<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 001-15181
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-3363001
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
82 RUNNING HILL ROAD
SOUTH PORTLAND, MAINE 04106
(Address of principal executive offices, including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (207) 775-8100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares outstanding of the issuer's classes of common stock as
of the close of business on October 31, 2000:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NUMBER OF SHARES
------------------- ----------------
<S> <C>
Class A Common Stock, par value $.01 per share 82,089,257
Class B Common Stock, par value $.01 per share 17,281,000
</TABLE>
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--------------------------------------------------------------------------------
<PAGE> 2
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
for the Three and Nine Months Ended October 1, 2000 and
September 26, 1999........................................ 3
Condensed Consolidated Balance Sheets as of October 1, 2000
(Unaudited) and December 26, 1999......................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended October 1, 2000 and September
26, 1999.................................................. 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 26
Item 6. Exhibits and Reports on Form 8-K............................ 26
Signature............................................................ 27
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 1, SEPTEMBER 26, OCTOBER 1 SEPTEMBER 26,
2000 1999 2000 1999
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Revenue
Net sales -- trade.............................. $450.7 $302.5 $1,229.6 $710.5
Contract manufacturing.......................... 25.3 33.3 84.8 87.3
------ ------ -------- ------
Total revenue........................... 476.0 335.8 1,314.4 797.8
Operating expenses:
Cost of sales -- trade.......................... 286.2 212.9 790.1 535.6
Cost of contract manufacturing.................. 16.1 24.9 52.8 64.2
Research and development........................ 20.8 14.3 57.4 36.9
Selling, general and administrative............. 57.8 54.2 165.8 116.4
Purchased in-process research and development... 5.8 -- 9.0 34.0
Restructuring and impairments................... -- -- (5.6) 16.8
------ ------ -------- ------
Total operating expenses................ 386.7 306.3 1,069.5 803.9
------ ------ -------- ------
Operating income (loss)........................... 89.3 29.5 244.9 (6.1)
Interest expense.................................. 18.7 30.4 62.4 76.8
Interest income................................... 6.8 -- 16.8 0.5
------ ------ -------- ------
Income (loss) before income taxes................. 77.4 (0.9) 199.3 (82.4)
Provision (benefit) for income taxes.............. 7.7 (0.1) 19.9 (5.2)
------ ------ -------- ------
Net income (loss)................................. $ 69.7 $ (0.8) $ 179.4 $(77.2)
====== ====== ======== ======
Net income (loss) applicable to common
stockholders.................................... $ 69.7 $ (2.0) $ 179.4 $(83.7)
====== ====== ======== ======
Net income (loss) per common share:
Basic........................................... $ 0.70 $(0.02) $ 1.85 $(1.24)
====== ====== ======== ======
Diluted......................................... $ 0.68 $(0.02) $ 1.77 $(1.24)
====== ====== ======== ======
Weighted average common shares:
Basic........................................... 99.1 80.4 96.9 67.5
====== ====== ======== ======
Diluted......................................... 102.9 80.4 101.1 67.5
====== ====== ======== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
OCTOBER 1, DECEMBER 26,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 403.7 $ 138.7
Receivables, net.......................................... 211.6 140.3
Inventories............................................... 185.9 166.3
Other current assets...................................... 20.3 13.7
-------- --------
Total current assets................................... 821.5 459.0
Property, plant and equipment, net.......................... 532.8 375.8
Intangible assets, net...................................... 314.5 261.4
Other assets................................................ 56.0 41.4
-------- --------
Total assets........................................... $1,724.8 $1,137.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ -- $ 1.4
Accounts payable.......................................... 142.4 109.3
Accrued expenses and other current liabilities............ 128.1 94.5
-------- --------
Total current liabilities.............................. 270.5 205.2
Long-term debt, less current portion........................ 720.2 717.2
Other liabilities........................................... 2.5 2.0
-------- --------
Total liabilities...................................... 993.2 924.4
Commitments and contingencies
Stockholders' equity:
Class A common stock...................................... 0.7 0.6
Class B common stock...................................... 0.3 0.3
Additional paid-in capital................................ 787.2 449.5
Accumulated deficit....................................... (51.9) (231.3)
Less treasury stock at cost............................... (4.7) (5.9)
-------- --------
Total stockholders' equity............................. 731.6 213.2
-------- --------
Total liabilities and stockholders' equity............. $1,724.8 $1,137.6
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS) (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
OCTOBER 1, SEPTEMBER 26,
2000 1999
---------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $179.4 $ (77.2)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization............................. 110.8 94.3
Amortization of deferred compensation..................... 2.8 0.7
Restructuring and impairments............................. (5.6) 16.8
Non-cash interest expense................................. 6.5 12.9
Purchased in-process research and development............. 9.0 34.0
Loss on disposal of property, plant and equipment......... 1.3 0.5
Deferred income taxes..................................... (0.5) 4.3
Changes in operating assets and liabilities, net of acquired
balances:
Receivables............................................... (59.5) (49.4)
Inventories............................................... (1.5) (4.5)
Other current assets...................................... (5.2) 4.7
Current liabilities....................................... 50.8 51.1
Other assets and liabilities.............................. (15.6) 2.0
------ -------
Cash provided by operating activities................ 272.7 90.2
Cash flows from investing activities:
Capital expenditures...................................... (211.3) (52.8)
Proceeds from sale of property, plant and equipment....... 3.5 30.2
Purchase of molds and tooling............................. (3.6) (2.3)
Purchase of long-term investments......................... (7.2) --
Acquisitions, net of cash acquired........................ (32.5) (414.9)
------ -------
Cash used in investing activities.................... (251.1) (439.8)
Cash flows from financing activities:
Proceeds from revolving credit facility, net.............. 2.1 --
Issuance of long-term debt................................ -- 660.0
Repayment of long-term debt............................... (1.5) (531.3)
Proceeds from issuance of common stock, net............... 241.0 344.9
Proceeds from exercise of stock options................... 3.9 1.0
Purchase of treasury stock................................ -- (5.9)
Debt issuance costs....................................... (2.1) (22.3)
------ -------
Cash provided by financing activities................ 243.4 446.4
------ -------
Net change in cash and cash equivalents..................... 265.0 96.8
Cash and cash equivalents at beginning of period............ 138.7 3.2
------ -------
Cash and cash equivalents at end of period.................. $403.7 $ 100.0
====== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheets of Fairchild Semiconductor
International, Inc. (the "Company") as of October 1, 2000 and December 26, 1999,
and the Condensed Consolidated Statements of Operations and Cash Flows for the
three and nine month periods ended October 1, 2000 and September 26, 1999, were
prepared by the Company. In the opinion of management, the accompanying
condensed consolidated financial statements contain all adjustments (consisting
of only normal recurring items) necessary to present fairly the financial
position and results of operations of the Company. Interim results of operations
are not necessarily indicative of the results to be expected for the full year.
This report should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the fiscal year ended December 26, 1999.
Certain prior period amounts have been reclassified to conform to their
current presentation.
NOTE 2 -- INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
OCTOBER 1, DECEMBER 26,
2000 1999
---------- ------------
(IN MILLIONS)
<S> <C> <C>
Raw materials.......................................... $ 28.7 $ 17.1
Work in process........................................ 115.5 99.3
Finished goods......................................... 41.7 49.9
------ ------
Total inventories............................ $185.9 $166.3
====== ======
</TABLE>
NOTE 3 -- COMPUTATION OF NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per common share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of stock options, however, due to the
Company's net losses for the three and nine months ended September 26, 1999, the
addition of these common stock equivalents would have been anti-dilutive and
accordingly they have been excluded from the calculations for those periods. In
addition, there were 4,203,601 anti-dilutive common equivalent shares
outstanding at October 1, 2000 which could potentially dilute basic net income
per common share in future periods.
6
<PAGE> 7
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The net losses used in computing net loss per common share for the three
and nine months ended September 26, 1999, have been increased by dividends
accrued during each respective period for the then outstanding redeemable
preferred stock, resulting in increases to the net losses applicable to common
stockholders. All of the Company's redeemable preferred stock was converted to
common stock on August 9, 1999, in connection with the Company's initial public
offering. The following table reconciles basic to diluted weighted average
shares outstanding and net income (loss) to net income (loss) applicable to
common stockholders:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 1, SEPTEMBER 26, OCTOBER 1, SEPTEMBER 26,
2000 1999 2000 1999
---------- ------------- ---------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Basic weighted average common shares
outstanding..................................... 99.1 80.4 96.9 67.5
Net effect of dilutive stock options based on the
treasury stock method using the average market
price........................................... 3.8 -- 4.2 --
------ ----- ------ ------
Diluted weighted average common shares
outstanding..................................... 102.9 80.4 101.1 67.5
====== ===== ====== ======
Net income (loss)................................. $ 69.7 $(0.8) $179.4 $(77.2)
Dividends on redeemable preferred stock........... -- 1.2 -- 6.5
------ ----- ------ ------
Net income (loss) applicable to common
stockholders.................................... $ 69.7 $(2.0) $179.4 $(83.7)
====== ===== ====== ======
</TABLE>
NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
OCTOBER 1, SEPTEMBER 26,
2000 1999
---------- -------------
(IN MILLIONS)
<S> <C> <C>
Cash paid for:
Income taxes...................................... $ 3.5 $ 0.7
===== =====
Interest.......................................... $54.2 $36.6
===== =====
</TABLE>
For the nine months ended September 26, 1999, the Company accumulated
dividends on its then outstanding redeemable preferred stock of approximately
$6.5 million. The accumulated dividends were recorded as an increase to the
carrying value of the redeemable preferred stock and accumulated deficit.
NOTE 5 -- SEGMENT INFORMATION
The Company has three reportable segments: Analog and Mixed Signal Products
Division ("Analog"), Discrete Power and Signal Technologies Products Group
("Discrete") and Interface and Logic Products Group ("Interface").
The Company has determined that its Configurable Products Business Unit
(formerly known as the Non-Volatile Memory Division which was reported as a
separate segment) and its QT Optoelectronics Division do not meet the
requirements of a reportable segment under SFAS No. 131, and accordingly reports
these segments' results as part of the "Other" category for all periods
presented. The Company's contract manufacturing business is not a separate
reportable segment and its results are recorded together with the Configurable
Products Business Unit and the QT Optoelectronics Division in the "Other"
category. Management evaluates the contract manufacturing business differently
than its other operating segments, due in large part to the fact that it is
predominantly driven by contractual agreements for limited time periods, entered
into with the Company's former parent National Semiconductor and Samsung
Electronics. Selected
7
<PAGE> 8
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
operating segment financial information for the three and nine months ended
October 1, 2000 and September 26, 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 1, SEPTEMBER 26, OCTOBER 1, SEPTEMBER 26,
2000 1999 2000 1999
---------- ------------- ---------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUE:
Analog............................ $ 94.9 $ 75.4 $ 275.9 $153.1
Discrete.......................... 196.3 134.1 553.7 295.9
Interface and Logic............... 114.4 77.9 312.7 219.4
Other(1).......................... 70.4 48.4 172.1 129.4
------ ------ -------- ------
Total...................... $476.0 $335.8 $1,314.4 $797.8
====== ====== ======== ======
OPERATING INCOME (LOSS):
Analog............................ $ 11.2 $ 8.4 $ 33.7 $ 16.9
Discrete.......................... 38.6 7.9 96.9 11.8
Interface and Logic............... 31.9 7.1 72.9 20.1
Other(1).......................... 13.4 6.1 44.8 (4.1)
Purchased in-process research and
development..................... (5.8) -- (9.0) (34.0)
Restructuring and impairments..... -- -- 5.6 (16.8)
------ ------ -------- ------
Total...................... $ 89.3 $ 29.5 $ 244.9 $ (6.1)
====== ====== ======== ======
</TABLE>
---------------
(1) Other includes revenues and operating income from contract manufacturing
activities disclosed in the Company's statements of operations. The Company
allocates no other costs to its contract manufacturing business other than
those separately shown in the statements of operations.
NOTE 6 -- RESTRUCTURING AND IMPAIRMENTS
During the nine months ended October 1, 2000, the Company recorded a
pre-tax restructuring gain of approximately $5.6 million. During the first
quarter of 2000, the Company re-evaluated and subsequently adjusted its non-cash
restructuring accruals based upon final execution of several of its plans. This
resulted in a one-time gain of $2.1 million. The Company also recorded a
one-time gain of $3.5 million for additional funds received in connection with
the sale of its former Mountain View, California facility.
The following table summarizes the year-to-date activity of the
restructuring plan completed in the quarter ended October 1, 2000, which related
to the transfer of analog wafer production to South Portland, Maine (millions):
<TABLE>
<S> <C>
Accrual balance as of December 26, 1999..................... $ 2.6
Cash payments............................................... (1.7)
-----
Accrual balance as of April 2, 2000......................... 0.9
Cash payments............................................... (0.6)
-----
Accrual balance as of July 2, 2000.......................... 0.3
Cash payments............................................... (0.3)
-----
Accrual balance as of October 1, 2000....................... $ --
=====
</TABLE>
8
<PAGE> 9
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 7 -- FOLLOW-ON OFFERING
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.
In addition, 1,410,000 shares were sold by an existing stockholder pursuant to
the underwriter's overallotment option. 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's former parent.
The Company did not receive any proceeds from shares sold by existing
stockholders. The net proceeds to the Company after the underwriting discount
and other related expenses were approximately $240.0 million.
NOTE 8 -- ACQUISITIONS
On May 28, 2000, the Company completed its acquisition of QT
Optoelectronics, Inc. ("QTO") for approximately $92.0 million, 86.6 percent paid
in the Company's common stock with the remainder paid in cash. In addition, in
conjunction with the acquisition, the Company assumed and immediately repaid
$14.0 million of QTO's long-term debt. QTO designs, manufactures and markets LED
lamps and displays, infrared components, custom optoelectronics and optocouplers
and is the world's largest independent company solely focused on
optoelectronics. The transaction was accounted for as a purchase and QTO's
results of operations since the date of acquisition have been included in the
accompanying statements of operations.
On September 8, 2000, the Company completed its acquisition of the power
management business of Micro Linear Corporation for a purchase price of
approximately $11.0 million in cash. Micro Linear's power management business
consists of analog products including offline power switches, low power battery
management, video filters and bus terminators. The transaction was accounted for
as a purchase and Micro Linear's results of operations since the date of
acquisition have been included in the accompanying statements of operations.
On September 8, 2000, the Company completed its acquisition of Kota
Microcircuits, Inc. ("Kota") for approximately $12.1 million, paid in the
Company's common stock. Kota designs manufactures and markets high-performance
operational amplifiers and other standard linear products. The transaction was
accounted for as a purchase and Kota's results of operations since the date of
acquisition have been included in the accompanying statements of operations.
NOTE 9 -- LONG-TERM DEBT
During the second quarter of 2000, the Company refinanced its senior credit
facilities, converting approximately $117.8 million of outstanding senior term
debt into a new revolving credit line with total borrowing capacity of $300.0
million and a maturity of June 6, 2004. In connection with the refinancing, the
Company paid approximately $2.1 million in deferred financing costs and
wrote-off $3.6 million of deferred financing costs associated with the retired
term debt. Borrowings under the new credit agreement accrue interest based on
either the bank's rate or the Eurodollar rate, at the option of the Company. The
interest rate at October 1, 2000 was 7.64%. Borrowings under the agreement are
secured by a pledge of common stock of the Company and its subsidiaries.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Readers are cautioned not to place undue reliance on forward-looking statements
in this report. See "Outlook and Business Risks" below.
OVERVIEW
Fairchild Semiconductor International, Inc. ("Fairchild International"),
through its wholly-owned subsidiary Fairchild Semiconductor Corporation
(collectively, the "Company"), is a leading designer, manufacturer and supplier
of building block semiconductors and optoelectronics for multi market uses.
Semiconductor product offerings include analog and mixed signal, discrete power
and signal technology, interface and logic, and non-volatile memory
semiconductors. Optoelectronic product offerings include optocouplers, LED
displays and infrared components. These multi-market products serve the
telecommunications, consumer, industrial, personal systems and automotive
markets.
The Company has changed its fiscal year-end from the last Sunday in May to
the last Sunday in December. The current fiscal year is the first full year
under the new fiscal calendar and will end on December 31, 2000. The Company's
discussion below compares the current quarter and year-to-date results to the
comparable results a year ago. The year-to-date results include the results of
the power device business acquired from Samsung Electronics Co., Ltd. on April
13, 1999. The comparable period of 1999 includes the power device business
results only from the date of acquisition forward. The table below presents
selected financial results for the nine months ended October 1, 2000 and
September 26, 1999 reported both with and without the power device business
acquired from Samsung Electronics:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------------------------------
EXCLUDING EXCLUDING
POWER DEVICES POWER DEVICES
OCTOBER 1, OCTOBER 1, SEPTEMBER 26, SEPTEMBER 26,
2000 2000 1999 1999
---------- ------------- ------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales -- trade..................... $1,229.6 $776.0 $710.5 $473.0
Contract manufacturing................. 84.8 63.2 87.3 75.3
-------- ------ ------ ------
Total revenue................ 1,314.4 839.2 797.8 548.3
Gross profit -- trade.................. 439.5 305.0 174.9 96.6
Gross profit -- contract
manufacturing........................ 32.0 19.6 23.1 16.6
Operating income (loss)................ 244.9 168.3 (6.1) (52.2)
</TABLE>
RESULTS OF OPERATIONS
Fairchild International generated net income of $69.7 million and $179.4
million in the third quarter and first nine months of 2000, respectively,
compared to net losses of $0.8 million and $77.2 million in the comparable
periods of 1999. Excluding restructuring and non-recurring (gains) charges and
amortization of acquisition-related intangibles, adjusted net income (loss) was
as follows for the three and nine months ended October 1, 2000 and September 26,
1999, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 1, SEPTEMBER 26, OCTOBER 1, SEPTEMBER 26,
2000 1999 2000 1999
---------- ------------- ---------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net income (loss)......................... $69.7 $(0.8) $179.4 $(77.2)
Restructuring and impairments............. -- -- (5.6) 16.8
Purchased in-process research and
development............................. 5.8 -- 9.0 34.0
Non-recurring (gains) charges............. -- 8.3 (1.8) 23.7
Amortization of acquisition-related
intangibles............................. 10.1 8.5 27.5 17.5
Less associated tax effects............... (1.6) (0.7) (2.9) (4.8)
----- ----- ------ ------
Adjusted net income....................... $84.0 $15.3 $205.6 $ 10.0
===== ===== ====== ======
</TABLE>
10
<PAGE> 11
Restructuring and impairments in the first nine months of 2000 include
gains in the first quarter resulting from additional funds received in
connection with the sale of the Company's former Mountain View, California
facility ($3.5 million) and the adjustment of restructuring reserves upon final
execution of several prior year actions ($2.1 million). Restructuring and
impairments in the first nine months of 1999 include in the first quarter,
restructuring charges resulting from the transfer of assembly and test
activities from the Company's former Mountain View, California facility to its
Penang, Malaysia facility ($2.7 million) and in the second quarter of 1999
charges associated with the transfer of all wafer production from Mountain View,
California to South Portland, Maine ($10.0 million) and charges related to the
1999 Memory restructuring action ($4.1 million). Non-recurring (gains) charges
in the first nine months of 2000 include charges for the write-off of debt
issuance costs associated with refinanced debt ($3.6 million) offset by gains
resulting from revisions of estimated charges recorded in sales and cost of
sales as part of the 1999 Memory restructuring action ($5.4 million).
Non-recurring (gains) charges in the first nine months of 1999 include in the
second quarter charges recorded in sales and cost of sales as part of the 1999
Memory restructuring action ($15.4 million) and, in the third quarter, charges
relating to the forgiveness of tax loans to management investors ($8.3 million).
Operating income was $89.3 million and $244.9 million in the third quarter
and first nine months of 2000, respectively, compared to operating income (loss)
of $29.5 million and $(6.1) million in the third quarter and first nine months
of 1999 respectively. Excluding restructuring and impairments, purchased
in-process research and development and non-recurring (gains) charges, operating
income was $95.1 million and $242.9 million in the third quarter and first nine
months of 2000, respectively, compared to $37.8 million and $68.4 million in the
comparable periods of 1999. The increase in operating income in the third
quarter of 2000 is due to higher revenues and gross profits due to new product
introductions and improved business conditions, resulting in higher factory
utilization in the third quarter of 2000 as compared to the third quarter of
1999. The increase in operating income in the first nine months of 2000 as
compared to the first nine months of 1999 is due to the aforementioned factors
plus the effect of the acquisition of the power device business from Samsung
Electronics in April 1999.
All operating segments reported improved operating results in the third
quarter and first nine months of 2000 as compared to the comparable periods of
1999. Analog had operating income of $11.2 million and $33.7 million in the
third quarter and first nine months of 2000, respectively, as compared to
operating income of $8.4 million and $16.9 million in the comparable periods of
1999. The increase in Analog's operating income in the third quarter of 2000 as
compared to the third quarter of 1999 was due to higher revenues, the beneficial
effect of moving wafer production to South Portland, Maine, offset by higher
costs on certain subcontracted wafers. The increase in Analog's operating income
in the first nine months of 2000 as compared to the first nine months of 1999 is
due to the aforementioned factors plus the effect of the acquisition of the
power device business from Samsung Electronics in April 1999. Discrete had
operating income of $38.6 million and $96.9 million in the third quarter and
first nine months of 2000, respectively, as compared to $7.9 million and $11.8
million in the comparable periods of 1999. The increase in Discrete's operating
income in the third quarter of 2000 as compared to the third quarter of 1999
resulted from higher revenues and gross profits due to a better sales mix
resulting from new product introductions, including new Power MOSFET products,
and improved factory utilization. The increase in operating income in the first
nine months of 2000 as compared to the first nine months of 1999 was due to the
aforementioned factors plus the addition of the discrete power business acquired
from Samsung Electronics. Interface and Logic had operating income of $31.9
million and $72.9 million in the third quarter and first nine months of 2000,
respectively, as compared to operating income of $7.1 million and $20.1 million
in the comparable periods of 1999. The increases in Interface and Logic
operating income was due to higher revenues and improved gross profits due to
improved pricing, a better sales mix resulting from new product introductions,
particularly Interface and Tiny Logic, and improved factory utilization.
Excluding depreciation and amortization of $38.7 million and $113.6 million
in the third quarter and first nine months of 2000, respectively, and $35.5
million and $95.0 million in the comparable periods of 1999, and restructuring
and non-recurring (gains) charges, earnings before interest, taxes, depreciation
and amortization ("EBITDA") were $133.8 million and $356.5 million in the third
quarter and first nine months of 2000,
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respectively, compared to $73.3 million and $163.4 million in the comparable
periods of 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 (94.7% and 93.6% of total revenues in the third quarter and first nine
months of 2000, respectively, and 90.1% and 89.1% of total revenues in the
comparable periods of 1999) and revenues from contract manufacturing services
provided to National Semiconductor and Samsung Electronics (5.3% and 6.4% of
total revenues in the third quarter and first nine months of 2000, respectively,
and 9.9% and 10.9% of total revenues in the comparable periods of 1999).
Trade sales increased 49.0% to $450.7 million in the third quarter of 2000
compared with $302.5 million in the third quarter of 1999. On year-to-date
basis, trade sales increased 73.1% to $1,229.6 million compared to $710.5
million for the comparable period in 1999. Excluding a non-recurring gain in the
first nine months of 2000 resulting from the release of reserves associated with
the 1999 Memory restructuring action of $2.1 million, trade sales increased
72.8% to $1,227.5 million on a year-to-date basis. Trade sales for the first
nine months of 2000 include sales from the power device business. Trade sales
for the first nine months of 1999 include sales from the power device business
as of the acquisition date of April 13, 1999. Increases in the Company's trade
sales resulted from higher sales volume reflecting strength in end-markets,
higher average selling prices and an improved sales mix due to new product
introductions.
Analog revenues increased 25.9% and 80.2% to $94.9 million and $275.9
million in the third quarter and first nine months of 2000, respectively, from
$75.4 million and $153.1 million in the comparable periods of 1999. The
increases in Analog sales in the third quarter reflect improved business
conditions resulting in both higher sales volumes and increased prices and, for
the first nine months of 2000, the additional benefit of a full nine month
period of power device revenues. Discrete revenues increased 46.4% and 87.1% to
$196.3 million and $553.7 million in the third quarter and first nine months of
2000, respectively, compared to $134.1 million and $295.9 million in the
comparable periods of 1999. The increases in Discrete revenue were across all
product lines as both volume and prices increased over the comparable prior year
periods. The first nine months of 2000 was also impacted by the addition of
power device revenues. Interface and Logic revenues increased 46.9% and 42.5% to
$114.4 million and $312.7 million in the third quarter and first nine months of
2000, respectively, from $77.9 million and $219.4 million in the comparable
periods of 1999. Increases in Interface and Logic revenues were due to volume
increases, resulting from strengthening demand, average selling price increases
and improved mix due to new product introductions.
Geographically, 22.8%, 12.9%, 47.9% and 16.4% of trade sales were derived
from North America, Europe, Asia/Pacific and Korea, respectively, in the third
quarter of 2000 as compared to 21.8%, 12.4%, 45.7% and 20.1%, respectively, in
the third quarter of 1999. On a year-to-date basis, 23.2%, 13.8%, 45.4% and
17.7% of trade sales were derived from North America, Europe, Asia/Pacific and
Korea, respectively, in the first nine months of 2000 as compared to 25.1%,
14.1%, 44.3% and 16.5%, respectively in the comparable period of 1999.
Asia/Pacific region revenues increased 56.2% and 77.1% in the third quarter and
first nine months of 2000, respectively, over the comparable periods of 1999.
The increases in the Asia/Pacific region are due to strength in the consumer
segment, improved regional economic conditions, expansion into the Chinese
markets and, in the first nine months of 2000, the incremental revenues from the
power device business. Revenues in the Europe region increased 54.9% and 69.0%
in the third quarter and first nine months of 2000, respectively, over the
comparable periods of 1999. The increase in Europe was due to improvements in
the communications, consumer and distribution markets and, in the first nine
months of 2000, the incremental power device revenues. North American revenues
increased 56.0% and 60.0% in the third quarter and first nine months of 2000,
respectively, over the comparable periods of 1999. The increase in North America
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resulted from strong distribution sales in both industrial and consumer markets
and improvements in communications and computing and, in the first nine months
of 2000, the incremental power device revenues.
Contract manufacturing revenues decreased 24.0% to $25.3 million in the
third quarter of 2000 compared to $33.3 million in the third quarter of 1999. On
a year-to-date basis, contract manufacturing revenues decreased 2.9% to $84.8
million as compared to $87.3 million for the comparable period in 1999. The
decrease in third quarter and year-to-date contract manufacturing revenue
results from diminishing demand from both National Semiconductor and Samsung
Electronics.
GROSS PROFIT
Gross profit increased 77.2% to $173.7 million in the third quarter of 2000
compared to $98.0 million in the third quarter of 1999. As a percentage of
sales, gross profits were 36.5% in the third quarter of 2000 as compared to
29.2% in the third quarter of 1999. On a year-to-date basis, gross profit
increased 138.1% to $471.5 million compared to $198.0 million in the comparable
period in 1999. As a percentage of sales, gross profits were 35.9% in the first
nine months of 2000, as compared to 24.8% in the comparable period in 1999.
Excluding non-recurring gains in the first nine months of 2000 resulting from
revisions of estimated charges associated with the 1999 Memory restructuring
action totaling $5.4 million, gross profits increased 135.4% to $466.1 million.
Gross trade profit increased 83.6% to $164.5 million in the third quarter of
2000 compared to $89.6 million in the third quarter of 1999. As a percentage of
sales, gross trade profits were 36.5% in the third quarter of 2000 compared to
29.6% in the third quarter of 1999. On a year-to-date basis, gross trade profit
increased 151.3% to $439.5 million compared to $174.9 million in the comparable
period in 1999. As a percentage of sales, gross trade profits were 35.7% in the
first nine months of 2000, as compared to 24.6% in the comparable period in
1999. Excluding non-recurring gains in the first nine months of 2000 resulting
from revisions of estimated charges associated with the 1999 Memory
restructuring action, gross trade profits increased 148.2% to $434.1 million.
The increase in gross trade profit as a percentage of trade sales was due in
part to a better sales mix resulting from new product introductions and slightly
higher average selling prices, as mentioned above, as well as the favorable
effect of increased factory utilization and the full benefit of cost reduction
actions undertaken during 1999. Contract manufacturing gross profit increased
9.5% to $9.2 million in the third quarter of 2000 compared to $8.4 million in
the third quarter of 1999. On a year-to-date basis, contract manufacturing gross
profit increased 38.5% to $32.0 million compared to $23.1 million in the
comparable period in 1999. The increase in contract manufacturing gross profit
in the third quarter of 2000 is due to favorable pricing adjustments and
improved factory utilization. The increase in contract manufacturing gross
profit for the first nine months of 2000 is due to incremental business with
Samsung Electronics as a result of the acquisition of the power device business.
RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $20.8 million, or 4.6% of
trade sales, in the third quarter of 2000, compared to $14.3 million, or 4.7% of
trade sales, in the third quarter of 1999. On a year-to-date basis, R&D was
$57.4 million, or 4.7% of trade sales, compared to $36.9 million, or 5.2% of
trade sales, for the comparable period of 1999. The increases in R&D spending
were primarily due to spending on new product development, focused primarily on
the Company's growth products (Analog, Power MOSFETS, Interface, CMOS Logic, and
Optoelectronics).
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were $57.8 million,
or 12.8% of trade sales, in the third quarter of 2000, compared to $54.2
million, or 17.9% of trade sales, in the third quarter of 1999. On a
year-to-date basis, SG&A expenses were $165.8 million, or 13.5% of trade sales,
compared to $116.4 million, or 16.4% of trade sales, for the comparable period
of 1999. The increase in SG&A expenses in the third quarter of 2000 as compared
to the third quarter of 1999 was due to higher selling expenses in support of
higher sales volumes. The increase in SG&A for the first nine months of 2000 as
compared to the first nine months of 1999 is due to the aforementioned factors
plus the incremental SG&A and amortization of
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<PAGE> 14
acquisition-related intangibles associated with the acquisitions of the power
device business and QT Optoelectronics.
RESTRUCTURING AND IMPAIRMENTS
The Company recorded a pre-tax gain of approximately $5.6 million during
the first nine months of 2000. This one-time gain was for additional funds
received in connection with the sale of the Company's former Mountain View,
California facility ($3.5 million) and the adjustment of restructuring reserves
($2.1 million) based upon final execution of several prior year plans.
Restructuring and impairments of $16.8 million were recorded in the first nine
months of 1999. In the first quarter of 1999, a one-time charge was taken in
connection with the transfer of assembly and test activities from the Company's
former Mountain View, California facility to its Penang, Malaysia facility ($2.7
million). In the second quarter of 1999 the Company recorded pre-tax
restructuring charges associated with the transfer of all wafer production from
Mountain View, California to South Portland, Maine ($10.0 million), and charges
related to the 1999 Memory restructuring action ($4.1 million).
INTEREST EXPENSE
Interest expense was $18.7 million and $62.4 million in the third quarter
and first nine months of 2000, respectively, compared to $30.4 million and $76.8
million in the comparable periods of 1999. Interest in the first nine months of
2000 includes a charge of $3.6 million for the write-off of debt issuance costs
associated with the refinancing of the Company's senior bank facilities.
Excluding this charge, interest expense was $58.8 million in the first nine
months of 2000. The decrease in interest expense is principally the result of
reduced indebtedness, which was retired with the proceeds of the Company's
initial public offering in August 1999, and the refinancing of the senior credit
facility in the second quarter of 2000.
INTEREST INCOME
Interest income was $6.8 million in the third quarter of 2000. There was no
interest income recorded in the third quarter of 1999. Interest income was $16.8
and $0.5 million in the first nine months of 2000 and 1999, respectively. The
increase in interest income in 2000 is due to the Company's higher cash balances
in 2000.
INCOME TAXES
Income tax expense was $7.7 million and $19.9 million for the third quarter
and first nine months of 2000, respectively, compared to a tax benefit of $0.1
million and $5.2 million in the third quarter and first nine months of 1999. The
effective tax rate was 10% for both the third quarter and first nine months of
2000, compared to 11.1% and 6.3% in the third quarter and first nine months of
1999. The tax provisions for the third quarter and first nine months of 2000 are
based on income generated primarily from the Company's foreign operations,
excluding Korea where the Company benefits from a tax holiday.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a borrowing capacity of $300.0 million for working capital
and general corporate purposes under its revolving credit facility. At October
1, 2000, the Company had drawn approximately $120.2 million against the
revolving credit facility.
The Company's senior credit facilities, 10 1/8% Senior Subordinated Notes
and 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 and limitations on borrowing money, among other restrictions. The
covenants relating to financial ratios include minimum fixed charge and interest
coverage ratios and a
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maximum leverage ratio. The senior credit facilities also limit Fairchild's
ability to modify its 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
Fairchild's subsidiaries to pay dividends or make advances to Fairchild
International. However, Company subsidiaries are permitted without material
restrictions under its debt instruments to pay dividends or make advances to
Fairchild Semiconductor Corporation. Fairchild believes that those funds
permitted to be transferred to it, together with existing cash, will be
sufficient to meet its 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. Fairchild intends to invest
approximately $280 to $290 million in 2000 to expand capacity at all of the
Company's major manufacturing fabs and assembly/test centers. In the long-term,
additional borrowing or equity investment may be required to fund future
acquisitions.
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.
In addition, 1,410,000 shares were sold by an existing stockholder pursuant to
the underwriter's overallotment option. 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's former parent.
The Company did not receive any proceeds from shares sold by existing
stockholders. The net proceeds to the Company after the underwriting discount
and other related expenses were approximately $240.0 million.
On June 6, 2000, the Company refinanced its senior credit facilities,
converting approximately $117.8 million of outstanding senior term debt into a
new revolving credit line with total borrowing capacity of $300.0 million.
Borrowings under the new credit agreement accrue interest based on either the
bank's rate or the Eurodollar rate, at the option of the Company. The interest
rate at October 1, 2000 was 7.64%. Borrowings under the agreement are secured by
a pledge of common stock of the Company and its subsidiaries. The maturity date
of the new facility is June 6, 2004.
As of October 1, 2000, the Company's cash and cash equivalents balance was
$403.7 million, an increase of $265.0 million from December 26, 1999.
During the first nine months of 2000, the Company's operations provided
$272.7 million in cash compared to $90.2 million of cash in the first nine
months of 1999. The increase in cash provided by operating activities reflects
increases in the first nine months of 2000 in net income (loss) adjusted for
non-cash items of $217.4 million offset by a decrease in cash flows from changes
in operating assets and liabilities of $34.9 million as compared with the first
nine months of 1999. Cash used in investing activities during the first nine
months of 2000 totaled $251.1 million, compared to $439.8 million in the first
nine months of 1999. The difference primarily results from the acquisition of
the power device business of Samsung in 1999 offset by increased capital
expenditures in the first nine months of 2000. Capital expenditures in the first
nine months of 2000 were made principally in the Company's wafer fabs and
assembly and test facilities, and were part of the Company's 2000 plan to add
capacity at all manufacturing locations. Capital expenditures for the balance of
2000 will be made primarily to execute this plan. Cash provided by financing
activities of $243.4 million for the first nine months of 2000 was primarily
from the issuance of common stock in the Company's secondary offering in January
2000. Cash provided by financing activities of $446.4 million in the first nine
months of 1999 was due primarily to proceeds from the Company's initial public
offering and revolving credit facility, offset by repayment of long-term debt.
LIQUIDITY AND CAPITAL RESOURCES OF FAIRCHILD INTERNATIONAL, EXCLUDING
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 the
first nine months of 2000, nor in the first nine months of 1999. Fairchild
International on a stand-alone basis has no cash requirements for the next
twelve months.
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OUTLOOK AND BUSINESS RISKS
This quarterly report includes "forward-looking statements" as that term is
defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimates," "anticipates," or "hopeful," or the negative of
those terms or other comparable terminology, or by discussions of strategy,
plans or intentions. For example, the following paragraph contains numerous
forward-looking statements about management's expectations of financial results
for the fourth quarter of 2000 and fiscal year 2001. Those and all other
forward-looking statements in this quarterly report are made based on
management's current expectations and estimates, which involve risks and
uncertainties The principal risks and uncertainties affecting the Company's
business are described below. Such risks and uncertainties could cause actual
results to be materially different than those in forward-looking statements.
Readers are cautioned not to place undue reliance on the forward-looking
statements in the following paragraphs or elsewhere in this quarterly report.
Fairchild International assumes no obligation to update such information.
Market conditions remained generally strong in the third quarter of 2000.
During the quarter, Fairchild experienced a backlog adjustment process as many
desktop PC and cell phone customers realigned their backlogs with current market
growth rates. Overall, lead-times have remained stable. As a result of capacity
expansion, the Company has been able to reduce lead-times in its critical Power
and Logic packages during the quarter. Pricing remained stable for 90% of the
Company's product mix, especially its new products, and is expected to remain
stable through the fourth quarter of 2000. Fairchild International expects that
revenues will be approximately $490 million in the fourth quarter of 2000 and
that total 2000 revenue will be approximately 39% higher than pro forma 1999
revenues, which include a full year of power device revenues. It is currently
estimated that 2001 revenues will be 20% to 25% higher than estimated 2000
revenues. Fairchild International expects that margins and operating profits
will continue to improve slowly through the fourth quarter as a result of
improved product mix due to continued new product introductions. Potential
factors that may preclude Fairchild International 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.
The manufacturing agreements entered into with National Semiconductor at
the time of the Company's recapitalization expired during the second quarter of
2000. For the twelve months ended May 2000, the agreements provided for
guaranteed minimum contract manufacturing revenues of $80.0 million. National
Semiconductor has complied with its purchase commitment. Fairchild International
and National Semiconductor have entered into new manufacturing agreements
effective June 1, 2000. The terms of these agreements are not as favorable to
the Company as the previous agreements since these agreements do not provide for
any minimum annual purchase commitments. Fairchild International expects that
revenues from National Semiconductor, which were approximately $19.4 million and
$63.2 million in the third quarter and first nine months of 2000, respectively,
will continue to decline modestly in the fourth quarter of 2000. As a result,
contract manufacturing revenues from National Semiconductor are expected to be
lower in 2000 than 1999. Fairchild International anticipates that capacity not
utilized for contract manufacturing activities in 2000 will be fully absorbed by
capacity demands for the Company's power and interface products.
Fairchild International's current effective tax rate is 10% as a result of
the utilization of net operating loss carryforwards in the United States and a
tax holiday in Korea. The Company is currently evaluating its ability to utilize
net operating loss carryforwards in the near-term. Once all net operating loss
carryforwards are utilized, the effective tax rate will increase to
approximately 25%. Had the Company experienced a 25% effective tax rate for the
first nine months of 2000, net income would have been reduced by $29.9 million,
or $0.29 per fully diluted share of common stock.
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Fairchild International's business is subject to a number of risks and
uncertainties, which could cause actual results to differ materially from those
expressed in forward-looking statements. They include but are not limited to the
following:
DOWNTURNS IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY OR CHANGES IN END USER
MARKET DEMANDS COULD REDUCE THE VALUE OF FAIRCHILD INTERNATIONAL'S BUSINESS.
The semiconductor industry is highly cyclical and the value of the
Fairchild International's business may decline during the "down" portion of
these cycles. During the latter half of fiscal year 1998 and most of fiscal year
1999, Fairchild International, as well as many others in its industry,
experienced significant declines in the pricing of its products as customers
reduced demand forecasts and manufacturers reduced prices to keep capacity
utilization high. Fairchild International believes these trends were due
primarily to the Asian financial crisis during that period and excess personal
computer inventories. Although Fairchild International does not expect such a
decline in the near future based on current indications, it cannot assure the
reader that its markets will not experience renewed, possibly more severe and
prolonged downturns in the future as a result of such cyclical changes. In
addition, Fairchild International may experience significant changes in its
profitability as a result of variations in sales, changes in product mix, price
competition for orders, changes in end user markets and the costs associated
with the introduction of new products. The market value of the stock of many
semiconductor companies, including Fairchild International, has recently
declined, possibly although not necessarily as a result of perceived reduced
demand for personal computers and cellular telephones. Reduced demand for
Fairchild International products could adversely affect its financial position
and prospects. In addition, perceived changes in the demand for Fairchild
International's products, whether or not reflected in fact, could reduce the
market price of Fairchild International's common stock if stockholders or
investors believe that such changes could adversely affect the Company's
financial condition or business prospects.
NEW TECHNOLOGIES COULD RESULT IN THE DEVELOPMENT OF NEW PRODUCTS AND A DECREASE
IN DEMAND FOR FAIRCHILD INTERNATIONAL'S PRODUCTS, AND FAIRCHILD INTERNATIONAL
MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS TO SATISFY CHANGES IN CONSUMER DEMANDS.
Fairchild International's failure to develop new technologies, or react to
changes in existing technologies, could materially delay development of new
products, which could result in decreased revenues and a loss of market share to
its competitors. Rapidly changing technologies and industry standards, along
with frequent new product introductions, characterize the semiconductor
industry. Fairchild International's financial performance depends on its ability
to design, develop, manufacture, assemble, test, market and support new products
and enhancements on a timely and cost-effective basis. For example, because
Fairchild International does not have a Flash Memory product which is becoming a
more significant product in the memory market, revenues from the memory segment
of the Company's business have decreased. Fairchild International cannot assure
the reader that the Company 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 other companies will not
render its products or technologies obsolete or noncompetitive. A fundamental
shift in technologies in Fairchild International's product markets could have a
material adverse effect on its competitive position within the industry.
BECAUSE MUCH OF FAIRCHILD INTERNATIONAL'S SUCCESS AND VALUE LIES IN ITS
OWNERSHIP AND USE OF INTELLECTUAL PROPERTY, THE COMPANY'S FAILURE TO PROTECT
THAT PROPERTY COULD ADVERSELY AFFECT ITS FUTURE GROWTH AND CONTINUED SUCCESS.
Failure to protect Fairchild International's existing intellectual property
rights may result in the loss of valuable technologies or having to pay other
companies for infringing on their intellectual property rights. Fairchild
International relies on patent, trade secret, trademark and copyright law to
protect such technolo-
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gies. Some of Fairchild International's technologies are not covered by any
patent or patent application, and Fairchild International cannot assure the
reader that:
- any of the more than 250 U.S. patents owned by Fairchild International or
numerous other patents which third parties license to it will not be
invalidated, circumvented, challenged or licensed to other companies; or
- any of Fairchild International's pending or future patent applications
will be issued within the scope of the claims sought by it if at all.
In addition, effective patent, trademark, copyright and trade secret
protection may be unavailable, limited or not applied for in certain foreign
countries.
Fairchild International also seeks to protect its proprietary technologies,
including technologies that may not be patented or patentable, in part by
confidentiality agreements and, if applicable, inventors' rights agreements with
the Company's collaborators, advisors, employees and consultants. Fairchild
International cannot assure the reader that these agreements will not be
breached, that it 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 Fairchild International's technologies have
been licensed on a non-exclusive basis from National Semiconductor, Samsung
Electronics and other companies which may license such technologies to others,
including, in the case of National Semiconductor commencing on March 11, 2002,
the Company's 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 Fairchild
International's technologies. If necessary or desirable, Fairchild International
may seek licenses under patents or intellectual property rights claimed by
others. However, Fairchild International cannot assure the reader that it will
obtain such licenses or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license from a third party
for technologies Fairchild International uses could cause the Company to incur
substantial liabilities and to suspend the manufacture or shipment of products
or its use of processes requiring the technologies.
FAIRCHILD INTERNATIONAL'S FAILURE TO OBTAIN OR MAINTAIN THE RIGHT TO USE CERTAIN
TECHNOLOGIES MAY NEGATIVELY AFFECT ITS FINANCIAL RESULTS.
Fairchild International's future success and competitive position depend in
part upon its ability to obtain or maintain proprietary technologies used in its
principal products, which is achieved in part by defending claims by competitors
of intellectual property infringement. The semiconductor industry is
characterized by litigation regarding patent and other intellectual property
rights. Fairchild International is involved in lawsuits, and could become
subject to other lawsuits, in which it is alleged that the Company has infringed
upon the intellectual property rights of other companies. See the Legal
Proceedings section of this and other quarterly and annual reports Fairchild
International files with the Securities and Exchange Commission. Fairchild
International's involvement in existing and future intellectual property
litigation could result in significant expense to it, adversely affecting sales
of the challenged product or technologies and diverting the efforts of the
Company's technical and management personnel, whether or not such litigation is
resolved in its favor. In the event of an adverse outcome as a defendant in any
such litigation, Fairchild International may be required to:
- pay substantial damages;
- indemnify customers for damages they might suffer if the products they
purchase from the Company violate the intellectual property rights of
others;
- 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.
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Fairchild International cannot assure the reader that it 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.
FAIRCHILD INTERNATIONAL MAY NOT BE ABLE TO CONSUMMATE FUTURE ACQUISITIONS, AND
CONSEQUENCES OF THOSE ACQUISITIONS WHICH THE COMPANY DOES COMPLETE MAY ADVERSELY
AFFECT IT.
Fairchild International plans to continue to pursue additional acquisitions
of related businesses. The expense incurred in consummating the future
acquisition of related businesses, or failure or inability to integrate such
businesses successfully into its existing business, could result in Fairchild
International incurring unanticipated expenses and losses. In addition,
Fairchild International may not be able to identify or finance additional
acquisitions, or realize any anticipated benefits from acquisitions it does
complete.
Should Fairchild International successfully acquire another business, the
process of integrating acquired operations into the Company's 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 existing operations. Some of the risks
associated with acquisitions include:
- Unexpected losses of key employees or customers of the acquired company
- Conforming the acquired company's standards, processes, procedures and
controls with the Company's operations
- Coordinating new product and process development
- Hiring additional management and other critical personnel
- Increasing the scope, geographic diversity and complexity of the
Company's operations.
In addition, although Samsung Electronics assists Fairchild International
in integrating the operations of the power device business into the Company's
operations pursuant to a transitional services agreement the Company entered
into at the time it acquired that business, Fairchild International may
encounter unforeseen obstacles or costs in such integration and in the
integration of other businesses it acquires.
In addition, Fairchild International may issue equity securities to pay for
any future acquisitions, which may be dilutive to its existing stockholders. The
Company may also incur debt or assume contingent liability in connection with
its acquisitions, which could harm its operating results.
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
Fairchild International's financial condition and operating results.
PRODUCTION TIME AND THE OVERALL COST OF PRODUCTS COULD INCREASE IF FAIRCHILD
WERE TO LOSE ONE OF ITS PRIMARY SUPPLIERS OR IF A PRIMARY SUPPLIER INCREASED THE
PRICES OF RAW MATERIALS.
Fairchild International's manufacturing operations depend upon obtaining
adequate supplies of raw materials on a timely basis, and its results of
operations could be adversely affected if it were unable to obtain adequate
supplies of raw materials in a timely manner or if the costs of raw materials
increased significantly. Fairchild International purchases 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, Fairchild International
subcontracts a minority of its wafer fabrication and assembly and test
operations to other manufacturers, including NS Electronics Ltd., Samsung
Electronics and National Semiconductor. Fairchild International's operations and
ability to satisfy customer obligations could be adversely affected if its
relationships with these subcontractors were disrupted or terminated.
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DELAYS IN BEGINNING PRODUCTION AT NEW FACILITIES, EXPANDING CAPACITY AT EXISTING
FACILITIES, IMPLEMENTING NEW PRODUCTION TECHNIQUES, OR IN CURING PROBLEMS
ASSOCIATED WITH TECHNICAL EQUIPMENT MALFUNCTIONS ALL COULD ADVERSELY AFFECT
FAIRCHILD INTERNATIONAL'S MANUFACTURING EFFICIENCIES.
Fairchild International's manufacturing efficiency will be an important
factor in its future profitability, and the Company cannot assure the reader
that it will be able to maintain its manufacturing efficiency or increase
manufacturing efficiency to the same extent as its competitors. Fairchild's
manufacturing processes are highly complex, require advanced and costly
equipment and are continuously being modified in an effort to improve yields and
product performance. Impurities or other difficulties in the manufacturing
process can lower yields.
In addition, Fairchild International is currently engaged in an effort to
expand capacity at all of its manufacturing facilities. As is common in the
semiconductor industry, the Company has from time to time experienced difficulty
in beginning production at new facilities or in effecting transitions to new
manufacturing processes. As a consequence, Fairchild International has suffered
delays in product deliveries or reduced yields. Fairchild International may
experience delays or problems in bringing planned new manufacturing capacity to
full production. Fairchild International may also experience problems in
achieving acceptable yields, or experience product delivery delays in the future
with respect to existing or planned new capacity as a result of, among other
things, capacity constraints, construction delays, upgrading or expanding
existing facilities or changing its process technologies, any of which could
result in a loss of future revenues. Fairchild International's 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.
A SIGNIFICANT PORTION OF FAIRCHILD INTERNATIONAL'S SALES ARE MADE BY
DISTRIBUTORS WHICH COULD CAN TERMINATE THEIR RELATIONSHIPS WITH THE COMPANY WITH
LITTLE OR NO NOTICE. THE TERMINATION OF A DISTRIBUTOR COULD REDUCE SALES AND
RESULT IN INVENTORY RETURNS.
Distributors accounted for 49.8% of Fairchild International's net sales for
the nine months ended October 1, 2000. Fairchild International's five domestic
distributors accounted for 7.4% of the Company's total net sales for the nine
months ended October 1, 2000. As a general rule, Fairchild International does
not have long-term agreements with its distributors and they may terminate their
relationships with Fairchild International with little or no advance notice.
Distributors generally offer competing products. The loss of one or more of
Fairchild International's distributors, or the decision by one or more of them
to reduce the number of Fairchild International products offered by such
distributor or to carry the product lines of the its competitors, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The termination of a significant distributor, whether at
the Company's or the distributor's initiative, or a disruption in the operations
of one or more of the Company's distributors could reduce its net sales in a
given quarter and could result in an increase in inventory returns.
THE SEMICONDUCTOR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD
REDUCE THE VALUE OF AN INVESTMENT IN FAIRCHILD INTERNATIONAL.
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 Fairchild International participates comes from companies of
various sizes, many of which are larger and have greater financial and other
resources than the Company has 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 Fairchild
International may introduce competing products in the future.
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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, which Fairchild International
acquired from Samsung Electronics Co., Ltd. in 1999, may result in the Company
incurring operating costs and expenses significantly greater than it anticipated
prior to the acquisition. Prior to the 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 from third-party suppliers. However, to provide these
services for a transition period after the acquisition of the power device
business, Fairchild International entered into a Transitional Services Agreement
with Samsung Electronics under which the power device business continues to
obtain a number of these services. Fairchild International cannot assure the
reader that upon termination of the Transitional Services Agreement in April
2002, it will be able to obtain similar services on comparable terms.
FAIRCHILD INTERNATIONAL 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 FAIRCHILD
INTERNATIONAL'S KOREAN SUBSIDIARY.
As a result of the acquisition of the power device business, Fairchild
International has 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 Fairchild International's Korean subsidiary.
Although historically the power device business generated significant revenues
from the sale of products to affiliated Samsung companies, Fairchild
International cannot assure the reader that it 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 the 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 Fairchild International and Samsung
Electronics if it concludes that Samsung Electronics has provided Fairchild
International with undue support or discriminated against its competitors.
THE POWER DEVICE BUSINESS SUBJECTS FAIRCHILD INTERNATIONAL 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, Fairchild
International has significant operations in South Korea and is 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. Fairchild cannot assure the reader
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 Fairchild International's 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
Fairchild International has taken steps to fix the costs subject to
currency fluctuations and to balance
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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
the Company's financial performance and results of operations.
A CHANGE IN FOREIGN TAX LAWS OR A DIFFERENCE IN THE CONSTRUCTION OF CURRENT
FOREIGN TAX LAWS BY RELEVANT FOREIGN AUTHORITIES COULD RESULT IN FAIRCHILD
INTERNATIONAL NOT RECOGNIZING THE BENEFITS IT ANTICIPATED IN CONNECTION WITH THE
TRANSACTION STRUCTURE USED TO CONSUMMATE THE ACQUISITION OF THE POWER DEVICE
BUSINESS.
The transaction structure Fairchild International 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., the Company's
wholly owned subsidiary which owns the power device business, has been granted a
ten year tax holiday under Korean law. The first seven years are tax-free,
followed by three years of income taxes at 50% of the statutory rate. If
Fairchild International's 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, the Company could suffer adverse tax and other financial consequences
or lose the benefits anticipated from its transaction structure.
FAIRCHILD INTERNATIONAL'S INTERNATIONAL OPERATIONS SUBJECT IT TO RISKS NOT FACED
BY DOMESTIC COMPETITORS.
Fairchild International cannot assure the reader that it will be successful
in overcoming the risks related to or arising from operating in international
markets. Through the Company's subsidiaries it maintains significant operations
in the Philippines, Malaysia and South Korea and also operates facilities in
China and Singapore. Fairchild International has sales offices and customers
around the world. 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 the Company manufactures its products.
FAIRCHILD INTERNATIONAL IS SUBJECT TO MANY ENVIRONMENTAL LAWS AND REGULATIONS
THAT COULD AFFECT ITS OPERATIONS OR RESULT IN SIGNIFICANT EXPENSES.
Federal, state and local laws and regulations impose various restrictions
and controls on the discharge of materials, chemicals and gases used in
Fairchild International's semiconductor manufacturing processes. In addition,
under some laws and regulations, the Company could be held financially
responsible for remedial measures if its properties are contaminated or if it
sends waste to a facility that becomes contaminated, even if Fairchild
International did not cause the contamination. Also, the Company may be subject
to common law claims if it releases substances that damage or harm third
parties. Although Fairchild International believes that its activities conform
to presently applicable environmental regulations, its failure to comply with
present or future regulations could result in the imposition of fines,
suspension of production, or a cessation of operation. Any regulation could
require Fairchild International to acquire costly equipment or to incur other
significant expenses to comply with environmental regulations.
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FAIRCHILD INTERNATIONAL MAY NOT BE ABLE TO ATTRACT OR RETAIN THE TECHNICAL OR
MANAGEMENT EMPLOYEES NECESSARY TO REMAIN COMPETITIVE IN ITS INDUSTRY.
Fairchild International's continued success depends on the retention and
recruitment of skilled personnel, including technical, marketing, management and
staff personnel. In the semiconductor industry, the competition for qualified
personnel, particularly experienced design engineers and other technical
employees, is intense. There can be no assurance that Fairchild International
will be able to retain its current personnel or recruit the key personnel it
requires. In addition, Fairchild International does not have employment
agreements with most members of its senior management team.
BECAUSE A LIMITED NUMBER OF PERSONS, INCLUDING MEMBERS OF FAIRCHILD
INTERNATIONAL'S MANAGEMENT TEAM, OWN A SUBSTANTIAL NUMBER OF COMPANY SHARES,
DECISIONS MAY BE MADE BY THEM THAT MAY BE DETRIMENTAL TO THE READER'S INTERESTS.
Sterling Holding Company, LLC, which is one of Fairchild International's
principal stockholders, and its directors and executive officers together own
approximately 36% of the outstanding shares of the Company's common stock
(including shares underlying vested options and shares of its Class B Common
Stock, which are convertible into shares of Fairchild International's common
stock). By virtue of such stock ownership, such persons have the power to
significantly influence Fairchild International's affairs and are able to
influence the outcome of matters required to be submitted to stockholders for
approval, including the election of its directors and amendment of the Company's
Restated Certificate of Incorporation and Bylaws. Fairchild International cannot
assure the reader that such persons will not exercise their influence over
Fairchild International in a manner detrimental to the reader's interests.
FAIRCHILD INTERNATIONAL'S LARGEST STOCKHOLDER AND ITS DIRECTORS AND EXECUTIVE
OFFICERS OWN A LARGE NUMBER OF COMPANY SHARES THAT COULD BE SOLD INTO THE MARKET
AT ANY TIME; FUTURE SALES OF THOSE SHARES COULD DEPRESS THE MARKET PRICE OF
FAIRCHILD INTERNATIONAL'S COMMON STOCK.
As of October 1, 2000, there were 99,353,245 shares of Fairchild
International common stock outstanding, including shares of Class A Common stock
and shares of Class B Common Stock, which are convertible into shares of Class A
Common Stock on a share-for-share basis at the option of the holder. Shares of
Company Class A Common Stock and Class B Common Stock are identical in all
respects, except Class B shares are non-voting and there is no public market for
Class B shares. Of the shares of common stock outstanding, approximately
35,500,000, or 36%, are "restricted securities" held by "affiliates" of
Fairchild International (as such terms are defined in Rule 144 under the
Securities Act of 1933). These affiliates include Fairchild International's
largest stockholder, Sterling Holding Company, LLC and the Company's directors
and executive officers. Restricted securities may not be sold into the public
market unless the sale is registered with the SEC or an exemption from
registration is available. Rule 144 provides such an exemption, and under that
rule all of the above-restricted shares could be sold into the public market
immediately subject only to volume, notice and manner of sale restrictions under
the rule. The volume limitations prohibit an affiliate from selling, in any
three-month period, more than either (1) one percent of the number of shares of
Class A Common Stock outstanding or (2) the average weekly volume of shares
traded during the four calendar weeks before the sale, whichever is greater.
Rule 144 also requires restricted securities to be held for at least one year
before sale; this condition has been met for all of the above-referenced shares.
If Fairchild International's affiliates sell a large number of restricted
shares, the market price of the Company's 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 the Company.
AS A HOLDING COMPANY, FAIRCHILD INTERNATIONAL IS TOTALLY DEPENDENT ON DIVIDENDS
FROM ITS OPERATING SUBSIDIARIES TO PAY DIVIDENDS.
Fairchild International expects it subsidiaries to retain substantially all
of their earnings to meet their own obligations. As a result, and because its
subsidiary, Fairchild Semiconductor Corporation, is prohibited by terms in its
debt instruments from making payments to the Company, it is unlikely that
Fairchild International
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will be able to make dividend payments in the near future. Fairchild
International is a holding company with no business operations, and its only
significant asset is the outstanding capital stock of its subsidiaries.
Fairchild International relies on payments from its subsidiaries to meet any
future obligations. Absent such payments, the Company will not be able to pay
cash dividends on its Class A Common Stock. Fairchild International currently
expects that the earnings and cash flow of its subsidiaries will be retained and
used by them in their operations, including by Fairchild Semiconductor
Corporation to service its debt obligations. Even if the Company decided to pay
a dividend on or make a distribution in respect of its Class A Common Stock,
Fairchild International cannot assure the reader that its subsidiaries will
generate sufficient cash flow to pay a dividend or distribute funds to Fairchild
International or that applicable state law and contractual restrictions,
including restrictions in Fairchild Semiconductor Corporation's debt
instruments, will permit such dividends or distributions.
FAIRCHILD INTERNATIONAL MAY NOT BE ABLE TO GENERATE THE NECESSARY AMOUNT OF CASH
TO SERVICE ITS EXISTING DEBT, WHICH MAY REQUIRE IT TO REFINANCE ITS DEBT OR
DEFAULT ON ITS SCHEDULED DEBT PAYMENTS.
Fairchild International cannot assure the reader that its 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 the Company under the senior credit
facilities in an amount sufficient to enable Fairchild International to pay its
indebtedness or to fund its other liquidity needs. In addition, because
Fairchild International's senior credit facilities have variable interest rates,
the cost of those borrowings will increase if market interest rates increase. If
the Company is unable to service its indebtedness, it may need to refinance all
or a portion of its indebtedness on or before maturity. Fairchild International
cannot assure the reader that it would be able to refinance any of its
indebtedness on commercially reasonable terms or at all, which could cause the
Company to default on its obligations and impair its liquidity.
FAIRCHILD INTERNATIONAL'S DEBT INSTRUMENTS RESTRICT OR PROHIBIT THE COMPANY'S
ABILITY TO ENGAGE IN OR ENTER INTO BUSINESS, OPERATING AND FINANCING
ARRANGEMENTS, WHICH COULD ADVERSELY AFFECT ITS ABILITY TO TAKE ADVANTAGE OF
POTENTIALLY PROFITABLE BUSINESS OPPORTUNITIES.
The operating and financial restrictions and covenants in the Fairchild
International's debt instruments may limit the Company's ability to finance its
future operations or capital needs or engage in other business activities that
may be in the Company's interest. Fairchild International's debt instruments
impose significant operating and financial restrictions on the Company affecting
its ability to incur additional indebtedness or create liens on Company assets,
pay dividends, sell assets, engage in mergers or acquisitions, make investments
or engage in other business activities, which could place the Company 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
the Company's debt instruments. In the event of any such default, the Fairchild
International's debtholders could demand payment of all borrowings outstanding,
including accrued interest and other fees. In addition, if Fairchild
International were unable to repay any borrowings under its senior credit
facilities when due, the lenders could proceed against their collateral, which
consists of substantially all of the capital stock of its domestic direct and
indirect subsidiaries and approximately 65% of the capital stock of its foreign
direct and indirect subsidiaries. If the indebtedness under Fairchild
International's debt instruments were to be accelerated, the value of its common
stock would likely decrease significantly.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
Commission. This SAB is effective beginning in the fourth quarter of 2000, as
provided for in SAB 101B. Compliance with this SAB is not expected to have a
material impact on the Company's consolidated financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138, which
establishes accounting and reporting standards for derivative instruments,
including
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certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
as provided for in SFAS No. 137. The adoption of this Statement is not expected
to have a material impact on the Company's consolidated financial position or
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosure about Market Risk, in Fairchild International's annual report on Form
10-K for the year ended December 26, 1999 and under the subheading "Quantitative
and Qualitative Disclosures about Market Risk" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 28 of
Fairchild International's Annual Report to Stockholders for the year ended
December 26, 1999.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 2, 1999, Fairchild's 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 the Company's products infringe two Siliconix patents and claims an
unspecified amount of damages. Fairchild is contesting these claims vigorously.
On or about October 3, 2000, Fairchild Semiconductor Corporation was named
as a defendant in a patent infringement lawsuit filed by U.S. Philips
Corporation in the United States District Court for the Southern District of New
York. The complaint filed in the suit alleges that some of Fairchild's products
infringe one Philips patent. The Company is continuing to investigate the
allegations and intends to contest these claims vigorously.
In addition to the above proceeding, from time to time Fairchild is
involved in other legal proceedings in the ordinary course of business. The
Company believes that there is no such ordinary course litigation pending that
could have, individually or in the aggregate, a material adverse effect on its
business, financial condition, results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
On September 13, 2000, Fairchild International filed a special report on
Form 8-K in connection with its acquisition of Micro Linear Corporation's power
management business and Kota Microcircuits, Inc.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fairchild Semiconductor International,
Inc.
By: /s/ DAVID A. HENRY
------------------------------------
David A. Henry
Vice President, Corporate Controller
(Principal Accounting Officer)
Date: November 14, 2000
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