1
Exhibit 13.01
SELECTED FINANCIAL DATA
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
The following table sets forth selected historical consolidated financial
data of Fairchild International. The historical consolidated financial data as
of December 26, 1999 and May 30, 1999 and for the seven months ended December
26, 1999, the fiscal years ended May 30, 1999, May 31, 1998 and May 25, 1997 are
derived from the audited consolidated financial statements of Fairchild
International included elsewhere in this Annual Report. The historical
consolidated financial data as of May 25, 1997 and May 26, 1996 and for the
fiscal year ended May 26, 1996 are derived from audited consolidated financial
statements of Fairchild International not included in this Annual Report. The
historical consolidated financial data as of and for the seven months ended
December 27, 1998 and the fiscal year ended May 28, 1995 are derived from
unaudited consolidated financial statements of Fairchild International that are
not included in this Annual Report. We believe that such unaudited consolidated
financial statements include all adjustments necessary for the fair presentation
of the financial condition and the results of operations of Fairchild
International for such periods and as of such dates. This information should be
read in conjunction with the consolidated financial statements of Fairchild
International and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Annual Report.
Seven Months Ended Fiscal Year Ended
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December 26, December 27, May 30, May 31, May 25, May 26, May 28,
(In millions) 1999 1998 1999 1998 1997 1996 1995
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CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Trade revenue $ 714.0 $322.3 $ 654.1 $ 635.8 $ 587.8 $688.7 $629.6
Contract manufacturing revenue 72.2 38.0 81.0 153.4 104.2 87.6 50.7
Total revenue $ 786.2 $360.3 $ 735.1 $ 789.2 $ 692.0 $776.3 $680.3
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Trade gross profit $ 214.1 $ 69.7 $ 135.7 $ 194.2 $ 145.7 $216.8 $203.8
% of trade revenue 30.0% 21.6% 20.7% 30.5% 24.8% 31.5% 32.4%
Contract manufacturing
gross profit 20.8 5.1 16.6 36.3 6.8 -- --
% of contract
manufacturing revenue 28.8% 13.4% 20.5% 23.7% 6.5% -- --
Total gross profit 234.9 74.8 152.3 230.5 152.5 216.8 203.8
% of total revenue 29.9% 20.8% 20.7% 29.2% 22.0% 27.9% 30.0%
Net income (loss) (1) 21.3 (30.5) (114.1) 20.6 15.5 72.3 74.3
OTHER FINANCIAL DATA:
EBIT (2) (3) $ 90.8 $ 0.6 $ 23.3 $ 102.8 $ 51.3 $ 72.1 $ 72.5
Depreciation and other
amortization 62.8 53.2 95.3 83.2 77.1 64.2 44.7
Amortization of intangibles 19.5 1.9 8.4 1.4 -- -- --
EBITDA (2) (3) 173.1 55.7 127.0 187.4 128.4 136.3 117.2
Adjusted net income (loss) (4) 54.5 (25.3) (33.4) 33.5 34.9 72.3 74.3
Capital expenditures 74.8 24.1 46.2 78.0 47.1 153.9 112.9
CONSOLIDATED BALANCE SHEET DATA
(END OF PERIOD):
Inventories $ 166.3 $ 148.6 $ 108.0 $ 73.1 $ 93.1 $ 68.8
Total assets 1,137.6 1,095.7 634.3 555.0 432.7 323.2
Long-term debt, less current portion 717.2 1,045.9 526.7 487.9 -- --
Redeemable preferred stock -- 90.1 80.5 71.8 -- --
Stockholders' equity (deficit) 213.2 (240.4) (116.6) (133.3) 349.2 233.2
(1) Prior to March 11, 1997, the amounts presented include all revenues and
costs attributable to the Fairchild Semiconductor 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 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 Fairchild Semiconductor
business had been operated on a stand-alone basis.
2
(2) Excludes one-time charges of $8.3 million for the forgiveness of certain
loans made to Fairchild International's management investors for payment of
individual income tax liabilities resulting from their ownership of Fairchild
International's common stock for seven months ended December 26, 1999; $55.3
million for purchased in-process research and development and restructuring and
impairments, and $15.4 million for additional sales and inventory reserves
associated with our Memory restructuring action in Fiscal 1999; $15.5 for
purchased in-process research and development in Fiscal 1998; and $14.1 million
for retention bonuses and $5.3 million for a restructuring charge in Fiscal
1997.
(3) Excludes other (income) expense.
(4) Adjusted net income (loss) is net income (loss) excluding restructuring and
other unusual charges and amortization of acquisition-related intangibles, net
of tax.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
BACKGROUND
The predecessors of Fairchild Semiconductor International, Inc. and its
wholly-owned subsidiary, Fairchild Semiconductor Corporation, were among the
pioneers of the semiconductor industry. The founders of the original Fairchild
Semiconductor invented the planar manufacturing process, regarded as one of the
most significant achievements since the invention of the transistor. Later
innovations, including Fairchild Advanced Schottky Technology (FASTt) and
Fairchild Advanced CMOS Technology (FACTe), formed the basis for a rich company
history. The Fairchild Semiconductor business was acquired in 1979 by
Schlumberger Limited and by National Semiconductor in 1987. The assets of the
Fairchild Semiconductor business were separated from National Semiconductor in
March 1997 and Fairchild Semiconductor Corporation began operating as a
stand-alone entity. At that time, the company's business consisted of the Logic
Products Group, historically a core business of Fairchild Semiconductor, the
Discrete Products Group and the Non-Volatile Memory Products Group, historically
multi-market businesses of National Semiconductor. On December 31, 1997, the
company acquired all of the outstanding common stock of Raytheon Semiconductor
Inc. for approximately $117.0 million in cash. Immediately prior to the closing
of the transaction, Raytheon Semiconductor, Inc. was renamed Fairchild
Semiconductor Corporation of California and, upon closing, became a wholly-owned
subsidiary of Fairchild Semiconductor Corporation. The transaction was accounted
for as a purchase. Accordingly, Fairchild International's operating results in
Fiscal 1998 include the operating results of Fairchild Semiconductor Corporation
of California as of the date of the acquisition. On April 13, 1999, Fairchild
International acquired the power device business of Samsung Electronics Co.,
Ltd. for $414.9 million in cash, including fees and expenses. The power device
business designs, manufactures and markets power discrete semiconductors and
standard analog integrated circuits serving the personal computer, industrial,
telecommunications and consumer electronics markets. The transaction was
accounted for as a purchase. Accordingly, Fairchild International's operating
results in Fiscal 1999 include the operating results of the power device
business, as of the date of the acquisition.
FISCAL YEAR CHANGE
We have changed our fiscal year end from the last Sunday in May to the last
Sunday in December. We refer to the seven-month transition period from May 31,
1999 to December 26, 1999 as Stub Year 1999. In the table below, we have
provided unaudited pro forma quarterly consolidated statements of operations on
a calendar-quarter basis for Fairchild International for the year ended December
26, 1999. The pro forma financial information is presented as if the acquisition
of the power device business and our initial public offering, completed on
August 9, 1999, had both been completed as of December 28, 1998, and is provided
as a base for comparison against future quarterly operating results.
Quarter Ended
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March 28, June 27, September 26, December 26,
(In millions, except per share data) 1999 (1) 1999 (1) (2) 1999 (1) (2) 1999
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Revenue:
Net sales -- trade $251.5 $282.9 $302.5 $331.4
Contract manufacturing 33.9 31.5 33.3 29.6
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Total revenue 285.4 314.4 335.8 361.0
Operating expenses:
Cost of sales -- trade 192.8 225.1 213.0 228.8
Cost of contract manufacturing 21.8 23.5 24.8 20.0
Research and development 12.8 13.8 14.3 16.2
Selling, general and administrative 32.3 42.2 54.2 50.9
Restructuring and impairments 2.7 14.1 -- --
Total operating expenses 262.4 318.7 306.3 315.9
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Operating income (loss) 23.0 (4.3) 29.5 45.1
3
Interest expense, net 18.0 18.0 18.0 17.7
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Income (loss) before income taxes 5.0 (22.3) 11.5 27.4
Provision (benefit) for income taxes 0.4 (1.3) 1.7 2.9
Net income (loss) $ 4.6 $ (21.0) $ 9.8 $ 24.5
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Net income (loss) per common share:
Basic $ 0.05 $(0.24) $ 0.11 $ 0.28
Diluted $ 0.05 $(0.24) $ 0.11 $ 0.26
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Weighted average common shares:
Basic 88.3 88.3 88.5 88.7
Diluted 91.6 88.3 91.9 92.8
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Supplemental data:
Adjusted net income (loss) (3) $ 15.6 $ 14.6 $ 25.9 $ 33.0
Diluted adjusted earnings (loss) per share (4) $ 0.17 $ 0.16 $ 0.28 $ 0.36
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(1) Pro forma financial information has been prepared on a basis consistent with
the pro forma financial statement presented in our registration statement on
Form S-1, as amended, filed with the Securities and Exchange Commission on
January 19, 2000 (S.E.C.
file number 333-92941).
Following is a table detailing the increase to historical revenue and net
income (loss) as a result of pro forma adjustments:
(In millions) Net
Quarter Ended Revenue Income (loss)
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March 28, 1999 $111.9 $11.2
June 27, 1999 30.2 48.6
September 26, 1999 -- 10.6
December 26, 1999 -- --
(2) The quarter ended June 27, 1999 includes non-recurring charges taken in
connection with the restructuring of the Memory Division, including $5.5 million
for additional sales allowances and $9.9 million for the write-off of
inventories. These charges were recorded as a reduction against net sales in the
case of the sales allowances and a charge to cost of sales for the inventory
write-offs. The quarter ended September 26, 1999 includes a non-recurring charge
of $8.3 million recorded in selling, general and administrative expense for the
forgiveness of certain loans made to the company's management investors for
payment of individual income tax liabilities resulting from their ownership of
Fairchild International's common stock.
(3) Adjusted net income (loss) represents net income (loss) before amortization
of acquisition-related intangibles and restructuring and other non-recurring
charges, net of associated tax effects.
(4) Diluted adjusted earnings (loss) per share is based on adjusted net income
(loss) and fully diluted shares outstanding, which include the dilutive effect,
if any, of stock options.
4
Fairchild International has defined four reportable segments: the Analog and
Mixed Signal Products Division, which we refer to as Analog; the Discrete Power
and Signal Technologies Products Group, which we refer to as Discrete; the
Interface and Logic Products Group, which we refer to as Interface and Logic;
and the Non-Volatile Memory Division, which we refer to as Memory. Power device
business products, which include analog and discrete power products and were
previously reported as a separate segment, are now included in the Analog and
Discrete segments. The following table sets forth the composition of trade
revenue by reportable segments and contract manufacturing services, as a
percentage of total revenues, excluding one-time charges totaling $5.5 million
in the Memory segment in Fiscal 1999:
Stub Year Fiscal Year
1999 1999 1998 1997
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Analog 22.1% 13.0% 4.1% -- %
Discrete 40.3 30.1 23.7 23.8
Interface and Logic 23.4 36.1 38.4 41.2
Memory 5.0 9.9 14.4 19.9
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Subtotal
trade sales 90.8 89.1 80.6 84.9
Contract
manufacturing
services 9.2 10.9 19.4 15.1
Total 100.0% 100.0% 100.0% 100.0%
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SEVEN MONTHS ENDED DECEMBER 26, 1999 COMPARED TO SEVEN MONTHS ENDED DECEMBER 27,
1998
Comparative financial information for Stub Year 1999 and the seven months
ended December 27, 1998, which we refer to as the first seven months of Fiscal
1999, is as follows:
Seven
Months Ended
Stub Year December 27,
(In millions) 1999 1998
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(unaudited)
Revenue:
Net sales -- trade $714.0 $322.3
Contract manufacturing 72.2 38.0
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Total revenue 786.2 360.3
Operating expenses:
Cost of sales -- trade 499.9 252.6
Cost of contract manufacturing 51.4 32.9
Research and development 35.0 21.3
Selling, general and administrative 117.4 52.9
Restructuring and impairments -- 4.5
Total operating expenses 703.7 364.2
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Operating income (loss) 82.5 (3.9)
Interest expense, net 56.2 34.2
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Income (loss) before income taxes 26.3 (38.1)
Provision (benefit) for income taxes 5.0 (7.6)
Net income (loss) $ 21.3 $(30.5)
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Results of Operations. Fairchild International generated net income of $21.3
million in Stub Year 1999, compared to a net loss of $30.5 million in the first
seven months of Fiscal 1999. Excluding unusual charges and amortization of
acquisition-related intangibles of $15.5 million and $19.5 million,
respectively, in Stub Year 1999, and $4.5 million and $2.0 million,
respectively, in the first seven months of Fiscal 1999, net of tax effects,
Fairchild International had adjusted net income of $54.5 million for Stub Year
1999 compared to an adjusted net loss of $25.3 million in the first seven months
of Fiscal 1999. Unusual charges in Stub Year 1999 included initial public
offering-related charges of $8.3 million, recorded in selling, general and
administrative expenses ("SG&A"), for the forgiveness of certain loans made to
Fairchild International's management investors for payment of individual income
tax liabilities resulting from their ownership of Fairchild International's
common stock, and $7.2 million, recorded in interest expense, for the write-off
of deferred financing
5
fees associated with the debt repaid with the proceeds from the initial public
offering. Unusual charges in the first seven months of Fiscal 1999 were due to
restructuring charges as a result of a workforce reduction. Operating income was
$82.5 million in Stub Year 1999, compared to an operating loss of $3.9 million
in the first seven months of Fiscal 1999. Excluding unusual charges, operating
income was $90.8 million in Stub Year 1999, compared to $0.6 million in the
first seven months of Fiscal 1999. The increase in operating income is due to
the acquisition of the power device business from Samsung Electronics and higher
revenues and gross profits due to new product introductions and improved
business conditions, resulting in higher factory utilization in Stub Year 1999
as compared to the first seven months of Fiscal 1999.
Excluding depreciation and amortization of $82.3 million and $55.1 million
in Stub Year 1999 and the first seven months of Fiscal 1999, respectively, and
unusual charges, earnings before interest, taxes, depreciation and amortization
("EBITDA") were $173.1 million in Stub Year 1999 compared to $55.7 million in
the first seven months of Fiscal 1999. EBITDA is presented because the company
believes that it is a widely accepted financial indicator of an entity's ability
to incur and service debt. EBITDA should not be considered as an alternative to
net income, operating income, or other consolidated operations and cash flow
data prepared in accordance with generally accepted accounting principles, as an
indicator of the operating performance of Fairchild International, or as an
alternative to cash flows as a measure of liquidity.
Revenues. Fairchild International's revenues consist of trade sales to
unaffiliated customers (90.8% and 89.5% of total revenues in Stub Year 1999 and
the first seven months of Fiscal 1999, respectively) and revenues from contract
manufacturing services provided to National Semiconductor and Samsung
Electronics (9.2% and 10.5% of total revenues in Stub Year 1999 and the first
seven months of Fiscal 1999, respectively).
Trade sales increased 121.5% to $714.0 million in Stub Year 1999 compared
with $322.3 million in the first seven months of Fiscal 1999. Trade sales for
Stub Year 1999 include sales from the power device business. Excluding sales
from the power device business, trade sales increased 28.9% in Stub Year 1999
over the first seven months of Fiscal 1999, as higher sales volume offset lower
average selling prices. The increase in trade sales is attributable to improved
demand due to strength in end-markets such as personal computers and
telecommunications and an economic recovery in the Asia/Pacific region.
Geographically, 20.7%, 12.2%, 45.6% and 21.5% of trade sales were derived in
the United States, Europe, Asia/Pacific and Korea, respectively, in Stub Year
1999. Excluding sales from the power device business, 31.8%, 17.5% and 50.7% of
trade sales were derived from North America, Europe and Asia/Pacific (including
Korea), respectively, in Stub Year 1999, compared to 40.3%, 18.4% and 41.3%,
respectively, in the first seven months of Fiscal 1999. Excluding sales from the
power device business, Asia/Pacific region revenues increased 58.2% in Stub Year
1999 over the first seven months of Fiscal 1999. The increase in the
Asia/Pacific region is due to strength in the consumer and personal computer
markets, as well as improved economic conditions. Revenues in the Europe region
increased 22.5% in Stub Year 1999 over the first seven months of Fiscal 1999.
The increase in Europe is due to improved telecommunications, consumer and
distribution markets. North American revenues increased 2.0% in Stub Year 1999
over the first seven months of Fiscal 1999. The increase in North America is the
result of improved market conditions offset by the continued move of contract
manufacturers to locations outside North America.
Contract manufacturing revenues increased 90.0% to $72.2 million in Stub
Year 1999 compared to $38.0 million in the first seven months of Fiscal 1999.
Excluding contract manufacturing services provided to Samsung Electronics,
contract manufacturing revenues increased 42.1% in Stub Year 1999 as compared to
the first seven months of Fiscal 1999, reflecting increased demand from National
Semiconductor.
Gross Profit. Gross profit increased 214.0% to $234.9 million in Stub Year
1999 compared to $74.8 million in the first seven months of Fiscal 1999.
Excluding the gross profit derived from power device products, gross profit
increased 71.8% in Stub Year 1999 over the first seven months of Fiscal 1999. As
a percentage of trade sales, gross trade profits were 30.0% in Stub Year 1999.
Excluding the power device business, gross trade profits as a percentage of
trade sales were 28.4% in Stub Year 1999 compared to 21.6% in the first seven
months of Fiscal 1999. The increase in gross trade profit as a percentage of
trade sales was due to the favorable effect of increased factory utilization and
the full benefit of cost reduction actions undertaken in Fiscal 1999, offset by
lower average selling prices. Average selling prices for Stub Year 1999 were
lower than the first seven months of Fiscal 1999, despite higher average selling
prices in the second quarter of Stub Year 1999 over the first quarter of Stub
Year 1999, particularly for Discrete and Interface and Logic products. Contract
manufacturing gross profit increased 307.8% to $20.8 million in Stub Year 1999
compared to $5.1 million in the first seven months of Fiscal 1999. The increase
in contract manufacturing gross profit is due to incremental business with
Samsung Electronics as a result of the acquisition of the power device business
and greater demand from National Semiconductor reflective of improved market
conditions. Contract manufacturing gross profit for the first seven months of
Fiscal 1999 included $13.0 million of fixed cost reimbursement under Fairchild
International's manufacturing agreements with National Semiconductor.
6
Research and Development. Research and development expenses ("R&D") were
$35.0 million, or 4.9% of trade sales, in Stub Year 1999, compared to $21.3
million, or 6.6% of trade sales, in the first seven months of Fiscal 1999. The
increase in R&D expenses is driven by the dedicated R&D costs incurred by the
power device business in Stub Year 1999 which Fairchild International did not
incur in the first seven months of Fiscal 1999. R&D efforts are focused on
Fairchild International's growth products (Analog, DMOS power and CMOS logic).
R&D expenditures for these growth products were 5.7% and 9.0% of trade sales in
Stub Year 1999 and the first seven months of Fiscal 1999, respectively. R&D
expenditures for Fairchild International's other products (Bipolar Logic,
Bipolar Discretes and EPROM) were less than 1% of trade sales for both Stub Year
1999 and the first seven months of Fiscal 1999. The decrease in R&D expenditures
for growth products as a percentage of trade sales is due to the relatively
smaller R&D requirements of the power device business as a percentage of sales.
Selling, General and Administrative. SG&A expenses were $117.4 million, or
16.4% of trade sales, in Stub Year 1999, compared to $52.9 million, or 16.4% of
trade sales, in the first seven months of Fiscal 1999. SG&A expenses for Stub
Year 1999 include an unusual charge of $8.3 million for the forgiveness of
certain loans made to Fairchild International's management investors for payment
of individual income tax liabilities resulting from their ownership of Fairchild
International's common stock. Excluding this unusual charge, SG&A was $109.1
million, or 15.3% of trade sales, in Stub Year 1999. The increase in SG&A
expenses (excluding the unusual charge) is primarily the result of the
incremental SG&A expenses of the power device business which Fairchild
International did not incur in the first seven months of Fiscal 1999, including
amortization of acquisition-related intangibles, and increased selling expenses
for the pre-existing business due to higher sales volume.
Restructuring. Fairchild International incurred a pre-tax restructuring
charge of approximately $4.5 million in the first seven months of Fiscal 1999.
The charge consisted of $0.8 million related to non-cash asset impairments and
$3.7 million of employee separation costs related to the reduction of
approximately 600 salaried, hourly and temporary positions, then representing
approximately 10% of Fairchild International's payroll. Substantially all
amounts have been expended with respect to Fairchild International's Fiscal 1999
restructuring actions with the exception of the Analog wafer production transfer
to South Portland, Maine.
Interest Expense, Net. Interest expense, net was $56.2 million in Stub Year
1999, compared to $34.2 million in the first seven months of Fiscal 1999.
Interest expense, net in Stub Year 1999 includes an unusual charge of $7.2
million for the write-off of deferred financing fees associated with debt
retired with the proceeds from the initial public offering. Excluding this
charge, interest expense, net was $49.0 million in Stub Year 1999. The increase,
excluding the unusual charges, is principally the result of indebtedness
incurred to finance the power device business acquisition, which occurred in the
fourth quarter of Fiscal 1999.
Income Taxes. Income tax expense was $5.0 million for Stub Year 1999,
compared to a tax benefit of $7.6 million in the first seven months of Fiscal
1999. The effective tax rates for Stub Year 1999 and the first seven months of
Fiscal 1999 on book pre-tax income were 19.0% and 19.9%, respectively. In Stub
Year 1999, the current tax provision increased while deferred tax benefits
decreased over the first seven months of Fiscal 1999. In Stub Year 1999, the
current tax provision is based on income generated from Fairchild
International's foreign operations, excluding Korea where Fairchild
International benefits from a tax holiday. The decrease in deferred tax benefits
is due to profits earned in Stub Year 1999 and Fairchild International's limited
ability to recognize the future benefit of U.S. net operating loss
carryforwards. In addition, deferred tax expense was recorded in Korea to
account for future book deductions in excess of future tax deductions arising
beyond the tax holiday period.
Fairchild International has adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. In accordance with the provisions of
SFAS No. 131, comparative disclosures of selected operating results of Fairchild
International's reportable segments is as follows:
Analog and Mixed Signal Products Division. Fairchild International formed
the Analog and Mixed Signal Products Division upon completion of the acquisition
of Raytheon. This division has expanded due to the inclusion of the analog
products of the power device business. Its product offerings include standard
linear products such as operational amplifiers, low drop out regulators and
ground fault interrupters, motor control integrated circuits, smart power
switches and D/C to D/C converters. Analog revenues increased 347.2% to $173.5
million in Stub Year 1999 from $38.8 million in the first seven months of Fiscal
1999. Stub Year 1999 includes the analog revenues of the power device business,
which is not included in the first seven months of Fiscal 1999. Normalized to
exclude power device products, Analog revenues were $42.9 million in Stub Year
1999, an increase of 10.6% from the first seven months of Fiscal 1999. The
increase is due to improved business conditions and new product revenues, which
more than offset revenue decreases in mature products.
Analog had operating income of $24.0 million in Stub Year 1999 as compared
to $0.2 million in the first seven months of Fiscal 1999. Excluding analog power
device products, Analog had an operating loss of $8.0 million in Stub Year 1999.
The increase in Analog's
7
operating loss (excluding analog power device products) was due to an
unfavorable sales mix and increased inventory valuation reserves in anticipation
of the closure of the Mountain View, California wafer fab, which occurred in the
latter part of Stub Year 1999.
Discrete Power and Signal Technologies Products Group. Discrete designs,
manufactures and markets a broad line of DMOS power MOSFETs, for both high and
low-voltage applications, IGBT, bipolar power transistors, small signal
transistors and diodes. This group has expanded due to the inclusion of the
discrete products of the power device business. An increasing volume of DMOS
power MOSFETs are manufactured using Fairchild International's leading edge
Trench technology. Discrete revenues increased 229.8% to $316.9 million in Stub
Year 1999, compared to $96.1 million in the first seven months of Fiscal 1999.
Stub Year 1999 includes the discrete revenues of the power device business which
are not included in the first seven months of Fiscal 1999. Excluding discrete
power device products, Discrete revenues increased 54.6% to $148.6 million in
Stub Year 1999 from the first seven months of Fiscal 1999. The increase was
across all product lines, DMOS products increased 81.9% over the first seven
months of Fiscal 1999. Revenues for mature Bipolar products grew 13.7% in Stub
Year 1999 over the first seven months of Fiscal 1999.
Discrete had operating income of $36.7 million in Stub Year 1999 as compared
to $4.5 million in the first seven months of Fiscal 1999. Excluding discrete
power device products, Discrete had operating income of $14.9 million in Stub
Year 1999. The increase in Discrete operating income was due to higher revenues
and improved gross profits due to improved factory utilization and higher
average selling prices.
Interface and Logic Products Group. Interface and Logic designs,
manufactures and markets a broad line of high-performance interface and standard
logic products. Its interface products include building block products such as
FST and GTL, and standards-specific products such as dual inline memory drivers
and Universal Serial Bus. Its logic products focus on the growing CMOS logic
market, from industry standard FACT and HCMOS to new products such as
TinyLogice, LCX and LVT. Its products also include mature bipolar logic products
such as FAST, LS and TTL. Interface and Logic revenues increased 27.9% to $184.0
million in Stub Year 1999, compared to $144.0 million in the first seven months
of Fiscal 1999. Revenues for interface products grew 224.4% in Stub Year 1999
over the first seven months of Fiscal 1999, due to success of new product
introductions. Logic products revenues increased 22.8% in Stub Year 1999 over
the first seven months of Fiscal 1999. The increase in Logic products revenues
was across all product lines. CMOS revenues grew 34.6%, while Bipolar revenues
grew 2.5% in Stub Year 1999 over the first seven months of Fiscal 1999.
Interface and Logic had operating income of $29.7 million in Stub Year 1999,
compared to $11.6 million in the first seven months of Fiscal 1999. The increase
in operating income was due to higher revenues and improved gross profits due to
improved factory utilization.
Non-Volatile Memory Division. Memory designs, manufactures and markets a
broad line of serial EEPROM, EPROM and applications-specific standard products,
including microcontrollers. Memory revenues decreased 8.8% to $39.6 million in
Stub Year 1999 from $43.4 million in the first seven months of Fiscal 1999. The
decrease was due to exiting certain unprofitable product lines in Stub Year 1999
as compared to the first seven months of Fiscal 1999, which include those
revenues, offset by revenue growth in new applications-specific standard
products, such as the ACEx family of microcontrollers.
Memory had operating income of $0.4 million in Stub Year 1999 as compared to
a loss of $15.7 million in the first seven months of Fiscal 1999. The decrease
in the Memory operating loss was due to the benefit from the implementation of
the Memory restructuring plan, implemented in the fourth quarter of Fiscal 1999.
Approximately 68.7% of Fairchild International's trade revenues were
generated from Analog, Discrete and Power Device products in Stub Year 1999.
YEAR ENDED MAY 30, 1999 COMPARED TO YEAR ENDED MAY 31, 1998
Results of Operations. Fairchild International incurred a net loss of $114.1
million in Fiscal 1999, compared to net income of $20.6 million in Fiscal 1998.
The net loss in Fiscal 1999 includes pre-tax charges totaling $75.9 million for
in-process research and development ($34.0 million) and the write-off of
deferred financing fees in connection with a refinancing of Fairchild
International's senior credit facilities ($5.2 million) as part of the
acquisition of the power device business of Samsung Electronics in April 1999,
and restructuring and related charges totaling $36.7 million. The Fiscal 1999
restructuring charges pertain to a workforce reduction undertaken in the first
quarter ($4.5 million), the transfer of Analog assembly and test operations in
the third quarter ($2.7 million), the closure of the Mountain View facility
($10.0 million) recorded in the fourth quarter and the restructuring of the
Memory business ($19.5 million), also in the fourth quarter. The charge for the
Memory restructuring includes $5.5 million and $9.9 million recorded as a
reduction to revenue and an increase to cost of sales, respectively, for
additional sales and inventory reserves associated with the restructuring. Net
income in Fiscal 1998 includes pre-tax charges of $15.5 million for in-process
research and development associated with the acquisition of Raytheon and an
after-tax charge of $1.5 million for the cumulative effect of a change in
accounting principle. Excluding unusual charges, net of tax effect, and
amortization of acquisition-related intangibles of $8.4 million and $1.4 million
in Fiscal 1999 and Fiscal 1998, respectively, Fairchild
8
International incurred a net loss of $33.4 million in Fiscal 1999, compared to
net income of $33.5 million in Fiscal 1998. The decrease is due primarily to
soft market conditions in the semiconductor industry that persisted for much of
Fiscal 1999, which resulted in severe price competition and factory
underutilization, particularly in the first half of Fiscal 1999, which
negatively impacted gross profit.
Fairchild International incurred an operating loss of $47.4 million in
Fiscal 1999, compared to operating income of $87.3 million in Fiscal 1998.
Excluding unusual charges, operating income was $23.3 million in Fiscal 1999,
compared to $102.8 million in Fiscal 1998. Excluding unusual charges and
depreciation and amortization of $103.7 million and $84.6 million in Fiscal 1999
and Fiscal 1998, respectively, earnings before interest, taxes and depreciation
and amortization, which we refer to as EBITDA, was $127.0 million in Fiscal
1999, compared to $187.4 million in Fiscal 1998.
Revenues. Fairchild International's revenues consist of trade sales to
unaffiliated customers (89.0% and 80.6% of total revenues in Fiscal 1999 and
Fiscal 1998, respectively) and contract manufacturing services to National
Semiconductor (11.0% and 19.4% of total revenues in Fiscal 1999 and Fiscal 1998,
respectively). Trade sales increased 2.9% to $654.1 million in Fiscal 1999 from
$635.8 million in Fiscal 1998. Trade sales in Fiscal 1999 include those of the
power device business since the acquisition date of April 13, 1999, and a
full-year of Analog. Additionally, trade sales have been reduced by $5.5 million
in Fiscal 1999 for one-time charges for additional sales reserves as a result of
the Memory restructuring. Trade sales in Fiscal 1998 include those of Analog
since the acquisition date of December 31, 1997. Excluding Power Device
revenues, one-time charges and normalizing Analog sales for the non-comparable
periods, trade sales decreased 14.0% in Fiscal 1999 from Fiscal 1998. All
segments reported trade sales decreases from the prior year, due to
industry-wide soft market conditions that were prevalent for much of Fiscal
1999. These soft market conditions, caused by the Asian financial crisis and
excess capacity in the semiconductor industry as a whole, resulted in severe
price pressures, which accounted for the majority of the revenue shortfall on a
comparable basis. Unit volume was flat for Fiscal 1999 as compared to Fiscal
1998.
Geographically, 33%, 17% and 50% of Fairchild International's trade sales in
Fiscal 1999 were generated in the United States, Europe and Asia, respectively,
compared to 38%, 21% and 41%, respectively, in Fiscal 1998. Soft market
conditions prevalent in Fiscal 1999 negatively impacted all geographic regions.
Trade sales in the United States decreased 9.8% in Fiscal 1999 from Fiscal 1998.
Excluding one-time charges, trade sales decreased 7.6%. Trade sales in Europe
decreased 16.1% in Fiscal 1999 from Fiscal 1998. Trade sales in Asia increased
24.3% in Fiscal 1999 over Fiscal 1998. Asia sales include those in Southeast
Asia, Korea and Japan. The increase in trade sales is due entirely to the
acquisition of the power device business. Excluding the power device business,
Asia trade sales decreased 2.1% in Fiscal 1999 from Fiscal 1998. Contract
manufacturing revenues decreased 47.2% to $81.0 million in Fiscal 1999, compared
to $153.4 million in Fiscal 1998. Contract manufacturing revenues in Fiscal 1999
include $18.7 million of billings under the guaranteed annual revenue and fixed
cost recovery provisions of the manufacturing agreements with National
Semiconductor. The decrease was due to reduced demand from National
Semiconductor.
Gross Profit. Gross profit decreased 33.9% to $152.3 million in Fiscal 1999
from $230.5 million in Fiscal 1998. Gross trade profit in Fiscal 1999 was
negatively impacted by one-time charges of $15.4 million for additional sales
and inventory reserves as a result of the Memory restructuring action. Excluding
one-time charges, gross profit decreased 27.2% to $167.7 million in Fiscal 1999.
Gross profit includes $16.6 million and $36.3 million in Fiscal 1999 and Fiscal
1998, respectively, attributable to contract manufacturing services provided to
National Semiconductor. As a percentage of trade sales, gross trade profit,
which excludes contract manufacturing, was 20.7% in Fiscal 1999 compared to
30.5% in Fiscal 1998. Excluding one-time charges, gross trade profit as a
percentage of trade sales was 22.9% in Fiscal 1999. The decrease in gross trade
profits as a percentage of sales in Fiscal 1999 from Fiscal 1998 was due to
lower average trade selling prices and the negative effects of significantly
decreased demand from National Semiconductor.
Contract manufacturing gross profit decreased 54.3% in Fiscal 1999 from
Fiscal 1998. As a percentage of contract manufacturing revenue, contract
manufacturing gross profit was 20.5% in Fiscal 1999, compared to 23.7% in Fiscal
1998. The decrease in contract manufacturing gross profit as a percent of
contract manufacturing revenues is due to the negative effects of lower factory
utilization due to reduced demand from National Semiconductor and an unfavorable
shift in sales mix toward ABiC wafers produced in Fairchild International's
six-inch fab in South Portland, Maine.
Research and Development. R&D expenses were $39.3 million, or 6.0% of trade
sales in Fiscal 1999, compared to $35.7 million, or 5.6% of trade sales in
Fiscal 1998. The increase in R&D expenses is due to the addition of the R&D
expenses of the power device business and a full year of Analog R&D expenses in
Fiscal 1999, as compared to five months of Analog R&D expenses recorded in
Fiscal 1998. R&D efforts are focused on Fairchild International's growth
products (CMOS logic, DMOS, Analog and the power device business products). In
Fiscal 1999, R&D expenditures were 7.7% of trade sales for these growth
products, and 3.0% of trade sales for all other products. In Fiscal 1998, R&D
expenditures were 8.7% and 2.7% for growth and all other products, respectively.
The decrease in R&D expenditures for growth products as a percentage of trade
sales is due to the relatively small R&D requirements of the power device
business as a percentage of sales.
9
Selling, General and Administrative. SG&A expenses were $105.1 million, or
16.1% of trade sales in Fiscal 1999, compared to $92.0 million or 14.5% of trade
sales in Fiscal 1998. The increase in SG&A expenses is due to the addition of
the SG&A expenses of the power device business, a full year of Analog SG&A
expenses in Fiscal 1999, as compared to five months of Analog SG&A expenses
recorded in Fiscal 1998, and amortization of acquisition-related intangibles,
including a full year of amortization of intangibles related to the Raytheon
acquisition in Fiscal 1999 as compared to five months in Fiscal 1998.
Restructuring. Fiscal 1999 included restructuring charges of $21.3 million,
as Fairchild International took several actions during Fiscal 1999 to reduce
costs and improve profitability in a number of areas. In the fourth quarter of
Fiscal 1999, Fairchild International took a pre-tax charge of $4.1 million for
actions to improve the profitability of Memory. These actions included
transferring wafer fabrication activities in Salt Lake City, Utah to third-party
subcontractors and obsoleting Memory product lines. The charge consists of $3.9
million for non-cash asset impairments at Fairchild International's facilities
in Salt Lake City, Utah and Sunnyvale, California, and $0.2 million for
severance and employee separation costs. In addition, Fairchild International
took charges of $5.5 million and $9.9 million recorded to revenue and cost of
sales, respectively, for additional sales and inventory reserves. Including
these charges, the total charge for the Memory restructuring was $19.5 million.
In the fourth quarter of Fiscal 1999, Fairchild International took a pre-tax
charge of $10.0 million for the closure of its Mountain View facility, which
supports the Analog Products Group. Fairchild International is transferring
Analog wafer fabrication activities to its facility in South Portland, Maine. As
a result of this transfer, Fairchild International expects a substantial
reduction in Analog wafer costs and improved gross profit. The charge consists
of $4.0 million for severance and employee separation costs, $4.5 million for
non-cash asset impairments, including a one-time loss for the sale of the
Mountain View facility of $1.9 million and $1.5 million in other exit costs. In
March 1999, Fairchild International sold the facility for $30.2 million, net of
closing costs, $0.5 million in escrow to cover demolition costs, and a $3.5
million holdback, payment of which is contingent upon either favorable action or
no action within one year of the sale date by the City of Mountain View with
respect to the buyer's application to increase the building density on the site.
Fairchild International views the holdback as a contingent gain, and as such did
not record this amount in its Statement of Operations. Fairchild International
expects, however, that a favorable ruling will be granted which will enable
Fairchild International to record a one-time gain from receipt of the holdback
in a subsequent period. In the third quarter of Fiscal 1999, Fairchild
International took a pre-tax charge of $2.7 million for the transfer of Analog
assembly and test activities from its Mountain View facility to Fairchild
International's facility in Penang, Malaysia and various third-party
subcontractors. The charge consisted of $1.9 million for non-cash asset
impairments and $0.8 million for severance and employee separation costs. Total
charges for Analog restructuring activities, including the loss on sale of the
Mountain View facility, were $12.7 million in Fiscal 1999.
In the first quarter of Fiscal 1999, Fairchild International took a pre-tax
restructuring charge of $4.5 million in connection with a plan to reduce costs
and improve operating efficiencies. The charge consisted of $3.7 million for
severance and employee separation costs related to the reduction of
approximately 600 salaried, hourly and temporary positions in the United States
and Cebu, the Philippines, representing approximately 10% of Fairchild
International's payroll. In addition, $0.8 million was recorded for the
write-off of various idle assets in Fairchild International's Mountain View and
Salt Lake City facilities.
Interest Expense, Net. Interest expense, net was $71.8 million in Fiscal
1999, compared to $54.5 million in Fiscal 1998. The increase was due to the
write-off of deferred financing fees of $5.2 million in connection with the
refinancing of its senior credit facilities as part of the acquisition of the
power device business, incremental interest expense as a result of additional
indebtedness incurred to finance the acquisition, a full year of interest
expense on borrowings to finance the Raytheon acquisition, as compared to five
months in Fiscal 1998 and interest expense on short-term borrowings in Fiscal
1999 which did not occur in Fiscal 1998.
Income Taxes. Income tax expense (benefit) was a benefit of $(5.1) million
in Fiscal 1999, compared to income tax expense of $10.7 million in Fiscal 1998.
The effective tax rate for Fiscal 1999 was 4.3%, compared to 32.6% in Fiscal
1998. The decrease in the effective rate is due to the inability of Fairchild
International to carry back its Fiscal 1999 operating loss due to the short time
Fairchild International has operated as a stand-alone entity and a tax holiday
for income generated by Fairchild International's Korean subsidiary, Fairchild
Korea Semiconductor Ltd., formed as a result of the acquisition of the power
device business. Fairchild Korea Semiconductor Ltd. has been granted a ten year
tax holiday. The first seven years are tax-free, followed by three years of
income taxes at 50% of the statutory rate.
Comparative financial information for Fairchild International's reportable
segments is as follows:
Analog and Mixed Signal Products Division. Analog revenues increased 199.4%
to $95.8 million in Fiscal 1999 from $32.0 million in Fiscal 1998. Fiscal 1999
includes the analog revenues of the power device business since the date of
acquisition. Fiscal 1998 includes revenues of Analog from the acquisition date
of Raytheon. Normalized to exclude power device products and the non-comparable
period of Analog sales in Fiscal 1999, Analog revenues were $25.5 million in
Fiscal 1999, a decrease of 20.3% from Fiscal 1998. The decrease for the
comparable period in Fiscal 1999 from Fiscal 1998 is due to revenue decreases in
its mature products, combined with lower than anticipated new product revenues.
10
Analog generated operating income of $8.1 million in Fiscal 1999 excluding
restructuring charges, compared to $2.2 million in Fiscal 1998. Excluding the
effect of the power device business and normalized for the non-comparable period
of Analog operating results in Fiscal 1999, Analog generated an operating loss
of $2.7 million in Fiscal 1999. The decrease in operating income is primarily
driven by the decline in revenues.
Discrete Power and Signal Technologies Products Group. Discrete revenues
increased 19.0% to $222.8 million in Fiscal 1999, compared to $187.3 million in
Fiscal 1998. Fiscal 1999 includes the discrete revenues of the power device
business since the date of acquisition. Excluding discrete power device
products, Discrete revenues decreased 3.7% in Fiscal 1999 from Fiscal 1998. The
decrease is attributable to lower revenues for its mature Bipolar products,
which decreased 18.1% from Fiscal 1998, partially offset by higher revenues for
its DMOS products, which increased 7.9% from Fiscal 1998.
Discrete generated operating income of $7.0 million in Fiscal 1999, compared
to operating income of $44.9 million in Fiscal 1998. Excluding the effect of the
power device business, Discrete generated operating income of $4.8 million in
Fiscal 1999. The decrease was due primarily to lower gross profit as a result of
lower contract manufacturing profits, unfavorable sales mix, the negative effect
of underutilization of the Salt Lake City fab, driven by lower contract
manufacturing and Memory volumes, and inventory write-downs in the Cebu, the
Philippines assembly and test facility.
Interface and Logic Products Group. Price competition was particularly
intense in Interface and Logic in Fiscal 1999. Logic revenues decreased 11.7% to
$267.6 million in Fiscal 1999, compared to $303.0 million in Fiscal 1998.
Revenues for interface products grew 573% in Fiscal 1999 over Fiscal 1998, due
to success of new product introductions. This increase was more than offset by a
14.4% decrease in logic products revenues. The decrease in logic products
revenues is primarily attributable to lower bipolar logic revenues, which
decreased 29.4% from Fiscal 1998. CMOS revenues decreased 2.9% in Fiscal 1999
over Fiscal 1998. Overall, new product revenues doubled in Fiscal 1999 over
Fiscal 1998.
Interface and Logic generated operating income of $35.7 million in Fiscal
1999, compared to $70.0 million in Fiscal 1998. The decrease in operating income
is attributable to lower average selling prices due to soft market conditions in
Fiscal 1999 and lower contract manufacturing profits.
Non-Volatile Memory Division. In order to improve the profitability of
Memory, Fairchild International took a charge of $19.5 million in Fiscal 1999.
Actions include transferring wafer fabrication activities in Salt Lake City,
Utah to third-party subcontractors and obsoleting Memory product lines.
Excluding a charge of $5.5 million recorded as a reduction to revenue in the
form of increased sales reserves as part of the restructuring, Memory revenues
decreased 35.3% to $73.4 million from $113.5 million in Fiscal 1998. The revenue
decrease was across all product lines. EEPROM revenues decreased 30.7% in Fiscal
1999 from Fiscal 1998, and EPROM revenues decreased 46.6% in Fiscal 1999 from
Fiscal 1998. The decreases are due to lower average selling prices, lower
volumes due to soft market conditions, and in the case of EPROM, a rapidly
shrinking market, which is being replaced by FLASH memory.
Memory generated an operating loss of $26.4 million in Fiscal 1999,
excluding the restructuring charge, compared to an operating loss of $14.2
million in Fiscal 1998. The increase in the operating loss is due primarily to
lower average selling prices as a result of soft market conditions in Fiscal
1999.
YEAR ENDED MAY 31, 1998 COMPARED TO YEAR ENDED MAY 25, 1997
Results of Operations. Net income increased 32.9% to $20.6 million in Fiscal
1998, as compared to $15.5 million in Fiscal 1997. Net income in Fiscal 1998
includes a pre-tax charge for in-process research and development associated
with the acquisition of Raytheon ($15.5 million) and an after-tax charge for the
cumulative effect of a change in accounting principle pertaining to business
process reengineering costs associated with Fairchild International's enterprise
software system implementation ($1.5 million) which had been previously
capitalized. Net income in Fiscal 1997 includes pre-tax charges related to
payment of retention bonuses ($14.1 million) and a restructuring charge ($5.3
million) related to workforce reductions. In addition, Fiscal 1998 net income
includes a full year of interest expense and income taxes, while Fiscal 1997
includes these charges only for the period subsequent to the recapitalization of
Fairchild Semiconductor Corporation. Prior to the recapitalization, the
Fairchild Semiconductor Business did not incur these costs. Excluding unusual
charges and amortization of acquisition-related intangibles of $1.4 million in
Fiscal 1998, net of tax effect, net income was $33.5 million and $34.9 million
in Fiscal 1998 and Fiscal 1997, respectively.
Operating income, excluding unusual charges, increased 100.4% to $102.8
million in Fiscal 1998 from $51.3 million in Fiscal 1997. Included in operating
income is $36.3 million and $6.8 million of gross profit on contract
manufacturing services in Fiscal 1998 and 1997, respectively, under
manufacturing agreements with National Semiconductor. Gross profit on contract
manufacturing services in Fiscal 1997 was generated subsequent to the
recapitalization of Fairchild Semiconductor Corporation. Prior to the
recapitalization, contract manufacturing revenues were recorded at cost. In
addition, operating income in Fiscal 1998 increased over Fiscal 1997 due to
higher trade revenues as a result of the acquisition of Raytheon and improved
market conditions, particularly in the first half of the year, higher trade
11
gross profit due to improved factory utilization, and the favorable effect of
currency devaluations in Southeast Asia on manufacturing costs. The following
table depicts operating income for Fairchild International's reportable
segments:
Fiscal Year
Ended May
(In millions) 1998 1997
- -------------------------------------------------------------------------------
Analog $ 2.2 $--
Discrete 44.9 21.7
Interface and Logic 70.0 21.3
Memory (14.2) 5.0
Analog was formed upon the completion of the acquisition of Raytheon. Its
results are consolidated with those of Fairchild International as of the date of
acquisition. Discrete and Interface and Logic operating profits increased 106.9%
and 228.6%, respectively, in Fiscal 1998 from Fiscal 1997. Memory suffered an
operating loss in Fiscal 1998, due primarily to lower revenues and gross profits
as a result of intense price competition.
Excluding unusual charges, depreciation and amortization of $84.6 million
and $77.1 million in Fiscal 1998 and 1997, respectively, and other expense of
$1.4 million in Fiscal 1997, EBITDA increased 46.0% to $187.4 million in Fiscal
1998 from $128.4 million in Fiscal 1997.
Fairchild International's results for the fiscal year ended May 31, 1998
consist of 53 weeks of activity, compared to 52 weeks for the fiscal years ended
May 25, 1997 and May 26, 1996.
Revenues. Fairchild International's revenues consist of trade sales to
unaffiliated customers (80.6% and 84.9% of total revenues in Fiscal 1998 and
1997, respectively) and revenues from contract manufacturing services provided
to National Semiconductor (19.4% and 15.1% of total revenues in Fiscal 1998 and
1997, respectively).
Trade sales increased 8.2% to $635.8 million in Fiscal 1998 compared to
$587.8 million in Fiscal 1997. Trade sales for Fiscal 1998 include those of
Raytheon since the acquisition. Excluding Raytheon, trade sales increased 2.7%
in Fiscal 1998 over Fiscal 1997. The increase in trade sales was driven
primarily by increased unit volume, as average selling prices were flat. Average
selling prices increased year over year for the first three quarters in Fiscal
1998, but decreased significantly in the fourth quarter as industry-wide market
conditions softened.
Discrete trade sales increased 13.9% in Fiscal 1998 over Fiscal 1997. The
increase was due to higher average selling prices, driven by new product
introductions and a favorable sales mix, and slightly higher unit volume. DMOS
trade sales increased 39.9% in Fiscal 1998 over Fiscal 1997, offsetting a
decrease of 7.6% in Bipolar trade sales. The increase in DMOS trade sales was
due to higher sales volume of new products featuring Fairchild International's
Trench technology, which offset price erosion in some of the more mature DMOS
products. The decrease in Bipolar trade sales was driven by a combination of
lower sales volume and slightly lower average selling prices. Reflective of
Fairchild International's growth strategy, trade sales of DMOS products in
Fiscal 1998 exceeded trade sales in Bipolar products for the first time.
Interface and Logic trade sales increased 6.2% in Fiscal 1998 over Fiscal
1997. The increase was driven by higher unit volume, which offset a decrease in
average selling prices. In Fiscal 1998, CMOS trade sales increased 14.3% over
Fiscal 1997, offsetting a decrease of 2.8% in Bipolar trade sales. The increase
in CMOS trade sales was across all product lines, including VHC, LCX, FACTe and
HCMOS. The decrease in Bipolar trade sales is reflective of the general market
trend toward lower power consuming CMOS products.
Memory trade sales decreased 17.7% in Fiscal 1998 over Fiscal 1997. The
decrease was driven by lower prices impacting all memory product lines due to
competitive pressures, partially offset by higher volume, particularly in
EEPROM. EEPROM had increased trade sales of 4.7% in Fiscal 1998 over Fiscal
1997. In a declining market, EPROM trade sales decreased 46.2% in Fiscal 1998
over Fiscal 1997, as EPROMs are being rapidly phased out by FLASH memory
products in the marketplace.
Geographically, 38%, 21% and 41% of trade sales were derived in the United
States, Europe and Asia, respectively, in Fiscal 1998, compared to 38%, 20% and
42% in Fiscal 1997. Trade sales in all regions grew over Fiscal 1997 levels.
Europe increased 12.7%, the United States increased 8.8% and Asia increased
5.4%, despite soft economic conditions in the region. Asia trade sales were
influenced by strong growth in Southeast Asia, which offset a year over year
decline in Japan.
Contract manufacturing revenues increased 47.2% to $153.4 million in Fiscal
1998 compared to $104.2 million in Fiscal 1997. This increase, when normalized
for higher prices to include a markup for all of Fiscal 1998, reflects greater
demand from National Semiconductor, particularly in the first nine months of
Fiscal 1998. During the fourth quarter, foundry revenues decreased 26.1% from
the third quarter as National Semiconductor sharply cut back its demand in
response to its own publicly-announced restructuring created by soft market
conditions in the industry.
12
Gross Profit. Gross profit increased 51.2% to $230.5 million in Fiscal 1998,
compared to $152.5 million in Fiscal 1997. Included in gross profit in Fiscal
1998 and 1997 is $36.3 million and $6.8 million, respectively, attributable to
contract manufacturing services provided to National Semiconductor. Prior to the
recapitalization of Fairchild Semiconductor Corporation in Fiscal 1997, these
revenues were recorded at cost. Gross trade profit excluding contract
manufacturing increased 33.3% in Fiscal 1998 over Fiscal 1997. As a percentage
of trade sales, gross trade profits were 30.5% and 24.8% in Fiscal 1998 and
1997, respectively. The increase in gross trade profit as a percentage of trade
sales was due to increased factory utilization due to improved market conditions
that existed through the third quarter of Fiscal 1998, the favorable effect on
fixed cost absorption of increased demand from National Semiconductor in the
first nine months of Fiscal 1998, the favorable effects of currency devaluations
in Southeast Asia on Fairchild International's manufacturing costs and the
acquisition of Raytheon, which increased Fairchild International's portfolio of
higher-margin products.
Research and Development. R&D expenses were $35.7 million, excluding a $15.5
million pre-tax charge for purchased in-process R&D expenses associated with the
acquisition of Raytheon, or 5.6% of trade sales in Fiscal 1998, compared to
$18.9 million, or 3.2% of trade sales in Fiscal 1997. The increase in R&D
expenses is driven by higher spending to support new product development,
reflecting Fairchild International's renewed emphasis on R&D efforts as a
stand-alone company following the recapitalization of Fairchild Semiconductor
Corporation. Prior to the recapitalization, R&D expenditures of the business
primarily consisted of allocations from National Semiconductor. Reflective of
increased R&D efforts, Fairchild International approximately doubled the number
of new products introduced in Fiscal 1998 from Fiscal 1997. In addition,
Fairchild International is spending higher levels of R&D expenses for its Analog
and Mixed Signal products, reflecting its strategy to focus on and grow this
segment of its business. R&D efforts are focused on Fairchild International's
growth products: CMOS Logic, DMOS, EEPROM and Analog. In Fiscal 1998, R&D
expenditures were 8.9% of trade sales for these growth products, and 0.5% of
trade sales for Fairchild International's other products (Bipolar Logic, Bipolar
Discretes and EPROM). Comparison of the above to Fiscal 1997 is not meaningful
as Fairchild International was not a stand-alone entity for the entire year.
Selling, General and Administrative. SG&A expenses were $92.0 million, or
14.5% of trade sales, in Fiscal 1998, compared to $96.4 million, or 16.4% of
trade sales, in Fiscal 1997. Excluding one-time retention bonuses of $14.1
million charged in Fiscal 1997, SG&A expenses were $82.3 million, or 14.0% of
trade sales in Fiscal 1997. The increase in SG&A expenses as a percent of trade
sales after elimination of retention bonuses is due to higher selling and
marketing expenses driven by inefficiencies experienced in the first half of
Fiscal 1998 while operating under transition service agreements with National
Semiconductor, and in the second half of Fiscal 1998 due to the integration of
the Raytheon sales force into Fairchild International. The increase in selling
and marketing expenses was partially offset by a decrease in general and
administrative expenses due to lower expenses incurred as a stand-alone entity
in Fiscal 1998 compared to Fiscal 1997, which reflects nine months of direct and
allocated expenses of the Fairchild Semiconductor Business while operated by
National Semiconductor.
Restructuring. Fiscal 1997 included a restructuring charge of $5.3 million,
incurred in the first quarter, for severance and other costs directly
attributable to a workforce reduction.
Interest Expense, Net. Interest expense, net was $54.5 million and $11.2
million in Fiscal 1998 and 1997, respectively. Fiscal 1998 includes a full year
of interest expense on indebtedness incurred to finance the recapitalization of
Fairchild Semiconductor Corporation, while Fiscal 1997 contains approximately
one quarter of such interest expense. In addition, Fairchild International
incurred additional indebtedness due to the purchase of Raytheon in the third
quarter of Fiscal 1998. Prior to the recapitalization in Fiscal 1997 of
Fairchild Semiconductor Corporation, the Fairchild Semiconductor Business was
allocated net interest expense from National Semiconductor. This amount is
included in other expense.
Other Expenses. Other expense was $1.4 million in Fiscal 1997, consisting
primarily of net interest expense allocated to the Fairchild Semiconductor
Business by National Semiconductor. There were no comparable amounts incurred in
Fiscal 1998.
In the third quarter of Fiscal 1998, Fairchild International took a pre-tax
charge of $15.5 million for purchased in-process research and development in
conjunction with the acquisition of Raytheon and an after-tax charge of $1.5
million for the cumulative effect of an accounting charge pertaining to
treatment of business process reengineering costs associated with Fairchild
International's enterprise software system implementation. The enterprise
software system implementation costs, relating to activities to assess the
system's capabilities in light of Fairchild International's current business
processes, were previously capitalized as part of the cost of the software.
Emerging Issues Task Force Issue 97-13, dated November 20, 1997, requires
companies to expense such costs as incurred.
Income Taxes. Income taxes were $10.7 million and $3.8 million in Fiscal
1998 and 1997, respectively. In Fiscal 1998, income taxes were recorded at an
effective tax rate of 32.6%. In Fiscal 1997, income taxes were recorded only for
the period subsequent to the recapitalization of Fairchild Semiconductor
Corporation, at an effective rate of 39.1%. The lower tax rate in Fiscal 1998
is due to a higher proportion of taxable income in lower tax countries as
compared to Fiscal 1997. Prior to the recapitalization of Fairchild
Semiconductor
13
Corporation, the Fairchild Semiconductor Business did not record a tax provision
or pay income taxes as it operated as a division of National Semiconductor.
ACQUISITION OF THE POWER DEVICE BUSINESS
In connection with the acquisition of the power device business, Fairchild
International allocated $34.0 million of the purchase price to in-process
research and development projects. This allocation represents the estimated fair
value based on risk-adjusted cash flows related to the incomplete products. At
the date of acquisition, the development of these projects had not yet reached
technological feasibility and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date.
Fairchild International's management assessed and allocated values to the
in-process research and development. The value assigned to these assets was
determined by identifying significant research projects for which technological
feasibility had not been established, including development, engineering and
testing activities associated with the introduction of the power device
business' next generation products. A discussion of the most significant
projects follows.
Smart Power Switch ("SPS"). This product line combines a Power Discrete
MOSFET and an analog IC in a single package to provide customers with low cost,
high functionality, high reliability and high productivity solutions. These
products are used in power chargers, and power supplies for PCs, TVs, VCRs and
monitors. Research and development is focused on cost reduction and further
reliability improvement of existing products. Long-term research and development
is focused on proprietary chip-on-chip assembly technology as well as developing
a one-chip solution.
Motor IC. This product line specializes in IC products that control various
motor drives. These products are used for driving motors in automotive, camera,
CD-ROM, CD player, floppy disk drive, hard disk drive and video recorder
applications. Current research and development is focused on adding more
channels as well as adding more intelligence/functionality onto the IC chips.
Integrated Gate Bipolar Transistor ("IGBT"). This product line uses a
proprietary silicon bonding process to fabricate devices for very high voltage
applications. Industrial segment applications include power supplies, welding
machines, robotics, ignition controls and battery chargers. Consumer segment
applications include lighting ballasts, camera strobes, induction heaters,
microwave ovens and washing machines. Research and development is focused on
developing IGBTs that will work with products that operate at higher frequency
ranges as well as higher voltages and higher currents.
The fair values assigned to each of the significant projects and estimated
time to complete are reported below. The estimated costs to complete for these
projects, which are estimated to be $4.7 million, are expected to be spent
evenly for the remainder of their respective development cycles.
Fair Man-Months
Product (In millions) Value to Complete
- ------------------------------------------------------------------------------
Smart Power Switch $ 13.9 57
Motor IC 8.2 131
IGBT 6.5 25
All Others 5.4 147
Total $ 34.0 360
- --------------------------------------------------------------------------
14
As of December 26, 1999 there were no significant changes from the original
estimates of time and cost to complete.
The material risks associated with the successful completion of the
in-process technology are associated with the power device business' ability to
successfully finish the creation of viable prototypes and successful design of
the chips and masks required. Fairchild International expects to benefit from
the in-process projects as the individual products that contain the in-process
technology are put into production and sold to end-users. The release dates for
each of the products within the product families are varied. The initial benefit
received from the significant in-process technologies occurred during the second
half of calendar year 1999.
The methodology used to assign value to purchased in-process research and
development was the income approach, which included an analysis of the markets,
cash flows, and risks associated with achieving such cash flows. Significant
assumptions that had to be made using this approach included revenue and
operating margin projections and determination of the applicable discount rate.
The forecast for the in-process project related products relied on sales
projections that were based on targeted market share and pricing estimates over
the expected product life cycles. In the model used to value the in-process
research and development projects, total projected revenues were expected to
exceed $200.0 million by 2003. Operating expenses for these products included
cost of goods sold and selling, general, and administrative expenses. Operating
expenses were estimated as a percentage of revenue, and were consistent with
historical results.
The forecasts used by Fairchild International in valuing in-process research
and development were based upon assumptions Fairchild International believes to
be reasonable but which are inherently uncertain and unpredictable. We cannot
assure you that the underlying assumptions used to estimate expected project
sales or profits, or the events associated with such projects, will transpire as
estimated. Fairchild International's assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances are likely to occur. For
these reasons, actual results may vary from the projected results.
The discount rate selected for power device business' in-process technology
was 20%. This discount rate is greater than Fairchild International's weighted
average cost of capital (approximately 15% at the date of acquisition of the
power device business) and reflects the risk premium associated with achieving
the forecasted cash flows associated with these projects. These risks include
the uncertainties in the economic estimates described above; the inherent
uncertainty surrounding the successful development of the purchased in-process
technology; the useful life of such technology; the profitability levels of such
technology; and the uncertainty of technological advances that are unknown at
this time.
As of December 26, 1999, revenues recognized from these projects were not
lower than the forecasted revenues and cash flows in the calculation of the
in-process research and development value.
ACQUISITION OF RAYTHEON
In connection with the acquisition of Raytheon, Fairchild International
allocated $15.5 million of the purchase price to in-process research and
development projects. This allocation represents the estimated fair value based
on risk-adjusted cash flows related to the incomplete products. At the date of
acquisition, the development of these projects had not yet reached technological
feasibility and the R&D in progress had no alternative future uses. Accordingly,
these costs were expensed as of the acquisition date.
Fairchild International's management assessed and allocated values to the
in-process research and development. The values assigned to each purchased R&D
project were determined by identifying significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of the
related products. The products associated with these projects include a broad
range of semiconductor products used in power management and video integrated
circuits, including personal computers, broadcast video and data communications.
The projects identified can be categorized in the analog or video product
families.
Analog Family. This family's strategy focuses on (i) a higher integration of
Ground Fault Interruptor chips and (ii) power for desktop personal computers,
notebook personal computers and cellular telephones. As of the acquisition date,
the remaining efforts for the projects to be completed included starting and
completing the beta testing phase of the development process, with a total
remaining cost to complete the testing of approximately $2.5 million, and
anticipated release dates by the end of Fiscal 1998.
Video Family. This family's in-process research and development was
identified in the following projects: (i) decoders and genlocks; (ii) digital
video encoders; and (iii) personal computer to television plug-n-play
converters. The remaining efforts for the projects to be completed included the
completion of the beta-testing phase of the development process for each
project. As of the acquisition date, remaining costs to complete were estimated
to be approximately $1.0 million for anticipated release dates by the end of
Fiscal 1998.
Decoders and Genlocks. These adaptive, combination based video decoders are
optimized for the video professional, allowing flexibility in system performance
while utilizing a common design approach. The genlocking analog to digital
converter is a companion product for both the new product decoders and encoders.
The products include analog, high-performance encoders which are in the beta
15
testing phase of development; a digital design, improved decoder for personal
computer and television applications which is in the alpha testing phase of
development; an improved genlocking digitizer which is in the design phase of
development; and an analog, genlocking decoder which is in the concept phase of
development.
Digital Video Encoders. The in-process product in this category is a digital
design video data processor, which is in the concept phase of development.
Personal Computer to Television Plug-N-Play Converter. The in-process
product in this category is an analog personal computer to television
plug-n-play converter, which is in the beta testing stage of development. This
product will be the next generation of the current offering with many
enhancements.
The material risks associated with the successful completion of the
in-process technology include Fairchild International's ability to successfully
finish the creation of viable prototypes, successful design of the chips and
masks required and the degree of the market's acceptance of these new products.
As of the acquisition date, Fairchild International expected to benefit from the
in-process projects as the individual products that contain the in-process
technology are put into production and sold to end-users. Significant positive
cash flows from these projects were expected to begin during 1999.
The methodology used to assign value to purchased in-process research and
development projects was the income approach, which includes an analysis of the
markets, cash flows, and risks associated with achieving such cash flows.
Significant assumptions that had to be made using this approach included
projected revenues, operating margins and determining an appropriate discount
rate. The forecast for the in-process project related products relied on sales
estimates that were based on targeted market share, pricing estimates and
expected product life cycles. In the model used to value the in-process research
and development projects, total projected revenues from these products were
expected to exceed $150.0 million by Fiscal 2002. Revenues were expected to peak
in Fiscal 2001 and decline thereafter as other new products and technologies
were expected to enter the market. Operating expenses for these products
included cost of goods sold and selling, general and administrative expenses.
Operating expenses were estimated as a percentage of revenues and were
consistent with historical results. The discount rate utilized for the acquired
in-process technologies was estimated at 22.5% in consideration of Fairchild
International's 15% weighted average cost of capital. The discount rate utilized
for the in-process technology was determined to be higher than Fairchild
International's weighted average cost of capital due to the fact that the
technology had not yet reached technological feasibility as of the date of
valuation.
As of December 26, 1999, total actual revenues in the analog and video
families on the in-process R&D projects were approximately 60% of total expected
revenues, impacting both analog and video products. The revenue shortfall in the
analog family and the associated reduction in expected cash flows was driven by
lower demand from personal computer customers. The revenue and cash flow
shortfall in the video family was driven by unfavorable market conditions which
began during Fiscal 1999. The weaker cash flows from these projects has not had,
nor is expected to have, any material adverse impact on the results of
operations of Fairchild International or its financial position, including the
recoverability of intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
Fairchild International has a borrowing capacity of $100.0 million for
working capital and general corporate purposes under the revolving credit
facility. No amount was drawn under the revolving credit facility at December
26, 1999.
The senior credit facilities, the 10 1/8% Senior Subordinated Notes and the
10 3/8% Senior Subordinated Notes do, and other debt instruments Fairchild
International may enter into in the future may, impose various restrictions and
covenants on Fairchild International which could potentially limit Fairchild
International's ability to respond to market conditions, to provide for
unanticipated capital investments or to take advantage of business
opportunities. The restrictive covenants include limitations on consolidations,
mergers and acquisitions, restrictions on creating liens, restrictions on paying
dividends or making other similar restricted payments, restrictions on asset
sales, limitations on borrowing money, and limitations on capital expenditures,
among other restrictions. The covenants relating to financial ratios include
minimum fixed charge and interest coverage ratios and a maximum leverage ratio.
The senior credit facilities also limit our ability to modify our certificate of
incorporation, bylaws, shareholder agreements, voting trusts or similar
arrangements. In addition, the senior credit facilities, the 10 1/8% Senior
Subordinated Notes and the 10 3/8% Senior Subordinated Notes contain additional
restrictions limiting the ability of our subsidiaries to make dividends or
advances to our company. However, our subsidiaries are permitted without
material restrictions under our debt instruments to make dividends or advances
to Fairchild Semiconductor Corporation. We believe that those funds permitted to
be transferred to us, together with existing cash, will be sufficient to meet
our cash obligations. Fairchild International expects that its existing cash and
available funds from its amended senior credit facilities and funds generated
from operations, will be sufficient to meet its anticipated operating
requirements and to fund its research and development and capital expenditures
for the next twelve months. We intend to invest approximately $240.0 million in
2000 to expand capacity at all of our major manufacturing fabs and assembly/test
centers. In the long-term, additional borrowing or equity investment may be
required to fund future acquisitions.
16
As of December 26, 1999, Fairchild International's cash and cash equivalents
balance was $138.7 million, an increase of $76.3 million from May 30, 1999.
During Stub Year 1999, Fairchild International's operations provided $115.7
million in cash compared to a use of $12.8 million of cash in the first seven
months of Fiscal 1999. The increase in cash provided by operating activities
reflects an increase in net income adjusted for non-cash items of $91.8 million
as well as an increase in cash flows from changes in operating assets and
liabilities of $36.7 million. Cash used in investing activities during Stub Year
1999 totaled $34.3 million, compared to a use of $25.2 million in the first
seven months of Fiscal 1999. The difference primarily relates to the refund of
Korean value added taxes paid as a result of the acquisition of the power device
business offset by increased capital expenditures in Stub Year 1999 as compared
to the first seven months of Fiscal 1999. Capital expenditures in Stub Year 1999
were made principally to add capacity in Fairchild International's assembly and
test manufacturing facilities, whereas in the first seven months of Fiscal 1999,
capital expenditures were made primarily to install Fairchild International's
enterprise software system. Cash used in financing activities of $5.1 million
for Stub Year 1999 includes proceeds received from Fairchild International's
initial public offering of its Class A Common Stock of $345.0 million, net of
fees and expenses. The net proceeds from the initial public offering were used
to repay an 11.74% Subordinated Note due 2008 ($101.4 million), to repay a 12.5%
Subordinated Note due 2008 ($53.0 million, including a prepayment penalty of
$0.8 million) and to repay the Tranche A term loan and partially repay the
Tranche B term loan, in each case under Fairchild International's senior credit
facilities, in the aggregate amount of $190.6 million. In addition, cash was
used for the repurchase of shares of our common stock. Cash provided by
financing activities of $34.7 million in the first seven months of Fiscal 1999
was due to proceeds received from Fairchild International's revolving credit
line.
LIQUIDITY AND CAPITAL RESOURCES OF FAIRCHILD INTERNATIONAL, EXCLUDING OUR
SUBSIDIARIES
Fairchild International is a holding company, the principal asset of which
is the stock of its subsidiary, Fairchild Semiconductor Corporation. Fairchild
International on a stand-alone basis had no cash flow from operations in Stub
Year 1999, nor in the first seven months of Fiscal 1999. Fairchild International
on a stand-alone basis has no cash requirements for the next twelve months.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Fairchild International is exposed to financial market risks, including
changes in interest rates and foreign currency exchange rates. To mitigate these
risks, Fairchild International utilizes derivative financial instruments.
Fairchild International does not use derivative financial instruments for
speculative or trading purposes. All of the potential changes noted below are
based on sensitivity analyses performed on Fairchild International's financial
position at December 26, 1999. Actual results may differ materially.
Fairchild International uses forward and option contracts to hedge firm
commitments and option contracts to hedge anticipated transactions. Gains and
losses on these foreign currency exposures would generally be offset by
corresponding losses and gains on the related hedging instruments, resulting in
negligible net exposure to Fairchild International.
A majority of Fairchild International's revenue, expense and capital
purchasing activities are transacted in U.S. dollars. However, Fairchild
International does conduct these activities by way of transactions denominated
in other currencies, primarily the Korean won, Malaysian ringgit, Philippine
peso, Japanese yen, British pound, and the Euro. Exposures in the Korean won are
minimal as won denominated revenues and costs generally offset one another. To
protect against reductions in value and the volatility of future cash flows
caused by changes in other foreign exchange rates, Fairchild International has
established hedging programs. We utilize currency forward contracts and currency
option contracts in these hedging programs. Fairchild International's hedging
programs reduce, but do not always entirely eliminate, the short-term impact of
foreign currency exchange rate movements. For example, during the twelve months
ended December 26, 1999, an adverse change in any one exchange rate (defined as
20%) over the course of the year would have resulted in an adverse impact on
income before taxes of less than $5.0 million.
Fairchild International has no interest rate exposure due to rate changes
for the 10 1/8% Senior Subordinated Notes or the 10 3/8% Senior Subordinated
Notes. However, Fairchild International does have interest rate exposure with
respect to the $118.6 million outstanding balance of its tranche B term loan due
to its variable LIBOR pricing. For example, a 50 basis point increase in
interest rates would result in increased annual interest expense of $0.6
million. From time to time, Fairchild International enters into interest rate
swaps or interest rate caps, primarily to reduce its interest rate exposure. As
of December 26, 1999, Fairchild International had no such instruments in place.
NATIONAL SEMICONDUCTOR RELATIONSHIP
Fairchild International and National Semiconductor have arrangements
relating to services and sale of Fairchild International's products as follows:
First, National Semiconductor has agreed to purchase products and services from
Fairchild International until June 11, 2000 under a foundry services agreement.
Second, National Semiconductor has agreed to provide administrative services to
Fairchild International under a transition services agreement. Third, National
Semiconductor has agreed to indemnify Fairchild International against losses
relating to infringement of intellectual property rights of third parties under
a technology licensing and transfer agreement.
National Semiconductor, under the terms of the Asset Purchase Agreement with
Fairchild International, is obligated to purchase an aggregate of $330.0 million
of contract manufacturing services during the 39-month period which began March
11, 1997, including a
17
minimum of $80.0 million of contract manufacturing services for the twelve
months ended May 28, 2000. In addition, National Semiconductor is obligated to
cover a contractually agreed-upon amount of fixed costs in Fairchild
International's 6-inch wafer fabrication plant in South Portland, Maine for the
twelve months ended May 28, 2000. In the event National Semiconductor does not
purchase $80.0 million of contract manufacturing services for the twelve months
ended May 28, 2000, the Asset Purchase Agreement requires National Semiconductor
to reimburse Fairchild International for unabsorbed fixed costs and lost profit
on the revenue shortfall.
FORWARD-LOOKING STATEMENTS
This annual report includes "forward-looking statements" as that term is
defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimates," "anticipates," or "hopeful," or the negative of
those terms or other comparable terminology, or by discussions of strategy,
plans or intentions. For example, the Outlook section below contains numerous
forward-looking statements. All forward-looking statements in this annual report
are made based on management's current expectations and estimates, which involve
risks and uncertainties, including those described in the following paragraph.
Among these factors are the following: changes in overall economic conditions;
changes in demand for our products; changes in inventories at our customers and
distributors; technological and product development risks; availability of
manufacturing capacity; availability of raw materials; competitors' actions;
loss of key customers; order cancellations or reduced bookings; changes in
manufacturing yields or output; significant litigation; and the impact on the
company's business due to internal systems or systems of suppliers and other
third parties adversely affected by year 2000 problems. Other factors that may
affect the company's future operating results are described in Fairchild
International's annual report on Form 10-K, under the Risk Factors caption in
the Business section. Such risks and uncertainties could cause actual results to
be materially different than those in forward-looking statements. Readers are
cautioned not to place undue reliance on the forward-looking statements in this
annual report. Fairchild International assumes no obligation to update such
information.
OUTLOOK
Market conditions have been generally improving since the third quarter of
Fiscal 1999. Strong bookings and demand throughout the historically slower
summer season continued throughout Stub Year 1999, which ended December 26,
1999. A portion of the bookings increase seen during Stub Year 1999 has occurred
as industry-wide leadtimes have extended and customers have committed their
backlog for a longer period of time. Going forward, Fairchild International
expects sequential bookings increases to return to more normal seasonal
patterns. Further significant lengthening of leadtimes is not anticipated. The
Semiconductor Industry Association forecasts calendar year 2000 industry sales
growth of 14-22% compared to calendar year 1999 for our targeted investment
areas in the power transistor, voltage regulator/reference generator and
interface markets. Fairchild International expects its revenue growth in these
focused areas to be at least at market growth rates. Fairchild International
believes that industry-wide demand is meeting supply in many product areas,
leading to some price firming during the second half of Stub Year 1999. If
tightening market trends continue, Fairchild International management expects
that prices will continue to stabilize or rise slowly through the first half of
calendar year 2000. Fairchild International expects that margins will continue
to improve slowly as a result of these price increases, better new product mix,
manufacturing cost reductions and better overhead spreading. Potential factors
that may preclude us from realizing any or all of these expectations include,
but are not limited to, softening of industry-wide demand, renewed industry-wide
price competition, failure to execute new product development plans and failure
to execute capacity expansion plans.
YEAR 2000 COMPLIANCE
In the fourth quarter of Fiscal 1997, Fairchild International commenced its
enterprise software system implementation project for the purpose of separating
from National Semiconductor's business systems. The system, which became
operational for several of Fairchild International's critical business processes
in the first half of Fiscal 1999, is year 2000 compliant. Additional modules of
the system are scheduled to be implemented through Fiscal 2000. For those legacy
systems that were not converted by December 31, 1999, year 2000 remediation
projects were completed in October 1999. Fairchild International's business is
dependent upon its information systems as an integral part of all major business
processes. Additionally, internal resources had been redeployed to identify,
test and correct year 2000 problems in other systems throughout Fairchild
International, including those systems embedded in Fairchild International's
machinery and equipment. Identification of systems and equipment that are not
year 2000 compliant and remediation projects to correct identified problems have
been completed. Fairchild International also reviewed the year 2000 readiness
and compliance of its principal suppliers of products and services, in order to
identify and assess any negative impacts that such non-compliances could have on
Fairchild International. In addition, Fairchild International worked with its
customers to identify potential year 2000 issues with its products. The company
has completed its assessments. Fairchild International does not believe there
are any year 2000 problems with its products. No year 2000 issues were noted
with its key suppliers which in Fairchild International's opinion would cause a
major disruption to its operations. In Stub Year 1999 and in the first seven
months of Fiscal 1999, incremental amounts incurred and charged to expense to
identify, test and correct such other year 2000 problems were immaterial to the
financial statements. Future
18
incremental expenditures are currently estimated to be less than $0.1 million.
Although we believe Fairchild International's systems are year 2000 compliant,
the failure of Fairchild International's suppliers and customers to address the
year 2000 issue could result in disruption to Fairchild International's
operations and have a significant adverse impact on its results of operations,
the extent of which Fairchild International has not yet estimated. Fairchild
International has completed the preparation of contingency plans. These plans
cover manufacturing equipment, information services and facilities. In addition,
contingency plans have been prepared in the event that key suppliers fail to
become year 2000 compliant. For example, for key materials which are imported
from outside the U.S., arrangements were made to insure at least four weeks of
available supply. Fairchild International, in the ordinary course of business,
seeks to expand its customer base to lessen dependence on any one customer for a
significant portion of its revenues, and seeks second sources of supply for its
key products and services where appropriate.
As of the date of this Annual Report, Fairchild International has not
experienced any significant year 2000 problems with its internal systems or
equipment, nor has Fairchild International detected any significant year 2000
problems affecting its customers or suppliers.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In Fiscal 1999, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivatives and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
Fairchild International intends to adopt SFAS No. 133 in 2001. Fairchild
International is presently analyzing SFAS No. 133, and has not yet determined
its impact on Fairchild International's consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
December 26, May 30,
(In millions, except share data) 1999 1999
- -------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 138.7 $ 62.4
Accounts receivable, net of allowances of $13.7 and $9.2
at December 26, 1999 and May 30, 1999, respectively 140.3 129.7
Inventories 166.3 148.6
Other current assets 13.7 65.7
- -------------------------------------------------------------------------------------------------------------
Total current assets 459.0 406.4
Property, plant and equipment, net 375.8 360.2
Deferred income taxes, net 3.8 2.8
Intangible assets, net of accumulated amortization of $29.4 and $9.9
at December 26, 1999 and May 30, 1999, respectively 261.4 278.5
Other assets 37.6 47.8
Total assets $ 1,137.6 $ 1,095.7
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 1.4 $ 14.1
Accounts payable 109.3 99.6
Accrued expenses and other current liabilities 96.0 85.0
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 206.7 198.7
Long-term debt, less current portion 717.2 1,045.9
Other liabilities 0.5 1.4
Total liabilities 924.4 1,246.0
- -------------------------------------------------------------------------------------------------------------
Redeemable preferred stock -- 12% Series A Cumulative Compounding
Preferred Stock, $.01 par value, $1,000 stated value; 70,000 shares
19
authorized, issued and outstanding at May 30, 1999 -- 90.1
Commitments and contingencies
Stockholders' equity (deficit):
Class A Common Stock, $.01 par value, voting; 110,000,000 shares
authorized, 60,393,769 and 29,591,440 shares issued and
outstanding at December 26, 1999 and May 30, 1999, respectively 0.6 0.3
Class B Common Stock, $.01 par value, nonvoting;
110,000,000 shares authorized, 28,396,000 and 33,376,000 shares
issued and outstanding at December 26, 1999 and May 30, 1999, respectively 0.3 0.3
Additional paid-in capital 449.5 9.6
Accumulated deficit (231.3) (250.6)
Less treasury stock (at cost) (5.9) --
Total stockholders' equity (deficit) 213.2 (240.4)
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 1,137.6 $ 1,095.7
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
Seven
Months Ended Year Ended
- ---------------------------------------------------------------------------------------------------------------------------------
December 26, May 30, May 31, May 25,
(In millions, except per share data) 1999 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Revenue:
Net sales -- trade $714.0 $ 654.1 $635.8 $587.8
Contract manufacturing 72.2 81.0 153.4 104.2
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue 786.2 735.1 789.2 692.0
Operating expenses:
Cost of sales -- trade 499.9 518.4 441.6 442.1
Cost of contract manufacturing 51.4 64.4 117.1 97.4
Research and development 35.0 39.3 35.7 18.9
Selling, general and administrative 117.4 105.1 92.0 96.4
Purchased in-process research and development -- 34.0 15.5 --
Restructuring and impairments -- 21.3 -- 5.3
Total operating expenses 703.7 782.5 701.9 660.1
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 82.5 (47.4) 87.3 31.9
Interest expense, net 56.2 71.8 54.5 11.2
Other expense, net -- -- -- 1.4
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 26.3 (119.2) 32.8 19.3
Provision (benefit) for income taxes 5.0 (5.1) 10.7 3.8
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle 21.3 (114.1) 22.1 15.5
Cumulative effect of change in accounting principle,
net of tax effect of $0.8 million -- -- (1.5) --
Net income (loss) $ 21.3 $(114.1) $ 20.6 $ 15.5
Net income (loss) applicable to common stockholders $ 19.3 $(123.9) $ 11.9 $ 13.7
- ---------------------------------------------------------------------------------------------------------------------------------
20
Basic earnings (loss) per common share:
Income before cumulative effect of
change in accounting principle $ 0.24 $ (1.97) $ 0.21
Cumulative effect of change
in accounting principle -- -- (0.02)
$ 0.24 $ (1.97) $ 0.19
- ---------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share:
Income before cumulative effect of
change in accounting principle $ 0.23 $ (1.97) $ 0.20
Cumulative effect of change
in accounting principle -- -- (0.02)
$ 0.23 $ (1.97) $ 0.18
- ---------------------------------------------------------------------------------------------------------------------
Weighted average common shares:
Basic 80.0 62.9 62.8
Diluted 83.7 62.9 65.0
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
Seven
Months Ended Year Ended
- ----------------------------------------------------------------------------------------------------------------------------------
December 26, May 30, May 31,
(In millions) 1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 21.3 $(114.1) $ 20.6
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Amortization of deferred compensation 1.4 0.1 0.2
Cumulative effect of change in accounting principle, net -- -- 1.5
Restructuring, net of cash expended -- 17.3 --
Depreciation and amortization 80.9 103.7 84.6
Loss on disposal of fixed assets 0.2 0.3 0.9
Non-cash interest expense 13.7 19.8 12.5
Purchased in-process research and development -- 34.0 15.5
Deferred income taxes 1.0 (2.4) (0.4)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (10.6) (53.2) 18.6
Inventories (19.9) 8.5 (21.3)
Other current assets 3.7 2.3 (1.6)
Accounts payable 15.1 21.4 (6.5)
Accrued expenses and other current liabilities 11.0 12.5 13.7
Other assets and liabilities, net (2.1) (6.1) (2.2)
Cash provided by operating activities 115.7 44.1 136.1
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (74.8) (46.2) (78.0)
Proceeds from sale of property, plant and equipment 0.9 31.2 --
Purchase of molds and tooling (1.3) (3.8) (5.7)
Refund (payment) of value added tax paid in connection with acquisition 40.9 (40.9) --
Acquisitions, net of cash acquired -- (414.9) (116.8)
Cash used in investing activities (34.3) (474.6) (200.5)
- ----------------------------------------------------------------------------------------------------------------------------------
21
Cash flows from financing activities:
Repayment of long-term debt (345.8) (151.3) (58.7)
Issuance of long-term debt -- 660.0 90.0
Proceeds from issuance of common stock, net 345.0 -- --
Purchase of treasury stock (5.9) -- --
Proceeds from exercise of stock options 1.6 -- --
Debt issuance costs -- (22.3) (1.1)
Cash provided by (used in) financing activities (5.1) 486.4 30.2
- ----------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 76.3 55.9 (34.2)
Cash and cash equivalents at beginning of period 62.4 6.5 40.7
Cash and cash equivalents at end of period $138.7 $ 62.4 $ 6.5
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes $ 1.8 $ -- $ 8.9
Interest $ 42.1 $ 46.6 $ 43.8
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
Common Stock
Class A Class B Additional
Class A Class B Par Par Paid-In
(In millions) Shares Shares Value Value Capital
- ----------------------------------------------------------------------------------------------------
Balances at May 26, 1996 -- -- $ -- $ -- $ --
Revenues less expenses -- -- -- -- --
Net intercompany activity -- -- -- -- --
- ----------------------------------------------------------------------------------------------------
Balances at March 10, 1997 -- -- -- -- --
Recapitalization of Business -- -- -- -- --
Distribution to National
Semiconductor by Fairchild -- -- -- -- --
PIK Note issued as additional
purchase consideration for
the stock of Fairchild -- -- -- -- --
Issuance of common stock 28.8 33.6 0.1 0.1 7.6
Net income -- -- -- -- --
Dividends on redeemable
preferred stock -- -- -- -- --
- ----------------------------------------------------------------------------------------------------
Balances at May 25, 1997 28.8 33.6 0.1 0.1 7.6
Net income -- -- -- -- --
Dividends on redeemable
preferred stock -- -- -- -- --
Adjustment to business
equity assumed -- -- -- -- --
Issuance of common stock 0.4 -- -- -- --
Common stock split issued in the
form of a stock dividend (4-1) -- -- 0.2 0.2 (0.4)
Deferred compensation related
to the grant of stock options -- -- -- -- 0.2
Tax benefit from compensation
related to lifting of restrictions
on common stock owned by
management investors -- -- -- -- 2.1
- ----------------------------------------------------------------------------------------------------
Total
Treasury Stockholders'
Accumulated Stock Business Equity
(In millions) Deficit (At Cost) Equity (Deficit)
- -------------------------------------------------------------------------------------------
Balances at May 26, 1996 $ -- $ -- $349.2 $349.2
Revenues less expenses -- -- 9.6 9.6
Net intercompany activity -- -- (25.4) (25.4)
- -------------------------------------------------------------------------------------------
Balances at March 10, 1997 -- -- 333.4 333.4
Recapitalization of Business 333.4 -- (333.4) --
Distribution to National
Semiconductor by Fairchild (401.6) -- -- (401.6)
PIK Note issued as additional
purchase consideration for
the stock of Fairchild (77.0) -- -- (77.0)
Issuance of common stock -- -- -- 7.8
Net income 5.9 -- -- 5.9
Dividends on redeemable
preferred stock (1.8) -- -- (1.8)
- -------------------------------------------------------------------------------------------
Balances at May 25, 1997 (141.1) -- -- (133.3)
Net income 20.6 -- -- 20.6
Dividends on redeemable
preferred stock (8.6) -- -- (8.6)
Adjustment to business
equity assumed 2.4 -- -- 2.4
Issuance of common stock -- -- -- --
Common stock split issued in the
form of a stock dividend (4-1) -- -- -- --
Deferred compensation related
to the grant of stock options -- -- -- 0.2
Tax benefit from compensation
related to lifting of restrictions
on common stock owned by
management investors -- -- -- 2.1
- -------------------------------------------------------------------------------------------
22
Balances at May 31, 1998 29.2 33.6 0.3 0.3 9.5
Net loss -- -- -- -- --
Dividends on redeemable
preferred stock -- -- -- -- --
Issuance of common stock 0.2 -- -- -- --
Conversion of common stock 0.2 (0.2) -- -- --
Deferred compensation related
to the grant of stock options -- -- -- -- 0.1
- ----------------------------------------------------------------------------------------------------
Balances at May 30, 1999 29.6 33.4 0.3 0.3 9.6
Net income -- -- -- -- --
Dividends on redeemable
preferred stock -- -- -- -- --
Conversion of redeemable
preferred stock 5.3 -- 0.1 -- 92.1
Exercise of stock options 0.8 -- -- -- 1.6
Issuance of common stock
in initial public offering 20.0 -- 0.2 -- 344.8
Conversion of common stock 5.0 (5.0) -- -- --
Deferred compensation related
to the grant of stock options -- -- -- -- 1.4
Purchase of treasury stock (0.3) -- -- -- --
Balances at December 26, 1999 60.4 28.4 $ 0.6 $ 0.3 $449.5
- ----------------------------------------------------------------------------------------------------
Balances at May 31, 1998 (126.7) -- -- (116.6)
Net loss (114.1) -- -- (114.1)
Dividends on redeemable
preferred stock (9.8) -- -- (9.8)
Issuance of common stock -- -- -- --
Conversion of common stock -- -- -- --
Deferred compensation related
to the grant of stock options -- -- -- 0.1
- ----------------------------------------------------------------------------------------------
Balances at May 30, 1999 (250.6) -- -- (240.4)
Net income 21.3 -- -- 21.3
Dividends on redeemable
preferred stock (2.0) -- -- (2.0)
Conversion of redeemable
preferred stock -- -- -- 92.2
Exercise of stock options -- -- -- 1.6
Issuance of common stock
in initial public offering -- -- -- 345.0
Conversion of common stock -- -- -- --
Deferred compensation related
to the grant of stock options -- -- -- 1.4
Purchase of treasury stock -- (5.9) -- (5.9)
Balances at December 26, 1999 $(231.3) $ (5.9) $ -- $213.2
- ----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Fairchild Semiconductor International, Inc. ("Fairchild International" or
the "Company"), formerly known as FSC Semiconductor Corporation, was
incorporated on March 10, 1997 by National Semiconductor Corporation ("National
Semiconductor" or "National"). On March 11, 1997, National Semiconductor
consummated an Agreement and Plan of Recapitalization ("Recapitalization"). As
part of the Recapitalization, National Semiconductor transferred all of the
capital stock of Fairchild Semiconductor Corporation ("Fairchild") and
approximately $12.8 million in cash to Fairchild International in exchange for
shares of Fairchild International's 12% Series A Cumulative Compounding
Preferred Stock, Fairchild International's common stock and a promissory note in
the principal amount of approximately $77.0 million.
In addition, National Semiconductor transferred substantially all of the
assets and liabilities of the Fairchild Semiconductor Business (the "Business")
to Fairchild International. The Business was defined as the logic, discrete and
memory divisions of National Semiconductor. The Recapitalization was accounted
for as a leveraged recapitalization, whereby Fairchild International assumed the
historical operating results of the Business. Fairchild International is a
leading global designer, developer and manufacturer of high performance
multi-market semiconductors. Fairchild International's interface and logic,
discrete, non-volatile memory and analog and mixed signal products are the
building block components for virtually all electronic devices, from
sophisticated computers to household appliances. The Company is headquartered in
South Portland, Maine, and has manufacturing operations in South Portland,
Maine, West Jordan, Utah, Cebu, the Philippines, Penang, Malaysia and Puchon,
South Korea.
On December 31, 1998, Fairchild acquired Raytheon Semiconductor Inc.
("Raytheon"). On April 13, 1999, Fairchild acquired the Power Device Business of
Samsung Electronics (the "power device business"). (See Note 17)
BASIS OF PRESENTATION
The consolidated financial statements as of December 26, 1999 and May 30,
1999, and for the seven months ended December 26, 1999, the fiscal years ended
May 30, 1999 and May 31, 1998 and for the period from March 11, 1997 through May
25, 1997, include the accounts and operations of the Company and its
wholly-owned subsidiaries.
Prior to March 11, 1997, the combined balance sheets included the assets and
liabilities that were directly related to the Business as they were operated
within National Semiconductor. These balance sheets did not include National
Semiconductor's corporate assets or liabilities not specifically identifiable to
Fairchild. National Semiconductor performed cash management on a
23
centralized basis and processed related receivables and certain payables,
payroll and other activity for Fairchild. These systems did not track
receivables, liabilities and cash receipts and payments on a business specific
basis. Accordingly, it was not practical to determine certain assets and
liabilities associated with the Business. Given these constraints, certain
supplemental cash flow information is presented in lieu of a statement of cash
flows for the year ended May 25, 1997. (See Note 16) The cash flows may have
been significantly different if not for the centralized cash management system
of National Semiconductor.
Prior to March 11, 1997, the combined statements of operations included all
revenues and costs attributable to the Business including an allocation of the
costs of shared facilities and overhead of National Semiconductor. In addition,
certain costs incurred at Fairchild plants for the benefit of other National
Semiconductor product lines were allocated from Fairchild to National
Semiconductor. All of the allocations and estimates in the combined statements
of operations were based on assumptions that management believes were reasonable
under the circumstances. However, these allocations and estimates are not
necessarily indicative of the costs that would have resulted if the Business had
been operated on a stand-alone basis.
Transactions with National Semiconductor have been identified in the
consolidated financial statements as transactions between related parties to the
extent practicable. (See Note 12)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company changed its fiscal year end from the last Sunday in May to the
last Sunday in December. The Company's results for the seven months ended
December 26, 1999 (Stub Year 1999) and for the fiscal years ended May 30, 1999
(Fiscal 1999), May 31, 1998 (Fiscal 1998) and May 25, 1997 (Fiscal 1997) consist
of 30 weeks, 52 weeks, 53 weeks, and 52 weeks, respectively.
Principles of Consolidation
Commencing with the Recapitalization, the consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
Revenue from the sale of semiconductor products is recognized when shipped,
with a provision for estimated returns and allowances recorded at the time of
shipment. Contract manufacturing revenues are recognized upon completion of the
contracted services.
RESEARCH AND DEVELOPMENT COSTS
The Company's research and development expenditures are charged to expense
as incurred.
RELATED PARTY ACTIVITY
In conjunction with the Recapitalization, Fairchild International and
National Semiconductor executed several agreements, which govern the performance
of manufacturing services by Fairchild International on behalf of National
Semiconductor and by National Semiconductor on behalf of Fairchild
International. In addition, National Semiconductor provided a number of business
support services to Fairchild International through May 30, 1999.
Prior to the Recapitalization, the Business performed contract manufacturing
services for National Semiconductor. The revenues for these services are
reflected at cost in the accompanying consolidated statements of operations.
Manufacturing costs were generally apportioned between National
Semiconductor and the Business' product lines based upon budgeted and actual
factory production loading. Certain manufacturing costs (e.g., material costs)
that were specifically identifiable with a particular product line were charged
or credited directly without apportionment.
National Semiconductor also performed manufacturing services for the
Business and incurred other elements of cost of sales on behalf of the Business,
including freight, duty, warehousing, and purchased manufacturing services from
third-party vendors.
Shared or common costs, including certain general and administrative, sales
and marketing, and research and development expenses, have been allocated from
National Semiconductor's corporate office, selling and marketing locations, and
manufacturing sites to the Business or from the Business' plants to National
Semiconductor product lines on a basis which is considered to fairly and
reasonably reflect the utilization of the services provided to, or benefit
obtained by, the business receiving the charge. National Semiconductor had net
interest income on a consolidated basis for all periods presented prior to the
Recapitalization. Although not material, these amounts have been allocated to
the Business prior to the Recapitalization on the basis of net assets and are
included in other expense, net. (See Note 12)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market.
PROPERTY, PLANT AND EQUIPMENT
24
Property, plant and equipment is recorded at cost and is generally
depreciated based upon the following estimated useful lives: buildings and
improvements, ten to thirty years, and machinery and equipment, three to ten
years. Depreciation is principally provided under the straight-line method.
INTANGIBLE ASSETS
Intangible assets were recorded as part of the Raytheon and power device
business acquisitions and are amortized by the use of the straight-line method
over their estimated lives, which are generally three to fifteen years. (See
Notes 3 and 17)
OTHER ASSETS
Other assets include deferred financing costs which represent costs incurred
related to the issuance of the Company's long-term debt. The costs are being
amortized using the effective interest method over the related term of the
borrowings, which ranges from five to ten years, and are included in interest
expense. Also included in other assets are mold and tooling costs. Molds and
tools are amortized over their expected useful lives, generally one to three
years.
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 Stub Year 1999, Fiscal 1999, Fiscal 1998, and Fiscal 1997 except as
discussed in Note 11.
CURRENCIES
The Company's functional currency for all operations worldwide is the U.S.
dollar. Accordingly, gains and losses from translation of foreign currency
financial statements are included in current results. In addition, cash
conversion of foreign currency and foreign currency transactions are included in
current results.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company utilizes various off-balance sheet financial instruments to
manage market risks associated with the fluctuations in certain interest rates
and foreign currency exchange rates. It is the Company's policy to use
derivative financial instruments to protect against market risk arising from the
normal course of business. Gains and losses on financial instruments that are
intended to hedge an identifiable firm commitment are deferred and included in
the measurement of the underlying transaction. Gains and losses on hedges of
anticipated transactions are deferred until such time as the underlying
transactions are recognized or immediately when the transaction is no longer
expected to occur. The criteria the Company uses for designating an instrument
as a hedge include the instrument's effectiveness in risk reduction and
one-to-one matching of derivative instruments to underlying transactions. In
addition, the Company uses forward and option contracts to hedge certain
non-U.S. denominated asset and liability positions. Gains and losses on these
contracts are matched with the underlying gains and losses resulting from
currency movement on these balance sheet positions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable and
payable, and accrued liabilities approximate fair value due to the short-term
maturities of these assets and liabilities. Fair values of long-term debt,
interest rate swaps and caps, currency forward contracts and currency options
are based on quoted market prices or pricing models using prevailing financial
market information at the date of measurement.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INCOME TAXES
Prior to the Recapitalization, the Business did not file separate income tax
returns but rather was included in the income tax returns filed by National
Semiconductor and its subsidiaries in various domestic and foreign
jurisdictions. Therefore, no provision for income taxes has been recorded in the
accompanying consolidated financial statements for the period from May 27, 1996
through March 10, 1997. Upon the Recapitalization, the Company became
responsible for its income taxes and, therefore, the provision for income taxes
included in the accompanying 1997 statement of operations is for the period from
March 11, 1997 through May 25, 1997.
25
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is presented for the seven months ended
December 26, 1999 and for the years ended May 30, 1999 and May 31, 1998 only
because it is not meaningful for earlier years since the Company did not have
common stock outstanding for the entire period during any earlier year.
Basic income (loss) per share was computed by dividing net income (loss)
applicable to common stockholders by the weighted average shares of common stock
outstanding. Diluted income (loss) per share also gives effect to all dilutive
potential common shares outstanding, consisting solely of outstanding stock
options.
The following table reconciles net income (loss) to net income (loss)
applicable to common stockholders, and basic to diluted weighted average shares
outstanding:
Seven Months
Ended Year Ended
- ------------------------------------------------------------------------
December 26, May 30, May 31,
(In millions) 1999 1999 1998
- ------------------------------------------------------------------------
Basic weighted average
common shares outstanding 80.0 62.9 62.8
Net effect of dilutive stock
options based on the treasury
stock method using
the average market price 3.7 -- 2.2
- ------------------------------------------------------------------------
Diluted weighted average
common shares outstanding 83.7 62.9 65.0
- ------------------------------------------------------------------------
Net income (loss) $ 21.3 $(114.1) $ 20.6
Dividends on redeemable
preferred stock 2.0 9.8 8.7
- ------------------------------------------------------------------------
Net income (loss) applicable
to common stockholders $ 19.3 $(123.9) $ 11.9
- ------------------------------------------------------------------------
Options to purchase 82,435, 4,282,570 and 750,000 shares of common stock
were outstanding at December 26, 1999, May 30, 1999 and May 31, 1998,
respectively, but were not included in the computation of diluted earnings per
share because the effect of including such options would have been
anti-dilutive.
EMPLOYEE STOCK PLAN
The Company accounts for its stock option plan in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. The Company provides the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation."
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the
current year presentation.
26
NOTE 3 -- FINANCIAL STATEMENT DETAILS
December 26, May 30,
(In millions) 1999 1999
- ----------------------------------------------------------------------------
Inventories
Raw materials $ 17.1 $ 13.6
Work in process 99.3 93.1
Finished goods 49.9 41.9
$ 166.3 $ 148.6
- ----------------------------------------------------------------------------
Other current assets
Refundable payment of value
added tax associated
with acquisition $ -- $ 40.9
Non-trade receivable from
manufacturing subcontractor -- 4.5
Deferred income taxes 5.6 7.6
Prepaid and other current assets 8.1 12.7
$ 13.7 $ 65.7
- ----------------------------------------------------------------------------
Property, plant and equipment
Land $ 19.0 $ 19.0
Buildings and improvements 178.2 177.0
Machinery and equipment 704.9 681.7
Construction in progress 49.3 18.1
- ----------------------------------------------------------------------------
Total property, plant and equipment 951.4 895.8
Less accumulated depreciation 575.6 535.6
$ 375.8 $ 360.2
- ----------------------------------------------------------------------------
Period of
Amortization
- ------------------------------------------------------------------------------
Intangible assets
Developed technology 15 years $171.0 $169.7
Customer base 8 years 54.4 53.9
Covenant not to compete 5 years 31.0 30.8
Trademarks and tradenames 4 years 25.3 25.1
Assembled workforce 3 years 9.1 8.9
- ------------------------------------------------------------------------------
Total intangible assets 290.8 288.4
Less accumulated
amortization (29.4) (9.9)
$261.4 $278.5
- ------------------------------------------------------------------------------
Accrued expenses
Payroll and employee
related accruals $ 44.4 $ 29.3
Accrued interest 17.1 13.5
Restructuring and
related allowances 2.6 12.5
Income taxes payable 2.3 0.3
Other 29.6 29.4
$ 96.0 $ 85.0
- ------------------------------------------------------------------------------
27
NOTE 4 -- LONG-TERM DEBT
Long-term debt consists of the following at:
December 26, May 30,
(In millions) 1999 1999
- ------------------------------------------------------------------------------
Term loans payable:
Tranche A $ -- $ 100.0
Tranche B 118.6 210.0
Senior subordinated notes payable 600.0 600.0
PIK note payable -- 99.2
CMP note payable -- 50.8
- ------------------------------------------------------------------------------
Total long-term debt 718.6 1,060.0
Less current portion 1.4 14.1
Long-term portion $ 717.2 $1,045.9
- ------------------------------------------------------------------------------
On April 14, 1999 the Company entered into a Senior Credit Facilities
Agreement ("Credit Agreement") with a syndicate of financial institutions in
order to refinance an existing credit agreement and finance the acquisition of
the power device business. (See Note 17) Borrowings under the Credit Agreement
are segregated into two tranches: $100.0 million Tranche A Term Loans and $210.0
million Tranche B Term Loans. The Tranche A Term Loans were scheduled to mature
on March 31, 2004, and were paid in full on August 9, 1999, with proceeds
obtained from the Company's initial public offering ("IPO"). The Company also
repaid approximately $90.6 million of the Tranche B Term Loans with the IPO
proceeds. The Tranche B Term Loans are scheduled to mature on December 15, 2004,
and are subject to quarterly principal payments ranging from $0.3 million to
$0.4 million commencing September 30, 1999 and ending September 30, 2004 with a
final principal payment of $112.5 million due December 15, 2004. The Credit
Agreement also includes a Revolving Credit Facility of $100.0 million. The
Revolving Credit Facility is scheduled to mature on March 31, 2004. No amounts
were outstanding under the Revolving Credit Facility at December 26, 1999 or May
30, 1999.
Borrowings under the Credit Agreement accrue interest based on either the
bank's base rate or the Eurodollar rate, at the option of the Company. The
interest rate was 8.4% and 8.2% for the Tranche B term loan at December 26, 1999
and May 30, 1999, respectively, and 7.7% for the Tranche A term loan at May 30,
1999. Fairchild pays a commitment fee of 0.5% per annum of the unutilized
commitments under the Revolving Credit Agreement. Borrowings are secured by
substantially all assets of Fairchild.
On April 7, 1999, Fairchild issued $300.0 million of 10 3/8% Senior
Subordinated Notes (the "10 3/8% Notes") at face value. The 10 3/8% Notes pay
interest on April 1 and October 1 of each year commencing October 1, 1999 and
are due October 1, 2007. The 10 3/8% Notes are unsecured and are subordinated to
all existing and future senior indebtedness of Fairchild. Until April 1, 2002,
Fairchild can redeem an amount not to exceed 35% of the 10 3/8% Notes with
proceeds raised from certain public equity offerings. On or after April 1, 2003,
the 10 3/8% Notes are redeemable by Fairchild, in whole or in part, at
redemption prices ranging from 100% to approximately 105% of the principal
amount.
On March 11, 1997, Fairchild issued $300.0 million of 10 1/8% Senior
Subordinated Notes (the "10 1/8% Notes" and, together with the 10 3/8% Notes,
the "Notes") at face value. The 10 1/8% Notes pay interest on March 15 and
September 15 of each year commencing September 15, 1997. The 10 1/8% Notes
are unsecured and are subordinated to all existing and future senior
indebtedness of Fairchild. The 10 1/8% Notes are redeemable by Fairchild, in
whole or in part, on or after March 15, 2002 at redemption prices ranging from
100% to approximately 105% of the principal amount. Fairchild is required to
redeem $150.0 million principal amount of 10 1/8% Notes on March 15, 2005 and
$75.0 million principal amount of 10 1/8% Notes on March 15, 2006 and 2007,
respectively, in each case at a redemption price of 100% of the principal amount
plus accrued interest to the date of redemption.
The payment of principal and interest on the Credit Agreement and the Notes
is fully and unconditionally guaranteed by Fairchild International. Fairchild
International is the parent company of Fairchild and currently conducts no
business and has no significant assets other than the capital stock of Fairchild
and certain deferred tax assets related to interest on its debt. Fairchild has
eleven direct subsidiaries and one indirect subsidiary, of which only one direct
subsidiary, Fairchild Semiconductor Corporation of California ("Fairchild
California"), is a guarantor on the Credit Agreement and the Notes. The
remaining direct and indirect subsidiaries are foreign-based and do not
guarantee either the Credit Agreement or the Notes.
On April 13, 1999, in connection with the acquisition of the power device
business, the Company entered into a Subordinated Credit Agreement with Citicorp
Mezzanine Partners, L.P. ("CMP Note") in the principal amount of $50.0 million.
The CMP Note bears interest at 12.5% per annum and matures on April 13, 2008. If
the Company voluntarily prepays any or all of the loan, the interest rate on the
amount prepaid is increased to 18% per annum retroactive to April 13, 1999. On
August 9, 1999, the Company prepaid the CMP Note, plus accrued interest, with
proceeds from its IPO. As this was considered a voluntary prepayment, interest
on the CMP Note was paid at a rate of 18% per annum. In connection with the
issuance of the CMP Note, Fairchild International issued a warrant for the
purchase of
28
3,538,228 shares of common stock of Fairchild International at an exercise price
of $0.01 per share. As a result of this repayment, this warrant became
unexerciseable.
On March 11, 1997, the Company issued a promissory note ("PIK Note") in the
principal amount of approximately $77.0 million to National Semiconductor as
part of the consideration for all of the capital stock of Fairchild. The PIK
Note bears interest at 11.74% per annum and matures in 2008. On August 9, 1999,
the Company paid in full the PIK Note plus accrued interest.
The Credit Agreement and the indenture under which the Notes were issued
contain certain restrictive financial and operating covenants, including
limitations on stock repurchases and prohibitions on the payment of dividends,
with which the Company was in compliance at December 26, 1999.
Aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows:
(In millions)
2000 $ 1.4
2001 1.2
2002 1.2
2003 1.2
2004 113.6
Thereafter 600.0
$718.6
- ------------------------------------------------------------
On April 29, 1997 and January 7, 1998, the Company entered into interest
rate swap agreements to reduce the impact of changes in interest rates on its
Senior Credit Facilities described above under the Original Credit Agreement.
The swap agreements fixed the interest rate on $60.0 million of the Senior
Credit Facility at 9.26% through May 2001, and $90.0 million of the Senior
Credit Facility at 8.21% through February 2000. The notional face amount of the
swap agreements was $151.3 million at May 31, 1998. The swap agreement covering
$60.0 million of the Senior Credit Facility was canceled without penalty on May
26, 1999. The swap agreement covering $90.0 million was settled on April 28,
1999 at a cost to the Company of $0.6 million.
NOTE 5 -- INCOME TAXES
As discussed in Note 2, the Business did not pay income taxes directly or
file separate income tax returns prior to the Recapitalization, and therefore,
no provision for income taxes has been recorded in the accompanying financial
statements for the period from May 27, 1996 to March 10, 1997.
In conjunction with the acquisition of the power device business, the Korean
government granted a ten year tax holiday to Fairchild Korea Semiconductor Ltd.
The exemption is 100% for the first seven years of the holiday and 50% for the
remaining three years of the holiday. Taxes exempted include income taxes,
dividend withholding taxes, acquisition tax, registration tax, property tax and
aggregate land tax. As such, no current provision for income taxes for Korea has
been provided. The tax holiday increased net income by $18.0 million or $0.22
per fully diluted share for the seven months ended December 26, 1999.
29
The provision (benefit) for income taxes included in the accompanying
consolidated statements of operations for Stub year 1999, Fiscal 1999, Fiscal
1998 and the period from March 11, 1997 to March 25, 1997, consisted of the
following:
Seven
Months March 11,
Ended Year Ended 1997 to
- -------------------------------------------------------------------------------
December 26, May 30, May 31, May 25,
(In millions) 1999 1999 1998 1997
- -------------------------------------------------------------------------------
Income (loss) before
income taxes:
U.S $ (46.6) $(103.7) $ 14.6 $ 7.2
Foreign 72.9 (15.5) 18.2 2.5
$ 26.3 $(119.2) $ 32.8 $ 9.7
- --------------------------------------------------------------------------------
Income tax provision (benefit):
Current:
U.S. federal $ -- $ (4.8) $ 7.1$ --
U.S. state
and local -- -- 1.5 --
Foreign 4.0 2.1 3.3 1.4
- --------------------------------------------------------------------------------
4.0 (2.7) 11.9 1.4
Deferred:
U.S. federal (2.1) (2.5) (2.0) 1.9
U.S. state
and local (0.2) 0.1 (0.4) 0.5
Foreign 3.3 -- 1.2 --
- --------------------------------------------------------------------------------
1.0 (2.4) (1.2) 2.4
Total income tax
provision (benefit):
U.S. federal (2.1) (7.3) 5.1 1.9
U.S. state and local (0.2) 0.1 1.1 0.5
Foreign 7.3 2.1 4.5 1.4
$ 5.0 $ (5.1) $ 10.7 $ 3.8
- --------------------------------------------------------------------------------
The reconciliation between the income tax rate computed by applying the U.S.
federal statutory rate and the reported worldwide tax rate follows:
Seven
Months March 11,
Ended Year Ended 1997 to
- ----------------------------------------------------------------------------
December 26, May 30, May 31, May 25,
1999 1999 1998 1997
- ---------------------------------------------------------------------------
U.S. federal
statutory rate 35.0% 35.0% 35.0% 35.0%
U.S. state and
local taxes, net of
federal benefit (0.5) 1.4 3.3 4.1
Tax differential related
to foreign income (64.8) (8.6) (5.7) --
Change in valuation
allowance 49.3 (23.5) -- --
19.0% 4.3% 32.6% 39.1%
- ---------------------------------------------------------------------------
30
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 December
26, 1999 and May 30, 1999 are presented below:
December 26, May 30,
(In millions) 1999 1999
- -----------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carry forwards $ 60.1 $ 34.0
Reserves and accruals 21.7 26.5
Plant and equipment 3.1 3.5
Intangibles, primarily intellectual
property and software 21.7 22.7
Tax credit carryovers 1.4 1.4
- ----------------------------------------------------------------------------
Total gross deferred tax assets 108.0 88.1
Valuation allowance (80.3) (62.7)
- ----------------------------------------------------------------------------
Net deferred tax assets 27.7 25.4
Deferred tax liabilities (all foreign):
Intangibles, primarily
intellectual property (11.9) (9.9)
Plant and equipment (5.0) (3.7)
Capital allowance (1.4) (1.4)
Total deferred tax liabilities (18.3) (15.0)
Net deferred tax assets $ 9.4 $ 10.4
- ----------------------------------------------------------------------------
In assessing the realizability of deferred tax assets, the Company
considered its taxable future earnings and the expected timing of the reversal
of temporary differences. Accordingly, the Company has recorded a valuation
allowance which reduces the gross deferred tax asset to an amount which the
Company believes will more likely than not be realized. Deferred tax assets and
liabilities are classified in the consolidated balance sheet based on the
classification of the related asset or liability.
Net operating loss, research and development credit and foreign tax credit
carryforwards totaled $158.5 million, $0.2 million and $1.2 million,
respectively, as of December 26, 1999. Upon utilization or recognition of the
net operating loss carryforwards, $7.5 million of the tax benefit will be
credited to additional paid-in capital. The net operating losses expire in 2019
and 2020. The research and development credits expire in varying amounts in 2012
through 2014. The foreign tax credits expire in varying amounts in 2002 through
2005.
Deferred income taxes have not been provided for the undistributed earnings
of the Company's foreign subsidiaries, which aggregated approximately $54.6
million at December 26, 1999. The Company plans to reinvest all such earnings
for future expansion. The amount of taxes attributable to these undistributed
earnings is not practicably determinable.
31
The Company's ability to utilize its net operating loss and credit
carryforwards may be limited in the future if the Company experiences an
ownership change as a result of future transactions. An ownership change occurs
when the ownership percentage of 5% or greater stockholders changes by more than
50% over a three-year period. The Company does not expect that a subsequent
ownership change would place any material limitation on the utilization of the
loss carryforward.
NOTE 6 -- STOCK-BASED COMPENSATION
At December 26, 1999, the Company has one stock option plan, the 1997 Stock
Option Plan, as amended and restated, (the "Plan") which is described below. The
Company accounts for its stock option plan in accordance with the provisions of
APB No. 25. As such, compensation expense is recorded on the date of grant only
if the current market price of the underlying stock exceeds the exercise price.
During the seven months ended December 26, 1999 and the year ended May 30, 1999,
the Company granted 1,358,700 and 25,600 stock options, respectively, with
exercise prices less than the market price of the underlying stock on the date
of the grant, and recorded total deferred compensation of $13.6 million and $0.3
million, respectively. Had compensation cost for the Company's stock option plan
been determined consistent with SFAS Statement No. 123, the Company would have
reported net income (loss) of $13.6 million, $(114.3) million, $20.6 million and
$15.5 million, respectively, in Stub Year 1999, Fiscal 1999, Fiscal 1998 and
Fiscal 1997, respectively.
The Company estimates the fair value of each option as of the date of grant
using a Black-Scholes pricing model with the following weighted average
assumptions:
December 26, May 30, May 31,
1999 1999 1998
- ------------------------------------------------------------------------------
Expected volatility 49% 49% --
Dividend yield -- -- --
Risk-free interest rate 4.89% 4.43% 5.88%
Expected life, in years 4.0 3.4 2.9
Under the Plan, the Company may grant options for up to 8,507,666 shares of
Class A Common Stock. Options granted under the Plan may be either (a) options
intended to constitute incentive stock options ("ISOs") under the Internal
Revenue Code or (b) non-qualified stock options. Options may be granted under
the Plan to regular salaried key employees (including officers) of the Company
and its subsidiaries and members of the Company's Board of Directors who are not
employees of the Company.
The exercise price of each option granted under the Plan shall be as
determined by a Committee of the Company's Board of Directors (the "Committee").
The maximum term of any option shall be ten years from the date of grant for
incentive stock options and ten years and one day from the date of grant for
non-qualified stock options. Options granted under the Plan are exercisable at
the determination of the Committee, currently vesting ratably over approximately
five years. Individuals receiving options under the Plan may not receive in any
one year period options to purchase more than 200,000 shares of common stock.
A summary of the status of the Company's stock option plan as of December
26, 1999, May 30, 1999 and May 31, 1998, and changes during the years then ended
are presented in the table below:
Stub Year 1999 Fiscal 1999 Fiscal 1998
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 4,283 $ 3.82 3,584 $ 2.20 2,029 $0.13
Granted 3,549 14.83 972 10.00 1,777 4.29
Exercised (805) 2.06 (93) 0.13 (142) 0.13
Canceled (63) 7.12 (180) 6.83 (80) 0.13
Outstanding at end of year 6,964 $ 9.60 4,283 $ 3.82 3,584 $2.20
- --------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 1,331 $ 5.56 1,612 $ 1.82 798 $0.13
Weighted average fair value of options granted $ 9.68 $ 0.09 $0.22
Information with respect to stock options outstanding and stock options
exercisable at December 26, 1999, is as follows:
32
Options Outstanding Options Exercisable
(000's) Weighted Average Weighted (000's) Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
$0.13 - 0.13 2,086 7.48 $ 0.13 732 $ 0.13
$10.00 - 10.00 2,881 9.13 10.00 444 10.00
$18.50 - 25.25 1,917 9.61 18.54 155 18.50
$28.00 - 28.50 80 9.93 28.44 -- --
6,964 8.78 $ 9.60 1,331 $ 5.56
- ------------------------------------------------------------------------------------------------------------------------------
NOTE 7 -- RETIREMENT PLANS
The Company sponsors the Fairchild Personal Savings and Retirement Plan (the
"Retirement Plan"), a contributory savings plan which qualifies under section
401(k) of the Internal Revenue Code. The Retirement Plan covers substantially
all employees in the United States. The Company provides a matching contribution
equal to 75% of employee elective deferrals up to a maximum of 6% of an
employee's annual compensation. The Company also maintains a non-qualified
Benefit Restoration Plan, under which employees who have otherwise exceeded
annual IRS limitations for elective deferrals can continue to contribute to
their retirement savings. The Company matches employee elective deferrals to the
Benefit Restoration Plan on the same basis as the Retirement Plan.
Total expense recognized under these plans was $2.3 million, $3.5 million,
$3.4 million and $1.1 million for the seven months ended December 26, 1999 and
the fiscal years ended May 30, 1999, May 31, 1998 and May 25, 1997,
respectively.
Employees in Korea who have been with the Company for over one year are
entitled by Korean law to receive lump-sum payments upon termination of their
employment. The payments are based on current rates of pay and length of service
through the date of termination. It is the Company's policy to accrue for this
estimated liability as of each balance sheet date. Amounts recognized as expense
were $2.4 million and $0.3 million for the seven months ended December 26, 1999
and the fiscal year ended May 30, 1999, respectively.
Employees in Malaysia participate in a defined contribution plan. The
Company has funded accruals for this plan in accordance with statutory
regulations in Malaysia. Contributions made by the Company under this plan were
$0.9 million, $1.2 million, $1.5 million and $0.4 million for the seven months
ended December 26, 1999 and the fiscal years ended May 30, 1999, May 31, 1998
and May 25, 1997, respectively.
Employees in the Philippines participate in a defined benefit plan that was
assumed by the Company from National Semiconductor as part of the
Recapitalization. The benefits are based on years of service and a multiple of
the employee's final monthly salary. The Company's funding policy is to
contribute annually the amount necessary to maintain the plan on an actuarially
sound basis. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future. The contributions made for the seven months ended December 26, 1999, and
for the fiscal years ended May 30, 1999, May 31, 1998 and May 25, 1997 were not
material to the consolidated financial statements.
NOTE 8 -- LEASE COMMITMENTS
Rental expense related to certain facilities and equipment of the Company's
plants was $8.2 million, $12.5 million, $9.5 million and $5.0 million for Stub
Year 1999, Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 26, 1999 are as follows:
Year ended December, (In millions)
- ----------------------------------------------------------------
2000 $ 9.9
2001 5.6
2002 4.6
2003 4.0
2004 4.0
Thereafter 12.1
$40.2
- ----------------------------------------------------------------
NOTE 9 -- REDEEMABLE PREFERRED STOCK
Concurrent with the Recapitalization, the Company authorized 70,000 shares
of redeemable preferred stock at a par value of $.01, all of which were
designated as 12% Series A Cumulative Compounding Preferred Stock (the
"Redeemable Preferred Stock"). The Redeemable Preferred Stock had a stated value
of $1,000 per share and was entitled to annual dividends when, as and if
declared, which dividends were cumulative, whether or not earned or declared,
and accrued at a rate of 12%, compounding annually. On August 9, 1999, in
connection with the IPO, all shares of Redeemable Preferred Stock were converted
into shares of the Company's Class A Common Stock. Each preferred stockholder
received 75.714571 shares of Class A Common Stock per share of
33
preferred stock, reflecting the $1,000 liquidation value of the preferred stock,
plus accumulated unpaid dividends to the date of conversion, converted into
common stock on the basis of $17.39 per share. As a result of the conversion,
70,000 shares of Redeemable Preferred Stock were converted into 5,300,020 shares
of Class A Common Stock. The total liquidation value of the Redeemable Preferred
Stock at August 9, 1999 was $92.2 million. At May 30, 1999, 70,000 shares were
issued and outstanding. The total liquidation value of the shares outstanding at
May 30, 1999 in the amount of $90.1 million is classified in the accompanying
consolidated balance sheet as Redeemable Preferred Stock.
NOTE 10 -- STOCKHOLDERS' EQUITY
RECAPITALIZATION
On March 11, 1997, National Semiconductor consummated the Recapitalization
under which the following transactions occurred:
(i) National Semiconductor, pursuant to an Asset Purchase Agreement, transferred
all of the assets and liabilities of the Business to Fairchild and its
subsidiaries in exchange for demand purchase notes of Fairchild and its
subsidiaries in the aggregate principal amount of $401.6 million (the "Purchase
Price Notes");
(ii) National Semiconductor transferred all of the capital stock of Fairchild
and approximately $12.8 million in cash to the Company in exchange for shares of
Redeemable Preferred Stock, shares of Class A voting and Class B nonvoting
common stock, and a promissory PIK Note of the Company in the principal amount
of approximately $77.0 million;
(iii) The Company issued Redeemable Preferred Stock and additional common stock
in the aggregate amounts of approximately $65.0 million;
(iv) The Company contributed cash in the amount of approximately $77.8 million
to the capital of Fairchild;
(v) Fairchild borrowed $120.0 million under term bank loans and issued $300.0
million of 10 1/8% Senior Subordinated Notes due 2007 (as described in Note 4).
The proceeds from these borrowings were used to repay the Purchase Price Notes
and certain debt acquisition costs.
The transaction was accounted for as a leveraged recapitalization whereby
the Company assumed the historical operating results of the Business.
Accordingly, the repayment of the Purchase Price Notes of $401.6 million and
issuance of the PIK Note of $77.0 million were included in the statements of
equity as a distribution to National Semiconductor by Fairchild and the Company,
respectively.
PREFERRED STOCK
Under the Company's Restated Certificate of Incorporation, the Company's
Board of Directors has the authority to issue up to 100,000 shares of preferred
stock, but only in connection with the adoption of a stockholder rights plan. At
December 26, 1999, no shares were issued.
INITIAL PUBLIC OFFERING
On August 9, 1999, the Company completed an initial public offering of its
Class A Common Stock and sold an aggregate of 20,000,000 shares at a price of
$18.50 per share. The underwriting discount was $1.11 per share. The net
proceeds after the underwriting discount and other IPO expenses were
approximately $345.0 million. In addition, National Semiconductor Corporation,
one of the Company's principal stockholders, sold 3,000,000 additional shares
pursuant to the underwriters' overallotment option. The Company received no
proceeds from this sale, which closed on August 12, 1999. Concurrent with the
IPO, all of the shares of the Company's previously authorized 12% Series A
Cumulative Compounding Preferred Stock were converted into shares of the
Company's Class A Common Stock.
COMMON STOCK
On January 5, 1998, the Board of Directors approved a four-for-one common
stock split in the form of a stock dividend. Stockholders received three
additional shares for each share held. Such distribution was made on April 29,
1998 to stockholders of record on that date. All share amounts in the
accompanying consolidated financial statements have been restated to
retroactively reflect the split.
The Company has authorized 220,000,000 shares of common stock at a par value
of $.01 per share, divided into two classes consisting of 110,000,000 shares of
Class A Common Stock and 110,000,000 shares of Class B Common Stock. Previously,
160,000,000 shares were authorized, consisting of 80,000,000 shares of Class A
Common Stock and 80,000,000 shares of Class B Common Stock. The holders of Class
A Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. Except as required by law, the
holders of Class B Common Stock have no voting rights. A holder of either class
of common stock may convert any or all of his shares into an
34
equal number of shares of the other class of common stock provided that in the
case of a conversion from Class B Common Stock, which is nonvoting, into Class A
Common Stock, which is voting, such conversion would be permitted only to the
extent that the holder of shares to be converted would be permitted under
applicable law to hold the total number of shares of Class A Common Stock which
would be held after giving effect to the conversion.
In connection with the issuance of the CMP Note (see Note 4), the Company
issued a warrant for the purchase of 3,538,228 shares of Class A Common Stock of
the Company at an exercise price of $0.01 per share to Citicorp Mezzaine
Partners, L.P. On August 9, 1999, the CMP Note was paid in full, and the warrant
became unexercisable.
Certain amendments to the Securities Purchase and Holders Agreement, dated
as of March 11, 1997 (the "Stockholders Agreement"), which were effected in May
1998, resulted in the lapse of certain risks of forfeiture by the management
investors with respect to their stock ownership of the Company. The lapse of
such restrictions resulted in the incurrence by the Company of deductible
compensation expense for income tax purposes of $10.4 million in Fiscal 1998.
The tax effect of the compensation expense of $2.1 million was recorded as a
reduction in income taxes payable and an increase to additional paid-in capital
at May 31, 1998. The tax effect was recorded using the alternative minimum tax
rate of 20%. In connection with this transaction, loans aggregating $5.0 million
were made by the Company to the management investors to pay their federal and
state individual income tax liabilities in June 1998. Such loans (including
accrued but unpaid interest thereon) were cancelled as a result of the Company's
IPO of its Class A Common Stock, which was completed on August 9, 1999. The
Company also paid such executive officers amounts sufficient to enable them to
discharge all tax liabilities arising out of the cancellation of such loans (as
well as all tax liabilities arising out of such payments). A total charge of
$8.3 million was recorded in selling, general and administrative expense during
the seven months ended December 26, 1999.
NOTE 11 -- RESTRUCTURING AND IMPAIRMENTS
In the first quarter of Fiscal 1999, in connection with management's plan to
reduce costs and improve operating efficiencies, the Company recorded a pre-tax
restructuring charge of approximately $4.5 million. The restructuring charge
consisted of $0.8 million related to non-cash asset impairments and $3.7 million
of employee separation costs. The asset impairments relate to idle production
equipment in the Company's former Mountain View, California and West Jordan,
Utah facilities, which primarily serve the Company's Analog and Discrete product
groups, respectively. As of December 26, 1999 these assets have been disposed
of. The charge for employee separation arrangements provided for severance and
other benefits associated with the approximately 600 salaried, hourly and
temporary employees severed as a result of this action. The affected employees,
who worked in production, engineering, sales and marketing and administration,
were located in the United States and Cebu, the Philippines.
In the third quarter of Fiscal 1999, the Company recorded a pre-tax
restructuring charge of approximately $2.7 million related to the transfer of
all assembly and test work performed at its former Mountain View, California
facility to its Penang, Malaysia facility. The charge consisted of $1.9 million
of non-cash asset impairments and $0.8 million for severance and other benefits
for 54 production employees terminated as a result of the transfer. The asset
impairments consisted of production equipment that were idled as a result of
this action. As of December 26, 1999 these assets have been disposed of.
In connection with the sale of its former Mountain View, California facility
on April 2, 1999, the Company announced the transfer of all wafer production to
its South Portland, Maine facility. In the fourth quarter of Fiscal 1999, the
Company recorded a pre-tax restructuring charge of approximately $10.0 million,
which consisted of $2.6 million of non-cash asset impairments, $4.0 million for
severance and employee benefits, $1.9 million for a loss on sale of the facility
and $1.5 million for other exit costs. This action resulted in the termination
of approximately 170 salaried, hourly and temporary employees, all of whom
worked for the Company's Analog and Mixed Signal Division in Mountain View or
San Diego, California in the areas of production, engineering, selling and
marketing and administration. Other exit costs include $1.0 million paid under a
noncancelable operating lease after operations ceased as well as other
incremental costs associated with the facility closure. The non-cash asset
impairments primarily consisted of production equipment that were not
transferred to South Portland, Maine. As of December 26, 1999, substantially all
of these assets have been disposed of.
During the fourth quarter of Fiscal 1999, the Company also recorded a
pre-tax charge of $4.1 million related to the restructuring of its memory
product lines, whereby the Company streamlined its operations to focus solely on
its most profitable products. The charge included $3.9 million for non-cash
asset impairments and $0.2 million for employee separation costs all of which
were paid by May 30, 1999. The non-cash impairments consisted of production
equipment and other equipment in West Jordan, Utah, and Sunnyvale, California,
that became idle as a result of the plan. The assets will be disposed of during
the first half of 2000.
The Memory Division product line restructuring plan also included the
write-off of inventories ($9.9 million) as well as provisions for additional
distribution sales allowances required as a result of this action ($5.5
million). These costs have been excluded from the restructuring charge and have
been recorded as a reduction against net sales in the case of the distribution
sales allowances and as a charge to cost of sales for the inventory write-offs.
35
Substantially all amounts have been expended with respect to the Company's
Fiscal 1999 restructuring actions with the exception of the analog wafer
production transfer to South Portland, Maine. The following table summarizes the
activity of the remaining active restructuring plan:
Fourth quarter Fiscal 1999 Mountain View Restructuring
(in millions):
Total charge $10.0
Non-cash items (3.4)
- ---------------------------------------------------------------
Accrual balance as of May 30, 1999 6.6
Cash payments (4.0)
Accrual balance as of December 26, 1999 $ 2.6
- ---------------------------------------------------------------
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
non-recurring charge related to work force reductions. During the year ended May
25, 1997, $5.3 million of severance was paid to terminated employees.
NOTE 12 -- RELATED PARTY TRANSACTIONS
Related party activity between the Company and National Semiconductor, in
addition to contract manufacturing services performed for National
Semiconductor, is summarized as follows:
Seven Months Year Year Period from Period from
Ended Ended Ended March 11, 1997 May 27, 1996
December 26, May 30, May 31, through through
(In millions) 1999 1999 1998 May 25, 1997 March 10, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Manufacturing services performed by
National Semiconductor plants or
purchased from third parties $ 1.0 $ 5.6 $14.0 $ 2.8 $34.3
Headquarters, freight, duty, warehousing
and other elements of cost of sales -- 4.4 17.9 3.7 41.8
$ 1.0 $10.0 $31.9 $ 6.5 $76.1
- -----------------------------------------------------------------------------------------------------------------------------------
Cost of business support services provided
by National Semiconductor $ 0.1 $10.7 $28.7 $11.6 $--
- -----------------------------------------------------------------------------------------------------------------------------------
Operating costs allocated to the Business
by National Semiconductor $-- $-- $-- $-- $63.9
- -----------------------------------------------------------------------------------------------------------------------------------
Operating costs allocated to National
Semiconductor by the Business $-- $-- $-- $-- $ 9.6
- -----------------------------------------------------------------------------------------------------------------------------------
Amounts receivable from National Semiconductor, included in accounts
receivable, totaled $8.8 million and $12.0 million at December 26, 1999 and May
30, 1999, respectively. Amounts payable to National Semiconductor, included in
accounts payable, totaled $0.2 million and $0.4 million at December 26, 1999 and
May 30, 1999, respectively.
NOTE 13 -- CONTINGENCIES
The Company's facilities in South Portland, Maine, West Jordan, Utah, Cebu,
the Philippines, and Penang, Malaysia have ongoing remediation projects to
respond to certain releases of hazardous substances that occurred prior to the
Recapitalization. Pursuant to the Asset Purchase Agreement, National
Semiconductor has agreed to indemnify the Company for the future costs of these
projects. The costs incurred to respond to these conditions were not material to
the consolidated financial statements during Stub Year 1999, Fiscal 1999, Fiscal
1998, and Fiscal 1997.
The Company's former Mountain View, California, facility is located on a
contaminated site under the Comprehensive Environmental Response, Compensation
and Liability Act. Under the terms of the Acquisition Agreement with Raytheon
Company, dated December 31, 1997, Raytheon Company has assumed responsibility
for all remediation costs or other liabilities related to historical
contamination.
On November 2, 1999, our principal operating subsidiary, Fairchild
Semiconductor Corporation, was named as a defendant in a patent infringement
lawsuit filed by Siliconix Incorporated in the United States District Court for
the Northern District of California. The
36
complaint filed in the suit alleges that some of our products infringe two
Siliconix patents and claims an unspecified amount of damages. The Company
intends to contest these claims vigorously.
On December 22, 1999, Fairchild Semiconductor Corporation and Fairchild
Korea Semiconductor Ltd. were named as defendants in a patent infringement
lawsuit filed by IXYS Corporation in the United States District Court for the
Northern District of California. The complaint filed in the lawsuit alleges that
one or more of our products infringe one IXYS patent and claims an unspecified
amount of damages. Although the Company is in the process of investigating IXYS'
claims, the Company believes these claims are subject to indemnification by
Samsung Electronics under the patent indemnification provisions of the Business
Transfer Agreement with Samsung Electronics. As of the date of this filing, the
Company is unable to assess the validity of IXYS' claims.
In addition, in the normal course of business, the Company is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. All such matters are
subject to uncertainties and outcomes that are not predictable with assurance.
Consequently, the Company is unable to ascertain the ultimate aggregate amount
of monetary liability or financial impact with respect to these additional
matters at December 26, 1999. It is management's opinion that after final
disposition, any monetary liability or financial impact to the Company would not
be material to the Company's consolidated financial position, annual results of
operations or cash flows.
NOTE 14 -- FINANCIAL INSTRUMENTS
FOREIGN CURRENCY INSTRUMENTS
The objective of the Company's foreign exchange risk management policy is to
preserve the U.S. dollar value of after-tax cash flows in relation to non-U.S.
dollar currency fluctuations. The Company uses forward and option contracts to
hedge firm commitments and option contracts to hedge anticipated transactions.
Gains and losses on financial instruments that are intended to hedge an
identifiable firm commitment are deferred and included in the measurement of the
underlying transaction. Gains and losses on hedges of anticipated transactions
are deferred until such time as the underlying transactions are recognized or
immediately when the transaction is no longer expected to occur. In addition,
the Company uses forward and option contracts to hedge certain non-U.S.
denominated asset and liability positions. Gains and losses on these contracts
are matched with the underlying gains and losses resulting from currency
movement on these balance sheet positions. Gains and losses on any instruments
not meeting the above criteria are recognized in income in the current period.
Net gains and losses from foreign currency transactions were not material for
Stub Year 1999, Fiscal 1999, Fiscal 1998, and Fiscal 1997.
INTEREST RATE DERIVATIVES
The Company utilizes interest rate swap or interest rate cap agreements to
limit the impact of the variable interest rate of certain long-term debt. The
variable rates on swaps and caps are based primarily on U.S. dollar LIBOR, and
the swaps are reset on a quarterly basis. The differential between fixed and
variable rates to be paid or received on swaps is accrued as interest rates
change in accordance with the agreements and is included in current interest
expense. The costs of interest rate cap agreements are included in interest
expense ratably over the lives of the agreements. Payments to be received as a
result of the cap agreements are accrued as a reduction of interest expense. As
of December 26, 1999, no swap or interest rate cap agreements were outstanding.
FAIR VALUE AND NOTIONAL PRINCIPAL OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The table below shows the fair value and notional principal of the Company's
off-balance sheet financial instruments as of December 26, 1999 and May 30,
1999. The notional principal amounts for off-balance sheet financial instruments
provide one measure of the transaction volume outstanding as of year end and do
not represent the amount of the Company's exposure to credit or market loss. The
estimates of fair value are based on applicable and commonly used pricing models
using prevailing financial market information as of December 26, 1999 and May
30, 1999. Although the following table reflects the notional principal and fair
value of amounts of off-balance sheet financial instruments, it does not reflect
the gains or losses associated with the exposures and transactions that the
off-balance sheet financial instruments are intended to hedge. The amounts
ultimately realized upon settlement of these financial instruments, together
with the gains and losses on the underlying exposures, will depend on actual
market conditions during the remaining life of the instruments.
37
December 26, 1999 May 30, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Notional Carrying Estimated Notional Carrying Estimated
(In millions) Principal Amount Fair Value Principal Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Rate Instruments Caps $ -- $ -- $ -- $310.0 $ -- $ --
Foreign Exchange Instruments Purchased Options 73.0 -- (0.1) 32.1 -- --
Fair Value of Financial Instruments
A summary table of estimated fair values of financial instruments follows:
December 26, 1999 May 30, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(In millions) Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt
Senior subordinated notes $600.0 $608.3 $600.0 $603.0
Term loans 118.6 118.6 310.0 310.0
PIK note -- -- 99.2 94.2
CMP note -- -- 50.8 50.8
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Fairchild designs, develops, manufactures and markets high performance
multi-market semiconductors. The Company is currently organized into four
product line operating segments: Analog and Mixed Signal Products Division,
Discrete Power and Signal Technologies Products Group, Interface and Logic
Products Group and the Non-Volatile Memory Division. Each of these groups has a
vice president, general manager who reports directly to the Chief Executive
Officer ("CEO"). The CEO allocates resources to each of these groups using
information on their revenues and operating profits before interest, taxes and
non-recurring items. The CEO has been identified as the Chief Operating Decision
Maker as defined by SFAS No. 131. Fairchild's products in all operating groups
are sold to original equipment manufacturers and distributors throughout the
world.
During Stub Year 1999, the Company integrated the power device business
acquired from Samsung Electronics in April of 1999, into its existing Analog and
Mixed Signal Products Division and its Discrete Power and Signal Technologies
Products Group product line operation segments. Fiscal 1999 segment information
has been restated to reflect the integration of this previously reported segment
into other reported segments.
In addition to the operating segments mentioned above, the Company also
operates sales and marketing, information systems, finance and administration
groups that are led by vice presidents and that also report to the CEO. The
expenses of these groups are allocated to the operating segments and are
included in the operating results reported below. The Company does not allocate
income taxes to its operating segments, and while interest expense allocations
are made for informational purposes, the operating segments are principally
evaluated on operating profit before interest and taxes.
Although the Company does not specifically identify and allocate all assets
by operating segment, it is the Company's strategy to have its capital intensive
manufacturing plants dedicated to its operating segments and to fully allocate
depreciation and amortization to its operating segments. Operating segments do
not sell products to each other, and accordingly, there are no inter-segment
revenues to be reported. The accounting policies for segment reporting are the
same as for the Company as a whole.
Statement of operations information on reportable segments for Stub Year
1999, Fiscal 1999, Fiscal 1998 and Fiscal 1997 is as follows:
Seven Months
Ended Year Ended
- ------------------------------------------------------------------------------------------------------------------------------
December 26, May 30, May 31, May 25,
(In millions) 1999 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Revenue and Operating Income (Loss):
Analog and Mixed Signal Products Division
Trade revenue $173.5 $ 95.8 $ 32.0 $ --
Operating income 24.0 8.1 2.2 --
- ------------------------------------------------------------------------------------------------------------------------------
Discrete Power and Signal Technologies Products Group
Trade revenue $316.9 $222.8 $187.3 $164.5
Contract manufacturing revenue 26.2 9.1 34.5 15.1
Operating income 36.7 7.0 44.9 21.7
- ------------------------------------------------------------------------------------------------------------------------------
Interface and Logic Products Group
Trade revenue $184.0 $267.6 $303.0 $285.3
38
Contract manufacturing revenue 46.0 71.9 118.9 89.1
Operating income 29.7 35.7 70.0 21.3
- ------------------------------------------------------------------------------------------------------------------------------
Non-Volatile Memory Division
Trade revenue $ 39.6 $ 73.4 $113.5 $138.0
Operating income (loss) 0.4 (26.4) (14.2) 5.0
- ------------------------------------------------------------------------------------------------------------------------------
Other (1)
Trade revenue -- $ (5.5) $ -- $ --
Operating income (loss) (8.3) (71.8) (15.6) (16.1)
- ------------------------------------------------------------------------------------------------------------------------------
Total Consolidated
Trade revenue $714.0 $654.1 $635.8 $587.8
Contract manufacturing revenue 72.2 81.0 153.4 104.2
Operating income (loss) 82.5 (47.4) 87.3 31.9
(1) Other includes in Stub Year 1999, $8.3 million for the forgiveness of
certain loans made to the Company's management investors for payment of
individual income tax liabilities resulting from their ownership of Fairchild
International's common stock; in Fiscal 1999, $34.0 million for purchased
in-process research and development, $21.3 million for restructuring, $15.4
million for additional charges taken for asset impairments in connection with
the Memory restructuring and $1.1 million of other charges not allocated to the
operating segments; in Fiscal 1998, purchased in-process research and
development; and in Fiscal 1997, $5.3 million for restructuring and $10.8
million not allocated to the operating segments for amounts charged to the
Fairchild Business by National pursuant to "push-down" accounting rules applied
in connection with the Recapitalization.
39
Property, plant and equipment (including molds and tooling) and depreciation
and amortization by reportable operating segment as of and for the seven months
ended December 26, 1999 and for the fiscal year ended May 30, 1999 is as
follows:
December 26, May 30,
(In millions) 1999 1999
- -----------------------------------------------------------------------------
Property, Plant and Equipment and
Depreciation and Amortization:
Analog and Mixed Signal Products Division
Property, plant and equipment $ 54.7 $ 52.1
Depreciation and amortization 15.9 12.0
- ----------------------------------------------------------------------------
Discrete Power and Signal Technologies Group
Property, plant and equipment $ 159.8 $ 153.4
Depreciation and amortization 31.4 28.6
- ----------------------------------------------------------------------------
Interface and Logic Products Group
Property, plant and equipment $ 162.6 $ 154.2
Depreciation and amortization 31.2 53.2
- ----------------------------------------------------------------------------
Non-Volatile Memory Division
Property, plant and equipment $ -- $ --
Depreciation and amortization 2.4 9.9
- ----------------------------------------------------------------------------
Other
Property, plant and equipment $ 2.7 $ 5.9
Depreciation and amortization -- --
- ----------------------------------------------------------------------------
Total Consolidated
Property, plant and equipment $ 379.8 $ 365.6
Depreciation and amortization $ 80.9 $ 103.7
Geographic revenue information for the seven months ended December 26, 1999
and for the fiscal years ended May 30, 1999, May 31, 1998, and May 25, 1997 are
based on the locations of the selling entities within the indicated geographic
areas. No individual foreign country except Korea is material to total revenues.
Revenues from unaffiliated customers by geographic region were as follows:
Seven Months
Ended Year Ended
- --------------------------------------------------------------------------------
December 26, May 30, May 31, May 25,
(In millions) 1999 1999 1998 1997
- --------------------------------------------------------------------------------
Total Revenues:
United States $ 201.2 $ 299.5 $ 395.7 $ 326.9
Korea 172.3 68.8 -- --
Asia 325.6 255.5 260.9 247.5
Europe 87.1 111.3 132.6 117.6
Total $ 786.2 $ 735.1 $ 789.2 $ 692.0
- --------------------------------------------------------------------------------
In Stub Year 1999, Fiscal 1999, Fiscal 1998 and Fiscal 1997, National
Semiconductor accounted for 6.9%, 11.0%, 19.4% and 15.1% of the Company's total
revenues. In Stub Year 1999, sales to Samsung Electronics accounted for
approximately 7.0% of the Company's total revenues.
Geographic property, plant and equipment balances as of December 26, 1999
and May 30, 1999 are based on the physical locations within the indicated
geographic areas and are as follows:
December 26, May 30,
(In millions) 1999 1999
- -------------------------------------------------------------------------------
Property, Plant and Equipment:
United States $ 172.3 $ 174.4
Korea 108.2 100.1
Philippines 47.1 40.5
Malaysia 43.1 39.7
All Others 5.1 5.5
- ------------------------------------------------------------------------------
Total $ 375.8 $ 360.2
- ------------------------------------------------------------------------------
40
NOTE 16 -- SUPPLEMENTAL CASH FLOW INFORMATION
As described in Note 1, National Semiconductor's cash management system was
not designed to trace centralized cash and related financing transactions to the
specific cash requirements of the Business. In addition, National
Semiconductor's corporate transaction systems were not designed to track
receivables and certain liabilities and cash receipts and payments on a business
specific basis. Given these constraints, the following data is presented to
facilitate analysis of key components of cash flow activity for Fiscal Year
1997:
Year Ending
May 25,
(In millions) 1997
- -----------------------------------------------------------------------------
Operating activities:
Revenues less expenses $ 15.5
Depreciation and amortization 77.1
Deferred taxes (20.3)
Loss on disposal of equipment, molds and tooling 1.0
Non-cash interest expense 1.9
Increase in accounts receivable (79.6)
Decrease in inventories 20.0
Increase in prepaid expenses and
other current assets (5.8)
Increase in other assets 0.9
Increase in accounts payable 12.2
Increase in accrued expenses and other liabilities 21.6
Net financing provided to
National Semiconductor* (25.4)
Cash provided by operating activities 19.1
- -----------------------------------------------------------------------------
Investing activities:
Capital expenditures (47.1)
Purchase of molds and tooling (7.2)
Cash used by investing activities (54.3)
- -----------------------------------------------------------------------------
Financing activities:
Issuance of long-term debt 420.0
Debt acquisition costs (20.3)
Issuance of common stock 7.8
Issuance of preferred stock 70.0
Distribution to National Semiconductor (401.6)
Cash provided by financing activities 75.9
- -----------------------------------------------------------------------------
Net change in cash and cash equivalents 40.7
Cash and cash equivalents at beginning of year --
Cash and cash equivalents at end of year $ 40.7
- -----------------------------------------------------------------------------
* Net financing provided from (to) National Semiconductor does not necessarily
represent the cash flows of the Business, or the timing of such cash flows, had
it operated on a stand-alone basis.
Cash paid for interest by the Company totaled $0.1 million for the period
from March 11, 1997 through May 25, 1997. The Business did not make any cash
payments for interest prior to March 11, 1997, as discussed in Note 1.
No cash payments were made for income taxes.
During the year ended May 25, 1997, the Company issued a note to National
Semiconductor in the principal amount of approximately $77.0 million as
additional purchase consideration for the capital stock of Fairchild. The
Company recorded the note as an increase to long-term debt and accumulated
deficit. For Stub Year 1999, Fiscal 1999 and 1998, and for the period from March
11 through May 25, 1997, the Company accumulated dividends on the redeemable
preferred stock of approximately $2.0 million, $9.8 million, $8.6 million and
$1.8 million, respectively. The Company recorded the accumulated dividends as an
increase to the carrying value of the redeemable preferred stock and accumulated
deficit.
NOTE 17 -- ACQUISITIONS
In April 1999, the Company completed the acquisition of the power device
business of Samsung Electronics for a purchase price of approximately $414.9
million, including related acquisition expenses. The power device business
designs, manufactures and markets
41
power discrete semiconductors and standard analog integrated circuits serving
the personal computer, industrial, telecommunications and consumer electronics
markets. The purchase includes all of the worldwide operations and assets of the
power device business, which are comprised in part of a high volume wafer
fabrication plant in Puchon, South Korea, design and development operations in
Puchon, South Korea, secured services for high volume assembly and test
operations and worldwide sales and marketing operations. The purchase price was
financed through a combination of borrowings under the Company's Senior Credit
Facilities, the CMP Note and the 103/8% Notes. (See Note 4)
The power device business acquisition was accounted for by the purchase
method of accounting and accordingly, the results of operations of the power
device business are included in the accompanying consolidated financial
statements since the acquisition date. Assets acquired and liabilities assumed
were recorded at their estimated fair values as of the acquisition date. The
purchase price exceeded the fair value of the net tangible assets acquired by
approximately $289.5 million. Approximately $34.0 million of the purchase price
in excess of fair value of net tangible assets was allocated to purchased
in-process research and development. Accordingly, the Company recorded a
non-recurring charge for this purchased in-process research and development
concurrent with the acquisition in Fiscal 1999. The remaining purchase price in
excess of fair value of net tangible assets was allocated to various intangible
assets, which are amortized on a straight-line basis over three to fifteen
years.
On December 31, 1997, the Company acquired all of the outstanding common
stock of Raytheon for approximately $117.0 million in cash plus transaction
expenses. Raytheon, based in Mountain View, California, designs, manufactures
and markets high performance analog and mixed signal integrated circuits for the
personal computer, communications, broadcast video and industrial markets. The
acquisition was accounted for by the purchase method of accounting and
accordingly, the results of operations of Raytheon are included in the
accompanying consolidated financial statements since that date. The purchase
price exceeded the fair value of the net tangible assets by approximately $48.4
million. Approximately $15.5 million of the purchase price in excess of fair
value of net tangible assets was allocated to purchased in-process research and
development. Accordingly, the Company recorded a non-recurring charge for this
purchased in-process research and development concurrent with the acquisition in
Fiscal 1998. The remaining purchase price in excess of fair value of net
tangible assets was allocated to various intangible assets, which are amortized
on a straight-line basis over three to fifteen years.
The following unaudited pro forma consolidated results of operations are
presented as if the power device business and Raytheon acquisitions were made at
the beginning of the periods presented below:
Year Ended
- ----------------------------------------------------------------------------
May 30, May 31,
(In millions, except per share data) 1999 1998
- ----------------------------------------------------------------------------
Revenues $ 1,111.9 $ 1,300.7
Net income (loss) (155.9) 20.6
Net income (loss) applicable
to common stockholders (165.7) 11.9
Net earnings (loss) per share:
Basic $ (2.63) $ 0.19
Diluted $ (2.63) $ 0.18
The pro forma results of operations include adjustments to give effect to
the contracts the Company entered into with Samsung Electronics, additional
depreciation and amortization related to the increased value of acquired fixed
assets and identifiable intangibles, interest expense on debt assumed issued to
finance the purchases, as well as adjustments to eliminate historical expenses
which will not be incurred by the Company. The unaudited pro forma information
is not necessarily indicative of the results of operations that would have
occurred had the acquisitions been made at the beginning of the periods
presented or the future results of the combined operations.
NOTE 18 -- CHANGE IN ACCOUNTING PRINCIPLE
Effective in the third quarter of Fiscal 1998, the Company adopted the
provisions of Emerging Issues Task Force Issue 97-13 "Accounting for Business
Process Reengineering Costs." This Issue requires companies to write-off
business process reengineering costs that had been previously capitalized. The
Company had been capitalizing such costs in conjunction with its enterprise
software implementation project. The Issue requires companies to write-off these
costs in the quarter that contains November 20, 1997.
The cumulative effect of adoption of this Issue resulted in a charge of $1.5
million; net of taxes of $0.8 million for the year ended May 31, 1998. Of the
pre-tax write-off, $1.6 million applies to costs incurred in Fiscal 1998, while
$0.7 million applies to costs incurred in Fiscal 1997. The charge relates
specifically to costs incurred to assess the system's capabilities in light of
the Company's current business processes, which under prior guidance was
capitalizable to the cost of the software.
42
NOTE 19 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Below are condensed consolidating balance sheets, statements of operations
and statements of cash flows of Fairchild International as of and for the seven
months ended December 26, 1999 and for the fiscal years ended May 30, 1999 and
May 31, 1998.
CONDENSED CONSOLIDATING BALANCE SHEETS
December 26, 1999
- --------------------------------------------------------------------------------------------
Unconsolidated Unconsolidated
Fairchild Fairchild
Semiconductor Semiconductor Guarantor
(In millions) International, Inc. Corporation Subsidiary
- --------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 117.3 $ --
Accounts receivable, net -- 39.5 0.5
Inventories -- 93.0 10.3
Other current assets -- 8.4 0.2
- --------------------------------------------------------------------------------------------
Total current assets -- 258.2 11.0
Property, plant and equipment, net -- 168.2 4.1
Deferred income taxes, net -- 14.7 7.5
Intangible assets, net -- 7.5 26.5
Investment in subsidiaries 209.9 335.0 148.4
Other assets -- 25.8 1.0
Total assets $ 209.9 $ 809.4 $ 198.5
- --------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 1.4 $ --
Accounts payable -- 52.2 0.6
Accrued expenses and
other current liabilities -- 58.4 5.2
- --------------------------------------------------------------------------------------------
Total current liabilities -- 112.0 5.8
Long-term debt, less current portion -- 717.2 --
Net intercompany (receivable) payable (3.3) (231.1) (33.0)
Other liabilities -- 1.4 --
Total liabilities (3.3) 599.5 (27.2)
- --------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock 0.6 -- --
Class B Common Stock 0.3 -- --
Additional paid-in capital 449.5 -- --
Accumulated earnings (deficit) (231.3) 209.9 225.7
Less treasury stock (at cost) (5.9) -- --
Total stockholders' equity 213.2 209.9 225.7
Total liabilities
and stockholders' equity $ 209.9 $ 809.4 $ 198.5
- --------------------------------------------------------------------------------------------
December 26, 1999
- ------------------------------------------------------------------------------------------
Consolidated
Non- Fairchild
Guarantor Semiconductor
(In millions) Subsidiaries Eliminations International, Inc.
- ------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 21.4 $ -- $ 138.7
Accounts receivable, net 100.3 -- 140.3
Inventories 63.0 -- 166.3
Other current assets 5.1 -- 13.7
- ---------------------------------------------------------------------------------------
Total current assets 189.8 -- 459.0
Property, plant and equipment, net 203.5 -- 375.8
Deferred income taxes, net (18.4) -- 3.8
Intangible assets, net 227.4 -- 261.4
Investment in subsidiaries -- (693.3) --
Other assets 10.8 -- 37.6
Total assets $ 613.1 $ (693.3) $1,137.6
- ---------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ -- $ 1.4
Accounts payable 56.5 -- 109.3
Accrued expenses and
other current liabilities 32.4 -- 96.0
- ---------------------------------------------------------------------------------------
Total current liabilities 88.9 -- 206.7
Long-term debt, less current portion -- -- 717.2
Net intercompany (receivable) payable 267.4 -- --
Other liabilities (0.9) -- 0.5
Total liabilities 355.4 -- 924.4
- ---------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock -- -- 0.6
Class B Common Stock -- -- 0.3
Additional paid-in capital -- -- 449.5
Accumulated earnings (deficit) 257.7 (693.3) (231.3)
Less treasury stock (at cost) -- -- (5.9)
Total stockholders' equity 257.7 (693.3) 213.2
Total liabilities
and stockholders' equity $ 613.1 $ (693.3) $1,137.6
- ---------------------------------------------------------------------------------------
43
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Seven Months Ended December 26, 1999
- ------------------------------------------------------------------------------------------
Unconsolidated Unconsolidated
Fairchild Fairchild
Semiconductor Semiconductor Guarantor
(In millions) International, Inc. Corporation Subsidiary
- ------------------------------------------------------------------------------------------
Revenue:
Net sales -- trade $ -- $116.8 $ 12.4
Net sales -- intercompany -- 466.9 7.9
Contract manufacturing -- 72.2 --
Total revenue -- 655.9 20.3
Operating expenses:
Cost of sales -- trade -- 23.1 8.5
Cost of sales -- intercompany -- 493.0 7.7
Cost of contract manufacturing -- 51.4 --
Research and development -- 17.5 6.7
Selling, general and administrative -- 52.9 5.5
Total operating expenses -- 637.9 28.4
Operating income (loss) -- 18.0 (8.1)
Interest expense, net 4.4 52.0 --
Equity in subsidiary income (25.7) (57.1) (55.1)
Income before income taxes 21.3 23.1 47.0
Provision (benefit) for income taxes -- (2.6) 0.4
Net income $ 21.3 $ 25.7 $ 46.6
Seven Months Ended December 26, 1999
- ------------------------------------------------------------------------------------------
Consolidated
Non- Fairchild
Guarantor Semiconductor
(In millions) Subsidiaries Eliminations International, Inc.
- ------------------------------------------------------------------------------------------
Revenue:
Net sales -- trade $584.8 $ -- $714.0
Net sales -- intercompany 82.7 (557.5) --
Contract manufacturing -- -- 72.2
Total revenue 667.5 (557.5) 786.2
Operating expenses:
Cost of sales -- trade 468.3 -- 499.9
Cost of sales -- intercompany 56.8 (557.5) --
Cost of contract manufacturing -- -- 51.4
Research and development 10.8 -- 35.0
Selling, general and administrative 59.0 -- 117.4
Total operating expenses 594.9 (557.5) 703.7
Operating income (loss) 72.6 -- 82.5
Interest expense, net (0.2) -- 56.2
Equity in subsidiary income -- 137.9 --
Income before income taxes 72.8 (137.9) 26.3
Provision (benefit) for income taxes 7.2 -- 5.0
Net income $ 65.6 $(137.9) $ 21.3
44
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Seven Months Ended December 26, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Unconsolidated Unconsolidated
Fairchild Fairchild
Semiconductor Semiconductor Guarantor
(In millions) International, Inc. Corporation Subsidiary
Cash flows provided by (used in) operating activities: $ -- $ 97.0 $ (0.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures -- (31.4) (0.4)
Proceeds from sale of property, plant and equipment -- -- 0.9
Purchase of molds and tooling -- -- --
Refund of value added tax
paid in connection with acquisition -- -- --
Investment (in) from affiliate (190.6) 180.5 --
Cash provided by (used in) investing activities (190.6) 149.1 0.5
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt (154.4) (191.4) --
Proceeds from issuance of common stock, net 345.0 -- --
Net intercompany financing -- 33.8 --
Purchase of treasury stock -- (5.9) --
Proceeds from exercise of stock options -- 1.6 --
Cash provided by (used in) financing activities 190.6 (161.9) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents -- 84.2 (0.3)
Cash and cash equivalents at beginning of period -- 33.1 0.3
Cash and cash equivalents at end of period $ -- $ 117.3 $--
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:
Cash paid (refunded) during the year for:
Income taxes $ -- $ (0.3) $--
Interest $ -- $ 42.1 $--
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated
Non- Fairchild
Guarantor Semiconductor
(In millions) Subsidiaries International, Inc.
- ------------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities: $ 19.5 $ 115.7
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (43.0) (74.8)
Proceeds from sale of property, plant and equipment -- 0.9
Purchase of molds and tooling (1.3) (1.3)
Refund of value added tax
paid in connection with acquisition 40.9 40.9
Investment (in) from affiliate 10.1 --
Cash provided by (used in) investing activities 6.7 (34.3)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt -- (345.8)
Proceeds from issuance of common stock, net -- 345.0
Net intercompany financing (33.8) --
Purchase of treasury stock -- (5.9)
Proceeds from exercise of stock options -- 1.6
Cash provided by (used in) financing activities (33.8) (5.1)
- ------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (7.6) 76.3
Cash and cash equivalents at beginning of period 29.0 62.4
Cash and cash equivalents at end of period $ 21.4 $ 138.7
- ------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:
Cash paid (refunded) during the year for:
Income taxes $ 2.1 $ 1.8
Interest $-- $ 42.1
- ------------------------------------------------------------------------------------------------------------------------
45
CONDENSED CONSOLIDATING BALANCE SHEETS
May 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Unconsolidated Unconsolidated
Fairchild Fairchild Non-
Semiconductor Semiconductor Guarantor Guarantor
(In millions) International, Inc. Corporation Subsidiary Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 33.1 $ 0.3 $ 29.0
Accounts receivable, net -- 35.6 10.4 83.7
Inventories -- 83.4 17.0 48.2
Other current assets -- 15.0 0.4 50.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets -- 167.1 28.1 211.2
Property, plant and equipment, net -- 166.1 8.3 185.8
Deferred income taxes, net -- 10.0 7.8 (15.0)
Intangible assets, net -- 8.0 28.1 242.4
Investment in subsidiaries (6.4) 267.8 83.2 --
Other assets -- 36.6 1.6 9.6
Total assets $ (6.4) $ 655.6 $ 157.1 $ 634.0
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ -- $ 14.1 $ -- $ --
Accounts payable -- 45.4 4.4 55.9
Accrued expenses and
other current liabilities -- 50.0 8.0 27.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities -- 109.5 12.4 82.9
Long-term debt, less current portion 150.0 895.9 -- --
Net intercompany (receivable) payable (6.1) (344.2) (24.3) 368.5
Other liabilities -- 0.8 -- 0.6
Total liabilities 143.9 662.0 (11.9) 452.0
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock 90.1 -- -- --
Commitments and contingencies
Stockholders' equity (deficit):
Class A Common Stock 0.3 -- -- --
Class B Common Stock 0.3 -- -- --
Additional paid-in capital 9.6 62.0 -- --
Accumulated earnings (deficit) (250.6) (68.4) 169.0 182.0
Total stockholders' equity (deficit) (240.4) (6.4) 169.0 182.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities
and stockholders' equity (deficit) $ (6.4) $ 655.6 $ 157.1 $ 634.0
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated
Fairchild
Semiconductor
(In millions) Eliminations International, Inc.
- --------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 62.4
Accounts receivable, net -- 129.7
Inventories -- 148.6
Other current assets -- 65.7
- --------------------------------------------------------------------------------------------------
Total current assets -- 406.4
Property, plant and equipment, net -- 360.2
Deferred income taxes, net -- 2.8
Intangible assets, net -- 278.5
Investment in subsidiaries (344.6) --
Other assets -- 47.8
Total assets $ (344.6) $ 1,095.7
- --------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ -- $ 14.1
Accounts payable (6.1) 99.6
Accrued expenses and
other current liabilities -- 85.0
- --------------------------------------------------------------------------------------------------
Total current liabilities (6.1) 198.7
Long-term debt, less current portion -- 1,045.9
Net intercompany (receivable) payable 6.1 --
Other liabilities -- 1.4
Total liabilities -- 1,246.0
- --------------------------------------------------------------------------------------------------
Redeemable preferred stock -- 90.1
Commitments and contingencies
Stockholders' equity (deficit):
Class A Common Stock -- 0.3
Class B Common Stock -- 0.3
Additional paid-in capital (62.0) 9.6
Accumulated earnings (deficit) (282.6) (250.6)
Total stockholders' equity (deficit) (344.6) (240.4)
- --------------------------------------------------------------------------------------------------
Total liabilities
and stockholders' equity (deficit) $ (344.6) $ 1,095.7
- --------------------------------------------------------------------------------------------------
46
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Year Ended May 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Unconsolidated Unconsolidated
Fairchild Fairchild Non-
Semiconductor Semiconductor Guarantor Guarantor
(In millions) International, Inc. Corporation Subsidiary Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue:
Net sales -- trade $ -- $ 177.1 $ 64.2 $412.8
Net sales -- intercompany -- 536.8 -- 101.1
Contract manufacturing --
National Semiconductor -- 81.0 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue -- 794.9 64.2 513.9
Operating expenses:
Cost of sales -- trade -- 57.1 39.7 421.6
Cost of sales -- intercompany -- 596.9 -- 41.0
Cost of contract manufacturing --
National Semiconductor -- 64.4 -- --
Research and development -- 26.1 10.8 2.4
Selling, general and administrative -- 62.9 13.8 28.4
Purchased in-process
research and development -- -- -- 34.0
Restructuring and impairments -- 8.6 12.7 --
Total operating expenses -- 816.0 77.0 527.4
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) -- (21.1) (12.8) (13.5)
Interest expense, net 11.3 54.1 4.4 2.0
Equity in subsidiary (income) loss 102.7 33.6 22.8 --
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (114.0) (108.8) (40.0) (15.5)
Provision (benefit) for income taxes 0.1 (6.1) (1.2) 2.1
Net income (loss) $(114.1) $(102.7) $(38.8) $ (17.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated
Fairchild
Semiconductor
(In millions) Eliminations International, Inc.
Revenue:
Net sales -- trade $ -- $ 654.1
Net sales -- intercompany (637.9) --
Contract manufacturing --
National Semiconductor -- 81.0
- ---------------------------------------------------------------------------------------------
Total revenue (637.9) 735.1
Operating expenses:
Cost of sales -- trade -- 518.4
Cost of sales -- intercompany (637.9) --
Cost of contract manufacturing --
National Semiconductor -- 64.4
Research and development -- 39.3
Selling, general and administrative -- 105.1
Purchased in-process
research and development -- 34.0
Restructuring and impairments -- 21.3
Total operating expenses (637.9) 782.5
- ---------------------------------------------------------------------------------------------
Operating income (loss) -- (47.4)
Interest expense, net -- 71.8
Equity in subsidiary (income) loss (159.1) --
- ---------------------------------------------------------------------------------------------
Income (loss) before income taxes 159.1 (119.2)
Provision (benefit) for income taxes -- (5.1)
Net income (loss) $ 159.1 $(114.1)
- ---------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Year Ended May 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Unconsolidated Unconsolidated
Fairchild Fairchild
Semiconductor Semiconductor Guarantor
(In millions) International, Inc. Corporation Subsidiary
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities: $ -- $ (14.7) $(29.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures -- (26.6) (0.5)
Proceeds from sale of property, plant and equipment -- 1.0 30.2
Purchase of molds and tooling -- -- --
Refundable payment of value added tax
associated with acquisitions -- -- --
Investment (in) from affiliate (50.0) 50.0 --
Net intercompany investing -- (406.8) --
Acquisitions, net of cash acquired -- (8.1) --
Cash provided by (used in) investing activities (50.0) (390.5) 29.7
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt -- (151.3) --
Issuance of long-term debt 50.0 610.0 --
Debt issuance costs -- (22.3) --
Cash provided by financing activities 50.0 436.4 --
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents -- 31.2 0.3
Cash and cash equivalents at beginning of period -- 1.9 --
Cash and cash equivalents at end of period $ -- $ 33.1 $ 0.3
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:
Cash paid (refunded) during the year for:
Income taxes $ -- $ (2.0) $ --
Interest $ -- $ 46.6 $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated
Non- Fairchild
Guarantor Semiconductor
(In millions) Subsidiaries International, Inc.
- -------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities: $ 88.2 $ 44.1
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (19.1) (46.2)
Proceeds from sale of property, plant and equipment -- 31.2
Purchase of molds and tooling (3.8) (3.8)
Refundable payment of value added tax
associated with acquisitions (40.9) (40.9)
Investment (in) from affiliate -- --
Net intercompany investing 406.8 --
Acquisitions, net of cash acquired (406.8) (414.9)
Cash provided by (used in) investing activities (63.8) (474.6)
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt -- (151.3)
Issuance of long-term debt -- 660.0
Debt issuance costs -- (22.3)
Cash provided by financing activities -- 486.4
- -------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 24.4 55.9
Cash and cash equivalents at beginning of period 4.6 6.5
Cash and cash equivalents at end of period $ 29.0 $ 62.4
- -------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:
Cash paid (refunded) during the year for:
Income taxes $ 2.0 $ --
Interest $ -- $ 46.6
- -------------------------------------------------------------------------------------------------------
47
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Year Ended May 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Unconsolidated Unconsolidated
Fairchild Fairchild Non-
Semiconductor Semiconductor Guarantor Guarantor
(In millions) International, Inc. Corporation Subsidiary Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue:
Net sales -- trade $ -- $ 222.1 $32.1 $381.6
Net sales -- intercompany -- 786.6 -- 114.4
Contract manufacturing --
National Semiconductor -- 153.4 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue -- 1,162.1 32.1 496.0
Operating expenses:
Cost of sales -- trade -- 39.3 20.0 382.3
Cost of sales -- intercompany -- 830.0 -- 71.0
Cost of contract manufacturing --
National Semiconductor -- 117.1 -- --
Research and development -- 30.1 4.6 1.0
Selling, general and administrative -- 65.8 5.1 21.1
Purchased in-process
research and development -- 15.5 -- --
Total operating expenses -- 1,097.8 29.7 475.4
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income -- 64.3 2.4 20.6
Interest expense, net 9.8 43.0 1.8 (0.1)
Equity in subsidiary income (28.7) (16.9) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 18.9 38.2 0.6 20.7
Provision (benefit) for income taxes (3.2) 9.5 0.2 4.2
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect
of change in accounting principle 22.1 28.7 0.4 16.5
Cumulative effect of change
in accounting principle,
net of tax effect of $0.8 million (1.5) -- -- --
Net income $ 20.6 $ 28.7 $ 0.4 $ 16.5
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated
Fairchild
Semiconductor
(In millions) Eliminations International, Inc.
- ---------------------------------------------------------------------------------------
Revenue:
Net sales -- trade $ -- $635.8
Net sales -- intercompany (901.0) --
Contract manufacturing --
National Semiconductor -- 153.4
- ---------------------------------------------------------------------------------------
Total revenue (901.0) 789.2
Operating expenses:
Cost of sales -- trade -- 441.6
Cost of sales -- intercompany (901.0) --
Cost of contract manufacturing --
National Semiconductor -- 117.1
Research and development -- 35.7
Selling, general and administrative -- 92.0
Purchased in-process
research and development -- 15.5
Total operating expenses (901.0) 701.9
- ---------------------------------------------------------------------------------------
Operating income -- 87.3
Interest expense, net -- 54.5
Equity in subsidiary income 45.6 --
- ---------------------------------------------------------------------------------------
Income before income taxes (45.6) 32.8
Provision (benefit) for income taxes -- 10.7
- ---------------------------------------------------------------------------------------
Income before cumulative effect
of change in accounting principle (45.6) 22.1
Cumulative effect of change
in accounting principle,
net of tax effect of $0.8 million -- (1.5)
Net income $ (45.6) $ 20.6
- ---------------------------------------------------------------------------------------
48
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Year Ended May 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Unconsolidated Unconsolidated
Fairchild Fairchild Non-
Semiconductor Semiconductor Guarantor Guarantor
(In millions) International, Inc. Corporation Subsidiary Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by
operating activities: $ -- $ 105.4 $ 0.4 $ 30.3
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures -- (48.7) (0.4) (28.9)
Purchase of molds and tooling -- -- -- (5.7)
Acquisitions, net of cash acquired -- (116.8) -- --
Cash used by investing activities -- (165.5) (0.4) (34.6)
- -----------------------------------------------------------------------------------------------------------------------------------
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) -- (4.3)
Cash and cash equivalents
at beginning of period -- 31.8 -- 8.9
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ -- $ 1.9 $ -- $ 4.6
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes $ -- $ 7.7 $ -- $ 1.2
Interest $ -- $ 43.8 $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated
Fairchild
Semiconductor
(In millions) Eliminations International, Inc.
- --------------------------------------------------------------------------------------
Cash flows provided by
operating activities: $ -- $ 136.1
- --------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures -- (78.0)
Purchase of molds and tooling -- (5.7)
Acquisitions, 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
- --------------------------------------------------------------------------------------
49
NOTE 20 -- UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial information for
Stub Year 1999 and Fiscal 1999:
Stub Year 1999
(In millions, except per share data) First Second Third (d)
- ---------------------------------------------------------------------------------------
Total revenue $ 324.5 $ 356.8 $ 104.9
Gross profit 95.5 113.3 26.1
Net income (loss) (a) (8.0) 22.5 6.8
Net income (loss)
applicable to common
stockholders (a) (10.0) 22.5 6.8
Basic earnings (loss)
per common share $ (0.15) $ 0.25 $ 0.08
Diluted earnings (loss)
per common share $ (0.15) $ 0.24 $ 0.07
Fiscal 1999
First Second Third Fourth
- ---------------------------------------------------------------------------------------
Total revenue (c) $ 151.3 $ 167.9 $ 169.4 $ 246.5
Gross profit (c) 36.7 35.6 41.0 45.3
Net income (loss) (b) (c) (16.2) (9.9) (11.1) (76.9)
Net income (loss)
applicable to common
stockholders (b) (c) (18.5) (12.3) (13.6) (79.5)
Basic earnings (loss)
per common share $ (0.29) $ (0.20) $ (0.22) $ (1.26)
Diluted earnings (loss)
per common share $ (0.29) $ (0.20) $ (0.22) $ (1.26)
Note: Amounts may not add due to rounding
(a) During the first quarter of Stub Year 1999, the Company recorded a charge of
$8.3 million for the forgiveness of certain loans made to the Company's
management investors for payment of individual income tax liabilities resulting
from their ownership of Fairchild International's common stock. (See Note 10)
(b) During the first, third and fourth quarters of Fiscal 1999, the Company
recorded charges of $4.5 million, $2.7 million and $48.1 million, respectively,
for restructuring charges and purchased in-process research and development.
(See Notes 11 and 17)
(c) In the fourth quarter of Fiscal 1999, the Company recorded charges to
write-off inventories ($9.9 million) and to increase sales reserves ($5.5
million) in connection with the Memory Division product line restructuring plan.
(See Note 11)
(d) The third quarter represents the four-week period beginning November 29,
1999 and ending December 26, 1999.
NOTE 21 -- SUBSEQUENT EVENT
On January 25, 2000, the Company completed a follow-on public offering of
23,500,000 shares of its Class A Common Stock at a price of $33.4375 per share.
The underwriting discount was $1.50 per share. The 23,500,000 shares included
6,140,880 newly issued shares sold by the Company and 17,359,120 shares sold by
existing stockholders including all remaining shares owned by National
Semiconductor. The Company did not receive any of the proceeds from shares sold
by the existing stockholders. In addition, the Company sold 1,410,000 additional
shares pursuant to the underwriter's overallotment option. The net proceeds to
the Company after the underwriting discount and other related expenses were
approximately $239.7 million.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fairchild Semiconductor International, Inc.:
We have audited the accompanying consolidated balance sheets of Fairchild
Semiconductor International, Inc. and subsidiaries (the "Company") as of
December 26, 1999 and May 30, 1999, the related consolidated statements of
operations and stockholders' equity (deficit) for the seven months ended
December 26, 1999 and for each of the years in the three-year period ended May
30, 1999, and the related consolidated statements of cash flows for the seven
months ended December 26, 1999 and for the years ended May 30, 1999 and
50
May 31, 1998. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements were prepared on the basis of
presentation as described in Note 1. Prior to March 11, 1997, the statements
present the combined business equity and the related combined revenues less
direct expenses before taxes of the Fairchild Semiconductor Business of National
Semiconductor Corporation (the Business), and are not intended to be a complete
presentation of the Business' financial position, results of operations or cash
flows. The results of operations before taxes are not necessarily indicative of
the results of operations before taxes that would have been recorded by the
Company on a stand-alone basis.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 26, 1999 and May 30, 1999, the results of operations for the seven
months ended December 26, 1999 and for each of the years in the three-year
period ended May 30, 1999, and the results of cash flows for the seven months
ended December 26, 1999 and for the years ended May 30, 1999 and May 31, 1998,
on the basis described in Note 1, in conformity with generally accepted
accounting principles.
As discussed in Note 18 to the consolidated financial statements, the
Company changed its method of accounting for business process reengineering
costs in the year ended May 31, 1998, to adopt the provisions of the Emerging
Issues Task Force Issue 97-13, "Accounting for Business Process Reengineering
Costs."
/s/ KPMG LLP
Boston, Massachusetts
January 21, 2000, except as to Note 21, which is as of January 25, 2000
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A Common Stock began trading on the New York Stock Exchange
("NYSE") on August 4, 1999 under the trading symbol "FCS". There is no
established public trading market for our Class B Common Stock. The following
table sets forth for the periods indicated the high and low closing sales prices
per share of Fairchild Semiconductor International, Inc. Class A Common Stock,
as reported by the NYSE:
High Low
- ------------------------------------------------------------------
First Quarter (from
August 4 to August 29, 1999) $ 28.50 $ 18.50
Second Quarter (from
August 30 to November 28, 1999 $ 32.00 $ 19.50
Remainder of Stub Year 1999 (from
November 29 to December 26, 1999) $ 34.13 $ 24.75
First Quarter of Fiscal 2000 (from
December 27, 1999 through
March 3, 2000) $ 41.94 $ 25.94
As of March 3, 2000, there were approximately 440 holders of record of our
Class A Common Stock and one holder of our Class B Common Stock. We have not
paid dividends on our Common Stock and have no present intention of so doing.
Certain agreements, pursuant to which we have borrowed funds, contain provisions
that limit the amount of dividends and stock repurchases that we may make.