<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 2000.
REGISTRATION NO. 333-33082
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 1
TO
FORM S-4
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.
82 RUNNING HILL ROAD
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:
CHRISTOPHER G. KARRAS, ESQ.
DECHERT PRICE & RHOADS
4000 BELL ATLANTIC TOWER
1717 ARCH STREET
PHILADELPHIA, PENNSYLVANIA 19103
(215) 994-4000
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time 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. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] -------------.
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] -------------.
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 MARCH 29, 2000
[FAIRCHILD SEMICONDUCTOR LOGO]
4,000,000 Shares
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
Class A Common Stock
------------------
This prospectus relates to 4,000,000 shares of our Class A Common Stock
that we may issue and offer for sale from time to time in connection with
business combination transactions or acquisitions in amounts, at prices and on
terms as we may determine at the time of offering. We have not fixed a period of
time during which the Class A Common Stock offered by this prospectus may be
offered or sold.
We will pay all expenses of this offering. No underwriting discounts or
commissions will be paid in connection with the issuance of Class A Common Stock
in business combination transactions or acquisitions, although finder's fees may
be paid with respect to specific acquisitions. Any person receiving a finder's
fee may be deemed to be an underwriter within the meaning of Section 2(11) of
the Securities Act of 1933.
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 March
15, 2000 was $32.44 per share.
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
STARTING ON PAGE 8.
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.
The date of this prospectus is .
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY..................... 1
RISK FACTORS........................... 8
FORWARD-LOOKING STATEMENTS............. 16
USE OF PROCEEDS........................ 16
DIVIDEND POLICY........................ 16
PRICE RANGE OF COMMON STOCK............ 17
CAPITALIZATION......................... 18
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENT AND UNAUDITED
SUPPLEMENTAL DATA.................... 19
SELECTED CONSOLIDATED FINANCIAL DATA OF
FAIRCHILD INTERNATIONAL.............. 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF FAIRCHILD
INTERNATIONAL........................ 28
SELECTED HISTORICAL FINANCIAL DATA OF
THE POWER DEVICE BUSINESS............ 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE POWER DEVICE
BUSINESS............................. 52
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDUSTRY OVERVIEW...................... 58
BUSINESS............................... 62
MANAGEMENT............................. 76
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS......................... 85
PRINCIPAL STOCKHOLDERS................. 93
DESCRIPTION OF CAPITAL STOCK........... 94
SHARES ELIGIBLE FOR FUTURE SALE........ 98
OTHER RESTRICTIONS ON RESALE........... 100
PLAN OF DISTRIBUTION................... 100
LEGAL MATTERS.......................... 100
EXPERTS................................ 100
WHERE YOU CAN FIND MORE INFORMATION.... 101
GLOSSARY............................... 102
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 Stub Year 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 one of the largest independent semiconductor
companies 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 $149.4 billion
during 1999 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 12.8%. We operate primarily in the approximately $65.4 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 (including interface) and discrete markets
are expected to grow from 1999 to 2002 at compounded annual growth rates of
15.1% and 9.5%, respectively, according to the Semiconductor Industry
Association. 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.
1
<PAGE> 5
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 all 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
Stub Year 1999 total revenue. Customers in our end user markets include industry
leaders such as Compaq, Ericsson, Lucent, Nortel Networks, Samsung Electronics
and Siemens.
EXPERIENCED MANAGEMENT. Our senior management team consists of seven
individuals who have on average approximately 25 years of experience in the
semiconductor industry. Our chief executive officer, Kirk P. Pond, has over 30
years of experience in the industry and has held senior management positions at
Texas Instruments and National Semiconductor. At National Semiconductor, Mr.
Pond was executive vice president and chief operating officer prior to his
current position at Fairchild 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 82 Running Hill Road, South
Portland, Maine 04106, and our telephone number is (207) 775-8100.
2
<PAGE> 6
THE OFFERING
Class A Common Stock
offered....................... 4,000,000 shares to be issued in connection
with proposed acquisitions by us or one or more
of our subsidiaries.
Common stock to be outstanding
after this offering(1)...... 83,210,179 shares of Class A Common Stock
17,281,000 shares of Class B Common Stock
----------------------------------------------
Total....................... 100,491,179 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 cash proceeds from this
offering. See "Use of Proceeds."
NYSE symbol................... FCS
- -------------------------
(1) Based on shares outstanding at February 29, 2000 and excluding 6,678,473
shares of Class A Common Stock reserved for issuance upon exercise of
outstanding stock options after February 29, 2000.
3
<PAGE> 7
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
statement of operations data for the seven months ended December 27, 1998 from
the unaudited condensed consolidated statement of operations included elsewhere
in this prospectus. We derived the historical balance sheet data as of December
26, 1999 and the historical statement of operations data for the seven months
ended December 26, 1999 and 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. The unaudited
balance sheet data, as adjusted for our follow-on stock offering, consummated on
January 25, 2000, reflect the application of the proceeds from that offering as
of December 26, 1999 and assume no cash proceeds to the company from this
offering.
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."
4
<PAGE> 8
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEVEN MONTHS
MAY 30, 1999 ENDED DECEMBER
FISCAL YEAR ENDED MAY ---------------------- --------------------
---------------------- PRO FORMA 1998
1997 1998 HISTORICAL (1)(2) (UNAUDITED) 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 $ 38.8 $173.5
Discrete.................................... 164.5 187.3 222.8 428.9 96.1 316.9
Logic....................................... 285.3 303.0 267.6 267.6 144.0 184.0
Memory(4)................................... 138.0 113.5 67.9 67.9 43.4 39.6
Contract manufacturing services............. 104.2 153.4 81.0 118.6 38.0 72.2
------- ------- ------- -------- ------ ------
Total revenue................................. $ 692.0 $ 789.2 $ 735.1 $1,111.9 $360.3 $786.2
======= ======= ======= ======== ====== ======
Gross profit(4)............................... $ 152.5 $ 230.5 $ 152.3 $ 279.5 $ 74.8 $234.9
Research and development...................... 18.9 35.7 39.3 52.4 21.3 35.0
Selling, general and administrative(5)........ 96.4 92.0 105.1 161.5 52.9 117.4
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) (3.9) 82.5
Interest expense, net(8)...................... 11.2 54.5 71.8 79.9 34.2 56.2
Other expense (income), net................... 1.4 -- -- (0.1) -- --
Provision (benefit) for income taxes.......... 3.8 10.7 (5.1) (5.1) (7.6) 5.0
------- ------- ------- -------- ------ ------
Income (loss) before cumulative effect of
change in accounting principle(9)......... $ 15.5 $ 22.1 $(114.1) $ (122.4) $(30.5) $ 21.3
======= ======= ======= ======== ====== ======
Net income (loss) applicable to common stock-
holders before cumulative effect of change in
accounting principle................................. $ 13.4 $(123.9) $ (122.4) $ 35.9 $ 19.3
======= ======= ======== ====== ======
EARNINGS PER COMMON SHARE(10):
Basic.................................................. $ 0.21 $ (1.97) $ (1.39) $(0.57) $ 0.24
Diluted................................................ $ 0.20 $ (1.97) $ (1.39) $(0.57) $ 0.23
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (IN MILLIONS):
Basic.................................................. 62.8 62.9 88.1 62.9 80.0
Diluted................................................ 65.0 62.9 88.1 62.9 83.7
OTHER FINANCIAL DATA:(1)
Amortization of intangibles(11)............... $ -- $ 1.4 $ 8.4 $ 33.5 $ 2.0 $ 19.5
Depreciation and other amortization........... 77.1 83.4 95.4 117.6 53.1 62.8
Capital expenditures.......................... 47.1 78.0 46.2 52.5 24.1 74.8
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 26, 1999
------------------------------------
AS ADJUSTED
HISTORICAL FOR FOLLOW-ON OFFERING
---------- ----------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents................................... $ 138.7 $ 378.4
Accounts receivable, net.................................... 140.3 140.3
Inventories................................................. 166.3 166.3
Total assets................................................ 1,137.6 1,377.3
Long-term debt, including current portion................... 718.6 718.6
Total stockholders' equity.................................. 213.2 452.9
</TABLE>
5
<PAGE> 9
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 seven months ended December 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) 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 seven months ended December 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 seven months ended December 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.
6
<PAGE> 10
(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."
7
<PAGE> 11
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.
WE HAVE $718.6 MILLION OF TOTAL INDEBTEDNESS AND A DEBT TO EQUITY RATIO OF 1.6
TO 1.0, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR ABILITY
TO GROW AND COMPETE.
After giving effect to our follow-on stock offering completed January 25,
2000, and the application of the proceeds of that offering, as of December 26,
1999, we would have had total indebtedness of $718.6 million, stockholders'
equity of $452.9 million and a ratio of debt to equity of 1.6 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:
- required us to dedicate approximately $42.1 million of our cash flow to
interest payments on our indebtedness in Stub Year 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.
Interest expense for Stub Year 1999 was $56.2 million. 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 December 26, 1999, have variable interest rates, the cost of
those borrowings will increase if market interest rates increase. If we are
unable to service our indebtedness, we may need to refinance all or a portion of
our indebtedness on or before maturity. We cannot assure you that we would be
able to refinance any of our indebtedness on commercially reasonable terms or at
all, which could cause us to default on our obligations and impair our
liquidity.
See "-- Cyclical Industry," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Fairchild International" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Power Device Business."
8
<PAGE> 12
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 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
9
<PAGE> 13
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 expenses on a stand-alone basis, including the effect of the
Transitional Services Agreement with
10
<PAGE> 14
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.
11
<PAGE> 15
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
12
<PAGE> 16
effort to improve yields and product performance. Impurities or other
difficulties in the manufacturing process can lower yields.
In addition, as is common in the semiconductor industry, we have from time
to time experienced difficulty in beginning production at new facilities or in
effecting transitions to new manufacturing processes. As a consequence, we have
suffered delays in product deliveries or reduced yields. We may experience
manufacturing problems in achieving acceptable yields or experience product
delivery delays in the future as a result of, among other things, capacity
constraints, construction delays, upgrading or expanding existing facilities or
changing our process technologies, any of which could result in a loss of future
revenues. Our operating results could also be adversely affected by the increase
in fixed costs and operating expenses related to increases in production
capacity if revenues do not increase proportionately.
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.
As of February 29, 2000, Sterling Holding Company, LLC, which is one of our
principal stockholders, and our directors and executive officers together own
19,606,490 shares (including shares underlying vested options), or approximately
24.8%, of the outstanding Class A Common Stock, our only class of voting stock,
and 17,281,000 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.
13
<PAGE> 17
In addition, effective patent, trademark, copyright and trade secret
protection may be unavailable, limited or not applied for in certain foreign
countries.
We also seek to protect our proprietary technologies, including
technologies that may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventors' rights agreements with our
collaborators, advisors, employees and consultants. We cannot assure you that
these agreements will not be breached, that we will have adequate remedies for
any breach or that such persons or institutions will not assert rights to
intellectual property arising out of such research. Certain of our technologies
have been licensed on a non-exclusive basis from National Semiconductor which
may license such technologies to others, including, commencing on March 11,
2002, our competitors. In addition, under a technology licensing and transfer
agreement, National Semiconductor has limited royalty-free, worldwide license
rights (without right to sublicense) to some of our technologies. If necessary
or desirable, we may seek licenses under patents or intellectual property rights
claimed by others. However, we cannot assure you that we will obtain such
licenses or that the terms of any offered licenses will be acceptable to us. The
failure to obtain a license from a third party for technologies we use could
cause us to incur substantial liabilities and to suspend the manufacture or
shipment of products or our use of processes requiring the technologies.
OUR FAILURE TO OBTAIN OR MAINTAIN THE RIGHT TO USE CERTAIN TECHNOLOGIES MAY
NEGATIVELY AFFECT OUR FINANCIAL RESULTS.
Our future success and competitive position depend in part upon our ability
to obtain or maintain certain proprietary technologies used in our principal
products, which is achieved in part by defending claims by our competitors of
intellectual property infringement. 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.
14
<PAGE> 18
Should we successfully acquire another business, the process of integrating
acquired operations into our existing operations may result in unforeseen
operating difficulties and may require significant financial resources that
would otherwise be available for the ongoing development or expansion of our
existing operations. In addition, although Samsung Electronics assists us in
integrating the operations of the power device business into our operations
pursuant to the Transitional Services Agreement, we may encounter unforeseen
obstacles or costs in such integration. Possible future acquisitions could
result in the incurrence of additional debt, contingent liabilities and
amortization expenses related to goodwill and other intangible assets, all of
which could have a material adverse effect on our financial condition and
operating results.
44,661,568, OR 46.3% OF OUR TOTAL OUTSTANDING SHARES OF COMMON STOCK (WITHOUT
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.
As of February 29, 2000, there were 79,210,179 shares of our Class A Common
Stock outstanding and 17,281,000 shares of our Class B Common Stock outstanding.
Of the shares of Class A Common Stock outstanding, 50,525,000 shares (excluding
shares issued upon the exercise of employee stock options or other benefit plans
and subsequently sold into the public market) have been sold into the public
market in transactions registered with the Securities and Exchange Commission
and are freely tradeable without restriction, unless held by "affiliates" of our
company as that term is defined in Rule 144 under the Securities Act of 1933.
"Affiliates" generally include directors, executive officers and significant
stockholders of the company.
The remaining 27,380,568 shares of Class A Common Stock and all of the
shares of Class B Common Stock are "restricted securities," as that term is
defined in Rule 144, and may not be sold into the public market unless the sale
is registered under the Securities Act of 1933 or an exemption from registration
is available. Of the restricted shares of Class A Common Stock, however, all are
available for sale into the public market immediately and without restriction
under the exemption provided by Rule 144(k), except for 19,065,862 of such
shares, which are held by affiliates. Of those affiliate shares 17,631,834 are
currently subject to lock-up agreements entered into in connection with our
follow-on public offering, completed on January 25, 2000. The lock-up
restrictions affecting those shares expire on April 24, 2000, after which such
affiliate shares may be sold into the public market subject only to Rule 144
restrictions, other than the holding period limitation under that rule. All
outstanding shares of Class B Common Stock may be converted by their holder into
shares of Class A Common Stock at any time, subject to the procedures set forth
in our Restated Certificate of Incorporation. See "Description of Capital
Stock." Any shares of Class A Common Stock received upon such conversion would
be subject to the lock-up agreement referred to above and eligible for sale into
the public market upon the expiration of the lock-up agreements, subject only to
Rule 144 restrictions, other than the holding period limitation under that rule.
If existing stockholders sell a large number of shares when, or after, the
lock-up agreements referred to above expire, or if Credit Suisse First Boston
Corporation, one of the underwriters of our follow-on stock offering, consents,
in its sole discretion, to sales before the agreements expire, 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 for
public sale, which may facilitate their sale of shares in the public market. See
"Shares Eligible for Future Sale."
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<PAGE> 19
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.
USE OF PROCEEDS
We will not receive any proceeds of this offering other than the value of
the businesses or properties we or our subsidiaries acquire in the proposed
acquisitions.
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."
16
<PAGE> 20
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
Remainder of Stub Year 1999 (from November 29 to December
26, 1999)................................................. $34.13 $24.75
First quarter of Fiscal 2000 (from December 27, 1999 through
March 15, 2000)........................................... $44.94 $25.38
</TABLE>
On March 15, 2000, the last reported sale price for our Class A Common
Stock was $32.44 per share. As of March 15, 2000, there were approximately 440
holders of record of our Class A Common Stock.
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<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of our company as of
December 26, 1999 (i) on an actual basis and (ii) as adjusted to give pro forma
effect to our follow-on public stock offering, completed January 25, 2000, and
the application of the proceeds of that offering. This table should be read in
conjunction with "Unaudited Pro Forma Combined Condensed Financial Statement and
Unaudited Supplemental Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Fairchild 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 DECEMBER 26, 1999
------------------------
AS ADJUSTED
FOR FOLLOW-ON
ACTUAL OFFERING
------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents................................... $ 138.7 $ 378.4
======= =========
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, 60,393,769 shares
issued and outstanding, actual; 110,000,000 shares
authorized, 67,944,649 shares issued and outstanding,
as adjusted........................................... 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........ 0.3 0.3
Additional paid-in capital............................. 449.5 689.1
Accumulated deficit.................................... (231.3) (231.3)
Treasury stock (at cost)............................... (5.9) (5.9)
------- ---------
Total stockholders' equity........................... 213.2 452.9
------- ---------
Total capitalization.............................. $ 931.8 $ 1,171.5
======= =========
</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 December 26, 1999, the weighted average interest rate with respect to the
tranche B term loan was approximately 8.38% per annum.
18
<PAGE> 22
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 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."
19
<PAGE> 23
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.
20
<PAGE> 24
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
21
<PAGE> 25
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.
22
<PAGE> 26
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
23
<PAGE> 27
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.
24
<PAGE> 28
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.
25
<PAGE> 29
SELECTED CONSOLIDATED FINANCIAL DATA OF FAIRCHILD INTERNATIONAL
The following table sets forth selected historical consolidated financial
data of Fairchild International. The historical statement of operations data for
the seven months ended December 27, 1998 is derived from the unaudited condensed
consolidated income statement of Fairchild International included elsewhere in
this prospectus. The historical consolidated financial data as of May 30, 1999
and December 26, 1999 and for the fiscal years ended May 25, 1997, May 31, 1998
and May 30, 1999 and for the seven months ended December 26, 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 is 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>
SEVEN MONTHS
ENDED DECEMBER
FISCAL YEAR ENDED MAY ----------------------
-------------------------------------------- 1998
1995 1996 1997 1998 1999 (UNAUDITED) 1999
------ ------ ------ ------ -------- ----------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<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 $360.3 $ 786.2
Gross profit(2).......................................... $203.8 $216.8 $152.5 $230.5 $ 152.3 $ 74.8 $ 234.9
Research and development................................. 31.0 30.3 18.9 35.7 39.3 21.3 35.0
Selling, general and administrative(3)................... 100.3 114.4 96.4 92.0 105.1 52.9 117.4
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) (3.9) 82.5
Interest expense, net(5)................................. -- -- 11.2 54.5 71.8 34.2 56.2
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) (38.1) 26.3
Provision (benefit) for income taxes..................... -- -- 3.8 10.7 (5.1) (7.6) 5.0
------ ------ ------ ------ -------- ------ --------
Income (loss) before cumulative effect of change in
accounting principle................................. 74.3 72.3 15.5 22.1 (114.1) (30.5) 21.3
Cumulative effect of change in accounting principle...... -- -- -- (1.5) -- -- --
------ ------ ------ ------ -------- ------ --------
Net income (loss)...................................... $ 74.3 $ 72.3 $ 15.5 20.6 (114.1) (30.5) 21.3
====== ====== ======
Dividends on preferred stock....................................................... (8.7) (9.8) (5.4) (2.0)
------ -------- ------ --------
Net income (loss) applicable to common stockholders.............................. $ 11.9 $ (123.9) $(35.9) $ 19.3
====== ======== ====== ========
Basic earnings (loss) per common share:
Income before cumulative effect of change in accounting principle................ $ 0.21 $ (1.97) $(0.57) $ 0.24
Cumulative effect of change in accounting principle.............................. (0.02) -- -- --
------ -------- ------ --------
$ 0.19 $ (1.97) $(0.57) $ 0.24
====== ======== ====== ========
Diluted earnings (loss) per common share:
Income before cumulative effect of change in accounting principle................ $ 0.20 $ (1.97) $(0.57) $ 0.23
Cumulative effect of change in accounting principle.............................. (0.02) -- -- --
------ -------- ------ --------
$ 0.18 $ (1.97) $(0.57) $ 0.23
====== ======== ====== ========
Weighted average common shares outstanding (in millions):
Basic............................................................................ 62.8 62.9 62.9 80.0
====== ======== ====== ========
Diluted.......................................................................... 65.0 62.9 62.9 83.7
====== ======== ====== ========
</TABLE>
26
<PAGE> 30
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED DECEMBER
FISCAL YEAR ENDED MAY ----------------------
-------------------------------------------- 1998
1995 1996 1997 1998 1999 (UNAUDITED) 1999
------ ------ ------ ------ -------- ----------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Revenue:
Analog................................................. $ -- $ -- $ -- $ 32.0 $ 95.8 $ 38.8 $ 173.5
Discrete............................................... 116.4 175.0 164.5 187.3 222.8 96.1 316.9
Logic.................................................. 327.7 339.5 285.3 303.0 267.6 144.0 184.0
Memory(2).............................................. 185.5 174.2 138.0 113.5 67.9 43.4 39.6
Contract manufacturing services........................ 50.7 87.6 104.2 153.4 81.0 38.0 72.2
------ ------ ------ ------ -------- ------ --------
Total revenue............................................ $680.3 $776.3 $692.0 $789.2 $ 735.1 $360.3 $ 786.2
====== ====== ====== ====== ======== ====== ========
Depreciation and amortization............................ $ 44.7 $ 64.2 $ 77.1 $ 83.2 $ 95.3 $ 53.1 $ 62.8
Amortization of intangibles(6)........................... -- -- -- 1.4 8.4 2.0 19.5
Capital expenditures..................................... 112.9 153.9 47.1 78.0 46.2 24.1 74.8
HISTORICAL BALANCE SHEET DATA (END OF PERIOD):
Inventories.............................................. $ 68.8 $ 93.1 $ 73.1 $108.0 $ 148.6 $ 166.3
Total assets............................................. 323.2 432.7 555.0 634.3 1,095.7 1,137.6
Long-term debt, excluding current portion................ -- -- 487.9 526.7 1,045.9 717.2
Total stockholders' equity (deficit)..................... 233.2 349.2 (133.3) (116.6) (240.4) 213.2
</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 seven months ended December 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 seven months ended December, 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.
27
<PAGE> 31
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. The original Fairchild Semiconductor
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 Limited, Fairchild
Semiconductor continued to innovate, introducing logic products such as FAST(R)
(Fairchild Advanced Schottky Technology) and FACT(TM) (Fairchild Advanced CMOS
Technology), which remain industry standard products today. In 1987, the
Fairchild Semiconductor business was acquired by National Semiconductor and
integrated into its operations. The assets of the Fairchild Semiconductor
business were separated from National Semiconductor in March 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 Semiconductor, Inc. for approximately $117.0 million in cash. That
business 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 Semiconductor, Inc. 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 Co.,
Ltd. 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 Fairchild International during the first 39 months after
consummation of the recapitalization of the Fairchild Semiconductor business.
28
<PAGE> 32
FISCAL YEAR CHANGE
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 table below, we have
provided unaudited pro forma quarterly consolidated statements of operations on
a calendar-quarter basis for Fairchild International for the year ended December
26, 1999. The pro forma financial information is presented as if the acquisition
of the power device business and our initial public offering, completed on
August 9, 1999, had both been completed as of December 28, 1998, and is provided
as a base for comparison against future quarterly operating results.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
MARCH 28, JUNE 27, SEPTEMBER 26, DECEMBER 26,
1999(1) 1999(1)(2) 1999(1)(2) 1999
--------- ---------- ------------- ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue:
Net sales -- trade................. $251.5 $282.9 $302.5 $331.4
Contract manufacturing............. 33.9 31.5 33.3 29.6
------ ------ ------ ------
Total revenue................... 285.4 314.4 335.8 361.0
Operating expenses:
Cost of sales -- trade............. 192.8 225.1 213.0 228.8
Cost of contract manufacturing..... 21.8 23.5 24.8 20.0
Research and development........... 12.8 13.8 14.3 16.2
Selling, general and
administrative.................. 32.3 42.2 54.2 50.9
Restructuring and impairments...... 2.7 14.1 -- --
Total operating expenses........ 262.4 318.7 306.3 315.9
------ ------ ------ ------
Operating income (loss).............. 23.0 (4.3) 29.5 45.1
Interest expense, net................ 18.0 18.0 18.0 17.7
------ ------ ------ ------
Income (loss) before income taxes.... 5.0 (22.3) 11.5 27.4
Provision (benefit) for income
taxes.............................. 0.4 (1.3) 1.7 2.9
Net income (loss).................... $ 4.6 $(21.0) $ 9.8 $ 24.5
====== ====== ====== ======
Net income (loss) per common share:
Basic.............................. $ 0.05 $(0.24) $ 0.11 $ 0.28
Diluted............................ $ 0.05 $(0.24) $ 0.11 $ 0.26
====== ====== ====== ======
Weighted average common shares:
Basic.............................. 88.3 88.3 88.5 88.7
Diluted............................ 91.6 88.3 91.9 92.8
====== ====== ====== ======
</TABLE>
29
<PAGE> 33
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
MARCH 28, JUNE 27, SEPTEMBER 26, DECEMBER 26,
1999(1) 1999(1)(2) 1999(1)(2) 1999
--------- ---------- ------------- ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Supplemental data:
Adjusted net income (loss)(3)...... $ 15.6 $ 14.6 $ 25.9 $ 33.0
Diluted adjusted earnings (loss)
per share(4).................... $ 0.17 $ 0.16 $ 0.28 $ 0.36
====== ====== ====== ======
</TABLE>
- -------------------------
(1) Pro forma financial information has been prepared on a basis consistent with
the pro forma financial statement presented in our registration statement on
Form S-1, as amended, filed with the Securities and Exchange Commission on
January 19, 2000 (S.E.C. file number 333-92941).
Following is a table detailing the increase to historical revenue and net
income (loss) as a result of pro forma adjustments:
<TABLE>
<CAPTION>
NET
QUARTER ENDED REVENUE INCOME (LOSS)
------------- ------- -------------
(IN MILLIONS)
<S> <C> <C>
March 28, 1999.............................................. $111.9 $11.2
June 27, 1999............................................... 30.2 48.6
September 26, 1999.......................................... -- 10.6
December 26, 1999........................................... -- --
</TABLE>
(2) The quarter ended June 27, 1999 includes non-recurring charges taken in
connection with the restructuring of the Memory Division, including $5.5
million for additional sales allowances and $9.9 million for the write-off
of inventories. These charges were recorded as a reduction against net sales
in the case of the sales allowances and a charge to cost of sales for the
inventory write-offs. The quarter ended September 26, 1999 includes a
non-recurring charge of $8.3 million recorded in selling, general and
administrative expense for the forgiveness of certain loans made to the
company's management investors for payment of individual income tax
liabilities resulting from their ownership of Fairchild International's
common stock.
(3) Adjusted net income (loss) represents net income (loss) before amortization
of acquisition-related intangibles and restructuring and other non-recurring
charges, net of associated tax effects.
(4) Diluted adjusted earnings (loss) per share is based on adjusted net income
(loss) and fully diluted shares outstanding, which include the dilutive
effect, if any, of stock options.
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>
STUB YEAR
FISCAL 1997 FISCAL 1998 FISCAL 1999 1999
--------------- --------------------------------- --------------------------------- ---------------
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TRADE SALES:
Analog................ $ -- $ -- $ -- $ -- $ 11.9 $ 20.1 $ 16.9 $ 17.7 $ 15.1 $ 46.1 $ 71.6 $ 79.7
Discrete.............. 42.7 46.2 48.2 47.0 49.6 42.5 38.9 45.7 47.0 91.2 130.5 147.1
Logic................. 69.2 78.9 79.8 79.8 75.6 68.7 60.9 67.7 65.6 73.4 72.7 84.0
Memory................ 35.6 32.6 31.6 28.5 28.0 25.4 18.4 20.9 19.3 14.8(1) 16.6 17.3
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total............. $147.5 $153.4 $158.7 $155.3 $165.1 $156.7 $135.1 $152.0 $147.0 $225.5 $291.4 $328.1
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
30
<PAGE> 34
<TABLE>
<CAPTION>
STUB YEAR
FISCAL 1997 FISCAL 1998 FISCAL 1999 1999
--------------- --------------------------------- --------------------------------- ---------------
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GROSS PROFIT (LOSS):
Analog................ $ -- $ -- $ -- $ -- $ 4.9 $ 7.2 $ 5.9 $ 7.4 $ 5.2 $ 20.0 $ 27.1 $ 28.1
Discrete.............. 13.4 15.8 18.9 17.9 17.3 12.8 8.9 10.5 10.7 14.7 36.0 43.8
Logic................. 15.7 21.0 25.9 29.7 25.6 21.3 14.8 17.7 20.4 20.6 21.2 29.6
Memory................ 6.8 6.5 5.9 2.3 1.3 3.2 (0.8) (2.0) (0.8) (2.1)(1) 2.1 3.5
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total............. $ 35.9 $ 43.3 $ 50.7 $ 49.9 $ 49.1 $ 44.5 $ 28.8 $ 33.6 $ 35.5 $ 53.2 $ 86.4 $105.0
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
GROSS PROFIT (LOSS)
PERCENTAGE:
Analog................ --% --% --% --% 41.2% 35.8% 34.9% 41.8% 34.4% 43.4% 37.8% 35.3%
Discrete.............. 31.4 34.2 39.2 38.1 34.9 30.1 22.9 23.0 22.8 16.1 27.6 29.8
Logic................. 22.7 28.2 32.8 37.2 33.9 31.0 24.3 26.1 31.1 28.1 29.2 35.2
Memory................ 19.1 19.9 18.7 8.1 4.6 12.6 (4.3) (9.6) (4.1) (14.2) 12.7 20.2
Total............. 24.3 28.2 31.9 32.1 29.7 28.4 21.3 22.1 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.
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 Interface and Logic;
and the Non-Volatile Memory Division, which we refer to as Memory. Power device
business products, which include analog and discrete power products and 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 totaling $5.5 million
in the Memory segment in Fiscal 1999:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------- STUB YEAR
1997 1998 1999 1999
----- ----- ----- ---------
<S> <C> <C> <C> <C>
Analog...................................... --% 4.1% 13.0% 22.1%
Discrete.................................... 23.8 23.7 30.1 40.3
Interface and Logic......................... 41.2 38.4 36.1 23.4
Memory...................................... 19.9 14.4 9.9 5.0
----- ----- ----- -----
Subtotal trade sales................... 84.9 80.6 89.1 90.8
Contract manufacturing services............. 15.1 19.4 10.9 9.2
Total.................................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
31
<PAGE> 35
SEVEN MONTHS ENDED DECEMBER 26, 1999 COMPARED TO SEVEN MONTHS ENDED DECEMBER 27,
1998
Comparative financial information for Stub Year 1999 and the seven months
ended December 27, 1998, which we refer to as the first seven months of Fiscal
1999, is as follows:
<TABLE>
<CAPTION>
SEVEN
MONTHS ENDED
DECEMBER 27, STUB YEAR
1998 1999
------------ ---------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Revenue:
Net sales -- trade............................. $322.3 $714.0
Contract manufacturing......................... 38.0 72.2
------ ------
Total revenue............................... 360.3 786.2
Operating expenses:
Cost of sales -- trade......................... 252.6 499.9
Cost of contract manufacturing................. 32.9 51.4
Research and development....................... 21.3 35.0
Selling, general and administrative............ 52.9 117.4
Restructuring and impairments.................. 4.5 --
Total operating expenses.................... 364.2 703.7
------ ------
Operating income (loss).......................... (3.9) 82.5
Interest expense, net............................ 34.2 56.2
------ ------
Income (loss) before income taxes................ (38.1) 26.3
Provision (benefit) for income taxes............. (7.6) 5.0
Net income (loss)................................ $(30.5) $ 21.3
====== ======
</TABLE>
Results of Operations. Fairchild International generated net income of
$21.3 million in Stub Year 1999, compared to a net loss of $30.5 million in the
first seven months of Fiscal 1999. Excluding unusual charges and amortization of
acquisition-related intangibles of $15.5 million and $19.5 million,
respectively, in Stub Year 1999, and $4.5 million and $2.0 million,
respectively, in the first seven months of Fiscal 1999, net of tax effects,
Fairchild International had adjusted net income of $54.5 million for Stub Year
1999 compared to an adjusted net loss of $25.3 million in the first seven months
of Fiscal 1999. Unusual charges in 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 seven months of
Fiscal 1999 were due to restructuring charges as a result of a workforce
reduction. Operating income was $82.5 million in Stub Year 1999, compared to an
operating loss of $3.9 million in the first seven months of Fiscal 1999.
Excluding unusual charges, operating income was $90.8 million in Stub Year 1999,
compared to $0.6 million in the first seven 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 Stub Year 1999 as compared to the first seven months of Fiscal
1999.
32
<PAGE> 36
Excluding depreciation and amortization of $82.3 million and $55.1 million
in Stub Year 1999 and the first seven months of Fiscal 1999, respectively, and
unusual charges, earnings before interest, taxes, depreciation and amortization
("EBITDA") were $173.1 million in Stub Year 1999 compared to $55.7 million in
the first seven months of Fiscal 1999. EBITDA is presented because the company
believes that it is a widely accepted financial indicator of an entity's ability
to incur and service debt. EBITDA should not be considered as an alternative to
net income, operating income, or other consolidated operations and cash flow
data prepared in accordance with generally accepted accounting principles, as an
indicator of the operating performance of 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 (90.8% and 89.5% of total revenues in Stub Year 1999 and
the first seven months of Fiscal 1999, respectively) and revenues from contract
manufacturing services provided to National Semiconductor and Samsung
Electronics (9.2% and 10.5% of total revenues in Stub Year 1999 and the first
seven months of Fiscal 1999, respectively).
Trade sales increased 121.5% to $714.0 million in Stub Year 1999 compared
with $322.3 million in the first seven months of Fiscal 1999. Trade sales for
Stub Year 1999 include sales from the power device business. Excluding sales
from the power device business, trade sales increased 28.9% in Stub Year 1999
over the first seven 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.
Geographically, 20.7%, 12.2%, 45.6% and 21.5% of trade sales were derived
in the United States, Europe, Asia/Pacific and Korea, respectively, in Stub Year
1999. Excluding sales from the power device business, 31.8%, 17.5% and 50.7% of
trade sales were derived from North America, Europe and Asia/Pacific (including
Korea), respectively, in Stub Year 1999, compared to 40.3%, 18.4% and 41.3%,
respectively, in the first seven months of Fiscal 1999. Excluding sales from the
power device business, Asia/Pacific region revenues increased 58.2% in Stub Year
1999 over the first seven months of Fiscal 1999. The increase in the
Asia/Pacific region is due to strength in the consumer and personal computer
markets, as well as improved economic conditions. Revenues in the Europe region
increased 22.5% in Stub Year 1999 over the first seven months of Fiscal 1999.
The increase in Europe is due to improved telecommunications, consumer and
distribution markets. North American revenues increased 2.0% in Stub Year 1999
over the first seven months of Fiscal 1999. The increase in North America is the
result of improved market conditions offset by the continued move of contract
manufacturers to locations outside North America.
Contract manufacturing revenues increased 90.0% to $72.2 million in Stub
Year 1999 compared to $38.0 million in the first seven months of Fiscal 1999.
Excluding contract manufacturing services provided to Samsung Electronics,
contract manufacturing revenues increased 42.1% in Stub Year 1999 as compared to
the first seven months of Fiscal 1999, reflecting increased demand from National
Semiconductor.
Gross Profit. Gross profit increased 214.0% to $234.9 million in Stub Year
1999 compared to $74.8 million in the first seven months of Fiscal 1999.
Excluding the gross profit derived from power device products, gross profit
increased 71.8% in Stub Year 1999 over the first seven months of Fiscal 1999. As
a percentage of trade sales, gross trade profits were 30.0% in Stub Year 1999.
Excluding the power device business, gross trade profits as a percentage of
trade sales were 28.4% in Stub Year 1999 compared to 21.6% in the first seven
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 Stub Year 1999 were
lower than the first seven months of Fiscal 1999,
33
<PAGE> 37
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
Interface and Logic products. Contract manufacturing gross profit increased
307.8% to $20.8 million in Stub Year 1999 compared to $5.1 million in the first
seven 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 seven months of Fiscal 1999 included $13.0 million of
fixed cost reimbursement under Fairchild International's manufacturing
agreements with National Semiconductor.
Research and Development. Research and development expenses ("R&D") were
$35.0 million, or 4.9% of trade sales, in Stub Year 1999, compared to $21.3
million, or 6.6% of trade sales, in the first seven 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 Stub Year 1999 which Fairchild International did not
incur in the first seven months of 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 5.7% and 9.0% of trade sales in
Stub Year 1999 and the first seven months of Fiscal 1999, respectively. R&D
expenditures for Fairchild International's other products (Bipolar Logic,
Bipolar Discretes and EPROM) were less than 1% of trade sales for both Stub Year
1999 and the first seven months of Fiscal 1999. The decrease in R&D expenditures
for growth products as a percentage of trade sales is due to the relatively
smaller R&D requirements of the power device business as a percentage of sales.
Selling, General and Administrative. SG&A expenses were $117.4 million, or
16.4% of trade sales, in Stub Year 1999, compared to $52.9 million, or 16.4% of
trade sales, in the first seven months of Fiscal 1999. SG&A expenses for 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 $109.1
million, or 15.3% of trade sales, in 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 seven 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 seven months 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 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.
Interest Expense, Net. Interest expense, net was $56.2 million in Stub
Year 1999, compared to $34.2 million in the first seven months of Fiscal 1999.
Interest expense, net in 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 $49.0 million in 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 $5.0 million for Stub Year 1999,
compared to a tax benefit of $7.6 million in the first seven months of Fiscal
1999. The effective tax rates for Stub Year 1999 and the first seven months of
Fiscal 1999 on book pre-tax income were 19.0% and 19.9%,
34
<PAGE> 38
respectively. In Stub Year 1999, the current tax provision increased while
deferred tax benefits decreased over the first seven months of Fiscal 1999. In
Stub Year 1999, the current 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 deferred tax benefits
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. In addition, deferred tax expense was recorded in Korea to
account for future book deductions in excess of future tax deductions arising
beyond the tax holiday period.
Fairchild International has 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 is as follows:
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 347.2% to $173.5
million in Stub Year 1999 from $38.8 million in the first seven months of Fiscal
1999. Stub Year 1999 includes the analog revenues of the power device business,
which is not included in the first seven months of Fiscal 1999. Normalized to
exclude power device products, Analog revenues were $42.9 million in Stub Year
1999, an increase of 10.6% from the first seven months of Fiscal 1999. The
increase is due to improved business conditions and new product revenues, which
more than offset revenue decreases in mature products.
Analog had operating income of $24.0 million in Stub Year 1999 as compared
to $0.2 million in the first seven months of Fiscal 1999. Excluding analog power
device products, Analog had an operating loss of $8.0 million in 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 latter part of Stub Year 1999.
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 229.8% to $316.9 million in Stub
Year 1999, compared to $96.1 million in the first seven months of Fiscal 1999.
Stub Year 1999 includes the discrete revenues of the power device business which
are not included in the first seven months of Fiscal 1999. Excluding discrete
power device products, Discrete revenues increased 54.6% to $148.6 million in
Stub Year 1999 from the first seven months of Fiscal 1999. The increase was
across all product lines, DMOS products increased 81.9% over the first seven
months of Fiscal 1999. Revenues for mature Bipolar products grew 13.7% in Stub
Year 1999 over the first seven months of Fiscal 1999.
Discrete had operating income of $36.7 million in Stub Year 1999 as
compared to $4.5 million in the first seven months of Fiscal 1999. Excluding
discrete power device products, Discrete had operating income of $14.9 million
in Stub Year 1999. The increase in Discrete operating income was due to higher
revenues and improved gross profits due to improved factory utilization and
higher average selling prices.
Interface and Logic Products Group. Interface and Logic designs,
manufactures and markets a broad line of high-performance interface and standard
logic products. Its interface products include
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<PAGE> 39
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 TinyLogice, LCX and LVT. Its products also include mature
bipolar logic products such as FAST, LS and TTL. Interface and Logic revenues
increased 27.9% to $184.0 million in Stub Year 1999, compared to $144.0 million
in the first seven months of Fiscal 1999. Revenues for interface products grew
224.4% in Stub Year 1999 over the first seven months of Fiscal 1999, due to
success of new product introductions. Logic products revenues increased 22.8% in
Stub Year 1999 over the first seven months of Fiscal 1999. The increase in Logic
products revenues was across all product lines. CMOS revenues grew 34.6%, while
Bipolar revenues grew 2.5% in Stub Year 1999 over the first seven months of
Fiscal 1999.
Interface and Logic had operating income of $29.7 million in Stub Year
1999, compared to $11.6 million in the first seven months of Fiscal 1999. The
increase in operating income was due to higher revenues and improved gross
profits due to improved factory utilization.
Non-Volatile Memory Division. Memory designs, manufactures and markets a
broad line of serial EEPROM, EPROM and applications-specific standard products,
including microcontrollers. Memory revenues decreased 8.8% to $39.6 million in
Stub Year 1999 from $43.4 million in the first seven months of Fiscal 1999. The
decrease was due to exiting certain unprofitable product lines in Stub Year 1999
as compared to the first seven months of Fiscal 1999, which include those
revenues, offset by revenue growth in new applications-specific standard
products, such as the ACEx family of microcontrollers.
Memory had operating income of $0.4 million in Stub Year 1999 as compared
to a loss of $15.7 million in the first seven months of Fiscal 1999. The
decrease in the Memory operating loss was due to the benefit from the
implementation of the Memory restructuring plan, implemented in the fourth
quarter of Fiscal 1999.
Approximately 68.7% of Fairchild International's trade revenues were
generated from Analog, Discrete and Power Device products in Stub Year 1999.
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 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
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<PAGE> 40
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 $103.8 million and $84.8 million in Fiscal 1999
and Fiscal 1998, respectively, earnings before interest, taxes and depreciation
and amortization, which we refer to as EBITDA, was $127.1 million in Fiscal
1999, compared to $187.6 million in Fiscal 1998.
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
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.
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<PAGE> 41
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
shift in 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 Memory. These actions
included 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.
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
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<PAGE> 42
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.
Comparative financial information for Fairchild International's reportable
segments is as follows:
Analog and Mixed Signal Products Division. 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 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
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<PAGE> 43
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. Price competition was particularly
intense in Interface and 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.
Interface and 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. 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
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<PAGE> 44
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
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
------ -----
(IN MILLIONS)
-------------
<S> <C> <C>
Analog......................................... $ -- $ 2.2
Discrete....................................... 21.7 44.9
Interface and 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 Interface 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 $84.8 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 $187.6 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
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<PAGE> 45
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.
Interface and 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, FACTe and
HCMOS. The decrease in Bipolar trade sales is reflective of the general market
trend toward lower power consuming CMOS products.
Memory trade sales decreased 17.7% in Fiscal 1998 over Fiscal 1997. The
decrease was driven by lower prices impacting all memory product lines due to
competitive pressures, partially offset by higher volume, particularly in
EEPROM. EEPROM had increased trade sales of 4.7% in Fiscal 1998 over Fiscal
1997. In a declining market, EPROM trade sales decreased 46.2% in Fiscal 1998
over Fiscal 1997, as EPROMs are being rapidly phased out by FLASH memory
products in the marketplace.
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.
42
<PAGE> 46
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 other 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 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
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<PAGE> 47
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 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>
FAIR MAN-MONTHS
PRODUCT VALUE TO COMPLETE
- ------- ----- -----------
(IN MILLIONS)
<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 December 26, 1999 there were no significant changes from the original
estimates of time and cost to complete.
44
<PAGE> 48
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 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 December 26, 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
45
<PAGE> 49
related products. The products associated with these projects include a broad
range of semiconductor products used in power management and video integrated
circuits, including personal computers, broadcast video and data communications.
The projects identified can be categorized in the analog or video product
families.
Analog Family. This family's strategy focuses on (i) a higher integration
of Ground Fault Interruptor chips and (ii) power for desktop personal computers,
notebook personal computers and cellular telephones. As of the acquisition date,
the remaining efforts for the projects to be completed included starting and
completing the beta testing phase of the development process, with a total
remaining cost to complete the testing of approximately $2.5 million, and
anticipated release dates by the end of Fiscal 1998.
Video Family. This family's in-process research and development was
identified in the following projects: (i) decoders and genlocks; (ii) digital
video encoders; and (iii) personal computer to television plug-n-play
converters. The remaining efforts for the projects to be completed included the
completion of the beta-testing phase of the development process for each
project. As of the acquisition date, remaining costs to complete were estimated
to be approximately $1.0 million for anticipated release dates by the end of
Fiscal 1998.
Decoders and Genlocks. These adaptive, combination based video decoders
are optimized for the video professional, allowing flexibility in system
performance while utilizing a common design approach. The genlocking analog to
digital converter is a companion product for both the new product decoders and
encoders. The products include analog, high-performance encoders which are in
the beta testing phase of development; a digital design, improved decoder for
personal computer and television applications which is in the alpha testing
phase of development; an improved genlocking digitizer which is in the design
phase of development; and an analog, genlocking decoder which is in the concept
phase of development.
Digital Video Encoders. The in-process product in this category is a
digital design video data processor, which is in the concept phase of
development.
Personal Computer to Television Plug-N-Play Converter. The in-process
product in this category is an analog personal computer to television
plug-n-play converter, which is in the beta testing stage of development. This
product will be the next generation of the current offering with many
enhancements.
The material risks associated with the successful completion of the
in-process technology include 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
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<PAGE> 50
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 December 26, 1999, total actual revenues in the analog and video
families on the in-process R&D projects were approximately 60% of total expected
revenues, impacting both analog and video products. The revenue shortfall in the
analog family and the associated reduction in expected cash flows was driven by
lower demand from personal computer customers. The revenue and cash flow
shortfall in the video family was driven by unfavorable market conditions which
began during Fiscal 1999. 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 December
26, 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
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. 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 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. We intend to invest approximately $240.0 million in
2000 to expand capacity at all of our major manufacturing fabs and assembly/test
centers. In the long-term, additional borrowing or equity investment may be
required to fund future acquisitions.
As of December 26, 1999, Fairchild International's cash and cash
equivalents balance was $138.7 million, an increase of $76.3 million from May
30, 1999.
During Stub Year 1999, Fairchild International's operations provided $115.7
million in cash compared to a use of $12.8 million of cash in the first seven
months of Fiscal 1999. The increase in cash provided by operating activities
reflects an increase in net income adjusted for non-cash items of $91.8 million
as well as an increase in cash flows from changes in operating assets and
liabilities of
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<PAGE> 51
$36.7 million. Cash used in investing activities during Stub Year 1999 totaled
$34.3 million, compared to a use of $25.2 million in the first seven 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
offset by increased capital expenditures in Stub Year 1999 as compared to the
first seven months of Fiscal 1999. Capital expenditures in Stub Year 1999 were
made principally to add capacity in Fairchild International's assembly and test
manufacturing facilities, whereas in the first seven months of Fiscal 1999,
capital expenditures were made primarily to install Fairchild International's
enterprise software system. Cash used in financing activities of $5.1 million
for 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 $34.7 million in the first seven 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 asset of which
is the stock of its subsidiary, Fairchild Semiconductor Corporation. Fairchild
International on a stand-alone basis had no cash flow from operations in Stub
Year 1999, nor in the first seven months of Fiscal 1999. Fairchild International
on a stand-alone basis has no cash requirements for the next twelve months.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 December 26, 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 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 December 26, 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.
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<PAGE> 52
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 $118.6 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 December 26, 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 for the twelve months ended May 28, 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 for the twelve months ended May 28, 2000. In the event
National Semiconductor does not purchase $80.0 million of contract manufacturing
services for the twelve months ended May 28, 2000, the Asset Purchase Agreement
requires National Semiconductor to reimburse Fairchild International for
unabsorbed fixed costs and lost profit on the revenue shortfall.
OUTLOOK
Market conditions have been generally improving since the third quarter of
Fiscal 1999. Strong bookings and demand throughout the historically slower
summer season continued throughout Stub Year 1999, which ended December 26,
1999. A portion of the bookings increase seen during 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 is 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 half 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.
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<PAGE> 53
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 were not 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 Stub Year 1999 and in the first seven
months of Fiscal 1999, incremental amounts incurred and charged to expense to
identify, test and correct such other year 2000 problems were immaterial to the
financial statements. Future incremental expenditures are currently estimated to
be less than $0.1 million. Although we believe Fairchild International's systems
are 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 Annual Report, 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> 54
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
52
<PAGE> 56
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
53
<PAGE> 57
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.
54
<PAGE> 58
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.
55
<PAGE> 59
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
56
<PAGE> 60
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.
57
<PAGE> 61
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 12.8%, 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 increased to $149.4 billion in 1999 from $125.6 billion in
1998. The increase was due primarily to the industry-wide recovery after the
market downturn of 1998.
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 1999 CAGR(2)
----- ----- ----- ----- ------ ------ ------ ------ ------ ------ -------
(DOLLARS IN BILLIONS)
<S> <C> <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 $ 51.7 21.1%
Memory:
Volatile............ 8.7 9.1 11.4 16.4 27.2 46.9 29.9 23.6 17.9 25.4 12.6%
Non-volatile........ 3.1 3.1 3.4 4.8 5.3 6.6 6.1 5.7 5.1 6.9 9.3%
----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Total memory...... 11.8 12.2 14.8 21.3 32.5 53.5 36.0 29.3 23.0 32.3 11.8%
Moving/Shaping........ 29.6 31.0 31.1 37.0 45.6 57.5 56.1 60.1 55.3 65.4 9.2%
----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Total............. $50.5 $54.6 $59.9 $77.3 $101.9 $144.4 $132.0 $137.2 $125.6 $149.4 12.8%
===== ===== ===== ===== ====== ====== ====== ====== ====== ======
</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.
58
<PAGE> 62
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.
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 1999
---- ---- ---- ----- ----- ----- ----- ----- ----- -----
(DOLLARS IN BILLIONS)
<S> <C> <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 $ 7.2
Mixed Signal............... 4.8 5.3 5.6 6.9 8.9 10.9 11.5 13.6 13.3 $14.9
---- ---- ---- ----- ----- ----- ----- ----- ----- -----
Total.................... $7.8 $8.3 $8.7 $10.7 $13.6 $16.6 $17.0 $19.8 $19.0 $22.1
==== ==== ==== ===== ===== ===== ===== ===== ===== =====
DISCRETE
DMOS Power................. $0.6 $0.7 $0.8 $ 1.1 $ 1.4 $ 2.1 $ 2.2 $ 2.2 $ 2.0 $ 2.5
Bipolar.................... 4.2 4.2 4.1 4.6 5.5 7.1 6.2 6.1 5.3 6.3
IGBT....................... -- -- -- -- -- 0.5 0.6 0.6 0.7 0.6
---- ---- ---- ----- ----- ----- ----- ----- ----- -----
Total.................... $4.8 $4.9 $4.9 $ 5.7 $ 6.9 $ 9.7 $ 9.0 $ 8.9 $ 8.0 $ 9.4
==== ==== ==== ===== ===== ===== ===== ===== ===== =====
LOGIC
Bipolar.................... $1.5 $1.4 $1.3 $ 1.5 $ 1.3 $ 1.3 $ 0.9 $ 0.9 $ 0.6 $ 0.6
CMOS/BiCMOS................ 1.1 1.1 1.0 1.4 1.8 2.3 2.1 2.4 1.9 2.2
---- ---- ---- ----- ----- ----- ----- ----- ----- -----
Total.................... $2.6 $2.5 $2.3 $ 2.9 $ 3.1 $ 3.6 $ 3.0 $ 3.3 $ 2.5 $ 2.8
==== ==== ==== ===== ===== ===== ===== ===== ===== =====
MEMORY:
NON-VOLATILE MEMORY
EPROM...................... $1.6 $1.4 $1.2 $ 1.3 $ 1.4 $ 1.4 $ 1.1 $ 0.7 $ 0.5 $ 0.5
EEPROM(3).................. -- 0.7 0.9 1.9 1.1 1.3 1.1 1.2 1.1 1.0
---- ---- ---- ----- ----- ----- ----- ----- ----- -----
Total.................... $1.8 $1.6 $1.7 $ 2.0 $ 2.1 $ 2.3 $ 2.0 $ 1.6 $ 1.4 $ 1.5
==== ==== ==== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- -------------------------
(1) All data 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 Worldwide Semiconductor Trade Statistics. Includes sales of
EEPROM and other revenues, such as those from LIFO and FIFO products.
59
<PAGE> 63
MOVING AND SHAPING MARKETS
Analog Market. Analog products are used to shape or condition electrical
signals, to amplify electrical signal strength, to convert electrical signals to
and from digital "one or zero" levels, to regulate voltage levels and to provide
interfaces between other products within an electrical system. The analog market
is split into two major segments: Standard Linear and Mixed Signal. The Standard
Linear market is comprised of building block products such as amplifiers,
voltage regulators, data conversion, interface circuits, and comparators. These
products are used in all end systems, from computers and telecommunications, to
industrial, automotive and consumer applications. The Mixed Signal market
consists of more complex analog products, which also contain some digital
circuitry for timing, information control and data flow. Mixed Signal products
are often developed for specific applications, such as video encoding, 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.
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. 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
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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 one of the largest independent semiconductor
companies, 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 and interface 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 was
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. The Fairchild Semiconductor business was
acquired by Schlumberger Limited in 1979 and by National Semiconductor
Corporation in 1987. In March 1997, as part of its recapitalization, the
Fairchild Semiconductor business was sold to a new and independent
company -- Fairchild Semiconductor Corporation. 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. That business 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 Interface and Logic Products Group.
On April 13, 1999, we purchased the power device business from Samsung
Electronics for approximately $414.9 million, including fees and expenses. The
power device business designs, manufactures and markets power discrete
semiconductors and standard analog integrated circuits serving the personal
computer, industrial, telecommunications and consumer electronics markets. The
power device business has developed a number of new product designs with
industry leading performance characteristics, such as its recent process
developments in trench technology and silicon bonding. The acquisition of the
power device business not only enhances our analog and power discrete product
offerings, but also provides us with a greater market presence in South Korea.
The acquisition of the power device business also provides us with additional
revenue opportunities through our relationship with Samsung Electronics:
- Samsung Electronics is required to purchase guaranteed minimum annual
levels of products from the power device business based on historical
volumes and market prices for a three-year period according to terms of a
product supply agreement.
- We are required to provide contract manufacturing services in the form of
wafer foundry services for Samsung Electronics for a three-year period
according to the terms of a foundry sale agreement. The agreement is
designed to provide us levels of profitability totaling W53,700 million
over three years.
In connection with the acquisition of the power device business, we have
obtained a full income tax holiday for a period of seven years in South Korea.
The power device business added
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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 completed the transfer of our analog wafer
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.
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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: COMPUTING INDUSTRIAL AND OTHER COMMUNICATIONS ELECTRONICS AUTOMOTIVE
- --------------------------- ----------------- -------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
PERCENTAGE OF OUR TRADE 35 - 40% 15% 15 - 20% 15 - 20% 5%
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 Zenith
Technology
Toshiba
- -----------------------------------------------------------------------------------------------------------------------------
EXAMPLE OF PRODUCT Computer Electric motor Portable phone VCR Engine control
APPLICATION: assembly line
control
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on Fairchild management estimates of end market uses of our products.
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
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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 all 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 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
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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 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
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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. 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
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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 Stub Year 1999, Fairchild International derived approximately 54% of its
trade sales from original equipment manufacturer customers through its regional
sales organizations and 46% 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 its office 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
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.
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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 December 26, 1999, support from the foreign sales
subsidiaries of Samsung Electronics ended in accordance with an agreement with
Samsung Electronics. Fairchild International's sales organizations in North
America and Europe have assumed distribution responsibilities for power device
business products in those regions. Distribution of power device business
products in Korea and in the rest of Asia and warehousing in Korea are
facilitated by Samsung Electronics. 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, 1999 and Stub Year 1999 were $18.9 million, $35.7 million,
$39.3 million and $35.0 million, respectively. Such expenditures represented
3.2%, 5.6%, 6.0% and 4.9% of trade sales in Fiscal 1997, 1998, 1999 and Stub
Year 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.
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 Asia. Our products are
manufactured and designed using a broad range of manufacturing processes and
proprietary design methods. We use all of the prevalent function-oriented
process technologies for wafer fabrication, including CMOS, Bipolar, BiCMOS,
DMOS and non-volatile memory technologies. We use primarily through-hole and
surface mount technologies in our assembly and test operations, in lead counts
from two to fifty-six leads.
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The table below sets forth 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 subcontracts a minority of its wafer fabrication
needs, primarily to Advanced Semiconductor Manufacturing Corporation of
Shanghai, 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, Amkor, NS Electronics (Bangkok) Ltd., and Korea
Micro Industry. As a result of the acquisition of the power device business,
these services are provided under 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.
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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 track backlog. 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.
SEASONALITY
Generally, Fairchild International is affected by the seasonal trends of
the semiconductor and related industries. With the change of our fiscal year
end, we expect revenues will be higher in the second and fourth quarters, and
lower in the first quarter due to holidays around the world and in the third
quarter due to the historically slow summer months. In Stub Year 1999, however,
typical seasonality was offset by the effects of the recovery of the overall
semiconductor market as the company recorded sequential revenue increases each
quarter.
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'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 the Fairchild Semiconductor
business, 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. 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. We believe that we
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have the right to use all technology used in the production of our products. See
"The Acquisition -- Intellectual Property and Trademark License Agreements."
ENVIRONMENTAL MATTERS
Our operations are subject to environmental laws and regulations in the
countries in which we operate that regulate, among other things, air and water
emissions and discharges at or from our manufacturing facilities; the
generation, storage, treatment, transportation and disposal of hazardous
materials by our company; the investigation and remediation of environmental
contamination; and the release of hazardous materials into the environment at or
from properties operated by our company and at other sites. As with other
companies engaged in like businesses, the nature of our operations exposes our
company to the risk of liabilities and claims with respect to such matters. We
believe, however, that our operations are in substantial compliance with
applicable environmental laws and regulations. Fairchild International's costs
to comply with environmental regulations were immaterial in Fiscal 1997, 1998,
1999 and Stub Year 1999.
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 8,397 full- and
part-time employees as of December 26, 1999, none of whom were represented by
collective bargaining agreements. Of the total number of employees, 6,943 were
engaged in manufacturing and information services, 332 were engaged in marketing
and sales, 677 were engaged in administration and 445 were engaged in research
and development. Of the total number of employees, 3,440, or 41%, were employed
in the Interface and Logic Products Group, 4,263, 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 372, or 4%, in corporate
administration or centralized sales and marketing activities. Fairchild
International believes that its relations with its employees are satisfactory.
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Fairchild Korea sponsors a Power Device Business Labor Council consisting
of seven representatives from the non-management workforce and seven members of
the management workforce. The Labor Council, under Korean law, is recognized as
a representative of the workforce for the purposes of consultation and
cooperation only. The Labor Council therefore has no right to take a work action
or to strike and is not party to any labor or collective bargaining agreements
with Fairchild Korea. Management of the power device business believes that its
relations with its employees and the Labor Council are satisfactory.
PROPERTIES
In the United States, our corporate headquarters as well as the
headquarters and wafer fabrication operations of the Interface and Logic
Products Group are located in approximately 240,000 square feet of space in
properties that we own in South Portland, Maine. On August 6, 1999 we entered
into a lease to occupy approximately 120,000 square feet of space at a new
location in South Portland, Maine. This facility will serve as our new worldwide
corporate headquarters and also provide additional space for the Interface and
Logic Products Group and is expected to be occupied in the spring of 2000.
Additional 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 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 was subject to (1) a
$3.5 million holdback which was paid to Fairchild International in February
2000; and (2) a $500,000 deposit which was 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. 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.
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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. 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." We intend to contest these claims
vigorously.
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, Global Operations
Keith Jackson........................ 44 Executive Vice President and General Manager, Analog,
Mixed Signal and Non-Volatile Memory Products Group
Darrell Mayeux....................... 57 Executive Vice President, Worldwide Sales and
Marketing
Deok J. Kim.......................... 47 Senior Vice President, President, Fairchild Korea
Semiconductor Ltd.
W.T. Greer, Jr. ..................... 59 Senior Vice President and General Manager, Interface
and Logic Group
Izak Bencuya......................... 46 Senior Vice President and General Manager, Discrete
Power and Signal Technologies Group
Ernesto M. D'Escoubet................ 56 Senior Vice President, Technology and Quality
John M. Watkins, Jr. ................ 57 Senior Vice President, Chief Information Officer
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
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Pierce Atwood included advising many large manufacturing companies, including
our company, on business, governmental, legal compliance and environmental
issues. He was most recently a senior partner and Chairman of the firm's
Management Committee.
Jerry M. Baker, Executive Vice President, Global Operations. Mr. Baker has
been Executive Vice President, Global Operations since February 2000.
Previously, Mr. Baker had 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 Division.
Keith Jackson, Executive Vice President and General Manager, Analog, Mixed
Signal and Non-Volatile Memory Products Group. Mr. Jackson joined our company
in March 1998. He has over 20 years of semiconductor industry experience. Most
recently, Mr. Jackson was President of TriTech Microelectronics in Singapore, a
manufacturer of analog and mixed signal products, which he joined in 1996. Prior
to that, he worked for National Semiconductor for 10 years, most recently as
Vice President and General Manager of the Analog and Mixed Signal division. He
has also held various marketing and engineering positions at National
Semiconductor and Texas Instruments.
Darrell Mayeux, Executive Vice President, Worldwide Sales and
Marketing. Mr. Mayeux has been Executive Vice President, Worldwide Sales and
Marketing since November 1996. He had been with National Semiconductor since
1992 as Vice President of Sales and Marketing for Logic Products Group. He
previously held engineering, marketing and general management positions with
Texas Instruments and Philips.
Deok J. Kim, Senior Vice President, President, Fairchild Korea
Semiconductor Ltd. Mr. Kim became Senior Vice President, 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.
W.T. Greer, Jr., Senior Vice President and General Manager, Interface and
Logic Group. Mr. Greer has been Senior Vice President and General Manager,
Interface and Logic Group since February 2000. Mr. Greer has over 30 years of
engineering and management experience in the semiconductor and electronics
industries. Prior to joining our company in 1997 as Vice President of Logic
Products, he served for ten years as Vice President and Director of Motorola
Semiconductor's Advanced Technologies Division and Military Products Operation.
Prior to that, he held various management positions at Texas Instruments.
Izak Bencuya, Senior Vice President and General Manager, Discrete Power and
Signal Technologies Group. Mr. Bencuya has been Senior Vice President and
General Manager, Discrete Power and Signal Technologies Group since February
2000. Mr. Bencuya has worked in the semiconductor and electronics field for 24
years. Prior to his current assignment, Mr. Bencuya spent six years as Director
of Power MOSFET Products. Mr. Bencuya also worked at GTE Laboratories and
Siliconix in various research and management roles.
Ernesto M. D'Escoubet, Senior Vice President, Technology and Quality. Mr.
D'Escoubet has been Senior Vice President, Technology and Quality, since
February 2000. Mr. D'Escoubet has over 30 years experience in the semiconductor
industry. Prior to assuming his current role, Mr. D'Escoubet spent eight years
as Vice President of Operations for the Interface and Logic Group. Prior to
that, he held various management positions at National Semiconductor and Harris
Corporation.
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John M. Watkins, Jr., Senior Vice President, Chief Information
Officer. Mr. Watkins joined our company in March 2000. Prior to joining our
company, Mr. Watkins spent five years as Chief Information Officer of Pratt and
Whitney. Prior to that, Mr. Watkins retired as a General after eleven years in
the United States Army. His most recent assignment was as Director of the
Defense Information Systems Agency in Washington, D.C.
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.
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 Citicorp Venture Capital Ltd. since 1996, where he was a
Vice President until being named a Managing Director in January 2000. 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 1999, he was employed by Solectron Texas, an electronic manufacturing
services company, where he served as its President from April 1996 until his
retirement. 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.
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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 the follow-on public offering of our Class A Common Stock,
completed January 25, 2000, the vesting of these options was accelerated so that
options that were to have vested in 2000 vested immediately prior to the
consummation of that 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.
EXECUTIVE COMPENSATION
The following table sets forth 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, Fiscal 1999 and Fiscal 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
Chief 1998 449,994 435,969 -- -- 39,844
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 Officer, 1998 262,024 152,240 -- -- 254,283
General Counsel and Secretary
Keith Jackson.................. 1999S(1) 174,038 175,000 114,455 50,000 8,454
Executive Vice President and 1999 275,002 82,500 151,380 -- 8,091
General Manager, Analog, 1998 63,462 38,060 -- -- 69,000
Mixed Signal and Non-Volatile
Memory Products
Jerry M. Baker................. 1999S(1) 175,000 175,000 592,898 50,000 8,505
Executive Vice President 1999 250,010 82,500 732,627 -- 13,624
Global Operations 1998 250,009 138,406 -- -- 12,598
</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. Jackson 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, $70,340 to Mr. Jackson and $350,600 to Mr. Baker were
made by Fairchild International to discharge their individual tax
liabilities in June 1998. These loans
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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 and the amount shown for Mr.
Jackson, which reflects relocation expenses.
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
Keith Jackson........... 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 the follow-on public offering of our Class A Common Stock,
the vesting of these options was accelerated so that options that were to
have vested on August 4, 2000 vested immediately prior to the consummation
of that 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.
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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........................ 40,000 160,000 $ 310,000 $1,240,000
Joseph R. Martin.................... 20,000 80,000 155,000 620,000
Daniel E. Boxer..................... 15,000 60,000 116,250 465,000
Keith Jackson....................... 210,000 40,000 5,302,500 310,000
Jerry M. Baker...................... 10,000 40,000 77,500 310,000
</TABLE>
- -------------------------
(1) Reflects net pre-tax amounts determined by subtracting the exercise price
from $26.25 per share, the fair market value of our Class A Common Stock at
the end of Stub Year 1999.
EMPLOYMENT AGREEMENTS
Employment Agreements with Messrs. Pond and Martin. The company expects to
enter into employment agreements with each of Kirk P. Pond and Joseph R. Martin.
The respective agreements provide that Mr. Pond be employed as President and
Chief Executive Officer and that Mr. Martin be employed as Executive Vice
President and Chief Financial Officer. Each agreement has a term of three years
and may be renewed for up to two additional one-year terms. Under the respective
agreements, Mr. Pond's base salary is $660,000 and Mr. Martin's base salary is
$400,000 or, in either case, such higher salary as the compensation committee
determines. Mr. Pond's annual incentive target amount under the company's
Executive Officer Incentive Plan is 90% of his base salary and Mr. Martin's
target amount is 70% of his base salary (actual bonus amounts range from 0% to
250% of the target amount, depending on whether the company achieves or exceeds
pre-established financial performance goals). The respective agreements provide
for grants of stock options under the company's 2000 Executive Stock Option
Plan. That plan has been approved by the board of directors and is subject to
stockholder approval at our annual meeting of stockholders on May 16, 2000. The
respective agreements provide that if stockholders approve the plan, Mr. Pond
will be granted options to purchase 1,000,000 shares of our Class A Common Stock
and Mr. Martin will be granted options to purchase 600,000 shares of our Class A
Common Stock under that plan, in each case at an exercise price per share equal
to the fair market value of the company's Class A Common Stock on the close of
trading on the date of the 2000 annual meeting. These options have ten-year
terms and will vest in their entirety five years after the grant date, with
earlier vesting if certain per share stock price targets are achieved. Each
agreement further provides that, beginning in 2001, the executive may be
considered for annual regular stock option grants under the company's 2000
Employee Stock Option Plan or similar broad-based plans adopted subsequently, to
ensure that the executive's long term incentives remain competitive.
Each agreement provides that if the executive retires after the initial
three year term, he is entitled to (1) health coverage for himself and his
family until the later of his or his spouse's death and (2) life insurance
coverage with a face value of $1.5 million on his life until his death. If the
executive retires after the initial term of the agreement, all of his options
granted under the company's broad-based stock option plans will vest and he may
continue to exercise such options for their full term. Each executive's
retirement benefits are subject to his not violating the non-compete and
confidentiality provisions in his employment agreement.
Each agreement also provides that the executive cannot compete with the
company during the term of the agreement and for a period following termination
of employment equal to the greater of 12 months or the time remaining in the
initial term of the agreement at the time of termination.
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Each agreement also provides for severance pay equal to three times the
executive's base salary and target annual bonus amount if the executive is
terminated without cause by the company or resigns for "good reason" (as such
terms are defined in the agreements) and, in such events, all of the executive's
options become fully exercisable for their remaining term. If a change in
control of the company occurs, the executive is entitled to accelerated vesting
of his option unless the change in control is initiated by the company and the
executive remains employed in the same position after the change in control. The
agreements also provide for tax restoration payments to the extent any of the
cash or equity severance benefits are subject to an excise tax imposed under the
Internal Revenue Code.
Employment Agreements with Messrs. Boxer, Baker and Jackson. The company
expects to enter into employment agreements with each of Daniel E. Boxer, Jerry
M. Baker and Keith Jackson. Mr. Boxer is employed as Executive Vice President,
Chief Administrative Officer, General Counsel and Secretary; Mr. Baker as
Executive Vice President, Global Operations; and Mr. Jackson as Executive Vice
President and General Manager, Analog, Mixed Signal and Non-volatile Memory
Products. Mr. Boxer's and Mr. Baker's agreements have terms of three years and
Mr. Jackson will have a one-year agreement. Under the respective agreements, Mr.
Boxer's annual base salary is $363,000, Mr. Baker's annual base salary is
$330,000 and Mr. Jackson's annual base salary is $320,000 or, in any case, such
higher salary as the compensation committee determines. Mr. Boxer's annual
incentive target amount under the company's Executive Officer Incentive Plan is
60% of his base salary, Mr. Baker's target amount is 60% of his base salary and
Mr. Jackson's target amount is 50% of his base salary (actual bonus amounts
range from 0% to 250% of the target amount, depending on whether the company
achieves pre-established performance goals). The respective agreements provide
that if the stockholders approve the 2000 Executive Stock Option Plan at our
2000 annual meeting of stockholders as described above, Messrs. Boxer, Baker and
Jackson will be granted options to purchase 300,000 shares, 300,000 shares and
150,000 shares, respectively, of Class A Common Stock, in each case at an
exercise price per share equal to the fair market value of the Class A Common
Stock on the close of trading on the date of the 2000 annual meeting. These
options have ten-year terms and will vest in their entirety five years after the
grant date, with earlier vesting if certain per share stock price targets are
achieved. Each agreement further provides that, beginning in 2001, the executive
may be considered for annual regular stock option grants under the company's
2000 Employee Stock Option Plan or similar broad-based plans adopted
subsequently, to ensure that the executive's long term incentives remain
competitive.
The agreements have in most other respects provisions similar to those of
the agreements of Messrs. Pond and Martin in relevant retirement situations,
except that the agreements for Messrs. Baker and Jackson provide for severance
pay equal to two times the executive's base salary and target annual bonus
amount, do not provide for tax restoration payments in the event of a change in
control, and provide for lower life insurance payments.
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.
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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.
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
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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 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 February 29, 2000, 6,678,473 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 our follow-on public stock
offering, completed January 25, 2000, the vesting of these options (as well as
the vesting of other options held by other selling stockholders in that
offering) was accelerated, so that options that were to have vested in 2000
vested immediately prior to the consummation of that 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, of up to approximately 4% 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
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acquisition of the power device business. These plans consist of all legally
mandated and nationally-sponsored benefits plans such as national medical
insurance, unemployment insurance and a national pension program, as well as
privately sponsored plans such as a medical treatment guarantee program and a
personal pension contribution program. We will either continue in the Samsung
Electronics-sponsored programs that currently exist or replicate existing
Samsung Electronics programs under the sponsorship of Fairchild Korea
Semiconductor Ltd.
In addition to the above-mentioned benefits plans, we are continuing
incentive compensation programs of the power device business which existed at
the date of the acquisition of the power device business. These programs include
an Individual Incentive Plan which provides potential annual incentive
compensation for key employees, a Productivity Incentive Plan which pays
semi-annually based on productivity rankings and a Management by Objectives
Incentive Plan which pays semi-annually based on reaching EBITDA goals (as
defined in the plan). These incentive plans make incentive payments available in
multiples of the employee's monthly base salary, with varying caps on the
payments available under the various plans, so that an employee can earn a
maximum of 200% of monthly base salary under any one plan. Under all of the
various incentive plans, the average employee will receive approximately six
months of pay in the form of incentive payments during a fiscal year.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
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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 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.
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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 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
and during Stub Year 1999, Fairchild Semiconductor Corporation incurred costs of
$2.8 million, $14.0 million, $5.6 million and $1.0 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, $15.1 million, and $0.1 million, respectively, for
business support services
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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 and during Stub Year 1999, Fairchild Semiconductor Corporation generated
revenues of $20.9 million, $124.5 million, $62.9 million and $42.1 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, $18.1 million and
$12.0 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, and during Stub Year
1999, Fairchild Semiconductor Corporation generated revenues of $28.5 million,
$153.4 million, $81.0 million and $54.1 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 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-
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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.
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
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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 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
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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 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
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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
Citicorp Venture Capital Ltd. owns an interest in Sterling Holding Company,
LLC, which owns approximately 32% of our outstanding common stock. See
"Principal Stockholders." In connection with the company's acquisition of the
power device business from Samsung Electronics Co., Ltd. in April 1999, Citicorp
Mezzanine Partners, L.P., the general partner of which is an affiliate of
Citicorp Venture Capital Ltd., contributed $50.0 million in cash to the company
in exchange for a 12.5% Subordinated Note Due 2008 and a warrant to purchase
3,538,228 shares of our common stock. The 12.5% Subordinated Note was repaid in
full with proceeds of our initial public offering in August 1999, upon which
event the warrant became no longer exercisable.
In connection with the recapitalization of the Fairchild Semiconductor
business in March 1997, the then-existing stockholders of our company entered
into a Stockholders' Agreement containing agreements relating to the capital
stock and corporate governance of our company and our wholly owned subsidiary,
Fairchild Semiconductor Corporation. Amendments to the Stockholders' Agreement
in May 1998 resulted in the lapse of risks of forfeiture by executive officers
of Fairchild Semiconductor Corporation with respect to their stock in our
company. The lapse of such restrictions resulted in the incurrence by such
executive officers of liability for federal and state income tax. Fairchild
Semiconductor Corporation made loans to the executive officers in June 1998 to
enable them to fund such tax liabilities. The loans were in the following
amounts: Kirk P. Pond -- $1,686,164; Joseph R. Martin -- $843,094; Daniel E.
Boxer -- $347,060; Keith Jackson -- $70,340; and Jerry M. Baker -- $350,600.
Such loans bore interest at a rate of 6% per annum. Such loans (including
accrued but unpaid interest thereon) were cancelled upon the occurrence of the
company's initial public offering in August 1999, resulting in compensation
income (including gross-ups for resulting income taxes paid by our company) to
the executive officers as follows: Kirk P. Pond -- $2,812,885; Joseph R.
Martin -- $1,406,446; Daniel E. Boxer -- $578,964; Keith Jackson -- $114,455;
and Jerry M. Baker -- $592,898. See "Management -- Summary Compensation Table."
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 and
accrued interest was repaid in full in January 2000.
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PRINCIPAL 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 February 29, 2000 (unless otherwise noted).
<TABLE>
<CAPTION>
CLASS A COMMON STOCK(1) CLASS B COMMON STOCK(2) % OF ALL
-------------------------- -------------------------- COMMON
NO. OF SHARES % OF CLASS NO. OF SHARES % OF CLASS STOCK(3)
------------- ---------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Sterling Holding Company, LLC(4)............. 13,704,404 17.3% 17,281,000 100.0% 32.1%
AXA Financial, Inc.(5)....................... 8,679,400 11.0% 9.0%
Kirk P. Pond(6).............................. 1,193,782 1.5% 1.2%
Joseph R. Martin(6).......................... 1,290,000 1.6% 1.3%
Daniel E. Boxer(6)........................... 502,536 * *
Jerry M. Baker(6)............................ 620,387 * *
Keith Jackson(6)............................. 270,000 * *
Richard M. Cashin, Jr.(6)(7)................. 876,731 1.1% *
Paul C. Schorr IV(6)(7)...................... 73,596 * *
Ronald W. Shelly(6).......................... 11,400 * *
William N. Stout(6)(8)....................... 31,346 * *
All directors and executive officers as a
group (17 persons)(6)(7)(8)................ 5,902,086 7.5% 6.1%
</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 shares 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 is 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 outstanding shares of Class
A Common Stock and Class B Common Stock combined.
(4) The address for Sterling Holding Company, LLC ("Sterling") is c/o Martin
Geller, CPA-PC, 800 Third Avenue, New York, New York 10022. Citicorp Venture
Capital Ltd., an indirect wholly owned subsidiary of Citigroup Inc., owns an
interest in Sterling and has the right to acquire up to 25,331,414 shares of
our common stock, including up to 19.9% of the outstanding shares of Class A
Common Stock, in exchange for Citicorp Venture Capital Ltd.'s interest in
Sterling.
(5) The address for AXA Financial, Inc. is 1290 Avenue of the Americas, New
York, New York 10104. Information reported is based on AXA Financial Inc.'s
filings with the Securities and Exchange Commission and is as of January 30,
2000.
(6) Shares reported include those underlying options to purchase Class A Common
Stock that were vested as of March 15, 2000.
(7) Does not include shares held by Sterling. Richard M. Cashin, Jr., one of our
directors, is President of Citicorp Venture Capital Ltd., which owns an
interest in Sterling and our company as described in Note 4 above. Paul C.
Shorr IV, another of our directors, is Managing Director of Citicorp Venture
Capital Ltd. As a result of such affiliations, Messrs. Cashin and Schorr may
be deemed to beneficially own the shares held by Sterling. Each of Messrs.
Cashin and Schorr disclaims beneficial ownership of the shares held by
Sterling.
(8) William N. Stout, one of our directors, is President and Chief Executive
Officer of Sterling and owns an interest in Sterling. Shares reported for
Mr. Stout, except for 11,400 shares underlying vested options, which Mr.
Stout holds directly, are held by Sterling, and Mr. Stout has the right to
exchange his interest in Sterling for such shares. As a result of his
affiliation with Sterling, Mr. Stout may also be deemed to beneficially own
shares held by Sterling in which he does not have an interest. Mr. Stout
disclaims beneficial ownership of all shares held by Sterling except those
among the shares reported for him above.
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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 79,210,179 shares were
outstanding at February 29, 2000 and (b) 110,000,000 shares of Class B Common
Stock, of which 17,281,000 shares were outstanding at February 29, 2000. 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. On
March 17, 2000, our board of directors approved, declared advisable and
recommended the stockholders to consider at our May 16, 2000 annual meeting of
stockholders a proposal to amend our Restated Certificate of Incorporation to
increase the number of shares of each of our classes of common stock to
140,000,000 from 110,000,000.
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 February 29, 2000, there were
approximately 440 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
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paying any cash dividends on shares of our Class B Common Stock in the
foreseeable future. As of February 29, 2000, there was one holder of record of
our Class B Common Stock.
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
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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.
- 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.
BYLAWS
Our Restated Bylaws, which are filed as an exhibit to the registration
statement that includes this prospectus, contain restrictions that limit a
stockholder's ability to nominate a candidate for election to the board of
directors, or to introduce an item of business at such a meeting, by requiring
at least 60 days' notice of the stockholder's intention to make a nomination or
introduce the item of business (except in the case of our May 16, 2000 annual
meeting of stockholders, in which case 10 days' notice before the meeting is
required). The bylaws also require certain information to be included in the
notice.
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, 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.
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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.
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 and such stockholders entered into a
Registration Rights Agreement. Pursuant to the Registration Rights Agreement,
upon the written request of Sterling, 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 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 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
As of February 29, 2000, 79,210,179 shares of Class A Common Stock were
outstanding (excluding shares issuable upon exercise of employee stock options,
of which 6,678,473 were outstanding at February 29, 2000) and 17,281,000 shares
of Class B Common Stock were outstanding. Class A and Class B shares are
convertible into the other on a one-to-one basis. 50,525,000 shares of Class A
Common Stock, which includes the 27,025,000 shares sold in our follow-on public
offering, completed January 25, 2000, and the 23,500,000 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 81,440 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 shares
of Class A Common Stock, and 17,281,000 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 19,066,362 shares of Class A Common Stock and 17,281,000
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).
Each of our company, some of our directors and executive officers and the
selling stockholders in our follow-on public offering has agreed not to offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the Securities and Exchange Commission a registration statement
under the Securities Act relating to, any shares of our common stock or
securities convertible into or exchangeable or exercisable for any shares of our
common stock without the prior written consent of Credit Suisse First Boston
Corporation until April 25, 2000. A total of 34,912,834 shares of Class A Common
Stock and Class B Common Stock are 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 830,000 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
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securities were acquired from our company or the date they were acquired from an
affiliate of our company, a stockholder who is not an affiliate of our company
at the time of sale and who has not been 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.
44,661,568 shares of "restricted securities" 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 only if they are registered or if
they are exempt from registration under Rule 144 or Rule 144(k), as follows:
- 9,457,234 shares of Class A Common Stock held by non-affiliates or in
which non-affiliates have an interest are available for resale
immediately without restriction in accordance with Rule 144(k).
- 291,500 shares held by recently appointed executive officers may be sold
into the market immediately in accordance with Rule 144.
- The remaining 34,912,834 shares of Class A Common Stock (including shares
of Class A Common Stock issued upon conversion of the 17,281,000
outstanding shares of Class B Common Stock) will be available for sale in
the open market beginning April 25, 2000 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 February 29, 2000, of these shares:
- 1,223,171 options had been exercised;
- 6,678,473 options were outstanding; and
- 606,022 options remained available for grant.
99
<PAGE> 103
OTHER RESTRICTIONS ON RESALE
The Class A Common Stock offered by this prospectus is being registered
under the Securities Act of 1933, but this registration does not cover resale or
distribution by persons who receive Class A Common Stock issued by us in our
acquisitions. Affiliates (as that term is defined in Rule 144 under the
Securities Act of 1933) of entities acquired by us who do not become affiliates
of our company may not resell Class A Common Stock registered under the
registration statement to which this prospectus relates except pursuant to an
effective registration statement under the Securities Act covering such shares,
or in compliance with Rule 145 promulgated under the Securities Act or another
applicable exemption from the registration requirements of the Securities Act.
Generally, Rule 145 permits such affiliates to sell such shares immediately
following the acquisition in compliance with certain volume limitations and
manner of sale requirements. Under Rule 145, sales by such affiliates during any
three-month period cannot exceed the greater of (1) 1% of the shares of our
Class A Common Stock outstanding and (2) the average weekly reported volume of
trading of shares of our Class A Common Stock on all national securities
exchanges during the four calendar weeks preceding the proposed sale. These
restrictions will cease to apply under most other circumstances if the affiliate
has held the Class A Common Stock for at least two years, provided that the
person or entity is not then an affiliate of our company. Individuals who are
not affiliates of the entity being acquired and do not become affiliates of our
company will not be subject to resale restrictions under Rule 145 and, unless
otherwise contractually restricted, may resell shares of our Class A Common
Stock immediately following the acquisition without an effective registration
statement under the Securities Act. The ability of affiliates to resell shares
of our Class A Common Stock under Rule 145 will be subject to our company having
satisfied its reporting requirements under the Securities Exchange Act of 1934,
as amended, for specified periods prior to the time of sale.
PLAN OF DISTRIBUTION
We will issue Class A Common Stock from time to time in connection with
acquisitions by us or our subsidiaries of other businesses, assets or
securities. We expect that the terms of the acquisitions involving the issuance
of securities covered by this prospectus will be determined by direct
negotiations with the owners or controlling persons of the businesses, assets or
securities to be acquired by us or our subsidiaries. No underwriting discounts
or commissions will be paid in connection with the issuance of our Class A
Common Stock, although finder's fees may be paid from time to time with respect
to specific mergers or acquisitions. Any person receiving such fees may be
deemed to be an underwriter within the meaning of the Securities Act of 1933.
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.
EXPERTS
The consolidated financial statements and schedules of Fairchild
Semiconductor International, Inc. as of May 30, 1999 and December 26, 1999, for
each of the years in the three-year period ended May 30, 1999, and for the seven
months ended December 26, 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.
100
<PAGE> 104
The report of KPMG LLP covering the December 26, 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-4 under the
Securities Act of 1933, covering the Class A Common Stock to be offered pursuant
to this prospectus (File No. 333- ). This prospectus, which is a part of
the registration statement, does not contain all of the information included in
the registration statement. Any statement made in this prospectus concerning the
contents of any contract, agreement or other document is not necessarily
complete. For further information with respect to Fairchild International and
the Class A Common Stock offered hereby, please reference the registration
statement, including its exhibits. If we have filed any contract, agreement or
other document as an exhibit to the registration statement, you should read the
exhibit for a more complete understanding of the document or matter involved.
Copies of the registration statement, including all related exhibits and
schedules, may be inspected without charge at the public reference facilities
maintained by the SEC, or obtained at prescribed rates from the Public Reference
Section of the SEC at the address set forth above. In addition, you may request
a copy of any of these filings, at no cost, by writing or telephoning us at the
following address or phone number:
Fairchild Semiconductor International, Inc.
82 Running Hill Road
South Portland, Maine 04106
Attention: General Counsel
(207) 775-8100
101
<PAGE> 105
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.
102
<PAGE> 106
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.
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.
Non-volatile Memory........ Memory products which retain their data content
without the need for constant power supply.
Op Amp..................... Operational Amplifier.
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<PAGE> 107
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 series of fuses in the circuitry that
can be selectively blown to create a unique type of
data.
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<PAGE> 108
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.
105
<PAGE> 109
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at May 30, 1999 and December 26,
1999...................................................... F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended May 30, 1999, and for the
seven months ended December 26, 1999...................... F-4
Consolidated Statements of Cash Flows for the years ended
May 31, 1998 and May 30, 1999, and for the seven months
ended December 26, 1999................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for each of the years in the three-year period ended May
30, 1999, and for the seven months ended December 26,
1999...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
POWER DEVICE BUSINESS
Report of Independent Accountants........................... F-45
Statements of Net Assets (Liabilities) as of December 31,
1997 and 1998............................................. F-46
Statements of Operations and Comprehensive Income (Loss) for
each of the years in the three-year period ended December
31, 1998.................................................. F-47
Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1998................. F-48
Notes to Financial Statements............................... F-49
</TABLE>
F-1
<PAGE> 110
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fairchild Semiconductor International, Inc.:
We have audited the accompanying consolidated balance sheets of Fairchild
Semiconductor International, Inc. and subsidiaries (the "Company") as of May 30,
1999 and December 26, 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 for the seven months ended December 26, 1999, and
the related consolidated statements of cash flows for the years ended May 31,
1998 and May 30, 1999 and for the seven months ended December 26, 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 30, 1999 and December 26, 1999, the results of operations for each of the
years in the three-year period ended May 30, 1999 and for the seven months ended
December 26, 1999, and the results of cash flows for the years ended May 31,
1998 and May 30, 1999 and for the seven months ended December 26, 1999, on the
basis described in Note 1, in conformity with generally accepted accounting
principles.
As discussed in Note 18 to the consolidated financial statements, the
Company changed its method of accounting for business process reengineering
costs in the year ended May 31, 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 21, 2000, except as to Note 21, which is as of January 25, 2000
F-2
<PAGE> 111
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 30, DECEMBER 26,
1999 1999
------------ ----------------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 62.4 $ 138.7
Accounts receivable, net of allowances of $9.2 and $13.7
at May 30, 1999 and December 26, 1999, respectively.... 129.7 140.3
Inventories............................................... 148.6 166.3
Other current assets...................................... 65.7 13.7
-------- --------
Total current assets................................... 406.4 459.0
Property, plant and equipment, net.......................... 360.2 375.8
Deferred income taxes, net.................................. 2.8 3.8
Intangible assets, net of accumulated amortization of $9.9
and $29.4 at May 30, 1999 and December 26, 1999,
respectively.............................................. 278.5 261.4
Other assets................................................ 47.8 37.6
-------- --------
Total assets........................................... $1,095.7 $1,137.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt......................... $ 14.1 $ 1.4
Accounts payable.......................................... 99.6 109.3
Accrued expenses and other current liabilities............ 85.0 96.0
-------- --------
Total current liabilities.............................. 198.7 206.7
Long-term debt, less current portion........................ 1,045.9 717.2
Other liabilities........................................... 1.4 0.5
-------- --------
Total liabilities...................................... 1,246.0 924.4
-------- --------
Redeemable preferred stock -- 12% Series A Cumulative
Compounding Preferred Stock, $.01 par value, $1,000 stated
value; 70,000 shares authorized, issued and outstanding at
May 30, 1999.............................................. 90.1 --
Commitments and contingencies
Stockholders' equity (deficit):
Class A Common Stock, $.01 par value, voting; 110,000,000
shares authorized, 29,591,440 and 60,393,769 shares
issued and outstanding at May 30, 1999 and December 26,
1999, respectively..................................... 0.3 0.6
Class B Common Stock, $.01 par value, nonvoting;
110,000,000 shares authorized, 33,376,000 and
28,396,000 shares issued and outstanding at May 30,
1999 and December 26, 1999, respectively............... 0.3 0.3
Additional paid-in capital................................ 9.6 449.5
Accumulated deficit....................................... (250.6) (231.3)
Less treasury stock (at cost)............................. -- (5.9)
-------- --------
Total stockholders' equity (deficit)................... (240.4) 213.2
-------- --------
Total liabilities and stockholders' equity (deficit)... $1,095.7 $1,137.6
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 112
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEVEN
YEAR ENDED MONTHS ENDED
-------------------------------- ------------
MAY 25, MAY 31, MAY 30, DECEMBER 26,
1997 1998 1999 1999
------- ---------- ------- ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue:
Net sales -- trade............................. $587.8 $635.8 $ 654.1 $714.0
Contract manufacturing......................... 104.2 153.4 81.0 72.2
------ ------ ------- ------
Total revenue............................... 692.0 789.2 735.1 786.2
Operating expenses:
Cost of sales -- trade......................... 442.1 441.6 518.4 499.9
Cost of contract manufacturing................. 97.4 117.1 64.4 51.4
Research and development....................... 18.9 35.7 39.3 35.0
Selling, general and administrative............ 96.4 92.0 105.1 117.4
Purchased in-process research and
development................................. -- 15.5 34.0 --
Restructuring and impairments.................. 5.3 -- 21.3 --
------ ------ ------- ------
Total operating expenses.................... 660.1 701.9 782.5 703.7
------ ------ ------- ------
Operating income (loss).......................... 31.9 87.3 (47.4) 82.5
Interest expense, net............................ 11.2 54.5 71.8 56.2
Other expense, net............................... 1.4 -- -- --
------ ------ ------- ------
Income (loss) before income taxes................ 19.3 32.8 (119.2) 26.3
Provision (benefit) for income taxes............. 3.8 10.7 (5.1) 5.0
------ ------ ------- ------
Income (loss) before cumulative effect of change
in accounting principle........................ 15.5 22.1 (114.1) 21.3
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) $ 21.3
====== ====== ======= ======
Net income (loss) applicable to common
stockholders................................... $ 13.7 $ 11.9 $(123.9) $ 19.3
====== ====== ======= ======
Basic earnings (loss) per common share:
Income before cumulative effect of change in
accounting principle $ 0.21 $ (1.97) $ 0.24
Cumulative effect of change in accounting
principle................................... (0.02) -- --
------ ------- ------
$ 0.19 $ (1.97) $ 0.24
====== ======= ======
Diluted earnings (loss) per common share:
Income before cumulative effect of change in
accounting principle........................ $ 0.20 $ (1.97) $ 0.23
Cumulative effect of change in accounting
principle................................... (0.02) -- --
------ ------- ------
................................................. $ 0.18 $ (1.97) $ 0.23
====== ======= ======
Weighted average common shares:
Basic.......................................... 62.8 62.9 80.0
====== ======= ======
Diluted........................................ 65.0 62.9 83.7
====== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 113
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN
YEAR ENDED MONTHS ENDED
------------------ ------------
MAY 31, MAY 30, DECEMBER 26,
1998 1999 1999
------- ------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 20.6 $(114.1) $ 21.3
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization of deferred compensation.................. 0.2 0.1 1.4
Cumulative effect of change in accounting principle,
net.................................................. 1.5 -- --
Restructuring, net of cash expended.................... -- 17.3 --
Depreciation and amortization.......................... 84.6 103.7 80.9
Loss on disposal of fixed assets....................... 0.9 0.3 0.2
Non-cash interest expense.............................. 12.5 19.8 13.7
Purchased in-process research and development.......... 15.5 34.0 --
Deferred income taxes.................................. (0.4) (2.4) 1.0
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable.................................... 18.6 (53.2) (10.6)
Inventories............................................ (21.3) 8.5 (19.9)
Other current assets................................... (1.6) 2.3 3.7
Accounts payable....................................... (6.5) 21.4 15.1
Accrued expenses and other current liabilities......... 13.7 12.5 11.0
Other assets and liabilities, net...................... (2.2) (6.1) (2.1)
------- ------- -------
Cash provided by operating activities................ 136.1 44.1 115.7
------- ------- -------
Cash flows from investing activities:
Capital expenditures...................................... (78.0) (46.2) (74.8)
Proceeds from sale of property, plant and equipment....... -- 31.2 0.9
Purchase of molds and tooling............................. (5.7) (3.8) (1.3)
Refund (payment) of value added tax paid in connection
with acquisition....................................... -- (40.9) 40.9
Acquisitions, net of cash acquired........................ (116.8) (414.9) --
------- ------- -------
Cash used in investing activities.................... (200.5) (474.6) (34.3)
------- ------- -------
Cash flows from financing activities:
Repayment of long-term debt............................... (58.7) (151.3) (345.8)
Issuance of long-term debt................................ 90.0 660.0 --
Proceeds from issuance of common stock, net............... -- -- 345.0
Purchase of treasury stock................................ -- -- (5.9)
Proceeds from exercise of stock options................... -- -- 1.6
Debt issuance costs....................................... (1.1) (22.3) --
------- ------- -------
Cash provided by (used in) financing activities...... 30.2 486.4 (5.1)
------- ------- -------
Net change in cash and cash equivalents..................... (34.2) 55.9 76.3
Cash and cash equivalents at beginning of period............ 40.7 6.5 62.4
------- ------- -------
Cash and cash equivalents at end of period.................. $ 6.5 $ 62.4 $ 138.7
======= ======= =======
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes........................................... $ 8.9 $ -- $ 1.8
======= ======= =======
Interest............................................... $ 43.8 $ 46.6 $ 42.1
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 114
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------- TOTAL STOCK-
CLASS A CLASS B ADDITIONAL ACCUMU- TREASURY HOLDERS'
CLASS A CLASS B PAR PAR PAID-IN LATED STOCK BUSINESS EQUITY
SHARES SHARES VALUE VALUE CAPITAL DEFICIT (AT COST) EQUITY (DEFICIT)
------- ------- ------- ------- ---------- ------- --------- -------- ---------
(IN MILLIONS)
<S> <C> <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)
Net income..................... -- -- -- -- -- 21.3 -- -- 21.3
Dividends on redeemable
preferred stock.............. -- -- -- -- -- (2.0) -- -- (2.0)
Conversion of redeemable
preferred stock.............. 5.3 -- 0.1 -- 92.1 -- -- -- 92.2
Exercise of stock options...... 0.8 -- -- -- 1.6 -- -- -- 1.6
Issuance of common stock in
initial public offering...... 20.0 -- 0.2 -- 344.8 -- -- -- 345.0
Conversion of common stock..... 5.0 (5.0) -- -- -- -- -- -- --
Deferred compensation related
to the grant of stock
options...................... -- -- -- -- 1.4 -- -- -- 1.4
Purchase of treasury stock..... (0.3) -- -- -- -- -- (5.9) -- (5.9)
---- ---- ---- ---- ------ ------- ----- ------- -------
Balances at December 26, 1999.... 60.4 28.4 $0.6 $0.3 $449.5 $(231.3) $(5.9) $ -- $ 213.2
==== ==== ==== ==== ====== ======= ===== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 115
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Fairchild Semiconductor International, Inc. ("Fairchild International" or
the "Company"), formerly known as FSC Semiconductor Corporation, was
incorporated on March 10, 1997 by National Semiconductor Corporation ("National
Semiconductor" or "National"). On March 11, 1997, National Semiconductor
consummated an Agreement and Plan of Recapitalization ("Recapitalization"). As
part of the Recapitalization, National Semiconductor transferred all of the
capital stock of Fairchild Semiconductor Corporation ("Fairchild") and
approximately $12.8 million in cash to Fairchild International in exchange for
shares of Fairchild International's 12% Series A Cumulative Compounding
Preferred Stock, Fairchild International's common stock and a promissory note in
the principal amount of approximately $77.0 million.
In addition, National Semiconductor transferred substantially all of the
assets and liabilities of the Fairchild Semiconductor Business (the "Business")
to Fairchild International. 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 International assumed the
historical operating results of the Business. Fairchild International is a
leading global designer, developer and manufacturer of high performance
multi-market semiconductors. Fairchild International's interface and 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, 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 (the "power device business"). (See Note 17)
BASIS OF PRESENTATION
The consolidated financial statements as of May 30, 1999 and December 26,
1999, and for the period from March 11, 1997 through May 25, 1997, the fiscal
years ended May 31, 1998 and May 30, 1999 and the seven months ended December
26, 1999, 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
F-7
<PAGE> 116
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION -- (CONTINUED)
National Semiconductor. In addition, certain costs incurred at Fairchild plants
for the benefit of other National Semiconductor product lines were allocated
from Fairchild to National Semiconductor. All of the allocations and estimates
in the combined statements of operations were based on assumptions that
management believes were reasonable under the circumstances. However, these
allocations and estimates are not necessarily indicative of the costs that would
have resulted if the Business had been operated on a stand-alone basis.
Transactions with National Semiconductor have been identified in the
consolidated 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 changed its fiscal year end from the last Sunday in May to the
last Sunday in December. The Company's results for the fiscal years ended May
25, 1997 (Fiscal 1997), May 31, 1998 (Fiscal 1998) and May 30, 1999 (Fiscal
1999) and for the seven months ended December 26, 1999 (Stub Year 1999) consist
of 52 weeks, 53 weeks, 52 weeks, and 30 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 International and
National Semiconductor executed several agreements, which govern the performance
of manufacturing services by Fairchild International on behalf of National
Semiconductor and by National Semiconductor on behalf of Fairchild
International. In addition, National Semiconductor provided a number of business
support services to Fairchild International 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
F-8
<PAGE> 117
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
manufacturing costs (e.g., material costs) that were specifically identifiable
with a particular product line were charged or credited directly without
apportionment.
National Semiconductor also performed manufacturing services for the
Business and incurred other elements of cost of sales on behalf of the Business,
including freight, duty, warehousing, and purchased manufacturing services from
third-party vendors.
Shared or common costs, including certain general and administrative, sales
and marketing, and research and development expenses, have been allocated from
National Semiconductor's corporate office, selling and marketing locations, and
manufacturing sites to the Business or from the Business' plants to National
Semiconductor product lines on a basis which is considered to fairly and
reasonably reflect the utilization of the services provided to, or benefit
obtained by, the business receiving the charge. National Semiconductor had net
interest income on a consolidated basis for all periods presented prior to the
Recapitalization. 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 expense, net. (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 ten
years. Depreciation is principally provided under 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
Notes 3 and 17)
OTHER ASSETS
Other assets include deferred financing 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.
F-9
<PAGE> 118
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets not held for
sale, including intangible assets, by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values. Based on
these evaluations, there were no adjustments to the carrying value of long-lived
assets in Fiscal 1997, Fiscal 1998, Fiscal 1999, and Stub Year 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 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.
F-10
<PAGE> 119
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 from May 27, 1996
through March 10, 1997. Upon the Recapitalization, the Company became
responsible for its income taxes and, therefore, the provision for income taxes
included in the accompanying 1997 statement of operations is for the period from
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
Net income (loss) per common share is presented for the years ended May 31,
1998 and May 30, 1999 and for the seven months ended December 26, 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>
YEAR ENDED SEVEN MONTHS
------------------ ENDED
MAY 31, MAY 30, DECEMBER 26,
1998 1999 1999
------- ------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
Basic weighted average common shares outstanding............ 62.8 62.9 80.0
Net effect of dilutive stock options based on the treasury
stock method using the average market price............... 2.2 -- 3.7
----- ------- -----
Diluted weighted average common shares outstanding.......... 65.0 62.9 83.7
===== ======= =====
Net income (loss)........................................... $20.6 $(114.1) $21.3
Dividends on redeemable preferred stock..................... 8.7 9.8 2.0
----- ------- -----
Net income (loss) applicable to common stockholders......... $11.9 $(123.9) $19.3
===== ======= =====
</TABLE>
Options to purchase 750,000, 4,282,570 and 82,435 shares of common stock
were outstanding at May 31, 1998, May 30, 1999 and December 26, 1999,
respectively, but were not included in the
F-11
<PAGE> 120
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
computation of diluted earnings per share because the effect of including such
options would have been anti-dilutive.
EMPLOYEE STOCK PLAN
The Company accounts for its stock option plan in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. The Company provides the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation."
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 3 -- FINANCIAL STATEMENT DETAILS
<TABLE>
<CAPTION>
MAY 30, DECEMBER 26,
1999 1999
------- ------------
(IN MILLIONS)
<S> <C> <C>
Inventories
Raw materials............................................. $ 13.6 $ 17.1
Work in process........................................... 93.1 99.3
Finished goods............................................ 41.9 49.9
------ ------
$148.6 $166.3
====== ======
Other current assets
Refundable payment of value added tax associated with
acquisition............................................ $ 40.9 $ --
Non-trade receivable from manufacturing subcontractor..... 4.5 --
Deferred income taxes..................................... 7.6 5.6
Prepaid and other current assets.......................... 12.7 8.1
------ ------
$ 65.7 $ 13.7
====== ======
Property, plant and equipment
Land...................................................... $ 19.0 $ 19.0
Buildings and improvements................................ 177.0 178.2
Machinery and equipment................................... 681.7 704.9
Construction in progress.................................. 18.1 49.3
------ ------
Total property, plant and equipment............... 895.8 951.4
Less accumulated depreciation............................. 535.6 575.6
------ ------
$360.2 $375.8
====== ======
</TABLE>
F-12
<PAGE> 121
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- FINANCIAL STATEMENT DETAILS -- (CONTINUED)
<TABLE>
<CAPTION>
PERIOD OF MAY 30, DECEMBER 26,
AMORTIZATION 1999 1999
------------ ------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
Intangible assets
Developed technology................................. 15 years $169.7 $171.0
Customer base........................................ 8 years 53.9 54.4
Covenant not to compete.............................. 5 years 30.8 31.0
Trademarks and tradenames............................ 4 years 25.1 25.3
Assembled workforce.................................. 3 years 8.9 9.1
------ ------
Total intangible assets......................................... 288.4 290.8
Less accumulated amortization...................................... (9.9) (29.4)
------ ------
$278.5 $261.4
====== ======
Accrued expenses
Payroll and employee related accruals.............................. $ 29.3 $ 44.4
Accrued interest................................................... 13.5 17.1
Restructuring and related allowances............................... 12.5 2.6
Income taxes payable............................................... 0.3 2.3
Other.............................................................. 29.4 29.6
------ ------
$ 85.0 $ 96.0
====== ======
</TABLE>
NOTE 4 -- LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
MAY 30, DECEMBER 26,
1999 1999
-------- ------------
(IN MILLIONS)
<S> <C> <C>
Term loans payable:
Tranche A................................................. $ 100.0 $ --
Tranche B................................................. 210.0 118.6
Senior subordinated notes payable......................... 600.0 600.0
PIK note payable.......................................... 99.2 --
CMP note payable.......................................... 50.8 --
-------- ------
Total long-term debt................................... 1,060.0 718.6
Less current portion........................................ 14.1 1.4
-------- ------
Long-term portion...................................... $1,045.9 $717.2
======== ======
</TABLE>
On April 14, 1999 the Company entered into a Senior Credit Facilities
Agreement ("Credit Agreement") with a syndicate of financial institutions in
order to refinance an existing credit agreement and finance the acquisition of
the power device business. (See Note 17) 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 were scheduled to mature
on
F-13
<PAGE> 122
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT -- (CONTINUED)
March 31, 2004, and were paid in full on August 9, 1999, with proceeds obtained
from the Company's initial public offering ("IPO"). The Company also repaid
approximately $90.6 million of the Tranche B Term Loans with the IPO proceeds.
The Tranche B Term Loans are scheduled to mature on December 15, 2004, and are
subject to quarterly principal payments ranging from $0.3 million to $0.4
million commencing September 30, 1999 and ending September 30, 2004 with a final
principal payment of $112.5 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 or December 26,
1999.
Borrowings under the Credit Agreement accrue interest based on either the
bank's base rate or the Eurodollar rate, at the option of the Company. The
interest rate was 8.2% and 8.4% for the Tranche B term loan at May 30, 1999 and
December 26, 1999, respectively, and 7.7% for the Tranche A term loan at May 30,
1999. Fairchild pays a commitment fee of 0.5% per annum of the unutilized
commitments under the Revolving Credit Agreement. Borrowings are secured by
substantially all assets of Fairchild.
On April 7, 1999, Fairchild issued $300.0 million of 10 3/8% Senior
Subordinated Notes (the "10 3/8% Notes") at face value. The 10 3/8% Notes pay
interest on April 1 and October 1 of each year commencing October 1, 1999 and
are due October 1, 2007. The 10 3/8% Notes are unsecured and are subordinated to
all existing and future senior indebtedness of Fairchild. Until April 1, 2002,
Fairchild can redeem an amount not to exceed 35% of the 10 3/8% Notes with
proceeds raised from certain public equity offerings. On or after April 1, 2003,
the 10 3/8% Notes are redeemable by Fairchild, in whole or in part, at
redemption prices ranging from 100% to approximately 105% of the principal
amount.
On March 11, 1997, Fairchild issued $300.0 million of 10 1/8% Senior
Subordinated Notes (the "10 1/8% Notes" and, together with the 10 3/8% Notes,
the "Notes") at face value. The 10 1/8% Notes pay interest on March 15 and
September 15 of each year commencing September 15, 1997. The 10 1/8% Notes are
unsecured and are subordinated to all existing and future senior indebtedness of
Fairchild. The 10 1/8% Notes are redeemable by Fairchild, in whole or in part,
on or after March 15, 2002 at redemption prices ranging from 100% to
approximately 105% of the principal amount. Fairchild is required to redeem
$150.0 million principal amount of 10 1/8% Notes on March 15, 2005 and $75.0
million principal amount of 10 1/8% Notes on March 15, 2006 and 2007,
respectively, in each case at a redemption price of 100% of the principal amount
plus accrued interest to the date of redemption.
The payment of principal and interest on the Credit Agreement and the Notes
is fully and unconditionally guaranteed by Fairchild International. Fairchild
International is the parent company of Fairchild and currently conducts no
business and has no significant assets other than the capital stock of Fairchild
and certain deferred tax assets related to interest on its debt. Fairchild has
eleven direct subsidiaries and one indirect subsidiary, of which only one direct
subsidiary, Fairchild Semiconductor Corporation of California ("Fairchild
California"), is a guarantor on the Credit Agreement and the Notes. The
remaining direct and indirect subsidiaries are foreign-based and do not
guarantee either the Credit Agreement or the Notes.
On April 13, 1999, in connection with the acquisition of the power device
business, the Company entered into a Subordinated Credit Agreement with Citicorp
Mezzanine Partners, L.P. ("CMP
F-14
<PAGE> 123
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LONG-TERM DEBT -- (CONTINUED)
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. On August 9, 1999, the
Company prepaid the CMP Note, plus accrued interest, with proceeds from its IPO.
As this was considered a voluntary prepayment, interest on the CMP Note was paid
at a rate of 18% per annum. 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.
As a result of this repayment, this warrant became unexerciseable.
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. On August 9, 1999,
the Company paid in full the PIK Note plus accrued interest.
The Credit Agreement and the indenture under which the Notes were issued
contain certain restrictive financial and operating covenants, including
limitations on stock repurchases and prohibitions on the payment of dividends,
with which the Company was in compliance at December 26, 1999.
Aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
2000........................................................ $ 1.4
2001........................................................ 1.2
2002........................................................ 1.2
2003........................................................ 1.2
2004........................................................ 113.6
Thereafter.................................................. 600.0
------
$718.6
======
</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. 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.
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.
F-15
<PAGE> 124
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES -- (CONTINUED)
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 current provision for
income taxes for Korea has been provided. The tax holiday increased net income
by $18.0 million or $0.22 per fully diluted share for the seven months ended
December 26, 1999.
The provision (benefit) for income taxes included in the accompanying
consolidated statements of operations for the period from March 11, 1997 to
March 25, 1997, Fiscal 1998, Fiscal 1999, and Stub year 1999, consisted of the
following:
<TABLE>
<CAPTION>
SEVEN
MONTHS
MARCH 11, YEAR ENDED ENDED
1997 TO ------------------ ------------
MAY 25, MAY 31, MAY 30, DECEMBER 26,
1997 1998 1999 1999
--------- ------- ------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Income (loss) before income taxes:
U.S. .................................... $7.2 $14.6 $(103.7) $(46.6)
Foreign.................................. 2.5 18.2 (15.5) 72.9
---- ----- ------- ------
$9.7 $32.8 $(119.2) $ 26.3
==== ===== ======= ======
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 4.0
---- ----- ------- ------
1.4 11.9 (2.7) 4.0
Deferred:
U.S. federal.......................... 1.9 (2.0) (2.5) (2.1)
U.S. state and local.................. 0.5 (0.4) 0.1 (0.2)
Foreign............................... -- 1.2 -- 3.3
---- ----- ------- ------
2.4 (1.2) (2.4) 1.0
Total income tax provision (benefit):
U.S. federal............................. 1.9 5.1 (7.3) (2.1)
U.S. state and local..................... 0.5 1.1 0.1 (0.2)
Foreign.................................. 1.4 4.5 2.1 7.3
---- ----- ------- ------
$3.8 $10.7 $ (5.1) $ 5.0
==== ===== ======= ======
</TABLE>
F-16
<PAGE> 125
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
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>
SEVEN
MONTHS
MARCH 11, YEAR ENDED ENDED
1997 TO ------------------ ------------
MAY 25, MAY 31, MAY 30, DECEMBER 26,
1997 1998 1999 1999
--------- ------- ------- ------------
<S> <C> <C> <C> <C>
U.S. federal statutory rate................. 35.0% 35.0% 35.0% 35.0%
U.S. state and local taxes, net of federal
benefit................................... 4.1 3.3 1.4 (0.5)
Tax differential related to foreign
income.................................... -- (5.7) (8.6) (64.8)
Change in valuation allowance............... -- -- (23.5) 49.3
----- ----- ------ ------
39.1% 32.6% 4.3% 19.0%
----- ----- ------ ------
</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 30,
1999 and December 26, 1999 are presented below:
<TABLE>
<CAPTION>
MAY 30, DECEMBER 26,
1999 1999
------- ------------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards......................... $ 34.0 $ 60.1
Reserves and accruals..................................... 26.5 21.7
Plant and equipment....................................... 3.5 3.1
Intangibles, primarily intellectual property and
software............................................... 22.7 21.7
Tax credit carryovers..................................... 1.4 1.4
------ ------
Total gross deferred tax assets................... 88.1 108.0
Valuation allowance....................................... (62.7) (80.3)
------ ------
Net deferred tax assets.............................. 25.4 27.7
Deferred tax liabilities (all foreign):
Intangibles, primarily intellectual property.............. (9.9) (11.9)
Plant and equipment....................................... (3.7) (5.0)
Capital allowance......................................... (1.4) (1.4)
------ ------
Total deferred tax liabilities.................... (15.0) (18.3)
------ ------
Net deferred tax assets..................................... $ 10.4 $ 9.4
====== ======
</TABLE>
In assessing the realizability of deferred tax assets, the Company
considered its taxable future earnings and the expected timing of the reversal
of temporary differences. Accordingly, the Company has recorded a valuation
allowance which reduces the gross deferred tax asset to an amount which the
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.
F-17
<PAGE> 126
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES -- (CONTINUED)
Net operating loss, research and development credit and foreign tax credit
carryforwards totaled $158.5 million, $0.2 million and $1.2 million,
respectively, as of December 26, 1999. Upon utilization or recognition of the
net operating loss carryforwards, $7.5 million of the tax benefit will be
credited to additional paid-in capital. The net operating losses expire in 2019
and 2020. The research and development credits expire in varying amounts in 2012
through 2014. The foreign tax credits expire in varying amounts in 2002 through
2005.
Deferred income taxes have not been provided for the undistributed earnings
of the Company's foreign subsidiaries, which aggregated approximately $54.6
million at December 26, 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.
The Company's ability to utilize its net operating loss and credit
carryforwards may be limited in the future if the Company experiences an
ownership change as a result of future transactions. An ownership change occurs
when the ownership percentage of 5% or greater stockholders changes by more than
50% over a three-year period. The Company does not expect that a subsequent
ownership change would place any material limitation on the utilization of the
loss carryforward.
NOTE 6 -- STOCK-BASED COMPENSATION
At December 26, 1999, the Company has one stock option plan, the 1997 Stock
Option Plan, as amended and restated, (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 and the seven months ended December 26, 1999,
the Company granted 25,600 and 1,358,700 stock options, respectively, 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 and $13.6
million, respectively. Had compensation cost for the Company's stock option plan
been determined consistent with SFAS No. 123, the Company would have reported
net income (loss) of $15.5 million, $20.6 million, $(114.3) million and $13.6
million in Fiscal 1997, Fiscal 1998, Fiscal 1999 and Stub Year 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>
MAY 31, MAY 30, DECEMBER 26,
1998 1999 1999
------- ------- ------------
<S> <C> <C> <C>
Expected volatility.................................... -- 49% 49%
Dividend yield......................................... -- -- --
Risk-free interest rate................................ 5.88% 4.43% 4.89%
Expected life, in years................................ 2.9 3.4 4.0
</TABLE>
Under the Plan, the Company may grant options for up to 8,507,666 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
F-18
<PAGE> 127
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- STOCK-BASED COMPENSATION -- (CONTINUED)
and its subsidiaries and members of the Company's Board of Directors who are not
employees of the Company.
The exercise price of each option granted under the Plan shall be as
determined by a Committee of the Company's Board of Directors (the "Committee").
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 Committee, currently vesting ratably over approximately
five years. Individuals receiving options under the Plan may not receive in any
one year period options to purchase more than 200,000 shares of common stock.
A summary of the status of the Company's stock option plan as of May 31,
1998, May 30, 1999 and December 26, 1999, and changes during the years then
ended are presented in the table below:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1999 STUB YEAR 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 4,283 $ 3.82
Granted............................... 1,777 4.29 972 10.00 3,549 14.83
Exercised............................. (142) 0.13 (93) 0.13 (805) 2.06
Canceled.............................. (80) 0.13 (180) 6.83 (63) 7.12
Outstanding at end of year............ 3,584 $2.20 4,283 $ 3.82 6,964 $ 9.60
===== ===== ===== ====== ====== ======
Exercisable at end of year............ 798 $0.13 1,612 $ 1.82 1,331 $ 5.56
Weighted average fair value of options
granted............................. $0.22 $ 0.09 $ 9.68
</TABLE>
Information with respect to stock options outstanding and stock options
exercisable at December 26, 1999, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
(000'S) REMAINING AVERAGE (000'S) AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.13 -- 0.13................. 2,086 7.48 $ 0.13 732 $ 0.13
$10.00 -- 10.00............... 2,881 9.13 10.00 444 10.00
$18.50 -- 25.25............... 1,917 9.61 18.54 155 18.50
$28.00 -- 28.50............... 80 9.93 28.44 -- --
----- -----
6,964 8.78 $ 9.60 1,331 $ 5.56
===== =====
</TABLE>
F-19
<PAGE> 128
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- RETIREMENT PLANS
The Company sponsors the Fairchild Personal Savings and Retirement Plan
(the "Retirement Plan"), a contributory savings plan which qualifies under
section 401(k) of the Internal Revenue Code. The Retirement Plan covers
substantially all employees in the United States. The Company provides a
matching contribution equal to 75% of employee elective deferrals up to a
maximum of 6% of an employee's annual compensation. The Company also maintains a
non-qualified Benefit Restoration Plan, under which employees who have otherwise
exceeded annual IRS limitations for elective deferrals can continue to
contribute to their retirement savings. The Company matches employee elective
deferrals to the Benefit Restoration Plan on the same basis as the Retirement
Plan.
Total expense recognized under these plans was $1.1 million, $3.4 million,
$3.5 million and $2.3 million for the fiscal years ended May 25, 1997, May 31,
1998, May 30, 1999, and the seven months ended December 26, 1999, respectively.
Employees in Korea who have been with the Company for over one year are
entitled by Korean law to receive lump-sum payments upon termination of their
employment. The payments are based on current rates of pay and length of service
through the date of termination. It is the Company's policy to accrue for this
estimated liability as of each balance sheet date. Amounts recognized as expense
were $0.3 million and $2.4 million for the fiscal year ended May 30, 1999 and
the seven months ended December 26, 1999, respectively.
Employees in Malaysia participate in a defined contribution plan. The
Company has funded accruals for this plan in accordance with statutory
regulations in Malaysia. Contributions made by the Company under this plan were
$0.4 million, $1.5 million, $1.2 million and $0.9 million for the fiscal years
ended May 25, 1997, May 31, 1998, and May 30, 1999, and the seven months ended
December 26, 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 fiscal years ended May 25, 1997, May 31,
1998 and May 30, 1999, and for the seven months ended December 26, 1999, were
not material to the consolidated financial statements.
NOTE 8 -- LEASE COMMITMENTS
Rental expense related to certain facilities and equipment of the Company's
plants was $5.0 million, $9.5 million, $12.5 million and $8.2 million for Fiscal
1997, Fiscal 1998, Fiscal 1999 and Stub Year 1999, respectively.
F-20
<PAGE> 129
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- LEASE COMMITMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases as of
December 26, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER, (IN MILLIONS)
- -------------------- -------------
<S> <C>
2000........................................................ $ 9.9
2001........................................................ 5.6
2002........................................................ 4.6
2003........................................................ 4.0
2004........................................................ 4.0
Thereafter.................................................. 12.1
-----
$40.2
=====
</TABLE>
NOTE 9 -- REDEEMABLE PREFERRED STOCK
Concurrent with the Recapitalization, the Company authorized 70,000 shares
of redeemable preferred stock at a par value of $.01, all of which were
designated as 12% Series A Cumulative Compounding Preferred Stock (the
"Redeemable Preferred Stock"). The Redeemable Preferred Stock had a stated value
of $1,000 per share and was entitled to annual dividends when, as and if
declared, which dividends were cumulative, whether or not earned or declared,
and accrued at a rate of 12%, compounding annually. On August 9, 1999, in
connection with the IPO, all shares of Redeemable 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
Redeemable Preferred Stock were converted into 5,300,020 shares of Class A
Common Stock. The total liquidation value of the Redeemable Preferred Stock at
August 9, 1999 was $92.2 million. At May 30, 1999, 70,000 shares were issued and
outstanding. The total liquidation value of the shares outstanding at May 30,
1999 in the amount of $90.1 million is classified in the accompanying
consolidated balance sheet as Redeemable Preferred Stock.
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 nonvoting common stock, and a promissory PIK Note
of the Company in the principal amount of approximately $77.0
million;
F-21
<PAGE> 130
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
(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 million 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.
PREFERRED STOCK
Under the Company's Restated Certificate of Incorporation, the Company's
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. At
December 26, 1999, no shares were issued.
INITIAL PUBLIC OFFERING
On August 9, 1999, the Company completed an initial public offering 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 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.
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.
The Company has authorized 220,000,000 shares of common stock at a par
value of $.01 per share, divided into two classes consisting of 110,000,000
shares of Class A Common Stock and 110,000,000 shares of Class B Common Stock.
Previously, 160,000,000 shares were authorized, consisting of 80,000,000 shares
of Class A Common Stock and 80,000,000 shares of Class B 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. Except as
required by law, the
F-22
<PAGE> 131
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
holders of Class B Common 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 Common Stock, which is nonvoting, into Class A Common
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 Common 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. On August 9, 1999, the CMP Note was paid in full, and the warrant
became unexercisable.
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 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) were cancelled as a result of the Company's
IPO of its Class A Common Stock, which was completed on August 9, 1999. The
Company also paid 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). A total charge of
$8.3 million was recorded in selling, general and administrative expense during
the seven months ended December 26, 1999.
NOTE 11 -- RESTRUCTURING AND IMPAIRMENTS
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 former Mountain View, California and West
Jordan, Utah facilities, which primarily serve the Company's Analog and Discrete
product groups, respectively. As of December 26, 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. The affected
employees, who worked in production, engineering, sales and marketing and
administration, were 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 former 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
F-23
<PAGE> 132
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- RESTRUCTURING AND IMPAIRMENTS -- (CONTINUED)
production employees terminated as a result of the transfer. The asset
impairments consisted of production equipment that were idled as a result of
this action. As of December 26, 1999 these assets have been disposed of.
In connection with the sale of its former 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 resulted in the termination of approximately 170 salaried, hourly and
temporary employees, all of whom worked 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 paid under a noncancelable operating lease after
operations ceased as well as other incremental costs associated with the
facility closure. The non-cash asset impairments primarily consisted of
production equipment that were not transferred to South Portland, Maine. As of
December 26, 1999, substantially all of these assets have been disposed of.
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 streamlined its operations to focus solely on
its most profitable products. The charge included $3.9 million for non-cash
asset impairments and $0.2 million for employee separation costs all of which
were paid by May 30, 1999. The non-cash impairments consisted of production
equipment and other equipment in West Jordan, Utah, and Sunnyvale, California,
that became idle as a result of the plan. The assets will be disposed of during
the first half of 2000.
The Memory Division product line restructuring plan also included 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.
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 plan:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
FOURTH QUARTER FISCAL 1999 MOUNTAIN VIEW RESTRUCTURING
Total charge................................................ $10.0
Non-cash items.............................................. (3.4)
-----
Accrual balance as of May 30, 1999..................... 6.6
Cash payments............................................... (4.0)
-----
Accrual balance as of December 26, 1999................ $ 2.6
=====
</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
F-24
<PAGE> 133
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- RESTRUCTURING AND IMPAIRMENTS -- (CONTINUED)
Business recorded a $5.3 million non-recurring charge related to work force
reductions. During the year ended May 25, 1997, $5.3 million of severance was
paid to terminated employees.
NOTE 12 -- RELATED PARTY TRANSACTIONS
Related party activity between the Company and National Semiconductor, in
addition to contract manufacturing services performed for National
Semiconductor, is summarized as follows:
<TABLE>
<CAPTION>
PERIOD PERIOD
FROM FROM
MAY 27, MARCH 11,
1996 1997 YEAR YEAR SEVEN MONTHS
THROUGH THROUGH ENDED ENDED ENDED
MARCH 10, MAY 25, MAY 31, MAY 30, DECEMBER 26,
1997 1997 1998 1999 1999
--------- --------- ------- ------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Manufacturing services performed by
National Semiconductor plants or
purchased from third parties.......... $34.3 $ 2.8 $14.0 $ 5.6 $1.0
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 $1.0
===== ===== ===== ===== ====
Cost of business support services
provided by National Semiconductor.... $ -- $11.6 $28.7 $10.7 $0.1
===== ===== ===== ===== ====
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 $12.0 million and $8.8 million at May 30, 1999 and December
26, 1999, respectively. Amounts payable to National Semiconductor, included in
accounts payable, totaled $0.4 million and $0.2 million at May 30, 1999 and
December 26, 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 1997, Fiscal 1998, Fiscal
1999 and Stub Year 1999.
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
F-25
<PAGE> 134
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- CONTINGENCIES -- (CONTINUED)
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.
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. The Company intends to contest these claims
vigorously.
On December 22, 1999, 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 the Company is in the process of investigating IXYS'
claims, the Company believes these claims are subject to indemnification by
Samsung Electronics under the patent indemnification provisions of the Business
Transfer Agreement with Samsung Electronics. The Company intends to contest this
claim vigorously.
In addition, in the normal course of business, the Company is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. All such matters are
subject to uncertainties and outcomes that are not predictable with assurance.
Consequently, the Company is unable to ascertain the ultimate aggregate amount
of monetary liability or financial impact with respect to these additional
matters at December 26, 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 consolidated 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 1997, Fiscal 1998, Fiscal 1999 and
Stub Year 1999.
F-26
<PAGE> 135
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- FINANCIAL INSTRUMENTS -- (CONTINUED)
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 December 26, 1999, no swap or interest rate cap agreements were outstanding.
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 financial instruments as of May 30, 1999 and
December 26, 1999. The notional principal amounts for off-balance sheet
financial instruments provide one measure of the transaction volume outstanding
as of year end and do not represent the amount of the Company's exposure to
credit or market loss. The estimates of fair value are based on applicable and
commonly used pricing models using prevailing financial market information as of
May 30, 1999 and December 26, 1999. Although the following table reflects the
notional principal and fair value of amounts of off-balance sheet financial
instruments, it does not reflect the gains or losses associated with the
exposures and transactions that the off-balance sheet financial instruments are
intended to hedge. The amounts ultimately realized upon settlement of these
financial instruments, together with the gains and losses on the underlying
exposures, will depend on actual market conditions during the remaining life of
the instruments.
<TABLE>
<CAPTION>
MAY 30, 1999 DECEMBER 26, 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
Caps.................. $310.0 $-- $ -- $ -- $-- $--
Foreign Exchange
Instruments
Purchased Options..... 32.1 -- -- 73.0 -- (0.1)
</TABLE>
F-27
<PAGE> 136
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- FINANCIAL INSTRUMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary table of estimated fair values of financial instruments follows:
<TABLE>
<CAPTION>
MAY 30, 1999 DECEMBER 26, 1999
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Long-Term Debt
Senior subordinated notes.................. $600.0 $603.0 $600.0 $608.3
Term loans................................. 310.0 310.0 118.6 118.6
PIK note................................... 99.2 94.2 -- --
CMP note................................... 50.8 50.8 -- --
</TABLE>
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
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 Products Group, Interface and Logic
Products Group and the Non-Volatile Memory Division. Each of these groups has a
vice president, general manager who reports directly to the Chief Executive
Officer ("CEO"). The CEO allocates resources to each of these groups using
information on their revenues and operating profits before interest, taxes and
non-recurring items. The CEO has been identified as the Chief Operating Decision
Maker as defined by SFAS No. 131. Fairchild's products in all operating groups
are sold to original equipment manufacturers and distributors throughout the
world.
During Stub Year 1999, the Company integrated the power device business
acquired from Samsung Electronics in April of 1999, into its existing Analog and
Mixed Signal Products Division and its Discrete Power and Signal Technologies
Products Group product line operation segments. Fiscal 1999 segment information
has been restated to reflect the integration of this previously reported segment
into other reported segments.
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 and to fully allocate
depreciation and amortization 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.
F-28
<PAGE> 137
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
Statement of operations information on reportable segments for Fiscal 1997,
Fiscal 1998, Fiscal 1999 and Stub Year 1999 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS
----------------------------- ENDED
MAY 25, MAY 31, MAY 30, DECEMBER 26,
1997 1998 1999 1999
------- ------- ------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUE AND OPERATING INCOME (LOSS):
Analog and Mixed Signal Products Division
Trade revenue.............................. $ -- $ 32.0 $ 95.8 $173.5
Operating income........................... -- 2.2 8.1 24.0
------ ------ ------ ------
Discrete Power and Signal Technologies
Products Group
Trade revenue.............................. $164.5 $187.3 $222.8 $316.9
Contract manufacturing revenue............. 15.1 34.5 9.1 26.2
Operating income........................... 21.7 44.9 7.0 36.7
------ ------ ------ ------
Interface and Logic Products Group
Trade revenue.............................. $285.3 $303.0 $267.6 $184.0
Contract manufacturing revenue............. 89.1 118.9 71.9 46.0
Operating income........................... 21.3 70.0 35.7 29.7
------ ------ ------ ------
Non-Volatile Memory Division
Trade revenue.............................. $138.0 $113.5 $ 73.4 $ 39.6
Operating income (loss).................... 5.0 (14.2) (26.4) 0.4
------ ------ ------ ------
Other(1)
Trade revenue.............................. $ -- $ -- $ (5.5) $ --
Operating income (loss).................... (16.1) (15.6) (71.8) (8.3)
------ ------ ------ ------
Total Consolidated
Trade revenue.............................. $587.8 $635.8 $654.1 $714.0
Contract manufacturing revenue............. 104.2 153.4 81.0 72.2
Operating income (loss).................... 31.9 87.3 (47.4) 82.5
</TABLE>
- -------------------------
(1) Other includes in Fiscal 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, purchased
in-process research and development; in Fiscal 1999, $34.0 million for
purchased in-process research and development, $21.3 million for
restructuring, $15.4 million for additional charges taken for asset
impairments in connection with the Memory restructuring and $1.1 million of
other charges not allocated to the operating segments; and in Stub Year
1999, $8.3 million for the forgiveness of certain loans made to the
Company's management investors for payment of individual income tax
liabilities resulting from their ownership of Fairchild International's
common stock.
F-29
<PAGE> 138
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
Property, plant and equipment (including molds and tooling) and
depreciation and amortization by reportable operating segment as of and for the
fiscal year ended May 30, 1999 and for the seven months ended December 26, 1999
is as follows:
<TABLE>
<CAPTION>
MAY 30, DECEMBER 26,
1999 1999
------- ------------
(IN MILLIONS)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION AND
AMORTIZATION:
Analog and Mixed Signal Products Division
Property, plant and equipment............................. $ 52.1 $ 54.7
Depreciation and amortization............................. 12.0 15.9
------ ------
Discrete Power and Signal Technologies Group
Property, plant and equipment............................. $153.4 $159.8
Depreciation and amortization............................. 28.6 31.4
------ ------
Interface and Logic Products Group
Property, plant and equipment............................. $154.2 $162.6
Depreciation and amortization............................. 53.2 31.2
------ ------
Non-Volatile Memory Division
Property, plant and equipment............................. $ -- $ --
Depreciation and amortization............................. 9.9 2.4
------ ------
Other
Property, plant and equipment............................. $ 5.9 $ 2.7
Depreciation and amortization............................. -- --
------ ------
Total Consolidated
Property, plant and equipment............................. $365.6 $379.8
Depreciation and amortization............................. $103.7 $ 80.9
</TABLE>
Geographic revenue information for all periods presented are based on the
locations of the selling entities within the indicated geographic areas. No
individual foreign country except Korea is material to total revenues.
F-30
<PAGE> 139
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION -- (CONTINUED)
Revenues from unaffiliated customers by geographic region were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS
----------------------------- ENDED
MAY 25, MAY 31, MAY 30, DECEMBER 26,
1997 1998 1999 1999
------- ------- ------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
TOTAL REVENUES:
United States............................... $326.9 $395.7 $299.5 $201.2
Korea....................................... -- -- 68.8 172.3
Asia........................................ 247.5 260.9 255.5 325.6
Europe...................................... 117.6 132.6 111.3 87.1
------ ------ ------ ------
Total......................................... $692.0 $789.2 $735.1 $786.2
====== ====== ====== ======
</TABLE>
In Fiscal 1997, Fiscal 1998, Fiscal 1999 and Stub Year 1999, National
Semiconductor accounted for 15.1%, 19.4%, 11.0% and 6.9% of the Company's total
revenues. In Stub Year 1999, sales to Samsung Electronics accounted for
approximately 7.0% of the Company's total revenues.
Geographic property, plant and equipment balances as of May 30, 1999 and
December 26, 1999 are based on the physical locations within the indicated
geographic areas and are as follows:
<TABLE>
<CAPTION>
MAY 30, DECEMBER 26,
1999 1999
------- ------------
(IN MILLIONS)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
United States............................................. $174.4 $172.3
Korea..................................................... 100.1 108.2
Philippines............................................... 40.5 47.1
Malaysia.................................................. 39.7 43.1
All Others................................................ 5.5 5.1
------ ------
Total....................................................... $360.2 $375.8
====== ======
</TABLE>
F-31
<PAGE> 140
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- SUPPLEMENTAL CASH FLOW INFORMATION
As described in Note 1, National Semiconductor's cash management system was
not designed to trace centralized cash and related financing transactions to the
specific cash requirements of the Business. In addition, National
Semiconductor's corporate transaction systems were 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> 141
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
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 1. 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,
Fiscal 1999 and Stub Year 1999, the Company accumulated dividends on the
redeemable preferred stock of approximately $1.8 million, $8.6 million, $9.8
million and $2.0 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 Senior Credit Facilities, the CMP Note and the
10 3/8% Notes. (See Note 4)
F-33
<PAGE> 142
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- ACQUISITIONS -- (CONTINUED)
The power device business acquisition was accounted for by the purchase
method of accounting and accordingly, the results of operations of the power
device business are included in the accompanying consolidated financial
statements since the acquisition date. Assets acquired and liabilities assumed
were 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 in Fiscal 1999. The remaining purchase price in
excess of fair value of net tangible assets was allocated to various intangible
assets, which are 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 in
Fiscal 1998. The remaining purchase price in excess of fair value of net
tangible assets was allocated to various intangible assets, which are 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 were made at
the beginning of the periods presented below:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------
MAY 31, MAY 30,
1998 1999
--------- ---------
(IN MILLIONS,
EXCEPT PER SHARE DATA)
<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
F-34
<PAGE> 143
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- ACQUISITIONS -- (CONTINUED)
assumed issued to finance the purchases, as well as adjustments to eliminate
historical expenses which will not be incurred by the Company. The unaudited pro
forma information is not necessarily indicative of the results of operations
that would have occurred had the acquisitions 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 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 1998,
while $0.7 million applies to costs incurred in Fiscal 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> 144
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 seven
months ended December 26, 1999 and for the fiscal years ended May 30, 1999 and
May 31, 1998.
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 26, 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........... $ -- $ 117.3 $ -- $ 21.4 $ -- $ 138.7
Accounts receivable,
net................... -- 39.5 0.5 100.3 -- 140.3
Inventories............. -- 93.0 10.3 63.0 -- 166.3
Other current assets.... -- 8.4 0.2 5.1 -- 13.7
------- ------- ------ ------ ------- --------
Total current
assets.............. -- 258.2 11.0 189.8 -- 459.0
Property, plant and
equipment, net.......... -- 168.2 4.1 203.5 -- 375.8
Deferred income taxes,
net..................... -- 14.7 7.5 (18.4) -- 3.8
Intangible assets, net.... -- 7.5 26.5 227.4 -- 261.4
Investment in
subsidiaries............ 209.9 335.0 148.4 -- (693.3) --
Other assets.............. -- 25.8 1.0 10.8 -- 37.6
------- ------- ------ ------ ------- --------
Total assets.......... $ 209.9 $ 809.4 $198.5 $613.1 $(693.3) $1,137.6
======= ======= ====== ====== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of
long-term debt........ $ -- $ 1.4 $ -- $ -- $ -- $ 1.4
Accounts payable........ -- 52.2 0.6 56.5 -- 109.3
Accrued expenses and
other current
liabilities........... -- 58.4 5.2 32.4 -- 96.0
------- ------- ------ ------ ------- --------
Total current
liabilities......... -- 112.0 5.8 88.9 -- 206.7
Long-term debt, less
current portion......... -- 717.2 -- -- -- 717.2
Net intercompany
(receivable) payable.... (3.3) (231.1) (33.0) 267.4 -- --
Other liabilities......... -- 1.4 -- (0.9) -- 0.5
Total liabilities..... (3.3) 599.5 (27.2) 355.4 -- 924.4
------- ------- ------ ------ ------- --------
Commitments and
contingencies
Stockholders' equity:
Class A Common Stock.... 0.6 -- -- -- -- 0.6
Class B Common Stock.... 0.3 -- -- -- -- 0.3
Additional paid-in
capital............... 449.5 -- -- -- -- 449.5
Accumulated earnings
(deficit)............. (231.3) 209.9 225.7 257.7 (693.3) (231.3)
Less treasury stock (at
cost)................. (5.9) -- -- -- -- (5.9)
------- ------- ------ ------ ------- --------
Total stockholders'
equity.............. 213.2 209.9 225.7 257.7 (693.3) 213.2
------- ------- ------ ------ ------- --------
Total liabilities and
stockholders'
equity.............. $ 209.9 $ 809.4 $198.5 $613.1 $(693.3) $1,137.6
======= ======= ====== ====== ======= ========
</TABLE>
F-36
<PAGE> 145
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED DECEMBER 26, 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...... $ -- $116.8 $ 12.4 $584.8 $ -- $714.0
Net
sales -- intercompany... -- 466.9 7.9 82.7 (557.5) --
Contract
manufacturing......... -- 72.2 -- -- -- 72.2
------ ------ ------ ------ ------- ------
Total revenue......... -- 655.9 20.3 667.5 (557.5) 786.2
Operating expenses:
Cost of
sales -- trade........ -- 23.1 8.5 468.3 -- 499.9
Cost of
sales -- intercompany... -- 493.0 7.7 56.8 (557.5) --
Cost of contract
manufacturing......... -- 51.4 -- -- -- 51.4
Research and
development........... -- 17.5 6.7 10.8 -- 35.0
Selling, general and
administrative........ -- 52.9 5.5 59.0 -- 117.4
Total operating
expenses............ -- 637.9 28.4 594.9 (557.5) 703.7
------ ------ ------ ------ ------- ------
Operating income (loss)... -- 18.0 (8.1) 72.6 -- 82.5
Interest expense, net..... 4.4 52.0 -- (0.2) -- 56.2
Equity in subsidiary
income.................. (25.7) (57.1) (55.1) -- 137.9 --
------ ------ ------ ------ ------- ------
Income before income
taxes................... 21.3 23.1 47.0 72.8 (137.9) 26.3
Provision (benefit) for
income taxes............ -- (2.6) 0.4 7.2 -- 5.0
Net income.............. $ 21.3 $ 25.7 $ 46.6 $ 65.6 $(137.9) $ 21.3
====== ====== ====== ====== ======= ======
</TABLE>
F-37
<PAGE> 146
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED DECEMBER 26, 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:.... $ -- $ 97.0 $(0.8) $19.5 $115.7
------- ------- ----- ----- ------
Cash flows from investing
activities:
Capital expenditures......... -- (31.4) (0.4) (43.0) (74.8)
Proceeds from sale of
property, plant and
equipment................. -- -- 0.9 -- 0.9
Purchase of molds and
tooling................... -- -- -- (1.3) (1.3)
Refund of value added tax
paid in connection with
acquisition............... -- -- -- 40.9 40.9
Investment (in) from
affiliate................. (190.6) 180.5 -- 10.1 --
Cash provided by (used in)
investing activities.... (190.6) 149.1 0.5 6.7 (34.3)
------- ------- ----- ----- ------
Cash flows from financing
activities:
Repayment of long-term
debt...................... (154.4) (191.4) -- -- (345.8)
Proceeds from issuance of
common stock, net......... 345.0 -- -- -- 345.0
Net intercompany financing... -- 33.8 -- (33.8) --
Purchase of treasury stock... -- (5.9) -- -- (5.9)
Proceeds from exercise of
stock options............. -- 1.6 -- -- 1.6
Cash provided by (used in)
financing activities.... 190.6 (161.9) -- (33.8) (5.1)
------- ------- ----- ----- ------
Net change in cash and cash
equivalents.................. -- 84.2 (0.3) (7.6) 76.3
Cash and cash equivalents at
beginning of period.......... -- 33.1 0.3 29.0 62.4
Cash and cash equivalents at
end of period................ $ -- $ 117.3 $ -- $21.4 $138.7
======= ======= ===== ===== ======
Supplemental Cash Flow
Information:
Cash paid (refunded) during
the year for:
Income taxes.............. $ -- $ (0.3) $ -- $ 2.1 $ 1.8
Interest.................. $ -- $ 42.1 $ -- $ -- $ 42.1
======= ======= ===== ===== ======
</TABLE>
F-38
<PAGE> 147
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-39
<PAGE> 148
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 -- trade........ -- 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-40
<PAGE> 149
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 affiliate... (50.0) 50.0 -- -- --
Net intercompany investing....... -- (406.8) -- 406.8 --
Acquisitions, net of cash
acquired....................... -- (8.1) -- (406.8) (414.9)
------ ------- ------ ------- -------
Cash provided by (used in)
investing activities......... (50.0) (390.5) 29.7 (63.8) (474.6)
------ ------- ------ ------- -------
Cash flows from financing
activities:
Repayment of long-term debt...... -- (151.3) -- -- (151.3)
Issuance of long-term debt....... 50.0 610.0 -- -- 660.0
Debt issuance costs.............. -- (22.3) -- -- (22.3)
------ ------- ------ ------- -------
Cash provided by financing
activities................... 50.0 436.4 -- -- 486.4
------ ------- ------ ------- -------
Net change in cash and cash
equivalents...................... -- 31.2 0.3 24.4 55.9
Cash and cash equivalents at
beginning of period.............. -- 1.9 -- 4.6 6.5
------ ------- ------ ------- -------
Cash and cash equivalents at end of
period........................... $ -- $ 33.1 $ 0.3 $ 29.0 $ 62.4
====== ======= ====== ======= =======
Supplemental Cash Flow Information:
Cash paid (refunded) during the
year for:
Income taxes................... $ -- $ (2.0) $ -- $ 2.0 $ --
====== ======= ====== ======= =======
Interest....................... $ -- $ 46.6 $ -- $ -- $ 46.6
====== ======= ====== ======= =======
</TABLE>
F-41
<PAGE> 150
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 -- trade........ -- 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.......... -- 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.................. (28.7) (16.9) -- -- 45.6 --
------ -------- ----- ------ ------- ------
Income 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 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................ $ 20.6 $ 28.7 $ 0.4 $ 16.5 $ (45.6) $ 20.6
====== ======== ===== ====== ======= ======
</TABLE>
F-42
<PAGE> 151
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 ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ---------- ------------ ------------ -------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Cash flows provided by
operating activities:... $-- $ 105.4 $ 0.4 $ 30.3 $-- $ 136.1
-- ------- ----- ------ -- -------
Cash flows from investing
activities:
Capital expenditures.... -- (48.7) (0.4) (28.9) -- (78.0)
Purchase of molds and
tooling............... -- -- -- (5.7) -- (5.7)
Acquisitions, net of
cash acquired......... -- (116.8) -- -- -- (116.8)
-- ------- ----- ------ -- -------
Cash used by investing
activities.......... -- (165.5) (0.4) (34.6) -- (200.5)
-- ------- ----- ------ -- -------
Cash flows from financing
activities:
Repayment of long-term
debt.................. -- (58.7) -- -- -- (58.7)
Issuance of long-term
debt.................. -- 90.0 -- -- -- 90.0
Debt issuance costs..... -- (1.1) -- -- -- (1.1)
-- ------- ----- ------ -- -------
Cash provided by
financing
activities.......... -- 30.2 -- -- -- 30.2
-- ------- ----- ------ -- -------
Net change in cash and
cash equivalents........ -- (29.9) -- (4.3) -- (34.2)
Cash and cash equivalents
at beginning of
period.................. -- 31.8 -- 8.9 -- 40.7
-- ------- ----- ------ -- -------
Cash and cash equivalents
at end of period........ $-- $ 1.9 $ -- $ 4.6 $-- $ 6.5
== ======= ===== ====== == =======
Supplemental Cash Flow
Information:
Cash paid during the
year for:
Income taxes.......... $-- $ 7.7 $ -- $ 1.2 $-- $ 8.9
== ======= ===== ====== == =======
Interest.............. $-- $ 43.8 $ -- $ -- $-- $ 43.8
== ======= ===== ====== == =======
</TABLE>
NOTE 20 -- UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial information for
Stub Year 1999 and Fiscal 1999 (in millions, except per share data):
<TABLE>
<CAPTION>
STUB YEAR 1999
-------------------------------
FIRST SECOND THIRD(D)
QUARTER QUARTER QUARTER
------- ------- --------
<S> <C> <C> <C>
Total revenue............................................... $324.5 $356.8 $104.9
Gross profit................................................ 95.5 113.3 26.1
Net income (loss)(a)........................................ (8.0) 22.5 6.8
Net income (loss) applicable to common stockholders(a)...... (10.0) 22.5 6.8
Basic earnings (loss) per common share...................... $(0.15) $ 0.25 $ 0.08
Diluted earnings (loss) per common share.................... $(0.15) $ 0.24 $ 0.07
</TABLE>
F-43
<PAGE> 152
<TABLE>
<CAPTION>
FISCAL 1999
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenue(c)............................................ $151.3 $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...................... $(0.29) $(0.20) $(0.22) $(1.26)
Diluted earnings (loss) per common share.................... $(0.29) $(0.20) $(0.22) $(1.26)
</TABLE>
- -------------------------
Note: Amounts may not add due to rounding
(a) During the first quarter of Stub Year 1999, the Company recorded a charge of
$8.3 million for the forgiveness of certain loans made to the Company's
management investors for payment of individual income tax liabilities
resulting from their ownership of Fairchild International's common stock.
(See Note 10)
(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 in-process 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)
(d) The third quarter represents the four-week period beginning November 29,
1999 and ending December 26, 1999.
NOTE 21 -- SUBSEQUENT EVENT
On January 25, 2000, the Company completed a follow-on public offering of
23,500,000 shares of its Class A Common Stock at a price of $33.4375 per share.
The underwriting discount was $1.50 per share. The 23,500,000 shares included
6,140,880 newly issued shares sold by the Company and 17,359,120 shares sold by
existing stockholders including all remaining shares owned by National
Semiconductor. The Company did not receive any of the proceeds from shares sold
by the existing stockholders. In addition, the Company sold 1,410,000 additional
shares pursuant to the underwriter's overallotment option. The net proceeds to
the Company after the underwriting discount and other related expenses were
approximately $239.7 million.
F-44
<PAGE> 153
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-45
<PAGE> 154
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-46
<PAGE> 155
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-47
<PAGE> 156
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-48
<PAGE> 157
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-49
<PAGE> 158
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-50
<PAGE> 159
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-51
<PAGE> 160
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-52
<PAGE> 161
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-53
<PAGE> 162
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-54
<PAGE> 163
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-55
<PAGE> 164
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-56
<PAGE> 165
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-57
<PAGE> 166
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-58
<PAGE> 167
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-59
<PAGE> 168
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-60
<PAGE> 169
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-61
<PAGE> 170
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-62
<PAGE> 171
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-63
<PAGE> 172
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-64
<PAGE> 173
[FAIRCHILD SEMICONDUCTOR LOGO]
<PAGE> 174
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides in relevant
part that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such person's conduct was unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Section 145 also provides that to the extent a director, officer, employee
or agent of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to above, or defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Furthermore, Section 145 provides that nothing in the above-described
provisions shall be deemed exclusive of any other rights to indemnification or
advancement of expenses to which any person may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise.
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
II-1
<PAGE> 175
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 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
2.01 Agreement and Plan of Recapitalization dated January 24,
1997 between Sterling and National Semiconductor
(incorporated by reference from Fairchild Semiconductor
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).
</TABLE>
II-2
<PAGE> 176
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
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 (filed March 23, 2000).
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).
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 (filed March 23, 2000).
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)).
</TABLE>
II-3
<PAGE> 177
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
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)).
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 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)).
10.18 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)).
10.19 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)).
10.20 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)).
10.21 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-4
<PAGE> 178
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.22 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)).
10.23 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)).
10.24 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)).
10.25 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)).
10.26 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)).
10.27 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)).
10.28 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)).
10.29 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)).
10.30 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)).
10.31 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)).
10.32 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)).
10.33 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)).
</TABLE>
II-5
<PAGE> 179
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.34 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)).
10.35 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)).
10.36 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)).
10.37 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)).
10.38 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)).
10.39 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)).
10.40 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).
10.41 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 KPMG LLP.
23.02 Consent of Samil Accounting Corporation.
23.03 Consent of Dechert Price & Rhoads (included in the opinion
filed as Exhibit 5.01).
24.01 Power of Attorney (filed March 23, 2000).
</TABLE>
II-6
<PAGE> 180
(b) Financial Statement Schedules:
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Fairchild Semiconductor International, Inc.
Under date of January 21, 2000, except as to Note 21, which is as of January 25,
2000, we reported on the consolidated balance sheets of Fairchild Semiconductor
International, Inc. and subsidiaries as of May 30, 1999 and December 26, 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
for the seven months ended December 26, 1999, and the related consolidated
statements of cash flows for the years ended May 31, 1998 and May 30, 1999 and
for the seven months ended December 26, 1999. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related financial statement schedule listed in Item 14(c). This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Boston, Massachusetts
January 21, 2000
II-7
<PAGE> 181
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS.
<TABLE>
<CAPTION>
DEFERRED TAX
RETURNS AND VALUATION
ALLOWANCES ALLOWANCE TOTAL
----------- ------------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Balances at May 26, 1996................................... $ -- $ -- $ --
Charged to costs and expenses.............................. 3.1 -- 3.1
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
Charged to costs and expenses.............................. 20.4 17.6 38.0
Deductions................................................. (15.9) -- (15.9)
------ ----- ------
Balances at December 26, 1999.............................. $ 13.7 $80.3 $ 94.0
====== ===== ======
</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 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the provisions described in Item 20, or otherwise, the
registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification by the registrant 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, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-8
<PAGE> 182
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed 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;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b) 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-9
<PAGE> 183
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
below-named Registrant has duly caused this Amendment No. 1 to 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 29th day of
March, 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. 1 to this Registration Statement has been signed below by the
following persons in the capacities at the above-named Registrant on March 29,
2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
* 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
</TABLE>
*By: /s/ DANIEL E. BOXER
------------------------------
Daniel E. Boxer
Attorney-in-fact
II-10
<PAGE> 184
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
2.01 Agreement and Plan of Recapitalization dated January 24,
1997 between Sterling and National Semiconductor
(incorporated by reference from Fairchild Semiconductor
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 (filed March 23, 2000).
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).
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)).
</TABLE>
<PAGE> 185
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
5.01 Opinion of Dechert Price & Rhoads (filed March 23, 2000).
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> 186
<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 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)).
10.18 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)).
10.19 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)).
10.20 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)).
10.21 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>
<PAGE> 187
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.22 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)).
10.23 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)).
10.24 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)).
10.25 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)).
10.26 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)).
10.27 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)).
10.28 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)).
10.29 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)).
10.30 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)).
10.31 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)).
10.32 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>
<PAGE> 188
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.33 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)).
10.34 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)).
10.35 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)).
10.36 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)).
10.37 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)).
10.38 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)).
10.39 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)).
10.40 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).
10.41 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 KPMG LLP.
23.02 Consent of Samil Accounting Corporation.
23.03 Consent of Dechert Price & Rhoads (included in the opinion
filed as Exhibit 5.01).
24.01 Power of Attorney (filed March 23, 2000).
</TABLE>
<PAGE> 1
EXHIBIT 23.01
The Board of Directors
Fairchild Semiconductor International, Inc.:
We consent to the inclusion of our reports dated January 21, 2000, except as to
Note 21, which is as of January 25, 2000, with respect to the consolidated
balance sheets of Fairchild Semiconductor International, Inc. and Subsidiaries
as of May 30, 1999 and December 26, 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 for the seven months ended December
26, 1999, the related consolidated statements of cash flows for the years ended
May 31, 1998 and May 30, 1999 and for the seven months ended December 26, 1999,
and the related schedule, which reports appear in this Registration Statement,
and to the reference to our firm under the heading "Experts" in this
Registration Statement on Form S-4.
Our report refers to a change in the method of accounting for business process
reengineering costs as a result of the Company adopting the provisions of the
Emerging Issues Task Force Issue 97-13, "Accounting for Business Process
Reengineering Costs."
KPMG LLP
Boston, Massachusetts
March 28, 2000
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 (No.
333-33082) 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
March 29, 2000
