<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1998
/ / 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)
<TABLE>
<S> <C>
DELAWARE 77-0449095
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
333 WESTERN AVENUE, SOUTH PORTLAND, 04106
ME (Zip Code)
(Address of principal executive
offices)
</TABLE>
Registrant's telephone number, including area code: (207) 775-8100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
------------------------
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant is not applicable as no public market for the voting stock of the
registrant exists.
The number of shares outstanding of the registrant's Common Stock
outstanding as of August 14, 1998 was 100.
DOCUMENTS INCORPORATED BY REFERENCE
None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
This amended form 10-K for the fiscal year ended May 31, 1998 is being filed
to include Schedule I-- Condensed Financial Information of Registrant in Item
14, which schedule was omitted from the original filing.
PART I
ITEM 1. BUSINESS
GENERAL
Fairchild Semiconductor Corporation, (together with its subsidiaries,
"Fairchild", or the "Company") is a leading global designer, developer and
manufacturer of high performance multi-market semiconductors. The Company's
logic, discrete, non-volatile memory and analog and mixed signal products are
the building block components for virtually all electronic devices, from
sophisticated computers to household appliances. Because of their basic
functionality, the Company's products provide customers with greater design
flexibility than more highly integrated products and improve the performance of
more complex devices or systems. Given such characteristics, the Company's
products have a wide range of applications. The Company's products are sold to
customers in the telecommunications, consumer, industrial, personal computer,
digital video and automotive markets.
With a history dating back more than 35 years, Fairchild's predecessors were
among the original founders of the semiconductor industry. The original
Fairchild was established in 1959 as a provider of memory and logic
semiconductors. Fairchild was acquired by Schlumberger in 1979. National
Semiconductor Corporation ("National") acquired Fairchild from Schlumberger in
1987, and fully integrated it into its operations. National spun-off Fairchild
as an independent company on March 11, 1997 pursuant to an Agreement and Plan of
Recapitalization ("Recapitalization"). At the time of the Recapitalization, the
Company consisted of the logic, discrete and non-volatile memory businesses of
National. On December 31, 1997, the Company acquired Raytheon Semiconductor,
Inc. ("Raytheon"), a wholly owned subsidiary of Raytheon Company, for
approximately $117.0 million in cash. Raytheon designs, manufactures and markets
high-performance analog and mixed signal semiconductors for the personal
computer, communications, broadcast video and industrial markets. Raytheon was
combined with the Non-Volatile Memory Products Group to form the Analog, Mixed
Signal and Non-Volatile Memory Products Group. Fairchild's other product groups
include the Logic Products Group and the Discrete Power and Signal Technologies
Group.
Concurrent with the Recapitalization, the Company entered into manufacturing
agreements with National. Under the terms of these agreements, the Company
provides contract manufacturing services to National. National, under the terms
of the Asset Purchase Agreement (the "Agreement"), is obligated to purchase an
aggregate of $330.0 million of contract manufacturing services during the 39
month period which began March 11, 1997, including a minimum of $100.0 million
and $90.0 million of contract manufacturing services in Fiscal Years 1998 and
1999, respectively. In addition, National is obligated to cover a contractually
agreed-upon amount of fixed costs in the Company's 6-inch fab in South Portland,
Maine in Fiscal Year 1999. In the fiscal year ended May 31, 1998, contract
manufacturing revenues with National represented 19.4% of total revenues. No
other customer accounted for more than 5% of total revenues.
LOGIC PRODUCTS GROUP
Logic devices are digital integrated circuits ("ICs") that control the
operation of electronic systems and move data. The Company designs, develops and
manufactures standard logic devices utilizing three wafer fabrication processes:
CMOS, BiCMOS and Bipolar. Within each of these production processes, the Company
manufactures products that possess advanced performance characteristics, as well
as mature products that provide high performance at low cost to customers. Since
market adoption rates of new
2
<PAGE>
standard logic families have historically spanned several years, the Company
continues to generate significant revenues from its mature products. Customers
are typically slow to move from an older product to a newer one. Further, for
any given product, standard logic customers use several different generations of
logic products in their designs. As a result, typical life cycles for logic
families are from 20 to 25 years. Since it takes new logic products an average
of three to five years to reach full market acceptance, the Company continues to
invest in new products to generate future revenue growth. Major competitors
include Texas Instruments, Motorola and Philips. The Company's logic products
are used in a wide variety of microelectronic applications, including
telecommunications, personal computers and peripherals, automotive systems,
consumer products and industrial systems.
CMOS. CMOS is a technology that consumes less power than Bipolar technology
and therefore permits more transistors to be integrated into a single IC.
Portable applications such as laptop computers and cellular telephones all
require the low power consumption of CMOS technology. As a result of the general
trend toward portability, CMOS technology has been expanding at the expense of
Bipolar, and is the focus of research and development spending in the Group. The
Company's CMOS offerings include mature products such as
FACT-Registered Trademark-, HCMOS, and CD4K, and new products such as LVC, VHC,
GTL, Switches and TinyLogic.
BIPOLAR. Bipolar devices typically operate at high speeds, require more
power, are less costly than CMOS devices and are used in many applications that
do not require CMOS solutions. The Company supplies a full line of Bipolar
products to a wide customer base in a wide range of end-user applications.
Bipolar products are generally mature products, with few new product development
activities associated with them. The Company's Bipolar offerings include
FAST-Registered Trademark-, ALS, LS, ECL and TTL.
BICMOS. BiCMOS is a hybrid of CMOS and Bipolar technologies developed to
combine the high speed and high drive characteristics of bipolar technologies
with the low power consumption and high integration of CMOS technologies. BiCMOS
is an emerging technology which requires complex manufacturing processes and is
used in niche applications, primarily in the telecommunications market. The
Company's BiCMOS offerings include ABT and LVT.
DISCRETE POWER AND SIGNAL TECHNOLOGIES GROUP
Discrete devices are individual diodes or transistors that perform basic
signal amplification and switching functions in electronic circuits. Driving the
long-term growth of discretes is the increasing importance of power management,
particularly in portable applications (E.G., pagers and notebook computers).
Fairchild participates in both the power and small signal discrete markets using
its DMOS and Bipolar technologies, manufacturing semiconductors that condition
(or shape) power or signals for use by other devices. While the world market is
dominated by such multinational semiconductor manufacturers as Toshiba, Motorola
and Philips, a significant portion of the industry is fragmented where
competition is primarily on a regional basis. Other competitors include
Siliconix and International Rectifier.
DMOS. DMOS discrete devices are used to convert, switch or otherwise shape
or condition electricity. The Company offers a wide range of DMOS power MOSFETs
designed for low- and medium-voltage applications over a wide range of
performance characteristics, power handling capabilities and package options.
DMOS is the growth area for the Group due to the trend towards smaller and
lighter products and longer battery life, as well as batteries with built-in
smart functions. As a result, DMOS products are the focus of the Group's
research and development expenditures. These expenditures have been directed
primarily toward the development of the Company's leading-edge Trench
technology. These products are commonly found in portable computers and
peripherals, portable telephones, automobiles, and battery- powered devices.
BIPOLAR. Fairchild manufactures and sells a wide range of bipolar
discretes, including single junction glass diodes, small signal transistors,
bipolar power transistors, JFETs and Zener diodes in a wide variety of
3
<PAGE>
package configurations. These devices switch, amplify and otherwise shape or
modify electronic signals and are found in nearly every electronic product,
including computers, cellular phones, mass storage devices, televisions, radios,
VCRs and camcorders.
ANALOG, MIXED SIGNAL AND NON-VOLATILE MEMORY PRODUCTS GROUP
ANALOG AND MIXED SIGNAL PRODUCTS
Acquired from Raytheon Company during Fiscal Year 1998, this product line
designs, manufactures and markets high-performance analog and mixed signal
integrated circuits for the personal computer, industrial , consumer and
broadcast video markets. These products are manufactured using leading-edge CMOS
and bipolar technologies. Analog and mixed signal products represent a
significant long-term growth area of the semiconductor industry. The increasing
demand to integrate high performance microprocessor-based electronics in
equipment ranging from personal computers to scientific instrumentation,
telecommunications and data communications networks has led analog and mixed
signal semiconductor suppliers to create designs that have higher levels of
integration to reduce space and power requirements and provide greater
functionality, all at lower cost. While operating in niche markets currently,
the Company plans to expand its product offerings in the future through new
product introductions and acquisitions. Major competitors include Linear
Technology, Harris, Motorola, Philips, Rockwell and Semtech.
ANALOG. Analog products control continuously variable functions such as
light, color, sound and power. They enable human beings to interface with the
digital world. The Company's analog product offerings are a mix of mature
products, such as operational amplifiers, audio amplifiers and ground fault
interrupters, which continue to generate significant revenues due to their long
product life cycles, and growth products such as DC to DC converters which are a
critical power management component in personal computers and notebooks.
MIXED SIGNAL. Mixed signal products are those which can process both analog
and digital information. The Company's mixed signal offerings include analog to
digital converters, digital to analog converters and market-leading digital
video encoders and decoders sold to manufacturers of high-end video equipment
and set top boxes.
NON-VOLATILE MEMORY PRODUCTS
The Company designs, manufactures and markets non-volatile memory circuits
which retain data after power to the device has been shut off. The non-volatile
memory market is divided into three segments: EPROM, EEPROM and FLASH. The
Company does not participate in the FLASH market segment. EPROMs are
electrically programmable read-only memories. EEPROMs are electrically erasable
programmable read-only memories that are similar to EPROMs, except they can be
erased electronically before being reprogrammed. These non-volatile memory
devices are used in personal computers and peripherals, telecommunications,
consumer products, automotive and industrial systems. The Company offers an
extensive portfolio of high performance serial EEPROM and EPROM products. Major
competitors include SGS-Thomson, Advanced Micro Devices, Atmel, Xicor and
Microchip Technology.
EEPROMS. EEPROMs are used primarily to store changing information in
consumer products and automotive applications such as microwaves, televisions,
stereos and automotive controls. EEPROMs are one of the growth products in the
group and a focus of research and development expenditures. The Company serves
the serial EEPROM product with product offerings in (i) standard EEPROM and (ii)
Application Specific Standard Products ("ASSP"). The Company's standard EEPROM
products serve each of the three bus interface protocols used with all industry
standard microcontrollers. The Company's ASSP products are individually
developed for specific applications and combine the Company's core EEPROM
competencies with logic capabilities. The Company's ASSP products serve three
applications
4
<PAGE>
groups: HiSeC, Plug and Play and SPD. HiSeC, introduced in 1994, is a single
chip remote keyless entry solution which operates complex rolling codes for
secure entry. The device is intended for applications such as automotive keyless
entry systems, garage door openers and other applications where secure
transmission of a code is critical. Plug and Play devices allow manufacturers of
computer add-on cards to automatically configure their cards for the host
system. SPD, introduced in 1996, allows a computer to identify specifications of
an add-on memory module and is used in memory upgrade products.
EPROMS. EPROMs are used in telecommunication switching equipment,
automotive applications, personal computer hard disk drives and Basic Input &
Output Systems ("BIOS"), printer controllers, industrial machine controls and
numerous other types of electronic equipment to store instructions which control
the equipment's operation. The ability of EPROMs to be programmed electrically
by the equipment manufacturer enables them to achieve shorter time to market for
new products than if they used products that must be programmed by the chip
manufacturer. The EPROM market is declining as FLASH becomes cost-effective at
lower densities. As a result, the Company is incurring minimal research and
development expenditures in this product line. Today, EPROMs are primarily
utilized in applications where storage of the instruction sets for
microcontrollers requires less than 2 Mb in density, which is virtually all
segments of the low-end consumer electronic market (E.G., answering machines,
garage door openers and washing machines). The Company currently sells EPROMs in
densities ranging from 64K to 4MB.
SALES, MARKETING AND DISTRIBUTION
Fairchild operates regional sales organizations in Europe, headquartered in
Swindon, England, the Americas, headquartered in Sunnyvale, California, the
Asia/Pacific region, with offices in Kowloon and Hong Kong and the Japan region
with its office in Tokyo, Japan. Each of the four regional sales organizations
is supported by logistics organizations which manage independently-operated FOB
warehouses. Product orders flow to the Company's manufacturing facilities, where
the product is made. Products are then shipped to a central warehouse in
Singapore, which ships, in most cases, directly to the customer.
Fairchild has dedicated direct sales organizations operating in the
Americas, Europe, Asia/Pacific and Japan regions that serve its major OEM
customers. The Company also has a large network of distributors and
manufacturer's representatives to distribute its products around the world.
Management believes that maintaining a small, highly focused, direct sales force
selling products for each of the Company's businesses, combined with an
extensive network of distributors and manufacturer's representatives , is the
most efficient way to serve its multi-market customer base. Fairchild also
maintains a dedicated marketing organization, which consists of marketing
organizations in each product group, including tactical and strategic marketing
and applications, as well as marketing personnel located in each of the sales
regions.
Typically, distributors handle a wide variety of products, including
products that compete with Fairchild products, and fill orders for many
customers. Most of the Company's sales to distributors are made under agreements
allowing for market price fluctuations and/or the right of return on unsold
merchandise. The Company has historically experienced low levels of returns of
unsold products. Manufacturer's representatives generally do not offer products
that compete directly with the Company's products, but may carry complementary
items manufactured by others. Manufacturer's representatives do not maintain a
product inventory; instead, their customers place large quantity orders directly
with Fairchild and are referred to distributors for smaller orders.
RESEARCH AND DEVELOPMENT
The Company's expenditures for research and development in Fiscal Years
1998, 1997 and 1996 were $35.7 million (excluding a $15.5 million pre-tax charge
for purchased in-process research and development associated with the
acquisition of Raytheon), $18.9 million and $30.3 million, respectively.
Manufacturing
5
<PAGE>
technology is a key determinant in the improvement of semiconductor products.
Each new generation of process technology has resulted in products with higher
speed and greater performance produced at lower cost. Infrastructure investments
made in recent years will enable the Company to continue to achieve high volume,
high reliability and low-cost production using leading edge process technology.
The Company's research and development efforts are focused on new product
development and improvements in process technology in the Company's growth
areas: CMOS logic, DMOS power discretes, EEPROMs and analog and mixed signal
products.
Each of the Company's product groups maintain independent research and
development organizations. The Company works closely with its major customers in
many research and development situations, in order to increase the likelihood
that the Company's products will be designed directly into the customers'
products and achieve rapid and lasting market acceptance.
MANUFACTURING
Fairchild currently operates five manufacturing facilities, three of which
are front-end wafer fabrication facilities located in the United States and two
of which are back-end assembly and test facilities in the Asia/Pacific region.
Fairchild's products are manufactured and designed using a broad range of
manufacturing processes and proprietary design methods. The Company uses all of
the prevalent function-oriented process technologies for wafer fabrication,
including CMOS, Bipolar, BiCMOS, DMOS and non-volatile memory technologies. The
Company uses primarily through-hole and surface mount technologies in its
assembly and test operations, in lead counts from two to fifty-six leads.
The Company's strategy is to have its manufacturing facilities dedicated to
its product groups. The South Portland, Maine, wafer fabrication facility
("wafer fab") and Penang, Malaysia assembly and test facility primarily support
the Logic Products Group. The West Jordan, Utah, wafer fab and Cebu, the
Philippines, assembly and test facility primarily support the Discrete Power and
Signal Technologies Group. The Mountain View, California, facility, which
include both wafer fab and assembly and test operations, supports Analog and
Mixed Signal Products. The Company also subcontracts fabrication of wafers,
primarily to Tower Semiconductor, Chartered Semiconductor and Torex
Semiconductor. Certain back-end assembly and testing operations are also
subcontracted. Primary subcontractors include Carsem, NS Electronics (Bangkok)
Ltd. and New Japan Radio Corporation.
Fairchild's manufacturing processes use many raw materials, including
silicon wafers, copper lead frames, mold compound, ceramic packages and various
chemicals and gases. The Company obtains its raw materials and supplies from a
large number of sources on a just-in-time basis. Although supplies for the raw
materials used by the Company are currently adequate, shortages could occur in
various essential materials due to interruption of supply or increased demand in
the industry.
BACKLOG
The Company's trade sales are made primarily pursuant to standard purchase
orders that are generally booked from one to twelve months in advance of
delivery. Backlog is influenced by several factors including market demand,
pricing and customer order patterns in reaction to product lead times.
Quantities actually purchased by customers, as well as prices, are subject to
variations between booking and delivery to reflect changes in customer needs or
industry conditions. Fairchild also sells certain products to key customers
pursuant to contracts. Contracts are annual fixed-price agreements with
customers setting forth the terms of purchase and sale of specific products.
These contracts allow the Company to schedule production capacity in advance and
allow customers to manage their inventory levels consistent with just-in-time
principles while shortening the cycle times required to produce ordered
products. However, quantity and price agreements under these contracts are, as a
matter of industry practice, difficult to maintain and implement . For these
reasons, the Company believes that the amount of backlog at a particular date is
not meaningful and is not necessarily a relevant indicator of future revenues.
6
<PAGE>
SEASONALITY
Generally, the Company is affected by the seasonal trends of the
semiconductor and related industries. As a result of these trends, the Company
typically experiences lower revenue in the third fiscal quarter, primarily due
to customer demand adjustments as a result of holiday seasons around the world.
Revenue usually has a seasonal peak in the Company's fourth fiscal quarter. In
Fiscal Year 1998, the Company did not experience the typical seasonality in the
fourth quarter due to decreasing customer demand primarily as a result of the
Asian financial crisis and softness in the personal computer market due to
excess inventories in the sales channels.
COMPETITION
Markets for the Company's products are highly competitive. Although only a
few companies compete with Fairchild in all of the Company's product lines, the
Company faces significant competition within each of its product lines from
major international semiconductor companies. Some of the Company's competitors
may have substantially greater financial and other resources with which to
pursue engineering, manufacturing, marketing and distribution of their products
than the Company. Competitors include manufacturers of standard semiconductors,
application-specific ICs and fully customized ICs, as well as customers who
develop their own integrated circuit products.
The Company competes in different product lines to various degrees on the
basis of price, technical performance, product features, product system
compatibility, customized design, availability, quality and sales and technical
support. The Company's ability to compete successfully depends on elements both
within and outside of its control, including successful and timely development
of new products and manufacturing processes, product performance and quality,
manufacturing yields and product availability, customer service, pricing,
industry trends and general economic trends.
TRADEMARKS AND PATENTS
The Company owns rights to a number of trademarks and patents that are
important to its business. Among others, management considers Fairchild,
FACT-Registered Trademark-, and FAST-Registered Trademark- to be trademarks that
are material to the Company's operations.
Fairchild's corporate policy is to protect proprietary products by obtaining
patents for such products when practicable. Under the Technology Licensing and
Transfer Agreement with National Semiconductor entered into in connection with
the Recapitalization, the Company has acquired 150 U.S. patents and obtained
perpetual, royalty free non-exclusive licenses on more than 1,000 of National
Semiconductor's patents. Pursuant to the Acquisition Agreement with Raytheon
Company, the Company acquired over 50 patents owned by Raytheon Semiconductor,
Inc., as well as licensing rights (similar to those granted to Fairchild by
National in the Recapitalization) for other semiconductor-related intellectual
property of Raytheon Company not directly owned by Raytheon Semiconductor, Inc.
Management believes that it has the right to use all technology used in the
production of its products.
ENVIRONMENTAL MATTERS
The Company's operations are subject to environmental laws and regulations
in the countries in which it operates that regulate, among other things, air and
water emissions and discharges at the Company's manufacturing facilities; the
generation, storage, treatment, transportation and disposal of solid and
hazardous wastes by the Company; the investigation, remediation and response
related to environmental contamination; and the release of hazardous substances,
pollutants and contaminants into the environment at or from properties operated
by the Company and at other sites. As with other companies engaged in like
businesses, the nature of the Company's operations exposes it to the risk of
liabilities or claims with respect to such matters. Management believes,
however, that its operations are in substantial compliance with
7
<PAGE>
applicable environmental laws and regulations. Costs to comply with
environmental regulations were immaterial in Fiscal Years 1998, 1997 and 1996.
The Company's facilities in South Portland, Maine, and, to a lesser extent,
West Jordan, Utah, have ongoing remediation projects to respond to certain
releases of hazardous substances that occurred prior to the consummation of the
Recapitalization. Pursuant to the Asset Purchase Agreement entered into in
conjunction with the Recapitalization, National Semiconductor has agreed to
indemnify the Company for the cost of these projects. Based on the historical
costs of these projects, management does not believe that the future remediation
costs will be material, even without the indemnity.
The Company's Mountain View, California, facility is located on a
contaminated site under the Comprehensive Environmental Response, Compensation
and Liability Act. Under the terms of the Acquisition Agreement with Raytheon
Company, dated December 31, 1997, Raytheon Company has assumed responsibility
for all remediation costs or other liabilities related to historical
contamination.
Future laws or regulations and changes in existing environmental laws or
regulations may subject the Company's operations to different, additional or
more stringent standards. While historically the cost of compliance with
environmental laws has not had a material adverse effect on the Company's
results of operations, business or financial condition, management cannot
predict with certainty its future costs of compliance because of changing
standards and requirements. There can be no assurance by the Company that
material costs will not be incurred in connection with the future compliance
with environmental laws.
EMPLOYEES
The Company's worldwide workforce consisted of 6,927 employees (full- and
part-time) as of May 31, 1998, none of whom were represented by collective
bargaining arrangements. Of the total number of employees, 5,943 were engaged in
manufacturing and information services, 225 were engaged in marketing and sales,
533 were engaged in administration, and 226 were engaged in research and
development. Of the total number of employees, 3,259 or 47% were employed in the
Logic Products Group, 3,000 or 43% were employed in the Discrete Power and
Signal Technologies Group, 452 or 7% were employed in the Analog, Mixed Signal
and Non-Volatile Memory Products Group and 211 or 3% were employed in corporate
or centralized sales and marketing activities. Management believes that its
relations with its employees are good.
ITEM 2. PROPERTIES
In the United States, the Company's corporate headquarters as well as
certain manufacturing and warehouse operations are located in approximately
240,000 square feet of space in properties owned by the Company in South
Portland, Maine. Additional manufacturing, warehouse and office facilities are
housed in approximately 300,000 square feet and 120,000 square feet of space in
properties owned by the Company in West Jordan, Utah and Mountain View,
California, respectively. Additional office and manufacturing space is located
in leased facilities in Sunnyvale, California and San Diego, California.
In Asia, the Company owns or leases approximately 397,000 square feet and
170,000 square feet of manufacturing and warehouse space in Penang, Malaysia,
and Cebu, the Philippines, respectively. Leases affecting the facilities in
Penang, Malaysia, and Cebu, the Philippines, are generally in the form of long-
term ground leases, with the Company owning improvements on the land. The
initial terms of these leases will expire beginning in 2014. In some cases the
Company has the option to renew the lease term, while in others the Company has
the option to purchase the leased premises. Additional warehouse space is leased
in Singapore.
The Company maintains regional sales offices in leased space in Swindon,
England, Kowloon, Hong Kong, and Tokyo, Japan. In addition, the Company
maintains smaller sales offices in leased space around the world.
8
<PAGE>
Management believes that its facilities around the world, whether owned or
leased, are well-maintained. The Company's manufacturing facilities contain
sufficient productive capacity to meet its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings arising in
the ordinary course of business. Management believes there is no 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is a wholly-owned subsidiary of FSC Semiconductor Corporation
("Fairchild Holdings"). As a result, its shares are not publicly traded.
The Company has not paid dividends on its Common Stock and has no present
intention of so doing. Certain agreements, pursuant to which the Company has
borrowed funds, contain provisions that limit the amount of dividends and stock
repurchases that the Company may make. (See Note 4 to the Company's Consolidated
Financial Statements.)
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from audited
Consolidated and Combined Financial Statements. The information set forth below
is not necessarily indicative of results of future operations, and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 and the Consolidated Financial
Statements and related Notes thereto in Item 8.
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Trade revenue..................................... $635.8 $587.8 $688.7 $629.6 $658.9
Contract manufacturing revenue.................... 153.4 104.2 87.6 50.7 57.7
------ ------ ------ ------ ------
Total revenue................................... $789.2 $692.0 $776.3 $680.3 $716.6
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Trade gross profit................................ $194.2 $145.7 $216.8 $203.8 $248.3
% of trade revenue................................ 30.5% 24.8% 31.5% 32.4% 37.7%
Contract manufacturing gross profit............... 36.3 6.8 -- -- --
% of contract manufacturing revenue............... 23.7% 6.5% -- -- --
Total gross profit................................ 230.5 152.5 216.8 203.8 248.3
% of total revenue................................ 29.2% 22.0% 27.9% 30.0% 34.6%
Net Income (3).................................... 27.2 16.7 72.3 74.3 125.5
OTHER FINANCIAL DATA:
EBIT (1)(2)....................................... $102.8 $ 51.3 $ 72.1 $ 72.5 $ 72.1
Depreciation and amortization..................... 84.6 77.1 64.2 39.1 33.0
EBITDA (1)(2)..................................... 187.4 128.4 136.3 111.6 105.1
Capital expenditures.............................. 78.0 47.1 153.9 112.9 88.2
CONSOLIDATED BALANCE SHEET DATA (END OF PERIOD):
Inventories....................................... $108.0 $ 73.1 $ 93.1 $ 68.8 $ 60.9
Total assets...................................... 631.8 554.3 432.7 323.2 233.0
Long-term debt.................................... 438.1 409.0 -- -- --
Business equity................................... -- -- 349.2 233.2 161.1
Stockholder's equity.............................. 46.3 16.7 -- -- --
</TABLE>
The Company has paid no cash dividends on its common stock in any of the
years presented above.
- ------------------------
(1) Excludes one-time charges of $15.5 million and $1.5 million for
purchasedin-process research and development and cumulative effect of change
in accounting principle, respectively, in Fiscal Year
10
<PAGE>
1998, and $14.1 million and $5.3 million for retention bonuses and a
restructuring charge, respectively, in Fiscal Year 1997.
(2) Excludes other (income) expense, net.
(3) Prior to March 11, 1997, the amounts presented include revenue less direct
and allocated expenses (See Note 1 to Consolidated Financial Statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto, presented elsewhere in this Form 10-K.
OVERVIEW
The Company is a leading designer, manufacturer and supplier of
high-performance logic, non-volatile memory, discrete power and signal
technology and analog and mixed signal semiconductors, serving the
telecommunications, consumer, industrial, personal systems and automotive
markets. On December 31, 1997, the Company acquired all of the outstanding
common stock of Raytheon for approximately $117.0 million in cash. Raytheon
designs, manufactures and markets high-performance analog and mixed signal
semiconductors for the personal computer, communications, broadcast video and
industrial markets. Immediately prior to the closing of the transaction,
Raytheon was renamed Fairchild Semiconductor Corporation of California (the
"Subsidiary"), and upon closing, became a wholly-owned subsidiary of the
Company. The Subsidiary was combined with the Non-Volatile Memory Products Group
and is being operated as the Analog, Mixed Signal and Non-Volatile Memory
Products Group. The transaction was accounted for as a purchase. Accordingly,
the Company's operating results in Fiscal Year 1998 include the operating
results of the Subsidiary as of the date of the acquisition. On March 11, 1997,
the Company consummated the Recapitalization with National, upon which the
Company began operating as a stand-alone entity. The results of operations in
Fiscal Year 1997 for the period prior to March 11, 1997 reflect the operating
results of the Fairchild Semiconductor Business (the "Business") of National,
and are not necessarily indicative of the results that would have been obtained
as a stand-alone company during that time. This is due in part to the fact that
National 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.
The following table sets forth the composition of revenue by product group
and contract manufacturing services, as a percentage of total revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
MAY 31, MAY 25, MAY 26,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Logic........................................ 38.4% 41.2% 43.7%
Discrete..................................... 23.7% 23.8% 22.6%
Analog, Mixed Signal and Non-Volatile
Memory..................................... 18.5% 19.9% 22.5%
Contract manufacturing services.............. 19.4% 15.1% 11.2%
------- ------- -------
100.0% 100.0% 100.0%
------- ------- -------
------- ------- -------
</TABLE>
The Company's results for the fiscal year ended May 31, 1998 consist of 53
weeks of activity, compared to 52 weeks for the fiscal years ended May 25, 1997
and May 26, 1996.
11
<PAGE>
YEAR ENDED MAY 31, 1998 COMPARED TO YEAR ENDED MAY 25, 1997
RESULTS OF OPERATIONS
Net income increased 62.9% to $27.2 million in Fiscal Year 1998, as compared
to $16.7 million in Fiscal Year 1997. Net income in Fiscal Year 1998 includes a
one-time pre-tax charge for in-process research and development associated with
the acquisition of Raytheon ($15.5 million) and an after-tax charge for the
cumulative effect of a change in accounting principle pertaining to certain
business process reengineering costs associated with the Company's enterprise
software system implementation ($1.5 million) which had been previously
capitalized. Net income in Fiscal Year 1997 includes one-time pre-tax charges
related to payment of retention bonuses ($14.1 million) and a restructuring
charge ($5.3 million) related to workforce reductions. In addition, Fiscal Year
1998 net income includes a full year of interest expense and income taxes, while
Fiscal Year 1997 includes these charges only for the period subsequent to the
Recapitalization. Prior to the Recapitalization, the Business did not incur
these costs.
Operating income, excluding one-time charges, increased 100.4% to $102.8
million in Fiscal Year 1998 from $51.3 million in Fiscal Year 1997. Included in
operating income is $36.3 million and $6.8 million of gross profit on contract
manufacturing services in Fiscal Years 1998 and 1997, respectively, under
manufacturing agreements with National. Gross profit on contract manufacturing
services in Fiscal Year 1997 was generated subsequent to the Recapitalization.
Prior to the Recapitalization, contract manufacturing revenues were recorded at
cost. In addition, operating income in Fiscal Year 1998 increased over Fiscal
Year 1997 due to higher trade revenues as a result of the acquisition of
Raytheon and improved market conditions, particularly in the first half of the
year, higher trade gross profit due to improved factory utilization, and the
favorable effect of currency devaluations in Southeast Asia on manufacturing
costs. Excluding one-time charges, depreciation and amortization of $84.6
million and $77.1 million in Fiscal Years 1998 and 1997, respectively, and other
expense of $1.4 million in Fiscal Year 1997, earnings before interest, taxes and
depreciation and amortization ("EBITDA") increased 46.0% to $187.4 million in
Fiscal Year 1998 from $128.4 million in Fiscal Year 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.
REVENUES
The Company's revenues consist of trade sales to unaffiliated customers
(80.6% and 84.9% of total revenues in Fiscal Years 1998 and 1997, respectively)
and revenues from contract manufacturing services provided to National (19.4%
and 15.1% of total revenues in Fiscal Years 1998 and 1997, respectively).
Trade sales increased 8.2% to $635.8 million in Fiscal Year 1998 compared to
$587.8 million in Fiscal Year 1997. Trade sales for Fiscal Year 1998 include
those of Raytheon since the acquisition. Excluding Raytheon, trade sales
increased 2.7% in Fiscal Year 1998 over Fiscal Year 1997. The increase in trade
sales was driven primarily by increased unit volume, as average selling prices
were flat. Average selling prices increased year over year for the first three
quarters in Fiscal Year 1998, but decreased significantly in the fourth quarter
as industry-wide market conditions softened.
Logic trade sales increased 6.2% in Fiscal Year 1998 over Fiscal Year 1997.
The increase was driven by higher unit volume, which offset a decrease in
average selling prices. In Fiscal Year 1998, CMOS trade sales increased 14.3%
over Fiscal Year 1997, offsetting a decrease of 2.8% in Bipolar trade sales. The
increase in CMOS trade sales was across all product lines, including VHC, LVC,
FACT and HCMOS. The decrease in Bipolar trade sales is reflective of the general
market trend toward lower power consuming CMOS products.
12
<PAGE>
Discrete trade sales increased 13.9% in Fiscal Year 1998 over Fiscal Year
1997. The increase was due to higher average selling prices, driven by new
product introductions and a favorable sales mix, and slightly higher unit
volume. DMOS trade sales increased 39.9% in Fiscal Year 1998 over Fiscal Year
1997, offsetting a decrease of 7.6% in Bipolar trade sales. The increase in DMOS
trade sales was due to higher sales volume of new products featuring the
Company's Trench technology, which offset price erosion in some of the more
mature DMOS products. The decrease in Bipolar trade sales was driven by a
combination of lower sales volume and slightly lower average selling prices.
Reflective of the Company's growth strategy, trade sales of DMOS products in
Fiscal Year 1998 exceeded trade sales in Bipolar products for the first time.
Analog, Mixed Signal and Non-Volatile Memory trade sales increased 5.4% in
Fiscal Year 1998 over Fiscal Year 1997. The increase was due entirely to the
acquisition of Raytheon. Excluding Analog and Mixed Signal Products,
Non-volatile Memory trade sales decreased 17.8% in Fiscal Year 1998 over Fiscal
Year 1997. The decrease was driven by lower prices impacting all memory product
lines due to competitive pressures, partially offset by higher volume,
particularly in EEPROM. EEPROM, which is the Company's long-term focus in the
non-volatile memory market, had increased trade sales of 4.7% in Fiscal Year
1998 over Fiscal 1997. In a declining market, EPROM trade sales decreased 46.2%
in Fiscal Year 1998 over Fiscal Year 1997, as EPROMs are being rapidly phased
out by FLASH memory products in the marketplace.
Geographically, 38%, 21% and 41% of trade sales were derived in North
America, Europe and Asia/ Pacific, respectively, in Fiscal Year 1998, compared
to 38%, 20% and 42% in Fiscal Year 1997. Trade sales in all regions grew over
Fiscal Year 1997 levels. Europe increased 12.7%, North America increased 8.8%
and Asia/Pacific increased 5.4%, despite soft economic conditions in the region.
Asia/Pacific trade sales were influenced by strong growth in Southeast Asia,
which offset a year over year decline in Japan.
Contract manufacturing revenues increased 47.2% to $153.4 million in Fiscal
Year 1998 compared to $104.2 million in Fiscal Year 1997. This increase, when
normalized for higher prices to include a markup for all of Fiscal Year 1998,
reflects greater demand from National, particularly in the first nine months of
Fiscal Year 1998. During the fourth quarter, foundry revenues decreased 26.1%
from the third quarter as National sharply cut back its demand in response to
its own publicly-announced restructuring created by soft market conditions in
the industry.
GROSS PROFIT
Gross profit increased 51.2% to $230.5 million in Fiscal Year 1998, compared
to $152.5 million in Fiscal Year 1997. Included in gross profit in the Fiscal
Years 1998 and 1997 is $36.3 million and $6.8 million, respectively,
attributable to contract manufacturing services provided to National. Prior to
the Recapitalization in Fiscal Year 1997, these revenues were recorded at cost.
Gross trade profit (excluding contract manufacturing) increased 33.3% in Fiscal
Year 1998 over Fiscal Year 1997. As a percentage of trade sales, gross trade
profits were 30.5% and 24.8% in Fiscal Years 1998 and 1997, respectively. The
increase in gross trade profit as a percentage of trade sales was due to
increased factory utilization due to improved market conditions and the
favorable effect on fixed cost absorption of increased demand from National in
the first nine months of Fiscal Year 1998, the favorable effects of currency
devaluations in Southeast Asia on the Company's manufacturing costs and the
acquisition of Raytheon, which increased the Company's portfolio of
higher-margin products.
RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $35.7 million (excluding a
$15.5 million pre-tax charge for purchased in-process R&D associated with the
acquisition of Raytheon), or 5.6% of trade sales in Fiscal Year 1998, compared
to $18.9 million, or 3.2% of trade sales in Fiscal Year 1997. The increase in
R&D is driven by higher spending to support new product development, reflecting
the Company's renewed
13
<PAGE>
emphasis on R&D efforts as a stand-alone company following the Recapitalization.
Prior to the Recapitalization, R&D expenditures of the business primarily
consisted of allocations from National. Reflective of increased R&D efforts, the
Company approximately doubled the number of new products introduced in Fiscal
Year 1998 from Fiscal Year 1997. In addition, the Company is spending higher
levels of R&D for its Analog and Mixed Signal products, reflecting its strategy
to focus on and grow this segment of its business. R&D efforts are focused on
the Company's growth products: CMOS Logic, DMOS, EEPROM and Analog. In Fiscal
Year 1998, R&D expenditures were 8.9% of trade sales for these growth products,
and 0.5% of trade sales for the Company's mature products (Bipolar Logic,
Bipolar Discretes and EPROM). Comparison of the above to Fiscal Year 1997 is not
meaningful as the Company was not a stand-alone entity for the entire year.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were $92.0 million, or
14.5% of trade sales, in Fiscal Year 1998, compared to $96.4 million, or 16.4%
of trade sales, in Fiscal Year 1997. Excluding one-time retention bonuses of
$14.1 million charged in Fiscal Year 1997, SG&A was $82.3 million, or 14.0% of
trade sales in Fiscal Year 1997. The increase in SG&A as a percent of trade
sales after elimination of retention bonuses is due to higher selling and
marketing expenses driven by inefficiencies experienced in the first half of
Fiscal Year 1998 while operating under transition service agreements with
National, and in the second half of Fiscal Year 1998 due to the integration of
the Raytheon sales force into the Company. The increase in selling and marketing
expenses was partially offset by a decrease in general and administrative
expenses due to lower expenses incurred as a stand-alone entity in Fiscal Year
1998 compared to Fiscal Year 1997, which reflects nine months of direct and
allocated expenses of the Business while operated by National.
RESTRUCTURING
Fiscal Year 1997 included a one-time restructuring charge of $5.3 million,
incurred in the first quarter, for severance and other costs directly
attributable to a workforce reduction.
INTEREST, NET
Interest, net was $44.7 million and $9.3 million in Fiscal Years 1998 and
1997, respectively. Fiscal Year 1998 includes a full year of interest expense on
indebtedness incurred to finance the Recapitalization, while Fiscal Year 1997
contains approximately one quarter. In addition, the Company incurred additional
indebtedness due to the purchase of Raytheon in the third quarter of fiscal
1998. Prior to the Recapitalization in Fiscal Year 1997, the Business was
allocated net interest expense from National. This amount is included in other
expense.
OTHER EXPENSES
Other expense was $1.4 million in Fiscal Year 1997, consisting primarily of
net interest expense allocated to the Business by National. There were no
comparable amounts incurred in Fiscal Year 1998.
In the third quarter of Fiscal Year 1998, the Company took a pre-tax charge
of $15.5 million for purchased in-process research and development in
conjunction with the acquisition of Raytheon and an after-tax charge of $1.5
million for the cumulative effect of an accounting charge pertaining to
treatment of certain costs associated with the Company's enterprise software
system implementation. The enterprise software system implementation costs,
relating to activities to assess the system's capabilities in light of the
Company's current business processes, were previously capitalized against the
cost of the software. Emerging Issues Task Force Issue 97-13, dated November 20,
1997, requires companies to expense such costs as incurred.
14
<PAGE>
INCOME TAXES
Income taxes were $13.9 million and $4.5 million in Fiscal Years 1998 and
1997, respectively. In Fiscal Year 1998, income taxes were recorded at an
effective tax rate of 32.6%. In Fiscal Year 1997, income taxes were recorded
only for the period subsequent to the Recapitalization, at an effective rate of
38.7%. The lower tax rate in Fiscal Year 1998 is due to a higher proportion of
taxable income in lower tax countries as compared to Fiscal Year 1997. Prior to
the Recapitalization, the Business did not record a tax provision or pay income
taxes as it operated as a division of National.
YEAR ENDED MAY 25, 1997 COMPARED TO YEAR ENDED MAY 26, 1996
RESULTS OF OPERATIONS
Net income decreased 76.9% to $16.7 million in Fiscal Year 1997 from $72.3
million in Fiscal Year 1996. Fiscal Year 1997 includes interest expense and
income taxes of $9.3 million and $4.5 million, respectively, incurred subsequent
to the Recapitalization. No such amounts were incurred in Fiscal Year 1996.
Operating income was $31.9 million in Fiscal Year 1997, a 55.8% decrease from
the prior year. This decrease was attributable to a combination of lower trade
sales driven by industry-wide adverse market conditions that impacted much of
Fiscal Year 1997, lower gross profits as a result of factory underutilization
caused by an inventory reduction initiative in Fiscal Year 1997, one-time
retention bonuses of $14.1 million and a one-time restructuring charge of $5.3
million in Fiscal Year 1997 related to the Company's workforce reductions in the
first quarter of Fiscal Year 1997, partially offset by gross profit on contract
manufacturing services in Fiscal Year 1997 subsequent to the Recapitalization.
Prior to the Recapitalization, these revenues were recorded at cost. Excluding
interest expense and one-time charges in Fiscal Year 1997 and other (income)
expense of $1.4 million and $(0.2) million in Fiscal Years 1997 and 1996,
respectively, EBITDA was $128.4 million in Fiscal Year 1997, compared to $136.3
million in Fiscal Year 1996.
REVENUES
The Company's revenues consist of trade sales to unaffiliated customers
(84.9% and 88.7% of total revenues in Fiscal Years 1997 and 1996, respectively)
and revenues from contract manufacturing services provided to National (15.1%
and 11.3% of total revenues in Fiscal Years 1997 and 1996, respectively).
Trade sales decreased 14.7% to $587.8 million in Fiscal Year 1997 from
$688.7 million in Fiscal Year 1996. The decrease in trade sales impacted all
product groups and was due primarily to industry-wide adverse market conditions
which impacted order rates starting in the second half of Fiscal Year 1996 and
continued through the first half of Fiscal Year 1997, after which order rates
recovered moderately. Trade sales were down 23.7% in the first half of Fiscal
Year 1997 over the first half of Fiscal Year 1996, but were down only 3.7% in
the second half of Fiscal Year 1997 over the second half of Fiscal Year 1996,
reflecting improvement in orders as market conditions improved.
Logic trade sales decreased 15.9% in Fiscal Year 1997 over Fiscal Year 1996.
The decline in Logic trade sales was almost entirely unit price driven, as
volumes were flat year on year. The majority of Logic's trade sales decline was
in the mature Bipolar products, which declined 22.1% in Fiscal Year 1997 over
Fiscal Year 1996. CMOS trade sales declined 9.5% in Fiscal Year 1997 over Fiscal
Year 1996. Reflective of the Company's growth strategy, CMOS trade sales in
Fiscal Year 1997 exceeded Bipolar trade sales for the first time.
Discrete trade sales decreased 6.2% in Fiscal Year 1997 over Fiscal Year
1996. The decline in Discrete trade sales was due to lower volume in Bipolar
products, whose trade sales decreased 27.7% in Fiscal Year 1997 over Fiscal Year
1996, offset by strong growth in higher-priced DMOS products, the focus of the
Group's growth strategy, whose trade sales increased 54.2% in Fiscal Year 1997
over Fiscal Year 1996.
15
<PAGE>
Non-Volatile Memory trade sales decreased 20.8% in Fiscal Year 1997 over
Fiscal Year 1996. The decline in Non-Volatile Memory trade sales was driven by a
significant decline in EPROM sales volume, whose trade sales decreased 40.8%
year over year, offset by continued growth in EEPROM trade sales, which
increased 6.2% in Fiscal Year 1997 over Fiscal Year 1996. Additionally, EEPROM
trade sales exceeded EPROM trade sales in Fiscal Year 1997 for the first time.
Geographically, 38%, 20% and 42% of trade sales were derived in North
America, Europe and Asia/ Pacific, respectively, in Fiscal Year 1997, as
compared to 38%, 23% and 39% in Fiscal Year 1996. All regions experienced
declines in trade sales in Fiscal Year 1997 as compared to Fiscal Year 1996.
Trade sales in North America declined 14%, Europe 27% and Asia/Pacific 7%.
Overall, exchange rates had a minimal effect on trade sales as the majority of
the Company's sales are U.S. dollar denominated.
Contract manufacturing revenues increased 19.0% to $104.2 million in Fiscal
Year 1997 from $87.6 million in Fiscal Year 1996. This increase, when normalized
for higher prices to include a markup in Fiscal Year 1997 subsequent to the
Recapitalization, was due to greater demand in Fiscal Year 1997 from National,
particularly for products manufactured in the Company's 6-inch wafer fab in
South Portland, Maine.
GROSS PROFIT
Gross profit decreased 29.7% to $152.5 million in Fiscal Year 1997 from
$216.8 million in Fiscal Year 1996. Included in the Fiscal Year 1997 amount, is
$6.8 million of gross profit attributable to contract manufacturing services
provided to National subsequent to the Recapitalization. Prior to the
Recapitalization, these revenues were recorded at cost. Under the Manufacturing
Agreements with National, prices for manufacturing services were designed to
generate a 20% gross profit for the Company. For the period subsequent to the
Recapitalization, the Company was achieving this level of gross profit with
respect to contract manufacturing revenues. As a percentage of trade sales,
gross trade profits were 24.8% and 31.5% in Fiscal Years 1997 and 1996,
respectively. The decline in gross trade profit as a percentage of trade sales
was due to lower prices, particularly in Logic, and lower factory utilization,
particularly in the first half of Fiscal Year 1997, due to adverse market
conditions and an inventory reduction initiative. The Company reduced
inventories by $20 million, or 21.5%, in Fiscal Year 1997 over Fiscal Year 1996.
In response to declining gross profit, management enacted cost reduction
programs, which included headcount reductions, in the first quarter of Fiscal
Year 1997. Gross trade profit as a percent of trade sales was 23.2% in the first
half of Fiscal Year 1997, reflecting slow order rates and low factory
utilization. Gross trade profit as a percent of trade sales increased to 26.3%
in the second half of Fiscal Year 1997, reflecting increased order rates,
improved factory utilization and the beneficial effects of the cost reduction
programs enacted in the first half of Fiscal Year 1997.
RESEARCH AND DEVELOPMENT
Research and development expense was $18.9 million, or 3.2% of trade sales
in Fiscal Year 1997, compared to $30.3 million, or 4.4% of trade sales, in
Fiscal Year 1996. The decrease in R&D relates primarily to reduced allocations
from National in Fiscal Year 1997 prior to the Recapitalization as a result of
the refocus of its strategic direction away from Fairchild's markets, as well as
the elimination of allocations from National subsequent to the Recapitalization.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $96.4 million, or 16.4% of
trade sales, in Fiscal Year 1997, compared to $114.4 million, or 16.6% of trade
sales, in Fiscal Year 1996. The decrease in SG&A expenses is attributable to
reduced allocations from National in Fiscal Year 1997 prior to the
Recapitalization, reflecting the reduced consumption of corporate services, and
the favorable effect of lower charges under the Transition Services Agreement
with National subsequent to the Recapitalization as compared to
16
<PAGE>
the allocations for those same services for the comparable period in Fiscal Year
1996, offset by one-time retention and incentive bonuses ($14.1 million) paid in
Fiscal Year 1997 concurrently with the Recapitalization.
RESTRUCTURING
Fiscal Year 1997 included a restructuring charge of $5.3 million for
severance and other costs directly attributable to a workforce reduction
undertaken in the first quarter of Fiscal Year 1997.
INTEREST, NET
Interest, net was $9.3 million in Fiscal Year 1997, as a result of
indebtedness incurred concurrently with the Recapitalization. In Fiscal Year
1997 prior to the Recapitalization, and in Fiscal Year 1996, the Company was
allocated net interest income from National. This amount is included in other
(income) expense.
OTHER (INCOME) EXPENSE
Other expense was $1.4 million in Fiscal Year 1997, compared to other income
of $0.2 million in Fiscal Year 1996. The increase in other expense was primarily
due to higher net interest expense allocated from National in Fiscal Year 1997.
INCOME TAXES
Income taxes were $4.5 million in Fiscal Year 1997. The provision for income
taxes was recorded only for the period subsequent to the Recapitalization. Prior
to the Recapitalization, the Company did not pay income taxes or file income tax
returns as it operated as a division of National. The effective tax rate on
income generated subsequent to the Recapitalization is 38.7%.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 1998, the Company's cash balance was $6.5 million, a decrease
of $34.2 million from May 25, 1997. In addition, the Company had available a
Revolving Credit Facility of $130.0 million on May 31, 1998, under which no
amounts were outstanding.
During Fiscal Year 1998, the Company generated sufficient cash from
operations to fund its research and development, capital expenditure and debt
service requirements. Additionally, the Company used approximately $75.0 million
of its existing cash to fund in part the acquisition of Raytheon. Concurrent
with the acquisition, the Company borrowed $90.0 million under a new Tranche C
term loan, the proceeds from which were used in part to repay the remaining
principal on its Tranche B term loan. Research and development expenditures are
made primarily to fund new product development. Capital expenditures in Fiscal
Year 1998, and those anticipated in Fiscal Year 1999 are being made primarily to
increase assembly and test capacity in the Company's manufacturing facilities
and to purchase and install an enterprise-wide information system. 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 Fiscal Year 1999.
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 and option contracts to hedge currency exposure when
deemed necessary for expenses denominated in Malaysian ringgit and Philippine
peso, as well as revenues denominated in Japanese yen and the major European
currencies. The recent devaluation of several currencies in Southeast Asia
against the U.S. dollar has not had, nor does the Company 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
17
<PAGE>
its manufacturing operations in Southeast Asia, and the fact that its sales in
that region (excluding Japan) are denominated in U.S. dollars. Recent economic
developments and the associated currency devaluations have softened demand in
that region, thereby negatively affecting the Company's revenues and
profitability, particularly in the second half of Fiscal Year 1998. Deferred
gains from hedging transactions were immaterial to the financial statements in
the Fiscal Years 1998 and 1997. Prior to the Recapitalization, such activities
were not performed by the Business, rather they were centralized by National.
The Company does not speculate in these financial instruments.
OUTLOOK AND BUSINESS RISKS
The statements contained under this heading and elsewhere in "Management's
Discussion and Analysis of Financial Condition and Results of Operations", as
well as the Business section of this Form 10-K, other than statements of
historical facts, are forward-looking statements based on current expectations
and management's estimates, which involve risks and uncertainties. Actual
results may differ materially from those set forth in or contemplated by such
forward-looking statements.
The following factors may affect the Company's operating results for Fiscal
Year 1999: (i) the potential effect of the Company's substantially leveraged
financial condition on its liquidity, its ability to fund capital expenditures,
working capital, debt service 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 ability to successfully integrate Raytheon and
other potential acquisitions into the Company's operations and the resultant
risk of losing key customers or employees of the acquired operation; (vii) the
Company's dependence on sales to National Semiconductor; (viii) the Company's
dependence on the availability and cost of raw materials used in its products
and upon key subcontractors providing it with wafer fabrication, assembly and
test services; (ix) the Company's reliance on complex manufacturing processes
and its sensitivity to maintaining yields, efficiencies and continuous
operations; (x) uncertainties and legal risks associated with the dependence on,
and potential disputes concerning, patents and other intellectual property
rights; and (xi) foreign currency and other risks associated with operating a
global business.
The industry is experiencing soft market conditions, which began in the
third quarter of Fiscal Year 1998, due to the Asian financial crisis and an
inventory correction in the personal computer market, resulting in excess
capacity in the semiconductor industry as a whole. These factors have combined
to cause severe price pressures and reduced demand, which will negatively impact
the Company's trade revenues and gross profit for the first half of Fiscal Year
1999, and may continue to negatively affect the Company's trade revenues and
gross profit in subsequent periods. In response, the Company is undertaking cost
reduction initiatives, including factory shutdowns, headcount reductions and
furloughs, for which the Company expects to take a one-time charge against
earnings of approximately $4.5 million in the first quarter of Fiscal Year 1999.
Despite these actions, the Company expects its trade revenues and gross profit
as a percent of sales in the first half of Fiscal Year 1999 to be substantially
below those of the first half of Fiscal Year 1998. No assurance can be given
that such measures will produce improved results in the second half of Fiscal
Year 1999.
In the fourth quarter of Fiscal Year 1998, National informed the Company
that its demand would be significantly lower in Fiscal Year 1999 than in Fiscal
Year 1998. This will result in substantially lower contract manufacturing
revenues in Fiscal Year 1999 as compared to Fiscal Year 1998 and will negatively
impact factory utilization, particularly in the 6-inch fab in South Portland,
Maine. National, under the terms of the Asset Purchase Agreement (the
"Agreement"), is obligated to purchase an aggregate of
18
<PAGE>
$330.0 million of contract manufacturing services during the 39 month period
which began March 11, 1997, including a minimum of $90.0 million of contract
manufacturing services in Fiscal Year 1999. In addition, National is obligated
to cover a contractually agreed-upon amount of fixed costs in the Company's
6-inch fab in South Portland, Maine in Fiscal Year 1999. While National's
product ordering and payment schedules for Fiscal Year 1999 remain under
discussion, National has reaffirmed its commitment to remain in compliance with
the terms of the Agreement.
The combination of soft market conditions and reduced demand from National
will result in a net loss for the first quarter of Fiscal Year 1999. Should
prices and order rates not improve during the first quarter or National not
comply with its obligations under the Agreement, the Company may experience a
loss in the second quarter of Fiscal Year 1999 and in subsequent periods as
well. As a result, the Company expects lower profits in Fiscal Year 1999 as
compared to Fiscal Year 1998.
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 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 Year 1999.
In the fourth quarter of Fiscal Year 1997, the Company commenced its
enterprise software system implementation project for the purpose of separating
from National's business systems. The software, which is expected to be
operational by the end of the first quarter of Fiscal Year 1999, is year 2000
compliant. Internal resources have been redeployed to identify, test and correct
year 2000 problems in other systems throughout the Company, including those
systems embedded in the Company's machinery and equipment. The Company is also
reviewing the year 2000 readiness and compliance of its principal suppliers of
products and services, in order to identify and assess any negative impacts that
such non-compliances could have on the Company. In addition, the Company is
working with its customers to identify potential year 2000 issues with its
products. To date, none have been identified. Management expects that its
assessments will be completed by December 31, 1998. For the Fiscal Years 1998
and 1997, incremental amounts incurred and charged to expense to identify, test
and correct such other year 2000 problems are immaterial to the consolidated
financial statements. Future incremental expenditures are also expected to be
immaterial to the consolidated financial statements. Although management
believes the Company's systems will be year 2000 compliant, the failure of the
Company's suppliers and customers to address the year 2000 issue, could result
in disruption to the Company's operations and have a significant adverse impact
on its results of operations, the extent of which the Company has not yet
estimated. The Company is not actively engaged in preparing contingency plans in
the event that key suppliers or customers fail to become year 2000 compliant.
However, the Company, in the ordinary course of business, seeks to expand its
customer base to lessen dependence on any one customer for a significant portion
of its revenues, and seeks second sources of supply for its key products and
services where appropriate.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
During and subsequent to Fiscal Year 1998, the Financial Accounting
Standards Board issued several new statements. Statement of Financial Accounting
Standards ("SFAS") No. 130 "Reporting Comprehensive Income" establishes
standards for reporting and display of comprehensive income in a full set of
19
<PAGE>
financial statements. This statement requires companies to (i) classify items of
classified income by their value in a financial statement, and (ii) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a balance
sheet. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about operating
segments in annual and interim financial statements. This statement also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997, but is not required in interim periods in the
first year of adoption. SFAS No. 132 "Employers' Disclosures about Pensions and
Other Postretirement Benefits" amends certain provisions of SFAS Nos. 87, 88 and
106. It revises employers' disclosures about pension and other postretirement
benefit plans. This statement is effective for fiscal years beginning after
December 15, 1997. SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" establishes accounting and reporting standards for
derivatives and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999.
The AICPA issued two new Statements of Position ("SOP") in Fiscal Year 1998.
SOP 98-1 "Accounting for Costs of Computer Software Developed or Obtained for
Internal Use" requires that companies capitalize certain internal-use software
costs upon meeting of certain criteria. This SOP is effective for fiscal years
beginning after December 15, 1998. SOP 98-5 "Reporting on the Costs of Start-up
Activities" requires companies to expense start-up costs and organization costs
as they are incurred. This SOP is effective for fiscal years beginning after
December 15, 1998.
The Company will adopt SFAS No. 130 in the first quarter of Fiscal Year 1999
and does not expect its provisions to have a material effect on the Company's
presentation of its financial statements. The Company intends to adopt SFAS No.
131 and SFAS No. 132 effective for its consolidated financial statements for the
fiscal year ending May 30, 1999 and will retroactively adopt the provisions of
SFAS No. 131 for the year ended May 31, 1998. The Company intends to adopt SOP
98-1 and SOP 98-5 in Fiscal Year 2000 and SFAS No. 133 in Fiscal Year 2001.
Adoption of SFAS No. 131 will only result in added disclosure and adoption of
SOP 98-5 is not expected to have a material effect on the consolidated financial
statements. The Company is presently analyzing SFAS No. 132, SFAS No. 133 and
SOP 98-1, and has not yet determined their impact on the Company's consolidated
financial statements.
20
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FAIRCHILD SEMICONDUCTOR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. 22
Consolidated Balance Sheets at May 31, 1998 and May 25, 1997.............. 23
Consolidated Statements of Operations for each of the years in the
three-year period ended
May 31, 1998............................................................ 24
Consolidated Statement of Cash Flows for the year ended May 31, 1998...... 25
Consolidated Statements of Stockholder's Equity for each of the years in
the three-year period ended May 31, 1998................................ 26
Notes to Consolidated Financial Statements................................ 27
</TABLE>
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Fairchild Semiconductor Corporation:
We have audited the accompanying balance sheets of Fairchild Semiconductor
Corporation (the "Company") as of May 31, 1998 and May 25, 1997, the related
consolidated and combined statements of operations and stockholder's equity for
each of the years in the three-year period ended May 31, 1998, and the related
consolidated statement of cash flows for the year ended May 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements were prepared on the basis of
presentation as described in Note 1. Prior to March 11, 1997, the statements
present the combined business equity and the related combined revenues less
direct expenses before taxes of the Fairchild Semiconductor Business of National
Semiconductor Corporation (the Business), and are not intended to be a complete
presentation of the Business' financial position, results of operations or cash
flows. The results of operations before taxes are not necessarily indicative of
the results of operations before taxes that would have been recorded by the
Company on a stand-alone basis.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of May
31, 1998 and May 25, 1997, the results of operations for each of the years in
the three year period ended May 31, 1998, and the results of cash flows for the
year ended May 31, 1998, on the basis described in Note 1, in conformity with
generally accepted accounting principles.
As discussed in Note 17 to the financial statements, the Company changed its
method of accounting for business process reengineering costs in 1998 to adopt
the provisions of the Emerging Issues Task Force Issue 97-13, "Accounting for
Business Process Reengineering Costs".
KPMG PEAT MARWICK LLP
Boston, Massachusetts
June 16, 1998, except as to Note 18, which is as of July 20, 1998
22
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 25, 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 6.5 $ 40.7
Accounts receivable, net of allowances of $14.2
and $15.9 at May 31, 1998 and May 25, 1997,
respectively.................................. 75.0 79.6
Inventories..................................... 108.0 73.1
Other current assets............................ 20.0 18.7
------ ------
Total current assets........................ 209.5 212.1
Property, plant and equipment, net................ 342.9 295.0
Deferred income taxes............................. 17.5 17.8
Intangible assets, net of accumulated amortization
of $1.4 at May 31, 1998......................... 31.5 --
Other assets...................................... 30.4 29.4
------ ------
Total assets................................ $631.8 $554.3
------ ------
------ ------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt............... $ 13.2 $ 11.0
Accounts payable................................ 77.7 77.1
Accrued expenses and other current
liabilities................................... 55.9 40.1
------ ------
Total current liabilities................... 146.8 128.2
Long-term debt, less current portion.............. 438.1 409.0
Other liabilities................................. 0.6 0.4
------ ------
Total liabilities........................... 585.5 537.6
------ ------
Commitments and contingencies
Stockholder's equity:
Common stock, $.01 par value; 1,000 shares
authorized, 100 shares issued and outstanding
at May 31, 1998 and May 25, 1997,
respectively.................................. -- --
Additional paid-in capital...................... 12.0 9.6
Retained earnings............................... 34.3 7.1
------ ------
Total stockholder's equity.................. 46.3 16.7
------ ------
Total liabilities and stockholder's
equity.................................... $631.8 $554.3
------ ------
------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
MAY 31, 1998 MAY 25, 1997 MAY 26, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Net sales--trade........................... $635.8 $587.8 $688.7
Contract manufacturing--National
Semiconductor............................ 153.4 104.2 87.6
------ ------ ------
Total revenue.......................... 789.2 692.0 776.3
Operating expenses:
Cost of sales.............................. 441.6 442.1 471.9
Cost of contract manufacturing--National
Semiconductor............................ 117.1 97.4 87.6
Research and development................... 35.7 18.9 30.3
Selling, general and administrative........ 92.0 96.4 114.4
Purchased in-process research and
development.............................. 15.5 -- --
Restructuring.............................. -- 5.3 --
------ ------ ------
Total operating expenses............... 701.9 660.1 704.2
------ ------ ------
Operating income............................. 87.3 31.9 72.1
Interest, net................................ 44.7 9.3 --
Other (income) expense, net.................. -- 1.4 (0.2)
------ ------ ------
Income before income taxes................... 42.6 21.2 72.3
Income taxes................................. 13.9 4.5 --
------ ------ ------
Income before cumulative effect of change in
accounting principle....................... 28.7 16.7 72.3
Cumulative effect of change in accounting
principle, net of tax effect of $0.8
million.................................... (1.5) -- --
------ ------ ------
Net income................................... $ 27.2 $ 16.7 $ 72.3
------ ------ ------
------ ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
MAY 31, 1998
-------------
<S> <C>
Cash flows from operating activities:
Net income........................................................................................ $ 27.2
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of change in accounting principle, net........................................ 1.5
Depreciation and amortization................................................................... 84.6
Loss on disposal of fixed assets................................................................ 0.9
Purchased in-process research and development................................................... 15.5
Deferred income taxes........................................................................... 2.8
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable............................................................................. 18.5
Inventories..................................................................................... (21.3)
Prepaid expenses and other current assets....................................................... (1.6)
Accounts payable................................................................................ (4.2)
Accrued expenses and other current liabilities.................................................. 11.6
Other assets and liabilities.................................................................... 0.6
------
Cash provided by operating activities......................................................... 136.1
------
Cash flows from investing activities:
Capital expenditures.............................................................................. (78.0)
Purchase of molds and tooling..................................................................... (5.7)
Purchase of Raytheon Semiconductor, Inc., net of cash acquired.................................... (116.8)
------
Cash used by investing activities............................................................... (200.5)
------
Cash flows from financing activities:
Repayment of long-term debt....................................................................... (58.7)
Issuance of long-term debt........................................................................ 90.0
Debt issuance costs............................................................................... (1.1)
------
Cash provided by financing activities........................................................... 30.2
------
Net change in cash and cash equivalents............................................................. (34.2)
Cash and cash equivalents at beginning of period.................................................... 40.7
------
Cash and cash equivalents at end of period.......................................................... $ 6.5
------
------
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes.................................................................................... $ 8.9
------
------
Interest........................................................................................ $ 43.8
------
------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL
(000'S) PAR PAID-IN RETAINED BUSINESS TOTAL
SHARES VALUE CAPITAL EARNINGS EQUITY EQUITY
-------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at May 28, 1995..................... -- -- -- -- 233.2 233.2
Revenues less expenses..................... -- -- -- -- 72.3 72.3
Net intercompany activity.................. -- -- -- -- 43.7 43.7
--- -------- ---------- -------- -------- --------
Balances at May 26, 1996..................... -- -- -- -- 349.2 349.2
Revenues less expenses..................... -- -- -- -- 9.6 9.6
Net intercompany activity.................. -- -- -- -- (25.4) (25.4)
--- -------- ---------- -------- -------- --------
Balances at March 10, 1997................... -- -- -- -- 333.4 333.4
Recapitalization of Business............... 0.1 -- 333.4 -- (333.4) --
Distribution to National Semiconductor by
Fairchild................................ -- -- (401.6) -- -- (401.6)
Capital contribution from Fairchild
Holdings................................. -- -- 77.8 -- -- 77.8
Net income for the period from March 11,
1997 through May 25, 1997................ -- -- -- 7.1 -- 7.1
--- -------- ---------- -------- -------- --------
Balances at May 25, 1997..................... 0.1 -- 9.6 7.1 -- 16.7
Net income................................. -- -- -- 27.2 -- 27.2
Adjustment to business equity assumed...... -- -- 2.4 -- -- 2.4
--- -------- ---------- -------- -------- --------
Balances at May 31, 1998..................... 0.1 $ -- $ 12.0 $ 34.3 $ -- $ 46.3
--- -------- ---------- -------- -------- --------
--- -------- ---------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Fairchild Semiconductor Corporation ("Fairchild" or the "Company") was
incorporated on February 10, 1997 by National Semiconductor Corporation
("National Semiconductor" or "National"). On March 11, 1997, National
Semiconductor consummated an Agreement and Plan of Recapitalization
("Recapitalization"). As part of the Recapitalization and pursuant to an Asset
Purchase Agreement, National Semiconductor transferred substantially all of the
assets and liabilities of the Fairchild Semiconductor Business (the "Business")
to the Company. The Business was defined as the logic, discrete and memory
divisions of National Semiconductor. The Recapitalization was accounted for as a
leveraged recapitalization, whereby the Company assumed the historical operating
results of the Business. Fairchild is a leading global designer, developer and
manufacturer of high performance multi-market semiconductors. The Company's
logic, discrete, non-volatile memory and analog and mixed signal products are
the building block components for virtually all electronic devices, from
sophisticated computers to household appliances. The Company is headquartered in
South Portland, Maine, and has manufacturing operations in South Portland,
Maine, West Jordan, Utah, Mountain View, California, Cebu, the Philippines, and
Penang, Malaysia. Fairchild is a wholly-owned subsidiary of FSC Semiconductor
Corporation ("Fairchild Holdings").
BASIS OF PRESENTATION
The consolidated financial statements at May 31, 1998 and for the fiscal
year then ended, as well as at May 25, 1997, and for the period from March 11,
1997 through May 25, 1997, include the accounts and operations of the Company
and its wholly-owned subsidiaries.
Prior to March 11, 1997, the combined balance sheets included the assets and
liabilities that were directly related to the Business as they were operated
within National Semiconductor. These balance sheets do not include National
Semiconductor's corporate assets or liabilities not specifically identifiable to
Fairchild. National Semiconductor performed cash management on a centralized
basis and processed related receivables and certain payables, payroll and other
activity for Fairchild. These systems did not track receivables, liabilities and
cash receipts and payments on a business specific basis. Accordingly, it was not
practical to determine certain assets and liabilities associated with the
Business. Given these constraints, certain supplemental cash flow information is
presented in lieu of a statement of cash flows for the years ended May 25, 1997
and May 26, 1996 (See Note 15). The financial condition and cash flows may have
been significantly different if not for the centralized cash management system
of National Semiconductor.
Prior to March 11, 1997, the combined statements of operations included all
revenues and costs attributable to the Business including an allocation of the
costs of shared facilities and overhead of National Semiconductor. In addition,
certain costs incurred at Fairchild plants for the benefit of other National
Semiconductor product lines were allocated from Fairchild to National
Semiconductor. All of the allocations and estimates in the combined statements
of operations were based on assumptions that management believes were reasonable
under the circumstances. However, these allocations and estimates are not
necessarily indicative of the costs that would have resulted if the Business had
been operated on a stand alone basis.
Transactions with National Semiconductor have been identified in the
financial statements as transactions between related parties to the extent
practicable (See Note 11).
27
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the Sunday on or nearest preceding May 31.
The Company's results for the fiscal year ended May 31, 1998 consist of 53 weeks
of activity, compared to 52 weeks for the fiscal years ended May 25, 1997 and
May 26, 1996.
PRINCIPLES OF CONSOLIDATION
Commencing with the Recapitalization, the consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
Revenue from the sale of semiconductor products is recognized when shipped,
with a provision for estimated returns and allowances recorded at the time of
shipment. Contract manufacturing revenues are recognized upon completion of
respective stages of production, defined as wafer fabrication, sort, assembly
and test.
RESEARCH AND DEVELOPMENT COSTS
The Company's research and development expenditures are charged to expense
as incurred.
RELATED PARTY ACTIVITY
In conjunction with the Recapitalization, Fairchild and National
Semiconductor executed several agreements which govern the performance of
manufacturing services by Fairchild on behalf of National Semiconductor and by
National Semiconductor on behalf of Fairchild. In addition, National
Semiconductor provides a number of business support services to Fairchild.
Prior to the Recapitalization, the Business performed contract manufacturing
services for National Semiconductor. The revenues for these services are
reflected at cost in the accompanying consolidated statements of operations.
Manufacturing costs were generally apportioned between National
Semiconductor and the Business' product lines based upon budgeted and actual
factory production loading. Certain manufacturing costs (e.g., material costs)
that were specifically identifiable with a particular product line were charged
or credited directly without apportionment.
National Semiconductor also performed manufacturing services for the
Business and incurred other elements of cost of sales on behalf of the Business,
including freight, duty, warehousing, and purchased manufacturing services from
third party vendors.
Shared or common costs, including certain general and administrative, sales
and marketing, and research and development expenses, have been allocated from
National Semiconductor's corporate office, selling and marketing locations, and
manufacturing sites to the Business or from the Business' plants to National
Semiconductor product lines on a basis which is considered to fairly and
reasonably reflect the utilization of the services provided to, or benefit
obtained by, the business receiving the charge. National Semiconductor had net
interest income on a consolidated basis for all periods presented prior to the
28
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recapitalization. Although not material, these amounts have been allocated to
the Business prior to the Recapitalization on the basis of net assets and are
included in other (income) expense (See Note 11).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is generally
depreciated based upon the following estimated useful lives: buildings and
improvements ten to thirty years, and machinery and equipment three to five
years. Depreciation is computed using the straight-line method.
INTANGIBLE ASSETS
Intangible assets were recorded as part of the Raytheon acquisition and are
amortized by the use of the straight-line method over their estimated lives
which are generally three to fifteen years. (See Note 16)
OTHER ASSETS
Other assets includes debt acquisition costs which represent costs incurred
related to the issuance of the Company's long-term debt. The costs are being
amortized using the effective interest method over the related term of the
borrowings, which ranges from five to ten years, and are included in interest
expense. Also included in other assets are mold and tooling costs. Molds and
tools are amortized over their expected useful lives, generally one to three
years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets not held for
sale, including intangible assets, by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values. Based on
these evaluations, there were no adjustments to the carrying value of long-lived
assets in Fiscal Years 1998, 1997 or 1996.
CURRENCIES
The Company's functional currency for all operations worldwide is the U.S.
dollar. Accordingly, gains and losses from translation of foreign currency
financial statements are included in current results. In addition, cash
conversion of foreign currency and foreign currency transactions are also
included in current results.
29
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company utilizes various off-balance sheet financial instruments to
manage market risks associated with the fluctuations in certain interest rates
and foreign currency exchange rates. It is the Company's policy to use
derivative financial instruments to protect against market risk arising from the
normal course of business. Gains and losses on financial instruments that are
intended to hedge an identifiable firm commitment are deferred and included in
the measurement of the underlying transaction. Gains and losses on hedges of
anticipated transactions are deferred until such time as the underlying
transactions are recognized or immediately when the transaction is no longer
expected to occur. In addition, the Company uses forward and option contracts to
hedge certain non-U.S. denominated asset and liability positions. Gains and
losses on these contracts are matched with the underlying gains and losses
resulting from currency movement on these balance sheet positions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable and
payable, and accrued liabilities approximate fair value due to the short-term
maturities of these assets and liabilities. Fair values of long term debt,
currency forward contracts and currency options are based on quoted market
prices or pricing models using prevailing financial market information as of May
31, 1998.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INCOME TAXES
Prior to the Recapitalization, the Business did not file separate income tax
returns but rather was included in the income tax returns filed by National
Semiconductor and its subsidiaries in various domestic and foreign
jurisdictions. Therefore, no provision for income taxes has been recorded in the
accompanying consolidated financial statements for the period May 27, 1996
through March 10, 1997 and for the year ended May 26, 1996. Upon the
Recapitalization, the Company became responsible for its income taxes and,
therefore, the provision for income taxes included in the accompanying 1997
statement of operations is for the period March 11, 1997 through May 25, 1997.
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
30
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EMPLOYEE STOCK PLAN
The Company accounts for its stock option plan in accordance with Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." In 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 provides an
alternative to APB 25 and is effective for fiscal years beginning after December
15, 1995. As permitted under SFAS No. 123, the Company continues to account for
its stock option plan in accordance with the provisions of APB 25 (see Note 6)
and provides the disclosures of pro forma net income as if the fair value method
under SFAS No. 123 had been applied.
RECLASSIFICATION
Certain amounts in Fiscal Years 1997 and 1996 have been reclassified to
conform with the current year presentation.
NOTE 3--FINANCIAL STATEMENT DETAILS
<TABLE>
<CAPTION>
MAY 31, MAY 25,
1998 1997
----------- -----------
<S> <C> <C>
(IN MILLIONS)
INVENTORIES (1)
Raw materials........................................................... $ 13.0 $ 8.8
Work in process......................................................... 69.5 43.4
Finished goods.......................................................... 25.5 20.9
----------- -----------
$ 108.0 $ 73.1
----------- -----------
----------- -----------
OTHER CURRENT ASSETS
Non-trade receivable from manufacturing subcontractor................... $ 12.7 $ 14.8
Prepaid and other current assets........................................ 7.3 3.9
----------- -----------
$ 20.0 $ 18.7
----------- -----------
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (1)
Land.................................................................... $ 23.5 $ 1.2
Buildings and improvements.............................................. 154.7 140.2
Machinery and equipment................................................. 575.1 526.8
Construction in progress................................................ 46.5 20.2
----------- -----------
Total property, plant and equipment................................... 799.8 688.4
Less accumulated depreciation........................................... 456.9 393.4
----------- -----------
$ 342.9 $ 295.0
----------- -----------
----------- -----------
ACCRUED EXPENSES (1)
Payroll and employee related accruals................................... $ 23.4 $ 14.9
Accrued interest........................................................ 8.1 8.9
Income taxes payable.................................................... 3.2 2.0
Other................................................................... 21.2 14.3
----------- -----------
$ 55.9 $ 40.1
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) Approximately $13.6 million of inventory, $49.9 million of property, plant
and equipment, and $4.1 million in accrued liabilities were obtained through
the Raytheon acquisition and contribute to the growth in each respective
account in Fiscal Year 1998.
31
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
MAY 31, MAY 25,
1998 1997
----------- -----------
<S> <C> <C>
(IN MILLIONS)
Tranche A term loan payable............................................... $ 62.5 $ 75.0
Tranche B term loan payable............................................... -- 45.0
Tranche C term loan payable............................................... 88.8 --
Senior subordinated notes payable......................................... 300.0 300.0
----------- -----------
Total long-term debt.................................................... 451.3 420.0
Less current portion...................................................... 13.2 11.0
----------- -----------
Long-term portion......................................................... $ 438.1 $ 409.0
----------- -----------
----------- -----------
</TABLE>
On March 11, 1997, the Company entered into a Senior Credit Facilities
agreement ("Credit Agreement") with a syndicate of financial institutions. On
December 31, 1997, the Credit Agreement was amended and restated ("Amended
Credit Agreement") in order to permit the acquisition of Raytheon Semiconductor,
Inc. (See Note 16).
Borrowings under the Amended Credit Agreement are segregated into two
tranches: $75.0 million Tranche A Term Loans and $90.0 million Tranche C Term
Loans. A portion of the proceeds from the Tranche C Term Loans was used to repay
in full the outstanding borrowings of the Tranche B Term Loans under the
original Credit Agreement. The Tranche A Term Loans are scheduled to mature on
March 11, 2002 and are subject to quarterly principal payments ranging from $2.5
million to $6.5 million, commencing May 30, 1997. The Tranche C Term Loans are
scheduled to mature on March 11, 2003 and are subject to quarterly principal
payments of $0.6 million each through February 2002, commencing February 28,
1998, with an additional four quarterly payments of $20.0 million each due
through March 11, 2003, commencing May 31, 2002. The Amended Credit Agreement
also includes a Revolving Credit Facility of $130.0 million. The Revolving
Credit Facility is scheduled to mature on March 11, 2002. No amounts were
outstanding under the Revolving Credit Facility as of May 31, 1998 and May 25,
1997.
The Senior Credit Facilities accrue interest based on either the bank's base
rate or the Eurodollar rate, at the option of the Company. The interest rate was
8.2% for the Tranche A term loan and 8.1% for the Tranche C term loan at May 31,
1998. The Company pays a commitment fee of 0.5% per annum of the unutilized
commitments under the Revolving Credit Agreement. Borrowings are secured by
substantially all assets of the Company.
On March 11, 1997, Fairchild issued $300.0 million of 10-1/8% Senior
Subordinated Notes (the "Notes") at face value. The Notes pay interest on March
15 and September 15 of each year commencing September 15, 1997. The Notes are
unsecured and are subordinated to all existing and future senior indebtedness of
the Company. The Notes are redeemable by the Company, in whole or in part, on or
after March 15, 2002 at redemption prices ranging from 100% to approximately
105% of the principal amount. The Company is required to redeem $150.0 million
principal amount of Notes on March 15, 2005 and $75.0 million principal amount
of Notes on March 15, 2006 and 2007, respectively, in each case at a redemption
price of 100% of the principal amount plus accrued interest to the date of
redemption.
The payment of principal and interest on the Senior Credit Facilities and
the Notes is fully and unconditionally guaranteed by Fairchild Holdings.
Fairchild Holdings currently conducts no business and has no significant assets
other than the capital stock of the Company. No subsidiaries of Fairchild
Holdings
32
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LONG-TERM DEBT (CONTINUED)
are guarantors on either the Senior Credit Facilities or the Notes. Included in
the accompanying consolidated balance sheets at May 31, 1998 and May 25, 1997
are approximately $93.6 million and $76.2 million of net assets, respectively,
related to the Company's foreign subsidiaries.
The Senior Credit Facilities and the indenture under which the Notes were
issued, contain certain restrictive financial and operating covenants, including
limitations on the payment of dividends and stock repurchases, with which the
Company was in compliance at May 31, 1998.
Aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
1999............................................................................ $ 13.2
2000............................................................................ 16.2
2001............................................................................ 20.9
2002............................................................................ 41.2
2003............................................................................ 59.8
Thereafter...................................................................... 300.0
------
$ 451.3
------
------
</TABLE>
On April 29, 1997 and January 7, 1998, the Company entered into interest
rate swap agreements to reduce the impact of changes in interest rates on its
Senior Credit Facilities described above. The swap agreements fixed the interest
rate on $60.0 million of the Senior Credit Facility at 9.26% through May 2001,
and $90.0 million of the Senior Credit Facility at 8.21% through February 2000.
The notional face amount of the swap agreements is $151.3 million and $60.0
million at May 31, 1998 and May 25, 1997, respectively (See Note 13). The swap
agreement covering $60.0 million of the Senior Credit Facility is cancelable
without penalty at the option of the Company after May 26, 1999.
The Company is exposed to credit loss in the event of nonperformance by the
other party to the interest rate swap agreement; however, the Company does not
anticipate nonperformance under the agreement.
NOTE 5--INCOME TAXES
As discussed in Note 2, the Business did not pay income taxes directly or
file separate income tax returns prior to the Recapitalization, and therefore,
no provision for income taxes has been recorded in the accompanying financial
statements for the period ended March 10, 1997 and for the year ended May 26,
33
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES (CONTINUED)
1996. The provision for income taxes included in the accompanying consolidated
statements of operations for Fiscal Year 1998 and for the period from March 11,
1997 to May 25, 1997, consisted of the following:
<TABLE>
<CAPTION>
MARCH 11, 1997
YEAR ENDED TO
MAY 31, 1998 MAY 25, 1997
------------- ---------------
(IN MILLIONS)
<S> <C> <C>
Income before income taxes:
U.S............................................. $ 24.4 $ 9.1
Non-U.S......................................... 18.2 2.5
----- -----
$ 42.6 $ 11.6
----- -----
----- -----
Income taxes:
Current:
U.S. federal.................................. $ 7.1 $ --
U.S. state and local.......................... 1.5 --
Non-U.S....................................... 3.3 1.4
----- -----
11.9 1.4
Deferred:
U.S. federal.................................. 1.2 2.5
U.S. state and local.......................... (0.4) 0.6
Non-U.S....................................... 1.2 --
----- -----
2.0 3.1
Total income taxes:
U.S. federal.................................. 8.3 2.5
U.S. state and local.......................... 1.1 0.6
Non-U.S....................................... 4.5 1.4
----- -----
$ 13.9 $ 4.5
----- -----
----- -----
</TABLE>
The reconciliation between the income tax rate computed by applying the U.S.
federal statutory rate and the reported worldwide tax rate follows:
<TABLE>
<CAPTION>
MARCH 11, 1997
YEAR ENDED TO
MAY 31, 1998 MAY 25, 1997
--------------- ---------------
(IN MILLIONS)
<S> <C> <C>
U.S. federal statutory rate....................... 35.0% 35.0%
U.S. state and local taxes, net of federal
benefit......................................... 2.0% 3.7%
Tax differential related to non-U.S. income....... (4.4)% --
--- ---
32.6% 38.7%
--- ---
--- ---
</TABLE>
As discussed in Note 1, the Recapitalization was accounted for as a
leveraged recapitalization whereby the Company retained the carrying value of
assets and liabilities of the Business. For income tax reporting purposes, the
Recapitalization was treated as a taxable transaction resulting in a step up of
the assets and liabilities to fair value at March 11, 1997. As such, gross
deferred tax assets of $53.7 million and a related
34
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES (CONTINUED)
valuation allowance of $30.7 million were established on March 11, 1997 with an
offsetting credit to Business equity.
The tax effects of temporary differences in the recognition of income and
expense for tax and financial reporting purposes that give rise to significant
portions of the deferred tax assets and the deferred tax liabilities at May 31,
1998 and May 25, 1997 are presented below:
<TABLE>
<CAPTION>
MAY 31, MAY 25,
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals................................................... $ 11.9 $ 5.4
Plant and equipment..................................................... 2.8 19.9
Intangibles, primarily intellectual property and software............... 31.2 25.3
AMT tax credit carryovers............................................... 3.8
----------- -----------
Total gross deferred assets........................................... 49.7 50.6
Valuation allowance..................................................... (30.7) (30.7)
----------- -----------
Net deferred tax assets............................................... 19.0 19.9
Deferred tax liabilities:
Capital allowance--foreign.............................................. (1.4) (0.3)
----------- -----------
Net deferred tax assets................................................... $ 17.6 $ 19.6
----------- -----------
----------- -----------
</TABLE>
In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are classified
in the consolidated balance sheet based on the classification of the related
asset or liability.
Deferred income taxes have not been provided for the undistributed earnings
of the Company's foreign subsidiaries which aggregated approximately $15.1
million at May 31, 1998. The Company plans to reinvest all such earnings for
future expansion. If such earnings were distributed, taxes would be increased by
approximately $1.2 million.
NOTE 6--STOCK BASED COMPENSATION
At May 31, 1998, Fairchild Holdings has one stock-based compensation plan,
the 1997 Stock Option Plan, as amended, (the "Plan") which is described below.
Fairchild Holdings accounts for its stock option plan in accordance with the
provisions of APB 25. As such, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeds the
exercise price. Had compensation cost for Fairchild Holdings stock option plan
been determined consistent with FASB Statement No. 123, the Company's net income
would have approximated reported net income of $27.2 million and $16.7 million,
respectively, in Fiscal Years 1998 and 1997.
35
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCK BASED COMPENSATION (CONTINUED)
The Company estimates the fair value of each option as of the date of grant
using a Black-Scholes pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Expected volatility.................................................... -- --
Dividend yield......................................................... -- --
Risk-free interest rate................................................ 5.88% 6.17%
Expected life, in years................................................ 2.9 2.6
</TABLE>
Under the Plan, Fairchild Holdings may grant options for up to 5,084,000
shares of Fairchild Holdings Class A common stock. Options granted under the
Plan may be either (a) options intended to constitute incentive stock options
("ISOs") under the Internal Revenue Code or (b) non-qualified stock options.
Options may be granted under the Plan to regular salaried officers and key
employees of the Company and its subsidiaries. During Fiscal Year 1998,
Fairchild Holdings effected a four-for-one common stock split in the form of a
stock dividend. All share and per share amounts have been adjusted to reflect
the split.
The exercise price of each option granted under the Plan shall be as
determined by the Board of Directors (the "Board"). The maximum term of any
option shall be ten years from the date of grant for incentive stock options and
ten years and one day from the date of grant for non-qualified stock options.
Options granted under the Plan are exercisable at the determination of the
Board, currently vesting ratably over approximately 4 years. Employees receiving
options under the Plan may not receive in any one year period options to
purchase more than 200,000 shares of common stock.
A summary of the status of Fairchild Holdings' stock option plan as of May
31, 1998 and May 25, 1997, and changes during the years then ended are presented
in the table below:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year................. 2,029 $ 0.13 -- $ --
Granted.......................................... 1,777 4.29 2,097 0.13
Exercised........................................ (142) 0.13 -- --
Canceled......................................... (80) 0.13 (68) 0.13
----- -----
Outstanding at end of year....................... 3,584 $ 2.20 2,029 $ 0.13
----- -----
----- -----
Exercisable at end of year....................... 798 $ 0.13 -- $ --
Weighted average fair value of options granted... $ 0.22 $ 0.02
</TABLE>
Information with respect to stock options outstanding and stock options
exercisable at May 31, 1998, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------------
(000'S) WEIGHTED-AVERAGE AVERAGE (000'S) WEIGHTED-
NUMBER REMAINING EXERCISE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE EXERCISE PRICE
- ----------------------------------- ------------- --------------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$.13............................... 2,834 8.95 $ 0.13 798 $ 0.13
$10.00............................. 750 9.94 10.00 -- --
----- -----
3,584 9.16 $ 2.20 798 $ 0.13
----- -----
----- -----
</TABLE>
36
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--RETIREMENT PLANS
Effective March 11, 1997, the Company sponsors the Fairchild Personal
Savings and Retirement Plan (the "Retirement Plan"), a contributory savings plan
which qualifies under section 401(k) of the Internal Revenue Code. The
Retirement Plan covers substantially all employees in the United States. At the
inception of the Retirement Plan, the Company provided a matching contribution
equal to 50% of employee elective deferrals up to a maximum of 6% of an
employee's annual compensation. Effective June 1, 1997, the Company increased
the matching contribution to 75% of employee elective deferrals. The Company
also maintains a non-qualified Benefit Restoration Plan, under which employees
who have otherwise exceeded annual IRS limitations for elective deferrals can
continue to contribute to their retirement savings. The Company matches employee
elective deferrals to the Benefit Restoration Plan on the same basis as the
Retirement Plan. Total expense recognized under these plans was $3.4 and $1.1
million for the years ended May 31, 1998 and May 25, 1997.
Employees in Malaysia participate in a defined contribution plan. The
Company has funded accruals for this plan in accordance with statutory
regulations in Malaysia. The net pension cost for the years ended May 31, 1998
and May 25, 1997 and the accrued pension cost at May 31, 1998 and May 25, 1997
are not material to the financial statements.
Employees in the Philippines participate in a defined benefit plan that was
assumed by the Company from National Semiconductor as part of the
Recapitalization. The benefits are based on years of service and a multiple of
the employee's final monthly salary. The Company's funding policy is to
contribute annually the amount necessary to maintain the plan on an actuarially
sound basis. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future. The contributions made for the years ended May 31, 1998 and May 25, 1997
are not material to the financial statements.
Prior to the Recapitalization, employees of the Business participated in
several National Semiconductor retirement, employee benefit, and incentive
plans. No liabilities related to retirement and similar plans, other than those
disclosed above, were assumed by the Company.
NOTE 8--LEASE COMMITMENTS
Rental expense related to certain facilities and equipment of the Company's
plants was $9.5 million, $5.0 million, and $4.8 million for the fiscal years
ended 1998, 1997 and 1996, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
1999........................................................................ $ 10.7
2000........................................................................ 8.8
2001........................................................................ 4.8
2002........................................................................ 2.0
2003........................................................................ 1.4
Thereafter.................................................................. 3.5
-----
$ 31.2
-----
-----
</TABLE>
37
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCKHOLDER'S EQUITY
The Company's capital structure consists of 1,000 authorized shares of
common stock, $.01 par value, of which 100 shares were issued and outstanding at
May 31, 1998 and May 25, 1997, respectively. The Company was formed as a
wholly-owned subsidiary of National Semiconductor on February 10, 1997. On March
11, 1997, concurrent with the Recapitalization, National Semiconductor
transferred all of the common stock of the Company to Fairchild Holdings in
exchange for shares of Fairchild Holdings stock. Immediately following the
transfer of stock to Fairchild Holdings, Fairchild Holdings invested an
additional $77.8 million in the Company.
In addition, the Company borrowed $120.0 million under term bank loans and
issued $300.0 million of 10 1/8% Notes as described in Note 4. The proceeds from
these borrowings were used to repay demand purchase notes from the Company to
National Semiconductor in the aggregate principal amount of $401.6 million, and
certain debt acquisition costs as described in Note 2. The purchase notes had
been issued by the Company and its foreign subsidiaries in exchange for the
assets and liabilities of the Business. The repayment of the purchase notes is
included in the accompanying consolidated statements of stockholder's equity as
a distribution to National Semiconductor.
Certain amendments to the Securities Purchase and Holders Agreement, dated
as of March 11, 1997 (the "Stockholders Agreement"), which were effected in May
1998, resulted in the lapse of certain risks of forfeiture by the management
investors with respect to their stock ownership of Fairchild Holdings. The lapse
of such restrictions resulted in the incurrence by the Company of deductible
compensation expense for income tax purposes of $10.4 million in Fiscal Year
1998. The tax effect of the compensation expense of $2.1 million was recorded as
a reduction in income taxes payable and payable to Fairchild Holdings at May 31,
1998. The tax effect was recorded using the alternative minimum tax rate of 20%.
In connection with this transaction, loans aggregating $5.0 million were made by
the Company to the management investors to pay their federal and state
individual income tax liabilities in June 1998. Such loans (including accrued
but unpaid interest thereon) will be cancelled over the four-year period
following their creation, or earlier, in whole, upon the occurrence of certain
qualifying public offerings of the Company's or Fairchild Holdings' stock and,
in part, upon the death or disability of the obligor. The Company has also
agreed to pay to such executive officers amounts sufficient to enable them to
discharge all tax liabilities arising out of the cancellation of such loans (as
well as all tax liabilities arising out of such payments). Any such executive
officer whose employment terminates will be required to repay any uncancelled
amounts immediately.
NOTE 10--RESTRUCTURING
In June 1996, National Semiconductor announced a restructuring of its
operations and the intent to pursue a sale or partial financing of the Business.
In connection with the restructuring, the Business recorded a $5.3 million
nonrecurring charge related to work force reductions. During the year ended May
25, 1997, $5.3 million of severance was paid to terminated employees.
38
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--RELATED PARTY TRANSACTIONS
Related party activity between the Company and National Semiconductor is
summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 11, 1997 PERIOD FROM
YEAR THROUGH MAY 27, 1996 YEAR
ENDED MAY 25, 1997 THROUGH ENDED
MAY 31, 1998 (IN MILLIONS) MARCH 10, 1997 MAY 26, 1996
------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Manufacturing services performed by National
Semiconductor plants or purchased from third
parties........................................... $ 14.0 $ 2.8 $ 34.3 $ 73.9
Headquarters, freight, duty, warehousing and other
elements of cost of sales......................... 17.9 3.7 41.8 58.5
------ ------ ------ ------------
$ 31.9 $ 6.5 $ 76.1 $ 132.4
------ ------ ------ ------------
------ ------ ------ ------------
Cost of business support services provided by
National Semiconductor............................ $ 28.7 $ 11.6 $ -- $ --
------ ------ ------ ------------
------ ------ ------ ------------
Operating costs allocated to the Business by
National Semiconductor............................ $ -- $ -- $ 63.9 $ 108.6
------ ------ ------ ------------
------ ------ ------ ------------
Operating costs allocated to National Semiconductor
by the Business................................... $ -- $ -- $ 9.6 $ 27.1
------ ------ ------ ------------
------ ------ ------ ------------
</TABLE>
Amounts receivable from National Semiconductor, included in accounts
receivable, totaled $12.4 million and $19.9 million at May 31, 1998 and May 25,
1997, respectively. Amounts payable to National Semiconductor, included in
accounts payable, totaled $5.3 million and $22.6 million at May 31, 1998 and May
25, 1997, respectively.
NOTE 12--CONTINGENCIES
The Company's facilities in South Portland, Maine, West Jordan, Utah, Cebu,
the Philippines, and Penang, Malaysia, have ongoing remediation projects to
respond to certain releases of hazardous substances that occurred prior to the
Recapitalization. Pursuant to the Asset Purchase Agreement, National
Semiconductor has agreed to indemnify the Company for the future costs of these
projects. The costs incurred to respond to these conditions were not material to
the combined financial statements of the Business during Fiscal Years 1997 and
1996.
The Company's Mountain View, California, facility is located on a
contaminated site under the Comprehensive Environmental Response, Compensation
and Liability Act. Under the terms of the Acquisition Agreement with Raytheon
Company, dated December 31, 1997, Raytheon Company has assumed responsibility
for all remediation costs or other liabilities related to historical
contamination.
In addition, in the normal course of business, the Company is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. All such matters are
subject to uncertainties and outcomes that are not predictable with assurance.
Consequently, the Company is unable to ascertain the ultimate aggregate amount
of monetary liability or financial impact with respect to these matters at May
31, 1998. It is management's opinion that after final disposition, any monetary
liability or financial impact to the Company would not be material to the
Company's financial position, or annual results of operations or cash flows.
39
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--FINANCIAL INSTRUMENTS
FOREIGN CURRENCY INSTRUMENTS
The objective of the Company's foreign exchange risk management policy is to
preserve the U.S. dollar value of after-tax cash flows in relation to non-U.S.
dollar currency fluctuations. The company uses forward and option contracts to
hedge firm commitment and anticipatory exposures. These exposures are primarily
comprised of non U.S. dollar sales and manufacturing costs. Gains and losses on
financial instruments that are intended to hedge an identifiable firm commitment
are deferred and included in the measurement of the underlying transaction.
Gains and losses on hedges of anticipated transactions are deferred until such
time as the underlying transactions are recognized or immediately when the
transaction is no longer expected to occur. In addition, the Company uses
forward and option contracts to hedge certain non-U.S. denominated asset and
liability positions. Gains and losses on these contracts are matched with the
underlying gains and losses resulting from currency movement on these balance
sheet positions. Net gains and losses from foreign currency transactions were
not material for fiscal years 1998, 1997 and 1996.
INTEREST RATE DERIVATIVES
The Company utilizes interest rate swap agreements to exchange the variable
interest rate of certain long-term, U.S. dollar debt for fixed interest rates.
The variable rates on swaps are based primarily on U.S. dollar LIBOR and reset
on a quarterly basis. These agreements have maturities of up to two years. The
differential between fixed and variable rates to be paid or received is accrued
as interest rates change in accordance with the agreements and is included in
current interest expense.
FAIR VALUE AND NOTIONAL PRINCIPAL OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The table below shows the fair value and notional principal of the Company's
off-balance sheet instruments as of May 31, 1998 and May 25, 1997. The notional
principal amounts for off-balance sheet instruments provide one measure of the
transaction volume outstanding as of year end and do not represent the amount of
the Company's exposure to credit or market loss. The estimates of fair value are
based on applicable and commonly used pricing models using prevailing financial
market information as of May 31, 1998, and May 25, 1997. Although the following
table reflects the notional principal and fair value of amounts of off-balance
sheet instruments, it does not reflect the gains or losses associated with the
exposures and transactions that the off-balance sheet instruments are intended
to hedge. The amounts ultimately realized upon settlement of these financial
instruments, together with the gains and losses on the underlying exposures,
will depend on actual market conditions during the remaining life of the
instruments.
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 25, 1997
-------------------------- ------------------------
NOTIONAL ESTIMATED NOTIONAL ESTIMATED
PRINCIPAL FAIR VALUE PRINCIPAL FAIR VALUE
----------- ------------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
INTEREST RATE INSTRUMENTS
Swaps............................................ $ 151.3 $ (0.5) $ 60.0 $ (0.2)
FOREIGN EXCHANGE INSTRUMENTS
Purchased Options................................ $ 31.7 $ 0.6 $ -- $ --
</TABLE>
40
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--FINANCIAL INSTRUMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary table of estimated fair values of financial instruments at Fiscal
Year end follows:
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 25, 1997
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
LONG TERM DEBT
Senior Subordinated Debt........................... $ 300.0 $ 310.5 $ 300.0 $ 311.3
Credit Facility.................................... 151.3 151.3 120.0 120.0
Currency Options....................................... 0.8 0.6 -- --
</TABLE>
The Company has outstanding foreign currency options denominated in Japanese
yen. All foreign currency options expire within one quarter. Unrealized gains
and losses on these option contracts are deferred and recognized in income in
the same period as the hedged transactions. Unrealized gains and losses as of
May 31, 1998 are not material to the consolidated financial statements.
Premiums, if any, on purchased foreign exchange option contracts are amortized
over the life of the option.
NOTE 14--INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
The Company operates in one industry segment and is engaged in the design,
development, manufacture and marketing of a wide variety of semiconductor
products for the semiconductor industry and original equipment manufacturers.
The Company operates in three main geographic areas. In the information that
follows, sales include local sales and exports made by operations within each
area. To control costs, a substantial portion of the Company's products are
transported between various facilities in the Americas, Asia and Europe in the
process of being manufactured and sold. Accordingly, it is not meaningful to
present interlocation transfers between the Company's facilities on a stand
alone basis. Sales to unaffiliated customers have little correlation with the
location of manufacture. It is, therefore, not meaningful to present operating
profit by geographic area.
The Company conducts a substantial portion of its operations outside of the
U.S. and is subject to risks associated with non-U.S. operations, such as
political risks, currency controls and fluctuations, tariffs, import controls
and air transportation.
41
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
AMERICAS EUROPE ASIA CONSOLIDATED
----------- --------- --------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1998:
Sales to unaffiliated customers....................... $ 242.3 $ 132.6 $ 260.9 $ 635.8
----------- --------- --------- -----------
----------- --------- --------- -----------
Total assets.......................................... $ 416.6 $ 12.2 $ 203.0 $ 631.8
----------- --------- --------- -----------
----------- --------- --------- -----------
1997:
Sales to unaffiliated customers....................... $ 222.7 $ 117.6 $ 247.5 $ 587.8
----------- --------- --------- -----------
----------- --------- --------- -----------
Total assets.......................................... $ 344.8 $ 14.9 $ 194.6 $ 554.3
----------- --------- --------- -----------
----------- --------- --------- -----------
1996:
Sales to unaffiliated customers....................... $ 260.3 $ 161.9 $ 266.5 $ 688.7
----------- --------- --------- -----------
----------- --------- --------- -----------
Total assets.......................................... $ 248.4 $ 0.8 $ 183.5 $ 432.7
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>
NOTE 15--SUPPLEMENTAL CASH FLOW INFORMATION
As described in Note 1, National Semiconductor's cash management system was
not designed to trace centralized cash and related financing transactions to the
specific cash requirements of the Business. In addition, National
Semiconductor's corporate transaction systems are not designed to track
receivables and certain liabilities and cash receipts and payments on a business
specific basis. Given these constraints, the following data are presented to
facilitate analysis of key components of cash flow activity for Fiscal Years
1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------
MAY 25, MAY 26,
1997 1996
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Operating activities
Revenues less expenses.................................................... $ 16.7 $ 72.3
Depreciation and amortization............................................. 77.1 64.2
Deferred taxes............................................................ (19.6) --
Loss on disposal of equipment, molds and tooling.......................... 1.0 2.0
Increase in accounts receivable........................................... (79.6) --
Decrease (increase) in inventories........................................ 20.0 (24.3)
Decrease (increase) in prepaid expenses and other current assets.......... (5.8) 11.1
Increase in other assets.................................................. 0.9 --
Increase (decrease) in accounts payable................................... 12.2 (5.2)
Increase (decrease) in accrued expenses and other liabilities............. 21.6 (1.3)
Net financing provided from (to) National Semiconductor*.................. (25.4) 43.7
----------- -----------
Cash provided by operating activities..................................... 19.1 162.5
----------- -----------
Investing activities:
Capital expenditures...................................................... (47.1) (153.9)
Purchase of molds and tooling............................................. (7.2) (8.6)
----------- -----------
Cash used by investing activities....................................... (54.3) (162.5)
----------- -----------
</TABLE>
42
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------
MAY 25, MAY 26,
1997 1996
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Financing activities:
Issurance of long-term debt............................................... 420.0 --
Debt acquisition costs.................................................... (20.3) --
Capital Contribution from Fairchild Holdings.............................. 77.8 --
Distribution to National Semiconductor.................................... (401.6) --
----------- -----------
Cash provided by financing activities................................... 75.9 --
----------- -----------
Net change in cash and cash equivalents................................... 40.7 --
Cash and cash equivalents at beginning of year............................ -- --
----------- -----------
Cash and cash equivalents at end of year.................................. $ 40.7 $ --
----------- -----------
----------- -----------
</TABLE>
Cash paid for interest by the Company totaled $0.1 million for the period
from March 11, 1997 through May 25, 1997. The Business did not make any cash
payments for interest prior to March 11, 1997, as discussed in Note 2. No cash
payments were made for income taxes for any period presented above.
* Net financing provided from (to) National Semiconductor does not necessarily
represent the cash flows of the Business, or the timing of such cash flows, had
it operated on a stand alone basis.
NOTE 16 -- ACQUISITIONS
On December 31, 1997, the Company acquired all of the outstanding common
stock of Raytheon Semiconductor, Inc. ("Raytheon") for approximately $117.0
million in cash plus transaction expenses. Raytheon, based in Mountain View,
California, designs, manufactures and markets high-performance analog and mixed
signal integrated circuits for the personal computer, communications, broadcast
video and industrial markets. The purchase price was financed through a
combination of existing cash and borrowings under the Tranche C Term Loan.
The acquisition was accounted for as a purchase as of December 31, 1997, and
the results of operations of Raytheon have been included since that date. The
purchase price exceeded the fair value of the net tangible assets by $48.4
million, of which $32.9 million was allocated to various intangible assets and
$15.5 million to in-process research and development. The in-process research
and development was expensed to operations concurrent with the acquisition.
The unaudited pro forma combined historical results, as if Raytheon had been
acquired at the beginning of Fiscal Years 1998 and 1997, respectively, are
estimated to be:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Net sales................................................ $ 836.5 $ 762.6
Net income............................................... $ 27.5 $ 12.6
</TABLE>
The pro forma results include amortization of the intangibles presented
above and interest expense on debt assumed issued to finance the purchase. The
pro forma results are not necessarily indicative of what
43
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 -- ACQUISITIONS (CONTINUED)
actually would have occurred if the acquisition had been completed as of the
beginning of each of the fiscal years presented, nor are they necessarily
indicative of future consolidated results.
NOTE 17--CHANGE IN ACCOUNTING PRINCIPLE
Effective in the third quarter of Fiscal Year 1998, the Company adopted the
provisions of Emerging Issues Task Force Issue 97-13 "Accounting for Business
Process Reengineering Costs." This Issue requires companies to write-off
business process reengineering costs that had been previously capitalized. The
Company had been capitalizing such costs in conjunction with its enterprise
software implementation project. The Issue requires companies to write-off these
costs in the quarter that contains November 20, 1997.
The cumulative effect of adoption of this Issue resulted in a charge of $1.5
million, net of taxes of $0.8 million for the year ended May 31, 1998. Of the
pre-tax write-off, $1.6 million applies to costs incurred in Fiscal Year 1998,
while $0.7 million applies to costs incurred in Fiscal Year 1997. The charge
relates specifically to costs incurred to assess the system's capabilities in
light of the Company's current business processes, which under prior guidance
was capitalizable to the cost of the software.
NOTE 18--SUBSEQUENT EVENT--WORKFORCE REDUCTION
On July 20, 1998, the Company announced a restructuring of its operations,
consisting of a reduction of approximately 10% of its payroll, which will
primarily affect its operations in the United States. The Company will take a
nonrecurring charge of approximately $4.5 million, primarily for severance costs
during the first quarter of Fiscal Year 1999.
44
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
persons who are members of the Board of Directors or executive officers of the
Company. Other officers may also be appointed to fill certain positions. Each
director of the Company will hold office until the next annual meeting of
stockholders of the Company or until his successor has been elected and
qualified.
<TABLE>
<CAPTION>
NAME AGE TITLE
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Kirk P. Pond........................... 53 Chairman of the Board of Directors, President and Chief Executive
Officer
Joseph R. Martin....................... 50 Executive Vice President and Chief Financial Officer and Director
Daniel E. Boxer........................ 52 Executive Vice President and Chief Administrative Officer, General
Counsel and Secretary
Jerry M. Baker......................... 46 Executive Vice President and General Manager, Discrete Power and
Signal Technologies Group
W. Wayne Carlson....................... 56 Executive Vice President and General Manager, Logic Products Group
Keith Jackson.......................... 42 Executive Vice President and General Manager, Analog, Mixed Signal
and Non-Volatile Memory Products Group
Darrell Mayeux......................... 55 Senior Vice President, Worldwide Sales and Marketing
David A. Henry......................... 37 Corporate Controller
Matthew W. Towse....................... 36 Treasurer
Brian L. Halla......................... 51 Director
William N. Stout....................... 59 Director
Richard M. Cashin, Jr.................. 45 Director
Paul C. Schorr IV...................... 31 Director
Ronald W. Shelly....................... 55 Director
</TABLE>
KIRK P. POND, CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CHIEF
EXECUTIVE OFFICER. Mr. Pond has been the President of the Company since June
1996. Since 1987, Mr. Pond has held several executive positions with National
Semiconductor, most recently Executive Vice President and Chief Operating
Officer. Prior executive management positions were with Fairchild Semiconductor
Corporation, Texas Instruments and Timex Corporation.
JOSEPH R. MARTIN, EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND
DIRECTOR. Mr. Martin has been the Executive Vice President and Chief Financial
Officer of the Company since June 1996. Mr. Martin has held several senior
financial positions with National Semiconductor since 1989, most recently as
Vice President of Finance, Worldwide Operations. Prior to joining National
Semiconductor, Mr. Martin was Senior Vice President and Chief Financial Officer
of VTC Incorporated, and prior to that held various senior positions with the
Company.
45
<PAGE>
DANIEL E. BOXER, EXECUTIVE VICE PRESIDENT AND CHIEF ADMINISTRATIVE OFFICER,
GENERAL COUNSEL AND SECRETARY. Mr. Boxer joined the Company in March 1997. He
has practiced law for 27 years and since 1975 had been a partner at the law firm
of Pierce Atwood, Portland, Maine. His practice at Pierce Atwood included
advising many of Maine's largest manufacturing companies, including the Company,
on business, governmental, legal compliance and environmental issues. He was
most recently a senior partner and Chairman of the firm's Management Committee.
JERRY M. BAKER, EXECUTIVE VICE PRESIDENT AND GENERAL MANAGER, DISCRETE POWER
AND SIGNAL TECHNOLOGIES GROUP. Mr. Baker has been Executive Vice President and
General Manager, Discrete Power and Signal Technologies Group, since December
1996. He has spent more than 24 years in a variety of engineering and management
positions within National Semiconductor, most recently as Vice President and
General Manager, Discrete Products Divisions.
W. WAYNE CARLSON, EXECUTIVE VICE PRESIDENT AND GENERAL MANAGER, LOGIC
PRODUCTS GROUP. Mr. Carlson has been Executive Vice President and General
Manager, Logic Products Group, since June 1996. He has 30 years of prior
engineering and management experience with National Semiconductor and Fairchild,
most recently as Vice President and General Manager, Data Management Division.
KEITH JACKSON, EXECUTIVE VICE PRESIDENT AND GENERAL MANAGER, ANALOG, MIXED
SIGNAL AND NON-VOLATILE MEMORY PRODUCTS GROUP. Mr. Jackson joined the Company
in March 1998. He has over 20 years of semiconductor industry experience. Most
recently, Mr. Jackson was President of TriTech Microelectronics in Singapore, a
manufacturer of analog and mixed signal products, which he joined in 1996. Prior
to that, he worked for National Semiconductor for 10 years, most recently as
Vice President and General Manager of the Analog and Mixed Signal division. He
has also held various marketing and engineering positions at National
Semiconductor and Texas Instruments.
DARRELL MAYEUX, SENIOR VICE PRESIDENT, WORLDWIDE SALES AND MARKETING. Mr.
Mayeux has been Senior Vice President, Worldwide Sales and Marketing since
November 1996. He had been with National Semiconductor since 1992 as Vice
President of Sales and Marketing for Logic Products Group. He previously held
engineering, marketing and general management positions with Texas Instruments
and Philips.
DAVID A. HENRY, CORPORATE CONTROLLER. Mr. Henry has been Corporate
Controller since December 1996. Previously, he had been with National
Semiconductor for eight years, and held various financial management positions,
most recently as Director of Financial Planning and Analysis for the Fairchild
Business of National Semiconductor. Mr. Henry previously worked for Amfac, Inc.
as well as Ernst and Whinney, and is a Certified Public Accountant.
MATTHEW W. TOWSE, TREASURER. Mr. Towse became Treasurer in March 1997. He
had been with National Semiconductor for six years and has held various
financial management positions, most recently as Controller for the Fairchild
plant in South Portland, Maine. Mr. Towse previously worked for Ernst & Young
and is a Certified Public Accountant.
BRIAN L. HALLA, DIRECTOR. Mr. Halla became a Director upon consummation of
the Recapitalization. He has been employed by National Semiconductor since 1996,
serving as Chairman of the Board, President and Chief Executive Officer. From
1988 to 1996, he was employed by LSI Logic Corporation, where he was (in reverse
chronological order) Executive Vice President, LSI Logic Products; Senior Vice
President and General Manager, Microprocessor/DSP Products Group; and Vice
General Manager, Microprocessor Products Group.
WILLIAM N. STOUT, DIRECTOR. Mr. Stout became a Director upon consummation
of the Recapitalization. He has been Chairman and Chief Executive Officer of
Sterling Holding Company and Sterling's subsidiaries since 1988. Sterling is
engaged, through subsidiaries including Trompeter Electronics Inc. and Semflex,
Inc. in the manufacture and sale of coaxial connectors, coaxial cable and
coaxial cable assemblies. From
46
<PAGE>
1985 to 1988, Mr. Stout was a private investor and consultant. From 1979 to
1985, Mr. Stout was President and Chief Executive Officer of Lundy Electronics &
Systems, which manufactured electronic products and systems.
RICHARD M. CASHIN, JR., DIRECTOR. Mr. Cashin became a Director upon
consummation of the Recapitalization. He has been employed by Citicorp Venture
Capital Ltd. since 1980, and has been President since 1994. Mr. Cashin is a
director of Levitz Furniture Incorporated, Lifestyle Furnishings International,
Euromax and Titan Wheel International.
PAUL C. SCHORR IV, DIRECTOR. Mr. Schorr became a Director upon consummation
of the Recapitalization. He has been employed by and been a Vice President of
Citicorp Venture Capital Ltd. since 1996. Prior to joining Citicorp Venture
Capital Ltd., Mr. Schorr was employed by McKinsey & Company, Inc. from 1993 to
1996 (in reverse chronological order) as an engagement manager and an associate.
He is a director of Inland Resources and Sybron Chemical.
RONALD W. SHELLY, DIRECTOR. Mr. Shelly became a Director in June 1998. He
is currently employed by Solectron Texas, an electronic manufacturing services
company, where he has served as its President since April 1996. Mr. Shelly has
more than 30 years experience in the semiconductor industry. Prior to joining
Solectron, he was employed by Texas Instruments for 30 years, most recently as
Executive Vice President, Custom Manufacturing Services.
ITEM 11. EXECUTIVE COMPENSATION
The attached table sets forth certain summary information concerning the
compensation received by the Company's Chief Executive Officer and the four
other most highly compensated executive officers relating to services rendered
during Fiscal Years 1998, 1997 and 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- -----------
STOCK ALL OTHER
OPTION COMPENSATION
FISCAL SALARY BONUS AWARDS (1) (2)
NAME AND PRINCIPAL POSITION YEAR ($) ($) (# SHARES) ($)
- ---------------------------------------- ----------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Kirk P. Pond (3)........................ 1998 449,994 435,969 -- 39,844
Chairman of the Board of Directors, 1997 424,624 594,382 100,000 3,018,314
President and Chief Executive Officer 1996 414,521 146,300 18,000 34,292
Joseph R. Martin........................ 1998 262,024 152,240 -- 19,818
Executive Vice President and Chief 1997 201,614 147,385 9,000 1,251,476
Financial Officer and Director 1996 181,466 68,875 7,500 7,114
Daniel E. Boxer......................... 1998 262,024 152,240 -- 254,283
Executive Vice President and Chief 1997 52,885 -- -- --
Administrative Officer, General 1996 -- -- -- --
Counsel
and Secretary
W. Wayne Carlson........................ 1998 250,004 138,406 -- 17,081
Executive Vice President and General 1997 245,862 198,582 10,000 801,614
Manager, Logic Products Group 1996 234,125 64,815 7,000 8,895
Jerry M. Baker.......................... 1998 250,009 138,406 -- 12,598
Executive Vice President and General 1997 204,864 241,269 10,000 602,782
Manager, Discrete Power and Signal 1996 169,370 54,744 10,200 6,906
Technologies
</TABLE>
47
<PAGE>
- ------------------------
(1) All options granted were for National Semiconductor common stock pursuant to
National Semiconductor's Stock Option Plan. National Semiconductor's
obligations under its Stock Option Plan were not assumed by the Company.
(2) Amounts shown reflect contributions and allocations to National
Semiconductor and/or Fairchild defined contribution retirement plans and the
value of insurance premiums paid by National Semiconductor and/or Fairchild
for term life insurance and disability insurance as follows: for Fiscal Year
1998, all amounts shown except $238,262 for Mr. Boxer representing a
one-time signing bonus. For Fiscal Year 1997, $18,314 for Mr. Pond; $4,289
for Mr. Martin; $4,500 for Mr. Baker; $4,542 and for Mr. Carlson. For Fiscal
Year 1996, all amounts shown. The remainder of the amounts shown for Fiscal
Year 1997 are comprised of one-time retention bonuses paid by National
Semiconductor as follows: $3,000,000 to Mr. Pond; $1,247,187 to Mr. Martin;
$598,282 to Mr. Baker; and $797,072 to Mr. Carlson.
(3) In addition to the amounts disclosed in the table, Mr. Pond received, as
long-term compensation from National Semiconductor in Fiscal Year 1996,
$311,190 in long-term incentive plan payoffs pursuant to National
Semiconductor's Performance Award Plan and, in Fiscal Year 1997, a severance
payment from National Semiconductor of $742,757. National Semiconductor's
obligations under the Performance Award Plan were not assumed by the
Company.
The following table provides information with respect to the named executive
officers concerning the exercise of National Semiconductor options during Fiscal
Year 1998, and unexercised National Semiconductor options held as of the end of
Fiscal Year 1998. No stock options were granted during Fiscal Year 1998 under
the FSC Semiconductor Stock Option Plan to the named executive officers.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR
EXERCISE REALIZED FISCAL YEAR END ($) (3)
NAME (#) (1) ($) (2) END (#) (3) (4)
- ----------------------------------------------------------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Kirk P. Pond............................................... 94,000 1,586,716 80,000 75,000
Joseph R. Martin........................................... 22,750 176,156 -- --
Daniel E. Boxer............................................ -- -- -- --
W. Wayne Carlson........................................... 22,375 207,063 -- --
Jerry M. Baker............................................. -- -- -- --
</TABLE>
- ------------------------
(1) Options exercised were for National Semiconductor Common Stock. The table
excludes any shares acquired under the National Semiconductor Employees
Stock Purchase Plan.
(2) Equals the market value of the underlying shares (based on the opening price
of National Semiconductor on the date of exercise) minus the exercise price.
(3) All options held by Mr. Pond were exercisable at the end of Fiscal Year
1998.
(4) Represents the difference between $16.875, the market price per share of
National Semiconductor common stock at Fiscal Year end, and the exercise
price.
DIRECTOR COMPENSATION
Certain non-employee directors of the Company receive cash compensation for
their services as a director. Messrs. Stout and Shelly receive $15,000 per year,
plus $1,000 for meetings attended in person and $500 for meetings attended by
teleconference. Messrs. Halla, Cashin and Schorr are not compensated for their
services as directors. Employee directors are not paid any fees or additional
compensation for
48
<PAGE>
service as members of the Board. All directors are reimbursed for expenses
incurred in attending Board meetings.
DEFERRED COMPENSATION AGREEMENTS
National Semiconductor adopted the National Semiconductor Corporation
Deferred Compensation Plan (the "Plan") shortly before the establishment of the
Company as an independent entity in March 1997. Under the Plan, Kirk P. Pond,
Joseph R. Martin, W. Wayne Carlson and Jerry M. Baker elected to defer receipt
of amounts that otherwise would have become payable under National
Semiconductor's Key Employee Incentive Plan, Discrete Retention Bonus Plan,
Discrete Performance Incentive Plan--Executive Level and/or letter agreements
with National Semiconductor concerning certain payments related to the
establishment of the Company as an independent entity. In March 1997, the
Company assumed the Plan and all liabilities with respect to payments due
thereunder, and the Plan participants released National Semiconductor from those
liabilities. The Plan is administered by the Board of Directors.
Amounts a Plan participant deferred pursuant to the Plan were credited to an
account for that participant on the books of the Company and will be credited
with earnings based on the employee's election. Each Plan participant has
elected the specific portions of the earnings on his deferrals will be measured
based on the performance of Fairchild Holdings Preferred Stock and Fairchild
Holdings Common Stock, and that a portion of the earnings on his deferrals will
be measured based on short-term U.S. Treasury obligations.
Amounts credited to a Plan participant's account also will be paid based on
the participant's election. Each participant has elected that the portion of his
account on which earnings are measured based on shares of the Fairchild Holdings
stock will be paid when such shares, if actually held, would be redeemed,
automatically or upon request, by Fairchild Holdings to the extent that all
restrictions on the transfer of such shares have lapsed. Generally, all payments
under the Plan will be made in cash. Payments will be made in all events (1)
upon liquidation or dissolution of the Company; (2) upon sale of fifty percent
(50%) or more of the equity interests in Fairchild Holdings or the Company,
consolidation or merger of the Company with or into another entity, or sale of
all or substantially all of the Company's assets; (3) to the participant's
beneficiary upon his death; and (4) upon the mandatory redemption of Fairchild
Holdings' Preferred Stock. Payments pursuant to items (2) through (4) of the
portion of any account the earnings on which are measured based on the
performance of Fairchild Holdings' stock will only be made, however, to the
extent that shares of such stock, if actually held, would be redeemed at that
time upon request. Payment to a participant may be accelerated if the
participant suffers an unforeseeable financial emergency or severe hardship.
In March 1997, the Company established a grantor trust (a so-called "rabbi
trust") (the "Trust") to which National Semiconductor and the Company together
contributed cash in an amount equal to the aggregate amount of deferrals under
the Plan as of the closing date of the Recapitalizaiton. The trust agreement
establishing the Trust provides that such amount will be invested in specific
amounts of Fairchild Holdings Preferred Stock and Fairchild Holdings Common
Stock.
EMPLOYMENT AGREEMENTS
In March 1997, the Company and Sterling Holding Company, LLC entered into an
employment agreement with each of Kirk P. Pond and Joseph R. Martin (each an
"Executive"). Mr. Pond is employed as Chairman of the Board of Directors and as
Chief Executive Officer of the Company. Mr. Martin is employed as Executive Vice
President and Chief Financial Officer, and serves as a member of the Board of
Directors of the Company. The respective agreements provide for an annual base
salary of $450,000 for Mr. Pond and $250,000 for Mr. Martin (which was
subsequently increased to $275,000), subject in each case to increases at the
discretion of the Board of Directors and to annual performance bonuses in
49
<PAGE>
accordance with the FSC Semiconductor Corporation 1997 Executive Officer
Incentive Plan. Each agreement also provides for the Executive to receive
standard Company benefits. The term of each agreement is three years subject to
automatic renewal for up to two consecutive one-year terms unless, in each case,
either the Company or the Executive gives prior notice of non-renewal. Under
each agreement, either the Executive or the Company may terminate the agreement
with or without cause. If terminated by the Company without cause or by the
Executive with cause, each agreement requires the Company to pay the Executive
monthly severance payments (approximately equal to his salary at the time of
termination plus an amount equal to incentive awards payable in the fiscal year
prior to termination) until the end of the term of the agreement or for 24
months if longer. Each Executive is subject to a non-competition covenant during
the term of his agreement and for a period of at least 24 months following
termination or expiration of the agreement.
PERSONAL SAVINGS AND RETIREMENT PLAN
The Company has adopted a Personal Savings and Retirement Plan (the
"Retirement Plan") for all eligible employees who are not foreign nationals or
contract employees. The Retirement Plan includes a cash or deferred arrangement
under Section 401(k) of the Internal Revenue Code and matching contributions
under Section 401(m) of the Internal Revenue Code. Under the 401(k) plan,
participants may elect to defer from 1% to 15% of their compensation on an
after-tax basis, directing the investment of these elective deferrals among
several mutual funds. The Company will make quarterly matching contributions
equal to 75% of the first 6% of an employee's before-tax elective deferral
contributions for the period. Both elective deferrals and matching contributions
under the 401(k) plan will be fully vested at all times.
FAIRCHILD BENEFIT RESTORATION PLAN
The Company has adopted the Fairchild Benefit Restoration Plan. Under the
Plan, certain employees of the Company are eligible (i) to defer on a before-tax
basis amounts over and above those they are permitted by law to defer under the
Company's Retirement Plan and (ii) to receive matching contributions from the
Company equal to the difference between matching contributions received under
the Retirement Plan and the matching contributions they would have received
under the Retirement Plan but for statutory limits applicable to such
contributions. Deferral and matching contributions are credited to accounts
established and maintained by the Company. Interest at a rate equal to a
commonly reported rate for long-term A-rated corporate bonds is credited to
participants' accounts at such times as determined by the Board of Directors
which administers the Plan. The Plan is an unfunded plan of deferred
compensation, and amounts payable thereunder are paid out of general corporate
assets of the Company and are subject to the claims of the general creditors of
the Company.
FAIRCHILD INCENTIVE PROGRAM
The Company has adopted the Fairchild Incentive Program. Under the Program,
all regular full-and part-time employees of the Company (with certain limited
exceptions) are eligible to receive annual or semiannual incentive awards from
the Company. The amount of each payment is based on a given employee's "Target
Award." As the Program is currently formulated, the Target Award is 5% of annual
compensation for non-exempt employees, from 5% to 15% (depending on grade level)
of annual compensation for exempt employees, and up to 35% (depending on grade
level) of annual compensation for certain management-level employees. Payment
awards range from 0% to 200% of the Target Award, depending on whether the
Company achieves certain pre-established earnings goals. Certain participants in
the Program are eligible to defer awards, and to the extent that the deferral
option applies only to certain Program participants, it constitutes a separate
unfunded plan known as the Fairchild Select Employee Incentive Deferral Plan
(the "Deferral Plan"). For participants who elect deferral, the Company will
establish and maintain book-entry accounts to which the Company shall credit
deferred payments and interest equal to a commonly reported rate for long-term
A-rated corporate bonds. Deferred amounts and
50
<PAGE>
accrued interest are paid to participants upon termination or on the date
pre-selected by the participant according to the terms of the Plan. The
Compensation Committee, which is presently comprised of the entire Board of
Directors, administers the Program and reserves the right, among other things,
not to make award payments, and to modify or amend the Program. The Deferral
Plan is an unfunded plan of deferred compensation, and benefits payable
thereunder are paid out of general corporate assets of the Company and are
subject to the claims of the general creditors of the Company.
FSC SEMICONDUCTOR CORPORATION 1997 EXECUTIVE OFFICER INCENTIVE PLAN
The Company adopted the FSC Semiconductor Corporation 1997 Executive Officer
Incentive Plan. Under the Plan, certain executive officers of the Company may be
eligible to receive annual incentive awards, based on a "Target Award" which
ranges from 40% to 70% of an officer's base annual compensation. Actual award
payments range from 0% to 200% of the Target Award depending on the extent to
which the Company achieves or surpasses certain pre-established earnings goals.
Participants may elect to defer all or any portion of an award payment. For
participants who elect deferral, the Company will establish and maintain
book-entry accounts, and credit cash account annually with deferred payments, as
well as interest at a rate equal to a commonly reported rate for long-term
A-rated corporate bonds. Deferrals and accrued interest thereon are paid to
participants upon termination or on a date pre-selected by the participant
according to the terms of the Plan. Eligibility for Plan participation,
performance goals and other terms of the Plan are determined by the Board of
Directors. To the extent of any deferrals, the Plan is an unfunded plan of
deferred compensation, and benefits payable thereunder are paid out of general
corporate assets of the Company and are subject to the claims of the general
creditors of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Fairchild's common stock is wholly-owned by FSC Semiconductor Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Concurrently with the establishment of the Company as a separate entity,
Fairchild and National entered into several agreements that remain in effect.
Under the Asset Purchase Agreement, dated as of March 11, 1997, National agreed
to indemnify Fairchild from damages arising out of any liabilities other than
those assumed by Fairchild in connection with such asset sale. In addition, the
Asset Purchase Agreement contains a provision that, subject to certain
limitations, forbids National for a period of five years beginning on March 11,
1997 from engaging in any business competing with Fairchild products in
existence on March 11, 1997. For a period of 39 months beginning on March 11,
1997 the Asset Purchase Agreement, subject to certain limitations, forbids
Fairchild from engaging in any business competing with National's products in
existence on March 11, 1997.
Under the Technology Licensing and Transfer Agreement, dated March 11, 1997,
between Fairchild and National, National assigned or non-exclusively licensed to
Fairchild certain patent, copyright, maskwork, trade secret and trademark rights
necessary to Fairchild's business and to make certain improvements to
Fairchild's product line. These rights include a non-exclusive license to
practice certain processes necessary to Fairchild's business. For patent rights,
National assigned to Fairchild more than 150 patents and granted Fairchild a
worldwide, royalty-free, non-exclusive license under applicable patents and
patent applications, for the life of such patents (but without right to
sublicense) to manufacture, package, use, sell, offer for sale, import, design
or develop Fairchild's products and certain improvements to those products. With
respect to copyrights and maskworks used in Fairchild's business, National
granted Fairchild an undivided interest in certain co-owned copyrights and
maskworks. For trademarks, National assigned certain trademarks related to
Fairchild's products and granted licenses recognizing transitional use of
visible trademarks and of product-embedded trademarks, which embedded trademarks
in some cases will not be eliminated until the relevant product is discontinued
or replaced. For patents that
51
<PAGE>
National assigned to Fairchild, a worldwide, paid-up, royalty-free,
non-exclusive license, with a limited right to sublicense, was granted by
Fairchild to National. National and Fairchild further cross-licensed certain
discoveries, improvements or inventions occurring within one year after March
11, 1997, with no right to grant sublicenses (except for the purpose of settling
third party claims against Fairchild). The agreement further provides that
National, for a period of time, shall indemnify and render assistance to
Fairchild for intellectual property claims made by third parties.
Under the National Foundry Services Agreement and the Fairchild Foundry
Services Agreement, each dated March 11, 1997 (collectively, the "Foundry
Agreements"), National and Fairchild agreed to manufacture semiconductor
products (i.e., provide "foundry" services) for each other during at least the
39-month period beginning on March 11, 1997. Foundry services are the
manufacturing processes through which thousands of integrated circuits are
fabricated from raw silicon wafers. The Fairchild Foundry Services Agreement
establishes the terms and conditions under which Fairchild provides foundry
services for National and the National Foundry Services Agreement defines the
terms and conditions under which National provides foundry services for
Fairchild. The Foundry Agreements (i) establish the processes the foundry
service provider shall use, (ii) define purchase commitments and production
forecasts, (iii) establish pricing, (iv) provide for engineering support from
the other party, (v) establish quality standards, (vi) specify delivery and
payment terms, among other things, and (vii) specify warranty and inspection
terms.
The National Assembly Services Agreement and the Fairchild Assembly Services
Agreement, each dated March 11, 1997 (collectively, the "Assembly Agreements")
provide for assembly and test services between National and Fairchild during at
least the 39-month period beginning on March 11, 1997. During the assembly and
test phase of semiconductor production, the thousands of integrated circuits
produced on silicon wafers during the foundry phase are separated and packaged
into individual devices ready for sale to customers. The Fairchild Assembly
Services Agreement sets forth the terms and conditions under which National
provides such services for Fairchild. Similar to the Foundry Agreements, the
Assembly Agreements establish terms for (i) volume commitments and production
planning, (ii) ordering and shipping, (iii) quality, inspection and acceptance
of finished goods and (iv) pricing and payment.
National and Fairchild entered into the Mil/Aero Wafer and Services
Agreement, dated March 11, 1997, which establishes, in a similar fashion, the
terms and conditions under which Fairchild manufactures integrated circuits for
certain military and aerospace industry customers of National.
Under a letter agreement, dated March 11, 1997, between National and
Fairchild, National is required to purchase from Fairchild a minimum of $330.0
million in goods and services in the 39-month period beginning on March 11,
1997, subject to certain conditions and adjustments. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Outlook."
Under the Transition Services Agreement, dated March 11, 1997, National
provided a number of business support services to Fairchild in order to assist
in Fairchild's conversion to an independent entity, from March 11, 1997 until,
in most instances, June 1, 1998, which deadline has since been extended with
respect to most services until August 31, 1998. These services included (i) data
processing and communication services, (ii) financial and administrative
support, (iii) purchasing services, (iv) marketing and sales services, (v)
logistics and operational support services, (vi) human resources and benefits
services and (vii) security assistance and consulting. National also agreed to
provide Fairchild, during such period, with additional services as provided in
separate shared facilities and services agreements for the South Portland,
Maine, site and a sublease for the Santa Clara, California, site (the latter
site having been vacated by Fairchild during Fiscal Year 1998). Generally, such
agreements provided that National would invoice Fairchild for the services
provided, with certain charges based on a fixed cost and other charges based on
National's actual incurred costs. In addition, under the agreements National
granted to Fairchild a royalty-free, perpetual and irrevocable worldwide license
to use National's in-house business, engineering and manufacturing systems
software. The license survives termination of such agreements.
52
<PAGE>
Certain amendments to the Securities Purchase and Holders Agreement, dated
as of March 11, 1997 (the "Stockholders Agreement"), which were effected on May
29, 1998, resulted in the lapse of certain risks of forfeiture by executive
officers of the Company with respect to their stock in Fairchild Holdings. The
lapse of such restrictions resulted in the incurrence by such executive officers
of liability for federal and state income tax. The Company made loans to such
executive officers in June 1998 to enable such officers to fund such tax
liabilities. These loans were in the following amounts: Kirk P.
Pond--$1,686,164; Joseph R. Martin--$843,094; Daniel E. Boxer--$347,060; Darrell
Mayeux--$347,060; W. Wayne Carlson--$347,060; Jerry M. Baker--$350,600. Such
loans bear interest at a rate of 6% per annum. Such loans (including accrued but
unpaid interest thereon) will be cancelled over the four-year period following
their creation, or earlier, in whole, upon the occurrence of certain qualifying
public offerings of the Company's or Fairchild Holdings' stock and, in part,
upon the death or disability of the obligor. The Company has also agreed to pay
to such executive officers amounts sufficient to enable them to discharge all
tax liabilities arising out of the cancellation of such loans (as well as all
tax liabilities arising out of such payments). Any such executive officer whose
employment terminates will be required to repay any uncancelled amounts
immediately. See Note 10 to the Company's Consolidated Financial Statements.
It is anticipated that the amounts payable by the Company with respect to
such executive officers' tax liabilities (assuming no repayment obligation on
the part of any executive officer and cancellation in full after 4 years) are as
follows:
Kirk P. Pond--$1,811,523; Joseph R. Martin--$905,763; Daniel E.
Boxer--$372,858; Darrell Mayeux--$372,858; W. Wayne Carlson--$372,858; Jerry M.
Baker--$384,287.
Daniel E. Boxer was a partner of Pierce Atwood, a Portland, Maine law firm,
during a portion of the fiscal year ended May 25, 1997. Pierce Atwood performed
legal services for Fairchild during such fiscal year and continued to perform
legal services for Fairchild in Fiscal Year 1998.
Keith Jackson, Executive Vice President, Analog, Mixed Signal & Non-Volatile
Memory Group, received a loan in the amount of $100,000 from the Company on
April 15, 1998 in order to assist him in covering the costs of relocating to
take this position with Fairchild. Such loan bears interest at a rate of 6% per
annum, with all accrued interest payable on each April 15, beginning April 15,
1999. The outstanding principal of the loan is payable in full upon the earlier
of (a) six months after any initial public offering of the Company's stock, (b)
60 days after Mr. Jackson ceases to be employed by Fairchild, or (c) April 15,
2003.
53
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS. The Index to Financial Statements of the
Company appears at page 21 of this Annual Report.
(2) FINANCIAL STATEMENT SCHEDULES. Financial statement schedules are
listed under Item 14(c) in this Annual Report.
(3) LIST OF EXHIBITS. See the Exhibit Index on page 57.
(b) REPORTS ON FORM 8-K: The Company did not file any Current Reports on
Form 8-K during the last quarter of the period covered by this report.
(c) FINANCIAL STATEMENT SCHEDULES.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Fairchild Semiconductor Corporation:
Under date of June 16, 1998, except as to Note 18, which is as of July 20,
1998, we reported on the consolidated balance sheets of Fairchild Semiconductor
Corporation and subsidiaries as of May 31, 1998 and May 25, 1997, the related
consolidated and combined statements of operations and equity for each of the
years in the three-year period ended May 31, 1998, and the related consolidated
statement of cash flows for the year ended May 31, 1998, as contained in the
annual report on Form 10-K for the year 1998. In connection with our audits of
the aforementioned consolidated and combined financial statements, we also
audited the related financial statement schedules listed in Item 14(c). These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated and combined financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
June 16, 1998
54
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FAIRCHILD SEMICONDUCTOR CORPORATION
CONDENSED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
MAY 31, 1998
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................................... $ 1.9
Accounts receivable, net.......................................................................... 24.7
Inventories....................................................................................... 90.7
Other current assets.............................................................................. 13.2
------
130.5
Property, plant and equipment, net.................................................................. 209.0
Deferred income taxes, net.......................................................................... 12.2
Intangible assets, net.............................................................................. --
Investment in subsidiaries.......................................................................... 211.0
Net intercompany receivable......................................................................... 8.2
Other assets........................................................................................ 19.2
------
Total assets.................................................................................... $ 590.1
------
------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................................................................. $ 13.2
Accounts payable.................................................................................. 53.8
Accrued expenses and other current liabilities.................................................... 38.6
------
Total current liabilities....................................................................... 105.6
Long-term debt, less current portion................................................................ 438.1
Other liabilities................................................................................... 0.1
------
Total liabilities............................................................................... 543.8
------
Commitments and contingencies
Stockholder's equity:
Common stock...................................................................................... --
Additional paid-in capital........................................................................ 12.0
Accumulated earnings.............................................................................. 34.3
------
Total stockholder's equity...................................................................... 46.3
------
Total liabilities and stockholder's equity...................................................... $ 590.1
------
------
</TABLE>
55
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
CONDENSED STATEMENT OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
MAY 31, 1998
------------
<S> <C>
Revenue
Net sales--trade.................................................................................. $ 222.1
Net sales--intercompany........................................................................... 786.6
Contract manufacturing--National Semiconductor...................................................... 153.4
------------
Total revenue................................................................................... 1,162.1
Operating expenses:
Cost of sales..................................................................................... 39.3
Cost of sales--intercompany....................................................................... 830.0
Cost of contract manufacturing--National Semiconductor............................................ 117.1
Research and development.......................................................................... 30.1
Selling, general and administrative............................................................... 65.8
Purchased in-process research and development..................................................... 15.5
------------
Total operating expenses........................................................................ 1,097.8
------------
Operating income.................................................................................... 64.3
Interest expense, net............................................................................... 43.0
Equity in income of subsidiaries.................................................................... 16.9
------------
Income before income taxes.......................................................................... 38.2
Provision for income taxes.......................................................................... 9.5
------------
Income before cumulative effect of change in accounting principle................................... 28.7
Cumulative effect of change in accounting principle, net of tax effect of $0.8 million.............. (1.5)
------------
Net income.......................................................................................... $ 27.2
------------
------------
</TABLE>
56
<PAGE>
FAIRCHILD SEMICONDUCTOR CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
MAY 31, 1998
------------
<S> <C>
Cash flows provided by operating activities:........................................................ $ 105.4
------------
Cash flows from investing activities:
Capital expenditures.............................................................................. (48.7)
Acquisitions, net of cash acquired................................................................ (116.8)
------------
Cash used by investing activities............................................................... (165.5)
------------
Cash flows from financing activities:
Repayment of long-term debt....................................................................... (58.7)
Issuance of long-term debt........................................................................ 90.0
Debt issuance costs............................................................................... (1.1)
------------
Cash provided by financing activities........................................................... 30.2
------------
Net change in cash and cash equivalents............................................................. (29.9)
Cash and cash equivalents at beginning of period.................................................... 31.8
------------
Cash and cash equivalents at end of period.......................................................... $ 1.9
------------
------------
Supplemental Cash Flow Information:
Cash paid during the year for
Income taxes.................................................................................... $ 8.9
Interest........................................................................................ $ 43.8
------------
------------
</TABLE>
57
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS.
<TABLE>
<CAPTION>
DEFERRED TAX
RETURNS AND VALUATION
DESCRIPTION ALLOWANCES ALLOWANCE TOTAL
- --------------------------------------------------------------- ------------- ------------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Balances at May 26, 1996....................................... $ -- $ -- $ --
Charged to costs and expenses.................................. 3.1 -- 3.1
Deductions..................................................... -- -- --
Charged to other accounts...................................... 12.8(1) 30.7(1) 43.5
----- ----- ---------
Balances at May 25, 1997....................................... 15.9 30.7 46.6
Charged to costs and expenses.................................. 41.8 -- 41.8
Deductions..................................................... (45.5) -- (45.5)
Charged to other accounts...................................... 2.0(2) -- 2.0
----- ----- ---------
Balances at May 31, 1998....................................... $ 14.2 $ 30.7 $ 44.9
----- ----- ---------
----- ----- ---------
</TABLE>
(1) Upon the consumation of the Recapitalization on March 11, 1997 these
accounts were established and charged to Business Equity.
(2) These amounts represent valuation reserves obtained through the acquisition
of Raytheon Semiconductor.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
By: /s/ JOSEPH R. MARTIN
-----------------------------------------
Joseph R. Martin
Executive Vice President, Chief Financial
Officer and Director
Date: July 29, 1999
59
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------
<C> <S>
2.01 Agreement and Plan of Recapitalization dated January 24, 1997 between
Sterling Holding Company, LLC ("Sterling") and National Semiconductor
Corporation ("National Semiconductor").+
2.02 Asset Purchase Agreement dated as of March 11, 1997 between the Company
and National Semiconductor.+
2.03 Acquisition Agreement dated November 25, 1997 between the Company and
Raytheon Company (2).
2.04 Amendment No. 1 to Acquisition Agreement dated December 29, 1997 between
the Company and Raytheon Company (2).
2.05 Exhibit 3.14 to Acquisition Agreement dated December 29, 1997 between the
Company and Raytheon Company (2).
3.01 Certificate of Incorporation of the Company.+
3.02 Bylaws of the Company.+
3.03 Certificate of Incorporation of Fairchild Holdings.+
3.04 Bylaws of Fairchild Holdings.+
3.05 Certificate of Amendment to Certificate of Incorporation of Fairchild
Holdings (3).
4.01 Indenture dated as of March 11, 1997 among the Company, Fairchild
Holdings, as Guarantor and United States Trust Company of New York, as
Trustee.+
4.02 Form of 10-1/8% Senior Subordinated Notes Due 2007 (included in Exhibit
4.01).+
10.01 Technology Licensing and Transfer Agreement dated March 11, 1997 between
National Semiconductor and the Company. +
10.02 Transition Services Agreement dated March 11, 1997 between National
Semiconductor and the Company.+
10.03 Fairchild Foundry Services Agreement dated March 11, 1997 between
National Semiconductor and the Company. +
10.04 Revenue Side Letter dated March 11, 1997 between National Semiconductor
and the Company. +
10.05 Fairchild Assembly Services Agreement dated March 11, 1997 between
National Semiconductor and the Company. +
10.06 National Foundry Services Agreement dated March 11, 1997 between National
Semiconductor and the Company. +
10.07 National Assembly Services Agreement dated March 11, 1997 between
National Semiconductor and the Company. +
10.08 Mil/Aero Wafer and Services Agreement dated March 11, 1997 between
National Semiconductor and the Company. +
10.09 Shared Services Agreement (South Portland) dated March 11, 1997 between
National Semiconductor and the Company.+
10.10 Credit Agreement dated March 11, 1997 among the Company, Fairchild
Holdings, Various Banks, Bankers Trust Company, Credit Suisse First
Boston Corporation and Canadian Imperial Bank of Commerce.+
10.11 Corporate Agreement dated February 20, 1992 between Torex Semiconductor
Ltd. and National Semiconductor. +
10.12* Assembly/Test Subcontract Agreement dated August 13, 1998 between NS
Electronics Bangkok (1993) Ltd. and the Company.
10.13 Supply Agreement dated January 20, 1996 between National Semiconductor
and Dynacraft Industries Sdn. Bhd. +
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------
<C> <S>
10.14 Licensing and Manufacturing Agreement dated April 27, 1990 between
National Semiconductor and Waferscale Integration, Inc. +
10.15 Qualified Titles Corresponding to Registry Title Nos. 19, 44 and 3400-Mk
12 from the State of Penang, Malaysia and corresponding Sale and Purchase
Agreements, each dated March 11, 1997, between National Semiconductor
Sdn. Bhd. and Fairchild Semiconductor Sdn. Bhd.+
10.16 Lease Agreement dated October 10, 1979 between Export Processing Zone
Authority and Fairchild Semiconductor (Hong Kong) Limited, and
Supplemental Agreements thereto dated May 1, 1982; December 12, 1983;
August 17, 1984; March 10, 1987; February 16, 1990; August 25, 1994; May
29, 1995; June 7, 1995; November 9, 1995; and October 24, 1996.+
10.17 Lease for Santa Clara Facilities dated as of March 11, 1997 between
National Semiconductor and the Company.+
10.18 Shared Facilities Agreement (South Portland) dated March 11, 1997 between
National Semiconductor and the Company.+
10.19 Environmental Side Letter dated March 11, 1997 between National
Semiconductor and the Company.+
10.20 Master Sublease Agreement dated March 11, 1997 between National
Semiconductor and the Company and Master Lease Agreement dated December
13, 1994 between General Electric Capital Corporation and National
Semiconductor.+
10.21 Fairchild NSC Deferred Compensation Plan Trust established effective
March 11, 1997.+
10.22 Fairchild NSC Deferred Compensation Plan assumed and continued, effective
March 11, 1997 (included as Schedule A to Exhibit 10.21).+
10.23 Fairchild Benefit Restoration Plan.+
10.24 Fairchild Incentive Plan.+
10.25 FSC Semiconductor Corporation Executive Officer Incentive Plan.+
10.26 FSC Semiconductor Corporation Stock Option Plan.+
10.27 Employment Agreement dated March 11, 1997 among the Company, Fairchild
Holdings, Sterling and Kirk P. Pond.+
10.28 Employment Agreement dated March 11, 1997 among the Company, Fairchild
Holdings, Sterling and Joseph R. Martin.+
10.29 Credit Agreement--Amended and Restated as of December 31, 1997 (1).
10.30 Employee Stock Purchase Savings Plan, as amended as of June 25, 1998 (3).
10.31 Fairchild Revocable Savings Plan Trust, dated February 20, 1998, executed
by Fleet Bank of Maine, as trustee (3).
10.32* Amendment to Securities Purchase and Holders Agreement dated May 29, 1998
10.33* Form of Promissory Note between the Company and Management Investors
dated June 3, 1998
21.1* List of subsidiaries of the Company
27.1* Financial Data Schedule for the Company.
</TABLE>
- ------------------------
+ Incorporated by reference from the Company's Registration Statement on Form
S-4 dated July 9, 1997 (File No. 333-26897).
* Filed herewith.
(1) Incorporated by reference from the Company's Form 10-Q dated April 13, 1998.
(2) Incorporated by reference from the Company's Current Report on Form 8-K
dated January 13, 1998.
(3) Incorporated by reference from FSC Semiconductor Corporation's Registration
Statement on Form S-8 dated June 25, 1998 (File No. 333-58603).
61
