1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 1, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 001-15181
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
DELAWARE 04-3363001
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</Table>
82 RUNNING HILL ROAD
SOUTH PORTLAND, MAINE 04106
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (207) 775-8100
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] No [ ]
The number of shares outstanding of the issuer's classes of common stock as
of the close of business on July 1, 2001:
<Table>
<Caption>
NUMBER
TITLE OF EACH CLASS OF SHARES
- ------------------- ----------
Class A Common Stock, par value $.01 per share.............. 99,508,445
</Table>
- --------------------------------------------------------------------------------
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2
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<Table>
<Caption>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
2
Condensed Consolidated Balance Sheets as of July 1, 2001
(Unaudited) and December 31, 2000.........................
3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three and Six Months Ended July 1, 2001 and July
2, 2000...................................................
4
Condensed Consolidated Statements of Comprehensive Income
(Unaudited) for the Three and Six Months Ended July 1,
2001 and July 2, 2000.....................................
5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended July 1, 2001 and July 2, 2000....
6
Notes to Condensed Consolidated Financial Statements
(Unaudited)...............................................
Item 2. Management's Discussion and Analysis of Financial Condition 17
and Results of Operations.................................
Item 3. Quantitative and Qualitative Disclosures about Market 31
Risk......................................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 31
Item 2. Changes in Securities....................................... 31
Item 4. Submission of Matters to a Vote of Security Holders......... 32
Item 6. Exhibits and Reports on Form 8-K............................ 32
SIGNATURE............................................................ 34
</Table>
1
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<Table>
<Caption>
JULY 1, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 256.9 $ 401.8
Accounts receivable, net.................................. 185.1 225.0
Inventories............................................... 233.2 192.8
Deferred income taxes..................................... 46.9 47.3
Other current assets...................................... 13.6 9.5
-------- --------
Total current assets.............................. 735.7 876.4
Property, plant and equipment, net.......................... 681.8 596.6
Intangible assets, net...................................... 503.9 298.1
Other assets................................................ 90.8 66.4
-------- --------
Total assets...................................... $2,012.2 $1,837.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 0.4 $ --
Accounts payable.......................................... 118.3 155.3
Accrued expenses and other current liabilities............ 116.9 136.9
-------- --------
Total current liabilities......................... 235.6 292.2
Long-term debt, less current portion........................ 938.4 705.2
Other liabilities........................................... 3.3 2.4
-------- --------
Total liabilities................................. 1,177.3 999.8
Commitments and contingencies
Stockholders' equity:
Class A common stock...................................... 1.0 0.8
Class B common stock...................................... -- 0.2
Additional paid-in capital................................ 802.8 801.1
Retained earnings......................................... 35.4 41.8
Accumulated other comprehensive income.................... 1.1 --
Less treasury stock at cost............................... (5.4) (6.2)
-------- --------
Total stockholders' equity........................ 834.9 837.7
-------- --------
Total liabilities and stockholders' equity........ $2,012.2 $1,837.5
======== ========
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
2
4
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ------------------
JULY 1, JULY 2, JULY 1, JULY 2,
2001 2000 2001 2000
------- ------- ------- -------
Revenue:
Net sales -- trade.................................... $354.5 $410.0 $722.3 $778.9
Contract manufacturing................................ 17.9 26.7 35.4 59.5
------ ------ ------ ------
Total revenue................................. 372.4 436.7 757.7 838.4
Operating expenses:
Cost of sales -- trade................................ 268.7 259.4 523.7 503.9
Cost of contract manufacturing........................ 11.2 16.7 23.4 36.7
Research and development.............................. 21.8 18.8 45.3 36.6
Selling, general and administrative................... 41.0 45.6 84.3 90.6
Amortization of acquisition-related intangibles....... 14.2 9.0 24.6 17.4
Purchased in-process research and development......... -- 3.2 12.8 3.2
Restructuring and impairments......................... 3.9 -- 13.4 (5.6)
------ ------ ------ ------
Total operating expenses...................... 360.8 352.7 727.5 682.8
------ ------ ------ ------
Operating income........................................ 11.6 84.0 30.2 155.6
Interest expense........................................ 26.6 22.9 50.5 43.7
Interest income......................................... (3.0) (6.0) (10.4) (10.0)
------ ------ ------ ------
Income (loss) before income taxes....................... (12.0) 67.1 (9.9) 121.9
Provision (benefit) for income taxes.................... (4.0) 7.4 (3.5) 12.2
------ ------ ------ ------
Net income (loss)....................................... $ (8.0) $ 59.7 $ (6.4) $109.7
====== ====== ====== ======
Net income (loss) per common share:
Basic................................................. $(0.08) $ 0.61 $(0.06) $ 1.15
====== ====== ====== ======
Diluted............................................... $(0.08) $ 0.59 $(0.06) $ 1.09
====== ====== ====== ======
Weighted average common shares:
Basic................................................. 99.5 97.6 99.4 95.8
====== ====== ====== ======
Diluted............................................... 99.5 102.0 99.4 100.2
====== ====== ====== ======
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
3
5
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JULY 1, JULY 2, JULY 1, JULY 2,
2001 2000 2001 2000
------- ------- ------- -------
Net income (loss)................................... $(8.0) $59.7 $(6.4) $109.7
Other comprehensive income (loss), net of tax:
Net change associated with hedging transactions... (0.4) -- 1.9 --
Net amount reclassed to earnings.................. (0.8) -- (0.8) --
----- ----- ----- ------
Comprehensive income (loss)......................... $(9.2) $59.7 $(5.3) $109.7
===== ===== ===== ======
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
4
6
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
------------------
JULY 1, JULY 2,
2001 2000
------- -------
Cash flows from operating activities:
Net income (loss)........................................... $ (6.4) $ 109.7
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization............................. 85.8 72.9
Amortization of deferred compensation..................... 2.2 2.0
Restructuring and impairments............................. 9.5 (2.3)
Non-cash interest expense................................. 2.2 5.7
Purchased in-process research and development............. 12.8 3.2
Loss on disposal of property, plant and equipment......... 1.0 1.2
Deferred income taxes..................................... (5.7) (0.1)
Changes in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable....................................... 36.1 (36.8)
Inventories............................................... (11.2) (1.4)
Other current assets...................................... 3.8 (1.8)
Current liabilities....................................... (60.4) 18.6
Other assets and liabilities, net......................... (6.5) (7.1)
------- -------
Cash provided by operating activities............. 63.2 163.8
------- -------
Cash flows from investing activities:
Capital expenditures...................................... (77.1) (109.9)
Purchase of molds and tooling............................. (2.0) (1.5)
Purchase of long-term investments......................... (3.5) (7.2)
Acquisitions, net of cash acquired........................ (344.1) (22.7)
------- -------
Cash used in investing activities................. (426.7) (141.3)
------- -------
Cash flows from financing activities:
Proceeds from revolving credit facility, net.............. -- 2.1
Repayment of long-term debt............................... (120.4) (0.8)
Issuance of long-term debt................................ 350.0 --
Proceeds from issuance of common stock and from exercise
of stock options, net.................................. 3.3 243.1
Purchase of treasury stock................................ (3.4) --
Debt issuance costs....................................... (10.9) (2.1)
------- -------
Cash provided by financing activities............. 218.6 242.3
------- -------
Net change in cash and cash equivalents..................... (144.9) 264.8
Cash and cash equivalents at beginning of period............ 401.8 138.7
------- -------
Cash and cash equivalents at end of period.................. $ 256.9 $ 403.5
======= =======
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
5
7
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheets of Fairchild Semiconductor
International, Inc. (the "Company") as of July 1, 2001 and December 31, 2000,
and the Condensed Consolidated Statements of Operations, Comprehensive Income
and Cash Flows for the three and six months ended July 1, 2001 and July 2, 2000,
were prepared by the Company. In the opinion of management, the accompanying
condensed consolidated financial statements contain all adjustments (consisting
of only normal recurring items) necessary to present fairly the financial
position and results of operations of the Company, in accordance with accounting
principles generally accepted in the United States of America. Interim results
of operations are not necessarily indicative of the results to be expected for
the full year. This report should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the fiscal year ended December 31, 2000.
Certain prior period amounts have been reclassified to conform to their
current presentation.
NOTE 2 -- INVENTORIES
The components of inventories are as follows:
<Table>
<Caption>
JULY 1, DECEMBER 31,
2001 2000
------- ------------
(IN MILLIONS)
Raw materials.......................................... $ 32.8 $ 24.8
Work in process........................................ 147.6 123.9
Finished goods......................................... 52.8 44.1
------ ------
Total inventories............................ $233.2 $192.8
====== ======
</Table>
NOTE 3 -- COMPUTATION OF NET INCOME (LOSS) PER SHARE
Basic net income per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income per
common share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of stock options. As a result of the net loss for the
three and six months ended July 1, 2001, approximately 3.1 million and 2.6
million, respectively, potential common equivalent shares have been excluded
from the calculation of diluted net loss per common share because their effect
would be anti-dilutive. In addition, options where the exercise price was
greater than the average market price of the common shares of 7,693,840 and
281,500 were excluded from the computation of diluted net income (loss) per
share for the periods ending July 1, 2001 and July 2, 2000, respectively.
6
8
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles basic to diluted weighted average shares
outstanding:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JULY 1, JULY 2, JULY 1, JULY 2,
2001 2000 2001 2000
------- ------- ------- -------
(IN MILLIONS)
Basic weighted average common
shares outstanding......................... 99.5 97.6 99.4 95.8
Net effect of dilutive stock options based on
the
treasury stock method using the average
market price............................... -- 4.4 -- 4.4
---- ----- ---- -----
Diluted weighted average common shares
outstanding................................ 99.5 102.0 99.4 100.2
==== ===== ==== =====
</Table>
NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION
<Table>
<Caption>
SIX MONTHS ENDED
------------------
JULY 1, JULY 2,
2001 2000
------- -------
(IN MILLIONS)
Cash paid for:
Income taxes.............................................. $ 6.8 $ 1.8
===== =====
Interest.................................................. $33.8 $36.1
===== =====
</Table>
NOTE 5 -- ACQUISITIONS
On March 16, 2001, the Company completed its acquisition of the discrete
power products business of Intersil Corporation (DPP) for a purchase price of
approximately $344.1 million in cash, including related acquisition expenses.
DPP is a leading provider of silicon-based discrete power devices for the
computer, communications, industrial, automotive, and space and defense end-user
markets. The transaction was accounted for as a purchase and DPP's results of
operations since the date of acquisition have been included in the accompanying
statement of operations. In connection with the DPP acquisition, the Company
recorded a non-recurring charge of $12.8 million for in-process research and
development. The remaining purchase price in excess of the fair value of
tangible and identifiable intangible assets was allocated to goodwill.
Intangible assets have been assigned lives ranging from three to fifteen years.
NOTE 6 -- SEGMENT INFORMATION
The Company is currently organized into three reportable segments: Analog
and Mixed Signal Products Group (Analog), Discrete Products Group (Discrete) and
Interface and Logic Products Group (Interface and Logic). The operating results
for DPP are included within the Discrete reporting segment.
The Company has determined that its Configurable Products business unit
(formerly known as the Non-Volatile Memory Division which was reported as a
separate segment) and its Optoelectronics Group do not meet the threshold for a
separate reportable segment under SFAS No. 131, and accordingly these segments'
results are included as part of the "Other" category for all periods presented.
The Company's contract manufacturing business is not a separate reportable
segment and its results are recorded together with the Configurable Products
business unit and the Optoelectronics Group in the "Other" category. Management
evaluates the contract manufacturing business differently than its other
operating segments, due in large part to the fact that it is predominantly
driven by contractual agreements for limited time periods, entered into with the
Company's former parent National Semiconductor and Samsung Electronics.
7
9
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Selected operating segment financial information for the three and six
months ended July 1, 2001 and July 2, 2000 is as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ------------------
JULY 1, JULY 2, JULY 1, JULY 2,
2001 2000 2001 2000
------- ------- ------- -------
(IN MILLIONS)
REVENUE:
Analog.......................................... $ 70.5 $ 94.5 $154.2 $181.0
Discrete........................................ 179.1 183.0 334.3 357.4
Interface and Logic............................. 73.6 104.8 165.7 198.3
Other(1)........................................ 49.2 54.4 103.5 101.7
------ ------ ------ ------
Total................................. $372.4 $436.7 $757.7 $838.4
====== ====== ====== ======
</Table>
<Table>
<Caption>
THREE MONTHS
ENDED SIX MONTHS ENDED
------------------ ------------------
JULY 1, JULY 2, JULY 1, JULY 2,
2001 2000 2001 2000
------- ------- ------- -------
(IN MILLIONS)
OPERATING INCOME:
Analog........................................... $(4.1) $14.0 $ -- $ 24.1
Discrete......................................... 7.3 32.2 19.6 58.0
Interface and Logic.............................. 9.1 24.2 30.3 41.0
Other(1)......................................... 3.2 16.8 6.5 30.1
----- ----- ------ ------
Subtotal......................................... 15.5 87.2 56.4 153.2
Purchased in-process research and development.... -- (3.2) (12.8) (3.2)
Restructuring and impairments.................... (3.9) -- (13.4) 5.6
----- ----- ------ ------
Total.................................. $11.6 $84.0 $ 30.2 $155.6
===== ===== ====== ======
</Table>
- ---------------
(1) Other includes revenues and operating income from contract manufacturing
activities disclosed in the Company's statements of operations. The Company
allocates no other costs to its contract manufacturing business other than
those separately shown in the statements of operations.
NOTE 7 -- RESTRUCTURING AND IMPAIRMENTS
During the three and six months ended July 1, 2001, the Company recorded
pre-tax restructuring and impairment charges of $3.9 million and $13.4 million,
respectively. In the second quarter of 2001 the charge is due to employee
separation costs related to severance and other benefits associated with work
force reduction actions affecting approximately 400 employees in the United
States and Malaysia. For the six months ended July 1, 2001 these charges also
include an $8.3 million charge for asset impairments relating to the
consolidation of the five-inch wafer fabrication line in South Portland, Maine
and $1.2 million for employee separation costs, affecting approximately 300
employees in the Philippines, recorded in the first quarter.
During the six months ended July 2, 2000, the Company recorded a pre-tax
restructuring gain of approximately $5.6 million. During the first quarter of
2000, the Company re-evaluated and subsequently adjusted its non-cash
restructuring accruals based upon final execution of several of its plans. This
resulted in a one-time gain of $2.1 million. The Company also recorded a
one-time gain of $3.5 million for additional funds received in connection with
the sale of its former Mountain View, California facility.
8
10
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the previously mentioned restructuring and
impairment charges for the six months July 1, 2001 (millions):
<Table>
Accrual balance as of December 31, 2000..................... $ --
Accrual................................................... 9.5
Non-cash items............................................ (8.3)
-----
Accrual balance as of April 1, 2001......................... 1.2
Accrual................................................... 3.9
Cash payments............................................. (3.9)
-----
Accrual balance as of July 1, 2001.......................... $ 1.2
=====
</Table>
The Company expects that all amounts will be substantially paid before the
end of the year.
NOTE 8 -- EQUITY
Effective March 7, 2001, one of the Company's principal stockholders
converted its 17,281,000 shares of Class B into an equal number of to Class A
Common Stock. As a result, no Class B shares were outstanding at July 1, 2001.
Total common shares outstanding were not affected by this transaction. Shares of
the Company's Class A Common Stock and Class B Common Stock are identical in all
respects, except that Class B shares have no voting rights, other than as
provided by law, and there is no public market for Class B shares.
NOTE 9 -- LONG-TERM DEBT
In connection with the financing of the DPP acquisition (See Note 5), on
January 31, 2001, the Company's principal operating subsidiary, Fairchild
Semiconductor Corporation, completed a private offering of $350.0 million of
10 1/2% senior subordinated notes (the "10 1/2% Notes"). Interest on the notes
will be paid semi-annually on February 1 and August 1 of each year commencing on
August 1, 2001. The 10 1/2% Notes are unsecured and are subordinated to all
existing and future senior indebtedness of the Company. The Company may redeem
the notes on or after February 1, 2005. Prior to February 1, 2004, the Company
may redeem up to 35% of the 10 1/2% Notes from the proceeds of certain equity
offerings. Net proceeds from this debt issuance, after deducting the
underwriting discount and offering expenses of approximately $10.9 million, were
$339.1 million.
On June 8, 2001, the Company completed an offer to exchange the privately
placed 10 1/2% Notes for publicly registered notes with substantially identical
terms of the privately placed notes, except that certain transfer restrictions,
registration rights and liquidated damages provisions relating to the previously
outstanding notes will not apply.
The Company's senior credit facility and the indentures governing the
10 1/8% Senior Subordinated Notes, 10 3/8% Senior Subordinated Notes and 10 1/2%
Senior Subordinated Notes impose various restrictions and covenants. 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,
restrictions on capital expenditures and limitations on incurring indebtedness,
among other restrictions. In addition, the senior credit facility contains
covenants relating to financial ratios including a minimum interest coverage
ratio and a maximum senior leverage ratio. Provided there are no outstanding
balances, compliance with these ratios is not required until the quarter ended
March 2003. The senior credit facility also limits the Company's ability to
modify the certificate of incorporation, bylaws, shareholder agreements, voting
trusts or similar arrangements. In addition, the senior credit facility, the
indenture governing the 10 1/8% Senior Subordinated Notes, the 10 3/8% Senior
Subordinated Notes and the 10 1/2% Senior Subordinated Notes contain additional
restrictions limiting the ability of the Company's subsidiaries to pay dividends
or make advances to the Company.
9
11
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- DERIVATIVES
Effective January 1, 2001, the Company adopted SFAS 133, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities,
and SFAS 138, which modified certain provisions of SFAS 133. All derivatives,
whether designated as hedging relationships or not, are required to be recorded
on the balance sheet at fair value. If the derivative is designated as a fair
value hedge, the changes in the fair value of the derivative and of the hedged
item attributable to the hedged risk are recognized in earnings. If the
derivative is designated as a cash flow hedge, the effective portions of changes
in the fair value of the derivative are recorded in other comprehensive income
(OCI) and are recognized in the income statement when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges
are recognized in earnings.
The Company uses derivative instruments to manage exposures to foreign
currencies. Certain forecasted transactions are exposed to foreign currency
risks. The Company monitors its foreign currency exposures to maximize the
overall effectiveness of its foreign currency hedge positions. Principal
currencies hedged include the Euro and the Japanese yen. The Company's
objectives for holding derivatives are to minimize the risks using the most
effective methods to eliminate or reduce the impacts of these exposures.
Changes in the fair value of derivative instruments related to time value
are included in the assessment of hedge effectiveness. Hedge ineffectiveness,
determined in accordance with SFAS 133 and SFAS 138, had no impact on earnings
for the six months ended July 1, 2001. No cash flow hedges were derecognized or
discontinued for the six months ended July 1, 2001.
Derivative gains and losses included in OCI are reclassified into earnings
at the time the forecasted revenue is recognized. The Company estimates that the
entire $1.1 million of net derivative gains included in OCI will be reclassified
into earnings within the next twelve months.
The adoption of SFAS 133 and SFAS 138 on January 1, 2001, resulted in no
cumulative adjustment to income or OCI as no cash flow derivative instruments
were outstanding at December 31, 2000.
NOTE 11 -- CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED)
The Company operates through its wholly owned subsidiary Fairchild
Semiconductor Corporation and other indirect wholly owned subsidiaries.
Fairchild Semiconductor International, Inc. and certain of Fairchild
Semiconductor Corporation's subsidiaries are guarantors under the 10 1/8%,
10 3/8% and 10 1/2% Senior Subordinated Notes. These guaranties are full and
unconditional. In addition, all guaranties are joint and several. Accordingly,
presented below are condensed consolidating balance sheets of Fairchild
International as of July 1, 2001 and December 31, 2000 and related condensed
consolidating statements of operations and cash flows for the three and six
months ended July 1, 2001 and July 2, 2000.
10
12
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
<Table>
<Caption>
JULY 1, 2001
---------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD NON-
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS
------------------- -------------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......... $ -- $ 240.9 $ 0.3 $ 15.7 $ --
Accounts receivable, net.......... -- 48.4 30.5 106.2 --
Inventories....................... -- 105.3 45.2 82.7 --
Deferred income taxes............. -- 46.1 0.8 -- --
Other current assets.............. -- 6.0 0.2 7.4 --
------ -------- ------ ------ ---------
Total current assets....... -- 446.7 77.0 212.0 --
Property, plant and equipment,
net............................... -- 258.2 74.5 349.1 --
Intangible assets, net.............. -- 9.5 315.1 179.3 --
Investment in subsidiary............ 827.9 934.0 147.8 (1.4) (1,908.3)
Other assets........................ 5.9 69.8 9.6 5.5 --
------ -------- ------ ------ ---------
Total assets............... $833.8 $1,718.2 $624.0 $744.5 $(1,908.3)
====== ======== ====== ====== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt............................ $ -- $ 0.4 $ -- $ -- $ --
Accounts payable.................. -- 54.8 10.8 52.7 --
Accrued expenses and other current
liabilities..................... -- 71.6 5.8 39.5 --
------ -------- ------ ------ ---------
Total current
liabilities.............. -- 126.8 16.6 92.2 --
Long-term debt, less current
portion........................... -- 938.4 -- -- --
Net intercompany (receivable)
payable........................... -- (181.4) 16.6 164.8 --
Other liabilities................... -- 6.5 3.0 (6.2) --
------ -------- ------ ------ ---------
Total liabilities.......... -- 890.3 36.2 250.8 --
------ -------- ------ ------ ---------
Commitments and contingencies
Stockholders' equity:
Class A common stock.............. 1.0 -- (6.2) 6.2 --
Class B common stock.............. -- -- -- -- --
Additional paid-in capital........ 802.8 -- -- -- --
Retained earnings (deficit)....... 35.4 826.8 594.0 487.5 (1,908.3)
Accumulated other comprehensive
income.......................... -- 1.1 -- -- --
Less treasury stock (at cost)..... (5.4) -- -- -- --
------ -------- ------ ------ ---------
Total stockholders'
equity................... 833.8 827.9 587.8 493.7 (1,908.3)
------ -------- ------ ------ ---------
Total liabilities and
stockholders' equity..... $833.8 $1,718.2 $624.0 $744.5 $(1,908.3)
====== ======== ====== ====== =========
<Caption>
JULY 1, 2001
-------------------
CONSOLIDATED
FAIRCHILD
SEMICONDUCTOR
INTERNATIONAL, INC.
-------------------
ASSETS
Current assets:
Cash and cash equivalents......... $ 256.9
Accounts receivable, net.......... 185.1
Inventories....................... 233.2
Deferred income taxes............. 46.9
Other current assets.............. 13.6
--------
Total current assets....... 735.7
Property, plant and equipment,
net............................... 681.8
Intangible assets, net.............. 503.9
Investment in subsidiary............ --
Other assets........................ 90.8
--------
Total assets............... $2,012.2
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt............................ $ 0.4
Accounts payable.................. 118.3
Accrued expenses and other current
liabilities..................... 116.9
--------
Total current
liabilities.............. 235.6
Long-term debt, less current
portion........................... 938.4
Net intercompany (receivable)
payable........................... --
Other liabilities................... 3.3
--------
Total liabilities.......... 1,177.3
--------
Commitments and contingencies
Stockholders' equity:
Class A common stock.............. 1.0
Class B common stock.............. --
Additional paid-in capital........ 802.8
Retained earnings (deficit)....... 35.4
Accumulated other comprehensive
income.......................... 1.1
Less treasury stock (at cost)..... (5.4)
--------
Total stockholders'
equity................... 834.9
--------
Total liabilities and
stockholders' equity..... $2,012.2
========
</Table>
11
13
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED JULY 1, 2001
-------------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ------------ ------------ ------------ -------------------
Revenue:
Net sales -- trade.... $ -- $ 62.8 $ 42.6 $249.1 $ -- $354.5
Net sales --
intercompany........ -- 228.2 21.1 86.7 (336.0) --
Contract
manufacturing....... -- 14.8 -- 3.1 -- 17.9
----- ------ ------ ------ ------- ------
Total revenue... -- 305.8 63.7 338.9 (336.0) 372.4
Operating expenses:
Cost of sales......... -- 33.4 38.0 197.3 -- 268.7
Cost of sales --
intercompany........ -- 225.4 19.9 90.7 (336.0) --
Cost of contract
manufacturing....... -- 9.5 -- 1.7 -- 11.2
Research and
development......... -- 11.7 5.5 4.6 -- 21.8
Selling, general and
administrative...... -- 23.1 6.3 11.6 -- 41.0
Amortization of
acquisition-related
intangibles......... -- 0.1 6.7 7.4 -- 14.2
Purchased in-process
research and
development......... -- -- -- -- -- --
Restructuring and
impairments......... -- 2.5 0.8 0.6 -- 3.9
----- ------ ------ ------ ------- ------
Total operating
expenses...... -- 305.7 77.2 313.9 (336.0) 360.8
----- ------ ------ ------ ------- ------
Operating income
(loss)................ -- 0.1 (13.5) 25.0 -- 11.6
Interest expense........ -- 26.5 -- 0.1 -- 26.6
Interest income......... -- (3.0) 0.1 (0.1) -- (3.0)
Equity in subsidiary
(income) loss......... 8.0 (11.6) (12.4) -- 16.0 --
----- ------ ------ ------ ------- ------
Income (loss) before
income taxes.......... (8.0) (11.8) (1.2) 25.0 (16.0) (12.0)
Provision (benefit) for
income taxes.......... -- (3.8) -- (0.2) -- (4.0)
----- ------ ------ ------ ------- ------
Net income (loss)..... $(8.0) $ (8.0) $ (1.2) $ 25.2 $ (16.0) $ (8.0)
===== ====== ====== ====== ======= ======
<Caption>
SIX MONTHS ENDED JULY 1, 2001
-------------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ------------ ------------ ------------ -------------------
Revenue:
Net sales -- trade.... $ -- $139.4 $ 50.1 $532.8 $ -- $722.3
Net sales --
intercompany........ -- 458.9 41.2 178.5 (678.6) --
Contract
manufacturing....... -- 30.8 -- 4.6 -- 35.4
----- ------ ------ ------ ------- ------
Total revenue... -- 629.1 91.3 715.9 (678.6) 757.7
Operating expenses:
Cost of sales......... -- 69.3 47.3 407.1 -- 523.7
Cost of sales --
intercompany........ -- 454.1 38.9 185.6 (678.6) --
Cost of contract
manufacturing....... -- 20.7 -- 2.7 -- 23.4
Research and
development......... -- 24.0 10.7 10.6 -- 45.3
Selling, general and
administrative...... -- 49.5 10.0 24.8 -- 84.3
Amortization of
acquisition-related
intangibles......... -- 0.2 9.6 14.8 -- 24.6
Purchased in-process
research and
development......... -- -- 12.8 -- -- 12.8
Restructuring and
impairments......... -- 10.8 1.2 1.4 -- 13.4
----- ------ ------ ------ ------- ------
Total operating
expenses...... -- 628.6 130.5 647.0 (678.6) 727.5
----- ------ ------ ------ ------- ------
Operating income
(loss)................ -- 0.5 (39.2) 68.9 -- 30.2
Interest expense........ -- 50.4 -- 0.1 -- 50.5
Interest income......... -- (10.3) 0.1 (0.2) -- (10.4)
Equity in subsidiary
(income) loss......... 6.4 (27.1) (31.7) -- 52.4 --
----- ------ ------ ------ ------- ------
Income (loss) before
income taxes.......... (6.4) (12.5) (7.6) 69.0 (52.4) (9.9)
Provision (benefit) for
income taxes.......... -- (6.1) -- 2.6 -- (3.5)
----- ------ ------ ------ ------- ------
Net income (loss)..... $(6.4) $ (6.4) $ (7.6) $ 66.4 $ (52.4) $ (6.4)
===== ====== ====== ====== ======= ======
</Table>
12
14
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JULY 2, 2001
----------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES INTERNATIONAL, INC.
------------------- -------------- ------------ ------------ -------------------
Cash flows used in operating
activities:..................... $ -- $ 33.3 $2.1 $ 27.8 $ 63.2
----- ------- ---- ------ -------
Investing activities:
Capital expenditures............ -- (37.9) -- (39.2) (77.1)
Purchase of molds and tooling... -- -- -- (2.0) (2.0)
Purchase of long-term
investments................... -- (3.5) -- -- (3.5)
Acquisitions, net of cash
acquired...................... -- (344.1) -- -- (344.1)
Investment (in) from
affiliate..................... 0.1 (0.1) -- -- --
----- ------- ---- ------ -------
Cash provided by (used
in) investing
activities............. 0.1 (385.6) -- (41.2) (426.7)
----- ------- ---- ------ -------
Financing activities:
Repayment of long-term debt..... (120.4) (120.4)
Issuance of long-term debt...... -- 350.0 -- -- 350.0
Proceeds from issuance of common
stock and from issuance of
stock options, net............ 3.3 -- -- -- 3.3
Purchase of treasury stock...... (3.4) -- -- -- (3.4)
Debt issuance costs............. -- (10.9) -- -- (10.9)
----- ------- ---- ------ -------
Cash provided by (used
in) financing
activities............. (0.1) 218.7 -- -- 218.6
----- ------- ---- ------ -------
Net change in cash and cash
equivalents..................... -- (133.6) 2.1 (13.4) (144.9)
Cash and cash equivalents at
beginning of period............. -- 374.5 -- 27.3 401.8
----- ------- ---- ------ -------
Cash and cash equivalents at end
of period....................... $ -- $ 240.9 $2.1 $ 13.9 $ 256.9
===== ======= ==== ====== =======
Supplemental Cash Flow
Information:
Cash paid during the year for:
Income taxes.................. $ -- $ 0.4 $ -- $ 6.4 $ 6.8
===== ======= ==== ====== =======
Interest...................... $ -- $ 33.8 $ -- $ -- $ 33.8
===== ======= ==== ====== =======
</Table>
13
15
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<Table>
<Caption>
DECEMBER 31, 2000
---------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD NON-
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS
------------------- -------------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents... $ -- $ 374.5 $ -- $ 27.3 $ --
Accounts receivable, net.... -- 53.7 5.1 166.2 --
Inventories................. -- 102.4 9.7 80.7 --
Deferred income taxes....... -- 46.5 0.8 -- --
Other current assets........ -- 1.6 3.9 4.0 --
------ -------- ------ ------ ---------
Total current
assets.............. -- 578.7 19.5 278.2 --
Property, plant and equipment,
net......................... -- 252.4 2.8 341.4 --
Intangible assets, net........ -- 11.6 102.4 184.1 --
Investment in subsidiary...... 831.8 601.6 146.5 -- (1,579.9)
Other assets.................. 5.9 36.1 16.7 7.7 --
------ -------- ------ ------ ---------
Total assets.......... $837.7 $1,480.4 $287.9 $811.4 $(1,579.9)
====== ======== ====== ====== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............ $ -- $ 86.2 $ 0.7 $ 68.4 $ --
Accrued expenses and other
current liabilities....... -- 77.1 5.9 53.9 --
------ -------- ------ ------ ---------
Total current
liabilities......... -- 163.3 6.6 122.3 --
Long-term debt................ -- 705.2 -- -- --
Net intercompany (receivable)
payable..................... -- (213.0) (31.1) 244.1 --
Other liabilities............. -- (6.9) 0.3 9.0 --
------ -------- ------ ------ ---------
Total liabilities..... -- 648.6 (24.2) 375.4 --
====== ======== ====== ====== =========
Commitments and contingencies
Stockholders' equity:
Class A common stock........ 0.8 -- -- -- --
Class B common stock........ 0.2 -- -- -- --
Additional paid-in
capital................... 801.1 -- -- -- --
Retained earnings........... 41.8 831.8 312.1 436.0 (1,579.9)
Less treasury stock (at
cost)..................... (6.2) -- -- -- --
------ -------- ------ ------ ---------
Total stockholders'
equity.............. 837.7 831.8 312.1 436.0 (1,579.9)
------ -------- ------ ------ ---------
Total liabilities and
stockholders'
equity.............. $837.7 $1,480.4 $287.9 $811.4 $(1,579.9)
====== ======== ====== ====== =========
<Caption>
DECEMBER 31, 2000
-------------------
CONSOLIDATED
FAIRCHILD
SEMICONDUCTOR
INTERNATIONAL, INC.
-------------------
ASSETS
Current assets:
Cash and cash equivalents... $ 401.8
Accounts receivable, net.... 225.0
Inventories................. 192.8
Deferred income taxes....... 47.3
Other current assets........ 9.5
--------
Total current
assets.............. 876.4
Property, plant and equipment,
net......................... 596.6
Intangible assets, net........ 298.1
Investment in subsidiary...... --
Other assets.................. 66.4
--------
Total assets.......... $1,837.5
========
LIABILITIES AND STOCKHOLDERS'
Current liabilities:
Accounts payable............ $ 155.3
Accrued expenses and other
current liabilities....... 136.9
--------
Total current
liabilities......... 292.2
Long-term debt................ 705.2
Net intercompany (receivable)
payable..................... --
Other liabilities............. 2.4
--------
Total liabilities..... 999.8
========
Commitments and contingencies
Stockholders' equity:
Class A common stock........ 0.8
Class B common stock........ 0.2
Additional paid-in
capital................... 801.1
Retained earnings........... 41.8
Less treasury stock (at
cost)..................... (6.2)
--------
Total stockholders'
equity.............. 837.7
--------
Total liabilities and
stockholders'
equity.............. $1,837.5
========
</Table>
14
16
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED JULY 2, 2000
---------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES
------------------- -------------- ------------
Revenue:
Net sales -- trade.......... $ -- $ 93.6 $ 8.9
Net sales -- intercompany... -- 248.3 4.2
Contract manufacturing...... -- 19.4 --
------ ------ ------
Total revenue......... -- 361.3 13.1
Operating expenses:
Cost of sales............... -- 26.0 5.7
Cost of sales --
intercompany.............. -- 246.5 4.2
Cost of contract
manufacturing............. -- 13.6 --
Research and development.... -- 11.0 2.9
Selling, general and
administrative............ -- 29.7 3.0
Amortization of acquisition-
related intangibles....... -- -- 1.4
Purchased in-process
research and
development............... -- -- 3.2
Restructuring and
impairments............... -- -- --
------ ------ ------
Total operating
expenses............. -- 326.8 20.4
------ ------ ------
Operating income (loss)...... -- 34.5 (7.3)
Interest expense............. -- 22.9 --
Interest income.............. -- (5.6) --
Equity in subsidiary (income)
loss........................ (59.7) (47.5) (34.8)
------ ------ ------
Income before income taxes... 59.7 64.7 27.5
Provision for income taxes... -- 5.0 0.7
------ ------ ------
Net income................... $ 59.7 $ 59.7 $ 26.8
====== ====== ======
<Caption>
THREE MONTHS ENDED JULY 2, 2000
-------------------------------------------------
CONSOLIDATED
NON- FAIRCHILD
GUARANTOR SEMICONDUCTOR
SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------ ------------ -------------------
Revenue:
Net sales -- trade.......... $307.5 $ -- $410.0
Net sales -- intercompany... 16.2 (268.7) --
Contract manufacturing...... 7.3 -- 26.7
------ ------- ------
Total revenue......... 331.0 (268.7) 436.7
Operating expenses:
Cost of sales............... 227.7 -- 259.4
Cost of sales --
intercompany.............. 18.0 (268.7) --
Cost of contract
manufacturing............. 3.1 -- 16.7
Research and development.... 4.9 -- 18.8
Selling, general and
administrative............ 12.9 -- 45.6
Amortization of acquisition-
related intangibles....... 7.6 -- 9.0
Purchased in-process
research and
development............... -- -- 3.2
Restructuring and
impairments............... -- -- --
------ ------- ------
Total operating
expenses............. 274.2 (268.7) 352.7
------ ------- ------
Operating income (loss)...... 56.8 -- 84.0
Interest expense............. -- -- 22.9
Interest income.............. (0.4) -- (6.0)
Equity in subsidiary (income)
loss........................ -- 142.0 --
------ ------- ------
Income before income taxes... 57.2 (142.0) 67.1
Provision for income taxes... 1.7 -- 7.4
------ ------- ------
Net income................... $ 55.5 $(142.0) $ 59.7
====== ======= ======
<Caption>
SIX MONTHS ENDED JULY 2, 2000
------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD NON-
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES
------------------- -------------- ------------ ------------
Revenue:
Net sales -- trade.......... $ -- $182.6 $ 8.9 $587.4
Net sales -- intercompany... -- 469.5 8.7 28.7
Contract manufacturing...... -- 43.8 -- 15.7
------- ------ ------ ------
Total revenue......... -- 695.9 17.6 631.8
Operating expenses:
Cost of sales............... -- 58.8 (0.5) 445.6
Cost of sales --
intercompany.............. -- 465.0 8.7 33.2
Cost of contract
manufacturing............. -- 30.1 -- 6.6
Research and development.... -- 21.5 6.3 8.8
Selling, general and
administrative............ -- 58.9 4.7 27.0
Amortization of acquisition-
related intangibles....... -- -- 2.2 15.2
Purchased in-process
research and
development............... -- -- 3.2 --
Restructuring and
impairments............... -- (2.3) (3.3) --
------- ------ ------ ------
Total operating
expenses............. -- 632.0 21.3 536.4
------- ------ ------ ------
Operating income (loss)...... -- 63.9 (3.7) 95.4
Interest expense............. -- 43.7 -- --
Interest income.............. -- (9.4) -- (0.6)
Equity in subsidiary (income)
loss........................ (109.7) (87.4) (63.6) --
------- ------ ------ ------
Income before income taxes... 109.7 117.0 59.9 96.0
Provision for income taxes... -- 7.3 0.7 4.2
------- ------ ------ ------
Net income................... $ 109.7 $109.7 $ 59.2 $ 91.8
======= ====== ====== ======
<Caption>
SIX MONTHS ENDED JULY 2, 2000
----------------------------------
CONSOLIDATED
FAIRCHILD
SEMICONDUCTOR
ELIMINATIONS INTERNATIONAL, INC.
------------ -------------------
Revenue:
Net sales -- trade.......... $ -- $778.9
Net sales -- intercompany... (506.9) --
Contract manufacturing...... -- 59.5
------- ------
Total revenue......... (506.9) 838.4
Operating expenses:
Cost of sales............... -- 503.9
Cost of sales --
intercompany.............. (506.9) --
Cost of contract
manufacturing............. -- 36.7
Research and development.... -- 36.6
Selling, general and
administrative............ -- 90.6
Amortization of acquisition-
related intangibles....... -- 17.4
Purchased in-process
research and
development............... -- 3.2
Restructuring and
impairments............... -- (5.6)
------- ------
Total operating
expenses............. (506.9) 682.8
------- ------
Operating income (loss)...... -- 155.6
Interest expense............. -- 43.7
Interest income.............. -- (10.0)
Equity in subsidiary (income)
loss........................ 260.7 --
------- ------
Income before income taxes... (260.7) 121.9
Provision for income taxes... -- 12.2
------- ------
Net income................... $(260.7) $109.7
======= ======
</Table>
15
17
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JULY 2, 2000
----------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES INTERNATIONAL, INC.
------------------- -------------- ------------ ------------ -------------------
Cash flows provided by (used in)
operating activities:........... $ -- $162.7 $(76.4) $ 77.5 $ 163.8
------- ------ ------ ------ -------
Investing activities:
Capital expenditures............ -- (59.6) (0.3) (50.0) (109.9)
Purchase of molds and tooling... -- -- -- (1.5) (1.5)
Purchase of long term
investments................... -- (7.2) -- -- (7.2)
Acquisitions, net of cash
acquired...................... -- (22.7) -- -- (22.7)
Investment (in) from
affiliate..................... (243.1) 164.4 78.7 -- --
------- ------ ------ ------ -------
Cash provided by (used
in) investing
activities............. (243.1) 74.9 78.4 (51.5) (141.3)
------- ------ ------ ------ -------
Financing activities:
Proceeds from revolving credit
facility, net................. -- 2.1 -- -- 2.1
Repayment of long-term debt..... -- (0.8) -- -- (0.8)
Issuance of long-term debt...... -- -- -- -- --
Proceeds from issuance of common
stock and from issuance of
stock options, net............ 243.1 -- -- -- 243.1
Purchase of treasury stock...... -- -- -- -- --
Debt issuance costs............. -- (2.1) -- -- (2.1)
------- ------ ------ ------ -------
Cash provided by (used
in) financing
activities............. 243.1 (0.8) -- -- 242.3
------- ------ ------ ------ -------
Net change in cash and cash
equivalents..................... -- 236.8 2.0 26.0 264.8
Cash and cash equivalents at
beginning of period............. -- 117.3 -- 21.4 138.7
------- ------ ------ ------ -------
Cash and cash equivalents at end
of period....................... $ -- $354.1 $ 2.0 $ 47.4 $ 403.5
======= ====== ====== ====== =======
Supplemental Cash Flow
Information:
Cash paid during the year for:
Income taxes.................. $ -- $ 0.1 $ -- $ 1.7 $ 1.8
======= ====== ====== ====== =======
Interest...................... $ -- $ 36.1 $ -- $ -- $ 36.1
======= ====== ====== ====== =======
</Table>
16
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS IN THIS REPORT. SEE "OUTLOOK" AND "BUSINESS RISKS" BELOW.
OVERVIEW
We are a leading designer, manufacturer and supplier of building block
semiconductors and optoelectronics for multi market uses. Semiconductor product
offerings include analog and mixed signal, discrete power and signal technology,
interface and logic, and non-volatile memory semiconductors. Optoelectronic
product offerings include optocouplers, LED displays and infrared components.
These multi-market products serve the telecommunications, consumer, industrial,
personal systems and automotive markets.
On March 16, 2001, we completed an acquisition of the discrete power
business of Intersil Corporation (DPP) for approximately $344.1 million in cash,
including related acquisition costs. DPP is a leading provider of silicon-based
discrete power devices for the computer, communications, industrial, automotive,
and space and defense markets. Included in the acquisition is the industry's
only eight inch wafer fabrication facility dedicated to discrete power products,
located in Mountaintop, Pennsylvania.
RESULTS OF OPERATIONS
We generated net losses of $8.0 million and $6.4 million in the second
quarter and first six months of 2001, respectively, compared to net income of
$59.7 million and $109.7 million in the comparable periods of 2000. Excluding
unusual (gains) charges and amortization of acquisition-related intangibles,
adjusted net income was as follows for the three and six months ended July 1,
2001 and July 2, 2000, respectively:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JULY 1, JULY 2, JULY 1, JULY 2,
2001 2000 2001 2000
------- ------- ------- -------
(IN MILLIONS)
Net income (loss).......................... $(8.0) $59.7 $ (6.4) $109.7
Restructuring and impairments............ 3.9 -- 13.4 (5.6)
Purchased in-process research and
development........................... -- 3.2 12.8 3.2
Non-recurring (gains) charges............ 2.5 (1.8) 2.5 (1.8)
Amortization of acquisition-related
intangibles........................... 14.2 9.0 24.6 17.4
Less associated tax effects.............. (6.8) (1.1) (15.0) (1.3)
----- ----- ------ ------
Adjusted net income........................ $ 5.8 $69.0 $ 31.9 $121.6
===== ===== ====== ======
</Table>
Restructuring and impairments in the second quarter and first six months of
2001 include $3.9 million recorded in the second quarter for employee severance
and benefit costs associated with workforce reduction actions, $8.3 million
recorded in the first quarter for asset impairment charges related to the
consolidation of the five-inch wafer fabrication line in South Portland, Maine
and $1.2 million recorded in the first quarter for employee severance and
benefit costs associated with workforce reduction actions. Restructuring and
impairments in the first six months of 2000 include gains resulting from our
re-evaluation and subsequent adjustment to our non-cash restructuring accruals
based upon the final execution of several of our plans ($2.1 million) as well as
a one-time gain for additional funds received in connection with the sale of our
former Mountain View, California facility ($3.5 million).
Purchased in-process research and development was recorded in connection
with our acquisitions of DPP in the first quarter of 2001 ($12.8 million) and QT
Optoelectronics, Inc. in the second quarter of 2000 ($3.2 million).
Non-recurring (gains) charges for the second quarter and first six months
of 2001 included a $2.5 million inventory charge associated with the
discontinuance of the digitizer product line in our Analog group. Non-recurring
(gains) charges for the second quarter and first six months of 2000 included
charges for the write-off
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of debt issuance costs associated with refinanced debt ($3.6 million) offset by
gains resulting from revisions of estimated charges recorded in sales and cost
of sales as part of the 1999 Memory restructuring action ($5.4 million).
Operating income was $11.6 million and $30.2 million in the second quarter
and first six months of 2001, respectively, compared to $84.0 million and $155.6
million in the second quarter and first six months of 2000. Excluding
restructuring and impairments and other non-recurring (gains) charges detailed
above, operating income was $18.0 million and $58.9 million in the second
quarter and first six months of 2001, respectively, compared to $81.8 million
and $147.8 million in the comparable periods of 2000. The decrease in operating
income is primarily due to soft market conditions in the semiconductor industry
in the first six months of 2001, resulting in lower prices, unit volumes and
underutilization of our factories, as well as from lower contract manufacturing
revenue. Despite the current industry conditions, we have continued to invest in
our research and development effort to drive new product introductions.
On a segment basis, Analog had an operating loss of $4.1 million and was
break-even in the second quarter and first six months of 2001, respectively, as
compared to operating income of $14.0 million and $24.1 million in the
comparable periods of 2000. The decreases in Analog's operating income are
primarily due to decreases in gross margins due to decreased revenues coupled
with lower factory utilization. Discrete had operating income of $7.3 million
and $19.6 million in the second quarter and first six months of 2001,
respectively, as compared to $32.2 million and $58.0 million in the comparable
periods of 2000. The decreases in Discrete's operating income are primarily due
to decreases in gross margins, coupled with increases in operating expenses,
including amortization of acquisition related intangibles, due primarily to the
acquisition of DPP. Interface and Logic had operating income of $9.1 million and
$30.3 million in the second quarter and first six months of 2001, respectively,
as compared to operating income of $24.2 million and $41.0 million in the
comparable periods of 2000. The decrease in Interface and Logic's operating
income is due to decreases in gross margins offset by spending reductions in
operating expenses.
Excluding depreciation and amortization of $47.5 million and $88.0 million
in the second quarter and first six months of 2001, respectively, and $36.5
million and $74.9 million in the comparable periods of 2000, restructuring and
impairments and other non-recurring (gains) charges, earnings before interest,
taxes depreciation and amortization (EBITDA) were $65.5 million and $146.9
million in the second quarter and first six months of 2001, respectively,
compared to $118.3 million and $222.7 million in the comparable periods of 2000.
EBITDA is presented because we believe that it is a widely accepted financial
indicator of an entity's ability to incur and service debt. Adjusted net income
is presented because we believe it reflects the true operating performance of
the business. EBITDA, adjusted net income, and adjusted operating income should
not be considered as an alternative to net income, operating income, or other
consolidated operations and cash flow data prepared in accordance with
accounting principles generally accepted in the United States of America, as an
indicator of our operating performance, or as an alternative to cash flow as a
measure of liquidity.
REVENUES
Our revenues consist of trade sales to unaffiliated customers (95.2 % and
95.3 % of total revenues in the second quarter and first six months of 2001,
respectively, and 93.9% and 92.9% of total revenues in the comparable periods of
2000) and revenues from contract manufacturing services provided to National
Semiconductor and Samsung Electronics (4.8 % and 4.7% of total revenues in the
second quarter and first six months of 2001, respectively, and 6.1% and 7.1% of
total revenues in the comparable periods of 2000).
Trade sales were $354.5 million in the second quarter of 2001 compared to
$410.0 million for the second quarter of 2000. On a year-to-date basis, trade
sales were $722.3 million in 2001 compared to $778.9 for the comparable period
of 2000. Increased revenues from our acquisitions that have taken place since
the second quarter of 2000 partially offset lower revenues in our continuing
businesses due to the industry-wide market slowdown.
Analog revenues decreased 25.4% and 14.8% to $70.5 million and $154.2
million in the second quarter and first six months of 2001, respectively, from
$94.5 million and $181.0 million in the comparable periods of
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2000. Discrete revenues decreased 2.1% and 6.5% to $179.1 million and $334.3
million in the second quarter and first six months of 2001, respectively,
compared to $183.0 million and $357.4 million in the comparable periods of 2000.
Interface and Logic revenues decreased 29.8% and 16.4% to $73.6 million and
$165.7 million in the second quarter and first six months of 2001, respectively,
from $104.8 million and $198.3 million in the comparable periods of 2000. These
revenue decreases were due to lower prices and unit volumes.
As a percentage of trade sales, geographic trade sales for North America,
Europe, Asia/Pacific and Korea were as follows for the three and six months
ended July 1, 2001 and July 2, 2000:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JULY 1, JULY 2, JULY 1, JULY 2,
2001 2000 2001 2000
------- ------- ------- -------
(IN MILLIONS)
North America................................ 23% 23% 22% 24%
Europe....................................... 14 14 14 14
Asia/Pacific................................. 47 46 47 44
Korea........................................ 16 17 17 18
--- --- --- ---
Total........................................ 100% 100% 100% 100%
=== === === ===
</Table>
North American revenues decreased 14% and 13% in the second quarter and
first six months of 2001 compared to the same periods of 2000. The North
American sales region has been hardest hit by the inventory correction occurring
in all end market segments. European revenues decreased 14% and 10% in the
second quarter and first six months of 2001 compared to same periods of 2000.
They have been impacted by the same factors affecting North America. Revenues in
our Asia/Pacific sales region have decreased 12% and are flat in the second
quarter and first six months of 2001 compared to the same periods of 2000. The
decrease in Asia/ Pacific sales in the second quarter was driven by the slow
down in the computing segment, including peripherals, as many of the
manufacturers for this market segment are located in this region. Sales in our
Korean region decreased 19% and 14% in the second quarter and first six months
of 2001 compared to the same period of 2000. This decrease was due to the impact
of a weaker Korean economy as financial restructuring in this country continues.
Contract manufacturing revenues decreased 33.0% and 40.5% to $17.9 million
and $35.4 in the second quarter and first six months of 2001 compared to $26.7
million and $59.5 million in the second quarter and first six months of 2000.
The decrease in contract manufacturing revenue resulted from diminishing demand
from both National Semiconductor and Samsung Electronics.
GROSS PROFIT
Gross profit was as follows for the three and six months ended July 1, 2001
and July 2, 2000:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- --------------------------------
JULY 1, JULY 2, JULY 1, JULY 2,
2001 2000 2001 2000
------------- -------------- -------------- --------------
(IN MILLIONS)
Trade gross profit........... $85.8 24.2% $150.6 36.7% $198.6 27.5% $275.0 35.3%
Contract manufacturing gross
profit..................... 6.7 37.4% 10.0 37.4% 12.0 33.9% 22.8 38.3%
----- ---- ------ ---- ------ ---- ------ ----
Total gross profit........... $92.5 24.8% $160.6 36.8% $210.6 27.8% $297.8 35.5%
===== ==== ====== ==== ====== ==== ====== ====
</Table>
Excluding non-recurring charges in the second quarter and first six months
of 2001 associated with an inventory charge as a result of the discontinuance of
the digitizer product line in our analog group ($2.5 million), total gross
profit was $95.0 million (25.5%) and $213.1 million (28.1%), respectively.
Excluding non-recurring (gains) in the second quarter and first six months of
2000 associated with revisions to estimated charges for the 1999 Memory
restructuring action ($5.4 million) total gross profit was $155.2 million
(35.7%)
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and $292.4 million (35.0%), respectively. The decrease in our trade gross
profits is primarily due to lower prices, unit volumes, a shift in product mix
to lower margin products and lower capacity utilization.
RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $21.8 million, or 6.1% of
trade sales, in the second quarter of 2001, compared to $18.8 million, or 4.6%
of trade sales, in the second quarter of 2000. On a year-to-date basis, R&D was
$45.3 million, or 6.3% of trade sales, compared to $36.6 million, or 4.7% of
trade sales, for the comparable period of 2000. The increases in R&D spending
were primarily due to R&D from our acquired businesses in 2000 and 2001 and
continued spending on new product development, focused primarily on our growth
products (Analog, Power MOSFETs, Interface, CMOS Logic, and Optoelectronics),
despite softer market conditions.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were $41.0 million,
or 11.6% of trade sales, in the second quarter of 2001, compared to $45.6
million, or 11.1% of trade sales, in the second quarter of 2000. On a
year-to-date basis, SG&A expenses were $84.3 million, or 11.7% of trade sales,
compared to $90.6 million, or 11.6% of trade sales, for the comparable period of
2000. We have offset SG&A from our acquired businesses in 2000 and 2001 with
spending reductions in response to softer market conditions.
AMORTIZATION OF ACQUISITION RELATED INTANGIBLES
Amortization of acquisition related intangibles was $14.2 million in the
second quarter of 2001, compared to $9.0 million in the second quarter of 2000.
On a year to date basis, amortization of acquisition related intangibles was
$24.6 million, compared to $17.4 million for the comparable period of 2000. The
increase in amortization is due to acquisitions that occurred in the latter part
of 2000 and in 2001.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased in-process research and development of $12.8 million was recorded
in the first quarter of 2001 in conjunction with the acquisition of DPP and $3.2
million in the second quarter of 2000 in conjunction with the acquisition of QT
Optoelectronics, Inc.
RESTRUCTURING AND IMPAIRMENTS
During the three and six months ended July 1, 2001, the Company recorded
pre-tax restructuring charges of $3.9 million and $13.4 million, respectively.
In the second quarter of 2001 the charge is due to employee separation costs
related to severance and other benefits associated with work force reduction
actions. For the six months ended July 1, 2001 these charges also include an
$8.3 million charge for asset impairments relating to the consolidation of the
five-inch wafer fabrication line in South Portland, Maine and $1.2 million for
employee separation costs recorded in the first quarter. As of July 1, 2001, the
accrued balance associated with these costs was $1.2 million. The Company
expects that all amounts will be substantially paid before the end of the year.
During the six months ended July 2, 2000, the Company recorded a pre-tax
restructuring gain of approximately $5.6 million. During the first quarter of
2000, the Company re-evaluated and subsequently adjusted its non-cash
restructuring accruals based upon final execution of several of its plans. This
resulted in a one-time gain of $2.1 million. The Company also recorded a
one-time gain of $3.5 million for additional funds received in connection with
the sale of its former Mountain View, California facility.
INTEREST EXPENSE
Interest expense was $26.6 million and $50.5 million in the second quarter
and first six months of 2000, respectively, compared to $22.9 million and $43.7
million in the comparable periods of 2000. The increase in
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interest expense is principally the result of additional interest associated
with the $350.0 million 10 1/2% Senior Subordinated Notes that were issued
during the first quarter of 2001.
INTEREST INCOME
Interest income was $3.0 million and $10.4 million in the second quarter
and first six months of 2001, respectively, compared to $6.0 million and $10.0
million in the comparable periods of 2000. The decrease in interest income for
the second quarter of 2001 compared to the comparable period of 2000 is due to
lower average cash balances coupled with lower rates of return.
INCOME TAXES
Income tax expense (benefit) was $(4.0) million and $(3.5) million for the
second quarter and first six months of 2001, respectively, compared to $7.4
million and $12.2 million in the second quarter and first six months of 2000.
The effective tax rates for the second quarter and first six months of 2001 were
33.3% and 35.3%, respectively, compared to 11.0% and 10.0% in the second quarter
and first six months of 2000. The increase in our effective tax rate is due to
the favorable effect of the utilization of deferred tax valuation allowances to
offset current year income tax expense in 2000. We did not realize a similar
benefit in 2001. In addition, due to regional economic conditions, our effective
tax rate has increased as a result of decreased profits in low tax
jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
We have a borrowing capacity of $300.0 million on a revolving basis for
working capital and general corporate purposes, including acquisitions, under
our senior credit facility. At July 1, 2001, no amounts were outstanding on our
revolving credit facility.
In connection with the financing of the DPP acquisition, on January 31,
2001, we completed a private offering of $350.0 million of 10 1/2% Senior
Subordinated Notes. Interest on these notes will be paid semi-annually on
February 1 and August 1 of each year, beginning August 1, 2001. We may redeem
the notes on or after February 1, 2005. Prior to February 1, 2004, we may redeem
up to 35% of the notes from the proceeds of equity offerings.
On June 8, 2001, we completed an offer to exchange the privately placed
10 1/2% Senior Subordinated Notes for publicly registered notes with terms
substantially identical to those of the outstanding notes, except that certain
transfer restrictions, registration rights and liquidated damages provisions
relating to the previously outstanding notes do not apply.
Our senior credit facility, the indentures governing our 10 1/8% Senior
Subordinated Notes, 10 3/8% Senior Subordinated Notes and 10 1/2% Senior
Subordinated Notes do, and other debt instruments we may enter into in the
future may, impose various restrictions and covenants on us which could
potentially limit our 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, restrictions on capital expenditures and limitations on incurring
indebtedness, among other restrictions. The covenants relating to financial
ratios include a minimum interest coverage ratio and a maximum senior leverage
ratio. Provided there are no outstanding balances, compliance with these ratios
is not required until the quarter ended March 2003. The senior credit facility
also limits our ability to modify our certificate of incorporation, bylaws,
shareholder agreements, voting trusts or similar arrangements. The subsidiaries
of Fairchild Semiconductor Corporation are permitted without material
restrictions under our debt instruments to pay dividends or make 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 debt obligations. We expect that existing cash and available funds from our
senior credit facility and funds generated from operations will be sufficient to
meet our anticipated operating requirements and to fund our research and
development and capital expenditures for the next twelve months. We intend to
invest
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approximately $125 to $135 million in 2001 to expand capacity primarily in
support of in-sourcing and our e-business initiatives. Additional borrowing or
equity investment may be required to fund future acquisitions.
As of July 1, 2001, the Company's cash and cash equivalents balance was
$256.9 million, a decrease of $144.9 million from December 31, 2000. After
giving consideration to the pay down of $120.2 million on our revolving credit
facility in the second quarter of 2001, cash would have decreased by $24.7
million from December 31, 2000 and decreased $0.5 million from the quarter ended
April 1, 2001.
During the first six months of 2001, our operations provided $63.2 million
in cash compared to $163.8 million of cash in the first six months of 2000. The
decrease in cash provided by operating activities reflects a decrease in the
first six months of 2001 in net income adjusted for non-cash items of $90.9
million and a decrease in cash flows from changes in operating assets and
liabilities of $9.7 million as compared with the first six months of 2000. Cash
used in investing activities during the first six months of 2001 totaled $426.7
million, compared to $141.3 million in the first six months of 2000. The
increase primarily results from the acquisition of the discrete power business
of Intersil Corporation offset by lower capital expenditures for the first six
months of 2001. Capital expenditures in the first six months of 2001 were made
principally in the company's wafer fabs, assembly and test facilities and our
e-business initiatives, and were part of the company's 2001 plan. Capital
expenditures for the balance of 2001 will continue to be primarily to increase
manufacturing capacity in support of production in-sourcing as well as for our
e-business initiative. Cash provided by financing activities of $218.6 million
for the first six months of 2001 was primarily from the issuance of $350.0
million of 10% Senior Subordinated Notes, net of associated fees and expenses of
approximately $10.9 million, offset by repayment of $120.2 million on our
revolving senior credit facility. Cash provided by financing activities of
$242.3 million in the first six months of 2000 was due primarily to proceeds
from our secondary stock offering.
LIQUIDITY AND CAPITAL RESOURCES OF FAIRCHILD INTERNATIONAL, EXCLUDING
SUBSIDIARIES
Fairchild Semiconductor International, Inc. is a holding company, the
principal asset of which is the stock of its wholly owned subsidiary, Fairchild
Semiconductor Corporation. Fairchild Semiconductor International on a
stand-alone basis had no cash flow from operations in the first six months of
2001, nor in the first six months of 2000. Fairchild Semiconductor International
on a stand-alone basis has no cash requirements for the next twelve months.
OUTLOOK
This quarterly report includes "forward-looking statements" as that term is
defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements can be identified by the use of forward-looking terminology such as
"we believe," "we expect," "we intend," "may," "will," "should," "seeks,"
"approximately," "plans," "estimates," "anticipates," or "hopeful," or the
negative of those terms or other comparable terms, or by discussions of our
strategy, plans or future performance. For example, this Outlook section
contains numerous forward-looking statements. All forward-looking statements in
this quarterly report are made based on management's current expectations and
estimates, which involve risks and uncertainties, including those described and,
more specifically, in the Business Risks section below. 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; and significant litigation. Factors that may affect our
operating results are described in the Business Risks section in quarterly and
annual reports we file with the Securities and Exchange Commission. Such risks
and uncertainties could cause actual results to be materially different from
those in the forward-looking statements. Readers are cautioned not to place
undue reliance on the forward-looking statements in this quarterly report. We
assume no obligation to update such information.
During the second quarter of 2001, we continued to be impacted by the
industry-wide slowdown that began at the end of 2000. In an economic environment
that continues to be difficult, we are beginning to see
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small signs of improvement, but feel it is premature to begin forecasting for a
strong fall upturn. We believe revenues for the third quarter of 2001 to be down
15% to 20% sequentially from second quarter 2001 revenues. At this level of
business, we expect that gross margins will be in the range of 20% to 22%. We
anticipate that continued price erosion coupled with continued low factory
utilization will be the main factors behind the sequential percentage decline in
gross margins.
We will continue executing on our cost reduction plans and expect total
research and development and selling, general and administrative expenses,
including amortization of intangibles, to be in the range of $67 to $70 million
for the third quarter of 2001. We expect interest expense to be approximately
$23 million and our effective tax rate to be 35% per quarter through the end of
2001.
For purposes of computing EBITDA, adjusted net income and net income per
share, we expect that depreciation and amortization will be roughly $33 million
and amortization of acquisition related intangibles to be approximately $14
million per quarter for the remainder of 2001. Finally, we expect an outstanding
diluted share count of approximately 102.5 million shares for the third quarter
of 2001.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill, noting that an assembled
workforce may no longer be accounted for as an identifiable intangible asset.
SFAS No. 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
We are required to adopt the provisions of SFAS No. 141 immediately and
SFAS No. 142 effective December 31, 2001. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS No. 142.
SFAS No. 141 will require upon adoption of SFAS No. 142, that we evaluate
our existing intangible assets and goodwill that were acquired in prior purchase
business combinations, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Upon adoption of SFAS No. 142, we will be required to reassess the
useful lives and residual values of all identifiable intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the first quarter of 2002. In addition, to the extent an
intangible asset is then determined to have an indefinite useful life, we will
be required to test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 during the first quarter of 2002. Any impairment loss
will be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first quarter of 2002.
SFAS No. 142 will require us to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this we must identify our reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. We will then have up to six months from the date of adoption
to determine the fair value of each reporting unit and compare it to the
reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and we must perform the second step of the transitional
impairment test. In the second step, we must compare the implied fair value of
the reporting unit's goodwill,
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determined by allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with SFAS No. 141, to its carrying amount, both
of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss for goodwill will be
recognized as the cumulative effect of a change in accounting principle in the
Company's statement of earnings.
As of December 31, 2001, we expect to have unamortized goodwill of
approximately $221.0 million, unamortized assembled workforce of approximately
$4.0 million and other unamortized identifiable intangible assets of
approximately $250.0 million, all of which will be subject to the transition
provisions of SFAS No. 141 and SFAS No. 142. Amortization expense related to
goodwill and assembled workforce was $5.3 million and $7.4 million for the three
and six months ended July 1, 2001, respectively. Because of the extensive effort
needed to comply with adopting SFAS No. 141 and SFAS No. 142, it is not
practicable to reasonably estimate the impact of adopting these statements on
the Company's financial statements at the date of this report, including whether
any transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
BUSINESS RISKS
Our business is subject to a number of risks and uncertainties, which could
cause actual results to differ materially from those expressed in
forward-looking statements. The risks described below are not the only ones
facing our company. Additional risks not currently known to us or that we
currently deem immaterial also may impair our business operations:
DOWNTURNS IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY OR CHANGES IN END
USER MARKET DEMANDS COULD REDUCE THE VALUE OF OUR BUSINESS.
The semiconductor industry is highly cyclical, and the value of our
business may decline during the "down" portion of these cycles. During the
latter half of Fiscal 1998 and most of Fiscal 1999, we, as well as many others
in our industry, experienced significant declines in the pricing of our products
as customers reduced demand forecasts and manufacturers reduced prices to keep
capacity utilization high. We believe these trends were due primarily to the
Asian financial crisis during that period and excess personal computer
inventories. Beginning in the fourth quarter of Calendar 2000 and continuing
into 2001, we and the rest of the semiconductor industry have experienced
backlog cancellations and reduced demand for our products, resulting in slower
revenue growth, due to excess inventories at computer and telecommunications
equipment manufacturers and general economic conditions, especially in the
technology sector. We may experience renewed, possibly more severe and
prolonged, downturns in the future as a result of such cyclical changes. Even as
demand increases following such downturns, our profitability may not increase
because of price competition that historically accompanies recoveries in demand.
In addition, we may experience significant changes in our profitability as a
result of variations in sales, changes in product mix, changes in end user
markets and the costs associated with the introduction of new products. The
markets for our products depend on continued demand for personal computers,
cellular telephones and consumer electronics and automotive and industrial
goods, and these end user markets may experience changes in demand that will
adversely affect our prospects.
WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS TO SATISFY CHANGES IN CONSUMER
DEMANDS.
Our failure to develop new technologies, or react to changes in existing
technologies, could materially delay development of new products, which could
result in decreased revenues and a loss of market share to our competitors.
Rapidly changing technologies and industry standards, along with frequent new
product introductions, characterize the semiconductor industry. Our financial
performance depends on our ability to design, develop, manufacture, assemble,
test, market and support new products and enhancements on a timely and
cost-effective basis. We may not successfully identify new product opportunities
and develop and bring new products to market in a timely and cost-effective
manner. Products or technologies developed by other companies may render our
products or technologies obsolete or noncompetitive. A fundamental shift in
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technologies in our product markets could have a material adverse effect on our
competitive position within our industry.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD ADVERSELY
AFFECT OUR FUTURE PERFORMANCE AND GROWTH.
Failure to protect our existing intellectual property rights may result in
the loss of valuable technologies or having to pay other companies for
infringing on their intellectual property rights. We rely on patent, trade
secret, trademark and copyright law to protect such technologies. Some of our
technologies are not covered by any patent or patent application, and we cannot
assure that:
- any of the more than 330 U.S. patents owned by us or numerous other
patents which third parties license to us will not be invalidated,
circumvented, challenged or licensed to other companies;
- any of the more than 500 patents that we acquired or licensed in the
acquisition of DPP will not be invalidated, circumvented or challenged;
or
- any of our pending or future patent applications will be issued within
the scope of the claims sought by us, if at all.
In addition, effective patent, trademark, copyright and trade secret
protection may be unavailable, limited or not applied for in some foreign
countries.
We also seek to protect our proprietary technologies, including
technologies that may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventors' rights agreements with our
collaborators, advisors, employees and consultants. We cannot assure you that
these agreements will not be breached, that we will have adequate remedies for
any breach or that such persons or institutions will not assert rights to
intellectual property arising out of such research. Some of our technologies
have been licensed on a non-exclusive basis from National Semiconductor
Corporation, Samsung Electronics Co., Ltd. and other companies which may license
such technologies to others, including, in the case of National Semiconductor
commencing on March 11, 2002, our competitors. In addition, under a technology
licensing and transfer agreement, National Semiconductor has limited
royalty-free, worldwide license rights (without right to sublicense) to some of
our technologies. If necessary or desirable, we may seek licenses under patents
or intellectual property rights claimed by others. However, we cannot assure you
that we will obtain such licenses or that the terms of any offered licenses will
be acceptable to us. The failure to obtain a license from a third party for
technologies we use could cause us to incur substantial liabilities and to
suspend the manufacture or shipment of products or our use of processes
requiring the technologies.
OUR FAILURE TO OBTAIN OR MAINTAIN THE RIGHT TO USE CERTAIN TECHNOLOGIES MAY
NEGATIVELY AFFECT OUR FINANCIAL RESULTS.
Our future success and competitive position depend in part upon our ability
to obtain or maintain proprietary technologies used in our principal products,
which is achieved in part by defending claims by competitors of intellectual
property infringement. The semiconductor industry is characterized by litigation
regarding patent and other intellectual property rights. We are involved in
lawsuits, and could become subject to other lawsuits, in which it is alleged
that we have infringed upon the patent or other intellectual property rights of
other companies. Our involvement in existing and future intellectual property
litigation could result in significant expense to our company, adversely
affecting sales of the challenged product or technologies and diverting the
efforts of our technical and management personnel, whether or not such
litigation is resolved in our favor. In the event of an adverse outcome as a
defendant in any such litigation, we may be required to:
- pay substantial damages;
- indemnify our customers for damages they might suffer if the products
they purchase from us violate the intellectual property rights of others;
- stop our manufacture, use, sale or importation of infringing products;
- expend significant resources to develop or acquire non-infringing
technologies;
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- discontinue processes; or
- obtain licenses to the intellectual property we are found to have
infringed.
We cannot assure you that we would be successful in such development or
acquisition or that such licenses would be available under reasonable terms. Any
such development, acquisition or license could require the expenditure of
substantial time and other resources.
WE MAY NOT BE ABLE TO CONSUMMATE FUTURE ACQUISITIONS OR SUCCESSFULLY
INTEGRATE ACQUISITIONS INTO OUR BUSINESS.
We plan to pursue additional acquisitions of related businesses. We believe
the semiconductor industry is going through a period of consolidation, and we
expect to participate in this development. The expense incurred in consummating
the future acquisition of related businesses, or our failure to integrate such
businesses successfully into our existing businesses, could result in our
company incurring unanticipated expenses and losses. In addition, we may not be
able to identify or finance additional acquisitions or realize any anticipated
benefits from acquisitions we do complete.
We are constantly pursuing acquisition opportunities and consolidation
possibilities and are in various stages of due diligence or preliminary
discussions with respect to a number of potential transactions, some of which
would be significant. No material potential transactions is subject to a letter
of intent or otherwise so far advanced as to make the transaction reasonably
certain.
Should we successfully acquire another business, the process of integrating
acquired operations into our existing operations may result in unforeseen
operating difficulties and may require significant financial resources that
would otherwise be available for the ongoing development or expansion of
existing operations. Some of the risks associated with acquisitions include:
- unexpected losses of key employees or customers of the acquired company;
- conforming the acquired company's standards, processes, procedures and
controls with our operations;
- coordinating new product and process development;
- hiring additional management and other critical personnel;
- negotiating with labor unions; and
- increasing the scope, geographic diversity and complexity of our
operations.
In addition, we may encounter unforeseen obstacles or costs in the
integration of other businesses we acquire.
Possible future acquisitions could result in the incurrence of additional
debt, contingent liabilities and amortization expenses related to goodwill and
other intangible assets, all of which could have a material adverse effect on
our financial condition and operating results.
PRODUCTION TIME AND THE OVERALL COST OF PRODUCTS COULD INCREASE IF WE WERE
TO LOSE ONE OF OUR PRIMARY SUPPLIERS OR IF A PRIMARY SUPPLIER INCREASED THE
PRICES OF RAW MATERIALS.
Our manufacturing operations depend upon obtaining adequate supplies of raw
materials on a timely basis. Our results of operations could be adversely
affected if we were unable to obtain adequate supplies of raw materials in a
timely manner or if the costs of raw materials increased significantly. We
purchase raw materials such as silicon wafers, lead frames, mold compound,
ceramic packages and chemicals and gases from a limited number of suppliers on a
just-in-time basis. From time to time, suppliers may extend lead times, limit
supplies or increase prices due to capacity constraints or other factors. In
addition, we subcontract a portion of our wafer fabrication and assembly and
test operations to other manufacturers, including Carsem, Amkor, NS Electronics
(Bangkok) Ltd., Samsung Electronics, Korea Micro Industry and ChipPAC, Inc. Our
operations and ability to satisfy customer obligations could be adversely
affected if our relationships with these subcontractors were disrupted or
terminated.
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DELAYS IN BEGINNING PRODUCTION AT NEW FACILITIES, EXPANDING CAPACITY AT
EXISTING FACILITIES, IMPLEMENTING NEW PRODUCTION TECHNIQUES, OR IN CURING
PROBLEMS ASSOCIATED WITH TECHNICAL EQUIPMENT MALFUNCTIONS, ALL COULD ADVERSELY
AFFECT OUR MANUFACTURING EFFICIENCIES.
Our manufacturing efficiency is an important factor in our profitability,
and we cannot assure you that we will be able to maintain our manufacturing
efficiency or increase manufacturing efficiency to the same extent as our
competitors. Our manufacturing processes are highly complex, require advanced
and costly equipment and are continuously being modified in an effort to improve
yields and product performance. Impurities or other difficulties in the
manufacturing process can lower yields.
In addition, we are currently engaged in an effort to expand capacity at
some of our manufacturing facilities. As is common in the semiconductor
industry, we have from time to time experienced difficulty in beginning
production at new facilities or in effecting transitions to new manufacturing
processes. As a consequence, we have suffered delays in product deliveries or
reduced yields. We may experience delays or problems in bringing planned new
manufacturing capacity to full production. We may also experience problems in
achieving acceptable yields, or experience product delivery delays in the future
with respect to existing or planned new capacity as a result of, among other
things, capacity constraints, construction delays, upgrading or expanding
existing facilities or changing our process technologies, any of which could
result in a loss of future revenues. Our operating results could also be
adversely affected by the increase in fixed costs and operating expenses related
to increases in production capacity if revenues do not increase proportionately.
A SIGNIFICANT PORTION OF OUR SALES ARE MADE BY DISTRIBUTORS WHO CAN
TERMINATE THEIR RELATIONSHIPS WITH US WITH LITTLE OR NO NOTICE. THE TERMINATION
OF A DISTRIBUTOR COULD REDUCE SALES AND RESULT IN INVENTORY RETURNS.
Distributors accounted for 56.4% of our net sales for the six months ended
July 1, 2001. Our five domestic distributors accounted for 9.0 % of our total
net sales for the six months ended July 1, 2001. As a general rule, we do not
have long-term agreements with our distributors and they may terminate their
relationships with us with little or no advance notice. Distributors generally
offer competing products. The loss of one or more of our distributors, or the
decision by one or more of them to reduce the number of our products they offer
or to carry the product lines of our competitors, could have a material adverse
effect on our business, financial condition and results of operations. The
termination of a significant distributor, whether at our or the distributor's
initiative, or a disruption in the operations of one or more of our
distributors, could reduce our net sales in a given quarter and could result in
an increase in inventory returns.
THE SEMICONDUCTOR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION
COULD REDUCE THE VALUE OF AN INVESTMENT IN OUR COMPANY.
The semiconductor industry is, and the multi-market semiconductor product
markets in particular are, highly competitive. Competition is based on price,
product performance, quality, reliability and customer service. In addition,
even in strong markets, price pressures may emerge as competitors attempt to
gain a greater market share by lowering prices. Competition in the various
markets in which we participate comes from companies of various sizes, many of
which are larger and have greater financial and other resources than we have and
thus are better able to pursue acquisition candidates and can better withstand
adverse economic or market conditions. In addition, companies not currently in
direct competition with us may introduce competing products in the future.
THE COSTS TO OPERATE THE DISCRETE POWER PRODUCTS BUSINESS ACQUIRED FROM
INTERSIL MAY INCREASE.
Prior to our acquisition of the discrete power products business, Intersil
operated that business as a division. Since the consummation of the DPP
acquisition, DPP incurred $11.6 million in costs for research and development,
sales and marketing and general and administrative activities. These costs
represent expenses incurred directly by DPP and charges incurred under the
transition services agreement with Intersil. Although Intersil has agreed to
provide certain of these services for a transition period under a transitional
services agreement, DPP will need to obtain many of these services on an arm's
length basis. We cannot assure you that we will be able to obtain similar
services on comparable terms. In addition, although Intersil will aid us in
integrating the DPP operations into our operations pursuant to the transitional
services agreement, we may encounter unforeseen obstacles or costs in such
integration.
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WE ENTERED INTO A NUMBER OF LONG-TERM SUPPLY AND SUPPORT CONTRACTS WITH
SAMSUNG ELECTRONICS IN CONNECTION WITH OUR ACQUISITION OF ITS POWER DEVICE
BUSINESS IN 1999. ANY DECREASE IN THE PURCHASE REQUIREMENTS OF SAMSUNG
ELECTRONICS OR THE INABILITY OF SAMSUNG ELECTRONICS TO MEET ITS CONTRACTUAL
OBLIGATIONS COULD SUBSTANTIALLY REDUCE OUR FINANCIAL PERFORMANCE.
As a result of the acquisition of the power device business in 1999, we
have numerous arrangements with Samsung Electronics, including arrangements
relating to product sales, designation as a vendor to affiliated Samsung
companies and other services. Any material adverse change in the purchase
requirements of Samsung Electronics, in its ability to supply the agreed-upon
services or in its ability to fulfill its other obligations could have a
material adverse effect on our results of operations. Although historically the
power device business generated significant revenues from the sale of products
to affiliated Samsung companies, we cannot assure you that we will be able to
sell products to affiliated Samsung companies or that the designation of the
power device business as a vendor to those affiliated Samsung companies will
generate any revenues for our company. Furthermore, under the Korean Fair Trade
Law, the Fair Trade Commission may issue an order requiring a change in the
terms and conditions of the agreements between us and Samsung Electronics if it
concludes that Samsung Electronics has provided us with undue support or
discriminated against our competitors.
THE POWER DEVICE BUSINESS SUBJECTS OUR COMPANY TO RISKS INHERENT IN DOING
BUSINESS IN KOREA, INCLUDING LABOR RISK, POLITICAL RISK AND CURRENCY RISK.
As a result of the acquisition of the power device business in 1999, we
have significant operations in South Korea and are subject to risks associated
with doing business in that country.
In addition to other risks disclosed relating to international operations,
some businesses in South Korea are subject to labor unrest. Also, relations
between South Korea and North Korea have been tense over most of South Korea's
history. We cannot assure you as to whether or when this situation will be
resolved or change abruptly as a result of current or future events. An adverse
change in economic or political conditions in South Korea or in its relations
with North Korea could have a material adverse effect on our Korean subsidiary.
The power device business' sales are denominated primarily in U.S. dollars
while a significant portion of its costs of goods sold and its operating
expenses are denominated in South Korean won. Although we have taken steps to
fix the costs subject to currency fluctuations and to balance won revenues and
won costs, a significant change in this balance, coupled with a significant
change in the value of the won relative to the dollar, could have a material
adverse effect on our financial performance and results of operations. In
addition, an unfavorable change in the value of the won could require us to
write down our won-denominated assets.
A CHANGE IN FOREIGN TAX LAWS OR A DIFFERENCE IN THE CONSTRUCTION OF CURRENT
FOREIGN TAX LAWS BY RELEVANT FOREIGN AUTHORITIES COULD RESULT IN US NOT
RECOGNIZING THE BENEFITS WE ANTICIPATED IN CONNECTION WITH THE TRANSACTION
STRUCTURE USED TO CONSUMMATE THE ACQUISITION OF THE POWER DEVICE BUSINESS.
The transaction structure we used for the acquisition of the power device
business is based on assumptions about the various tax laws, including
withholding tax, and other relevant laws of foreign jurisdictions. In addition,
our Korean subsidiary was granted a ten-year tax holiday under Korean law in
1999. The first seven years are tax-free, followed by three years of income
taxes at 50% of the statutory rate. In Calendar 2000, the tax holiday was
extended such that the exemption amounts were increased to 75% in the eighth
year and a 25% exemption was added to the eleventh year. If our assumptions
about tax and other relevant laws are incorrect, or if foreign taxing
jurisdictions were to change or modify the relevant laws, or if our Korean
subsidiary were to lose its tax holiday, we could suffer adverse tax and other
financial consequences or lose the benefits anticipated from the transaction
structure we used to acquire that business.
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OUR INTERNATIONAL OPERATIONS SUBJECT OUR COMPANY TO RISKS NOT FACED BY
DOMESTIC COMPETITORS.
Through our subsidiaries we maintain significant operations in the
Philippines, Malaysia and South Korea and also operate facilities in China and
Singapore. We also have sales offices and customers around the world. The
following are risks inherent in doing business on an international level:
- changes in import duties;
- trade restrictions;
- transportation delays;
- work stoppages;
- economic and political instability;
- foreign currency fluctuations; and
- the laws, including tax laws, and policies of the United States and of
the countries in which we manufacture our products.
WE ARE SUBJECT TO MANY ENVIRONMENTAL LAWS AND REGULATIONS THAT COULD AFFECT
OUR OPERATIONS OR RESULT IN SIGNIFICANT EXPENSES.
Increasingly stringent environmental regulations restrict the amount and
types of pollutants that can be released from our operations into the
environment. While historically the cost of compliance with environmental laws
has not had a material adverse effect on our results of operations, compliance
with these and any future regulations could require significant capital
investments in pollution control equipment or changes in the way we make our
products. In addition, because we use hazardous and other regulated materials in
our manufacturing processes, we are subject to risks of liabilities and claims,
regardless of fault, resulting from accidental releases, including personal
injury claims and civil and criminal fines, any of which could be material to
our cash flow or earnings. For example:
- we currently are remediating contamination at some of our operating plant
sites;
- we have been identified as a potentially responsible party at a number of
Superfund sites where we (or our predecessors) disposed of wastes in the
past; and
- significant regulatory and public attention on the impact of
semiconductor operations on the environment may result in more stringent
regulations, further increasing our costs.
Although most of our known environmental liabilities are covered by
indemnities from Raytheon Company or National Semiconductor, these indemnities
are limited to conditions that occurred prior to the consummation of those
transactions. Moreover, we cannot assure you that their indemnity obligations to
us for the covered liabilities will be adequate to protect us.
WE MAY NOT BE ABLE TO ATTRACT OR RETAIN THE TECHNICAL OR MANAGEMENT
EMPLOYEES NECESSARY TO REMAIN COMPETITIVE IN OUR INDUSTRY.
Our continued success depends on the retention and recruitment of skilled
personnel, including technical, marketing, management and staff personnel. In
the semiconductor industry, the competition for qualified personnel,
particularly experienced design engineers and other technical employees, is
intense. There can be no assurance that we will be able to retain our current
personnel or recruit the key personnel we require. In addition, we do not have
employment agreements with most members of our senior management team.
A SUBSTANTIAL NUMBER OF SHARES OF OUR COMPANY'S COMMON STOCK ARE OWNED BY A
LIMITED NUMBER OF PERSONS, AND THEIR INTERESTS MAY CONFLICT WITH YOUR INTERESTS.
Affiliates of Citigroup Inc, and our directors and executive officers
together own approximately 35.4% of the outstanding shares of our Class A Common
Stock (including shares underlying vested options). By virtue of such stock
ownership, such persons have the power to significantly influence our affairs
and are able to influence the outcome of matters required to be submitted to
stockholders for approval, including the election
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of its directors and amendment of our charter and bylaws. Such persons may
exercise their influence over us in a manner detriment to the interests of our
stockholders or bondholders.
WE ARE A LEVERAGED COMPANY WITH A DEBT TO EQUITY RATIO OF 1.12 TO 1, WHICH
COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR ABILITY TO GROW AND
COMPETE.
At July 1, 2001 we had total indebtedness of $938.8 million and a ratio of
debt to equity of 1.12 to 1.
Our substantial indebtedness could have important consequences. For
example, it could:
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;
- increase the amount of our interest expense, because certain of our
borrowings (namely borrowings under our Senior Credit Facility, which is
currently undrawn) are at variable rates of interest, which, if interest
rates increase, could result in higher interest expense;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- restrict us from making strategic acquisitions, introducing new
technologies or exploiting business opportunities;
- make it more difficult for us to satisfy our obligations with respect to
the instruments governing our indebtedness;
- place us at a competitive disadvantage compared to our competitors that
have less indebtedness; and
- limit, along with the financial and other restrictive covenants in our
debt instruments, among other things, our ability to borrow additional
funds, dispose of assets or pay cash dividends. Failing to comply with
those covenants could result in an event of default which, if not cured
or waived, could have a material adverse effect on our business,
financial condition and results of operations.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE MAY STILL BE ABLE TO INCUR
SUBSTANTIALLY MORE INDEBTEDNESS. INCURRING MORE INDEBTEDNESS COULD EXACERBATE
THE RISKS DESCRIBED ABOVE.
We may be able to incur substantial additional indebtedness in the future.
Although the terms of the indentures governing Fairchild Semiconductor
Corporation's outstanding 10 1/8% Senior Subordinated Notes, its outstanding
10 3/8% Senior Subordinated Notes, its outstanding 10 1/2% Senior Subordinated
Notes and the credit agreement relating to the senior credit facility contain
restrictions on the incurrence of additional indebtedness, these restrictions
are subject to a number of qualifications and exceptions and, under certain
circumstances, additional indebtedness incurred in compliance with these
restrictions could be substantial. The senior credit facility permits borrowings
of up to $300.0 million. As of July 1, 2001 we had $300 million available under
this revolving credit facility. If new debt is added to our subsidiaries'
current debt levels, the substantial risks described above would intensify.
WE MAY NOT BE ABLE TO GENERATE THE NECESSARY AMOUNT OF CASH TO SERVICE OUR
INDEBTEDNESS, WHICH MAY REQUIRE US TO REFINANCE OUR INDEBTEDNESS OR DEFAULT ON
OUR SCHEDULED DEBT PAYMENTS. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY
FACTORS BEYOND OUR CONTROL.
Our historical financial results have been, and our future financial
results are anticipated to be, subject to substantial fluctuations. We cannot
assure you that our business will generate sufficient cash flow from operations,
that currently anticipated cost savings and operating improvements will be
realized on schedule or at all, or that future borrowings will be available to
us under our senior credit facility in an amount sufficient to enable us to pay
our indebtedness or to fund our other liquidity needs. In addition, because our
senior credit facility has variable interest rates, the cost of those borrowings
will increase if market interest rates increase. If we are unable to meet our
expenses and debt obligations, we may need to refinance all or a portion of our
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indebtedness on or before maturity, sell assets or raise equity. We cannot
assure you that we would be able to refinance any of our indebtedness, sell
assets or raise equity on commercially reasonable terms or at all, which could
cause us to default on our obligations and impair our liquidity.
RESTRICTIONS IMPOSED BY THE CREDIT AGREEMENT RELATING TO OUR SENIOR CREDIT
FACILITY, THE INDENTURES GOVERNING FAIRCHILD SEMICONDUCTOR CORPORATION'S 10 1/8%
SENIOR SUBORDINATED NOTES, ITS 10 3/8% SENIOR SUBORDINATED NOTES, AND ITS
10 1/2% SENIOR SUBORDINATED NOTES RESTRICT OR PROHIBIT OUR ABILITY TO ENGAGE IN
OR ENTER INTO SOME BUSINESS OPERATING AND FINANCING ARRANGEMENTS, WHICH COULD
ADVERSELY AFFECT OUR ABILITY TO TAKE ADVANTAGE OF POTENTIALLY PROFITABLE
BUSINESS OPPORTUNITIES.
The operating and financial restrictions and covenants in our debt
instruments, such as the credit agreement relating to our senior credit
facility, the indenture governing Fairchild Semiconductor Corporation's 10 1/2%
Senior Subordinated Notes, the indenture governing its 10 1/8% Senior
Subordinated Notes, the indenture governing its 10 3/8% Senior Subordinated
Notes may limit our ability to finance our future operations or capital needs or
engage in other business activities that may be in our interests. Our debt
instruments impose significant operating and financial restrictions on us that
affect our ability to incur additional indebtedness or create liens on our
assets, pay dividends, sell assets, engage in mergers or acquisitions, make
investments or engage in other business activities. These restrictions could
place us at a disadvantage relative to competitors not subject to such
limitations.
In addition, the senior credit facility contains other and more restrictive
covenants and limits us from prepaying our other indebtedness. The senior credit
facility also requires us to maintain specified financial ratios. These
financial ratios become more restrictive over the life of the senior credit
facility. Our ability to meet those financial ratios can be affected by events
beyond our control, and we cannot assure you that we will meet those ratios. A
breach of any of these covenants, ratios or restrictions could result in an
event of default under the senior credit facility. Upon the occurrence of an
event of default under the senior credit facility, the lenders could elect to
declare all amounts outstanding under the senior credit facility, together with
accrued interest, to be immediately due and payable. If we were unable to repay
those amounts, the lenders could proceed against the collateral granted to them
to secure the indebtedness. If the lenders under the senior credit facility
accelerate the payment of the indebtedness, we cannot assure you that our assets
would be sufficient to repay in full that indebtedness and our other
indebtedness.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosure about Market Risk, in Fairchild Semiconductor International's annual
report on Form 10-K for the year ended December 31, 2000 and under the
subheading "Quantitative and Qualitative Disclosures about Market Risk" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 27 of Fairchild Semiconductor International's Annual Report
to Stockholders for the year ended December 31, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a defendant in a patent infringement lawsuit filed by Siliconix
Incorporated in the United States District Court for the Northern District of
California. The complaint filed in the suit alleges that some of our products
infringe two Siliconix patents and claims an unspecified amount of damages. We
intend to continue contesting these claims vigorously.
We are a defendant in a patent infringement lawsuit filed by U.S. Philips
Corporation in the United States District Court for the Southern District of New
York. The complaint filed in the suit alleges that some of our products infringe
one Philips patent and claims an unspecified amount of damages. We intend to
continue contesting these claims vigorously.
In addition to the above proceedings, from time to time we are involved in
other legal proceedings in the ordinary course of business. We believe that
there is no such ordinary course litigation pending that could
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have, individually or in the aggregate, a material adverse effect on our
business, financial condition, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
On April 25, 2001, upon stockholder approval at our annual meeting,
Fairchild Semiconductor International amended its restated certificate of
incorporation to increase the number of shares of Class A Common Stock
authorized for issuance to 170,000,000 from 140,000,000, and to increase the
number of shares of Class B Common Stock authorized for issuance to 170,000,000
from 140,000,000. The amendment did not materially modify the rights of holders
of either class of common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Fairchild Semiconductor International's annual meeting of stockholders was
held on April 25, 2001.
(b) The following directors were elected at the meeting:
<Table>
<Caption>
AUTHORITY
FOR WITHHELD
--- ---------
Kirk P. Pond.......................................... 91,039,418 839,551
Joseph R. Martin...................................... 91,026,928 852,041
Richard M. Cashin, Jr................................. 91,428,522 450,447
Charles M. Clough..................................... 91,472,048 406,921
William T. Comfort III................................ 91,412,220 466,749
Paul C. Schorr IV..................................... 91,424,224 454,745
Ronald W. Shelly...................................... 91,472,998 405,971
William N. Stout...................................... 91,428,622 450,347
</Table>
(c) A proposal to amend the company's restated certificate of incorporation,
authorizing the issuance of additional shares of common stock, as described in
Item 2, above, was approved at the meeting by the following votes:
FOR: 89,347,703 AGAINST: 2,491,556 ABSTAIN: 39,710
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<Table>
<Caption>
EXHIBIT
NO.
- -------
3.1 Certificate of Amendment to the Restated Certificate of
Incorporation of Fairchild Semiconductor International,
Inc., as filed with the Secretary of State of the State of
Delaware on April 25, 2001 (incorporated by reference from
Amendment No. 1 to Fairchild Semiconductor Corporation's
registration statement on Form S-4 (SEC File No. 333-58848),
filed April 27, 2001).
10.1 Amendment No. 2 dated as of August 3, 2001, superceding
Amendment No. 1 dated as of May 29, 2001, to the Credit
Agreement, dated as of June 6, 2000, among Fairchild
Semiconductor Corporation, Fairchild Semiconductor
International, Inc., Credit Suisse First Boston, Fleet
National Bank, ABN Amro Bank NV and certain other lenders.
(b) Reports on Form 8-K
</Table>
On April 25, 2001, we filed a special report on Form 8-K relating to
financial information for the three and six months ended April 1, 2001 and
forward-looking statements relating to the second quarter of 2001 and the year
ended December 30, 2001 as presented in a press release on April 24, 2001.
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On May 29, 2001 we filed a special report on Form 8-K in connection with
our announcement of our intent to offer $200 million principal amount of
Convertible Subordinated Notes as well as updating our second quarter 2001
outlook as presented in press releases dated May 29, 2001.
ITEMS 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAIRCHILD SEMICONDUCTOR
INTERNATIONAL, INC.
By: /s/ DAVID A. HENRY
------------------------------------
David A. Henry
Vice President, Corporate Controller
(Principal Accounting Officer)
Date: August 15, 2001
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