administrative expenses. Operating
expenses were estimated as a percentage of revenue, and were consistent with
historical results.
The forecasts used by Fairchild International in valuing in-process
research and development were based upon assumptions Fairchild International
believes to be reasonable but which are inherently uncertain and unpredictable.
We cannot assure you that the underlying assumptions used to estimate expected
project sales or profits, or the events associated with such projects, will
transpire
43
<PAGE> 47
as estimated. Fairchild International's assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances are likely to occur. For
these reasons, actual results may vary from the projected results.
The discount rate selected for power device business' in-process technology
was 20%. This discount rate is greater than Fairchild International's weighted
average cost of capital (approximately 15% at the date of acquisition of the
power device business) and reflects the risk premium associated with achieving
the forecasted cash flows associated with these projects. These risks include
the uncertainties in the economic estimates described above; the inherent
uncertainty surrounding the successful development of the purchased in-process
technology; the useful life of such technology; the profitability levels of such
technology; and the uncertainty of technological advances that are unknown at
this time.
As of November 28, 1999, revenues recognized from these projects were not
lower than the forecasted revenues and cash flows in the calculation of the
in-process research and development value.
ACQUISITION OF RAYTHEON
In connection with the acquisition of Raytheon, Fairchild International
allocated $15.5 million of the purchase price to in-process research and
development projects. This allocation represents the estimated fair value based
on risk-adjusted cash flows related to the incomplete products. At the date of
acquisition, the development of these projects had not yet reached technological
feasibility and the R&D in progress had no alternative future uses. Accordingly,
these costs were expensed as of the acquisition date.
Fairchild International's management assessed and allocated values to the
in-process research and development. The values assigned to each purchased R&D
project were determined by identifying significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of the
related products. The products associated with these projects include a broad
range of semiconductor products used in power management and video integrated
circuits, including personal computers, broadcast video and data communications.
The projects identified can be categorized in the analog or video product
families.
Analog Family. This family's strategy focuses on (i) a higher integration
of Ground Fault Interruptor chips and (ii) power for desktop personal computers,
notebook personal computers and cellular telephones. As of the acquisition date,
the remaining efforts for the projects to be completed included starting and
completing the beta testing phase of the development process, with a total
remaining cost to complete the testing of approximately $2.5 million, and
anticipated release dates by the end of Fiscal 1998.
Video Family. This family's in-process research and development was
identified in the following projects: (i) decoders and genlocks; (ii) digital
video encoders; and (iii) personal computer to television plug-n-play
converters. The remaining efforts for the projects to be completed included the
completion of the beta-testing phase of the development process for each
project. As of the acquisition date, remaining costs to complete were estimated
to be approximately $1.0 million for anticipated release dates by the end of
Fiscal 1998.
Decoders and Genlocks. These adaptive, combination based video decoders
are optimized for the video professional, allowing flexibility in system
performance while utilizing a common design approach. The genlocking analog to
digital converter is a companion product for both the new product decoders and
encoders. The products include analog, high-performance encoders which are in
the beta testing phase of development; a digital design, improved decoder for
personal computer and television applications which is in the alpha testing
phase of development; an improved genlocking
44
<PAGE> 48
digitizer which is in the design phase of development; and an analog, genlocking
decoder which is in the concept phase of development.
Digital Video Encoders. The in-process product in this category is a
digital design video data processor, which is in the concept phase of
development.
Personal Computer to Television Plug-N-Play-Converter. The in-process
product in this category is an analog personal computer to television
plug-n-play converter which is in the beta testing stage of development. This
product will be the next generation of the current offering with many
enhancements.
The material risks associated with the successful completion of the
in-process technology include Fairchild International's ability to successfully
finish the creation of viable prototypes, successful design of the chips and
masks required and the degree of the market's acceptance of these new products.
As of the acquisition date, Fairchild International expected to benefit from the
in-process projects as the individual products that contain the in-process
technology are put into production and sold to end-users. Significant positive
cash flows from these projects were expected to begin during 1999.
The methodology used to assign value to purchased in-process research and
development projects was the income approach, which includes an analysis of the
markets, cash flows, and risks associated with achieving such cash flows.
Significant assumptions that had to be made using this approach included
projected revenues, operating margins and determining an appropriate discount
rate. The forecast for the in-process project related products relied on sales
estimates that were based on targeted market share, pricing estimates and
expected product life cycles. In the model used to value the in-process research
and development projects, total projected revenues from these products were
expected to exceed $150.0 million by Fiscal 2002. Revenues were expected to peak
in Fiscal 2001 and decline thereafter as other new products and technologies
were expected to enter the market. Operating expenses for these products
included cost of goods sold and selling, general and administrative expenses.
Operating expenses were estimated as a percentage of revenues and were
consistent with historical results. The discount rate utilized for the acquired
in-process technologies was estimated at 22.5% in consideration of Fairchild
International's 15% weighted average cost of capital. The discount rate utilized
for the in-process technology was determined to be higher than Fairchild
International's weighted average cost of capital due to the fact that the
technology had not yet reached technological feasibility as of the date of
valuation.
As of November 28, 1999, total actual revenues in the analog and video
families on the in-process R&D projects were approximately 50% of total expected
revenues. The revenue shortfall in the analog family and the reductions in
expected cash flows were driven by lower demand from personal computer customers
and higher than expected costs on certain projects. Fairchild International has
addressed the cost issues in the restructuring of its Mountain View facility.
The revenue and cash flow shortfall in the video family was driven by
unfavorable market conditions during Fiscal 1998. The weaker cash flows from
these projects has not had, nor is expected to have, any material adverse impact
on the results of operations of Fairchild International or its financial
position, including the recoverability of intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
Fairchild International has a borrowing capacity of $100.0 million for
working capital and general corporate purposes under the revolving credit
facility. No amount was drawn under the revolving credit facility at November
28, 1999.
The senior credit facilities, the 10 1/8% Senior Subordinated Notes and the
10 3/8% Senior Subordinated Notes do, and other debt instruments Fairchild
International may enter into in the future may, impose various restrictions and
covenants on Fairchild International which could potentially limit Fairchild
International's ability to respond to market conditions, to provide for
45
<PAGE> 49
unanticipated capital investments or to take advantage of business
opportunities. The restrictive covenants include limitations on consolidations,
mergers and acquisitions, restrictions on creating liens, restrictions on paying
dividends or making other similar restricted payments, restrictions on asset
sales, limitations on borrowing money, and limitations on capital expenditures,
among other restrictions. The covenants relating to financial ratios include
minimum fixed charge and interest coverage ratios and a maximum leverage ratio.
The senior credit facilities also limit our ability to modify our certificate of
incorporation, bylaws, shareholder agreements, voting trusts or similar
arrangements. In addition, the senior credit facilities, the 10 1/8% Senior
Subordinated Notes and the 10 3/8% Senior Subordinated Notes contain additional
restrictions limiting the ability of our subsidiaries to make dividends or
advances to our company. However, our subsidiaries are permitted without
material restrictions under our debt instruments to make dividends or advances
to Fairchild Semiconductor Corporation. See "Description of Indebtedness" for a
detailed description of the covenants, including restrictions on dividends, in
our debt instruments. We believe that those funds permitted to be transferred to
us, together with existing cash, will be sufficient to meet our cash
obligations. Fairchild International expects that its existing cash, together
with the net proceeds to be received by us in this offering and available funds
from its amended senior credit facilities and funds generated from operations,
will be sufficient to meet its anticipated operating requirements and to fund
its research and development and capital expenditures for the next twelve
months. In the long-term, additional borrowing or equity investment may be
required to fund future acquisitions.
As of November 28, 1999, Fairchild International's cash and cash
equivalents balance was $123.6 million, an increase of $61.2 million from May
30, 1999.
During the first six months of stub year 1999, Fairchild International's
operations provided $79.6 million in cash compared to a use of $3.9 million of
cash in the first six months of Fiscal 1999. The increase in cash provided by
operating activities reflects an increase in net income adjusted for non-cash
items of $75.4 million as well as an increase in cash flows from changes in
operating assets and liabilities of $8.1 million. Cash used in investing
activities during the first six months of stub year 1999 totaled $12.9 million,
compared to a use of $19.8 million in the first six months of Fiscal 1999. The
difference primarily relates to the refund of Korean value added taxes paid as a
result of the acquisition of the power device business. Capital expenditures in
the first six months of stub year 1999 were made principally to add capacity in
Fairchild International's assembly and test manufacturing facilities, whereas in
the first six months of Fiscal 1999, capital expenditures were made primarily to
install Fairchild International's enterprise software system. Capital
expenditures for the balance of stub year 1999 will be made primarily to
increase capacity in Fairchild International's manufacturing facilities. Cash
used in financing activities of $5.5 million for the first six months of stub
year 1999 includes proceeds received from Fairchild International's initial
public offering of its Class A Common Stock of $345.0 million, net of fees and
expenses. The net proceeds from the initial public offering were used to repay
an 11.74% Subordinated Note due 2008 ($101.4 million), to repay a 12.5%
Subordinated Note due 2008 ($53.0 million, including a prepayment penalty of
$0.8 million) and to repay the Tranche A term loan and partially repay the
Tranche B term loan, in each case under Fairchild International's senior credit
facilities, in the aggregate amount of $190.6 million. In addition, cash was
used for the repurchase of shares of our common stock. Cash provided by
financing activities of $28.4 million in the first six months of Fiscal 1999 was
due to proceeds received from Fairchild International's revolving credit line.
LIQUIDITY AND CAPITAL RESOURCES OF FAIRCHILD INTERNATIONAL, EXCLUDING OUR
SUBSIDIARIES
Fairchild International is a holding company, the principal assets of which
are the stock of its subsidiary, Fairchild Semiconductor Corporation. Fairchild
International on a stand-alone basis had no cash flow from operations in the
first six months of stub year 1999, nor in the first six months of Fiscal 1999.
Fairchild International on a stand-alone basis has no cash requirements for the
next twelve months.
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<PAGE> 50
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Fairchild International is exposed to financial market risks, including
changes in interest rates and foreign currency exchange rates. To mitigate these
risks, Fairchild International utilizes derivative financial instruments.
Fairchild International does not use derivative financial instruments for
speculative or trading purposes. All of the potential changes noted below are
based on sensitivity analyses performed on Fairchild International's financial
position at November 28, 1999. Actual results may differ materially.
Fairchild International uses forward and option contracts to hedge firm
commitments and option contracts to hedge anticipated transactions. Gains and
losses on these foreign currency exposures would generally be offset by
corresponding losses and gains on the related hedging instruments, resulting in
negligible net exposure to Fairchild International.
A substantial majority of Fairchild International's revenue, expense and
capital purchasing activities are transacted in U.S. dollars. However, Fairchild
International does conduct these activities by way of transactions denominated
in other currencies, primarily the Korean won, Malaysian ringgit, Philippine
peso, Japanese yen, British pound, and the Euro. Exposures in the Korean won are
minimal as won denominated revenues and costs generally offset one another. To
protect against reductions in value and the volatility of future cash flows
caused by changes in other foreign exchange rates, Fairchild International has
established hedging programs. We utilize currency forward contracts and currency
option contracts in these hedging programs. Fairchild International's hedging
programs reduce, but do not always entirely eliminate, the short-term impact of
foreign currency exchange rate movements. For example, during the twelve months
ended November 28, 1999, an adverse change in any one exchange rate (defined as
20%) over the course of the year would have resulted in an adverse impact on
income before taxes of less than $5.0 million.
Fairchild International has no interest rate exposure due to rate changes
for the 10 1/8% Senior Subordinated Notes or the 10 3/8% Senior Subordinated
Notes. However, Fairchild International does have interest rate exposure with
respect to the $119.1 million outstanding balance of its tranche B term loan due
to its variable LIBOR pricing. For example, a 50 basis point increase in
interest rates would result in increased annual interest expense of $0.6
million. From time to time, Fairchild International enters into interest rate
swaps or interest rate caps, primarily to reduce its interest rate exposure. As
of November 28, 1999, Fairchild International had no such instruments in place.
NATIONAL SEMICONDUCTOR RELATIONSHIP
Fairchild International and National Semiconductor have arrangements
relating to services and sale of Fairchild International's products as follows:
First, National Semiconductor has agreed to purchase products and services from
Fairchild International until June 11, 2000 under a foundry services agreement.
Second, National Semiconductor has agreed to provide administrative services to
Fairchild International under a transition services agreement. Third, National
Semiconductor has agreed to indemnify Fairchild International against losses
relating to infringement of intellectual property rights of third parties under
a technology licensing and transfer agreement.
National Semiconductor, under the terms of the Asset Purchase Agreement
with Fairchild International, is obligated to purchase an aggregate of $330.0
million of contract manufacturing services during the 39-month period which
began March 11, 1997, including a minimum of $80.0 million of contract
manufacturing services in Fiscal 2000. In addition, National Semiconductor is
obligated to cover a contractually agreed-upon amount of fixed costs in
Fairchild International's 6-inch wafer fabrication plant in South Portland,
Maine in Fiscal 2000. In the event National Semiconductor does not purchase
$80.0 million of contract manufacturing services in Fiscal 2000, the Asset
Purchase Agreement requires National Semiconductor to reimburse Fairchild
International for unabsorbed fixed costs and lost profit on the revenue
shortfall.
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<PAGE> 51
OUTLOOK AND BUSINESS RISKS
The statements contained under this heading and elsewhere in "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Fairchild International", other than statements of historical facts, are
forward-looking statements based on current expectations and management's
estimates, which involve risks and uncertainties. Actual results may differ
materially from those set forth in or contemplated by such forward-looking
statements.
In addition to the factors set forth under "Risk Factors," the following
factors may affect Fairchild International's future operating results:
- the ability to successfully complete this offering;
- Fairchild International's dependence on continued demand for the
end-products such as personal computers, telecommunications, automotive,
and consumer and industrial electronic goods that incorporate Fairchild
International's products; and
- the ability to efficiently integrate the operations of the power device
business into Fairchild International and the risk of losing customers or
employees of the acquired operation.
Market conditions have been generally improving since the third quarter of
Fiscal 1999. Strong bookings and demand throughout the historically slower
summer season continued into the second quarter of stub year 1999, which ended
November 28, 1999. A portion of the bookings increase seen in both the first and
second quarters of stub year 1999 has occurred as industry-wide leadtimes have
extended and customers have committed their backlog for a longer period of time.
Going forward, Fairchild International expects sequential bookings increases to
return to more normal seasonal patterns. Further significant lengthening of
leadtimes are not anticipated. The Semiconductor Industry Association forecasts
calendar year 2000 industry sales growth of 14-22% compared to calendar year
1999 for our targeted investment areas in the power transistor, voltage
regulator/reference generator and interface markets. Fairchild International
expects its revenue growth in these focused areas to be at least at market
growth rates. Fairchild International believes that industry-wide demand is
meeting supply in many product areas, leading to some price firming during the
second quarter of stub year 1999. If tightening market trends continue,
Fairchild International management expects that prices will continue to
stabilize or rise slowly through the first half of calendar year 2000. Fairchild
International expects that margins will continue to improve slowly as a result
of these price increases, better new product mix, manufacturing cost reductions
and better overhead spreading. Potential factors that may preclude us from
realizing any or all of these expectations include, but are not limited to,
softening of industry-wide demand, renewed industry-wide price competition,
failure to execute new product development plans and failure to execute capacity
expansion plans.
On September 21, 1999, Taiwan experienced a major earthquake. The
earthquake and resulting aftershocks caused power outages and significant damage
to Taiwan's infrastructure. Fairchild International has no manufacturing
facilities in Taiwan. However, Fairchild International has a number of
customers, primarily personal computer manufactures, located there. Fairchild
International has not experienced any significant impact on its revenue in that
region as a result of the earthquake.
The power device business currently sells its products in Asia through a
network of exclusive sales agents on a commission basis. The prices for which
products are sold include the commission. The commissions are recorded as a
selling expense. Effective January 1, 2000, as part of the integration of the
power device business into Fairchild International's operations, the power
device business is ending these arrangements, and the products will be sold
through Fairchild International's existing distribution network at market
prices. Had the prospective arrangement been in place during stub year 1999,
revenues, gross profits and SG&A would each be reduced by approximately $10.0
million for the six months ended November 28, 1999.
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<PAGE> 52
YEAR 2000 COMPLIANCE
In the fourth quarter of Fiscal 1997, Fairchild International commenced its
enterprise software system implementation project for the purpose of separating
from National Semiconductor's business systems. The system, which became
operational for several of Fairchild International's critical business processes
in the first half of Fiscal 1999, is year 2000 compliant. Additional modules of
the system are scheduled to be implemented through Fiscal 2000. For those legacy
systems that will not be converted by December 31, 1999, year 2000 remediation
projects were completed in October 1999. Fairchild International's business is
dependent upon its information systems as an integral part of all major business
processes. Additionally, internal resources had been redeployed to identify,
test and correct year 2000 problems in other systems throughout Fairchild
International, including those systems embedded in Fairchild International's
machinery and equipment. Identification of systems and equipment that are not
year 2000 compliant and remediation projects to correct identified problems have
been completed. Fairchild International also reviewed the year 2000 readiness
and compliance of its principal suppliers of products and services, in order to
identify and assess any negative impacts that such non-compliances could have on
Fairchild International. In addition, Fairchild International worked with its
customers to identify potential year 2000 issues with its products. The company
has completed its assessments. Fairchild International does not believe there
are any year 2000 problems with its products. No year 2000 issues were noted
with its key suppliers which in Fairchild International's opinion would cause a
major disruption to its operations. In the first quarter of stub year 1999 and
in Fiscal 1999, incremental amounts incurred and charged to expense to identify,
test and correct such other year 2000 problems were immaterial to the financial
statements. Future incremental expenditures are currently estimated to be less
than $0.1 million. Although we believe Fairchild International's systems will be
year 2000 compliant, the failure of Fairchild International's suppliers and
customers to address the year 2000 issue could result in disruption to Fairchild
International's operations and have a significant adverse impact on its results
of operations, the extent of which Fairchild International has not yet
estimated. Fairchild International has completed the preparation of contingency
plans. These plans cover manufacturing equipment, information services and
facilities. In addition, contingency plans have been prepared in the event that
key suppliers fail to become year 2000 compliant. For example, for key materials
which are imported from outside the U.S., arrangements were made to insure at
least four weeks of available supply. Fairchild International, 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.
As of the date of this prospectus, Fairchild International has not
experienced any significant year 2000 problems with its internal systems or
equipment, nor has Fairchild International detected any significant year 2000
problems affecting its customers or suppliers.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In Fiscal 1999, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivatives and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
Fairchild International intends to adopt SFAS No. 133 in 2001. Fairchild
International is presently analyzing SFAS No. 133, and has not yet determined
its impact on Fairchild International's consolidated financial statements.
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<PAGE> 53
SELECTED HISTORICAL FINANCIAL DATA OF THE POWER DEVICE BUSINESS
The following table sets forth selected historical financial data of the
power device business. The historical financial data as of and for the years
ended December 31, 1996, 1997 and 1998 are derived directly from the audited
financial statements of the power device business included elsewhere in this
prospectus. The financial statements for the three years ended December 31, 1998
have been translated from South Korean Won into U.S. Dollars based on the
provisions of Statement of Financial Accounting Standards (SFAS) No. 52, Foreign
Currency Translation, and are presented in accordance with U.S. GAAP. For
historical financial information, assets and liabilities have been translated at
the exchange rate on the balance sheet date, and income statement amounts have
been translated using the weighted average of the exchange rates in effect
during the period. The income statement of the power device business has been
translated from Won into U.S. Dollars at the weighted average exchange rates of
805 Won, 951 Won and 1,399 Won to one U.S. Dollar for 1996, 1997 and 1998,
respectively. On June 29, 1999, the noon buying rate as reported by the Federal
Reserve Board of New York was 1,157.5 Won to one U.S. Dollar. This information
should be read in conjunction with the financial statements of the power device
business included elsewhere in this prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Power Device
Business."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $471.8 $478.1 $386.5
Gross profit................................................ $ 56.5 $131.0 $137.3
Research and development.................................... 18.6 19.2 15.2
Selling, general and administrative......................... 29.0 34.3 33.8
Litigation settlement expense............................... -- -- 58.0
------ ------ ------
Operating income............................................ $ 8.9 $ 77.5 $ 30.3
====== ====== ======
OTHER FINANCIAL DATA:
Revenue:
Discrete.................................................. $300.7 $286.4 $224.6
Analog.................................................... 117.4 154.3 145.3
Contract manufacturing services........................... 53.7 37.4 16.6
------ ------ ------
Total revenue............................................... $471.8 $478.1 $386.5
====== ====== ======
Depreciation and amortization............................... $ 49.0 $ 38.8 $ 22.3
Capital expenditures........................................ 118.1 10.9 8.6
HISTORICAL BALANCE SHEET DATA (END OF PERIOD):
Inventories................................................. $ 79.2 $ 50.5 $ 44.0
Total assets................................................ 340.1 188.6 170.3
Business equity............................................. 51.9 37.3 0.3
Cumulative translation adjustments.......................... (4.1) (18.6) (12.1)
</TABLE>
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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
International for approximately $414.9 million in cash, including fees and
expenses. The power device business is headquartered in Puchon, South Korea. For
all periods presented, the power device business has been operated as part of
the System LSI Division of Samsung Electronics. The operating results of the
power device business are not necessarily indicative of the results that would
have been obtained on a stand-alone basis. See Notes to Unaudited Pro Forma
Combined Condensed Financial Statements and Unaudited Supplemental Data.
The functional currency of the power device business is the Won. The
financial statements for the three years ended December 31, 1998, have been
translated into U.S. Dollars based on the provisions of SFAS No. 52, and are
presented in accordance with U.S. GAAP. The income statement of the power device
business has been translated into U.S. Dollars at the weighted average rates of
805 Won, 951 Won, and 1,399 Won to one U.S. Dollar for 1996, 1997 and 1998,
respectively.
The following table summarizes the composition of the revenues of the power
device business as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Trade sales to unaffiliated customers....................... 38.1% 40.9% 48.0%
Trade sales to Samsung Electronics and affiliated Samsung
companies................................................... 19.9 19.7 25.3
Trade sales to Foreign Sales Subsidiaries of Samsung
Electronics............................................... 30.6 31.6 22.4
----- ----- -----
Total product sales......................................... 88.6 92.2 95.7
Contract manufacturing revenues -- Samsung Electronics...... 11.4 7.8 4.3
----- ----- -----
Total.................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
As part of the acquisition of the power device business, Fairchild
International negotiated a Product Supply Agreement with Samsung Electronics,
which provides for guaranteed annual minimum levels of product purchases at
historical volumes and at current market-adjusted prices for three years. In
addition, the Product Supply Agreement stipulates that Samsung Electronics will
undertake its best efforts to assure that Fairchild International is established
as a preferred vendor of affiliated Samsung companies to the extent permissible
under applicable laws and regulations. The foreign sales subsidiaries of Samsung
Electronics re-sell products of the power device business to third party
customers in Asia, North America, Europe and Japan. As part of the acquisition
of the power device business, Fairchild International negotiated continued sales
support by the foreign sales subsidiaries of Samsung Electronics under a
Transitional Services Agreement for a period of three years. The power device
business provides wafer fabrication services to Samsung Electronics.
Historically, contract manufacturing revenues have been recorded at cost. As
part of the acquisition of the power device business, Fairchild International
negotiated a Foundry Sale Agreement with
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<PAGE> 55
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).
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS. Net income was $15.7 million for 1998, compared to
$42.9 million for 1997. Net income for 1998 includes a one-time charge for a
settlement of a patent infringement lawsuit of $58.0 million which did not occur
in 1997. Excluding this one-time charge which will remain with Samsung
Electronics, net income was $73.7 million, an increase of 71.8% from 1997.
Operating income, excluding the one-time charge, was $88.3 million in 1998,
compared to $77.5 million in 1997, an increase of 13.9%. The increase in
operating income is due primarily to increased gross profit as a result of the
devaluation of the Won, lower depreciation and a full year's benefit of the
impact of cost reduction actions in 1998, which were undertaken during 1997.
Excluding the one-time charge, foreign currency gains and losses and
depreciation and amortization of $22.3 million and $38.8 million in 1998 and
1997, respectively, EBITDA was $110.6 million in 1998 as compared to $116.3
million in 1997. EBITDA is presented because we believe that it is a widely
accepted indicator of an entity's ability to incur and service debt. EBITDA
should not be considered as an alternative to net income, operating income, or
other consolidated operations and cash flow data prepared in accordance with
generally accepted accounting principles, as an indicator of the operating
performance of the Power Device Business, or as an alternative to cash flows as
a measure of liquidity.
Revenues. The revenues of the power device business are comprised of
product sales to third parties, Samsung Electronics and affiliated Samsung
companies and foreign sales subsidiaries of Samsung Electronics (95.7% and 92.2%
of total revenues in 1998 and 1997, respectively) and revenues from contract
manufacturing services provided to Samsung Electronics (4.3% and 7.8% of total
revenues in 1998 and 1997, respectively). Product sales decreased 16.1% to
$369.9 million in 1998 from $440.7 million in 1997, driven by soft market
conditions in the semiconductor industry and the devaluation of the Won. The
decrease in product sales was driven by falling average selling prices, offset
by an increase in unit sales volume of 3.0% year over year. The decrease in
average selling prices is the result of price competition driven by excess
capacity in the semiconductor industry.
Sales of discrete products, representing 60.7% and 65.0% of 1998 and 1997
product sales, respectively, decreased 21.6% in 1998 from 1997. The decrease was
due entirely to lower average selling prices, which declined approximately 24%
in 1998 due in part to the devaluation of the Won, offset by slightly higher
volumes. Sales of analog products, representing 39.3% and 35.0% of 1998 and 1997
product sales, respectively, decreased 5.8% in 1998 from 1997. The decrease was
entirely due to lower average selling prices, which declined approximately 11%
in 1998 due in part to the devaluation of the Won, offset by higher volumes.
Geographically, 87.5%, 6.6% and 5.9% of product sales were derived in Asia,
North America and Europe in 1998, respectively, compared to 85.9%, 8.1% and 6.0%
in 1997. Product sales fell in all regions in 1998 from 1997. Product sales
decreased 14.5%, 31.8% and 17.4% in Asia, North America and Europe,
respectively, in 1998 as compared to 1997. The power device business' product
sales are primarily denominated in U.S. Dollars.
Contract manufacturing revenues decreased 55.6% to $16.6 million in 1998
from $37.4 million in 1997. Contract manufacturing revenues are recorded at
cost. The decrease in 1998 from 1997 was driven by lower demand from Samsung
Electronics.
Gross Profit. Despite lower revenues, gross profit increased 4.8% to
$137.3 million in 1998 from $131.0 million in 1997. As a percentage of product
sales, gross profits were 37.1% in 1998, compared to 29.7% in 1997. The increase
in gross profit as a percentage of product sales was driven by the
52
<PAGE> 56
devaluation of the Won against the U.S. Dollar, as the power device business'
manufacturing cost structure is primarily Won-based, while revenues are
predominately U.S. Dollar-denominated. The Won devalued 47.1% against the U.S.
Dollar in 1998. As a result of the acquisition of the power device business,
Fairchild International is seeking to minimize its exposure to fluctuations in
the Won to U.S. Dollar exchange rate. Actions to reduce such exposure include
increasing revenues denominated in Won and decreasing costs denominated in Won
per the terms of agreements with Samsung Electronics. Other actions include
negotiating U.S. Dollar prices and payment terms with subcontractors and hedging
activities. In addition, gross profit as a percentage of product sales was
enhanced by a full-year's benefit of cost reduction actions, including
efficiencies realized from the transfer of wafer fabrication processes relating
to epitaxial fabrication, which is an intermediate step in wafer fabrication,
and assembly and test activities to other Samsung Electronics' facilities, which
was completed during 1997, offset by the negative effect of falling average
selling prices and reduced factory utilization in the second half of 1998 as the
power device business slowed production in an effort to reduce inventories.
Research and Development. R&D expenses decreased 20.8% to $15.2 million or
4.1% of product sales in 1998, compared to $19.2 million or 4.4% of product
sales in 1997. The decrease in R&D expenses is due primarily to the devaluation
of the Won against the U.S. Dollar, as R&D expenses are primarily denominated in
Won. In Won, R&D expenses increased approximately 16% in 1998 from 1997 due to
increased headcount and expenses related to the operation of a pilot assembly
line for package development in 1998 which the power device business did not
incur in 1997.
Selling, General and Administrative. SG&A expenses decreased 1.5% to $33.8
million or 9.1% of product sales in 1998, from $34.3 million or 7.8% of product
sales in 1997. The decrease in SG&A expenses is due to the devaluation of the
Won, offset by higher Won-based allocations.
Litigation Settlement. The power device business incurred litigation
settlement costs, payable by Samsung Electronics, of $58.0 million in 1998
resulting from the settlement of a patent infringement lawsuit. No such amounts
were incurred in 1997.
Interest Expense, Net. Interest expense, net was $4.2 million and $10.1
million in 1998 and 1997, respectively. Interest is recorded on the allocated
portion of corporate borrowings by Samsung Electronics and on the amortization
of capital lease obligations on assets held by the power device business. The
reduction in interest in 1998 from 1997 is due primarily to lower corporate
borrowings allocated to the power device business in 1998. Both the allocated
corporate borrowings and the capital lease obligations were retained by Samsung
Electronics as part of the acquisition of the power device business.
Foreign Currency Losses, Net. The power device business experienced
foreign currency losses of $0.9 million in 1998, compared to $5.9 million in
1997. The decreased loss in 1998 is due to moderating foreign exchange losses in
1998 over 1997. In late 1997, the power device business suffered large foreign
exchange transaction losses on accounts payable denominated in U.S. Dollars,
resulting from the sudden devaluation of the Won. Accounts receivable
denominated in U.S. Dollars are not similarly exposed due to one to two day
settlements under letter of credit arrangements. Such transaction losses
moderated during 1998 as the Won strengthened against the U.S. Dollar during the
year.
Income Taxes. Income tax expense was $9.5 million and $18.5 million in
1998 and 1997, respectively. The effective tax rate was 37.8% in 1998, compared
to 30.2% in 1997. The increase in the effective rate is due to the translation
of the patent infringement settlement at the 1998 year ending exchange rate for
purposes of calculating Won-based income tax expense, as opposed to the weighted
average exchange rate for translating U.S. Dollar income tax expense, in
accordance with SFAS No. 52.
53
<PAGE> 57
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 million and $49.0 million in
1997 and 1996, respectively, EBITDA was $116.3 million in 1997, compared to
$57.9 million in 1996.
Revenues. The revenues of the power device business are comprised of
product sales to third parties, Samsung Electronics and affiliated Samsung
companies and foreign sales subsidiaries of Samsung Electronics (92.2% and 88.6%
of total revenues in 1997 and 1996, respectively) and revenues from contract
manufacturing services provided to Samsung Electronics (7.8% and 11.4% of total
revenues in 1997 and 1996, respectively). Product sales increased 5.4% to $440.7
million in 1997 from $418.0 million in 1996. The increase in product sales was
driven by a 7.4% increase in unit shipments, offset by a slight decrease in
average selling prices.
Sales of discrete products, representing 65.0% and 71.9% of 1997 and 1996
product sales, respectively, decreased 4.7% in 1997 from 1996. The decrease was
due to lower average selling prices, which offset a 4% increase in sales
volumes. Sales of analog products, representing 35.0% and 28.1% of 1997 and 1996
product sales, respectively, increased 31.4% in 1997 from 1996. The increase was
due to higher sales volume across all product families and the sales ramp for
the proprietary Samsung Power Switch, offset by slightly lower average selling
prices.
Geographically, 85.9%, 8.1% and 6.0% of product sales were derived in Asia,
North America and Europe in 1997, respectively, compared to 86.4%, 7.7% and 5.9%
in 1996. Product sales increased in all regions in 1997 from 1996. Product sales
increased 4.8%, 11.4% and 6.1% in Asia, North America and Europe, respectively,
in 1997 compared to 1996. The power device business' product sales are
denominated primarily in U.S. Dollars.
Contract manufacturing revenues decreased 30.4% to $37.4 million in 1997
from $53.7 million in 1996. Contract manufacturing revenues are recorded at
cost. The decrease in 1997 from 1996 was driven by lower demand from Samsung
Electronics.
Gross Profit. Gross profit increased 132.2% to $131.0 million in 1997 from
$56.5 million in 1996. As a percentage of product sales, gross profits were
29.7% in 1997, compared to 13.5% in 1996. The increase in gross profit as a
percentage of product sales was driven primarily by the effect of a full-year's
benefit of cost reduction actions, including efficiencies realized from the
transfer of wafer fabrication processes relating to epitaxial fabrication, which
is an intermediate step in wafer fabrication, and assembly and test activities
to other Samsung Electronics' facilities, which was completed during 1997. In
addition, gross profit was negatively impacted by the devaluation of the Won
against the U.S. Dollar, particularly in the second half of 1997, as the power
device business' manufacturing cost structure is primarily Won-based. The Won
devalued 18.1% against the U.S. Dollar in 1997.
Research and Development. R&D expenses increased 3.2% to $19.2 million, or
4.4% of product sales in 1997 compared to $18.6 million or 4.4% of product sales
in 1996. The increase in R&D expenses is primarily due to increased headcount to
support new product and process development activities.
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<PAGE> 58
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
International as part of the acquisition of the power device business.
Foreign Currency Losses, Net. The power device business experienced
foreign currency losses of $5.9 million in 1997, compared to $0.5 million in
1996. The increased loss is due to large foreign exchange losses on accounts
payable denominated in U.S. Dollars in late 1997, resulting from the sudden
devaluation of the Won. Accounts receivable denominated in U.S. Dollars are not
similarly exposed due to one to two day settlements under letter of credit
arrangements. Such a devaluation did not occur in 1996.
Income Taxes. Income tax expense was $18.5 million in 1997, as compared to
an income tax benefit of $4.8 million in 1996. The effective tax rate was 30.2%
in 1997. The effective tax rate for 1996 is not meaningful as the power device
business incurred a net loss before income taxes. Income tax benefits incurred
in 1996 represent an increase in deferred tax assets due to net operating losses
and R&D tax credits that will be utilized to offset future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The power device business' cash flows from operations are used to fund its
working capital, research and development and capital expenditure requirements,
as well as to support the overall cash requirements of Samsung Electronics.
In 1998, the power device business generated cash from operations of $128.1
million compared to $74.3 million in 1997. The increase is due to higher net
income adjusted for non-cash items, due to improved profitability as a result of
the devaluation of the Won, and increased cash flows from changes in operating
assets and liabilities, principally trade accounts and notes receivable, due to
not selling its U.S. Dollar-denominated receivables to banks in 1997 in
anticipation of a stronger U.S. Dollar. Cash used by investing activities was
$5.7 million in 1998, compared to $0.1 million in 1997. The increase was due to
less proceeds received in 1998 for sales of property, plant and equipment,
offset by lower capital expenditures. Cash used in financing activities was
$106.8 million in 1998, compared to $157.1 million in 1997. The decrease was due
to lower net corporate borrowings and lower capital lease payments.
Over the past three years, the power device business has spent
approximately $135.9 million, primarily for a new wafer fabrication line.
Capital expenditures are expected to be approximately $20.0 million in 1999. The
power device business' future cash flows from operations may be used by
Fairchild International's subsidiaries for their working capital and financing
requirements.
YEAR 2000 COMPLIANCE
The power device business is dependent upon the information systems of
Samsung Electronics. Under the terms of an agreement with Samsung SDS Co., Ltd.
entered into in connection with the acquisition of the power device business,
Samsung SDS Co., Ltd. has agreed to provide information technology services to
the power device business and to support the use of its information systems by
the power device business for a three-year period following consummation of the
acquisition of the
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<PAGE> 59
power device business. See "Certain Relationships and Related Transactions." The
terms of the agreement with Samsung SDS Co., Ltd. require them to insure the
systems utilized by the power device business are year 2000 compliant. Samsung
Electronics' systems have been certified by a Korean government agency to be
year 2000 compliant.
The power device business has deployed internal resources to identify, test
and correct year 2000 problems in other systems it employs, including those
embedded in its machinery and equipment. Year 2000 issues in its critical
manufacturing equipment and systems have been remedied. With the assistance of
Samsung Electronics, the power device business reviewed the year 2000 readiness
and compliance of its principal suppliers of products and services, in order to
identify and assess any negative impacts that such non-compliances could have on
the power device business. All key suppliers, including raw material suppliers
and subcontractors, have been assessed, with no major issues identified. In
addition, the power device business is working with its customers to identify
potential year 2000 problems with its products. To date, none have been
identified. For 1998, 1997 and 1996, incremental amounts incurred and charged to
expense to identify, test and correct year 2000 problems were immaterial to the
financial statements. Future amounts expected to be incurred are also believed
to be immaterial. Although the power device business expects its other systems
will be year 2000 compliant, either the failure of Samsung Electronics to make
its systems year 2000 compliant or the failure of its key suppliers and
customers to address the year 2000 issue could result in disruption to the
operations of the power device business and have a significant adverse effect on
its results of operations, the extent of which cannot be estimated. The power
device business has developed 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. These contingency
plans cover raw materials, subcontractors, production equipment, facilities and
information systems.
As of the date of this prospectus, the power device business has not
experienced any significant year 2000 problems with its internal systems or
equipment, nor has the power device business detected any significant year 2000
problems affecting its customers or suppliers.
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<PAGE> 60
INDUSTRY OVERVIEW
Semiconductors are the critical components used to create an increasing
variety of electronic products and systems. Since the invention of the
transistor in 1948, continuous improvements in semiconductor process and design
technologies have led to smaller, more complex and more reliable devices at a
lower cost per function. As performance has increased and size and cost have
decreased, semiconductors have expanded beyond their original primary
applications in computer systems to applications in telecommunications systems,
automotive products, consumer products and industrial automation and control
systems. In addition, system users and designers have demanded systems with
increased functionality, higher levels of performance, greater reliability and
shorter design cycle times, all in smaller packages at lower costs. These
demands have resulted in increased semiconductor content as a percentage of the
system costs of electronic products. The demand for electronic systems has also
expanded geographically with the emergence of new markets, particularly in the
Asia region.
Historically, changes in production capacity in the semiconductor industry
and, to a lesser extent, demand for electronic systems have resulted in
pronounced fluctuations in prices and margins. However, we believe that the
following factors may limit the severity of future cyclical variations: the
development of new semiconductor applications, the increased semiconductor
content as a percentage of total system cost, the trend towards consolidation in
the industry, more moderate capital spending on production capacity and the
increased customer use of just-in-time supply systems that have reduced
inventory levels.
Additionally, these trends have helped build demand for multi-market
companies that can provide a wide range of building block semiconductors as a
single-source supplier. Utilizing a single supplier with a sufficiently broad
product portfolio contributes to a manufacturer's overall cost reduction, and
helps to simplify the production of electronic products and systems.
Since 1990, the semiconductor market has expanded at a compounded annual
growth rate of approximately 12.0%, primarily as a result of two factors. The
first is the rapidly expanding end-user demand for faster, smaller and more
efficient electronic devices, with a greater range of functionality and
reliability, at lower costs. The second is the increasing value of
semiconductors as a percentage of the cost of electronic systems. According to
Worldwide Semiconductor Trade Statistics, the worldwide semiconductor total
available market declined to $125.6 billion in 1998 from $137.2 billion in 1997.
The decline was due primarily to an industry-wide drop in average selling prices
due to industry overcapacity. In addition, during the same period, total
available market for the DRAM segment of the semiconductor market declined by
29.3%, compared to a decline of 4.9% for all other segments in the aggregate.
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<PAGE> 61
SEMICONDUCTOR CLASSIFICATIONS
The following table sets forth the worldwide semiconductor total available
market in each of the three product functions of the semiconductor industry:
<TABLE>
<CAPTION>
WORLDWIDE SEMICONDUCTOR TOTAL AVAILABLE MARKET(1)
------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 CAGR(2)
----- ----- ----- ----- ------ ------ ------ ------ ------ -------
(DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Micro components............. $ 9.2 $11.4 $13.9 $19.1 $ 23.8 $ 33.4 $ 39.8 $ 47.8 $ 47.3 22.7%
Memory:
Volatile................... 8.7 9.1 11.4 16.4 27.2 46.9 29.9 23.6 17.9 9.4%
Non-volatile............... 3.1 3.1 3.4 4.8 5.3 6.6 6.1 5.7 5.1 6.4%
----- ----- ----- ----- ------ ------ ------ ------ ------
Total memory............. 11.8 12.2 14.8 21.3 32.5 53.5 36.0 29.3 23.0 8.7%
Moving/Shaping............... 29.6 31.0 31.1 37.0 45.6 57.5 56.1 60.1 55.3 8.1%
----- ----- ----- ----- ------ ------ ------ ------ ------
Total.................... $50.5 $54.6 $59.9 $77.3 $101.9 $144.4 $132.0 $137.2 $125.6 12.0%
===== ===== ===== ===== ====== ====== ====== ====== ======
</TABLE>
- -------------------------
(1) According to Worldwide Semiconductor Trade Statistics. Due to rounding, some
totals are not arithmetically correct sums of their component figures.
(2) Compounded annual growth rate. Represents the compounded annual growth rate
for the semiconductor industry since 1990.
The semiconductor industry can be divided into three product functions:
microcomponents, memory and moving and shaping. Microcomponents include
microprocessors and microcontrollers that process data according to instruction
sets embedded within the semiconductors themselves. These are considered the
"brains" of the electronic system and are at the center of the system
architecture. Memory includes two types of memory devices, volatile and
non-volatile, that store data and instructions. Volatile memory devices, which
need continual application of electricity to retain data, can be segmented into
DRAM (dynamic random access memory), SRAM (static random access memory) and VRAM
(video random access memory). Non-volatile devices, which retain data after
power to the device has been shut off, can be segmented into ROM (read-only
memory), EPROM, EEPROM and FLASH (memories that enable high speed electrical
reprogramming). Moving and shaping includes the moving of commands and the
shaping of signals to enable electronic devices to perform intended functions,
including moving information into memory or from one sub-system to another, or
allowing microprocessors to process data.
Semiconductors are either analog/mixed signal devices, where electronic
signals are not viewed as "one" and "zero," or digital devices, such as logic
devices, that do rely on ones and zeroes to control the operation of electronic
systems. Semiconductors may also be 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> 62
FAIRCHILD INTERNATIONAL MARKETS
The following table sets forth information with respect to worldwide
semiconductor sales by product family and process technology in which we
participate:
<TABLE>
<CAPTION>
WORLDWIDE SEMICONDUCTOR SALES(1)
------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ----- ----- ----- ----- ----- -----
(DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MOVING & SHAPING:
ANALOG
Standard Linear(2).... $3.0 $3.0 $3.1 $ 3.8 $ 4.7 $ 5.7 $ 5.5 $ 6.2 $ 5.7
Mixed Signal.......... 4.8 5.3 5.6 6.9 8.9 10.9 11.5 13.6 13.3
---- ---- ---- ----- ----- ----- ----- ----- -----
Total.............. $7.8 $8.3 $8.7 $10.7 $13.6 $16.6 $17.0 $19.8 $19.0
==== ==== ==== ===== ===== ===== ===== ===== =====
DISCRETE
DMOS Power............ $0.6 $0.7 $0.8 $ 1.1 $ 1.4 $ 2.1 $ 2.2 $ 2.2 $ 2.0
Bipolar............... 4.2 4.2 4.1 4.6 5.5 7.1 6.2 6.1 5.3
IGBT.................. -- -- -- -- -- 0.5 0.6 0.6 0.7
---- ---- ---- ----- ----- ----- ----- ----- -----
Total.............. $4.8 $4.9 $4.9 $ 5.7 $ 6.9 $ 9.7 $ 9.0 $ 8.9 $ 8.0
==== ==== ==== ===== ===== ===== ===== ===== =====
LOGIC
Bipolar............... $1.5 $1.4 $1.3 $ 1.5 $ 1.3 $ 1.3 $ 0.9 $ 0.9 $ 0.6
CMOS/BiCMOS........... 1.1 1.1 1.0 1.4 1.8 2.3 2.1 2.4 1.9
---- ---- ---- ----- ----- ----- ----- ----- -----
Total.............. $2.6 $2.5 $2.3 $ 2.9 $ 3.1 $ 3.6 $ 3.0 $ 3.3 $ 2.5
==== ==== ==== ===== ===== ===== ===== ===== =====
MEMORY:
NON-VOLATILE MEMORY
EPROM................. $1.6 $1.4 $1.2 $ 1.3 $ 1.4 $ 1.4 $ 1.1 $ 0.7 $ 0.5
EEPROM(3)............. 0.2 0.2 0.5 0.7 0.7 0.9 0.9 0.9 0.9
---- ---- ---- ----- ----- ----- ----- ----- -----
Total.............. $1.8 $1.6 $1.7 $ 2.0 $ 2.1 $ 2.3 $ 2.0 $ 1.6 $ 1.4
==== ==== ==== ===== ===== ===== ===== ===== =====
</TABLE>
- -------------------------
(1) All data other than data for EEPROM are according to Worldwide Semiconductor
Trade Statistics. Due to rounding, some totals are not arithmetically
correct sums of their component figures.
(2) The sales information for Standard Linear includes Interface.
(3) According to ICE Corporation and Dataquest.
MOVING AND SHAPING MARKETS
Analog Market. Analog products are used to shape or condition electrical
signals, to amplify electrical signal strength, to convert electrical signals to
and from digital "one or zero" levels, to regulate voltage levels and to provide
interfaces between other products within an electrical system. The analog market
is split into two major segments: Standard Linear and Mixed Signal. The Standard
Linear market is comprised of building block products such as amplifiers,
voltage regulators, data conversion, interface circuits, and comparators. These
products are used in all end systems, from computers and telecommunications, to
industrial, automotive and consumer applications. The Mixed Signal market
consists of more complex analog products, which also contain some digital
circuitry for timing, information control and data flow. Mixed Signal products
are often developed for specific
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<PAGE> 63
applications, such as video encoding, hard disk drive control, data
transmission, motor control and power supply control. We compete in both the
Standard Linear and Mixed Signal markets.
Discrete Market. The discrete business, unlike logic and memory, is highly
fragmented and composed of dozens of middle market suppliers. Discrete devices
consist of individual diodes or transistors, whereas integrated circuits (such
as memory or logic devices) combine millions of functions into a "single chip"
of silicon to form a more complex circuit. Discrete products are differentiated
almost entirely on the basis of performance, as opposed to on the basis of
function as in the integrated circuit market. We participate in both the power
and small signal discrete markets, manufacturing devices that condition power or
signals for use by other devices. While small signal discrete markets have
generally grown at slower, but more stable, rates than integrated circuit
markets, the power discrete market is rapidly growing due to the increasing
importance of power management, particularly in portable applications (e.g.,
pagers and notebook computers).
Standard Logic Market. Logic devices are integrated circuits that control
the operation of electronic systems and move data. The standard logic market is
fully digital and has five major participants, of which we are one of the
leaders. Standard logic products are fabricated through three primary process
technologies: Bipolar, CMOS and BiCMOS. Bipolar technology is targeted for high
speed applications while CMOS technology allows the manufacturer to create a
denser chip, consuming less power and generating less heat. BiCMOS is a hybrid
of Bipolar and CMOS. While Bipolar semiconductors were once used extensively in
large computer systems, CMOS has become the most prevalent technology,
particularly for devices used in portable personal computer systems. Given the
growing demand for portability, use of CMOS technology is expected to continue
to expand; however, the demand for Bipolar is expected to continue as a result
of its lower cost and suitability for particular applications.
MEMORY MARKET
Non-Volatile Memory Market. The memory market is comprised of volatile
memory devices (DRAM, SRAM and VRAM) and non-volatile memory devices (ROM,
EPROM, EEPROM and FLASH). Volatile memory devices need continual application of
electricity to retain data, while non-volatile memory retains data after the
power to the device has been turned off. Most of the historic economic
cyclicality in the semiconductor industry has been attributable to the volatile
memory market, as evidenced by a 29.3% decline in 1998 market sales versus a
4.9% decrease for the microcomponents, moving & shaping and non-volatile memory
markets.
We produce standard EPROM and EEPROM products, but also fabricate
application-specific EEPROM devices. We have standardized the
application-specific nature of the EEPROM process, having designed it to perform
functions in a specific application, but not be proprietary for any single
customer. EEPROMs are being used extensively due to their ease of
programmability, and the demand for these products is growing rapidly. The
EEPROM market has grown at a compounded annual growth rate of 20.7% from 1990 to
1998, ahead of the overall semiconductor market growth. EEPROMs are somewhat
isolated from FLASH products, as they serve different market needs.
Reprogrammable EEPROMs are used in many products to store frequently used phone
numbers (fax machines), store accumulated phone time (cellular phones) and
change authorization codes (keyless security systems). EPROMs have been losing
market share to FLASH products because FLASH memories are easily programmable
and have higher data densities. However, there is a level of EPROM demand that
is not economically served by FLASH. As a result, EPROMs are still utilized in
virtually all segments of the low-end consumer electronic market (e.g.,
answering machines, garage door openers and washing machines), where storage of
the instruction set for the microcontrollers require less than 2 Mb.
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BUSINESS
GENERAL
Fairchild International is the second-largest independent semiconductor
company, based on pro forma Fiscal 1999 revenues, focused solely on multi-market
products. We design, develop and market analog, discrete, logic and non-volatile
memory semiconductors. Within our multi-market products portfolio, we are
particularly strong in providing discrete and analog power management solutions.
Multi-market products are the building block components for virtually all
electronic devices, from sophisticated computers and internet hardware to
telecommunications equipment to household appliances. Because of their basic
functionality, our products provide customers with greater design flexibility
than more highly integrated products and improve the performance of more complex
devices or systems. Given such characteristics, our products have a wide range
of applications. Our products are sold to customers in the personal computer,
industrial, telecommunications, consumer electronics and automotive markets.
With a history dating back more than 35 years, Fairchild Semiconductor
Corporation's predecessors were among the original founders of the semiconductor
industry. The original Fairchild Semiconductor Corporation was established in
1959 as a provider of memory and logic semiconductors. Fairchild Semiconductor
Corporation was acquired by Schlumberger in 1979. National Semiconductor
acquired Fairchild Semiconductor Corporation from Schlumberger in 1987, and
fully integrated it into its operations. Pursuant to the recapitalization of
Fairchild Semiconductor Corporation, Fairchild Semiconductor Corporation
separated from National Semiconductor and became an independent company on March
11, 1997. At the time of the recapitalization, Fairchild Semiconductor
Corporation consisted of the discrete, logic and non-volatile memory businesses
of National Semiconductor. On December 31, 1997, Fairchild Semiconductor
Corporation 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 International's other product groups include
the Discrete Power and Signal Technologies Group and the Logic Products Group.
On April 13, 1999, we purchased the power device business from Samsung
Electronics for approximately $414.9 million, including fees and expenses. The
power device business designs, manufactures and markets power discrete
semiconductors and standard analog integrated circuits serving the personal
computer, industrial, telecommunications and consumer electronics markets. The
power device business has developed a number of new product designs with
industry leading performance characteristics, such as its recent process
developments in trench technology and silicon bonding. The acquisition of the
power device business not only enhances our analog and power discrete product
offerings, but also provides us with a greater market presence in South Korea.
The acquisition of the power device business also provides us with additional
revenue opportunities through our relationship with Samsung Electronics:
- Samsung Electronics is required to purchase guaranteed minimum annual
levels of products from the power device business based on historical
volumes and market prices for a three-year period according to terms of a
product supply agreement.
- We are required to provide contract manufacturing services in the form of
wafer foundry services for Samsung Electronics for a three-year period
according to the terms of a foundry sale agreement. The agreement is
designed to provide us levels of profitability totaling W53,700 million
over three years.
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In connection with the acquisition of the power device business, we have
obtained a full income tax holiday for a period of seven years in South Korea.
The power device business added approximately 1,481 employees, most of whom work
at its wafer fabrication facilities in South Korea, to Fairchild International's
work force at that time of approximately 6,600.
GROWTH STRATEGY
Our objective is to be the leading supplier of multi-market semiconductors
to the worldwide personal computer, industrial, telecommunications, consumer
electronics and automotive industries. Our business strategy emphasizes the
following key elements:
MAINTAIN HIGH QUALITY SERVICE. We seek to distinguish our service by
providing the industry's best support services, including electronic order
entry, just-in-time delivery and a full range of Internet services that provide
device specifications and order entry for samples. Since 1997, we have invested
in a number of innovative programs in order to deliver superior customer service
including:
- developing and maintaining four customer response centers staffed with
experienced employees to provide a link between customers and our design
engineers, manufacturing operations and sales personnel;
- creating a vice president of customer service position and establishing
customer focus teams and field application engineering teams;
- installing a state-of-the-art company-wide PeopleSoft enterprise software
system which provides a fully integrated order management, inventory and
manufacturing system;
- centralizing and consolidating our finished goods warehouse functions to
a primary site in Penang, Malaysia. This site, together with a Federal
Express shipment arrangement, facilitates timely movement of products
worldwide to end customers.
INTRODUCE NEW PRODUCTS. We are focused on expanding our customer base and
increasing our market share by continuing to develop new products and enhance
our current product portfolio to capitalize on industry trends. Since we became
a stand-alone company, we have designed and introduced over 500 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
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fabrication plants from our previously owned Mountain View, California facility
to our South Portland, Maine facility, which is expected to reduce our wafer
costs by two-thirds.
CUSTOMERS AND APPLICATIONS
Fairchild International designs, develops and manufactures products that it
supplies to more than 50,000 customers. As a result of the acquisition of the
power device business, we provide a wide range of more than 10,000 analog,
discrete, logic and non-volatile memory products to our diverse customer base.
Our position as a strategic supplier of basic and essential semiconductor
products fosters close relationships with customers. These relationships result
in additional growth opportunities for sales of existing products as well as
early knowledge of customers' evolving requirements and opportunities arising
from the related development of their new products.
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The following table sets forth our principal end-user markets, the
percentage of pro forma trade revenue generated from each end-user market,
principal applications for our products and most of our significant customers.
Products from each of our businesses are used throughout each of the major
end-user markets set forth below.
<TABLE>
<CAPTION>
CONSUMER
END MARKETS: PERSONAL COMPUTERS INDUSTRIAL AND OTHER TELECOMMUNICATIONS ELECTRONICS AUTOMOTIVE
- --------------------------- ------------------ -------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
PERCENTAGE OF OUR TRADE 40% 25% 15% 16% 4%
REVENUE(1):
- -------------------------------------------------------------------------------------------------------------------------------
APPLICATIONS: Chips for Industrial Central office Cable television Airbags
smartcards automation and switching systems systems Antiskid braking
Disk drives control Data Network Compact disc kits
Internet hardware Intelligent power equipment players Automotive
Monitors switches Cellular Home security entertainment
Network Lighting systems telephones systems systems
controllers Motor controllers ISDN controllers Household Central locking
Optical scanners Power supplies Modems appliances systems
PDA Smartcard readers PBX systems Pay television Fuel injection
Printers Set-top boxes decoders circuits
PC motherboards Satellite Ignition circuits
receiver Transmission
decoding circuits control circuits
VCR
- -------------------------------------------------------------------------------------------------------------------------------
CUSTOMERS: Apple Allen Bradley AT&T Canon Bosch
Compaq American Power Alcatel Creative Design Chrysler
Dell Honeywell Ericsson Daewoo Delco Electronics
Gateway Reliance Lucent LG Electronics Ford
Hewlett-Packard Siemens Technologies Motorola Mitsubishi
IBM Tektronics Nokia Samsung Teves
Intel Teradyne Nortel Networks Electronics Toyota
NEC Samsung Sony
Samsung Electronics Thompson
Electronics Siemens Consumer
Seagate Technology Zenith
Toshiba
- -------------------------------------------------------------------------------------------------------------------------------
EXAMPLE OF PRODUCT Computer Electric motor Portable phone VCR Engine control
APPLICATION: assembly line
control
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1998 combined trade revenues include those of Fairchild International for
the twelve-month period ended November 29, 1998 and those of the power
device business for the twelve-months ended December 31, 1998 and are
presented to be consistent with the data reported by Worldwide Semiconductor
Trade Statistics.
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PRODUCTS AND TECHNOLOGY
We design, develop and manufacture a broad range of products used in a wide
variety of microelectronic applications, including personal computer,
industrial, telecommunications, consumer products and automotive systems. Our
products are organized into three principal products groups: the Analog, Mixed
Signal and Non-Volatile Memory Products Group, the Discrete Power and Signal
Technologies Group, and the Interface and Logic Products Group. The power device
business includes power discrete and analog products. For purposes of this
presentation, these products have been combined with Analog and Mixed Signal
Products and the Discrete Power and Signal Technologies Group.
ANALOG, MIXED SIGNAL AND NON-VOLATILE MEMORY PRODUCTS GROUP
ANALOG AND MIXED SIGNAL PRODUCTS
Fairchild International designs, manufactures and markets high-performance
analog and mixed signal integrated circuits for the personal computer,
industrial, consumer electronics and broadcast video markets. These products are
manufactured using leading-edge CMOS, BiCMOS, DMOS and bipolar technologies.
Analog and mixed signal products represent a significant long-term growth area
of the semiconductor industry. The increasing demand to integrate high
performance microprocessor-based electronics in equipment ranging from personal
computers to scientific instrumentation, telecommunications and data
communications networks has led analog and mixed signal semiconductor suppliers
to create designs that have higher levels of integration to reduce space and
power requirements and provide greater functionality, all at lower cost. We
offer over 2,300 analog device products, including offerings in 92 of the top
100 best selling (in terms of volume) analog product types. Major competitors
include Analog Devices, Burr Brown, Linear Technology, Intersil, ON
Semiconductor, Philips and Semtech.
Analog. Analog products control continuously variable functions such as
light, color, sound and power. They enable human beings to interface with the
digital world. We provide analog products that solve problems relating to power
conversion, temperature sensing, management functions, battery chargers and
motor controls. Our Smart Power Switch is a proprietary, multichip module
consisting of a power management integrated circuit and a MOSFET. Smart Power
Switches provide a solution for off-line power converter designs in power
supplies, battery chargers, PC peripherals, and home and consumer applications.
We also offer a mix of mature products, such as operational amplifiers, audio
amplifiers, regulators, compurators, references and timers, and ground fault
interrupters, which continue to generate significant revenues due to their long
product life cycles.
Mixed Signal. Mixed signal products are those which can process both
analog and digital information. Our mixed signal offerings include analog to
digital converters, digital to analog converters and market-leading digital
video encoders and decoders sold to manufacturers of high-end video equipment
and set top boxes.
We believe our Analog product portfolio is further enhanced by a wide
variety of packaging solutions that we have developed. These solutions include
surface mount and tiny packages.
NON-VOLATILE MEMORY PRODUCTS
Fairchild International designs, manufactures and markets non-volatile
memory circuits which retain data after power to the device has been shut off.
We offer an extensive portfolio of high performance serial EEPROM and EPROM
products. We do not participate in the FLASH market segment. EPROMs are
electrically programmable read-only memories. These non-volatile memory devices
are used in the personal computer, industrial, telecommunications, consumer
electronics and
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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. We serve the EEPROM market with product
offerings in (i) standard EEPROM and (ii) Application Specific Standard Products
(or ASSP). Our standard EEPROM products serve each of the three serial bus
interface protocols used with all industry standard microcontrollers. Our
Application Specific Standard Products are individually developed for specific
applications and combine our core EEPROM competencies with logic capabilities.
Key product offerings in the ASSP category include the ACEx family of
microcontrollers and the SoftSelect(TM) family of devices for software control
of power management and frequencies.
The ACEx family consists of highly optimized 8-bit microcontrollers
featuring a rich instruction set and extremely low power consumption. Offered in
one of the smallest packages in the industry, its features make it ideal for
battery management and power management applications requiring low power
consumption and low weight. The SoftSelect(TM) family of devices provide
software control of power management and automatic configuration of motherboards
for personal computers. Other products in the ASSP category include Plug & Play
controllers for the PC market, single-chip high security solutions for
automotive remote keyless entry and other similar applications such as garage-
door openers, and the serial presence detect (SPD) device which permits
automatic configuration of memory modules on computers.
EPROMS. The ability of EPROMs to be programmed electrically by the
equipment manufacturer enables them to achieve shorter time to market for new
products than if they used products that must be programmed by the chip
manufacturer. Today, EPROMs are primarily utilized in applications where storage
of the instruction sets for microcontrollers requires less than 2 Mb in density,
which is virtually all segments of the low-end consumer electronic market (e.g.,
answering machines, garage door openers and washing machines). The EPROM market
is declining as FLASH becomes cost-effective at lower densities. As a result, we
are incurring minimal research and development expenditures in this product
line. We currently sell EPROMs in densities ranging from 64K to 4Mb.
DISCRETE POWER AND SIGNAL TECHNOLOGIES GROUP
Discrete devices are individual diodes or transistors that perform basic
signal amplification and switching functions in electronic circuits. Driving the
long-term growth of discretes is the increasing importance of power management,
particularly in portable applications (e.g., pagers and notebook computers). We
participate in both the power and small signal discrete markets using our DMOS
and Bipolar technologies, manufacturing semiconductors that condition (or shape)
power or signals for use by other devices. The acquisition of the power device
business added significantly to our discrete product portfolio, with only small
signal transistors overlapping with our existing portfolio. While the world
market is dominated by such multinational semiconductor manufacturers as
Toshiba, ON Semiconductor and Philips, a significant portion of the industry is
fragmented where competition is primarily on a regional basis. Other competitors
include Siliconix and International Rectifier.
DMOS. DMOS discrete devices are used to convert, switch or otherwise shape
or condition electricity. We offer a wide range of DMOS power MOSFETs designed
for low and high voltage applications over a wide range of performance
characteristics, power handling capabilities and package options. We are
focusing on DMOS as our growth area due to the trend towards smaller and lighter
products and longer battery life, as well as batteries with built-in smart
functions. DMOS products are the focus of our research and development
expenditures. These expenditures have been directed primarily toward the
development of our leading-edge Trench technology. These products are
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commonly found in portable computers and peripherals, portable telephones,
automobiles, and battery-powered devices. Our DMOS products include:
Low Voltage MOSFET. This product line is focused on developing products in
the Low Voltage DMOS area in support of the trend towards smaller and lighter
products, longer battery life expectancy, as well as batteries with built-in
smart functions. Research and development efforts and expenditures have been
directed towards the development of our leading edge Trench Technology. The
combination of leading edge wafer fabrication processes and new packaging
technology continues to allow our Low Voltage DMOS product families to set new
standards for low resistance and high current performance in miniature surface
mount power packaging. Our Low Voltage DMOS products are commonly found in
portable computers and peripherals, portable telephones, automobiles and
battery-powered devices.
High Voltage MOSFET. This product line offers a wide variety of HV MOSFET
devices designed for high voltage applications (200V to 900V) over a wide range
of performance characteristics, power handling 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 using this technology.
Bipolar. We manufacture and sell a wide range of bipolar discretes,
including single junction glass diodes, small signal transistors, bipolar power
transistors, JFETs and Zener diodes in a wide variety of package configurations.
These devices switch, amplify and otherwise shape or modify electronic signals
and are found in nearly every electronic product, including computers, cellular
phones, mass storage devices, televisions, radios, VCRs and camcorders.
INTERFACE AND LOGIC PRODUCTS GROUP
We design, develop and manufacture high-performance interface and logic
devices utilizing three wafer fabrication processes: CMOS, BiCMOS and Bipolar.
Within each of these production processes, we manufacture products that possess
advanced performance characteristics, as well as mature products that provide
high performance at low cost to customers.
Interface Products. The significant growth in the internet hardware and
cellular base station markets has increased demand for interface products.
Interface products generally connect signals from one part of a system to
another part of a system. Typical interface applications include backplane
driving, bus driving, clock driving and signal integrity. These applications all
require high speed, high current drive and low noise attributes. These types of
products are mixed signal in nature and require a high level of analog wave
shaping techniques on the output structures, minimizing the number of suppliers
with the capability to develop them. We believe we have developed some unique
competencies and patented circuit techniques along with a broad range of process
technologies which facilitate our expansion into the interface products market.
The interface market is divided into two categories: "building block
interface" and "standards-specific interface products." Current building block
products include our FST and GTL product families with planned expansions into
an LVDS family of products and clock driving products. Standards-specific
products are normally based on industry standards which are developed by
consortiums of hardware suppliers, software suppliers, end segment customers and
industry experts.
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We are an active participant on many committees where industry standards are
developed, and have product offerings in printer interface, dual inline memory
module drivers and Universal Serial Bus applications. Major competitors include
Texas Instruments, National Semiconductor, Maxim and Linear Technology.
Logic Products. Since market adoption rates of new standard logic families
have historically spanned several years, we continue to generate significant
revenues from our mature products. Customers are typically slow to move from an
older product to a newer one. Further, for any given product, standard logic
customers use several different generations of logic products in their designs.
As a result, typical life cycles for logic families are between 20 and 25 years.
Since it takes new logic products an average of three to five years to
reach full market acceptance, we continue to invest in new products to generate
future revenue growth. In addition, many of these investments have established
our logic devices as key components for the personal computer and
telecommunications markets, particularly in the internet and networking sector
and cellular communications sector. Internet appliances and internet
infrastructure equipment (such as LAN and WAN switches, hubs, routers and
servers) require high speed, high drive and low noise characteristics. We offer
logic devices using CMOS, BiCMOS and Bipolar processes that are required to
achieve these characteristics. Our ABT, LVT and ECL logic devices have all
successfully penetrated the internet hardware market. In addition, cellular
communications equipment such as cellular phones, pagers and base stations and
consumer set top box require low power and noise generation in very small
packages. We believe our Tiny Logic, VHC, LCX and FST switch technologies have
established our logic products among the leading technologies addressing these
requirements. Major competitors include Texas Instruments, ON Semiconductor and
Philips.
SALES, MARKETING AND DISTRIBUTION
In Fiscal 1999, Fairchild International derived approximately 58% of its
trade sales from original equipment manufacturer customers through its regional
sales organizations and 42% of its trade sales through distributors. Fairchild
International operates regional sales organizations in Europe, headquartered in
Swindon, England, the Americas, headquartered in Sunnyvale, California, the
Asia/Pacific region, with offices in Kowloon, Hong Kong, the Japan region with
its office in Tokyo, Japan and the Korea region, with its office in Puchon,
South Korea. Each of the regional sales organizations, with the exception of
Korea, is supported by logistics organizations which manage
independently-operated free-on-board warehouses. Product orders flow to
Fairchild International'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 International has dedicated direct sales organizations operating
in Europe, the Americas, Asia/Pacific, Japan and Korea that serve its major
original equipment manufacturer customers. Fairchild International 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
International'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 International 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 International products, and fill orders for
many customers. Some of Fairchild International's sales to distributors
primarily in North America are made under agreements allowing for market price
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fluctuations and/or the right of return on unsold merchandise, subject to the
right terminating after the expiration of a limited time period. Virtually all
distribution agreements contain a standard stock rotation provision allowing for
minimum levels of inventory returns. In Fairchild International's experience,
these inventory returns can usually be resold. Manufacturer's representatives
generally do not offer products that compete directly with Fairchild
International'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
International and are referred to distributors for smaller orders.
In 1998, the power device business derived approximately 73% of its trade
sales from third party original equipment manufacturer customers and Samsung
Electronics and affiliated Samsung companies and 27% of its trade sales through
distributors. The power device business has been historically supported by sales
organizations in Korea and in foreign sales subsidiaries of Samsung Electronics
throughout the world. As of November 30, 1999, support from the foreign sales
subsidiaries of Samsung Electronics ended in accordance with our agreement.
Fairchild International's sales organizations in North America and Europe have
assumed distribution responsibilities for power device business products.
Product orders flow to the power device business' manufacturing facility in
Puchon, 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 Fairchild
International's facility in Penang, Malaysia and then to customers. As a result
of the acquisition of the power device business, assembly and testing services
are provided under the Assembly and Test Services Agreements, and warehousing is
provided under the Transitional Services Agreement. See "Certain Relationships
and Related Transactions."
RESEARCH AND DEVELOPMENT
Fairchild International's expenditures for research and development in
Fiscal 1997, 1998 and 1999 were $18.9 million, $35.7 million and $39.3 million,
respectively. Such expenditures represented 3.2%, 5.6% and 6.0% of trade sales
in Fiscal 1997, 1998 and 1999, respectively. Manufacturing technology is a key
determinant in the improvement of semiconductor products. Each new generation of
process technology has resulted in products with higher speed and greater
performance produced at lower cost. Infrastructure investments made in recent
years will enable Fairchild International to continue to achieve high volume,
high reliability and low-cost production using leading edge process technology.
Fairchild International's research and development efforts are focused on new
product development and improvements in process technology in Fairchild
International's growth areas: CMOS logic, DMOS power discretes, EEPROMs and
analog and mixed signal products.
Each of Fairchild International's product groups maintain independent
research and development organizations. Fairchild International works closely
with its major customers in many research and development situations in order to
increase the likelihood that Fairchild International'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 Puchon
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
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products into their designs. Following the acquisition of the power device
business, research and development for power device business products continues
to be conducted by a research and development team at the Puchon facility.
MANUFACTURING
We operate five manufacturing facilities, three of which are front-end
wafer fabrication plants located in the United States and South Korea and two of
which are back-end assembly and test facilities in the Asia region. Our products
are manufactured and designed using a broad range of manufacturing processes and
proprietary design methods. We use all of the prevalent function-oriented
process technologies for wafer fabrication, including CMOS, Bipolar, BiCMOS,
DMOS and non-volatile memory technologies. We use primarily through-hole and
surface mount technologies in our assembly and test operations, in lead counts
from two to fifty-six leads.
The table below sets forth information with respect to our manufacturing
facilities, products and technologies.
MANUFACTURING FACILITIES
<TABLE>
<CAPTION>
LOCATION PRODUCTS TECHNOLOGIES
-------- -------- ------------
<S> <C> <C>
FRONT-END FACILITIES:
South Portland, Maine Bipolar, CMOS and BiCMOS 4-inch fab -- 5.0/3.0 micron
interface and logic products
Standard Linear products 5-inch fab -- 3.0/1.5 micron Op
Amps, Ground Fault
Interruptors
National Semiconductor contract 6-inch fab -- 1.5/0.5 micron
manufacturing CMOS and BiCMOS
Salt Lake City, Utah EPROMs, EEPROMs, ACE and USB 6-inch fab -- 1.0/0.65 micron
CMOS EPROM
Discrete power -- 2.0/0.8 micron CMOS
National Semiconductor contract EPROM
manufacturing -- 2.0 micron DMOS
Puchon, 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 MDIP, SOIC, EIAJ, TSSOP, SSOP,
interface and logic 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>
Fairchild International'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
Interface and 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. Fairchild International also
subcontracts out a minority of fabrication of wafers, primarily to Tower
Semiconductor, Chartered Semiconductor, Torex Semiconductor and New Japan Radio
Corporation. In order to maximize our production capacity, some of our back-end
assembly and testing operations are also subcontracted out. Primary
subcontractors include Carsem and NS Electronics (Bangkok) Ltd.
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The power device business' wafer fabrication plant in Puchon, South Korea,
supports the entire operations of the power device business. The power device
business subcontracts out nearly all of its assembly and test operations to
third party vendors, primarily to Korea Micro Industry, AUK and Woosuk
Electronic Company. The power device business also subcontracts manufacturing
services from Samsung Electronics. As a result of the acquisition of the power
device business, these services are provided under other manufacturing
agreements with Samsung Electronics.
Our manufacturing processes use many raw materials, including silicon
wafers, copper lead frames, mold compound, ceramic packages and various
chemicals and gases. We obtain our raw materials and supplies from a large
number of sources on a just-in-time basis. Although supplies for the raw
materials used by us are currently adequate, shortages could occur in various
essential materials due to interruption of supply or increased demand in the
industry.
BACKLOG
Our trade sales are made primarily pursuant to standard purchase orders
that are generally booked from one to twelve months in advance of delivery.
Backlog is influenced by several factors including market demand, pricing and
customer order patterns in reaction to product lead times. Quantities actually
purchased by customers, as well as prices, are subject to variations between
booking and delivery to reflect changes in customer needs or industry
conditions.
Fairchild International sells products to many key customers pursuant to
contracts. Contracts are annual fixed-price agreements with customers setting
forth the terms of purchase and sale of specific products. These contracts allow
Fairchild International 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
International recognizes revenue from contract manufacturing services but does
not account for these revenues on a backlog basis. For these reasons, Fairchild
International 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 International's backlog.
SEASONALITY
Generally, Fairchild International is affected by the seasonal trends of
the semiconductor and related industries. As a result of these trends, Fairchild
International typically experiences lower revenue from December to February (the
third quarter of our former fiscal year), primarily due to customer demand
adjustments as a result of holiday seasons around the world. Revenue usually has
a seasonal peak from March to May (the fourth quarter of our former fiscal
year). In Fiscal 1999, the typical seasonality was impacted by the effect of the
recovery of the overall semiconductor market, pricing and back-end capacity
constraints, particularly in the fourth quarter. During the first three quarters
of Fiscal 1999, unit shipments increased sequentially. However, this was offset
by sequential decreases in average selling prices, driven by over-capacity in
the industry. During the fourth quarter, average selling prices increased over
the third quarter, however unit shipments were flat compared to the third
quarter due to back-end capacity constraints.
The power device business is also affected by the seasonal trends of the
semiconductor and related industries. The power device business typically
experiences lower revenues in its fourth quarter. Revenue usually has a seasonal
peak in the third quarter. In 1998, the power device business
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<PAGE> 75
did not experience the typical seasonality in the third quarter due to market
softness in the semiconductor industry.
COMPETITION
Markets for our products are highly competitive. Although only a few
companies compete with us in all of our product lines, we face significant
competition within each of our product lines from major international
semiconductor companies. Some of our competitors may have substantially greater
financial and other resources with which to pursue engineering, manufacturing,
marketing and distribution of their products. Competitors include manufacturers
of standard semiconductors, application-specific integrated circuits and fully
customized integrated circuits, as well as customers who develop their own
integrated circuit products.
We compete in different product lines to various degrees on the basis of
price, technical performance, product features, product system compatibility,
customized design, availability, quality and sales and technical support. Our
ability to compete successfully depends on elements both within and outside of
our control, including successful and timely development of new products and
manufacturing processes, product performance and quality, manufacturing yields
and product availability, customer service, pricing, industry trends and general
economic trends.
TRADEMARKS AND PATENTS
Fairchild International owns rights to a number of trademarks and patents
that are important to its business. Among others, we consider Fairchild
Semiconductor, FACT(TM) and FAST(R) to be trademarks that are material to
Fairchild International's operations.
Fairchild International's corporate policy is to protect proprietary
products by obtaining patents for such products when practicable. Under a
technology licensing and transfer agreement with National Semiconductor entered
into in connection with the recapitalization of Fairchild Semiconductor
Corporation, Fairchild International 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 International acquired over 100 patents owned by
Raytheon Semiconductor, Inc., as well as licensing rights (similar to those
granted to Fairchild International by National Semiconductor in the
recapitalization of Fairchild Semiconductor Corporation) for other
semiconductor-related intellectual property of Raytheon Company not directly
owned by Raytheon Semiconductor, Inc. We believe that we have the right to use
all technology used in the production of our products.
Similarly, Fairchild International acquired from Samsung Electronics a
significant number of licenses and patents (granted, applied for and under
review for application). We obtained approximately 125 U.S. patents and over
1,000 Korean patents pursuant to the acquisition of the power device business.
Fairchild International also received the rights to use all relevant trademarks.
See "The Acquisition -- Intellectual Property and Trademark License Agreements."
ENVIRONMENTAL MATTERS
Our operations are subject to environmental laws and regulations in the
countries in which we operate that regulate, among other things, air and water
emissions and discharges at or from our manufacturing facilities; the
generation, storage, treatment, transportation and disposal of hazardous
materials by our company; the investigation and remediation of environmental
contamination; and the release of hazardous materials into the environment at or
from properties operated by our company and at other sites. As with other
companies engaged in like businesses, the nature of our operations exposes our
company to the risk of liabilities and claims with respect to such matters. We
believe, however, that our operations are in substantial compliance with
applicable environmental laws and
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regulations. Fairchild International's costs to comply with environmental
regulations were immaterial in Fiscal 1997, 1998 and 1999, as were the power
device business' environmental compliance costs for 1996, 1997 and 1998.
Fairchild International's facilities in South Portland, Maine, and, to a
lesser extent, Salt Lake City, Utah, have ongoing remediation projects to
respond to releases of hazardous materials that occurred prior to the
consummation of the recapitalization. Under the Asset Purchase Agreement, as
supplemented by ancillary agreements entered into in conjunction with the
recapitalization, National Semiconductor has agreed to indemnify Fairchild
International for the cost of these projects, subject to limitations. Based on
the historical costs of these projects, we do not believe that future
remediation costs will be material, even without the indemnity.
Fairchild International's previously owned Mountain View, California,
facility is listed on the National Priorities List under the Comprehensive
Environmental Response, Compensation, and Liability Act. Under the terms of the
Acquisition Agreement with Raytheon Company, dated December 31, 1997, Raytheon
Company has retained responsibility for, and has agreed to indemnify us with
respect to, remediation costs or other liabilities related to pre-acquisition
contamination.
Although we believe that the power device business has no significant
environmental liabilities, Samsung Electronics has agreed to indemnify Fairchild
International for environmental liabilities arising out of the Puchon, South
Korea plant or the power device business, subject to limitations.
Future laws or regulations and changes in existing environmental laws or
regulations may subject our operations to different, additional or more
stringent standards. While historically the cost of compliance with
environmental laws has not had a material adverse effect on our results of
operations, business or financial condition, we cannot predict with certainty
our future costs of compliance because of changing standards and requirements.
We cannot assure you that material costs will not be incurred in connection with
the future compliance with environmental laws.
EMPLOYEES
Fairchild International's worldwide workforce consisted of 8,385 full- and
part-time employees as of November 28, 1999, none of whom were represented by
collective bargaining agreements. Of the total number of employees, 6,933 were
engaged in manufacturing and information services, 330 were engaged in marketing
and sales, 677 were engaged in administration and 445 were engaged in research
and development. Of the total number of employees, 3,440, or 41%, were employed
in the Interface and Logic Products Group, 4,253, or 51%, were employed in the
Discrete Power and Signal Technology Group, 322, or 4%, in the Analog, Mixed
Signal and Non-Volatile Memory Products Group and 370, or 4%, in corporate
administration or centralized sales and marketing activities. Fairchild
International believes that its relations with its employees are satisfactory.
Fairchild Korea sponsors a Power Device Business Labor Council consisting
of seven representatives from the non-management workforce and seven members of
the management workforce. The Labor Council, under Korean law, is recognized as
a representative of the workforce for the purposes of consultation and
cooperation only. The Labor Council therefore has no right to take a work action
or to strike and is not party to any labor or collective bargaining agreements
with Fairchild Korea Semiconductor Ltd. Management of the power device business
believes that its relations with its employees and the Labor Council are
satisfactory.
PROPERTIES
In the United States, our corporate headquarters as well as the
headquarters and wafer fabrication operations of the Interface and Logic
Products Group are located in approximately 240,000 square feet of space in
properties that we own in South Portland, Maine. Additional
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manufacturing, warehouse and office facilities are housed in approximately
300,000 square feet of space in properties that we own in Salt Lake City, Utah.
Additional office and manufacturing space is located in leased facilities in
South Portland, Maine, Sunnyvale, California and San Diego, California.
Fairchild International transferred its analog wafer fabrication capability
from its Mountain View, California facility to its South Portland, Maine
facility. On April 23, 1999, Fairchild International sold its Mountain View
property for approximately $35.7 million. The sale price is subject to (1) a
$3.5 million holdback which will be paid to Fairchild International 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 International upon the demolition of
the existing structures on the Mountain View property. In connection with the
sale of the Mountain View property, Fairchild International entered into an
agreement to lease back the property until the transfer of its facility from the
property is completed. We pay monthly rent of $125,000 under the lease, which
expires on December 31, 2000.
In Asia, we own or lease approximately 397,000 square feet, 170,000 square
feet and 766,000 square feet of manufacturing, office and warehouse space in
Penang, Malaysia, Cebu, the Philippines and Puchon, South Korea, respectively.
Leases affecting the facilities in Penang, Malaysia, and Cebu, the Philippines,
are generally in the form of long-term ground leases, with Fairchild
International owning improvements on the land. The initial terms of these leases
will expire beginning in 2014. In some cases Fairchild International has the
option to renew the lease term, while in others Fairchild International 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.
We believe that our facilities around the world, whether owned or leased,
are well-maintained. Our manufacturing facilities contain sufficient productive
capacity to meet our needs for the foreseeable future.
LEGAL PROCEEDINGS
On November 2, 1999, our principal operating subsidiary, Fairchild
Semiconductor Corporation, was named as a defendant in a patent infringement
lawsuit filed by Siliconix Incorporated in the United States District Court for
the Northern District of California. The complaint filed in the suit alleges
that some of our products infringe two Siliconix patents and claims an
unspecified amount of damages. We intend to contest these claims vigorously.
On December 22, 1999, we, Fairchild Semiconductor Corporation and Fairchild
Korea Semiconductor Ltd. were named as defendants in a patent infringement
lawsuit filed by IXYS Corporation in the United States District Court for the
Northern District of California. The complaint filed in the lawsuit alleges that
one or more of our products infringe one IXYS patent and claims an unspecified
amount of damages. Although we are in the process of investigating IXYS' claims,
we believe these claims are subject to indemnification by Samsung Electronics
under the patent indemnification provisions of the Business Transfer Agreement
with Samsung Electronics. See "Certain Relationships and Related
Transactions -- Agreements Relating to the Power Device Business -- Business
Transfer Agreement." As of the date of this prospectus, we are unable to assess
the validity of IXYS' claims.
In addition to the above proceedings, from time to time we are involved in
other legal proceedings in the ordinary course of business. We believe that
there is no such ordinary course 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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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the persons who
are members of the Board of Directors or executive officers of our company. Each
director of our company will hold office until the 2000 annual meeting of
stockholders of our company or until his successor has been elected and
qualified.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Kirk P. Pond......................... 55 Chairman of the Board of Directors, President and
Chief Executive Officer
Joseph R. Martin..................... 52 Executive Vice President and Chief Financial Officer
and Director
Daniel E. Boxer...................... 54 Executive Vice President and Chief Administrative
Officer, General Counsel and Secretary
Jerry M. Baker....................... 48 Executive Vice President and General Manager, Discrete
Power and Signal Technologies Group
W. Wayne Carlson..................... 58 Executive Vice President and General Manager,
Interface and Logic Products Group
Keith Jackson........................ 44 Executive Vice President and General Manager, Analog,
Mixed Signal and Non-Volatile Memory Products Group
Deok J. Kim.......................... 47 President, Fairchild Korea Semiconductor Ltd.
Darrell Mayeux....................... 57 Executive Vice President, Worldwide Sales and
Marketing
David A. Henry....................... 38 Vice President, Corporate Controller
Matthew W. Towse..................... 37 Vice President, Treasurer
William N. Stout..................... 61 Director
Richard M. Cashin, Jr. .............. 46 Director
Paul C. Schorr IV.................... 32 Director
Ronald W. Shelly..................... 56 Director
</TABLE>
Kirk P. Pond, Chairman of the Board of Directors, President and Chief
Executive Officer. Mr. Pond has been the President of our company since June
1996. Since 1987, Mr. Pond had held several executive positions with National
Semiconductor, most recently Executive Vice President and Chief Operating
Officer. Prior executive management positions were with Fairchild Semiconductor
Corporation, Texas Instruments and Timex Corporation. Mr. Pond is a director of
Sybron Chemical.
Joseph R. Martin, Executive Vice President, Chief Financial Officer and
Director. Mr. Martin has been the Executive Vice President and Chief Financial
Officer of our company since June 1996. Mr. Martin had held several senior
financial positions with National Semiconductor since 1989, most recently as
Vice President of Finance, Worldwide Operations. Prior to joining National
Semiconductor, Mr. Martin was Senior Vice President and Chief Financial Officer
of VTC Incorporated. Mr. Martin is a director of ChipPAC Corp.
Daniel E. Boxer, Executive Vice President and Chief Administrative Officer,
General Counsel and Secretary. Mr. Boxer joined our company in March 1997. He
has practiced law for 27 years and since 1975 had been a partner at the law firm
of Pierce Atwood, Portland, Maine. His practice at Pierce Atwood included
advising many large manufacturing companies, including our company, on business,
governmental, legal compliance and environmental issues. He was most recently a
senior partner and Chairman of the firm's Management Committee.
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Jerry M. Baker, Executive Vice President and General Manager, Discrete
Power and Signal Technologies Group. Mr. Baker has been Executive Vice
President and General Manager, Discrete Power and Signal Technologies Group,
since December 1996. He has spent more than 24 years in a variety of engineering
and management positions within National Semiconductor, most recently as Vice
President and General Manager, Discrete Products Divisions.
W. Wayne Carlson, Executive Vice President and General Manager, Interface
and Logic Products Group. Mr. Carlson has been Executive Vice President and
General Manager, Logic Products Group, since June 1996. He has 33 years of prior
engineering and management experience with National Semiconductor and Fairchild
International, most recently as Vice President and General Manager, Data
Management Division.
Keith Jackson, Executive Vice President and General Manager, Analog, Mixed
Signal and Non-Volatile Memory Products Group. Mr. Jackson joined our company
in March 1998. He has over 20 years of semiconductor industry experience. Most
recently, Mr. Jackson was President of TriTech Microelectronics in Singapore, a
manufacturer of analog and mixed signal products, which he joined in 1996. Prior
to that, he worked for National Semiconductor for 10 years, most recently as
Vice President and General Manager of the Analog and Mixed Signal division. He
has also held various marketing and engineering positions at National
Semiconductor and Texas Instruments.
Deok J. Kim, President, Fairchild Korea Semiconductor Ltd. Mr. Kim became
President of Fairchild Korea Semiconductor Ltd. when we acquired the power
device business from Samsung Electronics in April 1999. He has over 24 years of
experience in the semiconductor industry. Mr. Kim joined the power device
business in 1990 as director of power product development and later became
managing director and vice president and general manager of the power device
business prior to its acquisition by Fairchild International. Before joining
Samsung Electronics, Mr. Kim held engineering and development positions with
Goldstar Semiconductor, AMI and General Electric.
Darrell Mayeux, Executive 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 International plant in South Portland, Maine. Mr. Towse previously
worked for Ernst & Young and is a Certified Public Accountant.
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.
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Richard M. Cashin, Jr., Director. Mr. Cashin became a Director in March
1997. He has been employed by Citicorp Venture Capital Ltd. since 1980, and has
been President since 1994. Mr. Cashin is a director of Lifestyle Furnishings
International, Euramax International plc, Delco Remy International, Gerber
Childrenswear, MSX International, IPC Information Systems and Titan Wheel
International.
Paul C. Schorr IV, Director. Mr. Schorr became a Director in March 1997.
He has been employed by and been a Vice President of Citicorp Venture Capital
Ltd. since 1996. Prior to joining Citicorp Venture Capital Ltd., Mr. Schorr was
employed by McKinsey & Company, Inc. from 1993 to 1996 (in reverse chronological
order) as an engagement manager and an associate. He is a director of KEMET
Corporation, Sybron Chemical, ChipPAC Corp. and Paper-Pak Products, Inc.
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
Two of our non-employee directors receive cash compensation for their
services as a director. Messrs. Stout and Shelly receive $20,000 per year, plus
$1,500 for meetings attended in person and $500 for meetings attended by
teleconference. Messrs. Cashin and Schorr do not receive cash compensation for
their services as directors. We do not pay our employee directors any fees or
additional compensation for service as members of our board. We reimburse all
our directors for expenses incurred in attending our board meetings.
In connection with our initial public offering, our board of directors
authorized a directors' option program pursuant to which non-employee directors
will receive options to purchase 7,000 shares of Class A Common Stock each year
at an exercise price equal to the fair market value of the shares on the date of
grant, subject to vesting over a five-year period after the date of grant. In
connection with this offering, the vesting of these options will be accelerated
so that options that were to have vested in 2000 will vest immediately prior to
the consummation of this offering and all subsequent vestings will be
accelerated one year. In addition, the board authorized grants to each
non-employee director of options to purchase 10,000 shares of Class A Common
Stock, at an exercise price equal to the fair market value of the shares at or
prior to the initial public offering, which options were fully vested on the
grant date.
COMPENSATION COMMITTEE
William N. Stout, Paul C. Schorr IV and Ronald W. Shelly are the members of
our Compensation Committee.
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EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation received by our Chief Executive Officer and our four other most
highly compensated executive officers relating to services rendered during stub
year 1999 (1999S), Fiscal 1999 and 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION --------------
----------------------------- NUMBER OF
FISCAL OTHER STOCK OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2) (IN SHARES)(3) COMPENSATION(4)
- --------------------------- ------ -------- -------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kirk P. Pond................. 1999S(1) $351,922 $630,000 $2,870,493 200,000 $ 26,422
Chairman of the Board of 1999 450,008 297,000 3,559,453 -- 40,321
Directors, President and 1998 449,994 435,969 -- -- 39,844
Chief Executive Officer
Joseph R. Martin............. 1999S(1) 210,581 273,000 1,406,446 100,000 22,355
Executive Vice President and 1999 284,600 128,700 1,779,730 -- 36,363
Chief Financial Officer and 1998 262,024 152,240 -- -- 19,818
Director
Daniel E. Boxer.............. 1999S(1) 192,500 231,000 578,964 75,000 10,298
Executive Vice President and 1999 275,002 108,900 732,627 -- 18,723
Chief Administrative 1998 262,024 152,240 -- -- 254,283
Officer, General Counsel and
Secretary
W. Wayne Carlson............. 1999S(1) 175,000 175,000 578,964 50,000 11,024
Executive Vice President and 1999 250,005 138,403 732,627 -- 20,198
General Manager, Interface 1998 250,004 138,406 -- -- 17,081
and Logic Products Group
Jerry M. Baker............... 1999S(1) 175,000 175,000 592,898 50,000 8,505
Executive Vice President and 1999 250,010 82,500 732,627 -- 13,624
General Manager, Discrete 1998 250,009 138,406 -- -- 12,598
Power and Signal
Technologies
</TABLE>
- -------------------------
(1) Amounts shown reflect compensation paid or earned during stub year 1999,
which began May 31, 1999 and ended December 26, 1999. Base salaries reported
reflect annual salaries as follows: $600,000 for Mr. Pond, $360,000 for Mr.
Martin, $330,000 for Mr. Boxer and $300,000 for each of Mr. Carlson and Mr.
Baker.
(2) Amounts shown for Fiscal 1999 reflect compensation resulting from the lapse
of risks of forfeiture by our executive officers with respect to their stock
in our company. As a result, each executive had individual income tax
liabilities. Loans of $1,686,164 to Mr. Pond, $843,094 to Mr. Martin,
$347,060 to Mr. Boxer, $347,060 to Mr. Carlson and $350,600 to Mr. Baker
were made by Fairchild International to discharge their individual tax
liabilities in June 1998. These loans accrued interest at 6% per annum. The
loans, together with accrued interest, were cancelled in connection with the
completion of our initial public offering on August 9, 1999, resulting in
compensation income (including gross-ups for resulting income taxes paid by
Fairchild International) for each executive officer equal to the respective
amounts reported for stub year 1999, except for Mr. Pond, who received
$2,812,885 in such income and $57,608 in other compensation.
(3) Reflects options granted in connection with our initial public offering. See
"Options Granted in Last Fiscal Year" below.
(4) Amounts shown reflect contributions and allocations to defined contribution
retirement plans and the value of insurance premiums for term life insurance
and disability insurance as follows: for stub year 1999 and Fiscal 1999, all
amounts shown. For Fiscal 1998, all amounts shown except $238,262 for Mr.
Boxer representing a one-time signing bonus.
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The following table sets forth information concerning stock options granted
to the executive officers named in the Summary Compensation Table during stub
year 1999.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
PERCENTAGE OF OF STOCK PRICE
NUMBER OF ALL OPTIONS APPRECIATION FOR OPTION
SECURITIES GRANTED TO ALL TERM(2)
UNDERLYING EMPLOYEES IN EXERCISE EXPIRATION ---------------------------
OPTIONS(1) STUB YEAR 1999 PRICE DATE 5% 10%
---------- -------------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Kirk P. Pond............ 200,000 6.1% $18.50 8/4/09 $2,326,910 $5,896,847
Joseph R. Martin........ 100,000 3.0% 18.50 8/4/09 1,163,455 2,948,424
Daniel E. Boxer......... 75,000 2.3% 18.50 8/4/09 872,591 2,211,318
W. Wayne Carlson........ 50,000 1.5% 18.50 8/4/09 581,728 1,474,212
Jerry M. Baker.......... 50,000 1.5% 18.50 8/4/09 581,728 1,474,212
</TABLE>
- -------------------------
(1) Twenty percent of options reported were immediately exercisable on the grant
date of August 4, 1999 and the remainder were to have become exercisable in
one-fourth increments on the first four anniversaries of the grant date. In
connection with this offering, the vesting of these options will be
accelerated so that options that were to have vested on August 4, 2000 will
vest immediately prior to the consummation of this offering and subsequent
vestings will be accelerated one year. See "Management -- Stock Option
Plan."
(2) Reflects net pre-tax gains which would be recognized at the end of the
option term if an executive exercised all of his options on the last day of
the option term and our stock price had grown at the 5% and 10% assumed
growth rates set by the Securities and Exchange Commission. The amounts
shown are not intended to forecast future appreciation in the price of our
Class A Common Stock.
The following table sets forth information regarding the number and value
of options held by the executive officers named in the Summary Compensation
Table at the end of stub year 1999. None of the named executive officers
exercised options during stub year 1999.
OPTION VALUES AT END OF LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SECURITIES NET VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END OPTIONS AT YEAR-END(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kirk P. Pond........................ 50,000 150,000 $387,500 $1,162,500
Joseph R. Martin.................... 20,000 80,000 155,000 620,000
Daniel E. Boxer..................... 15,000 60,000 116,250 465,000
W. Wayne Carlson.................... 10,000 40,000 77,500 310,000
Jerry M. Baker...................... 10,000 40,000 77,500 310,000
</TABLE>
- -------------------------
(1) Reflects net before-tax amounts determined by subtracting the exercise price
from $26.25, the fair market value of our Class A Common Stock at the end of
stub year 1999.
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EMPLOYMENT AGREEMENTS
In March 1997, Fairchild International and Sterling entered into an
employment agreement with each of Kirk P. Pond and Joseph R. Martin. The
employment agreements were entered into upon the closing of the recapitalization
in 1997.
Mr. Pond is employed as Chairman of the board of directors and as Chief
Executive Officer of Fairchild International. Mr. Martin is employed as
Executive Vice President and Chief Financial Officer, and serves as a member of
our board of directors. The agreements provide for Mr. Martin and Mr. Pond to
serve on our board of directors, and Sterling has committed to honor its
commitment to each executive under the agreements to assure their continued
membership on the board of directors. The respective agreements provide for an
annual base salary of $450,000 for Mr. Pond (which was subsequently increased to
$600,000) and $250,000 for Mr. Martin (which was subsequently increased to
$360,000), subject in each case to increases at the discretion of the board of
directors and to annual performance bonuses in accordance with the FSC
Semiconductor Corporation 1997 Executive Officer Incentive Plan. Each agreement
also provides for the executive to receive standard Fairchild International
benefits. The term of each agreement is three years subject to automatic renewal
for up to two consecutive one-year terms unless, in each case, either we or the
executive gives prior notice of non-renewal. Under each agreement, either we or
the executive may terminate the agreement with or without cause. If we terminate
without cause or the executive terminates with cause, each agreement requires us
to pay the executive monthly severance payments (approximately equal to his
salary at the time of termination plus an amount equal to incentive awards
payable in the fiscal year prior to termination) until the end of the term of
the agreement or for 24 months if longer. Each executive is subject to a
non-competition covenant during the term of his agreement and for a period of at
least 24 months following termination or expiration of the agreement.
PERSONAL SAVINGS AND RETIREMENT PLAN
We have adopted a Personal Savings and Retirement Plan, which we refer to
as the Retirement Plan, for all eligible employees who are not foreign nationals
or contract employees. The Retirement Plan includes a cash or deferred
arrangement under Section 401(k) of the Internal Revenue Code and matching
contributions under Section 401(m) of the Internal Revenue Code. Under the
401(k) plan, participants may elect to defer from 1% to 15% of their
compensation on an after-tax basis, directing the investment of these elective
deferrals among several mutual funds. We will make quarterly matching
contributions equal to 75% of the first 6% of an employee's before-tax elective
deferral contributions for the period. Both elective deferrals and matching
contributions under the 401(k) plan will be fully vested at all times.
FAIRCHILD BENEFIT RESTORATION PLAN
We have adopted the Fairchild Benefit Restoration Plan. Under the Fairchild
Benefit Restoration Plan, all participants in the Fairchild Personal Savings and
Retirement Plan who are exempt status employees in job grade nine or higher are
eligible (i) to defer on a before-tax basis amounts over and above those they
are permitted by law to defer under Fairchild International's Retirement Plan
and (ii) to receive matching contributions from our company equal to the
difference between matching contributions received under the Retirement Plan and
the matching contributions they would have received under the Retirement Plan
but for 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.
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FAIRCHILD INCENTIVE PROGRAM
We have adopted the Fairchild Incentive Program. Under the Fairchild
Incentive Program, all of our regular full-and part-time employees (with limited
exceptions) are eligible to receive annual or semiannual incentive awards. The
amount of each payment is based on a given employee's "Target Award." Under the
current formulation of the Fairchild Incentive Program, the Target Award is 5%
of annual compensation for non-exempt employees, from 5% to 15% (depending on
grade level) of annual compensation for exempt employees, and up to 35%
(depending on grade level) of annual compensation for all management-level
employees with the title of Director or Vice President. Payment awards range
from 0% to 250% of the Target Award, depending on whether we achieve pre-
established earnings goals. Participants in the Fairchild Incentive Program in
job grade nine or higher are eligible to defer awards, and to the extent that
the deferral option applies only to those Fairchild Incentive Program
participants in job grade nine or higher, it constitutes a separate unfunded
plan known as the Fairchild Deferred Incentive Plan. For participants who elect
deferral, we will establish and maintain book-entry accounts to which we will
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 administers the Fairchild Incentive Program and reserves the right,
among other things, not to make award payments, and to modify or amend the
Fairchild Incentive Program. The Deferral Plan is an unfunded plan of deferred
compensation, and benefits payable thereunder are paid out of our general
corporate assets and are subject to the claims of our general creditors.
FSC SEMICONDUCTOR CORPORATION 1997 EXECUTIVE OFFICER INCENTIVE PLAN
We adopted the FSC Semiconductor Corporation 1997 Executive Officer
Incentive Plan on March 11, 1997 and subsequently amended and restated it on
June 1, 1998. Under the Executive Officer Incentive Plan, executive officers
with the title of either Executive Vice President or President may be eligible
to receive annual incentive awards, based on a "Target Award" which ranges from
40% to 90% of an officer's base annual compensation. Actual award payments range
from 0% to 250% of the Target Award depending on the extent to which we achieve
or surpass pre-established earnings goals. Participants may elect to defer all
or any portion of an award payment. For participants who elect deferral, we will
establish and maintain book-entry accounts, and credit each account annually
with deferred payments, as well as interest at a rate equal to a commonly
reported rate for long-term A-rated corporate bonds. We pay deferrals and
accrued interest thereon to participants upon termination or on a date
pre-selected by the participant according to the terms of the Executive Officer
Incentive Plan. The board of directors determines eligibility for Executive
Officer Incentive Plan participation, performance goals and other terms of the
Executive Officer Incentive Plan. To the extent of any deferrals, the Executive
Officer Incentive Plan is an unfunded plan of deferred compensation, and
benefits payable thereunder are paid out of our general corporate assets and are
subject to the claims of our general creditors.
STOCK OPTION PLAN
Fairchild International adopted the 1997 Stock Option Plan which was
subsequently amended and restated effective June 24, 1999. Under the plan, as
amended, we have authorized for grant to directors, regular salaried officers
and key employees of our company and Fairchild Semiconductor Corporation options
for up to 8,507,666 shares of Class A Common Stock. 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 plan, a committee of two or more members
of our board of directors determines the exercise price of each option granted.
The exercise price may not be less than the fair market value of our Class A
Common Stock on the date of grant. The maximum term of any option is ten years
from the date of grant for incentive stock options and ten years and one day
from the date of grant for non-qualified stock
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options. Options granted are exercisable at the determination of our board of
directors, and most options currently vest ratably over approximately five
years. Within any one-year period, employees may not receive options to purchase
more than 200,000 shares of Class A Common Stock. As of November 28, 1999,
6,968,695 shares of common stock were reserved for issuance upon the exercise of
outstanding options. We have granted options to purchase a total of 575,000
shares of Class A Common Stock to our executive officers, including options for
200,000 shares to Kirk P. Pond, 100,000 shares to Joseph R. Martin, 75,000
shares to Daniel E. Boxer, 50,000 shares to Keith Jackson and 50,000 shares to
Jerry M. Baker. These options were granted on August 4, 1999 in connection with
our initial public offering. Twenty percent of the options were immediately
exercisable as of the grant date and the remainder were to have vested over a
four-year period following the date of grant. In connection with this offering,
the vesting of these options (as well as the vesting of other options held by
other selling stockholders) will be accelerated, so that options that were to
have vested in 2000 will vest immediately prior to the consummation of this
offering and all subsequent vestings will be accelerated one year. All of the
options granted in connection with our initial public offering have an exercise
price of $18.50 per share, the price to the public in our initial public
offering. In addition, our board of directors has authorized the grant of
additional options to purchase shares of Class A Common Stock to eligible
employees, subject to the discretion of the board, equal to 2% of the number of
shares outstanding each year.
EMPLOYEE STOCK PURCHASE PLAN
In April 2000, we expect to implement a new employee stock purchase plan,
pursuant to which U.S. employees and, to the extent permitted under applicable
laws, foreign employees of our non-U.S. subsidiaries will have an opportunity to
purchase shares of our Class A Common Stock at a price equal to 85% of the
market value on the first or last day of each calendar quarter, whichever is
lower. Shares purchased by us for sale to employees under the plan will be
purchased in open-market transactions. The plan will be designed and operated to
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code.
POWER DEVICE BUSINESS EMPLOYMENT AGREEMENTS AND BENEFIT PLANS
In connection with the acquisition of the power device business, we
executed employment agreements with Dr. Deok J. Kim, President of the power
device business and with the head of sales and marketing of the power device
business.
We also provide key management of the power device business, as well as all
other employees, with compensation and benefits plans comparable to those that
were in place on the date of the acquisition of the power device business. These
plans consist of all legally mandated and nationally-sponsored benefits plans
such as national medical insurance, unemployment insurance and a national
pension program, as well as privately sponsored plans such as a medical
treatment guarantee program and a personal pension contribution program. We will
either continue in the Samsung Electronics-sponsored programs that currently
exist or replicate existing Samsung Electronics programs under the sponsorship
of Fairchild Korea Semiconductor Ltd.
In addition to the above-mentioned benefits plans, we are continuing
incentive compensation programs of the power device business which existed at
the date of the acquisition of the power device business. These programs include
an Individual Incentive Plan which provides potential annual incentive
compensation for key employees, a Productivity Incentive Plan which pays
semi-annually based on productivity rankings and a Management by Objectives
Incentive Plan which pays semi-annually based on reaching EBITDA goals (as
defined in the plan). These incentive plans make incentive payments available in
multiples of the employee's monthly base salary, with varying caps on the
payments available under the various plans, so that an employee can earn a
maximum of 200% of monthly base salary under any one plan. Under all of the
various incentive plans, the average employee will receive approximately six
months of pay in the form of incentive payments during a fiscal year.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS RELATING TO THE RECAPITALIZATION OF THE FAIRCHILD SEMICONDUCTOR
BUSINESS
Pursuant to an Agreement and Plan of Recapitalization, dated January 24,
1997, between Sterling Holding Company, LLC and National Semiconductor, the
following transactions occurred concurrently on March 11, 1997:
- National Semiconductor transferred to Fairchild Semiconductor
Corporation -- which was at that time newly formed in connection with the
plan of recapitalization -- substantially all of the assets and
liabilities of the Fairchild Semiconductor business in exchange for
promissory notes in the aggregate principal amount of $401.6 million and
all of the capital stock of Fairchild Semiconductor Corporation.
- National Semiconductor transferred all of the capital stock of Fairchild
Semiconductor Corporation and approximately $12.8 million in cash to our
company -- also newly formed at that time in connection with the plan of
recapitalization -- in exchange for shares of our common and preferred
stock and an 11.74% Subordinated Note due 2008 in the principal amount of
$77.0 million.
- We issued common and preferred stock to Sterling Holding Company, LLC for
approximately $58.5 million in cash.
- We issued common and preferred stock to Kirk P. Pond, Joseph R. Martin
and other key employees of our company for a total of $6.5 million in
cash.
- We contributed cash in the amount of approximately $77.8 million to the
capital of our wholly owned subsidiary, Fairchild Semiconductor
Corporation.
- Fairchild Semiconductor Corporation borrowed $120.0 million under a bank
credit facility and received the net proceeds of approximately $291.0
million from the issuance of high-yield debt.
- Fairchild Semiconductor Corporation repaid the $401.6 million in
promissory notes issued to National Semiconductor in cash.
In the transactions described above, each of National Semiconductor, Sterling
Holding Company, LLC and the management investors paid $0.13 per share for our
common stock (after giving effect to a four-for-one common stock split, in the
form of a dividend, distributed to stockholders on April 29, 1998) and paid
$1,000 per share for our preferred stock.
Concurrently with the recapitalization, Fairchild Semiconductor Corporation
and National Semiconductor entered into several agreements that remain in
effect. Under the Asset Purchase Agreement, dated as of March 11, 1997, National
Semiconductor agreed to indemnify Fairchild Semiconductor Corporation for
damages arising out of any liabilities other than those assumed by Fairchild
Semiconductor Corporation in connection with such asset sale. In addition, the
Asset Purchase Agreement contains a provision that, subject to limitations,
forbids National Semiconductor for a period of five years beginning on March 11,
1997 from engaging in any business competing with our products in existence on
March 11, 1997. For a period of 39 months beginning on March 11, 1997 the Asset
Purchase Agreement, subject to limitations, forbids Fairchild Semiconductor
Corporation from engaging in any business competing with National
Semiconductor's products in existence on March 11, 1997.
Under the Technology Licensing and Transfer Agreement, dated March 11,
1997, between Fairchild Semiconductor Corporation and National Semiconductor,
National Semiconductor assigned or non-exclusively licensed to Fairchild
Semiconductor Corporation patent, copyright, maskwork, trade secret and
trademark rights necessary to Fairchild Semiconductor Corporation's business and
to make improvements to Fairchild Semiconductor Corporation's product line.
These rights include a non-exclusive license to practice processes necessary to
Fairchild Semiconductor Corporation's business. For patent rights, National
Semiconductor assigned to Fairchild Semiconductor Corporation 150 patents and
granted Fairchild Semiconductor Corporation a worldwide, royalty-free,
non-exclusive license under applicable patents and patent applications, for the
life of such patents (but without right to sublicense), to manufacture, package,
use, sell, offer for sale, import, design or develop Fairchild Semiconductor
Corporation's products and improvements to those products. With respect to
copyrights and maskworks
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used in Fairchild Semiconductor Corporation's business. National Semiconductor
granted Fairchild Semiconductor Corporation an undivided interest in certain
co-owned copyrights and maskworks. For trademarks, National Semiconductor
assigned trademarks related to Fairchild Semiconductor Corporation's products
and granted licenses recognizing transitional use of visible trademarks and of
product-embedded trademarks, which embedded trademarks in some cases will not be
eliminated until the relevant product is discontinued or replaced. For patents
that National Semiconductor assigned to Fairchild Semiconductor Corporation, a
worldwide, paid-up, royalty-free, non-exclusive license, with a limited right to
sublicense, was granted by Fairchild Semiconductor Corporation to National
Semiconductor. National Semiconductor and Fairchild Semiconductor Corporation
further cross-licensed discoveries, improvements or inventions occurring within
one year after March 11, 1997, with no right to grant sublicenses (except for
the purpose of settling third party claims against Fairchild Semiconductor
Corporation). The agreement further provides that National Semiconductor, for a
period of time, shall indemnify and render assistance to Fairchild Semiconductor
Corporation for intellectual property claims made by third parties.
Under the National Foundry Services Agreement and the Fairchild Foundry
Services Agreement, each dated March 11, 1997, National Semiconductor and
Fairchild Semiconductor Corporation agreed to manufacture semiconductor products
(i.e., provide "foundry" services) for each other during at least the 39-month
period beginning on March 11, 1997. Foundry services are the manufacturing
processes through which thousands of integrated circuits are fabricated from raw
silicon wafers. The Fairchild Foundry Services Agreement establishes the terms
and conditions under which Fairchild Semiconductor Corporation provides foundry
services for National Semiconductor and the National Foundry Services Agreement
defines the terms and conditions under which National Semiconductor provides
foundry services for Fairchild Semiconductor Corporation. Both foundry
agreements (i) establish the processes the foundry service provider shall use,
(ii) define purchase commitments and production forecasts, (iii) establish
pricing, (iv) provide for engineering support from the other party, (v)
establish quality standards, (vi) specify delivery and payment terms among other
things, and (vii) specify warranty and inspection terms.
The National Assembly Services Agreement and the Fairchild Assembly
Services Agreement, each dated March 11, 1997, provide for assembly and test
services between National Semiconductor and Fairchild Semiconductor Corporation
during at least the 39-month period beginning on March 11, 1997. During the
assembly and test phase of semiconductor production, the thousands of integrated
circuits produced on silicon wafers during the foundry phase are separated and
packaged into individual devices ready for sale to customers. The National
Assembly Services Agreement sets forth the terms and conditions under which
National Semiconductor provides such services for Fairchild Semiconductor
Corporation. The Fairchild Assembly Services Agreement sets forth the terms and
conditions under which Fairchild Semiconductor Corporation provides such
services to National Semiconductor. Similar to the foundry agreements, the
assembly agreements establish terms for (i) volume commitments and production
planning, (ii) ordering and shipping, (iii) quality, inspection and acceptance
of finished goods and (iv) pricing and payment.
Manufacturing services provided to Fairchild Semiconductor Corporation
under the National Foundry Services Agreement and the National Assembly Services
Agreement relate primarily to products in the Memory Division. Costs for these
services aggregated approximately 1% of Fairchild Semiconductor Corporation's
total manufacturing costs for Fiscal 1999.
National Semiconductor and Fairchild Semiconductor Corporation entered into
the Mil/Aero Wafer and Services Agreement, dated March 11, 1997, which
establishes, in a similar fashion, the terms and conditions under which
Fairchild Semiconductor Corporation manufactures integrated circuits for
military and aerospace industry customers of National Semiconductor.
Under a letter agreement, dated March 11, 1997, between National
Semiconductor and Fairchild Semiconductor Corporation, National Semiconductor is
required to purchase from Fairchild
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Semiconductor Corporation a minimum of $330.0 million in goods and services in
the 39-month period beginning on March 11, 1997, under the Fairchild Foundry
Services Agreement, Fairchild Assembly Services Agreement and the Mil/Aero Wafer
and Services Agreement.
Under the Transition Services Agreement, dated March 11, 1997, National
Semiconductor provided a number of business support services to Fairchild
Semiconductor Corporation in order to assist in Fairchild Semiconductor
Corporation's conversion to an independent entity, from March 11, 1997 until, in
most instances, June 1, 1998, which deadline was extended with respect to some
services until August 31, 1998. These services included (i) data processing and
communication services, (ii) financial and administrative support, (iii)
purchasing services, (iv) marketing and sales services, (v) logistics and
operational support services, (vi) human resources and benefits services and
(vii) security assistance and consulting. National Semiconductor also agreed to
provide Fairchild Semiconductor Corporation, during such period, with additional
services as provided in separate shared facilities and services agreements for
the South Portland, Maine, site and a sublease for the Santa Clara, California,
site (the latter site having been vacated by Fairchild Semiconductor Corporation
during Fiscal 1998). Generally, such agreements provided that National
Semiconductor would invoice Fairchild Semiconductor Corporation for the services
provided, with certain charges based on a fixed cost and other charges based on
National Semiconductor's actual incurred costs. In addition, under the
agreements National Semiconductor granted to Fairchild Semiconductor Corporation
a royalty-free, perpetual and irrevocable worldwide license to use National
Semiconductor's in-house business, engineering and manufacturing systems
software. The license survives termination of such agreements.
During the fiscal years ended May 25, 1997, May 31, 1998 and May 30, 1999,
Fairchild Semiconductor Corporation incurred costs of $2.8 million, $14.0
million and $5.6 million, respectively, for manufacturing services provided by
National Semiconductor under the National Foundry Services Agreement and the
National Assembly Services Agreement and $15.3 million, $46.6 million and $15.1
million, respectively, for business support services provided by National
Semiconductor under the Transition Services Agreement. In addition, during the
fiscal years ended May 25, 1997, May 31, 1998 and May 30, 1999, Fairchild
Semiconductor Corporation generated revenues of $20.9 million, $124.5 million
and $62.9 million, respectively, for manufacturing services provided by
Fairchild Semiconductor Corporation under the Fairchild Foundry Services
Agreement and the Mil/Aero Wafer and Services Agreement, and $7.6 million, $28.9
million and $18.1 million, respectively, for manufacturing services provided
under the Fairchild Assembly Services Agreement. On a combined basis during the
fiscal years ended May 25, 1997, May 31, 1998 and May 30, 1999, Fairchild
Semiconductor Corporation generated revenues of $28.5 million, $153.4 million
and $81.0 million, respectively, for manufacturing services provided by
Fairchild Semiconductor Corporation under the letter agreement dated March 11,
1997.
The terms of the agreements described above were the result of arms-length
negotiations and in our opinion are no less favorable to Fairchild Semiconductor
Corporation than those that could be obtained from non-affiliated parties.
AGREEMENTS RELATING TO THE POWER DEVICE BUSINESS.
The following contains summaries of the material agreements which we
entered into in connection with the acquisition of the power device business.
The descriptions in the summaries of the terms and provisions of the agreements
are not complete, and you should read the agreements themselves, copies of which
are incorporated by reference as exhibits to the registration statement of which
this prospectus is a part.
Business Transfer Agreement
The Business Transfer Agreement provided for the sale from Samsung
Electronics to Fairchild Korea Semiconductor Ltd., an indirect wholly owned
subsidiary of Fairchild Semiconductor
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Corporation, of substantially all of the assets and the assumption of the
liabilities occurring in the ordinary course of business of the power device
business for a purchase price of approximately $414.9 million, including fees
and expenses.
The assets purchased by Fairchild Korea Semiconductor Ltd. include, among
other things, land, a manufacturing plant and other buildings in Puchon, South
Korea, as well as, with some exceptions and limitations, all of the
manufacturing equipment, inventory, motor vehicles, contractual rights and
obligations, governmental permits and licenses and all other assets used to
conduct the power device business. In addition, the purchased assets included
all of the patents, trademarks, mask works, copyrights and other intellectual
property used primarily in the power device business. Samsung retained a
co-ownership interest in some of the assembly and test patents transferred in
the acquisition. Intellectual property which is used in connection with the
power device business, but which is also used by other affiliated Samsung
companies, is licensed to Fairchild Korea Semiconductor Ltd. by Samsung
Electronics. See "-- Intellectual Property and Trademark License Agreements."
Fairchild Korea Semiconductor Ltd. did not assume liabilities incurred by
or relating to the power device business on or prior to consummation of the
acquisition of the power device business, except for liabilities that arose in
the ordinary course of business and income tax liabilities as discussed below.
The agreement provides that Samsung Electronics will indemnify Fairchild Korea
Semiconductor Ltd. for those and other excluded liabilities as well as for
environmental liabilities of the power device business. Samsung Electronics'
liability under the environmental indemnity, together with other indemnification
claims under the agreement, is limited to $150.0 million. Samsung Electronics
will also indemnify Fairchild Korea Semiconductor Ltd., for a period of three
years after consummation of the acquisition of the power device business, for
damages that result from third-party claims that the products of the power
device business infringe patents owned by those third parties that were issued
before consummation of the acquisition. This separate patent infringement
indemnity is subject to limitations and conditions. For example, it does not
apply if the infringement claim would have been avoided were it not for a
post-closing product design change by Fairchild Korea Semiconductor Ltd. 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 Semiconductor Ltd. as of January 1,
1999. In connection with this provision, Samsung Electronics agreed to pay
Fairchild Korea Semiconductor Ltd. an amount equal to the net income before
income taxes of the power device business from January 1, 1999 to March 15,
1999, and half the net income before income taxes from March 15, 1999 to April
13, 1999. Accordingly, the agreement provides that Fairchild Korea Semiconductor
Ltd. assume liabilities for income taxes of the power device business, with
respect to amounts received, for the same period.
Under the agreement, Fairchild Korea Semiconductor Ltd. agreed to offer
employment to all power device business employees in South Korea and to provide,
either itself or through the Transitional Services Agreement, employee benefits
comparable to those provided by Samsung Electronics at the time of consummation
of the acquisition of the power device business. The agreement also contains a
provision that generally forbids Samsung Electronics from competing with the
power device business for a period of five years after consummation of the
acquisition of the power device business. In addition, both Samsung Electronics
and Fairchild Korea Semiconductor Ltd. have agreed that, for one year following
consummation of the acquisition of the power device business, neither of them
will solicit any director, officer or employee of the other party to terminate
his or her employment with the other party. In case an employee of either party
seeks employment with the other without solicitation, Samsung Electronics and
Fairchild Korea Semiconductor Ltd. have agreed to consult one another before
making a hiring decision.
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As required by the Business Transfer Agreement, Samsung Electronics and
Fairchild Korea Semiconductor Ltd. have entered into the Intellectual Property
License Agreement, the Transitional Services Agreement, the Assembly and Test
Services Agreements, the Trademark License Agreement, the Foundry Sale
Agreement, the Product Supply Agreement, the EPI Services Agreement, the Photo
Mask Supply Agreement and an employment agreement with Dr. Deok J. Kim, Vice
President and General Manager of the power device business.
In connection with the consummation of the acquisition of the power device
business, Fairchild Semiconductor Corporation, Fairchild Korea Semiconductor
Ltd. and Samsung Electronics entered into a closing agreement providing, among
other things, for post-consummation filings, mechanisms for determining purchase
price adjustments and confirming the agreed-upon schedules to the Business
Transfer Agreement.
Intellectual Property and Trademark License Agreements
Under the Intellectual Property License Agreement, Samsung Electronics
non-exclusively licensed to Fairchild Korea Semiconductor Ltd. patent, copyright
and mask work rights that are used in connection with the power device business,
but that were not transferred to Fairchild Korea Semiconductor Ltd. under the
Business Transfer Agreement. The licensed rights include rights to intellectual
property of Samsung Electronics as well as to intellectual property used in the
power device business under licenses granted by third parties, in each case to
the extent Samsung Electronics has the right to grant a license without
obligation or accounting to others. Licensed patent rights include rights to
design, develop, make, have made, use, offer for sale, import, package, sell or
modify any product of the power device business that is under design or
development or being manufactured or sold by the power device business on the
date of the acquisition of the power device business, as well as similar rights
with respect to derivative products that are designed for the power device
business and embody technologies assigned or licensed to Fairchild Korea
Semiconductor Ltd. in the acquisition of the power device business. Samsung
Electronics also sublicensed to Fairchild Korea Semiconductor Ltd. rights to
software necessary for the operation of the power device business for the life
of Samsung Electronics' license for that software.
For patents and other intellectual property that were transferred to
Fairchild Korea Semiconductor Ltd. under the Business Transfer Agreement,
Fairchild Korea Semiconductor Ltd. has non-exclusively licensed back to Samsung
Electronics rights to such intellectual property to the extent Samsung
Electronics needs such rights to fulfill obligations to third parties under
existing agreements, or to prosecute or defend infringement and other claims of
third parties arising in connection with the power device business prior to the
acquisition of the power device business.
Under the Trademark License Agreement, Samsung Electronics has licensed
Fairchild Korea Semiconductor Ltd. to continue to use Samsung Electronics'
trademarks on power device business products, and to use part numbers and other
proprietary identification systems in the power device business as long as
necessary for up to ten years to avoid retooling, requalification of existing
products or customer disruption. Fairchild Korea Semiconductor Ltd. has agreed
to use its good faith efforts to discontinue using Samsung Electronics'
trademarks and to replace them with Fairchild International's trademarks and
identification numbers. As the use of Samsung Electronics trademarks by
Fairchild Korea Semiconductor Ltd. 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
Semiconductor Ltd. that assist the power device business' conversion into an
indirect subsidiary of Fairchild International. The agreement
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requires Samsung Electronics to provide Fairchild Korea Semiconductor Ltd., for
up to three years following the acquisition of the power device business,
logistics, purchasing, sales, personnel, financial services, intellectual
property administration and other services that have been provided to the power
device business by Samsung Electronics or its sales subsidiaries and that were
necessary to operate the power device business during calendar year 1998.
Information technology services are provided under a separate agreement between
Fairchild Korea Semiconductor Ltd. and Samsung SDS Co., Ltd. The Transitional
Services Agreement requires services to be provided at a cost per service
consistent with costs charged to the power device business during calendar year
1998, subject to adjustments for inflation and before accounting for the effects
of currency exchange rate changes. Fairchild Korea Semiconductor Ltd. 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 Semiconductor Ltd. 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
Semiconductor Ltd., and costs of Fairchild Semiconductor Corporation's or our
company's personnel, which will be borne by Fairchild International. Samsung
Electronics will invoice Fairchild Korea Semiconductor Ltd. monthly for services
provided under the Transitional Services Agreement.
Manufacturing Agreements
Samsung Electronics and Fairchild Korea Semiconductor Ltd. have entered
into several manufacturing agreements, including a Product Supply Agreement
pursuant to which Fairchild Korea Semiconductor Ltd. has agreed to supply
products to Samsung Electronics, a Foundry Sale Agreement pursuant to which
Fairchild Korea Semiconductor Ltd. 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 Semiconductor Ltd., a Photo Mask
Supply Agreement pursuant to which Samsung Electronics has agreed to provide
mask work services for Fairchild Korea Semiconductor Ltd., and an EPI Services
Agreement pursuant to which Samsung Electronics has agreed to provide wafer
fabrication services for Fairchild Korea Semiconductor Ltd.
Under the Product Supply Agreement, Samsung Electronics has agreed that for
three years it will purchase power device business products from Fairchild Korea
Semiconductor Ltd. 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 Semiconductor Ltd. with an opportunity to match quotes
of other suppliers with respect to Samsung Electronics' needs for products
manufactured by the power device business, to the extent such needs exceed
Samsung Electronics' committed volume of purchases under the agreement. Samsung
Electronics' purchase commitments are conditioned on the ability of Fairchild
Korea Semiconductor Ltd. 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 Semiconductor Ltd. 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 Semiconductor Ltd. has
agreed to provide semiconductor wafer manufacturing services for Samsung
Electronics for a three-year period following consummation of the acquisition of
the power device business. The agreement is structured to provide that Fairchild
Korea Semiconductor Ltd. will earn a profit from foundry sales to Samsung
Electronics
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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 Semiconductor
Ltd. at Samsung Electronics' Onyang, South Korea facility and a subsidiary of
Samsung Electronics has agreed to provide such services at facilities in Suzhou,
China for three years following consummation of the acquisition of the power
device business. Under separate agreements for services to be provided at each
location, the costs charged for such services should be consistent (before
accounting for the effects of currency exchange rate changes) with historical
costs charged to the power device business, subject to adjustments for inflation
in the case of Suzhou and 5% annual price decreases, in the case of Onyang.
Fairchild Korea Semiconductor Ltd. 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 Semiconductor Ltd. will enter into good-faith negotiations to
allow Fairchild Korea Semiconductor Ltd. 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 Semiconductor Ltd. for three years following consummation of the
acquisition of the power device business at costs consistent (before accounting
for the effects of currency exchange rate changes) with costs historically
charged to the power device business. Under the EPI Services Agreement, Samsung
Electronics has agreed to provide epitaxial fabrication, an intermediate step in
wafer manufacturing, for three years following consummation of the acquisition
of the power device business at costs consistent (before accounting for the
effects of currency exchange rate changes) with historical costs charged to the
power device business, plus a 10% markup.
OTHER
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 Corporation 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 on February 9, 2000, the date six months following our initial
public offering of our company's stock.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of each holder of 5% or more of the outstanding shares of Class A
Common Stock (our only class of voting stock), each director and each executive
officer named in the Summary Compensation Table, and all directors and officers
as a group, as of November 28, 1999 and as adjusted to give effect to this
offering. The following table also sets forth stock ownership information before
and after this offering for each selling stockholder offering shares of stock in
this offering.
The numbers shown in the table below assume no exercise by the underwriters
of their over-allotment option. We have granted the underwriters an option to
purchase up to 1,410,000 additional shares of Class A Common Stock from us and
Sterling Holding Company, LLC has granted the underwriters an option to purchase
up to 2,115,000 additional shares of Class A Common Stock held by Sterling to
cover over-allotments, if any. The post-offering information assumes all shares
offered by the selling stockholders will be sold in this offering.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK(1)
------------------------------------------------------
SHARES OWNED SHARES OWNED CLASS B PERCENT OF ALL
PRIOR TO OFFERING AFTER OFFERING COMMON STOCK(2) COMMON STOCK
-------------------- SHARES ------------------- -------------------- OWNED
NUMBER PERCENT OFFERED NUMBER PERCENT NUMBER PERCENT AFTER OFFERING(3)
------ ------- ------- ------ ------- ------ ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sterling Holding Company,
LLC(4)(5)(6).................. 13,704,404 22.7% 9,000,000 4,704,404 7.1% 28,396,000 100% 34.9%
National Semiconductor
Corporation(7).............. 7,243,360 12.0% 7,243,360 -- -- -- -- --
Kirk P. Pond(8)(9)............ 1,443,228 2.4% 288,646 1,194,582 1.8% -- -- 1.3%
Joseph R. Martin(8)........... 1,494,752 2.5% 130,000 1,290,000 1.9% -- -- 1.4%
Daniel E. Boxer(8)(9)......... 603,208 1.0% 99,672 502,536 * -- -- *
Jerry M. Baker(8)............. 678,208 1.1% 67,821 620,387 * -- -- *
Keith Jackson(8).............. 293,520 * 33,520 270,000 * -- -- *
W. Wayne Carlson(8)........... 534,904 * -- 544,904 * -- -- *
Darrell Mayeux(8)............. 678,208 1.1% 50,100 638,108 1.0% -- -- *
David A. Henry(8)............. 17,300 * 10,000 17,300 * -- -- *
Matthew W. Towse(8)........... 12,400 * 9,200 12,400 * -- -- *
William N. Stout(5)(8)........ 29,946 * -- 31,346 * -- -- *
Richard M. Cashin,
Jr.(5)(8)................... 1,094,164 1.8% 218,833 876,731 1.3% -- -- *
Paul C. Schorr IV(5)(8)(10)... 90,245 * 18,049 73,596 * -- -- *
Ronald W. Shelly(8)........... 10,000 * -- 11,400 * -- -- *
All directors and executive
officers as a group (13
persons).................... 6,980,083 11.6% 925,840 6,083,290 9.2% -- -- 6.4%
Andrew C. Boxer............... 80,000 * 16,000 64,000 * -- -- *
Elisa S. Boxer................ 80,000 * 16,000 64,000 * -- -- *
Jennifer H. Martin............ 81,584 * 31,584 50,000 * -- -- *
Joseph R. Martin, Jr.......... 81,584 * 31,584 50,000 * -- -- *
Kathleen K. Martin............ 81,584 * 31,584 50,000 * -- -- *
Mariah E. Martin.............. 81,584 * 31,584 50,000 * -- -- *
Patrick F. Martin............. 81,584 * 31,584 50,000 * -- -- *
</TABLE>
- ---------------
* Less than 1%.
(1) Does not include shares of Class A Common Stock issuable upon conversion of
Class B Common Stock. A holder of Class B Common Stock may convert any or
all of such shares into an equal number of shares of Class A Common Stock,
provided that such conversion would be permitted only to the extent that the
holder of shares to be converted would be permitted under applicable law to
hold the total number of shares of Class A Common Stock which would be held
after giving effect to the conversion.
(2) Does not include shares of Class B Common Stock issuable upon conversion of
Class A Common Stock. A holder of Class A Common Stock may convert any or
all of such shares into an equal number of shares of Class B Common Stock.
(3) Represents the percentage of the total number of shares of Class A Common
Stock and Class B Common Stock combined.
(4) The address for Sterling Holding Company, LLC is c/o Fairchild Semiconductor
Corporation, 333 Western Avenue, South Portland, Maine 04106.
(5) William N. Stout, who is one of our directors, is affiliated with Sterling
in the capacities described under "Management -- Directors and Executive
Officers." The shares reported for Mr. Stout (except for 10,000 shares
underlying options which Mr. Stout holds directly) are held by Sterling but
do not include all shares held by Sterling, which Mr. Stout may be deemed to
beneficially own indirectly as a result of his affiliation with Sterling.
Mr. Stout disclaims beneficial ownership of all shares held by Sterling,
except for those among the shares reported for Mr. Stout, which he has the
right to acquire in exchange for an ownership interest in Sterling. Richard
M. Cashin, Jr. and Paul C. Schorr IV, two of our directors, are affiliated
with Sterling in the capacities described under "Management -- Directors and
Executive Officers" and footnote (6) below. The shares reported for Mr.
Cashin and Mr. Schorr do not include the shares held by Sterling, which Mr.
Cashin and Mr. Schorr may be deemed to beneficially own indirectly as a
result of their affiliations with Sterling. Each of Mr. Cashin and Mr.
Schorr disclaims beneficial ownership of the shares held by Sterling.
(6) Citicorp Venture Capital Ltd. owns an interest in Sterling and will have the
right to acquire up to 25,779,165 shares of our common stock (after giving
effect to this offering), including up to 19.9% of the outstanding shares of
our Class A Common Stock, in exchange for its interest in Sterling.
(7) The address for National Semiconductor Corporation is 2900 Semiconductor
Drive, Santa Clara, California 95052.
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(8) Shares beneficially owned after offering include shares underlying
options the vesting of which will be accelerated in connection with this
offering. See "Management -- Director Compensation and Arrangements" and
"Management -- Stock Option Plan."
(9) Does not include 1,903,836 shares of Class A Common Stock held by H.M.
Payson & Co. and Daniel E. Boxer, as trustees of the Kirk P. Pond
Children's Trust. Mr. Pond may not be deemed to beneficially own such
shares and Mr. Boxer disclaims beneficial ownership of such shares.
(10) Shares reported for Mr. Schorr are held, and will be offered and sold in
this offering, by BG Partners, LLP, a limited liability partnership in
which Mr. Schorr is the general partner.
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<PAGE> 95
DESCRIPTION OF CAPITAL STOCK
Our capital stock consists of 220,000,000 authorized shares of common
stock, par value $.01 per share, divided into two classes consisting of (a)
110,000,000 shares of Class A Common Stock, of which 60,295,344 shares were
outstanding at November 28, 1999 and (b) 110,000,000 shares of Class B Common
Stock, of which 28,396,000 shares were outstanding at November 28, 1999. Our
capital stock also consists of 100,000 authorized shares of preferred stock, par
value $.01 per share, none of which is issued or outstanding. On January 5,
1998, 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 Restated Certificate of Incorporation
and Bylaws, which have been filed as exhibits to 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 other than
elections of directors. Our Restated Certificate of Incorporation provides for
cumulative voting for directors. With cumulative voting, at each election for
directors, each holder of Class A Common Stock will be entitled to as many votes
as would equal the number of shares he or she holds multiplied by the number of
directors to be elected. The holder may cast all of his or her votes for a
single candidate or may distribute them among any number of candidates. Under
cumulative voting, a minority holder has a greater possibility of influencing
the election of directors because, for example, the minority holder can increase
the number of votes such holder may cast for an individual director. The holders
of Class A Common Stock will be entitled to such dividends as may be declared at
the discretion of 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." As of November 28, 1999, there were
777 holders of record of our Class A Common Stock.
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 such
shares to be converted certifies to us in writing that the holder 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. As of November 28,
1999, there was one holder of record of our Class B Common Stock.
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PREFERRED STOCK
Under our Restated Certificate of Incorporation, our board of directors has
the authority to issue up to 100,000 shares of preferred stock, but only in
connection with the adoption of a stockholder rights plan. A stockholder rights
plan may only be adopted by our board of directors with the approval of holders
of a majority of outstanding Class A Common Stock or with the unanimous consent
of our board of directors, unless Sterling and its affiliates hold less than 15%
of our outstanding common stock, in which case a stockholder rights plan may be
adopted with the approval of a majority of our board of directors. See "-- Other
Provisions of Our Restated Certificate of Incorporation." If our board of
directors has such requisite authority, it will be authorized to issue preferred
stock in connection with a stockholder rights plan in one or more series, and to
fix the voting powers, designations, preferences, and relative, participating,
optional or other special rights and qualifications, limitations and
restrictions of each series, including dividend rights, conversion rights,
voting rights, terms of redemption, liquidation preferences, and the number of
shares constituting any series. The ability of our board of directors to issue
preferred stock could have the effect of making it more difficult for a third
party to acquire, or discouraging a third party from acquiring, a majority of
our outstanding Class A Common Stock. Our board of director's ability to
establish the preferences and rights of the shares of any series of preferred
stock may also afford holders of any preferred stock preferences, powers and
rights (including voting rights) senior to the rights of holders of our Class A
Common Stock. We have no present plans to issue any shares of preferred stock.
OTHER PROVISIONS OF OUR RESTATED CERTIFICATE OF INCORPORATION
Our Restated Certificate of Incorporation contains provisions affecting the
rights of our stockholders and the powers of our board of directors, including
the following:
- We are not subject to the provisions of Section 203 of the General
Corporation Law of Delaware regulating takeovers. Section 203 generally
makes it more difficult for a third party to take control of a company by
prohibiting a third party owning more than 15% of the company's stock
from entering into transactions with the company unless the board of
directors or stockholders unaffiliated with the third party approve
either the third party or the transaction at issue, before the third
party becomes a 15% owner or the third party acquires at least 85% of the
company's stock.
- A stockholder rights plan can be adopted only with the consent of holders
of a majority of outstanding Class A Common Stock or with the unanimous
consent of our board of directors, except that if Sterling's and its
affiliates' ownership is less than 15% of our outstanding common stock,
then a stockholder rights plan can be adopted with the consent of a
majority of our board of directors. A stockholder rights plan generally
makes it more difficult for a hostile bidder to take control of a company
by providing existing stockholders with special rights which would make
it uneconomical for the third party to acquire additional interests. If
our board of directors is authorized to and decides to implement a
stockholder rights plan, the plan adopted by the board may deter
acquisitions which you might deem to be in your best interests.
- Our board of directors must have no fewer than seven and no more than
nine members and may not be divided into classes. The term of each member
of the board of directors expires at each annual stockholders' meeting.
Having a minimum number of directors ensures that cumulative voting will
operate to protect the interests of minority shareholders, since with a
smaller board it would take a greater percentage of votes to elect one
director. Similarly, by prohibiting a classified board, our Restated
Certificate of Incorporation ensures that stockholders may replace the
entire board at each annual election.
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- Stockholders may act by written consent, without a meeting and without
notice or a vote. This provision enables stockholders to act on matters
subject to a shareholder vote without waiting until the next annual or
special meeting of stockholders.
- Each of the provisions of our Restated Certificate of Incorporation
described above, and the provision described above under "Preferred
Stock" that limits the board of directors' ability to issue preferred
stock other than in connection with a stockholder rights plan, may be
amended only with the approval of holders of 75% of our outstanding Class
A Common Stock. Amending other provisions requires approval by holders of
a majority of our outstanding Class A Common Stock. The provision
requiring a supermajority vote also cannot be amended without the consent
of holders of 75% of the Class A Common Stock. If a third party -- that
is, a person or entity other than our principal stockholders or members
of our management -- acquires more than 40% of the Class A Common Stock,
then the holders of a majority of the Class A Common Stock could amend
the foregoing provisions. If, after any transfer by Sterling Holding
Company, LLC and its affiliates, Sterling and the affiliates together own
less than 15% of our outstanding common stock, then holders of a majority
of the Class A Common Stock could amend the foregoing provisions and the
supermajority provisions itself. The effect of each supermajority
provision is that holders of 25% of our Class A Common Stock could block
amendments to our Restated Certificate of Incorporation affecting the
provisions described above.
STOCKHOLDERS' AGREEMENT
Prior to our initial public offering, the then-existing stockholders of our
company entered into a Securities Purchase and Holders Agreement, which we refer
to as the Stockholders' Agreement, containing agreements among such stockholders
with respect to the capital stock and corporate governance of our company and
Fairchild Semiconductor Corporation.
The Stockholders' Agreement contains provisions which restrict the ability
of the stockholders party to it to transfer any common stock. Neither Sterling
nor any of its affiliates may sell any of their shares of our common stock to us
or any of our affiliates without offering the other stockholders who are party
to the agreement a pro rata opportunity to participate in such sale. In
addition, the Stockholders' Agreement restricts transactions between our company
and Fairchild Semiconductor Corporation, on the one hand, and owners of 15% or
more of the common stock and their affiliates, on the other hand. Some of our
principal stockholders, including Sterling Holding Company, LLC and National
Semiconductor, have the right to have observers present at meetings of our board
of directors if they are not represented on our board. We cannot issue shares of
stock to Sterling or any of its affiliates without offering the other parties to
the Stockholders Agreement an equal opportunity to purchase our shares.
The Stockholders' Agreement also contains provisions that require us to
give Sterling Holding Company, LLC, one of our principal stockholders, advance
notice of conversions or exchanges of our common stock or any action affecting
the voting rights of our common stock. After receiving such notice, Sterling has
the right to prevent the action for up to 90 days if, as a result of the action,
Sterling would control or have power over a greater number of shares than it
would be permitted to have under Small Business Administration regulations. The
Stockholders' Agreement also requires us to notify Sterling of actions that
would result in the number of record holders of our voting stock increasing from
fewer than 50 to 50 or more.
REGISTRATION RIGHTS AGREEMENT
In connection with the entry by the then-existing stockholders of our
company into the Stockholders' Agreement, our company, Sterling, some key
employees of Fairchild International,
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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 our best efforts to cause such registration statement to
become effective. If at any time we file 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 employees or existing stockholders, or a registration
statement registering a unit offering), we will use our best efforts to allow
the other parties to the Registration Rights Agreement to have their shares of
common stock (or a portion of their shares when an underwriter determines that
registering fewer than all their shares is advisable) included in such offering
of common stock. We will pay the registration expenses of the selling
stockholders, other than underwriting fees, brokerage fees and transfer taxes
applicable to the shares sold by such stockholders or the fees and expenses of
any accountants or other representatives retained by a selling stockholder.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class A Common Stock is
BankBoston, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, 66,436,224 shares of Class A Common
Stock will be outstanding (excluding shares issuable upon exercise of employee
stock options, of which 6,968,695 were outstanding at November 28, 1999) and
28,396,000 shares of Class B Common Stock will be outstanding. Class A and Class
B shares are convertible into the other on a one-to-one basis. 46,500,000 shares
of Class A Common Stock, which includes the 23,500,000 shares sold in this
offering (assuming the underwriters do not exercise their over-allotment option)
and the 23,000,000 shares sold in our initial public 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. An additional 43,824 shares of Class A Common Stock held by affiliates were
registered for resale in connection with our initial public offering and may be
sold into the public market without restriction, and all shares acquired upon
exercises of employee stock options will be freely tradable unless held by
affiliates. All of the remaining 18,936,465 shares of Class A Common Stock, and
28,396,000 shares of Class B Common Stock, are "restricted securities," as such
term is defined under Rule 144 promulgated under the Securities Act of 1933.
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 another exemption from
registration under the Securities Act. However, as discussed below, under
paragraph (k) of Rule 144, restricted shares of our common stock will be
eligible for sale into the public market without restriction, except for
10,219,270 shares of Class A Common Stock and 28,396,000 shares of Class A
Common Stock issuable upon conversion of the shares of Class B Common Stock,
which are held by affiliates and may be sold subject to Rule 144 restrictions
(other than the holding period requirement).
We expect that each of our company, some of our directors and executive
officers and the selling stockholders will agree 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
90 days after the consummation of this offering. We expect that 38,632,570
shares of Class A Common Stock and Class B Common Stock will be subject to these
lock-up restrictions. These restrictions 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, the exercise of any other
stock options outstanding on the date hereof or registration statements
pertaining to such plans or employee stock purchase plans.
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:
- one percent of the then-outstanding shares of Class A Common Stock, which
will equal approximately 664,000 shares immediately after this offering;
or
- 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 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
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company, a stockholder who is not an affiliate of our company at the time of
sale and who has not been an affiliate of our company for at least three months
prior to the sale would be entitled to sell shares of Class A Common Stock in
the public market immediately without compliance with the foregoing requirements
under Rule 144, unless otherwise restricted. Rule 144 does not require the same
person to have held the securities for the applicable periods.
47,332,465 shares of "restricted securities" (assuming the over-allotment
option has not been exercised) held by existing stockholders, including shares
of Class A Common Stock issued upon conversion of Class B Common Stock, may be
sold in the public market after this offering only if they are registered or if
they are exempt from registration under Rule 144 or Rule 144(k), as follows:
- 5,845,718 shares of Class A Common Stock held by non-affiliates will be
available for resale immediately following this offering without
restriction in accordance with Rule 144(k).
- 2,435,957 shares of Class A Common Stock held by non-affiliates will be
available for resale beginning February 7, 2000, without restriction in
accordance with Rule 144(k), upon the expiration of lock-up agreements
entered into in connection with our initial public offering.
- 435,520 shares of Class A Common Stock held immediately following this
offering by the Fairchild NSC Deferred Compensation Plan will be
registered by us on a registration statement on Form S-8 and distributed
by that plan, and will be available for resale beginning February 7,
2000, without restriction, upon the expiration of lock-up agreements
entered into in connection with our initial public offering.
- The remaining 38,615,270 shares of Class A Common Stock (including shares
of Class A Common Stock issued upon conversion of the 28,396,000
outstanding shares of Class B Common Stock) will be available for sale in
the open market after the expiration of the 90-day lock-up period
described above, subject only to the volume and other limitations (but
not the holding period requirements) under Rule 144.
We have authorized 8,507,666 shares of Class A Common Stock for grant under
our Stock Option Plan.
As of November 28, 1999, of these shares:
- 955,935 options have been exercised;
- 1,476,145 options have vested but have not been exercised; and
- 5,492,550 options have been granted but have yet to vest.
Following this offering we plan to file an amendment to an existing
registration statement on Form S-8 to register 435,520 shares of Class A Common
Stock to be distributed by the Fairchild NSC Deferred Compensation Plan, as
discussed above.
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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
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 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 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, 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 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 or final United
States Treasury Regulations regarding withholding and information reporting, as
applicable.
The final regulations regarding withholding and information reporting 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 , we and the selling stockholders have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Salomon Smith Barney Inc., Deutsche Bank Securities Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and FleetBoston Robertson Stephens
Inc. are acting as representatives, the following respective number of shares of
our Class A Common Stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ----------
<S> <C>
Credit Suisse First Boston Corporation......................
Salomon Smith Barney Inc. ..................................
Deutsche Bank Securities Inc. ..............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................
FleetBoston Robertson Stephens Inc. ........................
----------
Total.................................................. 23,500,000
==========
</TABLE>
Credit Suisse First Boston Corporation and Salomon Smith Barney Inc. are
acting as joint book-running managers in this offering.
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 if an
underwriter defaults, the purchase commitments of non-defaulting underwriters
may be increased or the offering of Class A Common Stock may be terminated.
We and one of the selling stockholders have granted to the underwriters a
30-day option to purchase on a pro rata basis up to 1,410,000 additional shares
of Class A Common Stock from us and up to 2,115,000 additional shares of Class A
Common Stock from one of the selling stockholders at the 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 propose to offer the shares of 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 and the selling group members may allow a
discount of $ per share on sales to other broker/dealers. After the public
offering, the offering price and concession and discount to broker/dealers may
be changed by the representatives.
The following table summarizes the discounts and commissions and estimated
expenses we and the selling stockholders will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions payable by us.... $ $ $ $
Expenses payable by us......... $ $ $ $
Underwriting discounts and
commissions payable by
selling stockholders......... $ $ $ $
</TABLE>
We, some of our officers and directors and, with respect to certain of
their shares, some of 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
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<PAGE> 105
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 Credit Suisse First Boston Corporation for a period
of 90 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 or filings of registration
statements relating 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. The total number of outstanding shares of common stock subject to these
restrictions is 38,632,570.
We and, to a limited extent, the selling stockholders, have agreed to
indemnify the underwriters against liabilities under the Securities Act, or
contribute to payments which the underwriters may be required to make in that
respect.
The shares of our Class A Common Stock are traded on The New York Stock
Exchange under the symbol "FCS."
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making 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 Class A
Common Stock so long as the stabilizing bids do not exceed a specified
maximum.
- Syndicate covering transactions involve purchases of the Class A 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 Class A Common Stock originally sold by such
syndicate member is purchased in a stabilizing transaction or a syndicate
covering transaction to cover syndicate short positions.
- In "passive" market making, market makers in the Class A Common Stock who
are underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until the
time, if any, at which a stabilizing bid is made.
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 The New York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
Salomon Smith Barney Inc., one of the underwriters, is an affiliate of
Sterling Holding Company, LLC. Sterling will own approximately 34.9% of our
common stock upon consummation of this offering. Accordingly, this offering is
being made in compliance with the requirements of Rule 2720 of the National
Association of Securities Dealers, Inc. Conduct Rules.
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.
Jennifer H. Martin, one of the selling shareholders, is the daughter of
Joseph R. Martin, our Chief Financial Officer, and is employed by Credit Suisse
First Boston Corporation. Ms. Martin will be selling 31,584 shares in this
offering.
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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 and National
Semiconductor 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, National Semiconductor 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, and National Semiconductor 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 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.
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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 by us hereby will be
passed upon for us by Dechert Price & Rhoads, Philadelphia, Pennsylvania. The
underwriters have been represented by Cravath, Swaine & Moore, New York, New
York.
EXPERTS
The consolidated financial statements and schedules of Fairchild
Semiconductor International, Inc. as of May 31, 1998 and May 30, 1999, and for
each of the years in the three-year period ended May 30, 1999, have been
included herein and in this registration statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The report of KPMG LLP covering the May 30, 1999 consolidated financial
statements of Fairchild Semiconductor International, Inc. contains an
explanatory paragraph that states that we changed our 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 financial statements as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998 of the power device
business included in this prospectus have been so included in reliance upon the
report (which contains explanatory paragraphs relating to the Korean economy and
transactions with Samsung Electronics Co. Ltd.) of Samil Accounting Corporation,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We 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 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
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. 333-92941). 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 International and
the Class A Common Stock offered hereby, please reference the registration
statement, including its exhibits. If we have filed any
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<PAGE> 108
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:
Fairchild Semiconductor International, Inc.
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. FACT(TM)
enhances connections between products, permitting
faster speeds at higher powers.
FAST(R).................... Fairchild Advanced Schottky Technology. FAST(R)
enhances connections between products, permitting
low power consumption at lower speeds.
FET........................ Field Effect Transistor.
Flash Memory............... A type of non-volatile memory, similar to an EEPROM
in that it is erasable and reprogrammable. The
difference is that it must be erased and
reprogrammed in sectors, not individual bits.
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Foundry.................... A wafer fabrication plant that manufactures silicon
for another business.
GFI........................ Ground Fault Interruptors.
GTL........................ Gunning Transceiver Logic.
HV MOSFET.................. High Voltage MOSFET.
IGBT....................... Insulated Gate Bipolar Transistor. A semiconductor
within an electronic switch, an IGBT operates at
high voltages.
Input-output interface..... A connection in electronic equipment allowing
circuits to connect more efficiently, such as
increasing speed by reducing power.
Integrated Circuit......... A combination of two or more transistors on a base
material, usually silicon. All semiconductor chips,
including memory chips and logic chips, are just
very complicated integrated circuits with thousands
of transistors.
LAN........................ Local Area Network. A local area network links many
nearby computers so that they may communicate and
share information. For example, an office network
is often LAN.
Lead Frames................ A conductive frame that brings the electrical
signals to and from the die.
Logic Product.............. A product that contains digital integrated circuits
that move and shape, rather than store,
information.
LS......................... Low Power Schottky.
LVT........................ Low Voltage Technology. Low voltage technology
enhances connections between products, permitting
circuits at different voltages to interface.
Mask....................... A piece of glass on which an integrated circuit's
circuitry design is laid out. Integrated circuits
may require up to 20 different layers of design,
each with its own mask. In the integrated circuit
production process, a light shines through the mask
leaving an image of the design on the wafer. Also
known as a reticle.
Mb......................... Mega Bit. One million (or 1,048,576) bits as a unit
of data size or memory capacity.
Memory..................... A group of integrated circuits that a computer uses
to store data and programs, such as ROM, RAM, DRAM,
SRAM, EEPROM and EPROM.
Micron..................... 1/25,000 of an inch. Circuity on an integrated
circuit typically follows lines that are less than
one micron wide.
MOS........................ Metal Oxide Semiconductor.
MOSFET..................... Metal Oxide Semiconductor FET. A semiconductor
within an electronic switch, a MOSFET operates at
mid-range voltages.
Motherboard................ The main piece of circuitry inside a PC.
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Non-volatile Memory........ Memory products which retain their data content
without the need for constant power supply.
Op Amp..................... Operational Amplifier.
Package.................... A protective case that surrounds the die,
consisting of a plastic housing and a lead frame.
PC......................... Personal Computer.
Planar Technology.......... By the later 1950s, transistors were made in
batches through a simple photolithographic
technique known as the mesa process. This process,
which led directly to the creation of the
commercially viable integrated circuit, is a form
of contact printing.
A cross section of a typical mesa transistor
resembles a mesa of silicon squatting on top of a
foundation of silicon. The three essential parts of
a transistor are all there: the base is the mesa,
the collector is the foundation, and the emitter is
a tiny piece of doped silicon embedded in the base.
To fabricate a mesa transistor, a flat wafer of
silicon was doped with either positive ions or
electrons, covered with a photomask (a photographic
plate), exposed to ultraviolet light and then
immersed in an acid bath, which etched away the
exposed area around the mesa.
For all the manufacturing benefits brought about by
the mesa process, it had two major drawbacks: the
mesa was susceptible to both physical harm and
contamination, and the process did not lend itself
to the making of resistors. Then Jean Hoerni, a
Swiss physicist and one of Fairchild
Semiconductor's founders, invented an ingenious way
around these obstacles by creating a flat, or
planar, transistor.
Instead of mounting the mesa, or base, on top of a
foundation of silicon, he diffused it into the
foundation, which served as the collector. Next he
diffused the emittor into the base. (The base was
composed of negatively doped silicon, the collector
and emitor of positively doped silicon; the first
planar device was thus a pnp transistor.) Then he
covered the whole thing with a protective coating
of silicon dioxide, an insulator, leaving certain
areas in the base and the emitter uncovered. He
diffused a thin layer of aluminum into these areas,
thereby creating "wires" that hooked the device up
to the outside (this was the idea of his colleague
and Fairchild Semiconductor's co-founder, Robert
Noyce). The result was a durable and reliable
transistor, and the all-important breakthrough that
made commercial production of integrated circuits
possible.
Plug and Play.............. A protocol that supports automated configuration of
add on cards.
Power Discrete............. A discrete device that converts, switches or
conditions electricity.
PROM....................... Programmable Read-Only Memory. Similar to ROM in
that once programmed it can be "read only" and not
changed. Programmable ROM means that customers can
program the integrated circuits themselves, so that
the integrated circuit need not be programmed when
it is manufactured. The programming is possible
because of a
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series of fuses in the circuitry that can be
selectively blown to create a unique type of data.
RAM........................ Random Access Memory. A type of volatile memory,
forming the main memory of a computer where
applications and files are run.
ROM........................ Read-Only Memory. Memory that is programmed by the
manufacturer and cannot be changed. Typically, ROM
is used to provide start-up data when a computer is
first turned on.
Semiconductor.............. A material with electrical conducting properties in
between those of metals and insulators. (Metals
always conduct and insulators never conduct, but
semiconductors sometimes conduct.) Essentially,
semiconductors transmit electricity only under
certain circumstances, such as when given a
positive or negative electric charge. Therefore, a
semiconductor's ability to conduct can be turned on
or off by manipulating those charges and this
allows the semiconductor to act as an electric
switch. The most common semiconductor material is
silicon, used as the base of most semiconductor
chips today because it is relatively inexpensive
and easy to create.
Silicon bonding............ A manufacturing process used to bond together two
silicon wafers, allowing higher resistivity in one
layer and lower resistivity in the other to help
conduct current.
Sort....................... The process of evaluating die into different
grades, good/bad or speed grades.
SPD........................ Serial Presence Detect.
Transistor................. An individual circuit that can amplify or switch
electric current. This is the building block of all
integrated circuits and semiconductors.
Trench technology.......... A manufacturing process used to etch trenches into
silicon wafers, allowing the transistor to be
placed both on the sides of the trenches and on the
surface of the wafer to enable transistors to be
condensed into a smaller area.
TTL........................ Transistor Transistor Logic.
Ultra small packaging...... The process of encasing very small semiconductors
so that they are protected and electronically and
mechanically connected to the outside world.
VHC........................ Very High Speed CMOS.
Volatile Memory............ Memory products which lose their data content when
the power supply is switched off.
Wafer...................... Thin, round, flat piece of silicon that is the base
of most integrated circuits.
WAN........................ Wide Area Network. A wide area network links many
computers from potentially all over the world so
that they may communicate and share information.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at May 31, 1998 and May 30,
1999...................................................... F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended May 30, 1999............... F-4
Consolidated Statements of Cash Flows for the years ended
May 31, 1998 and May 30, 1999............................. F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for each of the years in the three-year period ended May
30, 1999.................................................. F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Statements of Operations (Unaudited)
for the Six Months Ended November 29, 1998 and November
28, 1999.................................................. F-43
Condensed Consolidated Balance Sheet at November 28, 1999
(Unaudited)............................................... F-44
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended November 29, 1998 and November
28, 1999.................................................. F-45
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-46
POWER DEVICE BUSINESS
Report of Independent Accountants........................... F-49
Statements of Net Assets (Liabilities) as of December 31,
1997 and 1998............................................. F-50
Statements of Operations and Comprehensive Income (Loss) for
each of the years in the three-year period ended December
31, 1998.................................................. F-51
Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1998................. F-52
Notes to Financial Statements............................... F-53
</TABLE>
F-1
<PAGE> 114
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Fairchild Semiconductor International, Inc.:
We have audited the accompanying consolidated balance sheets of Fairchild
Semiconductor International, Inc. and subsidiaries (the "Company") as of May 31,
1998 and May 30, 1999, the related consolidated statements of operations and
stockholders' equity (deficit) for each of the years in the three-year period
ended May 30, 1999, and the related consolidated statements of cash flows for
the years ended May 31, 1998 and May 30, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements were prepared on the basis of
presentation as described in Note 1. Prior to March 11, 1997, the statements
present the combined business equity and the related combined revenues less
direct expenses before taxes of the Fairchild Semiconductor Business of National
Semiconductor Corporation (the Business), and are not intended to be a complete
presentation of the Business' financial position, results of operations or cash
flows. The results of operations before taxes are not necessarily indicative of
the results of operations before taxes that would have been recorded by the
Company on a stand-alone basis.
In our opinion, the accompanying financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
May 31, 1998 and May 30, 1999, the results of operations for each of the years
in the three year period ended May 30, 1999, and the results of cash flows for
the years ended May 31, 1998 and May 30, 1999, on the basis described in Note 1,
in conformity with generally accepted accounting principles.
As discussed in Note 18 to the financial statements, the Company changed
its method of accounting for business process reengineering costs in 1998 to
adopt the provisions of the Emerging Issues Task Force Issue 97-13, "Accounting
for Business Process Reengineering Costs".
KPMG LLP
Boston, Massachusetts
June 30, 1999, except as to Note 20, which is as of August 9, 1999
F-2
<PAGE> 115
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6.5 $ 62.4
Accounts receivable, net of allowances of $14.2 and $9.2
at May 31, 1998 and May 30, 1999, respectively......... 75.0 129.7
Inventories............................................... 108.0 148.6
Other current assets...................................... 20.0 65.7
------- --------
Total current assets................................... 209.5 406.4
Property, plant and equipment, net.......................... 342.9 360.2
Deferred income taxes, net.................................. 20.0 2.8
Intangible assets, net of accumulated amortization of $1.4
and $9.9 at May 31, 1998 and May 30, 1999, respectively... 31.5 278.5
Other assets................................................ 30.4 47.8
------- --------
Total assets........................................... $ 634.3 $1,095.7
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt......................... $ 13.2 $ 14.1
Accounts payable.......................................... 74.0 99.6
Accrued expenses and other current liabilities............ 55.9 85.0
------- --------
Total current liabilities.............................. 143.1 198.7
Long-term debt, less current portion........................ 526.7 1,045.9
Other liabilities........................................... 0.6 1.4
------- --------
Total liabilities...................................... 670.4 1,246.0
------- --------
Redeemable preferred stock -- 12% Series A cumulative
compounding preferred stock, $.01 par value, $1,000 stated
value; 70,000 shares authorized, issued and outstanding at
May 31, 1998 and May 30, 1999............................. 80.5 90.1
Commitments and contingencies
Stockholders' equity (deficit):
Class A common stock, $.01 par value, voting; 80,000,000
shares authorized, 29,238,800 and 29,591,440 shares
issued and outstanding at May 31, 1998 and May 30, 1999
respectively........................................... 0.3 0.3
Class B common stock, $.01 par value, nonvoting;
80,000,000 shares authorized, 33,635,520 and 33,376,000
shares issued and outstanding at May 31, 1998 and May
30, 1999, respectively................................. 0.3 0.3
Additional paid-in capital................................ 9.5 9.6
Accumulated deficit....................................... (126.7) (250.6)
------- --------
Total stockholders' equity (deficit)................... (116.6) (240.4)
------- --------
Total liabilities and stockholders' equity (deficit)... $ 634.3 $1,095.7
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 116
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenue:
Net sales -- trade.......................................... $587.8 $635.8 $ 654.1
Contract manufacturing -- National Semiconductor.......... 104.2 153.4 81.0
------ ------ -------
Total revenue.......................................... 692.0 789.2 735.1
Operating expenses:
Cost of sales............................................. 442.1 441.6 518.4
Cost of contract manufacturing -- National
Semiconductor.......................................... 97.4 117.1 64.4
Research and development.................................. 18.9 35.7 39.3
Selling, general and administrative....................... 96.4 92.0 105.1
Purchased in-process research and development............. -- 15.5 34.0
Restructuring and impairments............................. 5.3 -- 21.3
------ ------ -------
Total operating expenses............................... 660.1 701.9 782.5
------ ------ -------
Operating income (loss)..................................... 31.9 87.3 (47.4)
Interest expense, net....................................... 11.2 54.5 71.8
Other expense, net.......................................... 1.4 -- --
------ ------ -------
Income (loss) before income taxes........................... 19.3 32.8 (119.2)
Provision (benefit) for income taxes........................ 3.8 10.7 (5.1)
------ ------ -------
Income (loss) before cumulative effect of change in
accounting principle...................................... 15.5 22.1 (114.1)
Cumulative effect of change in accounting principle, net of
tax effect of $0.8 million................................ -- (1.5) --
------ ------ -------
Net income (loss)........................................... $ 15.5 $ 20.6 $(114.1)
====== ====== =======
Net income (loss) applicable to common stockholders......... $ 11.9 $(123.9)
====== =======
Basic earnings (loss) per common share:
Income before cumulative effect of change in accounting
principle.............................................. $ 0.21 $ (1.97)
Cumulative effect of change in accounting principle....... (0.02) --
------ -------
$ 0.19 $ (1.97)
====== =======
Diluted earnings (loss) per common share:
Income before cumulative effect of change in accounting
principle.............................................. $ 0.20 $ (1.97)
Cumulative effect of change in accounting principle....... (0.02) --
------ -------
$ 0.18 $ (1.97)
====== =======
Weighted average common shares:
Basic..................................................... 62.8 62.9
====== =======
Diluted................................................... 65.0 62.9
====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 117
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
MAY 31, 1998 MAY 30, 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 20.6 $(114.1)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization of deferred compensation.................. 0.2 --
Cumulative effect of change in accounting principle,
net................................................... 1.5 --
Restructuring, net of cash expended.................... -- 17.3
Depreciation and amortization.......................... 84.6 103.7
Loss on disposal of fixed assets....................... 0.9 0.3
Non-cash interest expense.............................. 12.5 19.8
Purchased in-process research and development.......... 15.5 34.0
Deferred income taxes.................................. (0.4) (2.4)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable.................................... 18.6 (53.2)
Inventories............................................ (21.3) 8.5
Other current assets................................... (1.6) 2.3
Accounts payable....................................... (6.5) 21.4
Accrued expenses and other current liabilities......... 13.7 12.5
Other assets and liabilities, net...................... (2.2) (6.0)
------- -------
Cash provided by operating activities................ 136.1 44.1
------- -------
Cash flows from investing activities:
Capital expenditures...................................... (78.0) (46.2)
Proceeds from sale of property, plant and equipment....... -- 31.2
Purchase of molds and tooling............................. (5.7) (3.8)
Refundable payment of value added tax associated with
acquisition............................................ -- (40.9)
Acquisitions, net of cash acquired........................ (116.8) (414.9)
------- -------
Cash used by investing activities.................... (200.5) (474.6)
------- -------
Cash flows from financing activities:
Repayment of long-term debt............................... (58.7) (151.3)
Issuance of long-term debt................................ 90.0 660.0
Debt issuance costs....................................... (1.1) (22.3)
------- -------
Cash provided by financing activities................ 30.2 486.4
------- -------
Net change in cash and cash equivalents..................... (34.2) 55.9
Cash and cash equivalents at beginning of period............ 40.7 6.5
------- -------
Cash and cash equivalents at end of period.................. $ 6.5 $ 62.4
======= =======
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes........................................... $ 8.9 $ --
======= =======
Interest............................................... $ 43.8 $ 46.6
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 118
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------- TOTAL
CLASS A CLASS B ADDITIONAL STOCKHOLDERS'
CLASS A CLASS B PAR PAR PAID-IN ACCUMULATED BUSINESS EQUITY
SHARES SHARES VALUE VALUE CAPITAL DEFICIT EQUITY (DEFICIT)
------- ------- ------- ------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at May 26, 1996........ -- -- $ -- $ -- $ -- $ -- $ 349.2 $ 349.2
Revenues less expenses.......... -- -- -- -- -- -- 9.6 9.6
Net intercompany activity..... -- -- -- -- -- -- (25.4) (25.4)
---- ---- ---- ---- ------- ------- ------- -------
Balances at March 10, 1997...... -- -- -- -- -- -- 333.4 333.4
Recapitalization of
Business................... -- -- -- -- -- 333.4 (333.4) --
Distribution to National
Semiconductor by
Fairchild.................. -- -- -- -- -- (401.6) -- (401.6)
PIK Note issued as additional
purchase consideration for
the stock of Fairchild..... -- -- -- -- -- (77.0) -- (77.0)
Issuance of common stock...... 28.8 33.6 0.1 0.1 7.6 -- -- 7.8
Net income.................... -- -- -- -- -- 5.9 -- 5.9
Dividends on redeemable
preferred stock............ -- -- -- -- -- (1.8) -- (1.8)
---- ---- ---- ---- ------- ------- ------- -------
Balances at May 25, 1997........ 28.8 33.6 0.1 0.1 7.6 (141.1) -- (133.3)
Net income.................... -- -- -- -- -- 20.6 -- 20.6
Dividends on redeemable
preferred stock............ -- -- -- -- -- (8.6) -- (8.6)
Adjustment to business equity
assumed.................... -- -- -- -- -- 2.4 -- 2.4
Issuance of common stock...... 0.4 -- -- -- -- -- -- --
Common stock split issued in
the form of a stock
dividend (4-1)............. -- -- 0.2 0.2 (0.4) -- -- --
Deferred compensation related
to the grant of stock
options.................... -- -- -- -- 0.2 -- -- 0.2
Tax benefit from compensation
related to lifting of
restrictions on common
stock owned by management
investors.................. -- -- -- -- 2.1 -- -- 2.1
---- ---- ---- ---- ------- ------- ------- -------
Balances at May 31, 1998........ 29.2 33.6 0.3 0.3 9.5 (126.7) -- (116.6)
Net loss...................... -- -- -- -- -- (114.1) -- (114.1)
Dividends on redeemable
preferred stock............ -- -- -- -- -- (9.8) -- (9.8)
Issuance of common stock...... 0.2 -- -- -- -- -- -- --
Conversion of common stock.... 0.2 (0.2) -- -- -- -- -- --
Deferred compensation related
to the grant of stock
options.................... -- -- -- -- 0.1 -- -- 0.1
---- ---- ---- ---- ------- ------- ------- -------
Balances at May 30, 1999........ 29.6 33.4 $0.3 $0.3 $ 9.6 $(250.6) $ -- $(240.4)
==== ==== ==== ==== ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 119
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Fairchild Semiconductor International, Inc. ("Fairchild International" or
the "Company"), formerly known as FSC Semiconductor Corporation, was
incorporated on March 10, 1997 by National Semiconductor Corporation ("National
Semiconductor" or "National"). On March 11, 1997, National Semiconductor
consummated an Agreement and Plan of Recapitalization ("Recapitalization"). As
part of the Recapitalization, National Semiconductor transferred all of the
capital stock of Fairchild Semiconductor Corporation ("Fairchild") and
approximately $12.8 million in cash to Fairchild International in exchange for
shares of Fairchild International' 12% Series A Cumulative Compounding Preferred
Stock, Fairchild International' common stock and a promissory note in the
principal amount of approximately $77.0 million.
In addition, National Semiconductor transferred substantially all of the
assets and liabilities of the Fairchild Semiconductor Business (the "Business")
to Fairchild. The Business was defined as the logic, discrete and memory
divisions of National Semiconductor. The Recapitalization was accounted for as a
leveraged recapitalization, whereby Fairchild assumed the historical operating
results of the Business. Fairchild is a leading global designer, developer and
manufacturer of high performance multi-market semiconductors. Fairchild's logic,
discrete, non-volatile memory and analog and mixed signal products are the
building block components for virtually all electronic devices, from
sophisticated computers to household appliances. The Company is headquartered in
South Portland, Maine, and has manufacturing operations in South Portland,
Maine, West Jordan, Utah, Mountain View, California, Cebu, the Philippines,
Penang, Malaysia and Puchon, South Korea.
On December 31, 1998, Fairchild acquired Raytheon Semiconductor Inc.,
("Raytheon"). On April 13, 1999, Fairchild acquired the Power Device Business of
Samsung Electronics. See Note 17.
BASIS OF PRESENTATION
The consolidated financial statements at May 31, 1998 and May 30, 1999 and
for the fiscal years then ended and for the period from March 11, 1997 through
May 25, 1997, include the accounts and operations of the Company and its
wholly-owned subsidiaries.
Prior to March 11, 1997, the combined balance sheets included the assets
and liabilities that were directly related to the Business as they were operated
within National Semiconductor. These balance sheets did not include National
Semiconductor's corporate assets or liabilities not specifically identifiable to
Fairchild. National Semiconductor performed cash management on a centralized
basis and processed related receivables and certain payables, payroll and other
activity for Fairchild. These systems did not track receivables, liabilities and
cash receipts and payments on a business specific basis. Accordingly, it was not
practical to determine certain assets and liabilities associated with the
Business. Given these constraints, certain supplemental cash flow information is
presented in lieu of a statement of cash flows for the year ended May 25, 1997
(See Note 16). The cash flows may have been significantly different if not for
the centralized cash management system of National Semiconductor.
Prior to March 11, 1997, the combined statements of operations included all
revenues and costs attributable to the Business including an allocation of the
costs of shared facilities and overhead of National Semiconductor. In addition,
certain costs incurred at Fairchild plants for the benefit of other National
Semiconductor product lines were allocated from Fairchild to National
Semiconductor. All of the allocations and estimates in the combined statements
of operations were based on assumptions
F-7
<PAGE> 120
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION -- (CONTINUED)
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.
Transactions with National Semiconductor have been identified in the
financial statements as transactions between related parties to the extent
practicable (See Note 12).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the Sunday on or nearest preceding May
31. The Company's results for the fiscal years May 25, 1997, May 31, 1998 and
May 30, 1999 consist of 52 weeks, 53 weeks, and 52 weeks, respectively.
PRINCIPLES OF CONSOLIDATION
Commencing with the Recapitalization, the consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
Revenue from the sale of semiconductor products is recognized when shipped,
with a provision for estimated returns and allowances recorded at the time of
shipment. Contract manufacturing revenues are recognized upon completion of the
contracted services.
RESEARCH AND DEVELOPMENT COSTS
The Company's research and development expenditures are charged to expense
as incurred.
RELATED PARTY ACTIVITY
In conjunction with the Recapitalization, Fairchild and National
Semiconductor executed several agreements, which govern the performance of
manufacturing services by Fairchild on behalf of National Semiconductor and by
National Semiconductor on behalf of Fairchild. In addition, National
Semiconductor provided a number of business support services to Fairchild
through May 30, 1999.
Prior to the Recapitalization, the Business performed contract
manufacturing services for National Semiconductor. The revenues for these
services are reflected at cost in the accompanying consolidated statements of
operations.
Manufacturing costs were generally apportioned between National
Semiconductor and the Business' product lines based upon budgeted and actual
factory production loading. Certain manufacturing costs (e.g., material costs)
that were specifically identifiable with a particular product line were charged
or credited directly without apportionment.
National Semiconductor also performed manufacturing services for the
Business and incurred other elements of cost of sales on behalf of the Business,
including freight, duty, warehousing, and purchased manufacturing services from
third party vendors.
F-8
<PAGE> 121
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Shared or common costs, including certain general and administrative, sales
and marketing, and research and development expenses, have been allocated from
National Semiconductor's corporate office, selling and marketing locations, and
manufacturing sites to the Business or from the Business' plants to National
Semiconductor product lines on a basis which is considered to fairly and
reasonably reflect the utilization of the services provided to, or benefit
obtained by, the business receiving the charge. National Semiconductor had net
interest income on a consolidated basis for all periods presented prior to the
Recapitalization. Although not material, these amounts have been allocated to
the Business prior to the Recapitalization on the basis of net assets and are
included in other (income) expense (See Note 12).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is generally
depreciated based upon the following estimated useful lives: buildings and
improvements, ten to thirty years, and machinery and equipment, three to five
years. Depreciation is computed using the straight-line method.
INTANGIBLE ASSETS
Intangible assets were recorded as part of the Raytheon and Power Device
Business acquisitions and are amortized by the use of the straight-line method
over their estimated lives, which are generally three to fifteen years. (See
Note 17)
OTHER ASSETS
Other assets include debt acquisition costs which represent costs incurred
related to the issuance of the Company's long-term debt. The costs are being
amortized using the effective interest method over the related term of the
borrowings, which ranges from five to ten years, and are included in interest
expense. Also included in other assets are mold and tooling costs. Molds and
tools are amortized over their expected useful lives, generally one to three
years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets not held for
sale, including intangible assets, by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values. Based on
these evaluations, there were no
F-9
<PAGE> 122
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
adjustments to the carrying value of long-lived assets in Fiscal Years 1997,
1998 and 1999, except as discussed in Note 11.
CURRENCIES
The Company's functional currency for all operations worldwide is the U.S.
dollar. Accordingly, gains and losses from translation of foreign currency
financial statements are included in current results. In addition, cash
conversion of foreign currency and foreign currency transactions are also
included in current results.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company utilizes various off-balance sheet financial instruments to
manage market risks associated with the fluctuations in certain interest rates
and foreign currency exchange rates. It is the Company's policy to use
derivative financial instruments to protect against market risk arising from the
normal course of business. Gains and losses on financial instruments that are
intended to hedge an identifiable firm commitment are deferred and included in
the measurement of the underlying transaction. Gains and losses on hedges of
anticipated transactions are deferred until such time as the underlying
transactions are recognized or immediately when the transaction is no longer
expected to occur. The criteria the Company uses for designating an instrument
as a hedge include the instrument's effectiveness in risk reduction and
one-to-one matching of derivative instruments to underlying transactions. In
addition, the Company uses forward and option contracts to hedge certain
non-U.S. denominated asset and liability positions. Gains and losses on these
contracts are matched with the underlying gains and losses resulting from
currency movement on these balance sheet positions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable and
payable, and accrued liabilities approximate fair value due to the short-term
maturities of these assets and liabilities. Fair values of long term debt,
interest rate swaps and caps, currency forward contracts and currency options
are based on quoted market prices or pricing models using prevailing financial
market information at the date of measurement.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INCOME TAXES
Prior to the Recapitalization, the Business did not file separate income
tax returns but rather was included in the income tax returns filed by National
Semiconductor and its subsidiaries in various domestic and foreign
jurisdictions. Therefore, no provision for income taxes has been recorded in the
accompanying consolidated financial statements for the period May 27, 1996
through March 10, 1997.
F-10
<PAGE> 123
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Upon the Recapitalization, the Company became responsible for its income taxes
and, therefore, the provision for income taxes included in the accompanying 1997
statement of operations is for the period March 11, 1997 through May 25, 1997.
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
NET INCOME (LOSS) PER COMMON SHARE
The Company has presented net income (loss) per share pursuant to SFAS No.
128, Earnings per Share, and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98. Net income (loss) per common share is presented for
the years ended May 31, 1998 and May 30, 1999 only because it is not meaningful
for earlier years since the Company did not have common stock outstanding for
the entire period during any earlier year.
Basic income (loss) per share was computed by dividing net income (loss)
applicable to common stockholders by the weighted average shares of common stock
outstanding. Diluted income (loss) per share also gives effect to all dilutive
potential common shares outstanding, consisting solely of outstanding stock
options.
The following table reconciles net income (loss) to net income (loss)
applicable to common stockholders, and basic to diluted weighted average shares
outstanding:
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Basic weighted average common shares outstanding............ 62.8 62.9
Net effect of dilutive stock options based on the treasury
stock method using the average market price................. 2.2 --
----- -------
Diluted weighted average common shares outstanding.......... 65.0 62.9
===== =======
Net income.................................................. $20.6 $(114.1)
Dividends on redeemable preferred stock..................... 8.7 9.8
----- -------
Net income applicable to common stockholders................ $11.9 $(123.9)
===== =======
</TABLE>
Options to purchase 750,000 and 4,282,570 shares of common stock were
outstanding at May 31, 1998 and May 30, 1999, respectively, but were not
included in the computation of diluted earnings per share because the effect of
including such options would be anti-dilutive.
EMPLOYEE STOCK PLAN
The Company accounts for its stock option plan in accordance with
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees." In 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based
F-11
<PAGE> 124
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Compensation." SFAS No. 123 provides an alternative to APB No. 25 and is
effective for fiscal years beginning after December 15, 1995. As permitted under
SFAS No. 123, the Company continues to account for its stock option plan in
accordance with the provisions of APB No. 25 (see Note 6) and provides the
disclosure of pro forma net income as if the fair value method under SFAS No.
123 had been applied.
RECLASSIFICATION
Certain fiscal 1997 and 1998 amounts have been reclassified to conform with
the current year presentation.
NOTE 3 -- FINANCIAL STATEMENT DETAILS
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Inventories(1)
Raw materials............................................................. $ 13.0 $ 13.6
Work in process......................................................... 69.5 93.1
Finished goods.......................................................... 25.5 41.9
------ ------
$108.0 $148.6
====== ======
Other current assets
Refundable payment of value added tax associated with acquisition....... $ -- $ 40.9
Non-trade receivable from manufacturing subcontractor................... 12.7 4.5
Deferred income taxes................................................... 1.6 7.6
Prepaid and other current assets........................................ 5.7 12.7
------ ------
$ 20.0 $ 65.7
====== ======
Property, plant and equipment(1)
Land.................................................................... $ 23.5 $ 19.0
Buildings and improvements.............................................. 154.7 177.0
Machinery and equipment................................................. 575.1 681.7
Construction in progress................................................ 46.5 18.1
------ ------
Total property, plant and equipment.................................. 799.8 895.8
Less accumulated depreciation........................................... 456.9 535.6
------ ------
$342.9 $360.2
====== ======
</TABLE>
F-12
<PAGE> 125
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- FINANCIAL STATEMENT DETAILS -- (CONTINUED)
<TABLE>
<CAPTION>
PERIOD OF MAY 31, MAY 30,
AMORTIZATION 1998 1999
------------ ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Intangible assets(1)
Developed technology...................................... 15 years $ 28.8 $169.7
Customer base............................................. 8 years -- 53.9
Covenant not to compete................................... 5 years -- 30.8
Trademarks and tradenames................................. 4 years -- 25.1
Assembled workforce....................................... 3 years 4.1 8.9
------ ------
Total intangible assets.............................................. 32.9 288.4
Less accumulated amortization........................................... (1.4) (9.9)
------ ------
$ 31.5 $278.5
====== ======
Accrued expenses(1)
Payroll and employee related accruals................................... $ 23.4 $ 29.3
Accrued interest........................................................ 8.1 13.5
Restructuring and related allowances.................................... -- 12.5
Income taxes payable.................................................... 3.2 0.3
Other................................................................... 21.2 29.4
------ ------
$ 55.9 $ 85.0
====== ======
</TABLE>
- -------------------------
(1) Approximately $49.1 million of inventory, $101.3 million of property, plant
and equipment, $255.5 million of intangible assets and $9.5 million of
accrued liabilities were obtained through the Power Device acquisition
completed in April 1999, and contribute to the growth in each respective
account in fiscal 1999.
NOTE 4 -- LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- --------
(IN MILLIONS)
<S> <C> <C>
Term Loans Payable:
Tranche A................................................... $ 62.5 $ 100.0
Tranche B................................................. -- 210.0
Tranche C................................................. 88.8 --
Senior subordinated notes payable......................... 300.0 600.0
PIK note payable.......................................... 88.6 99.2
CMP note payable.......................................... -- 50.8
------ --------
Total long-term debt................................... 539.9 1,060.0
Less current portion........................................ 13.2 14.1
------ --------
Long-term portion...................................... $526.7 $1,045.9
====== ========
</TABLE>
F-13
<PAGE> 126
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT -- (CONTINUED)
On March 11, 1997 Fairchild entered into a Senior Credit Facilities
Agreement which, on December 31, 1997, was amended and restated ("Original
Credit Agreement") in order to permit the acquisition of Raytheon (See Note 17).
On April 14, 1999 the Company entered into a new Senior Credit Facilities
Agreement ("Credit Agreement") with a syndicate of financial institutions in
order to refinance the Original Credit Agreement and finance the acquisition of
the Power Device Business (See Note 17). A portion of the proceeds from the new
Credit Agreement was used to repay in full all outstanding amounts under the
Original Credit Agreement.
Borrowings under the Credit Agreement are segregated into two tranches:
$100.0 million Tranche A Term Loans and $210.0 million Tranche B Term Loans. The
Tranche A Term Loans are scheduled to mature on March 31, 2004, and are subject
to quarterly principal payments ranging from $3.8 million to $6.8 million
commencing September 30, 1999. The Tranche B Term Loans are scheduled to mature
on December 15, 2004, and are subject to quarterly principal payments ranging
from $0.5 to $0.7 million commencing September 30, 1999 and ending September 30,
2004 with a final principal payment of $198.5 million due December 15, 2004. The
Credit Agreement also includes a Revolving Credit Facility of $100.0 million.
The Revolving Credit Facility is scheduled to mature on March 31, 2004. No
amounts were outstanding under the Revolving Credit Facility at May 30, 1999.
The Credit Agreement accrues interest based on either the bank's base rate
or the Eurodollar rate, at the option of Fairchild. The interest rate was 7.7%
for the Tranche A term loan and 8.2% for the Tranche B term loan at May 30,
1999. Fairchild pays a commitment fee of 0.5% per annum of the unutilized
commitments under the Revolving Credit Agreement. Borrowings are secured by
substantially all assets of Fairchild.
On April 7, 1999, Fairchild issued $300.0 million of 10 3/8% Senior
Subordinated Notes (the "10 3/8% Notes") at face value. The 10 3/8% Notes pay
interest on April 1 and October 1 of each year commencing October 1, 1999 and
are due October 1, 2007. The 10 3/8% Notes are unsecured and are subordinated to
all existing and future senior indebtedness of Fairchild. Until April 1, 2002,
Fairchild can redeem an amount not to exceed 35% of the 10 3/8% Notes with
proceeds raised from certain public equity offerings. On or after April 1, 2003,
the 10 3/8% Notes are redeemable by Fairchild, in whole or in part, at
redemption prices ranging from 100% to approximately 105% of the principal
amount.
On March 11, 1997, Fairchild issued $300.0 million of 10 1/8% Senior
Subordinated Notes (the "10 1/8% Notes" and, together with the 10 3/8% Notes,
the "Notes") at face value. The 10 1/8% Notes pay interest on March 15 and
September 15 of each year commencing September 15, 1997. The 10 1/8% Notes are
unsecured and are subordinated to all existing and future senior indebtedness of
Fairchild. The 10 1/8% Notes are redeemable by Fairchild, in whole or in part,
on or after March 15, 2002 at redemption prices ranging from 100% to
approximately 105% of the principal amount. Fairchild is required to redeem
$150.0 million principal amount of 10 1/8% Notes on March 15, 2005 and $75.0
million principal amount of 10 1/8% Notes on March 15, 2006 and 2007,
respectively, in each case at a redemption price of 100% of the principal amount
plus accrued interest to the date of redemption.
The payment of principal and interest on the Credit Agreement and the Notes
is fully and unconditionally guaranteed by Fairchild International. Fairchild
International is the parent company of Fairchild and currently conducts no
business and has no significant assets other than the capital
F-14
<PAGE> 127
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT -- (CONTINUED)
stock of Fairchild and certain deferred tax assets related to interest on its
debt. Fairchild has eleven direct subsidiaries and one indirect subsidiary, of
which only one direct subsidiary, Fairchild Semiconductor Corporation of
California ("Fairchild California"), is a guarantor on the Credit Agreement and
the Notes. The remaining direct and indirect subsidiaries are foreign-based and
do not guarantee either the Credit Agreement or the Notes.
On April 13, 1999, in connection with the acquisition of the Power Device
Business, the Company entered into a Subordinated Credit Agreement with Citicorp
Mezzanine Partners, L.P. ("CMP Note") in the principal amount of $50.0 million.
The CMP Note bears interest at 12.5% per annum and matures on April 13, 2008. If
the Company voluntarily prepays any or all of the loan, the interest rate on the
amount prepaid is increased to 18% per annum retroactive to April 13, 1999.
Since the Company plans to repay the loan within 18 months, the Company is
accruing interest on the CMP Note at a rate of 18% per annum in accordance with
EITF Issue No. 86-15. To the extent any Fairchild International senior
indebtedness prohibits Fairchild International from paying interest on the CMP
Note in cash, such interest shall be paid by adding interest to the then
outstanding principal amount of the CMP Note. Such amounts shall accrue interest
as a portion of the principal amount of the PIK Notes from the applicable
interest payment date. The CMP Note is subordinated to both the Senior Credit
Facilities and the Notes. In connection with the issuance of the CMP Note,
Fairchild International issued a warrant for the purchase of 3,538,228 shares of
common stock of Fairchild International at an exercise price of $0.01 per share.
See Note 10.
On March 11, 1997, the Company issued a promissory note ("PIK Note") in the
principal amount of approximately $77.0 million to National Semiconductor as
part of the consideration for all of the capital stock of Fairchild. The PIK
Note bears interest at 11.74% per annum and matures in 2008. During Fiscal Year
1998, National Semiconductor sold its interest in the PIK Note to a number of
financial institutions. To the extent any Fairchild International senior
indebtedness prohibits Fairchild International from paying interest due on the
PIK Notes in cash, such interest shall be paid by adding such interest to the
then outstanding principal amount of the PIK Notes. Such amount shall accrue
interest as a portion of the principal amount of the PIK Notes from the
applicable interest payment date. The PIK Notes are subordinated to both the
Senior Credit Facilities and the Notes.
The Credit Agreement, the indenture under which the Notes were issued, the
CMP Note, and the PIK Note contain certain restrictive financial and operating
covenants, including limitations on stock repurchases and prohibitions on the
payment of dividends, with which the Company was in compliance at May 30, 1999.
F-15
<PAGE> 128
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT -- (CONTINUED)
Aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
2000........................................................ $ 14.1
2001........................................................ 17.1
2002........................................................ 25.1
2003........................................................ 25.1
2004........................................................ 29.1
Thereafter.................................................. 949.5
--------
$1,060.0
========
</TABLE>
On April 29, 1997 and January 7, 1998, the Company entered into interest
rate swap agreements to reduce the impact of changes in interest rates on its
Senior Credit Facilities described above under the Original Credit Agreement.
The swap agreements fixed the interest rate on $60.0 million of the Senior
Credit Facility at 9.26% through May 2001, and $90.0 million of the Senior
Credit Facility at 8.21% through February 2000. The notional face amount of the
swap agreements was $151.3 million at May 31, 1998 (See Note 14). The swap
agreement covering $60.0 million of the Senior Credit Facility was canceled
without penalty on May 26, 1999. The swap agreement covering $90.0 million was
settled on April 28, 1999 at a cost to the Company of $0.6 million.
On April 28, 1999, the Company entered into an Interest Rate Cap Agreement.
This agreement caps the interest rate at 8.0% and 8.3% on the outstanding
balances of the Tranche A and Tranche B Term Loans, respectively. The interest
rate cap agreement expires August 31, 1999.
NOTE 5 -- INCOME TAXES
As discussed in Note 2, the Business did not pay income taxes directly or
file separate income tax returns prior to the Recapitalization, and therefore,
no provision for income taxes has been recorded in the accompanying financial
statements for the period from May 27, 1996 to March 10, 1997.
In conjunction with the acquisition of the Power Device Business, the
Korean government granted a ten year tax holiday to Fairchild Korea
Semiconductor Ltd. The exemption is 100% for the first seven years of the
holiday and 50% for the remaining three years of the holiday. Taxes exempted
include income taxes, dividend withholding taxes, acquisition tax, registration
tax, property tax and aggregate land tax. As such, no provision for income taxes
for Korea has been provided.
F-16
<PAGE> 129
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES -- (CONTINUED)
The provision (benefit) for income taxes included in the accompanying
consolidated statements of operations for Fiscal Years 1997, 1998 and 1999,
consisted of the following:
<TABLE>
<CAPTION>
MARCH 11, YEAR ENDED
1997 TO ------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
--------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S. .................................................... $7.2 $14.6 $(103.7)
Foreign................................................ 2.5 18.2 (15.5)
---- ----- -------
$9.7 $32.8 $(119.2)
==== ===== =======
Income tax provision (benefit):
Current:
U.S. federal........................................ $ -- $ 7.1 $ (4.8)
U.S. state and local................................ -- 1.5 --
Foreign............................................. 1.4 3.3 2.1
---- ----- -------
1.4 11.9 (2.7)
Deferred:
U.S. federal........................................ 1.9 (2.0) (2.5)
U.S. state and local................................ 0.5 (0.4) 0.1
Foreign............................................. -- 1.2 --
---- ----- -------
2.4 (1.2) (2.4)
Total income tax provision (benefit):
U.S. federal........................................... 1.9 5.1 (7.3)
U.S. state and local................................... 0.5 1.1 0.1
Foreign................................................ 1.4 4.5 2.1
---- ----- -------
$3.8 $10.7 $ (5.1)
==== ===== =======
</TABLE>
F-17
<PAGE> 130
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES -- (CONTINUED)
The reconciliation between the income tax rate computed by applying the
U.S. federal statutory rate and the reported worldwide tax rate follows:
<TABLE>
<CAPTION>
MARCH 11,
1997 TO
MAY 25, MAY 31, MAY 30,
1997 1998 1999
--------- ------- -------
<S> <C> <C> <C>
U.S. federal statutory rate............................... 35.0% 35.0% 35.0%
U.S. state and local taxes, net of federal benefit........ 4.1% 3.3% 1.4%
Tax differential related to foreign income................ -- (5.7)% (8.6)%
Loss not utilized......................................... -- -- (23.5)%
---- ---- -----
39.1% 32.6% 4.3%
==== ==== =====
</TABLE>
The tax effects of temporary differences in the recognition of income and
expense for tax and financial reporting purposes that give rise to significant
portions of the deferred tax assets and the deferred tax liabilities at May 31,
1998 and May 30, 1999 are presented below:
<TABLE>
<CAPTION>
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards........................... $ -- $ 34.0
Reserves and accruals..................................... 15.9 26.5
Plant and equipment....................................... 2.8 3.5
Intangibles, primarily intellectual property and
software............................................... 31.2 22.7
Tax credit carryovers..................................... 3.8 1.4
------ ------
Total gross deferred tax assets........................ 53.7 88.1
Valuation allowance....................................... (30.7) (62.7)
------ ------
Net deferred tax assets................................ 23.0 25.4
Deferred tax liabilities (all foreign):
Intangibles, primarily intellectual property.............. -- (9.9)
Plant and equipment....................................... -- (3.7)
Capital allowance......................................... (1.4) (1.4)
------ ------
Total deferred tax liabilities......................... (1.4) (15.0)
------ ------
Net deferred tax assets..................................... $ 21.6 $ 10.4
====== ======
</TABLE>
In assessing the realizability of deferred tax assets, the Company
estimated its future earnings and the expected timing of the reversal of
temporary differences. Accordingly, the Company has recorded a valuation
allowance which reduces the gross deferred tax asset to an amount which the
F-18
<PAGE> 131
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES -- (CONTINUED)
Company believes will more likely than not be realized. Deferred tax assets and
liabilities are classified in the consolidated balance sheet based on the
classification of the related asset or liability.
Net operating loss, research and development credit and foreign tax credit
carryforwards totaled $90.3 million, $0.2 million and $1.2 million,
respectively, as of May 30, 1999. The net operating loss expires in 2019. The
research and development credits expire in varying amounts in 2012, 2013 and
2019. The foreign tax credits expire in varying amounts in 2002 through 2004.
Deferred income taxes have not been provided for the undistributed earnings
of the Company's foreign subsidiaries, which aggregated approximately $13.8
million at May 30, 1999. The Company plans to reinvest all such earnings for
future expansion. The amount of taxes attributable to these undistributed
earnings is not practicably determinable.
NOTE 6 -- STOCK BASED COMPENSATION
At May 30, 1999, the Company has one stock-based compensation plan, the
1997 Stock Option Plan, as amended, (the "Plan") which is described below. The
Company accounts for its stock option plan in accordance with the provisions of
APB No. 25. As such, compensation expense is recorded on the date of grant only
if the current market price of the underlying stock exceeds the exercise price.
During the year ended May 30, 1999, the Company granted 25,600 stock options
with exercise prices less than the market price of the underlying stock on the
date of the grant, and recorded total deferred compensation of $0.3 million. Had
compensation cost for the Company's stock option plan been determined consistent
with SFAS Statement No. 123, the Company would have reported net income (loss)
of $15.5 million, $20.6 million and $(114.3) million, respectively, in fiscal
years 1997, 1998 and 1999, respectively.
The Company estimates the fair value of each option as of the date of grant
using a Black-Scholes pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected volatility......................................... -- -- 49%
Dividend yield.............................................. -- -- --
Risk-free interest rate..................................... 6.17% 5.88% 4.43%
Expected life, in years..................................... 2.6 2.9 3.4
</TABLE>
Under the Plan, the Company may grant options for up to 6,084,000 shares of
Class A common stock. Options granted under the Plan may be either (a) options
intended to constitute incentive stock options ("ISOs") under the Internal
Revenue Code or (b) non-qualified stock options. Options may be granted under
the Plan to regular salaried key employees (including officers) of the Company
and its subsidiaries.
The exercise price of each option granted under the Plan shall be as
determined by the Board of Directors (the "Board"). The maximum term of any
option shall be ten years from the date of grant for incentive stock options and
ten years and one day from the date of grant for non-qualified stock options.
Options granted under the Plan are exercisable at the determination of the
Board, currently vesting ratably over approximately 4 years. Employees receiving
options under the Plan may not receive in any one year period options to
purchase more than 200,000 shares of common stock.
F-19
<PAGE> 132
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- STOCK BASED COMPENSATION -- (CONTINUED)
A summary of the status of the Company's stock option plan as of May 25,
1997, May 31, 1998 and May 30, 1999, and changes during the years then ended are
presented in the table below:
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...... -- $ -- 2,029 $0.13 3,584 $ 2.20
Granted............................... 2,097 0.13 1,777 4.29 972 10.00
Exercised............................. -- -- (142) 0.13 (93) 0.13
Canceled.............................. (68) 0.13 (80) 0.13 (180) 6.83
----- ----- ------
Outstanding at end of year............ 2,029 $0.13 3,584 $2.20 4,283 $ 3.82
===== ===== ======
Exercisable at end of year............ -- $ -- 798 $0.13 1,612 $ 1.82
Weighted average fair value of options
granted............................. $0.02 $0.22 $ 0.09
</TABLE>
Information with respect to stock options outstanding and stock options
exercisable at May 30, 1999, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
(000'S) REMAINING AVERAGE (000'S) AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$.13......................... 2,683 7.95 $ 0.13 1,337 $ 0.13
$10.00....................... 1,600 9.28 10.00 275 10.00
----- -----
4,283 8.45 $ 3.82 1,612 $ 1.82
===== =====
</TABLE>
NOTE 7 -- RETIREMENT PLANS
The Company sponsors the Fairchild Personal Savings and Retirement Plan
(the "Retirement Plan"), contributory savings plan which qualifies under section
401(k) of the Internal Revenue Code. The Retirement Plan covers substantially
all employees in the United States. At the inception of the Retirement Plan, the
Company provided a matching contribution equal to 50% of employee elective
deferrals up to a maximum of 6% of an employee's annual compensation. Effective
June 1, 1997, the Company increased the matching contribution to 75% of employee
elective deferrals. The Company also maintains a non-qualified Benefit
Restoration Plan, under which employees who have otherwise exceeded annual IRS
limitations for elective deferrals can continue to contribute to their
retirement savings. The Company matches employee elective deferrals to the
Benefit Restoration Plan on the same basis as the Retirement Plan.
F-20
<PAGE> 133
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- RETIREMENT PLANS -- (CONTINUED)
Employees in Malaysia participate in a defined contribution plan. The
Company has funded accruals for this plan in accordance with statutory
regulations in Malaysia.
Under the National Pension Fund Law of Korea, the Company is required to
pay a certain percentage of employee retirement benefits to the National Pension
Fund in exchange for a reduction in severance liabilities. Contributed amounts
shall be refunded from the National Pension Plan to employees on their
retirement. This amount has been offset against deferred compensation except for
the portion related to employees with less than one year of service which is
included in current assets.
Total expense recognized under these plans was $1.1 million, $3.4 million
and $3.5 million for the years ended May 25, 1997, May 31, 1998 and May 30,
1999, respectively.
Employees in the Philippines participate in a defined benefit plan that was
assumed by the Company from National Semiconductor as part of the
Recapitalization. The benefits are based on years of service and a multiple of
the employee's final monthly salary. The Company's funding policy is to
contribute annually the amount necessary to maintain the plan on an actuarially
sound basis. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future. The contributions made for the years ended May 25, 1997, May 31, 1998
and May 30, 1999 are not material to the financial statements.
Prior to the Recapitalization, employees of the Business participated in
several National Semiconductor retirement, employee benefit, and incentive
plans. No liabilities related to retirement and similar plans, other than those
disclosed above, were assumed by the Company.
NOTE 8 -- LEASE COMMITMENTS
Rental expense related to certain facilities and equipment of the Company's
plants was $5.0 million, $9.5 million, and $12.5 million for fiscal years 1997,
1998 and 1999, respectively.
Future minimum lease payments under noncancelable operating leases as of
May 30, 1999 are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Fiscal Year
2000........................................................ $11.2
2001........................................................ 7.3
2002........................................................ 3.6
2003........................................................ 1.9
2004........................................................ 1.7
Thereafter.................................................. 4.6
-----
$30.3
=====
</TABLE>
NOTE 9 -- REDEEMABLE PREFERRED STOCK
Concurrent with the Recapitalization, the Company authorized 70,000 shares
of redeemable preferred stock at a par value of $.01, all of which are
designated as 12% Series A cumulative compounding preferred stock (the
"Redeemable Preferred Stock"). The Redeemable Preferred Stock
F-21
<PAGE> 134
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- REDEEMABLE PREFERRED STOCK -- (CONTINUED)
has a stated value of $1,000 per share and is entitled to annual dividends when,
as and if declared, which dividends will be cumulative, whether or not earned or
declared, and will accrue at a rate of 12%, compounding annually. At May 31,
1998 and May 30, 1999, 70,000 shares were issued and outstanding. The total
liquidation value of the shares outstanding at May 31, 1998 and May 30, 1999, in
the amounts of $80.5 million and $90.1 million, respectively, is classified in
the Company's balance sheet as Redeemable Preferred Stock. (See Note 10)
The Redeemable Preferred Stock is mandatorily redeemable in 2009. The
Company may optionally redeem, in whole or in part, the Redeemable Preferred
Stock at any time at a price per share of $1,000, plus accrued and unpaid
dividends to the date of redemption.
At the option of the Company, the Redeemable Preferred Stock may be
exchanged for junior subordinated debentures of the Company. The face value of
such junior subordinated debentures shall be (i) $1,000 per share of Redeemable
Preferred Stock exchanged, plus (ii) all accrued but unpaid dividends on such
stock to the date of exchange. Their maturity date will be the same as the
mandatory redemption date of the Redeemable Preferred Stock, and they shall bear
interest at a rate equal to the lesser of 12% and the maximum interest rate
permitted to be deducted as accrued under the relevant provisions of the
Internal Revenue Code of 1986.
NOTE 10 -- STOCKHOLDERS' EQUITY
RECAPITALIZATION
On March 11, 1997, National Semiconductor consummated the Recapitalization
under which the following transactions occurred:
(i) National Semiconductor, pursuant to an Asset Purchase Agreement,
transferred all of the assets and liabilities of the Business to
Fairchild and its subsidiaries in exchange for demand purchase notes
of Fairchild and its subsidiaries in the aggregate principal amount
of $401.6 million (the "Purchase Price Notes");
(ii) National Semiconductor transferred all of the capital stock of
Fairchild and approximately $12.8 million in cash to the Company in
exchange for shares of Redeemable Preferred Stock, shares of Class A
voting and Class B non-voting common stock, and a promissory PIK Note
of the Company in the principal amount of approximately $77.0
million;
(iii) The Company issued Redeemable Preferred Stock and additional common
stock in the aggregate amounts of approximately $65.0 million;
(iv) The Company contributed cash in the amount of approximately $77.8
million to the capital of Fairchild;
(v) Fairchild borrowed $120.0 million under term bank loans and issued
$300.0 million of 10 1/8% Senior Subordinated Notes due 2007 (as
described in Note 4). The proceeds from these borrowings were used to
repay the Purchase Price Notes and certain debt acquisition costs.
The transaction was accounted for as a leveraged recapitalization whereby
the Company assumed the historical operating results of the Business.
Accordingly, the repayment of the Purchase Price Notes of $401.6 and issuance of
the PIK Note of $77.0 million were included in the statements of equity as a
distribution to National Semiconductor by Fairchild and the Company,
respectively.
F-22
<PAGE> 135
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
COMMON STOCK
On January 5, 1998, the Board of Directors approved a four-for-one common
stock split in the form of a stock dividend. Stockholders received three
additional shares for each share held. Such distribution was made on April 29,
1998 to stockholders of record on that date. All share amounts in the
accompanying consolidated financial statements have been restated to
retroactively reflect the split.
As approved by stockholders on April 24, 1998, the Company has authorized
160,000,000 shares of common stock at a par value of $.01 per share, divided
into two classes consisting of 80,000,000 shares of Class A stock and 80,000,000
shares of Class B stock. Previously, 60,000,000 shares were authorized,
consisting of 30,000,000 shares of Class A stock and 30,000,000 shares of Class
B stock. The holders of Class A stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Except as
required by law, the holders of Class B stock have no voting rights. A holder of
either class of common stock may convert any or all of his shares into an equal
number of shares of the other class of common stock provided that in the case of
a conversion from Class B stock, which is nonvoting, into Class A stock, which
is voting, such conversion would be permitted only to the extent that the holder
of shares to be converted would be permitted under applicable law to hold the
total number of shares of Class A stock which would be held after giving effect
to the conversion.
In connection with the issuance of the CMP Note (see Note 4), the Company
issued a warrant for the purchase of 3,538,228 shares of Class A common stock of
the Company at an exercise price of $0.01 per share to Citicorp Mezzaine
Partners, L.P. The warrant can be exercised from 18 months until nine years
after the issuance thereof. If the Company prepays in full the CMP Note within
18 months after the issuance, the warrant will not become exercisable. The
Company intends to repay this note within 18 months of issuance, therefore the
value of this warrant was deemed to be immaterial, and no amount of the proceeds
of the CMP Note were allocated to this warrant.
Certain amendments to the Securities Purchase and Holders Agreement, dated
as of March 11, 1997 (the "Stockholders Agreement"), which were effected in May
1998, resulted in the lapse of certain risks of forfeiture by the management
investors with respect to their stock ownership of the Company. The lapse of
such restrictions resulted in the incurrence by the Company of deductible
compensation expense for income tax purposes of $10.4 million in Fiscal Year
1998. The tax effect of the compensation expense of $2.1 million was recorded as
a reduction in income taxes payable and an increase to additional paid-in
capital at May 31, 1998. The tax effect was recorded using the alternative
minimum tax rate of 20%. In connection with this transaction, loans aggregating
$5.0 million were made by the Company to the management investors to pay their
federal and state individual income tax liabilities in June 1998. Such loans
(including accrued but unpaid interest thereon) will be cancelled over the
four-year period following their creation, or earlier, in whole, upon the
occurrence of certain qualifying public offerings of the Company's or
Fairchild's stock and, in part, upon the death or disability of the obligor. The
Company has also agreed to pay to such executive officers amounts sufficient to
enable them to discharge all tax liabilities arising out of the cancellation of
such loans (as well as all tax liabilities arising out of such payments). Any
such executive officer whose employment terminates will be required to repay any
uncancelled amounts immediately.
F-23
<PAGE> 136
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- RESTRUCTURING CHARGES
In the first quarter of fiscal 1999, in connection with management's plan
to reduce costs and improve operating efficiencies, the Company recorded a
pre-tax restructuring charge of approximately $4.5 million. The restructuring
charge consisted of $0.8 million related to non-cash asset impairments and $3.7
million of employee separation costs. The asset impairments relate to idle
production equipment in the Company's Mountain View, California and West Jordan,
Utah facilities, which primarily serve the company's Analog and Discrete product
groups, respectively. As of May 30, 1999 these assets have been disposed of. The
charge for employee separation arrangements provided for severance and other
benefits associated with the approximately 600 salaried, hourly and temporary
employees severed as a result of this action, a reduction of approximately 10%
of the Company's payroll. The affected employees, who work in production,
engineering, sales and marketing and administration, are located in the United
States and Cebu, the Philippines.
In the third quarter of fiscal 1999, the Company recorded a pre-tax
restructuring charge of approximately $2.7 million related to the transfer of
all assembly and test work performed at its Mountain View, California facility
to its Penang, Malaysia facility. The charge consisted of $1.9 million of
non-cash asset impairments and $0.8 million for severance and other benefits for
54 production employees terminated as a result of the transfer. The asset
impairments consist of production equipment that will be idled as a result of
this action. As of May 30, 1999 these assets have been disposed of.
In connection with the sale of its Mountain View, California facility on
April 2, 1999, the Company announced the transfer of all wafer production to its
South Portland, Maine facility. In the fourth quarter of fiscal 1999, the
Company recorded a pre-tax restructuring charge of approximately $10.0 million,
which consisted of $2.6 million of non-cash asset impairments, $4.0 million for
severance and employee benefits, $1.9 million for a loss on sale of the facility
and $1.5 million for other exit costs. This action will result in the
termination of approximately 170 salaried, hourly and temporary employees, all
of whom work for the Company's Analog and Mixed Signal Division in Mountain View
or San Diego, California in the areas of production, engineering, selling and
marketing and administration. Other exit costs include $1.0 million to be paid
under a non-cancellable operating lease after operations cease as well as other
incremental costs associated with the facility closure. The non-cash asset
impairments primarily consist of production equipment that will not be
transferred to South Portland, Maine. The assets will be disposed of during the
first half of fiscal 2000.
During the fourth quarter of fiscal 1999, the Company also recorded a
pre-tax charge of $4.1 million related to the restructuring of its memory
product lines, whereby the Company is streamlining its operations to focus
solely on its most profitable products. The charge includes $3.9 million for
non-cash asset impairments and $0.2 million for employee separation costs all of
which have been paid at May 30, 1999. The non-cash impairments consist of
production equipment and other equipment in West Jordan and Sunnyvale,
California that become idle as a result of the plan. The assets will be disposed
of during the second half of fiscal 2000.
The Memory Division product line restructuring plan also included amounts
for the write-off of inventories ($9.9 million) as well as provisions for
additional distribution sales allowances required as a result of this action
($5.5 million). These costs have been excluded from the restructuring charge and
have been recorded as a reduction against net sales in the case of the
distribution sales allowances and as a charge to cost of sales for the inventory
write-offs.
F-24
<PAGE> 137
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- RESTRUCTURING CHARGES -- (CONTINUED)
The following table summarizes the recorded accruals and uses of the above
restructuring and impairment actions:
<TABLE>
<CAPTION>
ASSET SEVERANCE EXIT
IMPAIRMENTS BENEFITS COSTS TOTAL
----------- --------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
FIRST QUARTER RESTRUCTURING
Total charge..................................... $ 0.8 $ 3.7 $ -- $ 4.5
Cash payments.................................... -- (3.1) -- (3.1)
Non-cash items................................... (0.8) -- -- (0.8)
Adjustments...................................... -- (0.3) -- (0.3)
----- ----- ----- -----
Accrual balance as of May 30, 1999.......... -- 0.3 -- 0.3
THIRD QUARTER RESTRUCTURING
Total charge..................................... $ 1.9 $ 0.8 $ -- $ 2.7
Cash payments.................................... -- (0.7) -- (0.7)
Non-cash items................................... (1.9) -- -- (1.9)
----- ----- ----- -----
Accrual balance as of May 30, 1999.......... -- 0.1 -- 0.1
FOURTH QUARTER MOUNTAIN VIEW RESTRUCTURING
Total charge..................................... $ 4.5 $ 4.0 $ 1.5 $10.0
Cash payments.................................... -- -- -- --
Non-cash items................................... (3.4) -- -- (3.4)
----- ----- ----- -----
Accrual balance as of May 30, 1999.......... 1.1 4.0 1.5 6.6
FOURTH QUARTER MEMORY DIVISION RESTRUCTURING
Total charge..................................... $ 3.9 $ 0.2 $ -- $ 4.1
Cash payments.................................... -- (0.2) -- (0.2)
Non-cash items................................... (3.9) -- -- (3.9)
----- ----- ----- -----
Accrual balance as of May 30, 1999.......... -- -- -- --
----- ----- ----- -----
Total accrual balance as of May 30, 1999......... $ 1.1 $ 4.4 $ 1.5 $ 7.0
===== ===== ===== =====
</TABLE>
In June 1996, National Semiconductor announced a restructuring of its
operations and the intent to pursue a sale or partial financing of the Business.
In connection with the restructuring, the Business recorded a $5.3 million
nonrecurring charge related to work force reductions. During the year ended May
25, 1997, $5.3 million of severance was paid to terminated employees.
F-25
<PAGE> 138
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- RELATED PARTY TRANSACTIONS
Related party activity between the Company and National Semiconductor, in
addition to contract manufacturing services performed for National
Semiconductor, is summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MAY 27, 1996 MARCH 11, 1997 YEAR YEAR
THROUGH THROUGH ENDED ENDED
MARCH 10, 1997 MAY 25, 1997 MAY 31, 1998 MAY 30, 1999
-------------- -------------- ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Manufacturing services performed by
National Semiconductor plants or
purchased from third parties...... $34.3 $ 2.8 $14.0 $ 5.6
Headquarters, freight, duty,
warehousing and other elements of
cost of sales....................... 41.8 3.7 17.9 4.4
----- ----- ----- -----
$76.1 $ 6.5 $31.9 $10.0
===== ===== ===== =====
Cost of business support services
provided by National
Semiconductor..................... $ -- $11.6 $28.7 $10.7
===== ===== ===== =====
Operating costs allocated to the
Business by National
Semiconductor..................... $63.9 $ -- $ -- $ --
===== ===== ===== =====
Operating costs allocated to
National Semiconductor by the
Business.......................... $ 9.6 $ -- $ -- $ --
===== ===== ===== =====
</TABLE>
Amounts receivable from National Semiconductor, included in accounts
receivable, totaled $12.4 million, and $12.0 million at May 31, 1998 and May 30,
1999, respectively. Amounts payable to National Semiconductor, included in
accounts payable, totaled $5.3 million and $0.4 million at May 31, 1998 and May
30, 1999, respectively.
NOTE 13 -- CONTINGENCIES
The Company's facilities in South Portland, Maine, West Jordan, Utah, Cebu,
the Philippines, and Penang, Malaysia, have ongoing remediation projects to
respond to certain releases of hazardous substances that occurred prior to the
Recapitalization. Pursuant to the Asset Purchase Agreement, National
Semiconductor has agreed to indemnify the Company for the future costs of these
projects. The costs incurred to respond to these conditions were not material to
the consolidated financial statements during fiscal years 1997, 1998 and 1999,
respectively.
The Company's former Mountain View, California, facility is located on a
contaminated site under the Comprehensive Environmental Response, Compensation
and Liability Act. Under the terms of the Acquisition Agreement with Raytheon
Company, dated December 31, 1997, Raytheon Company has assumed responsibility
for all remediation costs or other liabilities related to historical
contamination.
In addition, in the normal course of business, the Company is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. All such matters are
subject to uncertainties and outcomes that are not predictable with assurance.
Consequently, the Company is unable to ascertain the ultimate aggregate amount
of
F-26
<PAGE> 139
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- CONTINGENCIES -- (CONTINUED)
monetary liability or financial impact with respect to these matters at May 30,
1999. It is management's opinion that after final disposition, any monetary
liability or financial impact to the Company would not be material to the
Company's financial position, annual results of operations or cash flows.
NOTE 14 -- FINANCIAL INSTRUMENTS
FOREIGN CURRENCY INSTRUMENTS
The objective of the Company's foreign exchange risk management policy is
to preserve the U.S. dollar value of after-tax cash flows in relation to
non-U.S. dollar currency fluctuations. The Company uses forward and option
contracts to hedge firm commitments and option contracts to hedge anticipated
transactions. Gains and losses on financial instruments that are intended to
hedge an identifiable firm commitment are deferred and included in the
measurement of the underlying transaction. Gains and losses on hedges of
anticipated transactions are deferred until such time as the underlying
transactions are recognized or immediately when the transaction is no longer
expected to occur. In addition, the Company uses forward and option contracts to
hedge certain non-U.S. denominated asset and liability positions. Gains and
losses on these contracts are matched with the underlying gains and losses
resulting from currency movement on these balance sheet positions. Gains and
losses on any instruments not meeting the above criteria are recognized in
income in the current period, Net gains and losses from foreign currency
transactions were not material for fiscal years 1997, 1998 and 1999.
INTEREST RATE DERIVATIVES
The Company utilizes interest rate swap or interest rate cap agreements to
limit the impact of the variable interest rate of certain long-term debt. The
variable rates on swaps and caps are based primarily on U.S. dollar LIBOR, and
the swaps are reset on a quarterly basis. The differential between fixed and
variable rates to be paid or received on swaps is accrued as interest rates
change in accordance with the agreements and is included in current interest
expense. The costs of interest rate cap agreements are included in interest
expense ratably over the lives of the agreements. Payments to be received as a
result of the cap agreements are accrued as a reduction of interest expense. As
of May 30, 1999, no swap agreements were outstanding, and the outstanding
interest rate cap agreement had a maturity of three months.
FAIR VALUE AND NOTIONAL PRINCIPAL OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The table below shows the fair value and notional principal of the
Company's off-balance sheet instruments as of May 31, 1998 and May 30, 1999. The
notional principal amounts for off-balance sheet instruments provide one measure
of the transaction volume outstanding as of year end and do not represent the
amount of the Company's exposure to credit or market loss. The estimates of fair
value are based on applicable and commonly used pricing models using prevailing
financial market information as of May 31, 1998, and May 30, 1999. Although the
following table reflects the notional principal and fair value of amounts of
off-balance sheet instruments, it does not reflect the gains or losses
associated with the exposures and transactions that the off-balance sheet
instruments are intended to hedge. The amounts ultimately realized upon
settlement of these financial instruments,
F-27
<PAGE> 140
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- FINANCIAL INSTRUMENTS -- (CONTINUED)
together with the gains and losses on the underlying exposures will depend on
actual market conditions during the remaining life of the instruments.
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 30, 1999
----------------------------------- -----------------------------------
NOTIONAL CARRYING ESTIMATED NOTIONAL CARRYING ESTIMATED
PRINCIPAL AMOUNT FAIR VALUE PRINCIPAL AMOUNT FAIR VALUE
--------- -------- ---------- --------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest Rate
Instruments
Swaps................. $151.3 $ -- $(0.5) $ -- $-- $ --
Caps.................. -- -- -- 310.0 -- --
Foreign Exchange
Instruments
Purchased Options..... 31.7 0.8 0.6 32.1 -- --
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary table of estimated fair values of financial instruments follows:
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 30, 1999
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Long Term Debt
Senior Subordinated Notes.................. $300.0 $310.5 $600.0 $603.0
Term Loans................................. 151.3 151.3 310.0 310.0
PIK Note................................... 88.6 87.7 99.2 94.2
CMP Note................................... -- -- 50.8 50.8
</TABLE>
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting information about operating segments and related
disclosures about products, geographic information and major customers.
Comparative operating segment information for fiscal 1997 and 1998 is also
presented in accordance with SFAS No. 131.
Fairchild designs, develops, manufactures and markets high performance
multi-market semiconductors. The Company is currently organized into four
product line operating segments: Analog and Mixed Signal Products Division,
Discrete Power and Signal Technologies Group, Logic Products Group and the
Non-Volatile Memory Division. The revenues and operating profits of the recently
acquired Power Device Business, which were previously reported as a separate
segment, are now included in the Analog and Discrete segments. Each of these
groups has a vice president, general manager who reports directly to the Chief
Executive Officer ("CEO"). The CEO allocates resources to each of these groups
using information on their revenues and operating profits before interest, taxes
and non-recurring items. The CEO has been identified as the Chief Operating
Decision Maker as defined by SFAS No. 131.
F-28
<PAGE> 141
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
Fairchild's products in all operating groups are sold to original equipment
manufacturers and distributors throughout the world.
In addition to the operating segments mentioned above, the Company also
operates sales and marketing, information systems, finance and administration
groups that are led by vice presidents and that also report to the CEO. The
expenses of these groups are allocated to the operating segments and are
included in the operating results reported below. The Company does not allocate
income taxes to its operating segments, and while interest expense allocations
are made for informational purposes, the operating segments are principally
evaluated on operating profit before interest and taxes.
Although the Company does not specifically identify and allocate all assets
by operating segment, it is the Company's strategy to have its capital intensive
manufacturing plants dedicated to its operating segments. Operating segments do
not sell products to each other, and accordingly, there are no inter-segment
revenues to be reported. The accounting policies for segment reporting are the
same as for the Company as a whole.
Statement of operations information on reportable segments for the three
years ended May 30, 1999 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUE AND OPERATING INCOME (LOSS):
Analog and Mixed Signal Products Division
Trade revenue............................................ $ -- $ 32.0 $ 95.8
Operating income (loss).................................. -- 2.2 8.1
------ ------ ------
Discrete Power and Signal Technologies Group
Trade revenue............................................ $164.5 $187.3 $222.8
Contract manufacturing revenue........................... 15.1 34.5 9.1
Operating income......................................... 21.7 44.9 7.0
------ ------ ------
Logic Products Group
Trade revenue............................................ $285.3 $303.0 $267.6
Contract manufacturing revenue........................... 89.1 118.9 71.9
Operating income......................................... 21.3 70.0 35.7
------ ------ ------
Non-Volatile Memory Division
Trade revenue............................................ $138.0 $113.5 $ 73.4
Operating income (loss).................................. 5.0 (14.2) (26.4)
------ ------ ------
</TABLE>
F-29
<PAGE> 142
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Other(1)
Revenue.................................................. $ -- $ -- $ (5.5)
Operating income (loss).................................. (16.1) (15.6) (71.8)
------ ------ ------
Total Consolidated
Trade revenue............................................ $587.8 $635.8 $654.1
Contract manufacturing revenue........................... 104.2 153.4 81.0
Operating income (loss).................................. 31.9 87.3 (47.4)
</TABLE>
- ---------------
(1) Other includes in fiscal year 1997, $5.3 million for restructuring and $10.8
million not allocated to the operating segments for amounts charged to the
Fairchild Business by National pursuant to "push-down" accounting rules
applied in connection with the Recapitalization. In fiscal 1998, such
amounts represent purchased in-process research and development. For fiscal
1999, such charges include $34.0 million for purchased in-process research
and development, $21.3 million for restructuring, $15.4 million for
additional charges taken for asset impairments in connection with the Memory
restructuring and $1.1 million of other charges not allocated to the
operating segments.
Property, plant and equipment (including molds and tooling) and
depreciation and amortization by reportable operating segment as of and for the
years ended May 31, 1998 and May 30, 1999 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT(1) AND DEPRECIATION AND
AMORTIZATION
Analog and Mixed Signal Products Division
Property, plant and equipment............................. $ 49.1 $ 8.3
Depreciation and amortization............................. 3.3 8.9
------ ------
Discrete Power and Signal Technologies Group
Property, plant and equipment............................. $114.8 $194.8
Depreciation and amortization............................. 20.8 31.7
------ ------
Logic Products Group
Property, plant and equipment............................. $172.5 $151.2
Depreciation and amortization............................. 51.7 53.2
------ ------
</TABLE>
F-30
<PAGE> 143
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Non-Volatile Memory Division
Property, plant and equipment............................. $ -- $ --
Depreciation and amortization............................. 8.8 9.9
------ ------
Other
Property, plant and equipment............................. $ 6.5 $ 5.9
Depreciation and amortization............................. -- --
------ ------
Total Consolidated
Property, plant and equipment............................. $342.9 $360.2
Depreciation and amortization............................. 84.6 103.7
</TABLE>
- ---------------
(1) Property, plant and equipment includes molds and tooling, which is
classified in other assets on the consolidated balance sheets. Intangible
assets are solely identifiable to the Analog and Mixed Signal Division and
the Power Device Products Group.
Geographic revenue information for the three years ended May 30, 1999 is
based on the locations of the selling entities within the indicated geographic
areas. No individual foreign country is material to total revenues.
Revenues from unaffiliated customers by geographic region were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
TOTAL REVENUES:
United States.............................................. $326.9 $395.7 $299.5
Asia..................................................... 247.5 260.9 324.3
Europe................................................... 117.6 132.6 111.3
------ ------ ------
Total...................................................... $692.0 $789.2 $735.1
====== ====== ======
</TABLE>
In fiscal years 1997, 1998 and 1999, National Semiconductor accounted for
15.1%, 19.4% and 11.0% of the Company's total revenues.
F-31
<PAGE> 144
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
Geographic property, plant and equipment balances as of May 31, 1998 and
May 30, 1999 are based on the physical locations within the indicated geographic
areas and are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------
MAY 31, MAY 30,
1998 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
United States............................................. $257.0 $174.4
Korea..................................................... -- 100.1
Philippines............................................... 36.8 40.5
Malaysia.................................................. 47.4 39.7
All others................................................ 1.7 5.5
------ ------
Total....................................................... $342.9 $360.2
====== ======
</TABLE>
NOTE 16 -- SUPPLEMENTAL CASH FLOW INFORMATION
As described in Note 1, National Semiconductor's cash management system was
not designed to trace centralized cash and related financing transactions to the
specific cash requirements of the Business. In addition, National
Semiconductor's corporate transaction systems are not designed to track
receivables and certain liabilities and cash receipts and payments on a business
specific basis. Given these constraints, the following data is presented to
facilitate analysis of key components of cash flow activity for fiscal year
1997:
<TABLE>
<CAPTION>
YEAR ENDING
MAY 25,
1997
-------------
(IN MILLIONS)
<S> <C>
Operating activities:
Revenues less expenses...................................... $ 15.5
Depreciation and amortization............................. 77.1
Deferred taxes............................................ (20.3)
Loss on disposal of equipment, molds and tooling.......... 1.0
Non-cash interest expense................................. 1.9
Increase in accounts receivable........................... (79.6)
Decrease in inventories................................... 20.0
Increase in prepaid expenses and other current assets..... (5.8)
Increase in other assets.................................. 0.9
Increase in accounts payable.............................. 12.2
Increase in accrued expenses and other liabilities........ 21.6
Net financing provided to National Semiconductor*......... (25.4)
-------
Cash provided by operating activities.................. 19.1
-------
Investing activities:
Capital expenditures...................................... (47.1)
Purchase of molds and tooling............................. (7.2)
-------
Cash used by investing activities...................... (54.3)
-------
</TABLE>
F-32
<PAGE> 145
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- SUPPLEMENTAL CASH FLOW INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDING
MAY 25,
1997
-------------
(IN MILLIONS)
<S> <C>
Financing activities:
Issuance of long-term debt................................ 420.0
Debt acquisition costs.................................... (20.3)
Issuance of common stock.................................. 7.8
Issuance of preferred stock............................... 70.0
Distribution to National Semiconductor.................... (401.6)
-------
Cash provided by financing activities.................. 75.9
-------
Net change in cash and cash equivalents..................... 40.7
Cash and cash equivalents at beginning of year.............. --
-------
Cash and cash equivalents at end of year.................... $ 40.7
=======
</TABLE>
- -------------------------
* Net financing provided from (to) National Semiconductor does not necessarily
represent the cash flows of the Business, or the timing of such cash flows,
had it operated on a stand alone basis.
Cash paid for interest by the Company totaled $0.1 million for the period
from March 11, 1997 through May 25, 1997. The Business did not make any cash
payments for interest prior to March 11, 1997, as discussed in Note 2. No cash
payments were made for income taxes.
During the year ended May 25, 1997, the Company issued a note to National
Semiconductor in the principal amount of approximately $77.0 million as
additional purchase consideration for the capital stock of Fairchild. The
Company recorded the note as an increase to long-term debt and accumulated
deficit. For the period from March 11 through May 25, 1997, and for fiscal 1998
and fiscal 1999, the Company accumulated dividends on the redeemable preferred
stock of approximately $1.8 million, $8.6 million and $9.8 million,
respectively. The Company recorded the accumulated dividends as an increase to
the carrying value of the redeemable preferred stock and accumulated deficit.
NOTE 17 -- ACQUISITIONS
In April 1999, the Company completed the acquisition of the Power Device
Business of Samsung Electronics for a purchase price of approximately $414.9
million, including related acquisition expenses. The Power Device Business
designs, manufactures and markets power discrete semiconductors and standard
analog integrated circuits serving the personal computer, industrial,
telecommunications and consumer electronics markets. The purchase includes all
of the worldwide operations and assets of the Power Device Business, which are
comprised in part of a high volume wafer fabrication plant in Puchon, South
Korea, design and development operations in Puchon, South Korea, secured
services for high volume assembly and test operations and worldwide sales and
marketing operations. The purchase price was financed through a combination of
borrowings under the Company's new Senior Credit Facilities, the CMP Note and
the 10 3/8% Notes. (See Note 4.)
The Power Device Business acquisition has been accounted for by the
purchase method of accounting and accordingly, the results of operations of the
Power Device Business are included in
F-33
<PAGE> 146
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- ACQUISITIONS -- (CONTINUED)
the accompanying consolidated financial statements since the acquisition date.
Assets acquired and liabilities assumed have been recorded at their estimated
fair values as of the acquisition date. The purchase price exceeded the fair
value of the net tangible assets acquired by approximately $289.5 million.
Approximately $34.0 million of the purchase price in excess of fair value of net
tangible assets was allocated to purchased in-process research and development.
Accordingly, the Company recorded a non-recurring charge for this purchased
in-process research and development concurrent with the acquisition. The
remaining purchase price in excess of fair value of net tangible assets was
allocated to various intangible assets, which will be amortized on a
straight-line basis over three to fifteen years.
On December 31, 1997, the Company acquired all of the outstanding common
stock of Raytheon for approximately $117.0 million in cash plus transaction
expenses. Raytheon, based in Mountain View, California, designs, manufactures
and markets high performance analog and mixed signal integrated circuits for the
personal computer, communications, broadcast video and industrial markets. The
acquisition was accounted for by the purchase method of accounting and
accordingly, the results of operations of Raytheon are included in the
accompanying consolidated financial statements since that date. The purchase
price exceeded the fair value of the net tangible assets by approximately $48.4
million. Approximately $15.5 million of the purchase price in excess of fair
value of net tangible assets was allocated to purchased in-process research and
development. Accordingly, the Company recorded a non-recurring charge for this
purchased in-process research and development concurrent with the acquisition.
The remaining purchase price in excess of fair value of net tangible assets was
allocated to various intangible assets, which will be amortized on a
straight-line basis over three to fifteen years.
The following unaudited pro forma consolidated results of operations are
presented as if the Power Device Business and Raytheon acquisitions had been
made at the beginning of the periods presented below:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
MAY 31, MAY 30,
1998 1999
---------- ----------
(IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenues................................................. $1,300.7 $1,111.9
Net income (loss)........................................ 20.6 (155.9)
Net income (loss) applicable to common stockholders...... 11.9 (165.7)
Net earnings (loss) per share:
Basic.................................................. $ 0.19 $ (2.63)
Diluted................................................ $ 0.18 $ (2.63)
</TABLE>
The pro forma results of operations include adjustments to give effect to
the contracts the Company entered into with Samsung Electronics, additional
depreciation and amortization related to the increased value of acquired fixed
assets and identifiable intangibles, interest expense on debt assumed issued to
finance the purchases, as well as adjustments to eliminate historical expenses
which will not be incurred by the Company. The unaudited pro forma information
is not necessarily
F-34
<PAGE> 147
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- ACQUISITIONS -- (CONTINUED)
indicative of the results of operations that would have occurred had the
purchases been made at the beginning of the periods presented or the future
results of the combined operations.
NOTE 18 -- CHANGE IN ACCOUNTING PRINCIPLE
Effective in the third quarter of Fiscal Year 1998, the Company adopted the
provisions of Emerging Issues Task Force Issue 97-13 "Accounting for Business
Process Reengineering Costs." This Issue requires companies to write-off
business process reengineering costs that had been previously capitalized. The
Company had been capitalizing such costs in conjunction with its enterprise
software implementation project. The Issue requires companies to write-off these
costs in the quarter that contains November 20, 1997.
The cumulative effect of adoption of this Issue resulted in a charge of
$1.5 million; net of taxes of $0.8 million for the year ended May 31, 1998. Of
the pre-tax write-off, $1.6 million applies to costs incurred in Fiscal Year
1998, while $0.7 million applies to costs incurred in Fiscal Year 1997. The
charge relates specifically to costs incurred to assess the system's
capabilities in light of the Company's current business processes, which under
prior guidance was capitalizable to the cost of the software.
F-35
<PAGE> 148
NOTE 19 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Below are condensed consolidating balance sheets, statements of operations
and statements of cash flows of Fairchild International as of and for the years
ended May 30, 1999 and May 31, 1998:
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 30, 1999
-----------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ ------------ -------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ -- $ 33.1 $ 0.3 $ 29.0 $ -- $ 62.4
Accounts receivable,
net................... -- 35.6 10.4 83.7 -- 129.7
Inventories............. -- 83.4 17.0 48.2 -- 148.6
Other current assets.... -- 15.0 0.4 50.3 -- 65.7
------- ------ ------ ------ ------- --------
Total current
assets.............. -- 167.1 28.1 211.2 -- 406.4
Property, plant and
equipment, net.......... -- 166.1 8.3 185.8 -- 360.2
Deferred income taxes,
net..................... -- 10.0 7.8 (15.0) -- 2.8
Intangible assets, net.... -- 8.0 28.1 242.4 -- 278.5
Investment in
subsidiaries............ (6.4) 267.8 83.2 -- (344.6) --
Other assets.............. -- 36.6 1.6 9.6 -- 47.8
------- ------ ------ ------ ------- --------
Total assets.......... $ (6.4) $655.6 $157.1 $634.0 $(344.6) $1,095.7
======= ====== ====== ====== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current portion of
long-term debt........ $ -- $ 14.1 $ -- $ -- $ -- $ 14.1
Accounts payable........ -- 45.4 4.4 55.9 (6.1) 99.6
Accrued expenses and
other current
liabilities........... -- 50.0 8.0 27.0 -- 85.0
------- ------ ------ ------ ------- --------
Total current
liabilities......... -- 109.5 12.4 82.9 (6.1) 198.7
Long-term debt, less
current portion......... 150.0 895.9 -- -- -- 1,045.9
Net intercompany
(receivable) payable.... (6.1) (344.2) (24.3) 368.5 6.1 --
Other liabilities......... -- 0.8 -- 0.6 -- 1.4
------- ------ ------ ------ ------- --------
Total liabilities..... 143.9 662.0 (11.9) 452.0 -- 1,246.0
------- ------ ------ ------ ------- --------
Redeemable preferred
stock................... 90.1 -- -- -- -- 90.1
Commitments and
contingencies
Stockholders' equity
(deficit):
Class A common stock.... 0.3 -- -- -- -- 0.3
Class B common stock.... 0.3 -- -- -- -- 0.3
Additional paid-in
capital............... 9.6 62.0 -- -- (62.0) 9.6
Accumulated earnings
(deficit)............. (250.6) (68.4) 169.0 182.0 (282.6) (250.6)
------- ------ ------ ------ ------- --------
Total stockholders'
equity (deficit).... (240.4) (6.4) 169.0 182.0 (344.6) (240.4)
------- ------ ------ ------ ------- --------
Total liabilities and
stockholders' equity
(deficit)........... $ (6.4) $655.6 $157.1 $634.0 $(344.6) $1,095.7
======= ====== ====== ====== ======= ========
</TABLE>
F-36
<PAGE> 149
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 30, 1999
-----------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ ------------ -------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Net sales -- trade........ $ -- $ 177.1 $ 64.2 $412.8 $ -- $ 654.1
Net
sales -- intercompany... -- 536.8 -- 101.1 (637.9) --
Contract
manufacturing -- National
Semiconductor........ -- 81.0 -- -- -- 81.0
------- ------- ------ ------ ------- -------
Total revenue........ -- 794.9 64.2 513.9 (637.9) 735.1
Operating expenses:
Cost of sales........... -- 57.1 39.7 421.6 -- 518.4
Cost of
sales -- intercompany... -- 596.9 -- 41.0 (637.9) --
Cost of contract
manufacturing --
National
Semiconductor........ -- 64.4 -- -- -- 64.4
Research and
development.......... -- 26.1 10.8 2.4 -- 39.3
Selling, general and
administrative....... -- 62.9 13.8 28.4 -- 105.1
Purchased in-process
research and
development.......... -- -- -- 34.0 -- 34.0
Restructuring and
impairments.......... -- 8.6 12.7 -- -- 21.3
------- ------- ------ ------ ------- -------
Total operating
expenses........... -- 816.0 77.0 527.4 (637.9) 782.5
------- ------- ------ ------ ------- -------
Operating income (loss)... -- (21.1) (12.8) (13.5) -- (47.4)
Interest expense, net..... 11.3 54.1 4.4 2.0 -- 71.8
Equity in subsidiary
(income) loss........... 102.7 33.6 22.8 -- (159.1) --
------- ------- ------ ------ ------- -------
Income (loss) before
income taxes............ (114.0) (108.8) (40.0) (15.5) 159.1 (119.2)
Provision (benefit) for
income taxes............ 0.1 (6.1) (1.2) 2.1 -- (5.1)
------- ------- ------ ------ ------- -------
Net income (loss)....... $(114.1) $(102.7) $(38.8) $(17.6) $ 159.1 $(114.1)
======= ======= ====== ====== ======= =======
</TABLE>
F-37
<PAGE> 150
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 30, 1999
--------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ -------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used in)
operating activities:.................. $ -- $(14.7) $(29.4) $ 88.2 $ 44.1
------- ------ ------ ------- -------
Cash flows from investing activities:
Capital expenditures................... -- (26.6) (0.5) (19.1) (46.2)
Proceeds from sale of property, plant
and equipment....................... -- 1.0 30.2 -- 31.2
Purchase of molds and tooling.......... -- -- -- (3.8) (3.8)
Refundable payment of value added tax
associated with acquisitions........ -- -- -- (40.9) (40.9)
Investment (in) from affilliate........ (50.0) 50.0 -- -- --
Net intercomany investing.............. (406.8) -- 406.8 --
Acquisitions, net of cash acquired..... -- (8.1) -- (406.8) (414.9)
------- ------ ------ ------- -------
Cash provided by (used in) investing
activities........................ (50.0) (390.5) 29.7 (63.8) (474.6)
------- ------ ------ ------- -------
Cash flows from financing activities:
Repayment of long-term debt............ -- (151.3) -- -- (151.3)
Issuance of long-term debt............. 50.0 610.0 -- -- 660.0
Debt issuance costs.................... -- (22.3) -- -- (22.3)
------- ------ ------ ------- -------
Cash provided by financing
activities........................ 50.0 436.4 -- -- 486.4
------- ------ ------ ------- -------
Net change in cash and cash
equivalents............................ -- 31.2 0.3 24.4 55.9
Cash and cash equivalents at beginning of
period................................. -- 1.9 -- 4.6 6.5
------- ------ ------ ------- -------
Cash and cash equivalents at end of
period................................. $ -- $ 33.1 $ 0.3 $ 29.0 $ 62.4
======= ====== ====== ======= =======
Supplemental Cash Flow Information:
Cash paid (refunded) during the year
for:
Income taxes........................ $ -- $ (2.0) $ -- $ 2.0 $ --
======= ====== ====== ======= =======
Interest............................ $ -- $ 46.6 $ -- $ -- $ 46.6
======= ====== ====== ======= =======
</TABLE>
F-38
<PAGE> 151
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, 1998
-----------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ ------------ -------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ -- $ 1.9 $ -- $ 4.6 $ -- $ 6.5
Accounts receivable,
net................... -- 24.7 13.3 37.0 -- 75.0
Inventories............. -- 90.7 14.8 2.5 -- 108.0
Other current assets.... -- 13.2 0.5 6.3 -- 20.0
------- ------ ------ ------ ------- -------
Total current
assets.............. -- 130.5 28.6 50.4 -- 209.5
Property, plant and
equipment, net.......... -- 209.0 48.1 85.8 -- 342.9
Deferred income taxes,
net..................... 3.9 12.2 5.3 (1.4) -- 20.0
Intangible assets, net.... -- -- 31.5 -- -- 31.5
Investment in
subsidiaries............ 46.3 211.0 -- -- (257.3) --
Other assets.............. -- 19.2 1.6 9.6 -- 30.4
------- ------ ------ ------ ------- -------
Total assets.......... $ 50.2 $581.9 $115.1 $144.4 $(257.3) $ 634.3
======= ====== ====== ====== ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current portion of
long-term debt........ $ -- $ 13.2 $ -- $ -- $ -- $ 13.2
Accounts payable........ -- 56.1 5.5 14.7 (2.3) 74.0
Accrued expenses and
other current
liabilities........... -- 38.6 1.8 15.5 -- 55.9
------- ------ ------ ------ ------- -------
Total current
liabilities......... -- 107.9 7.3 30.2 (2.3) 143.1
Long-term debt, less
current portion......... 88.6 438.1 -- -- -- 526.7
Net intercompany
(receivable) payable.... (2.3) (10.5) (9.6) 20.1 2.3 --
Other liabilities......... -- 0.1 -- 0.5 -- 0.6
------- ------ ------ ------ ------- -------
Total liabilities..... 86.3 535.6 (2.3) 50.8 -- 670.4
------- ------ ------ ------ ------- -------
Redeemable preferred
stock................... 80.5 -- -- -- -- 80.5
Commitments and
contingencies
Stockholders' equity
(deficit):
Class A common stock.... 0.3 -- -- -- -- 0.3
Class B common stock.... 0.3 -- -- -- -- 0.3
Additional paid-in
capital............... 9.5 12.0 -- -- (12.0) 9.5
Accumulated earnings
(deficit)............. (126.7) 34.3 117.4 93.6 (245.3) (126.7)
------- ------ ------ ------ ------- -------
Total stockholders'
equity (deficit).... (116.6) 46.3 117.4 93.6 (257.3) (116.6)
------- ------ ------ ------ ------- -------
Total liabilities and
stockholders' equity
(deficit)........... $ 50.2 $581.9 $115.1 $144.4 $(257.3) $ 634.3
======= ====== ====== ====== ======= =======
</TABLE>
F-39
<PAGE> 152
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1998
-----------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ ------------ -------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Net sales -- trade...... $ -- $ 222.1 $32.1 $381.6 $ -- $635.8
Net
sales -- intercompany... -- 786.6 -- 114.4 (901.0) --
Contract
manufacturing -- National
Semiconductor......... -- 153.4 -- -- -- 153.4
------ -------- ----- ------ ------- ------
Total revenue......... -- 1,162.1 32.1 496.0 (901.0) 789.2
Operating expenses:
Cost of sales........... -- 39.3 20.0 382.3 -- 441.6
Cost of
sales -- intercompany... -- 830.0 -- 71.0 (901.0) --
Cost of contract
manufacturing --
National
Semiconductor......... -- 117.1 -- -- -- 117.1
Research and
development........... -- 30.1 4.6 1.0 -- 35.7
Selling, general and
administrative........ -- 65.8 5.1 21.1 -- 92.0
Purchased in-process
research and
development........... -- 15.5 -- -- -- 15.5
------ -------- ----- ------ ------- ------
Total operating
expenses............ -- 1,097.8 29.7 475.4 (901.0) 701.9
------ -------- ----- ------ ------- ------
Operating income (loss)... -- 64.3 2.4 20.6 -- 87.3
Interest expense, net..... 9.8 43.0 1.8 (0.1) -- 54.5
Equity in subsidiary
(income) loss........... (28.7) (16.9) -- -- 45.6 --
------ -------- ----- ------ ------- ------
Income (loss) before
income taxes............ 18.9 38.2 0.6 20.7 (45.6) 32.8
Provision (benefit) for
income taxes............ (3.2) 9.5 0.2 4.2 -- 10.7
------ -------- ----- ------ ------- ------
Income (loss) before
cumulative effect of
change in accounting
principle............... 22.1 28.7 0.4 16.5 (45.6) 22.1
Cumulative effect of
change in accounting
principle, net of tax
effect of $0.8
million................. (1.5) -- -- -- -- (1.5)
------ -------- ----- ------ ------- ------
Net income (loss)......... $ 20.6 $ 28.7 $ 0.4 $ 16.5 $ (45.6) $ 20.6
====== ======== ===== ====== ======= ======
</TABLE>
F-40
<PAGE> 153
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1998
--------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ -------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash flows provided by operating
activities:...................... $-- $105.4 $0.4 $30.3 $136.1
-- ------ ---- ----- ------
Cash flows from investing
activities:
Capital expenditures............. -- (48.7) (0.4) (28.9) (78.0)
Purchase of molds and tooling.... -- -- -- (5.7) (5.7)
Acquisitions, net of cash
acquired....................... -- (116.8) -- -- (116.8)
-- ------ ---- ----- ------
Cash used by investing
activities................... -- (165.5) (0.4) (34.6) (200.5)
-- ------ ---- ----- ------
Cash flows from financing
activities:
Repayment of long-term debt...... -- (58.7) -- -- (58.7)
Issuance of long-term debt....... -- 90.0 -- -- 90.0
Debt issuance costs.............. -- (1.1) -- -- (1.1)
-- ------ ---- ----- ------
Cash provided by financing
activities................... -- 30.2 -- -- 30.2
-- ------ ---- ----- ------
Net change in cash and cash
equivalents...................... -- (29.9) -- (4.3) (34.2)
Cash and cash equivalents at
beginning of period.............. -- 31.8 -- 8.9 40.7
-- ------ ---- ----- ------
Cash and cash equivalents at end of
period........................... $-- $ 1.9 $ -- $ 4.6 $ 6.5
== ====== ==== ===== ======
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes................... $-- $ 7.7 $ -- $ 1.2 $ 8.9
== ====== ==== ===== ======
Interest....................... $-- $ 43.8 $ -- $ -- $ 43.8
== ====== ==== ===== ======
</TABLE>
The 10 3/8% Senior Subordinated Notes Due 2007 are fully and
unconditionally guaranteed by the guarantor subsidiary, Fairchild Semiconductor
Corporation of California. The guarantor subsidiary is a wholly-owned subsidiary
of Fairchild. Separate financial statements and other disclosures concerning the
guarantor subsidiary are not presented because management has determined that
they are not material to investors.
NOTE 20 -- SUBSEQUENT EVENT
On August 9, 1999, the Company completed an initial public offering of
20,000,000 shares of its Class A Common Stock. The gross proceeds from the
offering of $370.0 million were used to repay the 11.74% PIK Note ($101.4
million), to repay the 12.5% CMP Note ($53.0 million), including a prepayment
penalty of $0.8 million, to fund a capital contribution to Fairchild ($191.0
million) which was used to repay the Tranche A term loan and partially repay the
Tranche B term loan, and to pay fees and expenses from the offering. In
addition, as a result of the offering, the warrant issued to Citicorp Mezzanine
Partners to purchase 3,538,228 shares of the Company's Class A Common Stock
became unexercisable.
F-41
<PAGE> 154
NOTE 21 -- UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial information for
fiscal 1998 and 1999 (in millions, except per share amounts):
<TABLE>
<CAPTION>
FISCAL 1998
--------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenue............................................... $ 199.5 $ 195.8 $ 206.6 $ 187.3
Gross profit................................................ 61.4 59.1 59.7 50.3
Income (loss) before cumulative effect of change in
accounting principle(a)................................... 13.0 11.1 (2.2) 0.2
Net income (loss)(a)........................................ 13.0 11.1 (3.7) 0.2
Net income (loss) applicable to common stockholders(a)...... 11.1 9.0 (6.2) (2.0)
Basic earnings (loss) per common share:
Net income (loss) applicable to common stockholders
before cumulative effect of change in accounting
principle............................................. $ 0.18 $ 0.14 $ (0.08) $ (0.03)
Net income (loss) applicable to common stockholders..... $ 0.18 $ 0.14 $ (0.10) $ (0.03)
Diluted earnings (loss) per common share:
Net income (loss) applicable to common stockholders
before cumulative effect of change in accounting
principle............................................. $ 0.18 $ 0.14 $ (0.08) $ (0.03)
Net income (loss) applicable to common stockholders..... $ 0.18 $ 0.14 $ (0.10) $ (0.03)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1999
--------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenue(c)............................................ $ 151.1 $ 167.9 $ 169.4 $ 246.5
Gross profit(c)............................................. 36.7 35.6 41.0 45.3
Net income (loss)(b), (c)................................... (16.2) (9.9) (11.1) (76.9)
Net income (loss) applicable to common stockholders(b),
(c)....................................................... (18.5) (12.3) (13.6) (79.5)
Basic earnings (loss) per common share:
Net income (loss) applicable to common stockholders..... $ (0.29) $ (0.20) $ (0.22) $ (1.26)
Diluted earnings (loss) per common share:
Net income (loss) applicable to common stockholders..... $ (0.29) $ (0.20) $ (0.22) $ (1.26)
</TABLE>
- ---------------
Note: Amounts may not add due to rounding.
(a) During the third quarter of fiscal 1998, the company recorded a charge of
$15.5 million for purchased research and development. See note 17.
(b) During the first, third and fourth quarters of Fiscal 1999, the company
recorded charges of $4.5 million, $2.7 million and $48.1 million,
respectively, for restructuring charges and purchased research and
development. See notes 11 and 17.
(c) In the fourth quarter of Fiscal 1999, the company recorded charges to
write-off inventories ($9.9 million) and to increase sales reserves ($5.5
million) in connection with the Memory Division product line restructuring
plan. See note 11.
F-42
<PAGE> 155
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
NOVEMBER 29, NOVEMBER 28,
1998 1999
------------ ------------
<S> <C> <C>
Revenue:
Net sales--trade.......................................... $287.1 $619.5
Contract manufacturing.................................... 32.1 61.8
------ ------
Total revenue.......................................... 319.2 681.3
Operating expenses:
Cost of sales............................................. 224.7 428.1
Cost of contract manufacturing............................ 28.5 44.4
Research and development.................................. 18.3 29.7
Selling, general and administrative....................... 46.2 109.7
Restructuring and impairments............................. 4.5 --
------ ------
Total operating expenses............................... 322.2 611.9
------ ------
Operating income (loss)..................................... (3.0) 69.4
Interest expense, net....................................... 29.6 50.8
------ ------
Income (loss) before income taxes........................... (32.6) 18.6
Provision (benefit) for income taxes........................ (6.5) 4.1
------ ------
Net income (loss)........................................... $(26.1) $ 14.5
====== ======
Net income (loss) applicable to common stockholders......... $(30.8) $ 12.5
====== ======
Net income (loss) per common share:
Basic..................................................... $(0.49) $ 0.16
====== ======
Diluted................................................... $(0.49) $ 0.15
====== ======
Weighted average common shares:
Basic..................................................... 62.9 78.7
====== ======
Diluted................................................... 62.9 82.0
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-43
<PAGE> 156
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN MILLIONS)(UNAUDITED)
<TABLE>
<CAPTION>
NOVEMBER 28,
1999
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 123.6
Receivables, net.......................................... 145.9
Inventories............................................... 162.4
Other current assets...................................... 14.9
--------
Total current assets................................... 446.8
Property, plant and equipment, net.......................... 362.8
Intangible assets, net...................................... 264.0
Other assets................................................ 41.6
--------
Total assets........................................... $1,115.2
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 1.4
Accounts payable.......................................... 99.4
Accrued expenses and other current liabilities............ 89.8
--------
Total current liabilities.............................. 190.6
Long-term debt, less current portion........................ 717.2
Other liabilities........................................... 2.0
--------
Total liabilities...................................... 909.8
Commitments and contingencies
Stockholders' equity:
Class A common stock...................................... 0.6
Class B common stock...................................... 0.3
Additional paid-in capital................................ 448.6
Accumulated deficit....................................... (238.2)
Less treasury stock at cost............................... (5.9)
--------
Total stockholders' equity............................. 205.4
--------
Total liabilities and stockholders' equity............. $1,115.2
========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-44
<PAGE> 157
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
NOVEMBER 29, NOVEMBER 28,
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $(26.1) $ 14.5
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 47.4 69.9
Amortization of deferred compensation.................. -- 1.1
Restructuring charges, net of cash expended............ 1.9 --
Non-cash interest expense.............................. 5.1 13.3
Loss (gain) on disposal of property, plant and
equipment............................................ (0.1) 0.2
Deferred income taxes.................................. (6.2) (1.6)
Changes in operating assets and liabilities, net:
Receivables............................................... (18.0) (16.2)
Inventories............................................... 6.6 (16.0)
Other current assets...................................... 7.0 4.7
Current liabilities....................................... (20.1) 9.8
Other assets and liabilities.............................. (1.4) (0.1)
------ -------
Cash provided by (used in) operating activities...... (3.9) 79.6
------ -------
Cash flows from investing activities:
Capital expenditures...................................... (19.4) (53.8)
Proceeds from sale of property, plant and equipment....... 1.0 0.9
Purchase of molds and tooling............................. (1.4) (0.9)
Refund of value added tax paid in connection with
acquisition............................................ -- 40.9
------ -------
Cash used in investing activities.................... (19.8) (12.9)
------ -------
Cash flows from financing activities:
Proceeds from revolving credit facility, net.............. 31.5 --
Repayment of long-term debt............................... (3.1) (345.8)
Proceeds from issuance of common stock, net............... -- 345.0
Proceeds from exercise of stock options................... -- 1.2
Purchase of treasury stock................................ -- (5.9)
------ -------
Cash provided by (used in) financing activities...... 28.4 (5.5)
------ -------
Net change in cash and cash equivalents..................... 4.7 61.2
Cash and cash equivalents at beginning of period............ 6.5 62.4
------ -------
Cash and cash equivalents at end of period.................. $ 11.2 $ 123.6
====== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-45
<PAGE> 158
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheet of Fairchild Semiconductor
International, Inc. (the "Company") as of November 28, 1999 and the Condensed
Consolidated Statements of Operations and Cash Flows for the six-month periods
ended November 29, 1998 and November 28, 1999 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 included in the Company's annual report on Form
10-K for the fiscal year ended May 30, 1999.
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>
NOVEMBER 28,
1999
-------------
(IN MILLIONS)
<S> <C>
Raw materials.............................................. $ 13.7
Work in process............................................ 97.4
Finished goods............................................. 51.3
------
Total inventories..................................... $162.4
======
</TABLE>
NOTE 3 -- COMPUTATION OF NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per common share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period. For
the six months ended November 28, 1999, common equivalent shares consisted of
7.0 million stock options, all of which were dilutive. Using the treasury stock
method, 3.3 million shares were added to weighted average shares outstanding for
purposes of the diluted net income per share calculation. For the six months
ended November 29, 1998, common equivalent shares consisted of 3.8 million stock
options, all of which were anti-dilutive and excluded from the calculation of
net loss per share due to the company's net losses for that period. The net
income (loss) used in computing net income (loss) per common share has been
adjusted where applicable, to reflect dividends accrued during each respective
period for preferred stock, resulting in an increase to the net loss applicable
to common stockholders and a decrease to the net income applicable to common
stockholders for the six months ended November 29, 1998 and November 28, 1999,
respectively.
NOTE 4 -- INITIAL PUBLIC OFFERING
On August 9, 1999, the Company completed an initial public offering ("IPO")
of its Class A Common Stock and sold an aggregate of 20,000,000 shares at a
price of $18.50 per share. The underwriting discount was $1.11 per share. The
net proceeds after the underwriting discount and
F-46
<PAGE> 159
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
other IPO expenses were approximately $345.0 million. In addition, National
Semiconductor Corporation, one of the Company's principal stockholders, sold
3,000,000 additional shares pursuant to the underwriters' overallotment option.
The Company received no proceeds from this sale, which closed on August 12,
1999. Concurrent with the IPO, all of the shares of the Company's previously
authorized 12% Series A Cumulative Compounding Preferred Stock were converted
into shares of the Company's Class A Common Stock. Each preferred stockholder
received 75.714571 shares of Class A Common Stock per share of preferred stock,
reflecting the $1,000 liquidation value of the preferred stock, plus accumulated
unpaid dividends to the date of conversion, converted into common stock on the
basis of $17.39 per share. As a result of the conversion, 70,000 shares of
preferred stock were converted into 5,300,020 shares of common stock.
NOTE 5 -- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
NOVEMBER 29, NOVEMBER 28,
1998 1999
------------ ------------
(IN MILLIONS)
<S> <C> <C>
Cash paid for:
Income taxes............................... $ 1.0 $ 1.5
===== =====
Interest................................... $22.7 $42.1
===== =====
</TABLE>
For the six-month periods ended November 29, 1998 and November 28, 1999,
the Company accumulated dividends on the redeemable preferred stock of
approximately $4.7 million and $2.0 million, respectively. The accumulated
dividends were recorded as an increase to the carrying value of the redeemable
preferred stock and accumulated deficit.
NOTE 6 -- SEGMENT INFORMATION
During the first six months of stub year 1999, the Company integrated the
power device business acquired from Samsung Electronics in April 1999, into its
existing Analog and Mixed Signal Products Division and its Discrete Power and
Signal Technologies Group product line operating segments. In addition, the
Company's Logic Products Group was renamed to the Interface and Logic Products
Group, reflecting this segment's emphasis on its Interface products. These
changes were approved by the Company's Chief Executive Officer, who has been
identified as the Chief Operating Decision Maker as defined by SFAS No. 131.
Selected operating segment financial information for the six months ended
November 29, 1998 and November 28, 1999 is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------------------------------------
NOVEMBER 29, 1998 NOVEMBER 28, 1999
------------------------------- -------------------------------
CONTRACT CONTRACT
TRADE MANUFACTURING TOTAL TRADE MANUFACTURING TOTAL
------ ------------- ------ ------ ------------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Analog................. $ 34.6 $ -- $ 34.6 $151.3 $ -- $151.3
Discrete............... 84.5 4.3 88.8 277.6 22.7 300.3
Interface and Logic.... 128.7 27.8 156.5 156.7 39.1 195.8
Memory................. 39.3 -- 39.3 33.9 -- 33.9
------ ----- ------ ------ ----- ------
Total............. $287.1 $32.1 $319.2 $619.5 $61.8 $681.3
====== ===== ====== ====== ===== ======
</TABLE>
F-47
<PAGE> 160
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
NOVEMBER 29, NOVEMBER 28,
1998 1999
------------ ------------
(IN MILLIONS)
<S> <C> <C>
OPERATING INCOME (LOSS):
Analog....................................... $ 0.7 $20.9
Discrete..................................... 4.4 32.0
Interface and Logic.......................... 9.8 24.6
Memory....................................... (13.4) 0.2
Other unusual charges(1)..................... (4.5) (8.3)
------ -----
Total................................... $ (3.0) $69.4
====== =====
</TABLE>
- -------------------------
(1) For the six months ended November 29, 1998, the amount represents a
restructuring charge for severance related to a workforce reduction and
certain asset write-offs. For the six months ended November 28, 1999, the
amount represents a one-time charge for the write-off of receivables from
the management investors to pay their federal and state individual income
tax liabilities resulting from the lapse of risks of forfeiture with respect
to their stock ownership. Such receivables were cancelled as a result of the
Company's initial public offering. This write-off includes amounts to
discharge the individual tax liabilities associated with the cancellation.
NOTE 7 -- RESTRUCTURING CHARGES
Substantially all amounts have been expended with respect to the Company's
fiscal 1999 restructuring actions with the exception of the analog wafer
production transfer to South Portland, Maine. The following table summarizes the
activity of the remaining active restructuring plans:
Fourth Quarter Fiscal 1999 Mountain View Restructuring (In millions):
<TABLE>
<S> <C>
Total charges............................................... $10.0
Cash payments............................................... --
Non-cash items.............................................. (3.4)
-----
Accrual balance as of May 30, 1999........................ 6.6
Cash payments............................................... (0.6)
-----
Accrual balance as of August 29, 1999..................... $ 6.0
=====
Cash payments............................................... (3.2)
-----
Accrual balance as of November 28, 1999................... $ 2.8
=====
</TABLE>
F-48
<PAGE> 161
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-49
<PAGE> 162
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-50
<PAGE> 163
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-51
<PAGE> 164
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-52
<PAGE> 165
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 Puchon, the Republic of Korea ("Korea")
and shares the Samsung Puchon 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.
F-53
<PAGE> 166
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies followed by the Business in the
preparation of its financial statements are summarized below.
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 Puchon factory and do not include cost of raw materials and/or
processing costs incurred outside of the Samsung Puchon 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 Puchon 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,
F-54
<PAGE> 167
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
contingent liabilities and allocated expenses. Actual results could differ from
those estimates, and such differences may be material to the financial
statements.
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.
F-55
<PAGE> 168
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
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 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.
F-56
<PAGE> 169
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
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.
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.
F-57
<PAGE> 170
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
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>
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.
F-58
<PAGE> 171
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
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 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-59
<PAGE> 172
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-60
<PAGE> 173
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-61
<PAGE> 174
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-62
<PAGE> 175
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.
F-63
<PAGE> 176
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
The Business has two 7-year subcontract agreements with Usha HBB (India)
Ltd. ("Usha") and Psi Technologies, Inc. ("Psi"), third party subcontractors, in
connection with assembly and test of certain products of the Business. The Usha
agreement provides for the subcontractor to provide and the Business to purchase
at least 480 million units per year at a unit price of $0.01153. And the Psi
agreement provides for the subcontractor to provide and the Business to purchase
at least 4 million units per month at a unit price of $0.0581. These unit prices
in the agreements are subject to adjustment to reflect changes in market prices.
The agreements with Usha and Psi expire in July 2001 and July 2005,
respectively.
Subject to the subcontractors' quality and performance, at December 31,
1998, the approximate future purchase commitments under these agreements are as
follows:
<TABLE>
<CAPTION>
YEAR PURCHASE COMMITMENT
---- -------------------
<S> <C>
1999.............................................. $ 8,323
2000.............................................. 8,323
2001.............................................. 6,017
2002.............................................. 2,789
2003.............................................. 2,789
2004 and thereafter............................... 4,416
-------
Total............................................. $32,657
=======
</TABLE>
Total payments to Usha and Psi under the agreements were $3,734 thousand,
$3,953 thousand and $5,169 thousand for the years ended December 31, 1996, 1997
and 1998, respectively. For each of these periods, the Business purchased the
minimum guaranteed units.
GUARANTEE PROVIDED
In relation to the Business, Samsung has guaranteed payment of principal
and interest on a bank loan provided to Korea Microsystems, Inc., a third-party
subcontractor of the Business, up to $2,070 thousand due in April 2002.
F-64
<PAGE> 177
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
CAPITAL LEASE
With respect to the Business, Samsung leases machinery and equipment under
capital lease arrangements. The future minimum lease payments under the capital
leases are as follows:
<TABLE>
<CAPTION>
MINIMUM
LEASE
FOR THE YEAR ENDING DECEMBER 31, PAYMENTS
- -------------------------------- --------
<S> <C>
1999........................................................ $ 8,086
2000........................................................ 6,467
2001........................................................ 3,177
2002........................................................ 1,475
Thereafter.................................................. 226
-------
Total.................................................. 19,431
Less: amount representing interest.......................... (1,678)
-------
Present value of minimum lease payments..................... 17,753
Less: current portion....................................... (8,086)
-------
Total capital lease obligation, non-current portion......... $ 9,667
=======
</TABLE>
11. UNSTABLE ECONOMIC ENVIRONMENT:
The operations of the Business, and those of similar companies in Korea,
have been affected, and may continue to be affected for the foreseeable future,
by the unstable economic conditions in Korea and the Asia Pacific region.
Specific factors that impact these companies include volatility in the value of
the Korean won and interest rates and the general deterioration of the economies
of countries in the Asia Pacific region.
12. BUSINESS EQUITY:
Business equity represents Samsung's ownership interest in the recorded net
assets (liabilities) of the Business. A summary of activity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Beginning balance...................................... $ 66,049 $ 51,949 $ 37,301
Net income............................................. 2,767 42,945 15,654
Net capital distribution............................... (16,867) (57,593) (52,683)
-------- -------- --------
Ending balance......................................... $ 51,949 $ 37,301 $ 272
======== ======== ========
</TABLE>
F-65
<PAGE> 178
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES:
As discussed in Note 2, the Business did not pay income taxes directly or
file separate income tax returns. The Business incurs income tax liabilities in
Korean won and based on taxable income determined in accordance with generally
accepted accounting principles and tax laws of Korea. The tax provision
(benefit) included in these financial statements reflects current tax expense
and the impact of accounting for deferred taxes under the asset and liability
method, including the impact of foreign currency translation of such deferred
tax amounts.
The income tax provision (benefit) for 1996, 1997 and 1998 consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Current................................................... -- $ 9,515 $11,178
Deferred.................................................. $(4,754) 9,034 (1,659)
------- ------- -------
Income tax provision (benefit)............................ $(4,754) $18,549 $ 9,519
======= ======= =======
</TABLE>
The deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the Business' ability to generate taxable
income within the period which the temporary differences reverse, the outlook of
the Korean economic environment and the overall future industry outlook.
Management has considered these factors in reaching its conclusion as to the
need for a valuation allowance for financial reporting purposes.
The Business does not have any formalized tax sharing agreement with
Samsung.
The income tax effect of temporary differences comprising the deferred tax
assets and deferred tax liabilities as of December 31, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets -- current:
Inventory reserve........................................... $ 842 $ 1,154
Other..................................................... 67 30
------- -------
909 1,184
------- -------
Deferred tax assets (liabilities) -- non-current:
Provision for deferred employee compensation.............. -- 783
Excess depreciation....................................... (3,173) (2,697)
------- -------
(3,173) (1,914)
------- -------
Net deferred tax liabilities................................ $(2,264) $ (730)
======= =======
</TABLE>
F-66
<PAGE> 179
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES: -- (CONTINUED)
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.
There are no related tax effects allocated to foreign currency translation
adjustments due to the fact that the Business' functional currency is Korean
won.
A summary of cumulative translation adjustments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Cumulative translation adjustments:
Beginning balance....................................... $ 705 $ (4,132) $(18,623)
Current-period change................................. (4,837) (14,491) 6,526
------- -------- --------
Ending balance........................................ $(4,132) $(18,623) $(12,097)
======= ======== ========
</TABLE>
F-67
<PAGE> 180
POWER DEVICE BUSINESS OF SAMSUNG ELECTRONICS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. RELATED PARTY TRANSACTIONS:
Related party activity between the Business and Samsung (including
subsidiaries and affiliates of Samsung) is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Product sales to other operating units of Samsung...... $ 66,834 $ 68,472 $ 56,126
Product sales to foreign sales subsidiaries of
Samsung................................................ 144,338 150,943 86,552
Product sales to other Samsung subsidiaries and
affiliates........................................... 27,032 25,503 41,691
-------- -------- --------
Total sales....................................... $238,204 $244,918 $184,369
======== ======== ========
Manufacturing services performed by other operating
units of Samsung..................................... $ 81,151 $ 75,962 $ 49,775
Manufacturing services performed by a Chinese
subsidiary of Samsung................................ 5,149 22,086 16,352
Purchase of raw materials from Samsung affiliates...... 15,966 20,797 10,626
-------- -------- --------
Total manufacturing costs......................... $102,266 $118,845 $ 76,753
======== ======== ========
Selling, general and administrative expenses allocated
from Samsung......................................... $ 26,891 $ 27,880 $ 27,536
======== ======== ========
Sales of manufacturing equipment to other operating
units of Samsung..................................... $ 12,590 $ 6,945 $ 56
======== ======== ========
Purchase of manufacturing equipment from other
operating units of Samsung........................... $ 20,937 $ 1,088 $ 2,355
======== ======== ========
</TABLE>
16. GEOGRAPHIC INFORMATION:
The Business is engaged in one industry segment, namely the development,
manufacture and marketing of power semiconductors. Sales data, summarized by
geographic area, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Korea.................................................. $178,321 $171,058 $137,111
Asia................................................... 182,839 207,602 186,668
North America.......................................... 32,001 35,638 24,308
Europe................................................. 24,886 26,402 21,812
-------- -------- --------
Total............................................. $418,047 $440,700 $369,899
======== ======== ========
</TABLE>
Substantially all of the Business' assets are located in Korea.
F-68
<PAGE> 181
[FAIRCHILD SEMICONDUCTOR LOGO]
<PAGE> 182
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 International.
<TABLE>
<S> <C>
SEC registration fee...................................... $ 202,444.28
Printing and engraving fees............................... 500,000
Legal fees and expenses................................... 400,000
Accounting fees and expenses.............................. 225,000
Blue Sky fees and expenses................................ 500
Directors' and Officers' Insurance........................ 200,000
Miscellaneous............................................. 64,723
-------------
Total........................................... $ 1,390,223
=============
</TABLE>
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 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
II-1
<PAGE> 183
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 our company or a constituent corporation absorbed in a
consolidation or merger, or is or was serving at the request of our 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 our company serving at its
request as an administrator, trustee or other fiduciary of one or more of the
employee benefit plans of our 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 our 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. Our Certificate of Incorporation contains
a provision so limiting the personal liability of our directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On March 11, 1997, Fairchild International issued approximately 28,764,480
shares of Class A Common Stock, 33,635,520 shares of Class B Common Stock (in
each case such amounts adjusted to reflect a subsequent stock split), $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 of Fairchild Semiconductor Corporation. These securities were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act.
On April 13, 1999, Fairchild International issued a 12.5% Subordinated Note
Due 2008 in the original principal amount of $50.0 million in connection with
the acquisition of the power device business, the financings in connection with
the acquisition and the application of the proceeds of such financings. This
note was issued pursuant to the exemption from registration provided by Section
4(2) of the Securities Act.
II-2
<PAGE> 184
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.01* Form of Underwriting Agreement to be dated
among Fairchild International, the selling stockholders,
Credit Suisse First Boston Corporation, Salomon Smith Barney
Inc., Deutsche Bank Securities Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and FleetBoston Robertson
Stephens Inc.
2.01 Agreement and Plan of Recapitalization dated January 24,
1997 between Sterling and National Semiconductor
(incorporated by reference from Fairchild Semiconductor
Corporation's Registration Statement on Form S-4 filed May
12, 1997 (File No. 333-26897)).
2.02 Asset Purchase Agreement dated as of March 11, 1997 between
Fairchild Semiconductor and National Semiconductor
(incorporated by reference from Fairchild Semiconductor
Corporation's Registration Statement on Form S-4 filed May
12, 1997 (File No. 333-26897)).
2.03 Acquisition Agreement dated November 25, 1997 between
Fairchild Semiconductor Corporation and Raytheon Company
(incorporated by reference from Fairchild Semiconductor
Corporation's Current Report on Form 8-K dated December 31,
1997, filed January 13, 1998).
2.04 Amendment No. 1 to Acquisition Agreement dated December 29,
1997 between Fairchild Semiconductor Corporation and
Raytheon Company (incorporated by reference from Fairchild
Semiconductor Corporation's Current Report on Form 8-K dated
December 31, 1997, filed January 13, 1998).
2.05 Exhibit 3.14 to Acquisition Agreement dated December 29,
1997 between Fairchild Semiconductor Corporation and
Raytheon Company (incorporated by reference from Fairchild
Semiconductor Corporation's Current Report on Form 8-K dated
December 31, 1997, filed January 13, 1998).
2.06 Business Transfer Agreement dated December 20, 1998 between
Samsung Electronics and Fairchild Semiconductor Corporation
(incorporated by reference from Fairchild Semiconductor
Corporation's Current Report on Form 8-K dated April 13,
1999, filed April 27, 1999).
2.07 Closing Agreement dated April 13, 1999 among Samsung
Electronics, Fairchild Korea Semiconductor Ltd. and
Fairchild Semiconductor Corporation (incorporated by
reference from Fairchild Semiconductor Corporation's Current
Report on Form 8-K dated April 13, 1999, filed April 27,
1999).
3.01 Restated Certificate of Incorporation of Fairchild
International (incorporated by reference from Fairchild
International's Annual Report on Form 10-K for the fiscal
year ended May 30, 1999, filed August 27, 1999 (File No.
001-15181)).
3.02 Bylaws of Fairchild International (incorporated by reference
from Fairchild Semiconductor Corporation's Registration
Statement on Form S-4 filed May 12, 1997 (File No.
333-26897)).
4.01 Indenture dated April 7, 1999 among Fairchild Semiconductor
Corporation, Fairchild International, as Guarantor,
Fairchild Semiconductor Corporation of California, as
Guarantor, and the United States Trust Company of New York
(incorporated by reference from Fairchild Semiconductor
Corporation's Registration Statement on Form S-4 filed May
12, 1997 (File No. 333-26897)).
4.02 Form of 10 3/8% Senior Subordinated Notes Due 2007 (included
in Exhibit 4.01).
</TABLE>
II-3
<PAGE> 185
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
4.03 Registration Rights Agreement dated March 11, 1997 among
Fairchild International, Sterling, National Semiconductor
and certain investors (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
5.01* Opinion of Dechert Price & Rhoads.
10.01 Indenture dated as of March 11, 1997 among Fairchild
Semiconductor Corporation, Fairchild International, as
Guarantor and United States Trust Company of New York, as
Trustee relating to Fairchild Semiconductor Corporation's
10 1/8% Senior Subordinated Notes (incorporated by reference
from Fairchild Semiconductor Corporation's Registration
Statement on Form S-4 filed May 12, 1997 (File No.
333-26897)).
10.02 Form of 10 1/8% Senior Subordinated Notes Due 2007 (included
in Exhibit 10.01).
10.03 Technology Licensing and Transfer Agreement dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor Corporation (incorporated by reference from
Amendment No. 3 to Fairchild Semiconductor Corporation's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.04 Transition Services Agreement dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Fairchild
Semiconductor Corporation's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.05 Fairchild Foundry Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Amendment No. 3
to Fairchild Semiconductor Corporation's Registration
Statement on Form S-4, filed July 9, 1997 (File No.
333-26897)).
10.06 Revenue Side Letter dated March 11, 1997 between National
Semiconductor and Fairchild Semiconductor Corporation
(incorporated by reference from Amendment No. 3 to Fairchild
Semiconductor Corporation's Registration Statement on Form
S-4, filed July 9, 1997 (File No. 333-26897)).
10.07 Fairchild Assembly Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Amendment No. 3
to Fairchild Semiconductor Corporation's Registration
Statement on Form S-4, filed July 9, 1997 (File No.
333-26897)).
10.08 National Foundry Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Amendment No. 3
to Fairchild Semiconductor Corporation's Registration
Statement on Form S-4, filed July 9, 1997 (File No.
333-26897)).
10.09 National Assembly Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Amendment No. 3
to Fairchild Semiconductor Corporation's Registration
Statement on Form S-4, filed July 9, 1997 (File No.
333-26897)).
10.10 Mil/Aero Wafer and Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Amendment No. 3
to Fairchild Semiconductor Corporation's Registration
Statement on Form S-4, filed July 9, 1997 (File No.
333-26897)).
10.11 Shared Services Agreement (South Portland) dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor Corporation (incorporated by reference from
Amendment No. 3 to Fairchild Semiconductor Corporation 's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
</TABLE>
II-4
<PAGE> 186
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.12 Corporate Agreement dated February 20, 1992 between Torex
Semiconductor Ltd. and National Semiconductor (incorporated
by reference from Amendment No. 3 to Fairchild Semiconductor
Corporation's Registration Statement on Form S-4, filed July
9, 1997 (File No. 333-26897)).
10.13 Assembly/Test Subcontract Agreement dated August 13, 1998
between NS Electronics Bangkok (1993) Ltd. and Fairchild
Semiconductor Corporation (incorporated by reference from
Fairchild Semiconductor Corporation's Annual Report on Form
10-K for the fiscal year ended May 31, 1998, filed August
27, 1998).
10.14 Supply Agreement dated January 20, 1996 between National
Semiconductor and Dynacraft Industries Sdn. Bhd.
(incorporated by reference from Amendment No. 3 to Fairchild
Semiconductor Corporation's Registration Statement on Form
S-4, filed July 9, 1997 (File No. 333-26897)).
10.15 Licensing and Manufacturing Agreement dated April 27, 1990
between National Semiconductor and Waferscale Integration,
Inc. (incorporated by reference from Amendment No. 3 to
Fairchild Semiconductor Corporation's Registration Statement
on Form S-4, filed July 9, 1997 (File No. 333-26897)).
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 Corporation's
Registration Statement on Form S-4, filed May 12, 1997 (File
No. 333-26897)).
10.17 Lease for Santa Clara Facilities dated as of March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Fairchild
Semiconductor Corporation's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.18 Shared Facilities Agreement (South Portland) dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor Corporation (incorporated by reference from
Fairchild Semiconductor Corporation's Registration Statement
on Form S-4, filed May 12, 1997 (File No. 333-26897)).
10.19 Environmental Side Letter dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Fairchild
Semiconductor Corporation's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.20 Master Sublease Agreement dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor
Corporation and Master Lease Agreement dated December 13,
1994 between General Electric Capital Corporation and
National Semiconductor (incorporated by reference from
Fairchild Semiconductor Corporation's Registration Statement
on Form S-4, filed May 12, 1997 (File No. 333-26897)).
10.21 Fairchild Benefit Restoration Plan (incorporated by
reference from Fairchild Semiconductor Corporation's
Registration Statement on Form S-4 dated, filed May 12, 1997
(File No. 333-26897)).
10.22 Fairchild Incentive Plan (incorporated by reference from
Fairchild Semiconductor Corporation's Registration Statement
on Form S-4, filed May 12, 1997 (File No. 333-26897)).
10.23 FSC Semiconductor Corporation Executive Officer Incentive
Plan (incorporated by reference from Fairchild Semiconductor
Corporation's Registration Statement on Form S-4 dated,
filed May 12, 1997 (File No. 333-26897)).
</TABLE>
II-5
<PAGE> 187
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.24 Fairchild International Amended and Restated Stock Option
Plan (incorporated by reference from Fairchild
International's Annual Report on Form 10-K for the fiscal
year ended May 30, 1999, filed August 27, 1999 (File No.
001-15181)).
10.25 Employment Agreement dated March 11, 1997 among Fairchild
Semiconductor Corporation, Fairchild International, Sterling
and Kirk P. Pond (incorporated by reference from Fairchild
Semiconductor Corporation's Registration Statement on Form
S-4 dated, filed May 12, 1997 (File No. 333-26897)).
10.26 Employment Agreement dated March 11, 1997 among Fairchild
Semiconductor Corporation, Fairchild International, Sterling
and Joseph R. Martin (incorporated by reference from
Fairchild Semiconductor Corporation's Registration Statement
on Form S-4, filed May 12, 1997 (File No. 333-26897)).
10.27 Fairchild Revocable Savings Plan Trust, dated February 20,
1998, executed by Fleet Bank of Maine, as trustee
(incorporated by reference from Fairchild International's
Registration Statement on Form S-8, filed July 7, 1998 (File
No. 333-58603)).
10.28 Transitional Services Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea Semiconductor Ltd.
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.29 Product Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea Semiconductor Ltd.
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.30 Foundry Sale Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea Semiconductor Ltd.
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.31 Intellectual Property License Agreement dated April 13, 1999
between Samsung Electronics and Fairchild Korea
Semiconductor Ltd. (incorporated by reference from Amendment
No. 1 to Fairchild International's Registration Statement on
Form S-1, filed June 30, 1999 (File No. 333-78557)).
10.32 Trademark License Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea Semiconductor Ltd.
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.33 Assembly and Test Services Agreement (Onyang) dated April
13, 1999 between Samsung Electronics and Fairchild Korea
Semiconductor Ltd. (incorporated by reference from Amendment
No. 1 to Fairchild International's Registration Statement on
Form S-1, filed June 30, 1999 (File No. 333-78557)).
10.34 Assembly and Test Services Agreement (Suzhou) dated April
13, 1999 between SESS Electronics Suzhou Semiconductor Co.,
Ltd. and Fairchild Korea Semiconductor Ltd. (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.35 EPI Services Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea Semiconductor Ltd.
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
</TABLE>
II-6
<PAGE> 188
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.36 Photo Mask Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea Semiconductor Ltd.
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.37 Credit Agreement dated April 14, 1999 among Fairchild
Semiconductor Corporation, Fairchild International, certain
lenders named within the Credit Agreement, Credit Suisse
First Boston Corporation, Salomon Brothers Holding Company
Inc., ABN Amro Bank NV and Fleet National Bank (incorporated
by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.38 Employment Agreement dated March 28, 1999 between Fairchild
International and Deok-Jung Kim (incorporated by reference
from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.39 Employment Agreement dated as of April 23, 1999 between
Fairchild Semiconductor Corporation and Kyoung-Soo Kim
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.40 Sublease Agreement dated April 23, 1999 between Veritas
Software Corporation and Fairchild Semiconductor Corporation
of California (incorporated by reference from Amendment No.
1 to Fairchild International's Registration Statement on
Form S-1, filed June 30, 1999 (File No. 333-78557)).
10.41 Fairchild Executive Incentive Plan, as amended and restated,
effective June 1, 1998 (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
10.42 Securities Purchase and Holders Agreement dated as of March
11, 1997 among Fairchild International, Sterling, National
Semiconductor and Management Investors (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.43 Amendment to Securities Purchase and Holders Agreement dated
May 29, 1998 (incorporated by reference from Fairchild
Semiconductor Corporation's Annual Report on Form 10-K for
the fiscal year ended May 31, 1998, filed August 27, 1998).
10.44 Form of Promissory Note between Fairchild Semiconductor
Corporation and Management Investors dated June 3, 1998
(incorporated by reference from Fairchild Semiconductor
Corporation's Annual Report on Form 10-K for the fiscal year
ended May 31, 1998, filed August 27, 1998).
21.01 Subsidiaries of Fairchild International (incorporated by
reference from Fairchild International's Registration
Statement on Form S-1, filed May 14, 1999 (File No. 333-
78557)).
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.
24.01+ Power of Attorney.
</TABLE>
- ---------------
* Filed herewith.
+ Filed December 17, 1999.
II-7
<PAGE> 189
(b) Financial Statement Schedules:
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Fairchild Semiconductor International, Inc.:
Under date of June 30, 1999, we reported on the consolidated balance sheets of
Fairchild Semiconductor International, Inc. and subsidiaries as of May 31, 1998
and May 30, 1999, the related consolidated statements of operations and
stockholders' equity (deficit) for each of the years in the three-year period
ended May 30, 1999, and the related consolidated statements of cash flows for
the years ended May 31, 1998 and May 30, 1999. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related financial statement schedules listed in Item 16(b). These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Boston, Massachusetts
June 30, 1999
II-8
<PAGE> 190
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 30, 1999
------------ ------------
<S> <C> <C>
ASSETS
Current asset:
Receivable from Fairchild Semiconductor Corporation....... $ 2.3 $ 6.1
Deferred income taxes, net.................................. 3.9 --
Investment in Fairchild Semiconductor Corporation(1)........ 46.3 (6.4)
------- -------
Total assets...................................... $ 52.5 $ (0.3)
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Long-term debt(2)........................................... $ 88.6 $ 150.0
------- -------
Total liabilities................................. 88.6 150.0
------- -------
Redeemable preferred stock.................................. 80.5 90.1
Stockholders' equity (deficit):
Class A common stock...................................... 0.3 0.3
Class B common stock...................................... 0.3 0.3
Additional paid-in capital................................ 9.5 9.6
Accumulated deficit....................................... (126.7) (250.6)
------- -------
Total stockholders' equity (deficit).............. (116.6) (240.4)
------- -------
Total liabilities and stockholders' equity
(deficit)....................................... $ 52.5 $ (0.3)
======= =======
</TABLE>
- ---------------
(1) Fairchild Semiconductor International, Inc. is a guarantor of the debt
obligations of Fairchild Semiconductor Corporation. Therefore, losses from
the investment in Fairchild Semiconductor Corporation have continued to be
recorded beyond the amount of investment in Fairchild Semiconductor
Corporation in accordance with APB No. 18.
(2) Long-term debt is repayable as follows: $99.2 million in 2008 and $50.8
million in 2009.
II-9
<PAGE> 191
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 25, MAY 31, MAY 30,
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Interest expense............................................ $ 1.9 $ 9.8 $ 11.3
Equity in income (loss) of Fairchild Semiconductor
Corporation................................................. 16.7 28.7 (102.7)
----- ----- -------
Income (loss) before income taxes........................... 14.8 18.9 (114.0)
----- ----- -------
Provision (benefit) for income taxes........................ (0.7) (3.2) 0.1
----- ----- -------
Income (loss) before cumulative effect of change in
accounting principle...................................... 15.5 22.1 (114.1)
Cumulative effect of change in accounting principle, net of
tax effect of $0.8 million................................ -- (1.5) --
----- ----- -------
Net income (loss)........................................... $15.5 $20.6 $(114.1)
===== ===== =======
</TABLE>
II-10
<PAGE> 192
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
MAY 25, 1997 MAY 31, 1998 MAY 30, 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:.................... $ -- $ -- $ --
------ ------ -------
Cash flows from investing activities:
Investment in Fairchild Semiconductor Corporation...... (77.8) -- (50.0)
------ ------ -------
Cash used by investing activities.............. (77.8) -- (50.0)
------ ------ -------
Cash flows from financing activities:
Issuance of long-term debt............................. -- -- 50.0
Issuance of common stock............................... 7.8 -- --
Issuance of preferred stock............................ 70.0 -- --
------ ------ -------
Cash provided by financing activities.......... 77.8 -- 50.0
------ ------ -------
Net change in cash and cash equivalents.................. -- -- --
Cash and cash equivalents at beginning of period......... -- -- --
------ ------ -------
Cash and cash equivalents at end of period............... $ -- $ -- $ --
====== ====== =======
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes...................................... $ -- $ -- $ --
====== ====== =======
Interest.......................................... $ -- $ -- $ --
====== ====== =======
</TABLE>
II-11
<PAGE> 193
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING TRANSACTIONS
During the year ended May 25, 1997, Fairchild International 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
Semiconductor Corporation. Fairchild International recorded the note as an
increase to long-term debt and accumulated deficit. For the period from March 11
through May 25, 1997, and for Fiscal 1998 and Fiscal 1999, Fairchild
International accumulated dividends on the redeemable preferred stock of
approximately $1.8 million, $8.6 million and $9.8 million, respectively.
Fairchild International recorded the accumulated dividends as an increase to the
carrying value of the redeemable preferred stock and accumulated deficit.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS.
<TABLE>
<CAPTION>
DEFERRED TAX
RETURNS AND VALUATION
DESCRIPTION ALLOWANCES ALLOWANCE TOTAL
- ----------- ----------- ------------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Balances at May 26, 1996................................... $ -- $ -- $ --
Charged to costs and expenses.............................. 3.1 -- 3.1
Deductions................................................. -- -- --
Charged to other accounts.................................. 12.8(1) 30.7(1) 43.5
------ ----- ------
Balances at May 25, 1997................................... 15.9 30.7 46.6
Charged to costs and expenses.............................. 41.8 -- 41.8
Deductions................................................. (45.5) -- (45.5)
Charged to other accounts.................................. 2.0(2) -- 2.0
------ ----- ------
Balances at May 31, 1998................................... 14.2 30.7 44.9
Charged to costs and expenses.............................. 29.8 32.0 61.8
Deductions................................................. (34.9) -- (34.9)
Charged to other accounts.................................. 0.1(2) -- 0.1
------ ----- ------
Balances at May 30, 1999................................... $ 9.2 $62.7 $ 71.9
====== ===== ======
</TABLE>
- -------------------------
(1) Upon the consummation of the Recapitalization on March 11, 1997, these
amounts were established and charged to Business Equity.
(2) These amounts represent valuation reserves obtained through the acquisitions
of Raytheon Semiconductor and the power device business for $2.0 million and
$0.1 million, respectively.
All other schedules are omitted because of the absence of the conditions
under which they are required or because the information required by such
omitted schedules is set forth in the financial statements or the notes thereto.
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 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
II-12
<PAGE> 194
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-13
<PAGE> 195
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
below-named Registrant has duly caused this Amendment No. 2 to 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 19th day of
January, 2000.
FAIRCHILD SEMICONDUCTOR
INTERNATIONAL, INC.
By: *
-----------------------------------------
Kirk P. Pond
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to this Registration Statement has been signed below by the
following persons in the capacities at the above-named Registrant on January 19,
2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman of the Board of Directors,
- --------------------------------------------------- President and Chief Executive Officer
Kirk P. Pond (principal executive officer)
* Executive Vice President, Chief Financial
- --------------------------------------------------- Officer and Director
Joseph R. Martin (principal financial officer)
/s/ DAVID A. HENRY Vice President, Corporate Controller
- --------------------------------------------------- (principal accounting officer)
David A. Henry
* Director
- ---------------------------------------------------
William N. Stout
* Director
- ---------------------------------------------------
Richard M. Cashin, Jr.
* Director
- ---------------------------------------------------
Paul C. Schorr IV
* Director
- ---------------------------------------------------
Ronald W. Shelly
*: By /s/ DAVID A. HENRY
David A. Henry
Attorney-in-fact
</TABLE>
II-14
<PAGE> 196
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.01* Form of Underwriting Agreement to be dated
among Fairchild International, the selling stockholders,
Credit Suisse First Boston Corporation, Salomon Smith Barney
Inc., Deutsche Bank Securities Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and FleetBoston Robertson
Stephens Inc.
2.01 Agreement and Plan of Recapitalization dated January 24,
1997 between Sterling and National Semiconductor
(incorporated by reference from Fairchild Semiconductor
Corporation's Registration Statement on Form S-4 filed May
12, 1997 (File No. 333-26897)).
2.02 Asset Purchase Agreement dated as of March 11, 1997 between
Fairchild Semiconductor and National Semiconductor
(incorporated by reference from Fairchild Semiconductor
Corporation's Registration Statement on Form S-4 filed May
12, 1997 (File No. 333-26897)).
2.03 Acquisition Agreement dated November 25, 1997 between
Fairchild Semiconductor Corporation and Raytheon Company
(incorporated by reference from Fairchild Semiconductor
Corporation's Current Report on Form 8-K dated December 31,
1997, filed January 13, 1998).
2.04 Amendment No. 1 to Acquisition Agreement dated December 29,
1997 between Fairchild Semiconductor Corporation and
Raytheon Company (incorporated by reference from Fairchild
Semiconductor Corporation's Current Report on Form 8-K dated
December 31, 1997, filed January 13, 1998).
2.05 Exhibit 3.14 to Acquisition Agreement dated December 29,
1997 between Fairchild Semiconductor Corporation and
Raytheon Company (incorporated by reference from Fairchild
Semiconductor Corporation's Current Report on Form 8-K dated
December 31, 1997, filed January 13, 1998).
2.06 Business Transfer Agreement dated December 20, 1998 between
Samsung Electronics and Fairchild Semiconductor Corporation
(incorporated by reference from Fairchild Semiconductor
Corporation's Current Report on Form 8-K dated April 13,
1999, filed April 27, 1999).
2.07 Closing Agreement dated April 13, 1999 among Samsung
Electronics, Fairchild Korea Semiconductor Ltd. and
Fairchild Semiconductor Corporation (incorporated by
reference from Fairchild Semiconductor Corporation's Current
Report on Form 8-K dated April 13, 1999, filed April 27,
1999).
3.01 Restated Certificate of Incorporation of Fairchild
International (incorporated by reference from Fairchild
International's Annual Report on Form 10-K for the fiscal
year ended May 30, 1999, filed August 27, 1999 (File No.
001-15181)).
3.02 Bylaws of Fairchild International (incorporated by reference
from Fairchild Semiconductor Corporation's Registration
Statement on Form S-4 filed May 12, 1997 (File No.
333-26897)).
4.01 Indenture dated April 7, 1999 among Fairchild Semiconductor
Corporation, Fairchild International, as Guarantor,
Fairchild Semiconductor Corporation of California, as
Guarantor, and the United States Trust Company of New York
(incorporated by reference from Fairchild Semiconductor
Corporation's Registration Statement on Form S-4 filed May
12, 1997 (File No. 333-26897)).
4.02 Form of 10 3/8% Senior Subordinated Notes Due 2007 (included
in Exhibit 4.01).
</TABLE>
<PAGE> 197
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
4.03 Registration Rights Agreement dated March 11, 1997 among
Fairchild International, Sterling, National Semiconductor
and certain investors (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
5.01* Opinion of Dechert Price & Rhoads.
10.01 Indenture dated as of March 11, 1997 among Fairchild
Semiconductor Corporation, Fairchild International, as
Guarantor and United States Trust Company of New York, as
Trustee relating to Fairchild Semiconductor Corporation's
10 1/8% Senior Subordinated Notes (incorporated by reference
from Fairchild Semiconductor Corporation's Registration
Statement on Form S-4 filed May 12, 1997 (File No.
333-26897)).
10.02 Form of 10 1/8% Senior Subordinated Notes Due 2007 (included
in Exhibit 10.01).
10.03 Technology Licensing and Transfer Agreement dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor Corporation (incorporated by reference from
Amendment No. 3 to Fairchild Semiconductor Corporation's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.04 Transition Services Agreement dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Fairchild
Semiconductor Corporation's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.05 Fairchild Foundry Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Amendment No. 3
to Fairchild Semiconductor Corporation's Registration
Statement on Form S-4, filed July 9, 1997 (File No.
333-26897)).
10.06 Revenue Side Letter dated March 11, 1997 between National
Semiconductor and Fairchild Semiconductor Corporation
(incorporated by reference from Amendment No. 3 to Fairchild
Semiconductor Corporation's Registration Statement on Form
S-4, filed July 9, 1997 (File No. 333-26897)).
10.07 Fairchild Assembly Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Amendment No. 3
to Fairchild Semiconductor Corporation's Registration
Statement on Form S-4, filed July 9, 1997 (File No.
333-26897)).
10.08 National Foundry Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Amendment No. 3
to Fairchild Semiconductor Corporation's Registration
Statement on Form S-4, filed July 9, 1997 (File No.
333-26897)).
10.09 National Assembly Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Amendment No. 3
to Fairchild Semiconductor Corporation's Registration
Statement on Form S-4, filed July 9, 1997 (File No.
333-26897)).
10.10 Mil/Aero Wafer and Services Agreement dated March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Amendment No. 3
to Fairchild Semiconductor Corporation's Registration
Statement on Form S-4, filed July 9, 1997 (File No.
333-26897)).
</TABLE>
<PAGE> 198
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.11 Shared Services Agreement (South Portland) dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor Corporation (incorporated by reference from
Amendment No. 3 to Fairchild Semiconductor Corporation 's
Registration Statement on Form S-4, filed July 9, 1997 (File
No. 333-26897)).
10.12 Corporate Agreement dated February 20, 1992 between Torex
Semiconductor Ltd. and National Semiconductor (incorporated
by reference from Amendment No. 3 to Fairchild Semiconductor
Corporation's Registration Statement on Form S-4, filed July
9, 1997 (File No. 333-26897)).
10.13 Assembly/Test Subcontract Agreement dated August 13, 1998
between NS Electronics Bangkok (1993) Ltd. and Fairchild
Semiconductor Corporation (incorporated by reference from
Fairchild Semiconductor Corporation's Annual Report on Form
10-K for the fiscal year ended May 31, 1998, filed August
27, 1998).
10.14 Supply Agreement dated January 20, 1996 between National
Semiconductor and Dynacraft Industries Sdn. Bhd.
(incorporated by reference from Amendment No. 3 to Fairchild
Semiconductor Corporation's Registration Statement on Form
S-4, filed July 9, 1997 (File No. 333-26897)).
10.15 Licensing and Manufacturing Agreement dated April 27, 1990
between National Semiconductor and Waferscale Integration,
Inc. (incorporated by reference from Amendment No. 3 to
Fairchild Semiconductor Corporation's Registration Statement
on Form S-4, filed July 9, 1997 (File No. 333-26897)).
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 Corporation's
Registration Statement on Form S-4, filed May 12, 1997 (File
No. 333-26897)).
10.17 Lease for Santa Clara Facilities dated as of March 11, 1997
between National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Fairchild
Semiconductor Corporation's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.18 Shared Facilities Agreement (South Portland) dated March 11,
1997 between National Semiconductor and Fairchild
Semiconductor Corporation (incorporated by reference from
Fairchild Semiconductor Corporation's Registration Statement
on Form S-4, filed May 12, 1997 (File No. 333-26897)).
10.19 Environmental Side Letter dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor
Corporation (incorporated by reference from Fairchild
Semiconductor Corporation's Registration Statement on Form
S-4, filed May 12, 1997 (File No. 333-26897)).
10.20 Master Sublease Agreement dated March 11, 1997 between
National Semiconductor and Fairchild Semiconductor
Corporation and Master Lease Agreement dated December 13,
1994 between General Electric Capital Corporation and
National Semiconductor (incorporated by reference from
Fairchild Semiconductor Corporation's Registration Statement
on Form S-4, filed May 12, 1997 (File No. 333-26897)).
10.21 Fairchild Benefit Restoration Plan (incorporated by
reference from Fairchild Semiconductor Corporation's
Registration Statement on Form S-4 dated, filed May 12, 1997
(File No. 333-26897)).
</TABLE>
<PAGE> 199
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.22 Fairchild Incentive Plan (incorporated by reference from
Fairchild Semiconductor Corporation's Registration Statement
on Form S-4, filed May 12, 1997 (File No. 333-26897)).
10.23 FSC Semiconductor Corporation Executive Officer Incentive
Plan (incorporated by reference from Fairchild Semiconductor
Corporation's Registration Statement on Form S-4 dated,
filed May 12, 1997 (File No. 333-26897)).
10.24 Fairchild International Amended and Restated Stock Option
Plan (incorporated by reference from Fairchild
International's Annual Report on Form 10-K for the fiscal
year ended May 30, 1999, filed August 27, 1999 (File No.
001-15181)).
10.25 Employment Agreement dated March 11, 1997 among Fairchild
Semiconductor Corporation, Fairchild International, Sterling
and Kirk P. Pond (incorporated by reference from Fairchild
Semiconductor Corporation's Registration Statement on Form
S-4 dated, filed May 12, 1997 (File No. 333-26897)).
10.26 Employment Agreement dated March 11, 1997 among Fairchild
Semiconductor Corporation, Fairchild International, Sterling
and Joseph R. Martin (incorporated by reference from
Fairchild Semiconductor Corporation's Registration Statement
on Form S-4, filed May 12, 1997 (File No. 333-26897)).
10.27 Fairchild Revocable Savings Plan Trust, dated February 20,
1998, executed by Fleet Bank of Maine, as trustee
(incorporated by reference from Fairchild International's
Registration Statement on Form S-8, filed July 7, 1998 (File
No. 333-58603)).
10.28 Transitional Services Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea Semiconductor Ltd.
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.29 Product Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea Semiconductor Ltd.
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.30 Foundry Sale Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea Semiconductor Ltd.
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.31 Intellectual Property License Agreement dated April 13, 1999
between Samsung Electronics and Fairchild Korea
Semiconductor Ltd. (incorporated by reference from Amendment
No. 1 to Fairchild International's Registration Statement on
Form S-1, filed June 30, 1999 (File No. 333-78557)).
10.32 Trademark License Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea Semiconductor Ltd.
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.33 Assembly and Test Services Agreement (Onyang) dated April
13, 1999 between Samsung Electronics and Fairchild Korea
Semiconductor Ltd. (incorporated by reference from Amendment
No. 1 to Fairchild International's Registration Statement on
Form S-1, filed June 30, 1999 (File No. 333-78557)).
</TABLE>
<PAGE> 200
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.34 Assembly and Test Services Agreement (Suzhou) dated April
13, 1999 between SESS Electronics Suzhou Semiconductor Co.,
Ltd. and Fairchild Korea Semiconductor Ltd. (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.35 EPI Services Agreement dated April 13, 1999 between Samsung
Electronics and Fairchild Korea Semiconductor Ltd.
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.36 Photo Mask Supply Agreement dated April 13, 1999 between
Samsung Electronics and Fairchild Korea Semiconductor Ltd.
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.37 Credit Agreement dated April 14, 1999 among Fairchild
Semiconductor Corporation, Fairchild International, certain
lenders named within the Credit Agreement, Credit Suisse
First Boston Corporation, Salomon Brothers Holding Company
Inc., ABN Amro Bank NV and Fleet National Bank (incorporated
by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.38 Employment Agreement dated March 28, 1999 between Fairchild
International and Deok-Jung Kim (incorporated by reference
from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.39 Employment Agreement dated as of April 23, 1999 between
Fairchild Semiconductor Corporation and Kyoung-Soo Kim
(incorporated by reference from Amendment No. 1 to Fairchild
International's Registration Statement on Form S-1, filed
June 30, 1999 (File No. 333-78557)).
10.40 Sublease Agreement dated April 23, 1999 between Veritas
Software Corporation and Fairchild Semiconductor Corporation
of California (incorporated by reference from Amendment No.
1 to Fairchild International's Registration Statement on
Form S-1, filed June 30, 1999 (File No. 333-78557)).
10.41 Fairchild Executive Incentive Plan, as amended and restated,
effective June 1, 1998 (incorporated by reference from
Amendment No. 1 to Fairchild International's Registration
Statement on Form S-1, filed June 30, 1999 (File No.
333-78557)).
10.42 Securities Purchase and Holders Agreement dated as of March
11, 1997 among Fairchild International, Sterling, National
Semiconductor and Management Investors (incorporated by
reference from Amendment No. 1 to Fairchild International's
Registration Statement on Form S-1, filed June 30, 1999
(File No. 333-78557)).
10.43 Amendment to Securities Purchase and Holders Agreement dated
May 29, 1998 (incorporated by reference from Fairchild
Semiconductor Corporation's Annual Report on Form 10-K for
the fiscal year ended May 31, 1998, filed August 27, 1998).
10.44 Form of Promissory Note between Fairchild Semiconductor
Corporation and Management Investors dated June 3, 1998
(incorporated by reference from Fairchild Semiconductor
Corporation's Annual Report on Form 10-K for the fiscal year
ended May 31, 1998, filed August 27, 1998).
</TABLE>
<PAGE> 201
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
21.01 Subsidiaries of Fairchild International (incorporated by
reference from Fairchild International's Registration
Statement on Form S-1, filed May 14, 1999 (File No. 333-
78557)).
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.
24.01+ Power of Attorney.
</TABLE>
- ---------------
* Filed herewith.
+ Filed December 17,1999.
<PAGE> 1
Exhibit 1.01
27,025,000 Shares
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
Class A Common Stock
UNDERWRITING AGREEMENT
January 19, 2000
CREDIT SUISSE FIRST BOSTON CORPORATION
SALOMON SMITH BARNEY INC.
DEUTSCHE BANK SECURITIES INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
FLEETBOSTON ROBERTSON STEPHENS INC.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. Fairchild Semiconductor International, Inc.,
a Delaware corporation (the "COMPANY"), proposes to issue and sell to the
Underwriters (as defined) 6,140,880 shares (the "SECURITIES") of its Class A
Common Stock (the "COMMON STOCK") and Sterling Holding Company, LLC
("STERLING"), National Semiconductor Corporation ("NATIONAL") and the other
stockholders listed on Schedule A hereto (collectively with Sterling and
National, the "SELLING STOCKHOLDERS") propose severally to sell an aggregate of
17,359,120 outstanding shares of the Common Stock (such 23,500,000 shares of
Common Stock being hereinafter referred to as the "FIRM SECURITIES" ). The
Company proposes to issue and sell to the Underwriters, at the option of the
Underwriters, an aggregate of not more than 1,410,000 shares of Common Stock and
Sterling proposes to sell to the Underwriters, at the option of the
Underwriters, an aggregate of not more than 2,115,000 outstanding shares of the
Common Stock (such 3,525,000 additional shares being hereinafter referred to as
the "OPTIONAL SECURITIES") as set forth below. The Firm Securities and the
Optional Securities are herein collectively called the "OFFERED SECURITIES". The
Company and the Selling Stockholders hereby agree with the several Underwriters
named in Schedule A hereto (the "UNDERWRITERS") as follows:
2. Representations and Warranties of the Company and the Selling
Stockholders. (a) The Company represents and warrants to, and agrees with,
the several Underwriters that:
(i) A registration statement (No. 333-92941) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission (the "COMMISSION") and either
(i) has been declared effective under the Securities Act of 1933 (the
"ACT") and is not proposed to be amended or (ii) is proposed to be
amended by amendment or post-effective amendment. If such registration
statement (the "INITIAL REGISTRATION STATEMENT") has been declared
effective, either (i) an additional registration statement (the
"ADDITIONAL REGISTRATION STATEMENT") relating to the Offered Securities
may have been filed with the Commission pursuant to Rule 462(b) ("RULE
462(B)") under the Act and, if so filed, has become effective upon
filing pursuant to such Rule and the Offered Securities all have been
duly registered under the Act pursuant to the initial registration
statement and, if applicable, the additional registration statement or
(ii) such an additional registration statement is proposed to be filed
with the Commission pursuant to Rule 462(b) and will become effective
upon filing pursuant to such Rule and upon such filing the Offered
Securities will all have been duly registered under the Act pursuant to
the initial registration statement and such additional registration
statement. If
<PAGE> 2
2
the Company does not propose to amend the initial registration
statement or if an additional registration statement has been filed and
the Company does not propose to amend it, and if any post-effective
amendment to either such registration statement has been filed with the
Commission prior to the execution and delivery of this Agreement, the
most recent amendment (if any) to each such registration statement has
been declared effective by the Commission or has become effective upon
filing pursuant to Rule 462(c) ("RULE 462(C)") under the Act or, in the
case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "EFFECTIVE TIME" with respect to the
initial registration statement or, if filed prior to the execution and
delivery of this Agreement, the additional registration statement means
(i) if the Company has advised the Representatives that it does not
propose to amend such registration statement, the date and time as of
which such registration statement, or the most recent post-effective
amendment thereto (if any) filed prior to the execution and delivery of
this Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (ii) if the Company
has advised the Representatives that it proposes to file an amendment
or post-effective amendment to such registration statement, the date
and time as of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is declared
effective by the Commission. If an additional registration statement
has not been filed prior to the execution and delivery of this
Agreement but the Company has advised the Representatives that it
proposes to file one, "EFFECTIVE TIME" with respect to such additional
registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule
462(b). "EFFECTIVE DATE" with respect to the initial registration
statement or the additional registration statement (if any) means the
date of the Effective Time thereof. The initial registration statement,
as amended at its Effective Time, including all information contained
in the additional registration statement (if any) and deemed to be a
part of the initial registration statement as of the Effective Time of
the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("RULE
430A(B)") under the Act, is hereinafter referred to as the "INITIAL
REGISTRATION STATEMENT". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including
all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "ADDITIONAL REGISTRATION
STATEMENT". The Initial Registration Statement and the Additional
Registration Statement are herein referred to collectively as the
"REGISTRATION STATEMENTS" and individually as a "REGISTRATION
STATEMENT". The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance with
Rule 424(b) ("RULE 424(B)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter
referred to as the "PROSPECTUS". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement: (i)
on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement conformed in all material respects to
the requirements of the Act and the rules and regulations of the
Commission promulgated thereunder ("RULES AND REGULATIONS") and did not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all material respects to the
requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact
and did not omit, or will not omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading and (iii) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the Additional
Registration Statement is prior to the execution and delivery of this
Agreement, the Additional Registration Statement each conforms, and at
the time of filing of the Prospectus pursuant to Rule 424(b) or (if no
such filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all material
respects to the requirements of the Act and the Rules and Regulations,
and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: on the
<PAGE> 3
3
Effective Date of the Initial Registration Statement, the Initial
Registration Statement and the Prospectus will conform in all material
respects to the requirements of the Act and the Rules and Regulations,
neither of such documents will include any untrue statement of a
material fact or will omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, and no Additional Registration Statement has been or will
be filed. The two preceding sentences do not apply to statements in or
omissions from a Registration Statement or the Prospectus based upon
written information furnished to the Company by any Selling Stockholder
or any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
is that described as such in Section 7(c) hereof.
(iii) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus; and the Company is duly qualified to do business as
a foreign corporation in good standing in all other jurisdictions in
which its ownership or lease of property or the conduct of its business
requires such qualification, except to the extent that the failure to
so qualify or be in good standing would not have a material adverse
effect on the business, assets, operations, properties, financial
condition, liabilities or prospects of the Company and its subsidiaries
taken as a whole, or would not materially and adversely affect the
ability of the Company to perform its obligations under this Agreement
(a "MATERIAL ADVERSE EFFECT").
(iv) Each subsidiary of the Company has been duly incorporated
and is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus; and each subsidiary of the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification, except to the
extent that the failure to so qualify or be in good standing would not
have a Material Adverse Effect; all of the issued and outstanding
capital stock of each subsidiary of the Company has been duly
authorized and validly issued and is fully paid and nonassessable; and
the capital stock of each subsidiary owned by the Company, directly or
through subsidiaries, is owned free from liens, encumbrances and
defects, other than as described in the Prospectus.
(v) The Offered Securities and all other outstanding shares
of capital stock of the Company have been duly authorized; all
outstanding shares of capital stock of the Company are, and, when the
Offered Securities sold by the Company hereunder have been delivered
and paid for in accordance with this Agreement on each Closing Date (as
defined below), the Offered Securities will have been, validly issued,
fully paid and nonassessable and will conform in all material respects
to the description thereof contained in the Prospectus; and the
stockholders of the Company have no preemptive rights with respect to
the Offered Securities, other than as set forth in the Securities
Purchase and Holders Agreement, as amended, dated March 11, 1997, among
the Company and the stockholders of the Company.
(vi) This Agreement has been duly authorized, executed and
delivered by the Company.
(vii) There are no contracts, agreements or understandings
between the Company or any subsidiary of the Company and any person
that would give rise to a valid claim against the Company or any
subsidiary of the Company or any Underwriter for a brokerage
commission, finder's fee or other like payment, other than to the
Underwriters, in connection with this offering.
(viii) There are no contracts, agreements or understandings
between the Company or any subsidiary of the Company and any person
granting such person the right to require the Company or any subsidiary
of the Company to file a registration statement under the Act with
respect to any securities of the Company or any subsidiary of the
Company owned or to be owned by such person or to require the Company
or any subsidiary of the Company to include such securities in the
securities registered pursuant to a Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act, other than the
Registration Rights Agreement dated March 11, 1997 among the Company
and certain stockholders of the Company.
<PAGE> 4
4
(ix) The Offered Securities have been approved for listing on
the New York Stock Exchange subject, in the case of the Offered
Securities to be sold by the Company hereunder, to notice of issuance.
(x) No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or any court is required
for the consummation of the transactions contemplated by this Agreement
in connection with the issuance and sale of the Offered Securities by
the Company, except such as have been obtained and made under the Act
and the Rules and Regulations of the Commission thereunder and such as
may be required under state securities or blue sky laws in connection
with the offer and sale of the Offered Securities by the Company.
(xi) The execution, delivery and performance of this
Agreement, and the issuance and sale of the Offered Securities by the
Company, will not result in a breach or violation of any of the terms
and provisions of, or constitute a default under, any domestic or, to
the knowledge of the Company, foreign, statute, rule, regulation or
order of any governmental agency or body or any court, having
jurisdiction over the Company or any subsidiary of the Company or any
of their properties, or any agreement or instrument to which the
Company or any such subsidiary is a party or by which the Company or
any such subsidiary is bound or to which any of the properties of the
Company or any such subsidiary is subject or the charter or by-laws of
the Company or any such subsidiary, and the Company has full power and
authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement.
(xii) Except as disclosed in the Prospectus, the Company and
its subsidiaries have good and marketable title to all real properties
and all other properties and assets owned by them and necessary to
conduct the business now operated by them, in each case free from
liens, encumbrances and defects that would materially affect the value
thereof or materially interfere with the use made or to be made thereof
by them; and except as disclosed in the Prospectus, the Company and its
subsidiaries hold any leased real or personal property necessary to the
conduct of the business now operated by them under valid and
enforceable leases with no exceptions that would materially interfere
with the use made or to be made thereof by them.
(xiii) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business presently operated
and conducted by them, subject to such qualifications as may be set
forth in the Prospectus or except where the failure to so possess would
not, singularly or in the aggregate, have a Material Adverse Effect;
and have not received any notice of proceedings relating to the
revocation or modification of any such certificate, authority or permit
that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material
Adverse Effect.
(xiv) No material labor dispute with the employees of the
Company or any subsidiary of the Company exists or, to the knowledge of
the Company or any subsidiary of the Company, is imminent that might
have a Material Adverse Effect.
(xv) The Company and its subsidiaries own, possess, have the
right to use by license or otherwise, or can acquire on reasonable
terms, adequate trademarks, trade names and other rights to inventions,
know-how, patents, copyrights, confidential information and other
intellectual property (collectively, "INTELLECTUAL PROPERTY RIGHTS")
necessary to conduct the business now operated by them and, except as
disclosed in the Prospectus, have not received any notice of
infringement of or conflict with asserted rights of others with respect
to any intellectual property rights that, if determined adversely to
the Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect.
(xvi) Except as disclosed in the Prospectus, neither the
Company nor any of its subsidiaries is in violation of any statute, any
rule, regulation, decision or order of any governmental agency or body
or any court, domestic or foreign, relating to the use, disposal or
release of hazardous or toxic substances or relating to the protection
or restoration of the environment or human exposure to hazardous or
toxic substances (collectively, "ENVIRONMENTAL LAWS"), owns or operates
any real property contaminated with any substance that is subject to
any environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any
claim relating to any environmental laws, which violation,
contamination, liability or claim would individually or in the
aggregate have a Material
<PAGE> 5
5
Adverse Effect; and neither the Company nor any subsidiary of the
Company is aware of any pending investigation which might lead to such
a claim.
(xvii) Except as disclosed in the Prospectus, there are no
pending actions, suits or proceedings against or affecting the Company,
any of its subsidiaries or any of their respective properties that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect, or
which are otherwise material in the context of the sale of the Offered
Securities; and no such actions, suits or proceedings are, to the
Company's or any subsidiary's knowledge, threatened.
(xviii) The consolidated financial statements of the Company
included in each Registration Statement and the Prospectus present
fairly the financial position of the Company and Fairchild
Semiconductor Corporation on the basis stated therein as of the dates
shown and their results of operations and cash flows for the periods
shown, and such financial statements have been prepared in conformity
with the generally accepted accounting principles in the United States
applied on a consistent basis; the schedules included in each
Registration Statement present fairly the information required to be
stated therein; and the assumptions used in preparing the pro forma
financial statements, and the related notes thereto, included in each
Registration Statement and the Prospectus provide a reasonable basis
for presenting the significant effects directly attributable to the
transactions or events described therein, the related pro forma
adjustments give appropriate effect to those assumptions, and the pro
forma columns therein reflect the proper application of those
adjustments to the corresponding historical financial statement
amounts.
(xix) To the knowledge of the Company, the financial
statements of the Power Device Business of Samsung Electronics Co.,
Ltd. ("FAIRCHILD KOREA") included in each Registration Statement and
the Prospectus present fairly the financial position of Fairchild Korea
as of the dates shown and its results of operations and cash flows for
the periods shown, and such financial statements have been prepared in
conformity with the generally accepted accounting principles in the
United States applied on a consistent basis; the schedules included in
each Registration Statement present fairly the information required to
be stated therein; and the assumptions used in preparing the pro forma
financial statements, and the related notes thereto, included in each
Registration Statement and the Prospectus provide a reasonable basis
for presenting the significant effects directly attributable to the
transactions or events described therein, the related pro forma
adjustments give appropriate effect to those assumptions, and the pro
forma columns therein reflect the proper application of those
adjustments to the corresponding historical financial statement
amounts.
(xx) Except as disclosed in the Prospectus, (i) there has been
no material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or
other), business, properties or results of operations of the Company
and its subsidiaries taken as a whole, since the date of the most
recent audited financial statements of the Company and its subsidiaries
included in the Prospectus and (ii) there has been no dividend or
distribution of any kind declared, paid or made by the Company or any
subsidiary on any class of its capital stock since the date of the most
recent audited financial statements of the Company and the subsidiaries
included in the Prospectus.
(xxi) Neither the Company nor any subsidiary is an open-end
investment company, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
United States Investment Company Act of 1940 (the "INVESTMENT COMPANY
ACT"); and each of the Company and its subsidiaries is not and, after
giving effect to the offering and sale of the Offered Securities and
the application of the proceeds thereof as described in the Prospectus,
will not be an "investment company" as defined in the Investment
Company Act.
(xxii) Neither the Company nor its subsidiaries has entered
and will not enter into any contractual arrangement with respect to the
distribution of the Offered Securities except for this Agreement.
(xxiii) None of the Company and its subsidiaries or, to the
best knowledge of the Company or any subsidiary, any director, officer,
agent, employee or other person associated with or acting on behalf of
the Company or any subsidiary has (i) used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity; (ii) made any direct or indirect
unlawful payment to any foreign or
<PAGE> 6
6
domestic government official or employee from corporate funds; (iii)
violated or is in violation of any provision of the Foreign Corrupt
Practices Act of 1977; or (iv) made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment.
(xxiv) The Company is not a "United States real property
holding corporation" for purposes of section 897 of the Internal
Revenue Code of 1986, as amended.
(b) Each Selling Stockholder severally and not jointly represents and
warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has and on each Closing Date
hereinafter mentioned will have valid and unencumbered title to the Offered
Securities to be delivered by such Selling Stockholder on such Closing Date and
full right, power and authority to enter into this Agreement, and, if
applicable, the Power of Attorney and the Custody Agreements (the "CUSTODY
AGREEMENTS") between such Selling Stockholder and BankBoston, N.A., as Custodian
(the "CUSTODIAN"), and to sell, assign, transfer and deliver the Offered
Securities to be delivered by such Selling Stockholder or the Custodian, as the
case may be, on such Closing Date hereunder; and upon the delivery of and
payment for the Offered Securities on each Closing Date hereunder the several
Underwriters will acquire valid and unencumbered title to the Offered Securities
to be delivered by such Selling Stockholder or the Custodian, as the case may
be, on such Closing Date.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all material respects to the requirements of the Act and
the Rules and Regulations and did not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, (B) on the Effective
Date of the Additional Registration Statement (if any), each Registration
Statement conformed, or will conform, in all material respects to the
requirements of the Act and the Rules and Regulations and did not include, or
will not include, any untrue statement of a material fact and did not omit, or
will not omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and (C) on the date of
this Agreement, the Initial Registration Statement and, if the Effective Time of
the Additional Registration Statement is prior to the execution and delivery of
this Agreement, the Additional Registration Statement each conforms, and at the
time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing
is required) at the Effective Date of the Additional Registration Statement in
which the Prospectus is included, each Registration Statement and the Prospectus
will conform, in all material respects to the requirements of the Act and the
Rules and Regulations, and neither of such documents includes, or will include,
any untrue statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading. If the Effective Time of the Initial Registration
Statement is subsequent to the execution and delivery of this Agreement: on the
Effective Date of the Initial Registration Statement, the Initial Registration
Statement and the Prospectus will conform in all material respects to the
requirements of the Act and the Rules and Regulations, neither of such documents
will include any untrue statement of a material fact or will omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading. The two preceding sentences apply only to the extent
that any statements in or omissions from a Registration Statement or the
Prospectus are based on written information furnished to the Company by such
Selling Stockholder specifically for use therein.
(iii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between such Selling Stockholder and any
person that would give rise to a valid claim against such Selling Stockholder or
any Underwriter for a brokerage commission, finder's fee or other like payment
in connection with this offering.
(iv) No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in connection
with the sale of the Offered Securities by such Selling Stockholder, except such
as have been obtained and made under the Act and the Rules and Regulations of
the Commission thereunder and such as may be required under state securities or
blue sky laws in connection with the offer and sale of the Offered Securities by
such Selling Stockholder.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions set forth herein, the Company and the Selling
Stockholders severally and not jointly agree to sell to the Underwriters, and
the Underwriters agree, severally and not jointly, to purchase from the Company
and the
<PAGE> 7
7
Selling Stockholders, at a purchase price of $_ per share, the
respective numbers of shares of Firm Securities set forth opposite the names of
the several Underwriters in Schedule A hereto.
Certificates in negotiable form for the Offered Securities to be sold
by the Selling Stockholders (other than National) hereunder have been placed in
custody, for delivery under this Agreement, under the Custody Agreements made
with the Custodian. Each Selling Stockholder (other than National) agrees that
the shares represented by the certificates held in custody for such Selling
Stockholder under such Selling Stockholder's Custody Agreement are subject to
the interests of the Underwriters hereunder, that the arrangements made by such
Selling Stockholder for such custody are to that extent irrevocable, except as
provided in any Custody Agreement with respect to the Selling Stockholder party
thereto, and that the obligations of such Selling Stockholder hereunder shall
not be terminated by operation of law, whether by the death of any individual
Selling Stockholder or the occurrence of any other event, or in the case of a
trust, by the death of any trustee or trustees or the termination of such trust,
except as provided in any Custody Agreement with respect to the Selling
Stockholder party thereto. If any individual Selling Stockholder party to a
Custody Agreement or any such trustee or trustees should die, or if any other
such event should occur, or if any of such trusts should terminate, before the
delivery of the Offered Securities hereunder, certificates for such Offered
Securities shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such death or other event or termination had
not occurred, regardless of whether or not the Custodian shall have received
notice of such death or other event or termination.
The Company and the Selling Stockholders or the Custodian, as the case
may be, will deliver the Firm Securities to the Representatives for the accounts
of the Underwriters, against payment of the purchase price in Federal (same day)
funds by official wire transfer to an account designated by the Company, the
Selling Stockholders and the Custodian, as the case may be, at a bank acceptable
to CSFBC at the office of Cravath, Swaine & Moore, at 9:00 A.M., New York time,
on January [25], 2000 or at such other time not later than seven full business
days thereafter as CSFBC and the Company determine, such time being herein
referred to as the "FIRST CLOSING DATE". For purposes of Rule 15c6-1 under the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), the First
Closing Date (if later than the otherwise applicable settlement date) shall be
the settlement date for payment of funds and delivery of securities for all the
Offered Securities sold pursuant to the offering. The certificates for the Firm
Securities so to be delivered will be in definitive form, in such denominations
and registered in such names as CSFBC requests and will be made available for
checking and packaging at the above office at least 24 hours prior to the First
Closing Date.
In addition, upon written notice from CSFBC given to the Company and
Sterling from time to time not more than 30 days subsequent to the date of the
Prospectus, the Underwriters may purchase all or less than all of the Optional
Securities at the purchase price per share of Common Stock to be paid for the
Firm Securities. The Company and Sterling agree, severally and not jointly, to
sell to the Underwriters the number of Optional Securities specified in such
notice and the Underwriters agree, severally and not jointly, to purchase such
Optional Securities. Such Optional Securities shall be purchased for the account
of each Underwriter in the same proportion as the number of Firm Securities set
forth opposite such Underwriter's name in Schedule A hereto bears to the total
number of Firm Securities (subject to adjustment by CSFBC to eliminate
fractions) and may be purchased by the Underwriters only for the purpose of
covering over-allotments made in connection with the sale of the Firm
Securities. In the event that the over-allotment option is exercised by the
Underwriters in part but not in full, the amount of Optional Securities
purchased by the Underwriters from the Company and Sterling shall be in exact
proportion to the amount of Optional Securities purchased by the Underwriters
from the Company and Sterling had the over-allotment option been exercised by
the Underwriters in full. No Optional Securities shall be sold or delivered
unless the Firm Securities previously have been, or simultaneously are, sold and
delivered. The right to purchase the Optional Securities or any portion thereof
may be exercised from time to time and to the extent not previously exercised
may be surrendered and terminated at any time upon notice by CSFBC to the
Company and Sterling.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "CLOSING DATE"), shall be determined by CSFBC\
but shall be not later than five full business days after written notice
of election to purchase Optional Securities is given. The Company and Sterling
or the Custodian, as the case may be, will deliver the Optional Securities being
purchased on each Optional Closing Date to the Representatives for the accounts
of the several Underwriters, against payment of the purchase price therefor in
Federal (same day)
<PAGE> 8
8
funds by official wire transfer to an account at a bank acceptable to CSFBC,
at the above office. The certificates for the Optional Securities being
purchased on each Optional Closing Date will be in definitive form, in such
denominations and registered in such names as CSFBC requests upon reasonable
notice prior to such Optional Closing Date and will be made available for
checking and packaging at the above office at a reasonable time in advance
of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling Stockholders.
The Company and, as specifically set forth below, the Selling Stockholders,
each with respect to itself, agree with the several Underwriters that:
(a) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Company will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to
by CSFBC, subparagraph (4)) of Rule 424(b) not later than the earlier
of (A) the second business day following the execution and delivery of
this Agreement or (B) the fifteenth business day after the Effective
Date of the Initial Registration Statement. The Company will advise
CSFBC promptly of any such filing pursuant to Rule 424(b). If the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement and an additional registration
statement is necessary to register a portion of the Offered Securities
under the Act but the Effective Time thereof has not occurred as of
such execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective
amendment thereto with the Commission pursuant to and in accordance
with Rule 462(b) on or prior to 10:00 P.M., New York time, on the date
of this Agreement or, if earlier, on or prior to the time the
Prospectus is printed and distributed to any Underwriter, or will make
such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration
statement as filed or the related prospectus or the Initial
Registration Statement, the Additional Registration Statement (if any)
or the Prospectus and will not effect such amendment or supplementation
without CSFBC's consent; and the Company will also advise CSFBC
promptly of the effectiveness of each Registration Statement (if its
Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration
Statement or the Prospectus and of the institution by the Commission of
any stop order proceedings in respect of a Registration Statement and
will use its reasonable best efforts to prevent the issuance of any
such stop order and to obtain as soon as possible its lifting, if
issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CSFBC of such event and will promptly
prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an
amendment which will effect such compliance. Neither CSFBC's consent
to, nor the Underwriters' delivery of, any such amendment or supplement
shall constitute a waiver of any of the conditions set forth in Section
6.
(d) As soon as practicable, but not later than the
Availability Date (as defined below), the Company will make generally
available to its security holders an earnings statement covering a
period of at least 12 months beginning after the Effective Date of the
Initial Registration Statement (or, if later, the Effective Date of the
Additional Registration Statement) which will satisfy the provisions of
Section 11(a) of the Act. For the purpose of the preceding sentence,
"AVAILABILITY DATE" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such
Effective Date, except that, if such fourth fiscal quarter is the last
quarter of the Company's fiscal year, "AVAILABILITY DATE" means the
90th day after the end of such fourth fiscal quarter.
<PAGE> 9
9
(e) The Company will furnish to the Representatives copies of
each Registration Statement (three of which will be signed and will
include all exhibits), each related preliminary prospectus, and, so
long as a prospectus relating to the Offered Securities is required to
be delivered under the Act in connection with sales by any Underwriter
or dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as CSFBC reasonably
requests. The Prospectus shall be so furnished on or prior to 3:00
P.M., New York time, on the business day following the later of the
execution and delivery of this Agreement or the Effective Time of the
Initial Registration Statement. All other documents shall be so
furnished as soon as available. The Company will pay the expenses of
printing and distributing to the Underwriters all such documents.
(f) The Company, in cooperation with the Underwriters and
their counsel, will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required for the distribution; provided that the Company will not be
required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction.
(g) During the period of three years hereafter, the Company
will furnish to the Representatives and, upon request, to each of the
other Underwriters, as soon as practicable after the end of each fiscal
year, a copy of its annual report to stockholders for such year; and
the Company will furnish to the Representatives and, upon request, to
each of the other Underwriters, (i) as soon as available, a copy of
each report and any definitive proxy statement of the Company filed
with the Commission under the Exchange Act or mailed to stockholders,
and (ii) from time to time, such other information concerning the
Company as CSFBC may reasonably request.
(h) The Company and the Selling Stockholders will pay all
expenses incident to the performance of the obligations of the Company
and the Selling Stockholders, as the case may be, under this Agreement,
for any filing fees and other expenses (including fees and
disbursements of counsel) incurred in connection with qualification of
the Offered Securities for sale under the laws of such jurisdictions as
CSFBC designates and the printing of memoranda relating thereto, for
the filing fee incident to, and the reasonable fees and disbursements
of counsel to the Underwriters in connection with, the review by the
National Association of Securities Dealers, Inc. of the Offered
Securities, for any travel expenses of the Company's officers and
employees, for all fees and expenses incident to listing the Offered
Securities on The New York Stock Exchange and any other expenses of the
Company in connection with attending or hosting meetings with
prospective purchasers of the Offered Securities and for expenses
incurred in distributing preliminary prospectuses and the Prospectus
(including any amendments and supplements thereto) to the Underwriters.
(i) In connection with the offering, until CSFBC shall have
notified the Company and the other Underwriters of the completion of
the distribution of the Offered Securities, neither the Company nor any
of its affiliates has or will, either alone or with one or more other
persons, bid for or purchase for any account in which it or any of its
affiliates has a beneficial interest, any Offered Securities or attempt
to induce any person to purchase any Offered Securities; and neither it
nor any of its affiliates will make bids or purchases for the purpose
of creating actual, or apparent, active trading in, or of raising the
price of, the Offered Securities.
(j) For a period of 90 days after the First Closing Date, the
Company, each of the Selling Stockholders (other than National,
Sterling, Jennifer H. Martin, Joseph R. Martin, Jr. and Elisa S.
Boxer), Citicorp Venture Capital Ltd., CCT Partners IV, LP, W. Wayne
Carlson, William N. Stout and Ronald W. Shelly will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under
the Act relating to, any additional shares of its shares of Common
Stock or securities convertible into or exchangeable or exercisable for
any shares of its shares of Common Stock, or publicly disclose the
intention to make any such offer, sale, pledge, disposition or filing,
without the prior written consent of CSFBC. Notwithstanding the
foregoing sentence, during such 90 day period (A) the Company
(1) may grant stock options pursuant to the Company's existing stock
option plans, and may issue shares of Common Stock pursuant to the
exercise of such options, (2) may file registration statements on Form
S-8 and amendments thereto in connection with those stock option or
employee stock purchase plans of the Company in existence on the
Closing Date, (3) may file an amendment to the registration statement
on Form S-8 to register 435,520 additional shares of Common Stock and
distribute such shares pursuant to the Fairchild-NSC Deferred
Compensation
<PAGE> 10
10
Plan, (4) may issue shares of Common Stock upon the exercise of any
option or warrant or the conversion or exchange of a security issued by
it and outstanding on the date hereof and (5) may issue shares or
options in acquisitions in which the acquiror or acquirors of such
shares agree(s) to such restrictions, and (B) the foregoing
limitations, subject to the provisions set forth below, shall not
affect offers, sales or other dispositions by any Selling
Stockholder of those shares of Common Stock issued upon conversion of
the Company's previously authorized 12% Series A Cumulative Compounding
Preferred Stock (the "Converted Common Stock"); PROVIDED, that any such
sales of Converted Common Stock shall be effectuated by a broker-dealer
affiliate of CSFBC; and PROVIDED FURTHER, that the Selling Stockholder
proposing to offer, sell or otherwise dispose of any Converted Common
Stock obtains the prior approval of the Company Compliance Officer
prior to any sale of the Converted Common Stock, which approval shall
be based upon CSFBC's judgment as to any adverse effect of the proposed
sale on the market for Company Common Stock.
(k) The Company will apply the net proceeds of the offering
and the sale of the Offered Securities received by it in the manner set
forth in the Prospectus under the caption "Use of Proceeds."
(l) Each Selling Stockholder agrees to deliver to CSFBC,
attention: Transactions Advisory Group, on or prior to the First
Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
(m) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, (i) with respect to Kirk P. Pond,
Joseph R. Martin, Daniel E. Boxer and David A. Henry, any event occurs
as a result of which the Prospectus as then amended or supplemented
would include, and (ii) with respect to each of the other Selling
Stockholders, any event occurs as a result of which, to the knowledge
of such Selling Shareholder, the Prospectus as then amended or
supplemented would include, an untrue statement of a material fact or
omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Act, such Selling Stockholder will
promptly notify CSFBC and the Company of such event.
6. Conditions of the Obligations of the Underwriters. The obligations
of the several Underwriters (i) to purchase and pay for the Firm Securities on
the First Closing Date will be subject to the accuracy of the representations
and warranties on the part of the Company and the Selling Stockholders herein
and in the Custody Agreements in all material respects, except to the extent
such representations and warranties are already qualified by materiality in
Section 2 herein, to the accuracy of the statements of Company, Sterling and
National officers made pursuant to the provisions hereof, to the performance by
the Company and the Selling Stockholders of their respective obligations
hereunder and to the additional conditions precedent listed in this Section 6
and (ii) to purchase and pay for the Optional Securities on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and Sterling herein and in its Custody
Agreement in all material respects, except to the extent such representations
and warranties are already qualified by materiality in Section 2 herein, to the
accuracy of the statements of Company and Sterling officers made pursuant to the
provisions hereof, to the performance by the Company and Sterling of their
respective obligations hereunder and to the following additional conditions
precedent:
(a) The Representatives shall have received a letter, dated
the date of delivery thereof (which, if the Effective Time of the
Initial Registration Statement is prior to the execution and delivery
of this Agreement, shall be on or prior to the date of this Agreement
or, if the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement, shall be
prior to the filing of the amendment or post-effective amendment to the
registration statement to be filed shortly prior to such Effective
Time), of KPMG LLP, independent auditors for the Company and its
subsidiaries (except for Fairchild Korea), substantially in the form of
Exhibit A hereto and acceptable to the Underwriters.
(b) The Underwriters shall have received a letter, dated the
date of delivery thereof, of Samil Accounting Corporation, independent
auditors for Fairchild Korea, substantially in the form of Exhibit B
hereto and acceptable to the Underwriters.
<PAGE> 11
11
(c) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this Agreement,
such Effective Time shall have occurred not later than 10:00 P.M., New
York time, on the date of this Agreement or such later date as shall
have been consented to by CSFBC. If the Effective Time of the
Additional Registration Statement (if any) is not prior to the
execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or, if earlier, the time the Prospectus is printed and
distributed to any Underwriter, or shall have occurred at such later
date as shall have been consented to by CSFBC. If the Effective Time of
the Initial Registration Statement is prior to the execution and
delivery of this Agreement, the Prospectus shall have been filed with
the Commission in accordance with the Rules and Regulations and Section
5(a) of this Agreement. Prior to such Closing Date, no stop order
suspending the effectiveness of a Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Selling Stockholders, the
Company or the Representatives, shall be threatened by the Commission.
(d) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) a change in U.S. or
international financial, political or economic conditions or currency
exchange rates or exchange controls as would, in the reasonable
judgment of CSFBC, be likely to prejudice materially the success of the
public offering or the sale and payment for of the Offered Securities
whether in the primary market or in respect of dealings in the
secondary market, or (ii) any change, or any development or event
involving a prospective change, in the financial condition, business,
properties or results of operations of the Company and its subsidiaries
taken as a whole which, in the reasonable judgment of CSFBC, is
material and adverse and makes it impractical or inadvisable to proceed
with the completion of the public offering or the sale of and payment
for the Offered Securities; (iii) any downgrading in the rating of any
debt securities of the Company or its subsidiaries by any "nationally
recognized statistical rating organization" (as defined for purposes of
Rule 436(g) under the Securities Act), or any public announcement that
any such organization has under surveillance or review its rating of
any debt securities of the Company or its subsidiaries (other than an
announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iv) any
suspension or limitation of trading in securities generally on the New
York Stock Exchange or any setting of minimum prices for trading on
such exchange, or any suspension of trading of any securities of the
Company or its subsidiaries on any exchange or in the over-the-counter
market; (v) any banking moratorium declared by Federal or New York
authorities; or (vi) any outbreak or escalation of major hostilities in
which the United States or Korea is involved, any declaration of war by
Congress or the Korean government or any other substantial national or
international calamity or emergency if, in the reasonable judgment of a
majority in interest of the Underwriters, including CSFBC, the effect
of any such outbreak, escalation, declaration, calamity or emergency
makes it impractical or inadvisable to proceed with the completion of
the public offering or sale of and payment for the Offered Securities.
(e) The Representatives shall have received an opinion, dated
the Closing Date, of Daniel E. Boxer, General Counsel of the Company,
that:
(i) each of the subsidiaries of the Company
(except Fairchild Korea) is a corporation in good standing
under the laws of the jurisdiction of its incorporation, with
corporate power and corporate authority to own its properties
and conduct its businesses as described in the Prospectus; and
is duly qualified to do business as a foreign corporation and
is in good standing in the jurisdictions listed in such
opinion;
(ii) except as disclosed in the Prospectus, insofar
as is known to such counsel, there are no actions, suits or
proceedings threatened or pending against the Company or
subsidiaries of the Company or any of their respective
properties that if determined adversely to the Company or any
subsidiary would be reasonably likely to have a Material
Adverse Effect; and
(iii) such counsel does not know of any legal or
governmental proceedings required to be described in a
Registration Statement or the Prospectus which are not
described as required or of any contracts or documents of a
character required to be described in a Registration Statement
or the Prospectus or to be filed as exhibits to a Registration
Statement which are not described and filed as required.
<PAGE> 12
12
(f) The Representatives shall have received an opinion, dated
the Closing Date, of Dechert Price & Rhoads, counsel for the Company,
that:
(i) the Company is a corporation in good standing
under the laws of the State of Delaware, with corporate power
and corporate authority to own its properties and conduct its
businesses as described in the Prospectus;
(ii) each of Fairchild Semiconductor Corporation and
Fairchild Semiconductor Corporation of California is a
corporation in good standing under the laws of the state of
Delaware;
(iii) insofar as is known to such counsel, to the
extent the Prospectus contains summaries of statutes, legal
proceedings or agreements to which the Company or any of its
subsidiaries is a party (or provisions thereof) referred to
therein, such statements are true and correct in all material
respects;
(iv) the Offered Securities and all other outstanding
shares of capital stock of the Company have been duly
authorized; all outstanding shares of capital stock of the
Company are, and, when the Offered Securities have been
delivered and paid for in accordance with this Agreement on
each Closing Date, such Offered Securities will have been,
validly issued, fully paid and nonassessable and will conform
in all material respects to the description thereof contained
in the Prospectus; and the stockholders of the Company have no
preemptive rights with respect to the shares of Common Stock,
other than as set forth in the Securities Purchase and Holders
Agreement, as amended, dated March 11, 1997, among the Company
and certain stockholders of the Company;
(v) no consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court
is required for the performance by the Company of its
obligations under this Agreement or in connection with the
issuance and sale of the Offered Securities by the Company
except such as have been obtained or made or as may be
required under the Securities Act or the Exchange Act and the
rules and regulations of the Commission thereunder and such as
may be required by state securities or blue sky laws in
connection with the offer and sale of the Offered Securities,
and except for such consents, approvals, authorizations,
orders or filings the failure of which to obtain or make would
not result in a Material Adverse Effect;
(vi) the execution, delivery and performance of this
Agreement by the Company and the issuance and sale of the
Offered Securities by the Company will not result in a breach
or violation of any of the terms and provisions of, or
constitute a default under, any material New York or Federal
statute, rule or regulation or the Delaware General
Corporation Law applicable to the Company or any order of any
governmental agency or body or any court having jurisdiction
over the Company, Fairchild Semiconductor Corporation or
Fairchild Semiconductor Corporation of California or any of
their properties and which order is known to such counsel, or
any agreement or instrument listed in such opinion, or the
charter or by-laws of the Company, Fairchild Semiconductor
Corporation or Fairchild Semiconductor Corporation of
California, and the Company has full power and authority to
authorize, issue and sell the Offered Securities to be sold by
the Company as contemplated by this Agreement;
(vii) except as disclosed in the Prospectus, insofar
as is known to such counsel, there are no actions, suits or
proceedings threatened or pending against the Company or any
of its properties that if determined adversely to the Company
would be reasonably likely to have a Material Adverse Effect;
(viii) the Company is not an open-end investment
company, unit investment trust or face-amount certificate
company that is or is required to be registered under Section
8 of the Investment Company Act, and it is not a closed-end
investment company required to be registered, but not
registered, thereunder; and the Company is not, and after
giving effect to the offering and sale of the Offered
Securities and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment
company" as defined in the Investment Company Act;
<PAGE> 13
13
(ix) the Initial Registration Statement was declared
effective under the Act as of the date and time specified in
such opinion, the Additional Registration Statement (if any)
was filed and became effective under the Act as of the date
and time (if determinable) specified in such opinion, the
Prospectus either was filed with the Commission pursuant to
the subparagraph of Rule 424(b) specified in such opinion on
the date specified therein or was included in the Initial
Registration Statement or the Additional Registration
Statement (as the case may be), and, to the knowledge of such
counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and
no proceedings for that purpose have been instituted or are
pending or threatened under the Act, and each Registration
Statement and the Prospectus, and each amendment or supplement
thereto, as of their respective effective or issue dates,
complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations (except
as to the financial statements, supporting schedules,
footnotes and other financial and statistical information
included therein, as to which such counsel expresses no
opinion); and
(x) this Agreement has been duly authorized, executed
and delivered by the Company.
In addition, such counsel shall state in a separate letter
that they have participated in conferences with officers and other
representatives of the Company and representatives of the Underwriters
and its counsel during which the contents of the Registration Statement
and related matters were discussed and reviewed and, although such
counsel has not independently verified is not passing upon and does not
assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement, on the basis of
the information that was developed in the course of the performance of
the services referred to above, considered in the light of such
counsel's understanding of the applicable law, that nothing came to
their attention that caused them to believe that any part of a
Registration Statement or any amendment thereto made prior to the
Closing Date (other than the financial statements and schedules and the
other financial and statistical data included therein, as to which such
counsel expresses no opinion), as of its effective date or as of such
Closing Date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that the
Prospectus or any amendment or supplement thereto, made prior to the
Closing Date (other than the financial statements and schedules and the
other financial and statistical data included therein, as to which such
counsel expresses no opinion), as of the date of the Prospectus or any
amendment or Supplement thereto or as of such Closing Date, contained
any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
State of New York, the General Corporation Law of the State of Delaware
or the Federal laws of the United States, to the extent they deem
proper and specified in such opinion, upon the opinion of other counsel
who are satisfactory to counsel for the Underwriters (which opinion
will be attached thereto) and (B) as to matters of fact, to the extent
they deem proper, on certificates of responsible officers of the
Company and public officials. Such opinion may be limited to the
General Corporation Law of the State of Delaware and the laws of the
State of New York, and the Federal laws of the United States.
(g) The Representatives shall have received an opinion, dated
the Closing Date, from Kim & Chang, special counsel for the Company,
that:
(i) Fairchild Korea is a limited liability company
(chusik hoesa) duly organized and validly existing under the
laws of the Republic of Korea; and Fairchild Korea has the
corporate power to own its property and conduct its business
in accordance with its Articles of Incorporation.
(ii) Notwithstanding that certain other licenses and
permits may be required for Fairchild Korea to conduct its
business, no separate business license is necessary under the
Korean laws in order for Fairchild Korea to engage in
developing, manufacturing and selling power device products.
<PAGE> 14
14
(h) The Representatives shall have received an opinion, dated
such Closing Date, of John M. Clark, III, General Counsel for National,
to the effect that:
(i) National had valid and unencumbered title to the
Offered Securities delivered by National on the Closing Date
and had full right, power and authority to sell, assign,
transfer and deliver the Offered Securities delivered by
National on such Closing Date hereunder; and the several
Underwriters have acquired valid and unencumbered title to the
Offered Securities purchased by them from National on such
Closing Date hereunder;
(ii) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court
is required to be obtained or made by National for the
consummation of the transactions contemplated by this
Agreement in connection with the sale of the Offered
Securities sold by National, except such as have been obtained
and made under the Act and may be required under state
securities laws;
(iii) The execution, delivery and performance of this
Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any
of the terms and provisions of, or constitute default under,
any statute, any rule, regulation or order of any governmental
agency or body or any court having jurisdiction over National
or any of its properties or any agreement or instrument to
which National is a party or by which National is bound or to
which any of the properties of National is subject, or the
charter or by-laws of National; and
(iv) This Agreement has been duly authorized,
executed and delivered by National.
(i) The Representatives shall have received an opinion, dated
January 19, 2000, of Dechert Price & Rhoads, counsel for Sterling, to
the effect that:
(i) Sterling had valid and unencumbered title to the
Maximum Number of Shares (as defined in the Power of
Attorney), which Shares are represented by the certificates
being concurrently deposited with the Custodian, pursuant to
the Custody Agreement, between Sterling and the Custodian, and
has full right, power and authority to sell, assign, transfer
and deliver the Shares pursuant to this Agreement; and the
Underwriters have acquired valid and unencumbered title to the
Shares purchased by them from Sterling on the Closing Date
hereunder;
(ii) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court
is required to be obtained or made by Sterling for the
consummation of the transactions contemplated by this
Agreement in connection with the sale of the Shares sold by
Sterling, except such as have been or will be obtained or made
under the Act and such as may be required under state
securities laws;
(iii) The execution, delivery and performance of this
Agreement and the consummation of the transactions therein
contemplated will not result in a breach or violation of any
of the terms and provisions of, or constitute a default under,
any material New York or Federal statute, rule or regulation
or the Delaware General Limited Liability Company Law
applicable to Sterling or any order of
any governmental agency or body or any court having
jurisdiction over Sterling or any of its properties and which
order is known to such counsel, or any agreement or instrument
listed on Schedule A to such opinion, or the certificate of
formation, limited liability company agreement or any other
constitutive documents of Sterling, and Sterling has full
power and authority to sell the Shares sold by it as
contemplated by this Agreement;
(iv) Each of the Power of Attorney and Custody
Agreement has been duly authorized, executed and delivered by
Sterling and constitutes a valid and legally binding
obligation of Sterling enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and
to general equity principles; and
<PAGE> 15
15
(v) This Agreement has been duly authorized, executed
and delivered by one of the Attorneys (as defined in the Power
of Attorney) on behalf of Sterling.
(j) The Representatives shall have received from Cravath,
Swaine & Moore, counsel for the Underwriters, such opinion or opinions,
dated such Closing Date, with respect to the incorporation of the
Company, the validity of the Offered Securities delivered on such
Closing Date, the Registration Statements, the Prospectus and other
related matters as the Representatives may require, and the Company
shall have furnished to such counsel such documents as they request for
the purpose of enabling them to pass upon such matters.
(k) The Representatives shall have received a certificate,
dated such Closing Date, of the President or any Vice President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable investigation
and in their capacity as such officers, on behalf of the Company, shall
state that: the representations and warranties of the Company in this
Agreement are true and correct; the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied hereunder at or prior to such Closing Date; no stop order
suspending the effectiveness of any Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
threatened by the Commission; the Additional Registration Statement (if
any) satisfying the requirements of subparagraphs (1) and (3) of Rule
462(b) was filed pursuant to Rule 462(b), including payment of the
applicable filing fee in accordance with Rule 111(a) or (b) under the
Act, prior to the time the Prospectus was printed and distributed to
any Underwriter; and, subsequent to the dates of the most recent
financial statements of the Company in the Prospectus, there has been
no material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or
other), business, properties or results of operations of the Company
and its subsidiaries taken as a whole except as set forth in or
contemplated by the Prospectus or as described in such certificate.
(l) The Representatives shall have received a certificate,
dated such Closing Date, of the President or any Senior Vice President
and a principal financial or accounting officer of National in which
such officers, to the best of their knowledge and after reasonable
investigation and in their capacity as such officers, on behalf of
National, shall state that: all the representations and warranties of
National contained in this Agreement are true and correct on the date
hereof with the same force and effect as if made on and as of the date
hereof; and National has complied with all of the agreements and
satisfied all conditions on its part contained in this Agreement and
required to be complied with or satisfied by National on or prior to
such Closing Date.
(m) The Representatives shall have received a certificate,
dated such Closing Date, of the President or any Senior Vice President
and any authorized representative of Sterling in which such officers or
representatives, to the best of their knowledge and after reasonable
investigation and in their capacity as such officers or
representatives, on behalf of Sterling, shall state that: all the
representations and warranties of Sterling contained in this Agreement
are true and correct on the date hereof with the same force and effect
as if made on and as of the date hereof; and Sterling has complied with
all of the agreements and satisfied all conditions on its part
contained in this Agreement and required to be complied with or
satisfied by Sterling on or prior to such Closing Date.
(n) The Representatives shall have received a letter, dated
such Closing Date, of KPMG LLP which meets the requirements of
subsection (a) of this Section 6, except that the specified date
referred to in such subsection will be a date not more than three days
prior to such Closing Date for the purposes of this subsection (n).
(o) The Representatives shall have received a letter, dated
the Closing Date, of Samil Accounting Corporation which meets the
requirements of subsection (b) of this Section 6, except that the
specified date referred to in such subsection will be a date not more
than three business days prior to the Closing Date for the purposes of
this subsection (o).
(p) The Company shall have received a waiver from each party
thereto (other than the Company) with respect to registration rights
granted to such party under the Registration Rights Agreement, dated
March 11, 1997, among the Company, Sterling, National and the
management investors listed therein.
<PAGE> 16
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(q) The "lock-up" agreements between the Representatives and
the Company, Citicorp Venture Capital Ltd., CCT Partners IV, LP, Kirk
P. Pond, Joseph R. Martin, Daniel E. Boxer, Jerry M. Baker, Darrell
Mayeux, Keith Jackson, David A. Henry, Matthew W. Towse, Richard M.
Cashin, Jr., Paul C. Schorr IV, Andrew C. Boxer, Kathleen K. Martin,
Mariah E. Martin, Patrick F. Martin, W. Wayne Carlson, William N. Stout
and Ronald W. Shelly, delivered to you on or before the date hereof,
shall be in full force and effect on the Closing Date.
(r) The Power of Attorney between each of the Selling
Stockholders (other than National) and the Custodian, and the Custody
Agreements, between each of the Selling Stockholders (other than
National) and the Custodian, shall have been received by the Custodian
and be in full force and effect on the Closing Date.
The Selling Stockholders and the Company will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. CSFBC may in its sole discretion waive
on behalf of the Underwriters compliance with any conditions to the obligations
of the Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution. (a)(i) The Company will indemnify
and hold harmless each Underwriter, its partners, directors and officers and
each person, if any, who controls such Underwriter within the meaning of Section
15 of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred; PROVIDED, HOWEVER, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement in or omission or alleged omission from any of such
documents in reliance upon and in conformity with written information furnished
to the Company by any Underwriter through the Representatives specifically for
use therein, it being understood and agreed that the only such information
furnished by any Underwriter consists of the information described as such in
subsection (c) below; and PROVIDED FURTHER, HOWEVER, that the foregoing
indemnity with respect to any preliminary prospectus shall not inure to the
benefit of the Underwriter from whom the person asserting any such losses,
claims, damages, liabilities or actions in respect thereof purchased Offered
Securities to the extent that such losses, claims, damages, liabilities or
actions in respect thereof of such Underwriter result from a fact that such
Underwriter sold Offered Securities to a person in an initial resale to whom
there was not sent or given, at or prior to the written confirmation of the sale
of such Offered Securities, a copy of the Prospectus (as amended or
supplemented), if the Company had previously furnished a copy of such amendments
or supplements to such Underwriter, and the losses, claims, damages, liabilities
or actions in respect thereof of such Underwriter result from an untrue
statement or omission of a material fact contained in the preliminary
prospectus, which was corrected in the Prospectus.
(b) Each Selling Stockholder will severally and not jointly indemnify
and hold harmless each Underwriter, its partners, directors and officers and
each person who controls such Underwriter within the meaning of Section 15 of
the Act, against any losses, claims, damages or liabilities, joint or several,
to which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, the
Prospectus, or any amendment or supplement thereto, or any related preliminary
prospectus, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, in each case to the extent, but only to the extent,
that such untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Selling Stockholder specifically for use therein and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; PROVIDED, HOWEVER,
that the Selling Stockholders will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged omission
from any of such documents in reliance upon and in conformity with
<PAGE> 17
17
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below; and PROVIDED FURTHER,
HOWEVER, that the foregoing indemnity with respect to any preliminary prospectus
shall not inure to the benefit of the Underwriter from whom the person asserting
any such losses, claims, damages, liabilities or actions in respect thereof
purchased Offered Securities to the extent that such losses, claims, damages,
liabilities or actions in respect thereof of such Underwriter result from a fact
that such Underwriter sold Offered Securities to a person in an initial resale
to whom there was not sent or given, at or prior to the written confirmation of
the sale of such Offered Securities, a copy of the Prospectus (as amended or
supplemented), if the Company had previously furnished a copy of such amendments
or supplements to such Underwriter, and the losses, claims, damages, liabilities
or actions in respect thereof of such Underwriter result from an untrue
statement or omission of a material fact contained in the preliminary
prospectus, which was corrected in the Prospectus; and PROVIDED FURTHER,
however, that the liability under this Section 7(b) of each Selling Stockholder
shall be limited to an amount equal to the aggregate gross proceeds to such
Selling Stockholder from the sale of Securities sold by such Selling Stockholder
hereunder.
(c) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person, if any who
controls the Company within the meaning of Section 15 of the Act, and each
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or such Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by such Underwriter through the
Representatives specifically for use therein, and will reimburse any legal or
other expenses reasonably incurred by the Company and each Selling Stockholder
in connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred, it being understood and
agreed that the only such information furnished by any Underwriter consists of
the following information in the Prospectus furnished on behalf of each
Underwriter: the paragraph on the cover page concerning the terms of the
Offering by the Underwriters, the concession and reliance figures appearing in
the fifth paragraph under the caption "Underwriting" and the over-allotment and
stabilization information contained in the tenth paragraph under the caption
"Underwriting."
(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party (who shall not, except
with the consent of the indemnified party, be counsel to the indemnifying
party), and after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party under this Section, as the case may be,
for any legal or other expenses subsequently incurred by such indemnified party
in connection with thedefense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action in respect of which any indemnified party is or could have been a party
and indemnity could have been sought hereunder by such indemnified party unless
such settlement (i) includes an unconditional release of such indemnified party
from all liability on any claims that are the subject matter of such action and
(ii) does not include a statement as to, or an admission of, fault, culpability
or a failure to act by or on behalf of an indemnified party.
(e) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a), (b)
or (c) above, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of the losses, claims,
<PAGE> 18
18
damages or liabilities referred to in subsection (a), (b) or (c) above (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company and the Selling Stockholders on the one hand and the Underwriters on
the other from the offering of the shares of Common Stock or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Stockholders on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Stockholders bear to
the total underwriting discounts and commissions received by the Underwriters.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, the Selling Stockholders or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (e) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim which is
the subject of this subsection (e). Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the shares of Common
Stock underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under
this Section shall be in addition to any liability which the Company and the
Selling Stockholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the Company, to each officer of the Company who has signed a
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company and, with respect to any Optional
Closing Date, to the Company and Sterling for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting
Underwriters shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the Offered Securities that such defaulting
Underwriters agreed but failed to purchase on such Closing Date. If any
Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CSFBC, the Company and the Selling Stockholders, and, in the case of any
Optional Securities, the Company and Sterling for the purchase of such Offered
Securities by other persons are not made within 36 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Stockholders or, in the
case of any Optional Securities, the Company or Sterling, except as provided in
Section 9 (provided that if such default occurs with respect to Optional
Securities after the First Closing Date, this Agreement will not terminate as to
the Firm Securities or any Optional Securities purchased prior to such
termination). As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section. Nothing herein will
relieve a defaulting Underwriter from liability for its default.
<PAGE> 19
19
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Stockholders and of the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, the Selling
Stockholders, the Company or any of their respective representatives, officers
or directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Stockholders shall
remain responsible for the expenses to be paid or reimbursed by it pursuant to
Section 5 and the respective obligations of the Company, the Selling
Stockholders and the Underwriters pursuant to Section 7 shall remain in effect,
and if any Offered Securities have been purchased hereunder the representations
and warranties in Section 2 and all obligations under Section 5 shall also
remain in effect. If the purchase of the Offered Securities by the Underwriters
is not consummated for any reason other than solely because of the termination
of this Agreement pursuant to Section 8 or the occurrence of any event specified
in clause (iii), (iv), (v) or (vi) of Section 6(d), the Company and the Selling
Stockholders will reimburse the Underwriters for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) reasonably incurred by
them in connection with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at Fairchild Semiconductor
International, Inc., 333 Western Avenue, Mail Stop 01-00, South Portland, ME,
04106, Attention: Daniel E. Boxer, Esq. or, if sent to National, will be mailed,
delivered or telegraphed and confirmed to it at National Semiconductor
Corporation, 1090 Kifer Road, Mail Stop 16-135, Sunnyvale, CA 94086, Attention:
John M. Clark, III, Esq., or if sent to Sterling, will be mailed, delivered or
telegraphed and confirmed to it at Sterling Holding Company, LLC, c/o Fairchild
Semiconductor Corporation, 333 Western Avenue, South Portland, ME 04106, Attn:
Daniel E. Boxer, Esq., or if sent to any of the other Selling Stockholders, will
be mailed, delivered or telegraphed and confirmed to it at the address set forth
in the applicable Custody Agreement; PROVIDED, HOWEVER, that any notice to an
Underwriter pursuant to Section 8 will be mailed, delivered or telegraphed and
confirmed to such Underwriter.
12. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
13. Representation of Underwriters. The Representatives will act for
the several Underwriters in connection with this financing, and any action
under this Agreement taken by the Representatives jointly or by CSFBC will be
binding upon all the Underwriters.
14. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
15. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
The Company and the Selling Stockholders hereby submit to the
non-exclusive jurisdiction of the Federal and state courts in the Borough of
Manhattan in The City of New York in any suit or proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby.
<PAGE> 20
20
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement among the
Company, the Selling Stockholders and the several Underwriters in accordance
with its terms.
Very truly yours,
FAIRCHILD SEMICONDUCTOR INTERNATIONAL,
INC.,
By
----------------------------------------------
Name:
Title:
NATIONAL SEMICONDUCTOR CORPORATION,
By
----------------------------------------------
Name:
Title:
THE SELLING STOCKHOLDERS SET FORTH ON
SCHEDULE A HERETO (OTHER THAN NATIONAL),
By
----------------------------------------------
Name:
Title: Attorney-in-Fact for the Selling
Stockholders (other than National)
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
SALOMON SMITH BARNEY INC.
DEUTSCHE BANK SECURITIES INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
FLEETBOSTON ROBERTSON STEPHENS INC.
Acting on behalf of themselves and as the
Representatives of the several
Underwriters
By CREDIT SUISSE FIRST BOSTON CORPORATION,
By
---------------------------------------
Name:
Title
<PAGE> 21
SCHEDULE A
<TABLE>
<S> <C>
NUMBER OF
UNDERWRITER FIRM SECURITIES
Credit Suisse First Boston Corporation................................................
Salomon Smith Barney Inc. ............................................................
Deutsche Bank Securities Inc..........................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated....................................
FleetBoston Robertson Stephens, Inc...................................................
Total............................................................................. 23,500,000
==========
</TABLE>
<PAGE> 22
<TABLE>
<S> <C> <C>
NUMBER OF FIRM NUMBER OF
SELLING STOCKHOLDER SECURITIES OPTIONAL SECURITIES
------------------- ---------- -------------------
Sterling Holding Company,
LLC................................. 9,000,000 2,115,000
National Semiconductor
Corporation......................... 7,243,360 --
Kirk P. Pond........................ 288,646 --
Joseph R. Martin.................... 130,000 --
Daniel E. Boxer..................... 99,672 --
Jerry M. Baker...................... 67,821 --
Keith Jackson....................... 33,520 --
Darrell Mayeux...................... 50,100 --
David A. Henry...................... 10,000 --
Matthew W. Towse.................... 9,200 --
Richard M. Cashin, Jr............... 218,833 --
BG Partners, LLP
(Paul C. Schorr IV)................. 18,049 --
Andrew C. Boxer..................... 16,000 --
Elisa S. Boxer...................... 16,000 --
Jennifer H. Martin.................. 31,584 --
Joseph R. Martin, Jr................ 31,584 --
Kathleen K. Martin.................. 31,584 --
Mariah E. Martin.................... 31,584 --
Patrick F. Martin................... 31,584
----------
Total....................... 17,359,120 2,115,000
---------- =========
</TABLE>
<PAGE> 1
Exhibit 5.01
[LETTERHEAD OF DECHERT PRICE & RHOADS]
January 19, 2000
Fairchild Semiconductor International, Inc.
333 Western Avenue
Mail Stop 01-00
South Portland, Maine 04106
Re: 27,025,000 SHARES OF CLASS A COMMON STOCK,
AS DESCRIBED IN THE REGISTRATION STATEMENT
ON FORM S-1 (REGISTRATION NO. 333-92941)
----------------------------------------
Gentlemen and Ladies:
We have acted as your counsel in connection with the registration under
the Securities Act of 1933, as amended, of 23,500,000 shares of your Class A
Common Stock, par value $.01 per share (the "Shares"), and 3,525,000 shares of
your Class A Common Stock, par value $.01 per share (the "Optional Shares"). You
and Sterling Holding Company, LLC, a Delaware limited liability company
("Sterling"), have granted the underwriters an option to purchase 1,410,000 and
2,115,000 Optional Shares, respectively, solely to cover over-allotments, if
any, in connection with the offering that is the subject of the above-referenced
registration statement (the "Registration Statement"). The Shares and the
Optional Shares are to be sold pursuant to an underwriting agreement (the
"Underwriting Agreement"), among Fairchild Semiconductor International, Inc.
(the "Company"), Sterling, National Semiconductor Corporation and the other
selling stockholders identified therein (collectively with Sterling and National
Semiconductor Corporation, the "Selling Stockholders"), and Credit Suisse First
Boston Corporation, Salomon Smith Barney Inc., Deutsche Bank Securities, Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and FleetBoston Robertson
Stephens, Inc. as representatives of the several underwriters (the
"Underwriters"), the form of which is included as Exhibit 1.01 to the
Registration Statement.
<PAGE> 2
Fairchild Semiconductor International, Inc.
January 19, 2000
Page 2
We have participated in the preparation of the Registration Statement
and have reviewed the proposed form of the Underwriting Agreement, and we have
examined such corporate records and documents, certificates of officers and
matters of law as we have considered appropriate to enable us to give this
opinion.
Based upon the foregoing, it is our opinion that the Shares have been
duly authorized and, (i) with respect to the Shares to be sold by you, when
delivered to the Underwriters against payment therefor in accordance with the
terms of the Underwriting Agreement, will be validly issued, fully paid and
non-assessable, and (ii) with respect to the Shares to be sold by the Selling
Stockholders, are validly issued, fully paid and non-assessable.
It is also our opinion that the Optional Shares have been duly
authorized and, (i) with respect to the Optional Shares to be sold by you, when
delivered to the Underwriters against payment therefor in accordance with the
terms of the Underwriting Agreement, will be validly issued, fully paid and
non-assessable, and (ii) with respect to the Optional Shares to be sold by
Sterling, are validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the prospectus contained
therein, under the caption "Legal Matters." We do not admit to being within the
categories of persons whose consent is required under Section 7 of the
Securities Act or under the rules and regulations promulgated by the Securities
and Exchange Commission.
Very truly yours,
/s/ Dechert Price & Rhoads
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 (No.
333-92941) of Fairchild Semiconductor International, Inc. of our report dated
February 24, 1999 relating to the financial statements of the Power Device
Business of Samsung Electronics Co., Ltd., which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
/s/ Samil Accounting Corporation
Samil Accounting Corporation
Seoul, Korea
January 19, 2000
<PAGE> 1
Exhibit 23.03
The Board of Directors
Fairchild Semiconductor International, Inc.:
We consent to the inclusion of our reports dated June 30, 1999, except as to
Note 20, which is as of August 9, 1999, with respect to the consolidated balance
sheets of Fairchild Semiconductor International, Inc. and Subsidiaries as of May
31, 1998 and May 30, 1999, and the related consolidated statements of operations
and stockholders' equity (deficit) for each of the years in the three-year
period ended May 30, 1999, and the related consolidated statements of cash flows
for the years ended May 31, 1998 and May 30, 1999, and the related schedules,
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."
KPMG LLP
Boston, Massachusetts
January 18, 2000
