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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 November 23, 1997
[ ] 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: 333-26897
FAIRCHILD SEMICONDUCTOR CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0449095
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
333 Western Avenue, Mail Stop 01-00
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 December 18, 1997:
Title of Each Class Number of Shares
-------------------- ----------------
Common Stock; $0.01 par value 100
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FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1 Financial Statements
Condensed Consolidated Statements of Operations
(Unaudited) for the Three and Six Months Ended
November 23, 1997 and November 24, 1996........................... 3
Condensed Consolidated Balance Sheets as of November 23,
1997 (Unaudited) and May 25, 1997................................. 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Three and Six Months Ended
November 23, 1997................................................. 5
Notes to Condensed Consolidated Financial
Statements (Unaudited)............................................ 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 9
Part II Other Information
Item 1 Legal Proceedings................................................... 15
Item 6 Exhibits and Reports on Form 8-K.................................... 15
Signature................................................................... 16
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions) (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 23, NOVEMBER 24, NOVEMBER 23, NOVEMBER 24,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Net sales--trade..................................... $ 155.3 $ 154.0 $ 314.0 $ 286.9
Contract manufacturing -- National Semiconductor..... 40.5 24.0 81.3 50.1
------ ------ ------ ------
Total revenue...................................... 195.8 178.0 395.3 337.0
Direct costs and allocated expenses:
Cost of sales--trade................................. 105.4 117.5 213.4 220.4
Cost of contract manufacturing -- National
Semiconductor...................................... 31.3 24.0 61.4 50.1
Research and development............................. 7.8 4.3 14.9 8.5
Selling, general and administrative.................. 21.0 23.2 42.0 41.9
Restructuring of operations.......................... -- -- -- 5.3
------ ------ ------ ------
Total operating costs and expenses................. 165.5 169.0 331.7 326.2
------ ------
Operating income....................................... 30.3 63.6
Interest, net.......................................... 10.7 -- 21.7 --
Other expense.......................................... -- 0.5 -- 0.9
------ ------ ------ ------
Income before income taxes............................. 19.6 41.9
Revenues less direct and allocated expenses before
income taxes......................................... $ 8.5 $ 9.9
====== ======
Income taxes........................................... 6.9 14.7
------ ------
Net income............................................. $ 12.7 $ 27.2
====== ======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
NOVEMBER 23, MAY 25,
1997 1997
------------- -----------
ASSETS
Current assets:
Cash............................................ $ 79.1 $ 40.7
Receivables, net................................ 80.9 79.6
Inventories..................................... 78.2 73.1
Prepaid expenses and other current assets....... 11.7 16.6
Deferred income taxes........................... 2.1 2.1
------ ------
Total current assets.......................... 252.0 212.1
Property, plant and equipment, net.............. 285.0 295.0
Deferred income taxes........................... 13.2 17.8
Other assets.................................... 28.9 29.4
------ ------
Total assets.................................. $ 579.1 $ 554.3
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............... $ 11.0 $ 11.0
Accounts payable................................ 60.0 77.1
Accrued expenses and other current liabilities.. 57.9 40.1
------ ------
Total current liabilities..................... 128.9 128.2
Long-term debt, less current portion.............. 403.5 409.0
Other liabilities................................. 0.4 0.4
------ ------
Total liabilities............................. 532.8 537.6
Commitments and contingencies
Stockholders' Equity:
Common stock.................................... -- --
Additional paid-in capital...................... 12.0 9.6
Retained earnings............................... 34.3 7.1
------ ------
Total stockholders' equity.................... 46.3 16.7
------ ------
Total liabilities and stockholders' equity.... $ 579.1 $ 554.3
====== ======
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
THREE MONTHS SIX MONTHS
ENDED ENDED
NOVEMBER 23, NOVEMBER 23,
1997 1997
-------------- -------------
Operating activities:
Net income....................................... $ 12.7 $ 27.2
Addback non-cash adjustments to net income:
Depreciation and amortization.................. 20.3 40.3
Loss on disposal of fixed assets............... 0.3 0.5
Deferred income taxes.......................... (0.6) 4.6
Changes in certain assets and liabilities, net:
Accounts receivable............................ 16.9 1.2
Inventories.................................... (6.6) (5.1)
Prepaid expenses and other current assets...... 2.6 4.9
Other assets................................... 0.2 0.1
Current liabilities............................ (5.2) 0.6
----- -----
Cash provided by operating activities........ 40.6 74.3
Investing activities:
Capital expenditures............................. (15.7) (27.5)
Purchase of molds and tooling.................... (1.7) (2.9)
----- -----
Cash used by investing activities............ (17.4) (30.4)
Financing activities:
Repayment of long-term debt...................... (2.8) (5.5)
----- -----
Cash used by financing activities............ (2.8) (5.5)
Net change in cash and cash equivalents............ 20.4 38.4
Cash and cash equivalents at beginning of period... 58.7 40.7
----- -----
Cash and cash equivalents at end of period......... $ 79.1 $ 79.1
===== =====
Cash paid for interest and taxes was $18.7 million and $3.0 million
respectively for the three-month period ended November 23, 1997, and $22.6
million and $3.3 million respectively for the six-month period ended November
23, 1997.
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1--BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheets of Fairchild Semiconductor
Corporation (the "Company") as of November 23, 1997 and May 25, 1997 and the
Condensed Consolidated Statements of Operations and Cash Flows for the three-
and six-month periods ended November 23, 1997 were prepared by the Company.
The Combined Condensed Statements of Operations of the Fairchild
Semiconductor Business (the "Business") for the three- and six-month periods
ending November 24, 1996 include all revenues and costs attributable to the
Business as it was operated within National Semiconductor Corporation
("National"), including allocations for shared facilities and overhead. In
addition, National performed cash management on a centralized basis. As a
result, receivables, liabilities and cash receipts and payments were not
identifiable on a business specific basis. Given these constraints, certain
supplemental cash flow information is presented in lieu of statements of cash
flows (Note 3). In the opinion of management, the accompanying condensed
consolidated financial statements as of and for the three- and six-month
periods ended November 23, 1997 contain all adjustments (consisting of only
normal recurring items) necessary to present fairly the financial position
and results of operations of the Company. The allocations and estimates in
the Combined Condensed Statements of Operations as of and for the three-and
six-month periods ended November 24, 1996 were based on assumptions that
management believes were reasonable under the circumstances. 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
financial statements and notes thereto included in the special financial
report on Form 10-K for the fiscal year ended May 25, 1997 and the Company's
Registration Statement filed on Form S-4 dated July 9, 1997.
NOTE 2--INVENTORIES
The components of inventories are as follows:
NOVEMBER 23, MAY 25,
1997 1997
--------------- -----------
(In millions)
Raw materials....................................... $ 9.9 $ 8.8
Work in process..................................... 49.3 43.4
Finished goods...................................... 19.0 20.9
----- -----
Total inventories................................. $ 78.2 $ 73.1
===== =====
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NOTE 3--SUPPLEMENTAL CASH FLOW INFORMATION
As described in Note 1, National's cash management system was not
designed to trace centralized cash and related financing transactions to the
specific cash requirements of the Business. In addition, National's corporate
transaction systems were not designed to track receivables and certain
liabilities and cash receipts and payments on a business specific basis.
Given these constraints, the following unaudited data are presented to
facilitate analysis of key components of cash flow activity:
THREE MONTHS SIX MONTHS
ENDED ENDED
NOVEMBER 24, NOVEMBER 24,
1996 1996
------------- ------------
(In millions)
Operating activities:
Revenues less expenses........................ $ 8.5 $ 9.9
Depreciation and amortization................. 19.5 37.6
Loss (gain) on disposal of fixed assets....... (0.2) 0.2
Decrease in inventories....................... 14.8 19.9
Increase in prepaid expenses and other
current assets............................... (4.8) (0.8)
Decrease in other assets...................... 1.5 0.7
Increase (decrease) in accounts payable....... 1.4 (16.3)
Increase (decrease) in accrued expenses and
other liabilities............................ (1.7) 9.1
----- -----
Cash provided by operating activities....... 39.0 60.3
Investing activities:
Capital expenditures.......................... (9.9) (30.6)
Purchase of molds and tooling................. (1.6) (2.8)
----- -----
Cash used by investing activities........... (11.5) (33.4)
----- -----
Net financing provided to
National Semiconductor *...................... $ 27.5 $ 26.9
===== =====
- ------------------------
* Net financing provided to National Semiconductor does not necessarily
represent the cash flows of the Business, or the timing of such cash flows,
had it operated on a stand-alone basis.
Note 4 -- Long-term Debt
On November 18, 1997, the Company amended certain provisions of its Senior
Credit Facilities Agreement with a syndicate of financial institutions.
Specifically, the amount available under the Revolving Credit Facility was
increased from $75 million to $130 million. In addition, certain restrictive
covenants were amended in order to permit the acquisition of Raytheon
Semiconductor, Inc. (Note 5). As of November 23, 1997, no amounts were
outstanding under the Revolving Credit Facility.
7
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Note 5 -- Subsequent Event
On November 25, 1997, the Company signed an agreement to acquire all of the
outstanding common stock of Raytheon Semiconductor, Inc., a California-based
supplier of analog and mixed signal integrated circuits, for approximately $120
million in cash. The Company intends to finance the acquisition through a
combination of borrowings under its existing Revolving Credit Facility (Note 4),
borrowings under a new Tranche C term loan within its existing Senior Term
Facility, and existing cash. In conjunction with the acquisition, the Company
intends to refinance its existing Tranche B term loan with proceeds from the new
Tranche C term loan. The new Tranche C term loan will mature on March 11, 2003
and will bear interest based on either the bank's base rate or the Eurodollar
rate at the option of the Company. The transaction, which is presently expected
to be completed by December 31, 1997, will be accounted for as a purchase.
NOTE 6--RECLASSIFICATIONS
Certain amounts in the unaudited financial statements for the three and
six-month periods ended November 24, 1996 have been reclassified to conform to
the presentation in the unaudited financial statements for the three and
six-month periods ended November 23, 1997.
In addition, certain non-cash adjustments were recorded in the second
quarter to increase accounts receivable ($2.5 million) and current liabilities
($0.1 million), offset against additional paid in capital. The purpose of these
adjustments was to properly state business equity assumed as part of the
Recapitalization.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Fairchild Semiconductor Corporation (the "Company") is a leading designer,
manufacturer and supplier of high-performance logic, non-volatile memory and
discrete power and signal technology semiconductors, serving the
telecommunications, consumer, industrial, personal systems and automotive
markets. The results of operations for the second quarter and first half of
fiscal 1997 (three- and six-month periods ended November 24, 1996) reflect the
operating results of the Fairchild Semiconductor Business (the "Business") of
National Semiconductor Corporation ("National"), and are not necessarily
indicative of the results that would have been obtained as a stand-alone
company. This is due in part to the fact that National allocated to the Business
certain corporate and other overhead costs at levels higher than those
experienced as a stand-alone company. In addition, the Business, prior to the
establishment of the Company, provided manufacturing services to National at
cost and now provides such services at higher prices.
RESULTS OF OPERATIONS
Net income was $12.7 million and $27.2 million for the second quarter and
first half of fiscal 1998, respectively. As a stand-alone operation in fiscal
1998, the Company incurred interest expense and income tax expense of $10.7
million and $6.9 million, respectively, in the second quarter of fiscal 1998
and $21.7 million and $14.7 million, respectively, in the first half of
fiscal 1998, that the Business did not incur in the comparable periods of
fiscal 1997. Operating income was $30.3 million and $63.6 million in the
second quarter and first half of fiscal 1998, respectively, compared to
revenues less direct and allocated expenses before income taxes of $8.5
million and $9.9 million in the comparable periods of fiscal 1997. This
increase is primarily attributable to higher trade revenues, particularly in
the first quarter of fiscal 1998, as a result of improved market conditions,
higher trade gross profit due to improved factory utilization and improved
pricing, along with a one-time restructuring charge of $5.3 million for
workforce reductions in first half of fiscal 1997 which did not recur in the
first half of fiscal 1998. In addition, the Company generated $9.2 million
and $19.9 million of gross profit on contract manufacturing services in the
second quarter and first half of fiscal 1998, respectively, under
manufacturing agreements with National. In the comparable periods of fiscal
1997, these revenues were recorded at cost. Excluding depreciation and
amortization of $20.3 million and $40.3 million in the second quarter and
first half of fiscal 1998, respectively, and $19.5 million and $37.6 million
in the comparable periods of fiscal 1997, and other expense of $0.5 million
and $0.9 million in the second quarter and first half of fiscal 1997,
respectively, earnings before interest, taxes and depreciation and
amortization ("EBITDA") were $50.6 million and $103.9 million in the second
quarter and first half of fiscal 1998, respectively, compared to $28.5
million and $48.4 million in the comparable periods of fiscal 1997. EBITDA is
presented because the Company believes that it is a widely accepted financial
indicator of an entity's ability to incur and service debt. EBITDA should not
be considered as an alternative to net income, operating income, or other
consolidated operations and cash flow data prepared in accordance with
generally accepted accounting principles, as an indicator of the operating
performance of the Company, or as an alternative to cash flows as a measure
of liquidity.
9
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REVENUES
The Company's revenues consist of trade sales to unaffiliated customers
(79.3% and 79.4% of total revenues in the second quarter and first half of
fiscal 1998, respectively, and 86.5% and 85.1% in the comparable periods of
fiscal 1997) and revenues from contract manufacturing services provided to
National (20.7% and 20.6% of total revenues in the second quarter and first half
of fiscal 1998, respectively, and 13.5% and 14.9% in the comparable periods of
fiscal 1997).
Trade sales increased 1.0% to $155.3 million in the second quarter of
fiscal 1998 compared to $154.0 million in the second quarter of fiscal 1997.
On a year-to-date basis, trade sales increased 9.4% to $314.0 million
compared to $286.9 million for the comparable period of fiscal 1997.
Logic trade sales increased 7.0% and 12.3% in the second quarter and
first half of fiscal 1998, respectively, over the comparable periods of
fiscal 1997. The increase was driven by a significant increase in unit
volume, reflecting strong market demand, which offset a slight decrease in
average selling prices. In the second quarter of fiscal 1998, CMOS trade
sales increased 14.6% over the second quarter of fiscal 1997, offsetting a
decrease of 1.0% in Bipolar trade sales, reflective of the general market
trend favoring CMOS. On a year-to-date basis, CMOS and Bipolar trade sales
increased 15.5% and 8.9%, respectively, over the comparable periods of fiscal
1997.
Discrete trade sales increased 18.6% and 26.1% in the second quarter and
first half of fiscal 1998, respectively, over the comparable periods of
fiscal 1997. The increase was due almost entirely to higher average selling
prices, driven by new product introductions and a favorable sales mix, as
unit volume was down slightly. Small Signal trade sales increased 39.4%,
offsetting a decrease of 5.2% in Power DMOS trade sales in the second quarter
of fiscal 1998 over the second quarter of fiscal 1997. Power DMOS trade sales
in the second quarter of fiscal 1998 were impacted by manufacturing problems
at the Company's facility in Cebu, Philippines, which have been rectified. On
a year-to-date basis, Small Signal and Power DMOS trade sales increased 39.4%
and 9.1%, respectively, over the comparable period of fiscal 1997.
Memory trade sales decreased 28.4% and 13.9% in the second quarter and
first half of fiscal 1998, respectively, over the comparable periods of
fiscal 1997. The decrease was driven by lower prices impacting all product
lines due to competitive pressures, partially offset by higher volume,
particularly in E2PROM. E2PROM trade sales decreased 0.7% in the second
quarter of fiscal 1998 over the second quarter of fiscal 1997, but have
increased 16.4% in the first half of fiscal 1998 over the first half of
fiscal 1997. EPROM trade sales decreased 56.5% and 44.0% in the second
quarter and first half of fiscal 1998, respectively, over the comparable
periods of fiscal 1997.
Geographically, 38%, 22% and 40% of trade sales were derived in North
America, Europe and Asia/Pacific, respectively, in the second quarter of
fiscal 1998, compared to 38%, 19% and 43% in the second quarter of fiscal
1997. Trade sales in Europe increased 15.7% over a year ago due to strength
in the telecommunications market, which offset a decrease of 5.2% in
Asia/Pacific, due in part to the delayed transition to a dedicated sales
force in Japan and price pressures, particularly in Memory, in Southeast
Asia. North America trade sales were flat year over year. On a year-to-date
basis, 37%, 20% and 43% of trade sales were derived in North America, Europe
and Asia/Pacific, respectively, compared to 39%, 19% and 42% in the first
half of fiscal 1997. Trade sales in all regions were higher in the first half
of fiscal 1998 compared to a year ago. Trade sales increased 4.0%, 14.9% and
12.2% in North America, Europe and Asia/Pacific, respectively, the result of
improved market conditions.
10
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Contract manufacturing revenues increased 68.8% to $40.5 million in the
second quarter of fiscal 1998 compared to $24.0 million in the second quarter
of fiscal 1997. On a year-to-date basis, contract manufacturing revenues
increased 62.3% to $81.3 million, compared to $50.1 million for the
comparable period in fiscal 1997. This increase reflects greater demand from
National.
GROSS PROFIT
Gross profit increased 61.9% to $59.1 million in the second quarter of
fiscal 1998, compared to $36.5 million in the second quarter of fiscal 1997. On
a year-to-date basis, gross profit increased 81.2% to $120.5 million from $66.5
million for the comparable period of fiscal 1997. Included in gross profit in
the second quarter and first half of fiscal 1998 is $9.2 million and $19.9
million, respectively, attributable to contract manufacturing services provided
to National. In the comparable periods of fiscal 1997, these revenues were
recorded at cost. Gross trade profit (excluding contract manufacturing)
increased 36.7% and 51.3% in the second quarter and first half of fiscal 1998,
respectively, over the comparable periods of fiscal 1997. As a percentage of
trade sales, gross trade profits were 32.1% and 32.0% in the second quarter and
first half of fiscal 1998, respectively, compared to 23.7% and 23.2% in the
comparable periods of fiscal 1997. The increase in gross trade profit as a
percentage of trade sales was due to higher average selling prices, increased
factory utilization due to improved market conditions and the favorable effects
of currency devaluations in Southeast Asia on the Company's manufacturing costs.
RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $7.8 million, or 5.0% of
trade sales in the second quarter of fiscal 1998, compared to $4.3 million, or
2.8% of trade sales in the second quarter of fiscal 1997. On a year-to-date
basis, R&D was $14.9 million, or 4.7% of trade sales, compared to $8.5 million,
or 3.0% of trade sales, for the comparable period of fiscal 1997. The increase
in R&D is driven by higher spending to support new product development,
reflecting renewed emphasis on R&D efforts as a stand-alone company. R&D efforts
are focused on the Company's growth products: CMOS Logic, Power DMOS, and
E2PROM. In the second quarter and first half of fiscal 1998, R&D expenditures
were 8.8% and 8.3% of trade sales, respectively, for these growth products, and
0.9% and 1.0% of trade sales, respectively, for the Company's mature products
(Bipolar Logic, Small Signal Discretes and EPROM). In the comparable periods of
fiscal 1997, R&D expenditures of the Business primarily consisted of allocations
from National.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were $21.0 million, or
13.5% of trade sales, in the second quarter of fiscal 1998, compared to $23.2
million, or 15.1% of trade sales, in the second quarter of fiscal 1997. On a
year-to-date basis, SG&A was $42.0 million, or 13.4% of trade sales, compared to
$41.9 million, or 14.6% of trade sales for the comparable period of fiscal 1997.
The decrease in SG&A as a percent of trade sales is primarily attributable to
the effect of one-time retention and incentive bonuses charged to SG&A in the
second quarter of fiscal 1997 which did not recur in the second quarter of
fiscal 1998, lower G&A expenses due to lower stand-alone costs compared to the
direct and allocated G&A expenses of the Business, offset by higher selling
expenses primarily related to inefficiencies experienced while operating under
transition service agreements with National.
11
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RESTRUCTURING
The first half of fiscal 1997 included a one-time restructuring charge of
$5.3 million for severance and other costs directly attributable to a workforce
reduction.
INTEREST, NET
Interest, net was $10.7 million and $21.7 million in the second quarter and
first half of fiscal 1998, respectively, as a result of indebtedness incurred
concurrent with the Recapitalization, which occurred in the fourth quarter of
fiscal 1997. In the comparable periods of fiscal 1997, the Business was
allocated net interest expense from National. This amount is included in other
expense.
OTHER EXPENSE
Other expense was $0.5 million and $0.9 million in the second quarter and
first half of fiscal 1997, respectively, consisting of primarily net interest
expense allocated to the Business by National. There were no comparable amounts
incurred in the comparable periods of fiscal 1998.
INCOME TAXES
Income taxes were $6.9 million and $14.7 million in the second quarter and
first half of fiscal 1998, respectively, an effective tax rate of 35%. In the
comparable periods of fiscal 1997, the Business did not record a tax provision
or pay income taxes as it operated as a division of National.
LIQUIDITY AND CAPITAL RESOURCES
As of November 23, 1997, the Company's cash balance was $79.1 million, an
increase of $38.4 million from May 25, 1997. In addition, the Company had
available a Revolving Credit Facility of $130 million on November 23, 1997,
under which no amounts were outstanding. The Business had no cash as of
November 24, 1996, as cash management was centralized by National and amounts
were not identifiable on a business specific basis.
In the second quarter and first half of fiscal 1998, the Company
generated sufficient cash from operations to fund its research and
development, capital expenditure and debt service requirements. Research and
development expenditures are made primarily to fund new product development.
Capital expenditures in the second quarter and first half of fiscal 1998 and
for the remainder of the fiscal year are being made primarily to increase
capacity in the Company's manufacturing facilities and to purchase and
install an enterprise-wide information system. The Company expects that its
existing cash together with available funds from its amended Senior Credit
Facilities, and funds generated from operations, will be sufficient to meet
its investing and financing requirements for the next twelve months.
The Company utilizes financial instruments to hedge its overall exposure
to the effects of foreign currency and interest rate fluctuations. The
Company utilizes short-term forward contracts to hedge currency exposure when
deemed necessary for expenses denominated in Malaysian ringgit and Philippine
pesos, as well as revenues denominated in Japanese yen and the major European
currencies. The recent devaluation of several currencies in Southeast Asia
against the U.S. dollar has not had, nor does the Company
12
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presently expect it to have, a material adverse effect on the Company's
results of operations or financial condition. The Company currently benefits
from lower dollar-denominated expenses incurred by its manufacturing
operations in Southeast Asia. The effect of lower manufacturing costs is
presently expected to substantially offset any adverse impact to the
Company's revenues in the region for the remainder of the fiscal year, which
may result from soft market conditions created by the devaluations and other
economic factors. Deferred gains from hedging transactions were immaterial to
the financial statements in the second quarter and first half of fiscal 1998.
The Company does not speculate in these financial instruments.
OUTLOOK AND BUSINESS RISKS
The statements contained under this heading and in the Liquidity and
Capital Resources section of Management's Discussion and Analysis, other than
statements of historical facts, are forward looking statements based on
current expectations and management's estimates, which involve risks and
uncertainties. Actual results may differ materially from those set forth in
such forward looking statements.
The following factors may affect the Company's operating results for
fiscal 1998: (i) the potential effect of the Company's substantially
leveraged financial condition on its liquidity, its ability to fund capital
expenditures, working capital and research and development and its ability to
withstand adverse general economic, market or competitive conditions and
developments; (ii) restrictive covenants contained in the Company's debt
instruments that could limit its ability to borrow additional funds, dispose
of or acquire assets or fund capital expenditures; (iii) the highly cyclical
and competitive nature of the semiconductor industry; (iv) the Company's
dependence on continued demand for the end-products such as personal
computers, telecommunications, automotive, and consumer and industrial
electronic goods that incorporate the Company's products; (v) the need to
design, develop, manufacture, market and support new products in order to
remain competitive in the Company's markets; (vi) the Company's dependence on
sales to National Semiconductor; (vii) the Company's dependence on the
availability and cost of new materials used in its products and upon key
subcontractors providing it with wafer fabrication, assembly and test
services; (viii) the Company's reliance on complex manufacturing processes
and its sensitivity to maintaining yields, efficiencies and continuous
operations; (ix) uncertainties and legal risks associated with the dependence
on, and potential disputes concerning, patents and other intellectual
property rights; and (x) foreign currency and other risks associated with
operating a business internationally.
On November 25, 1997, the Company announced it had reached an agreement
to acquire all of the outstanding common stock of Raytheon Semiconductor,
Inc. ("Raytheon") for approximately $120 million in cash. Raytheon designs,
manufactures and markets high-performance analog and mixed signal integrated
circuits for the personal computer, communications, broadcast video and
industrial markets. The transaction, which is presently expected to be
completed by December 31, 1997, will be accounted for as a purchase. While
the Company expects to recognize special charges related to certain
acquisition and related expenses during its third quarter, the amount of such
charges and their impact on the Company's operating results have yet to be
determined. The Company believes that its products, technologies and
capabilities and those of Raytheon are complementary, and that the separate
operations are compatible. However, the integration of the companies and the
Company's higher leverage resulting from the acquisition may have an
unfavorable impact on future operating results if the Company encounters
unforeseen obstacles, or is unable to successfully execute its integration
plan.
13
<PAGE>
The Company relies on certain subcontractors for wafer fabrication and
assembly and test services. In particular, the Company utilizes NS
Electronics (Bangkok) Ltd. ("NS Electronics") as a subcontractor for a
significant portion of assembly and test services for its non-volatile memory
products. NS Electronics has common ownership and business and management
relationships with Alphatec Electronics Public Company Ltd. ("Alphatec").
Alphatec has recently reported financial difficulties, and its ability to
continue its current operations and the impact of such on the operations of
NS Electronics are uncertain. The Company's contract with NS Electronics
expired on November 23, 1997 and negotiations to renew the contract are in
progress. While negotiations continue, the parties have agreed to operate
under the pricing arrangements of the proposed contract, which are generally
favorable to the Company. The Company continues to explore sourcing
alternatives, including other subcontractors and expansion of internal
capacity. There can be no assurance that the Company would be able to replace
any loss of assembly or test services as a result of adverse developments
affecting Alphatec and NS Electronics, nor any assurance that such services
could be replaced on terms equally favorable to the Company. Accordingly,
should NS Electronics cease or sharply curtail its operations in the near
future, there could be a material adverse effect on the Company's results of
operations in fiscal 1998.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings arising in
the ordinary course of its business. Management believes there is no litigation
pending that could have a material adverse effect on its results of operations
or its financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 First Amendment to Credit Agreement dated November 18, 1997
27 Financial Data Schedule
b) Reports on Form 8-K
Fairchild Semiconductor Corporation filed no reports on Form 8-K
during the quarter ended November 23, 1997.
Items 2, 3, 4 and 5 are not applicable and have been omitted.
15
<PAGE>
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 CORPORATION
Date: December 23, 1997 By: /s/ Joseph R. Martin
---------------------------------
Joseph R. Martin
Executive Vice President, Finance
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
16
<PAGE>
Exhibit 10.1
FIRST AMENDMENT TO CREDIT AGREEMENT
FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
November 18, 1997, among FSC SEMICONDUCTOR CORPORATION, a Delaware
corporation ("Holdings"), FAIRCHILD SEMICONDUCTOR CORPORATION, a Delaware
corporation (the "Borrower"), the lenders party to the Credit Agreement
referred to below (the "Banks"), BANKERS TRUST COMPANY, as Administrative
Agent (the "Administrative Agent"), CREDIT SUISSE FIRST BOSTON, as
Syndication Agent (the "Syndication Agent"), and CANADIAN IMPERIAL BANK OF
COMMERCE, as Documentation Agent (the "Documentation Agent", and together
with the Administrative Agent and the Syndication Agent, the "Agents").
Unless otherwise defined herein, all capitalized terms used herein and
defined in the Credit Agreement are used herein as so defined.
W I T N E S S E T H :
WHEREAS, Holdings, the Borrower, the Banks, the Administrative
Agent, the Syndication Agent and the Documentation Agent are parties to a
Credit Agreement, dated as of March 11, 1997 (as amended, modified or
supplemented through the date hereof, the "Credit Agreement");
WHEREAS, the Borrower desires to acquire substantially all of the
assets (or 100% of the capital stock of a corporation or other entity to be
formed to own and operate the business) of the Raytheon Semiconductor
Division of the Raytheon Company, for a purchase price not to exceed
$120,000,000, pursuant to an acquisition agreement (the "Acquisition
Agreement") between the Borrower and the Raytheon Company which conforms in
all material respects to the Exclusivity Agreement, dated October 27, 1997,
summarizing the terms and conditions of the Acquisition Agreement (the
"Summary of Terms"), attached hereto as Schedule I (collectively, the
"Raytheon Acquisition");
WHEREAS, in connection with the Raytheon Acquisition and in order to
consummate same, the Banks have agreed to increase the Total Revolving Loan
Commitment as set forth herein;
WHEREAS, subject to the terms and conditions set forth herein, the
Banks desire to (i) permit the Borrower to consummate the Raytheon
Acquisition and (ii) amend the Credit Agreement as provided herein; and
<PAGE>
WHEREAS, subject to the terms and conditions set forth below, the
parties hereto agree as follows;
NOW, THEREFORE, it is agreed:
1. Notwithstanding anything to the contrary contained in Sections
9.02, 9.05 and 9.14 of the Credit Agreement, the Banks hereby consent to the
Borrower consummating the Raytheon Acquisition, so long as (i) any Liens or
Indebtedness issued or assumed in connection with the Raytheon Acquisition
are otherwise permitted under the Credit Agreement, (ii) promptly after (but
in no event later than 30 days after) the consummation of the Raytheon
Acquisition, 100% (or, in the case of a Foreign Subsidiary, excluding that
portion of the voting stock of such Foreign Subsidiary which would be in
excess of 65% of the total outstanding voting stock of such Foreign
Subsidiary) of the capital stock of any Subsidiary acquired pursuant to the
Raytheon Acquisition is pledged and delivered to the Collateral Agent for the
benefit of the Secured Creditors pursuant the Pledge Agreement, (iii) within
10 days after the Raytheon Acquisition, each newly acquired Domestic
Wholly-Owned Subsidiary (x) executes and delivers a counterpart of the
Subsidiaries Guaranty and (y) secures the Borrower's obligations pursuant to
the Credit Agreement and the other Credit Documents (or such Subsidiary's
obligations pursuant to a Subsidiaries Guaranty) by executing a counterpart
of the Security Agreement and the Pledge Agreement and (iv) no Default or
Event of Default then exists or would result therefrom.
2. Section 9.05(ii) is hereby amended by deleting the number
"$5,000,000" appearing in the last line therein and inserting in lieu thereof
the number "$75,000,000".
3. The Credit Agreement is hereby amended by inserting the
following new Section 13.19:
"13.19. (a) The Borrower covenants and agrees that on and after the
First Amendment Effective Date, it shall not be permitted to incur Loans
or have Letters of Credit issued which would cause the sum of the then
outstanding principal amount of Revolving Loans and Swingline Loans and
Letter of Credit Outstandings to exceed $75,000,000 unless, in connection
with any such Credit Event, the Borrower establishes to the satisfaction
of the Administrative Agent (including by the delivery of a certificate
of the Borrower's chief financial officer setting forth in reasonable
detail the reasons therefor) that such incurrence of such
-2-
<PAGE>
Loans or issuance of such Letter of Credit would be permitted pursuant to
the terms of the Senior Subordinated Note Indenture."
4. On and after the Increase Effective Date (as defined below),
Schedule I to the Credit Agreement shall be hereby amended by deleting the
column entitled "Revolving Loan Commitment" appearing therein and inserting
in lieu thereof as a new column entitled "Revolving Loan Commitment" the
information set forth on Schedule II attached hereto, which Schedule II
reflects an increase in the Total Revolving Loan Commitment of $55,000,000.
The Borrower and the Banks hereby agree to the $55,000,000 increase in the
Total Revolving Loan Commitment. Each Bank hereby acknowledges and agrees
that from and after the Increase Effective Date its Revolving Loan Commitment
shall be the amount set forth opposite such Bank's name on Schedule II
attached hereto, as such amount may be adjusted from time to time in
accordance with the terms of the Credit Agreement. In connection with the
increase in the Total Revolving Loan Commitment pursuant to this Section 4,
the Borrower shall, in coordination with the Administrative Agent and the
Banks, repay outstanding Revolving Loans of certain Banks and, if necessary,
incur additional Revolving Loans from other Banks, in each case so that the
Banks participate in each Borrowing of outstanding Revolving Loans pro rata
on the basis of their Revolving Loan Commitments (after giving effect to this
Amendment). It is hereby agreed that any breakage or similar costs of the
type described in Section 1.11 of the Credit Agreement incurred by the Banks
in connection with any repayment or reborrowing of Revolving Loans
contemplated by this Section 4 shall be for the account of the Borrower.
5. Each Credit Party hereby agrees that, (i) on or after the
Increase Effective Date and upon the reasonable request of the Collateral
Agent, such Credit Party will execute such amendments to the Mortgages as the
Collateral Agent shall reasonably require in connection with the transactions
contemplated by this Amendment and (ii) all Revolving Loans, Swingline Loans
and Letters of Credit incurred pursuant to the additional Total Revolving
Loan Commitment effected hereby shall also be entitled to the benefits of the
Security Documents and the Guaranties.
6. The Borrower hereby covenants and agrees that, on the Increase
Effective Date, the Borrower shall have executed and delivered to the
Administrative Agent for the benefit of each Bank with a Revolving Loan
Commitment and whose Revolving Loan Commitment is being increased pursuant to
Section 4 of this Amendment (each such Bank, an "Increasing Bank") a new
Revolving Note reflecting the increased Revolving Loan Commitment of such
Bank, and the Increasing Banks shall surrender to the Borrower the Revolving
Notes so replaced.
-3-
<PAGE>
7. In order to induce the Banks to enter into this Amendment, the
Borrower hereby represents and warrants that (i) the representations,
warranties and agreements contained in Section 7 of the Credit Agreement are
true and correct in all material respects on and as of the First Amendment
Effective Date (except with respect to any representations and warranties
limited by their terms to a specific date, which shall be true and correct in
all material respects as of such date), (ii) there exists no Default or Event
of Default on the First Amendment Effective Date, in each case both before
and after giving effect to this Amendment and (iii) neither the execution,
delivery or performance by any credit Party of this Amendment, nor the
consummation of the transactions contemplated hereby (including, the
incurrence of the additional Total Revolving Loan Commitment as contemplated
herein) violates or will violate any term, provision or condition of the
Senior Subordinated Note Documents, and no consents or approvals shall be
required to be obtained by Holdings or any of its Subsidiaries from the
holders of the Senior Subordinated Notes in connection with the transactions
contemplated herein.
8. This Amendment is limited as specified and shall not constitute
a modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
9. This Amendment may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Administrative
Agent.
10. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF
THE STATE OF NEW YORK.
11. This Amendment shall become effective on the date (the "First
Amendment Effective Date") when Holdings, the Borrower, each Subsidiary
Guarantor, the Required Banks and each Increasing Bank shall have signed a
counterpart hereof (whether the same or different counterparts) and shall
have delivered (including by way of facsimile) the same to the Administrative
Agent at the Notice Office.
12. For the purposes of this Amendment, the Increase Effective Date
shall mean the date on which all of the following conditions have been
satisfied:
(a) The First Amendment Effective Date shall have occurred;
-4-
<PAGE>
(b) There shall have been delivered to the Administrative Agent and
the Banks true and correct copies of the Acquisition Agreement, which
shall conform in all material respects with the terms and conditions set
forth in the Summary of Terms attached hereto as Schedule I with any
material departures or waivers therefrom to be reasonably satisfactory to
the Agents and the Required Banks; the Acquisition Agreement shall have
been duly executed and delivered by the parties thereto and shall be in
full force and effect; all conditions precedent to the consummation of
the Raytheon Acquisition as set forth in the Acquisition Agreement shall
have been satisfied, and not waived except with the consent (which will
not be unreasonably withheld) of each Agent and the Required Banks, to
the satisfaction of each Agent and the Required Banks; and the Raytheon
Acquisition shall have been, or shall substantially contemporaneously
(and in any event on the Increase Effective Date) be, consummated in
accordance with the Acquisition Agreement and all applicable law
(excluding immaterial violations of law which could not reasonably be
expected to have, in the aggregate for all such violations, a material
adverse effect on the consummation of the Raytheon Acquisition or on the
operations, financial condition or prospects of Holdings and its
Subsidiaries taken as a whole);
(c) After giving effect to the Raytheon Acquisition, nothing shall
have occurred (and neither the Banks nor the Agents shall have become
aware of any facts or conditions not previously known) which the Agents
or the Required Banks shall determine (i) has, or is reasonably likely to
have, a material adverse effect on the rights or remedies of the Banks or
the Agents, or on the ability of the Credit Parties to perform their
obligations to them, or (ii) has, or is reasonably likely to have, a
material adverse effect on the operations, financial condition or
prospects of Holdings and its Subsidiaries taken as a whole;
(d) The Administrative Agent shall have received from Pierce
Atwood, counsel to Holdings and its Subsidiaries, an opinion addressed to
each of the Agents and each of the Banks, in form and substance
satisfactory to the Agents, and covering such matters incident to this
Amendment and the transactions contemplated herein (including the matters
set forth in Section 13.19 of the Credit Agreement (as amended hereby) as
the Agents may reasonably request; and
(e) The Administrative Agent shall have received resolutions of the
Board of Directors of each Credit Party, which resolutions shall be
certified by the Secretary or any Assistant Secretary of such Credit
Party and shall authorize the execution, delivery and performance by such
Credit Party of this Amendment and the consummation of the transactions
contemplated hereby, and the foregoing shall be reasonably acceptable to
the Agents in their reasonable discretion;
-5-
<PAGE>
13. From and after the First Amendment Effective Date, all
references in the Credit Agreement and the other Credit Documents to the
Credit Agreement shall be deemed to be references to the Credit Agreement as
modified hereby.
* * *
-6-
<PAGE>
IN WITNESSES WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Amendment as of the date
first above written.
FSC SEMICONDUCTOR CORPORATION
By_______________________
Name:
Title:
FAIRCHILD SEMICONDUCTOR
CORPORATION
By__________________________
Name:
Title:
<PAGE>
BANKERS TRUST COMPANY,
Individually and as Administrative Agent
By___________________________
Name:
Title:
<PAGE>
CREDIT SUISSE FIRST BOSTON,
Individually and as Syndication Agent
By___________________________
Name:
Title:
By___________________________
Name:
Title:
<PAGE>
CANADIAN IMPERIAL BANK OF
COMMERCE, Individually and as
Documentation Agent
By___________________________
Name:
Title:
<PAGE>
ABN AMRO BANK, N.V.
By___________________________
Name:
Title:
By___________________________
Name:
Title:
<PAGE>
BANKBOSTON, N.A.
By___________________________
Name:
Title:
<PAGE>
THE BANK OF NOVA SCOTIA
By___________________________
Name:
Title:
<PAGE>
BANK OF SCOTLAND
By___________________________
Name:
Title:
<PAGE>
BANK OF TOKYO-MITSUBISHI
By___________________________
Name:
Title:
<PAGE>
BANQUE FRANCAISE DU COMMERCE
EXTERIEUR
By___________________________
Name:
Title:
<PAGE>
CHANCELLOR SENIOR SECURED
MANAGEMENT
By___________________________
Name:
Title:
<PAGE>
CORESTATES BANK, N.A.
By___________________________
Name:
Title:
<PAGE>
DRESDNER BANK AG, New York Branch and
Grand Cayman Branch
By___________________________
Name:
Title:
By___________________________
Name:
Title:
<PAGE>
SENIOR DEBT PORTFOLIO
By Boston Management and Research,
as Investment Advisor
By___________________________
Name:
Title:
<PAGE>
FIRST SOURCE FINANCIAL LLP
By First Source Financial, Inc.,
its Agent/Manager
By___________________________
Name:
Title:
<PAGE>
FLEET NATIONAL BANK
By___________________________
Name:
Title:
<PAGE>
THE FUJI BANK, LIMITED
NEW YORK BRANCH
By___________________________
Name:
Title:
<PAGE>
GENERAL ELECTRIC
CAPITAL CORPORATION
By___________________________
Name:
Title:
<PAGE>
KEYBANK NATIONAL ASSOCIATION
By___________________________
Name:
Title:
<PAGE>
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By___________________________
Name:
Title:
<PAGE>
THE MITSUBISHI TRUST & BANKING
CORPORATION, LOS ANGELES AGENCY
By___________________________
Name:
Title:
<PAGE>
PILGRIM AMERICA PRIME RATE TRUST
By___________________________
Name:
Title:
<PAGE>
PNC BANK, NATIONAL ASSOCIATION
By___________________________
Name:
Title:
<PAGE>
PRIME INCOME TRUST
By___________________________
Name:
Title:
<PAGE>
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
By___________________________
Name:
Title:
<PAGE>
SCHEDULE I
See attached.
<PAGE>
SCHEDULE II
Revolving
Bank Loan
Commitment _____
__________
Bankers Trust Company $30,083,333.34
Credit Suisse First Boston 30,083,333.33
Canadian Imperial Bank of Commerce 10,833,333.33
PNC Bank National Association 5,000,000.00
Fleet National Bank 5,000,000.00
The Fuji Bank, Limited New York Branch 5,000,000.00
Bank of Scotland 4,000,000.00
ABN Amro Bank, N.V. 4,000,000.00
First Source Financial LLP 4,000,000.00
Corestates Bank, N.A. 4,000,000.00
Bank of Tokyo-Mitsubishi 4,000,000.00
The Bank of Nova Scotia 4,000,000.00
The First National Bank of Boston 4,000,000.00
General Electric Capital Corporation 4,000,000.00
Banque Francaise du Commerce Exterieur 4,000,000.00
The Mitsubishi Trust & Banking Corporation,
Los Angeles Agency 4,000,000.00
Dresdner Bank AG, New York Branch
and Grand Cayman Branch 4,000,000.00
Van Kampen American Capital Prime Rate Income Trust --
Pilgrim America Prime Rate Trust --
Prime Income Trust --
Merrill Lynch Senior Floating Rate Fund, Inc. --
Total $130,000,000.00
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAY-31-1998 MAY-31-1998
<PERIOD-START> AUG-25-1997 MAY-26-1997
<PERIOD-END> NOV-23-1997 NOV-23-1997
<CASH> 79,100 79,100
<SECURITIES> 0 0
<RECEIVABLES> 94,100 94,100
<ALLOWANCES> 13,200 13,200
<INVENTORY> 78,200 78,200
<CURRENT-ASSETS> 252,000 252,000
<PP&E> 709,100 709,100
<DEPRECIATION> 424,100 424,100
<TOTAL-ASSETS> 579,100 579,100
<CURRENT-LIABILITIES> 128,900 128,900
<BONDS> 403,500 403,500
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 46,300 46,300
<TOTAL-LIABILITY-AND-EQUITY> 579,100 579,100
<SALES> 195,800 395,300
<TOTAL-REVENUES> 195,800 395,300
<CGS> 136,700 274,800
<TOTAL-COSTS> 165,500 331,700
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 10,700 21,700
<INCOME-PRETAX> 19,600 41,900
<INCOME-TAX> 6,900 14,700
<INCOME-CONTINUING> 12,700 27,200
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,700 27,200
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
