- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
<Table>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
</Table>
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.)
82 RUNNING HILL ROAD
SOUTH PORTLAND, MAINE 04106
(Address of principal executive offices, including zip code)
</Table>
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 March 31, 2002:
<Table>
<Caption>
TITLE OF EACH CLASS NUMBER OF SHARES
------------------- ----------------
Class A Common Stock, par value $.01 per share 100,481,804
Class B Common Stock, par value $.01 per share 0
</Table>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<Table>
<Caption>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2002
(Unaudited) and December 30, 2001........................... 2
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended March 31, 2002 and April 1,
2001........................................................ 3
Condensed Consolidated Statements of Comprehensive Income
(Unaudited) for the Three Months Ended March 31, 2002 and
April 1, 2001............................................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 2002 and April 1,
2001........................................................ 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 34
Item 6. Exhibits and Reports on Form 8-K............................ 34
Signature............................................................. 35
</Table>
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<Table>
<Caption>
MARCH 31, DECEMBER 30,
2002 2001
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 512.8 $ 504.4
Accounts receivable, net............................... 156.4 133.6
Inventories............................................ 204.5 209.1
Deferred income taxes.................................. 16.1 16.4
Other current assets................................... 11.4 11.3
-------- --------
Total current assets.............................. 901.2 874.8
Property, plant and equipment, net.......................... 651.3 659.6
Intangible assets, net...................................... 466.5 479.8
Other assets................................................ 133.7 135.0
-------- --------
Total assets...................................... $2,152.7 $2,149.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt...................... $ 0.4 $ 0.4
Accounts payable....................................... 106.1 106.7
Accrued expenses and other current liabilities......... 85.3 92.2
-------- --------
Total current liabilities......................... 191.8 199.3
Long-term debt, less current portion........................ 1,138.0 1,138.2
Other liabilities........................................... 3.7 3.7
-------- --------
Total liabilities................................. 1,333.5 1,341.2
Commitments and contingencies
Stockholders' equity:
Class A common stock................................... 1.0 1.0
Class B common stock................................... -- --
Additional paid-in capital............................. 816.4 809.7
Retained earnings...................................... 2.8 0.1
Accumulated other comprehensive income................. 0.8 1.0
Less treasury stock (at cost).......................... (1.8) (3.8)
-------- --------
Total stockholders' equity........................ 819.2 808.0
-------- --------
Total liabilities and stockholders' equity........ $2,152.7 $2,149.2
======== ========
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
2
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
--------------------
MARCH 31, APRIL 1,
2002 2001
--------- --------
Revenue:
Net sales -- trade........................................ $326.2 $367.8
Contract manufacturing.................................... 10.7 17.5
------ ------
Total revenue.......................................... 336.9 385.3
Operating expenses:
Cost of sales -- trade.................................... 248.6 255.0
Cost of contract manufacturing............................ 8.7 12.2
Research and development.................................. 20.7 23.5
Selling, general and administrative....................... 34.5 43.3
Amortization of acquisition-related intangibles........... 9.3 10.4
Purchased in-process research and development............. 1.7 12.8
Restructuring and impairments............................. 3.6 9.5
------ ------
Total operating expenses............................... 327.1 366.7
------ ------
Operating income............................................ 9.8 18.6
Interest expense............................................ 28.6 23.9
Interest income............................................. (2.5) (7.4)
Other income................................................ (20.5) --
------ ------
Income before income taxes.................................. 4.2 2.1
Provision for income taxes.................................. 1.5 0.5
------ ------
Net income.................................................. $ 2.7 $ 1.6
====== ======
Net income per common share:
Basic..................................................... $ 0.03 $ 0.02
====== ======
Diluted................................................... $ 0.03 $ 0.02
====== ======
Weighted average common shares:
Basic..................................................... 100.3 99.3
====== ======
Diluted................................................... 106.1 101.2
====== ======
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
3
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
--------------------
MARCH 31, APRIL 1,
2002 2001
--------- --------
Net income.................................................. $ 2.7 $1.6
Other comprehensive income, net of tax:
Net change associated with hedging transactions........... 0.2 2.3
Net amount reclassed to earnings.......................... (0.4) --
----- ----
Comprehensive income........................................ $ 2.5 $3.9
===== ====
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
4
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
--------------------
MARCH 31, APRIL 1,
2002 2001
--------- --------
Cash flows from operating activities:
Net income.................................................. $ 2.7 $ 1.6
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization........................... 40.3 39.8
Amortization of deferred compensation................... 1.0 0.7
Restructuring and impairments........................... 1.8 8.7
Non-cash interest expense............................... 1.5 1.0
Purchased in-process research and development........... 1.7 12.8
Loss (gain) on disposal of property, plant and
equipment.............................................. (0.2) 0.6
Deferred income taxes................................... 0.2 (2.4)
Gain on sale of space and defense business.............. (20.5) --
Changes in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable..................................... (23.0) 26.1
Inventories............................................. 3.7 (19.4)
Other current assets.................................... 0.2 10.1
Current liabilities..................................... (10.2) (41.8)
Other assets and liabilities, net....................... 1.8 (4.6)
------ -------
Cash provided by operating activities.............. 1.0 33.2
------ -------
Cash flows from investing activities:
Capital expenditures.................................... (21.0) (47.4)
Purchase of molds and tooling........................... (1.3) (1.1)
Purchase of long-term investments....................... -- (3.5)
Acquisitions and divestitures, net of cash acquired..... 24.6 (343.1)
------ -------
Cash provided by (used) in investing activities.... 2.3 (395.1)
------ -------
Cash flows from financing activities:
Repayment of long-term debt............................. (0.2) --
Issuance of long-term debt.............................. -- 350.0
Proceeds from issuance of common stock and from exercise
of stock options, net.................................. 5.3 1.8
Purchase of treasury stock.............................. -- (3.4)
Debt issuance costs..................................... -- (10.7)
------ -------
Cash provided by financing activities.............. 5.1 337.7
------ -------
Net change in cash and cash equivalents..................... 8.4 (24.2)
Cash and cash equivalents at beginning of period............ 504.4 401.8
------ -------
Cash and cash equivalents at end of period.................. $512.8 $ 377.6
====== =======
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
5
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements of
Fairchild Semiconductor International, Inc. (the Company) have been prepared in
conformity with accounting principles generally accepted in the United States,
consistent in all material respects with those applied in the company's Annual
Report on Form 10-K for the year ended December 30, 2001, except as noted below.
The interim financial information is unaudited, but reflects all normal
adjustments, which are, in the opinion of management, necessary to provide a
fair statement of results for the interim periods presented. The interim
financial statements should be read in connection with the financial statements
in the company's Annual Report on Form 10-K for the year ended December 30,
2001. Certain amounts for prior periods have been reclassified to conform to the
current presentation.
NOTE 2 -- INVENTORIES
The components of inventories are as follows:
<Table>
<Caption>
MARCH 31, DECEMBER 30,
2002 2001
--------- ------------
(IN MILLIONS)
Raw materials............................................... $ 27.6 $ 27.6
Work in process............................................. 130.7 129.7
Finished goods.............................................. 46.2 51.8
------ ------
Total inventories......................................... $204.5 $209.1
====== ======
</Table>
NOTE 3 -- COMPUTATION OF NET INCOME 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. At March 31, 2002, $1.8 million was
not included in the computation of net income and 6,666,667 of potential common
shares were not included in the computation of diluted earnings per share as a
result of the assumed conversion of the convertible senior subordinated notes
because the effect would have been anti-dilutive.
The following table reconciles basic to diluted weighted average shares
outstanding:
<Table>
<Caption>
THREE MONTHS ENDED
--------------------
MARCH 31, APRIL 1,
2002 2001
--------- --------
(IN MILLIONS)
Basic weighted average common shares outstanding............ 100.3 99.3
Net effect of dilutive stock options based on the treasury
stock method using the average market price............... 5.8 1.9
----- -----
Diluted weighted average common shares outstanding.......... 106.1 101.2
===== =====
</Table>
6
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION
<Table>
<Caption>
THREE MONTHS ENDED
--------------------
MARCH 31, APRIL 1,
2002 2001
--------- --------
(IN MILLIONS)
Cash paid for:
Income taxes.............................................. $ 0.3 $ 3.2
===== =====
Interest.................................................. $32.8 $18.0
===== =====
</Table>
NOTE 5 -- ACQUISITIONS AND DIVESTITURES
On March 20, 2002, the Company completed its acquisition of the cross-point
switch product line and associated intellectual property of I-Cube, Inc.
(I-Cube) for approximately $1.0 million in cash. The acquired cross-point switch
products are critical to Internet infrastructure, data communications,
telecommunications, broadcast video, test equipment and digital signal
processing. The transaction was accounted for as a purchase and the acquired
product line's results of operation since the date of acquisition have been
included in the accompanying statement of operations. The purchase price was
allocated entirely to in-process research and development.
On March 20, 2002, the Company sold its military and space-related discrete
power product line to International Rectifier Corporation for approximately
$29.6 million in cash. As a result of the sale, the Company recorded a gain of
$20.5 million, which was net of the assets acquired by International Rectifier,
transaction fees and other exit costs associated with the sale.
On March 25, 2002, the Company completed its acquisition of the assets of
Signal Processing Technologies, Inc. (SPT), a wholly-owned subsidiary of Toko,
Inc., for approximately $4.0 million in cash. SPT, located in Colorado Springs,
Colorado, markets high performance analog-to-digital and digital-to-analog
converters and comparators for the consumer, communications, and industrial
markets. The purchase also includes a design center in Horten, Norway. The
transaction was accounted for as a purchase and the acquired business's results
of operations since the date of acquisition have been included in the
accompanying statement of operations. In connection with the SPT purchase, the
Company recorded a non-recurring charge of $0.7 million for in-process research
and development. The remaining purchase price was allocated to various tangible
and identifiable intangible assets, which will be amortized over its useful life
of 5 years.
NOTE 6 -- GOODWILL
Effective December 31, 2001 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, which addresses financial accounting and
reporting for acquired goodwill and other intangible assets. Goodwill and other
intangibles with indefinite lives are no longer amortized. Instead, the Company
will perform an annual test for impairment of these assets.
7
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of acquired intangible assets as of March 31, 2002 is as follows:
<Table>
<Caption>
AS OF MARCH 31, 2002
-----------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
(IN MILLIONS)
Identifiable intangible assets:
Developed technology..................................... $222.6 $ (42.8)
Customer base............................................ 55.8 (21.0)
Covenant not to compete.................................. 30.4 (18.0)
Trademarks and tradenames................................ 24.9 (18.3)
Patents.................................................. 5.3 (2.5)
------ -------
Subtotal.............................................. 339.0 (102.6)
Goodwill................................................. 230.1 --
------ -------
Total................................................. $569.1 $(102.6)
====== =======
</Table>
The carrying amount of goodwill by reporting unit for the quarter ended
March 31, 2002 is as follows:
<Table>
<Caption>
DISCRETE
DOMESTIC POWER
(IN MILLIONS) ANALOG PRODUCTS OPTOELECTRONICS TOTAL
- ------------- -------- -------- --------------- ------
Balance as of March 31, 2002................. $15.5 $159.9 $54.7 $230.1
</Table>
During the quarter, there were no changes to the carrying amount of
goodwill due to acquisitions. In addition, the annual test for impairment of
goodwill as required by SFAS No. 142 was completed during the quarter. No
impairment was indicated. The fair value of the reporting units for purposes of
the annual impairment test were estimated using discounted future cash flows.
Identified reporting units which carry goodwill include domestic analog,
discrete power products and Optoelectronics, which does not meet the
requirements of a segment as defined in SFAS No. 131.
8
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For comparative purposes, net income before goodwill amortization net of
tax and related per share amounts for the Company for the three months ended
April 1, 2001 are as follows (in millions, except per share amounts):
<Table>
<Caption>
THREE MONTHS ENDED
APRIL 1, 2001
------------------
NET INCOME:
Reported.................................................. $ 1.6
Goodwill amortization.................................. 2.1
Less associated tax effects............................ (0.5)
------
Net income before goodwill................................ $ 3.2
======
BASIC EARNINGS PER SHARE:
Net income................................................ $ 0.02
Goodwill amortization.................................. 0.02
Less associated tax effects............................ (0.01)
------
Net income before goodwill................................ $ 0.03
======
DILUTED EARNINGS PER SHARE:
Net income................................................ $ 0.02
Goodwill amortization.................................. 0.02
Less associated tax effects............................ (0.01)
------
Net income before goodwill................................ $ 0.03
======
</Table>
The estimated amortization expense for the remainder of Fiscal 2002 and for
each of the five succeeding fiscal years is as follows:
<Table>
<Caption>
ESTIMATED AMORTIZATION EXPENSE: IN MILLIONS
- ------------------------------- -----------
Remainder of Fiscal 2002.................................... $28.3
Fiscal 2003................................................. 33.0
Fiscal 2004................................................. 25.8
Fiscal 2005................................................. 24.1
Fiscal 2006................................................. 23.9
Fiscal 2007................................................. 18.5
</Table>
NOTE 7 -- SEGMENT INFORMATION
The Company is currently organized into three reportable segments: the
Analog and Mixed Signal Products Group (Analog), the Discrete Products Group
(Discrete) and the Interface and Logic Products Group (Interface and Logic). The
operating results for I-Cube are included with the Interface and Logic reporting
segment. The operating results for SPT are included with the Analog reporting
segment.
The Company has determined that its Memory (formerly referred to as
Configurable Products) business unit 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
Memory business unit and the Optoelectronics Group in the "Other" category.
Management evaluates the contract manufacturing business differently than its
other operating
9
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
segments due in large part to the fact that it is predominantly driven by
contractual agreements for limited time periods entered into with National
Semiconductor Corporation and Samsung Electronics Co., Ltd.
Selected operating segment financial information for the three months ended
March 31, 2002 and April 1, 2001 is as follows:
<Table>
<Caption>
THREE MONTHS ENDED
--------------------
MARCH 30, APRIL 1,
2002 2001
--------- --------
(IN MILLIONS)
REVENUE:
Analog.................................................... $ 77.5 $ 84.1
Discrete.................................................. 178.8 155.2
Interface and Logic....................................... 51.5 92.1
Other..................................................... 29.1 53.9
------ ------
Total.................................................. $336.9 $385.3
====== ======
</Table>
<Table>
<Caption>
THREE MONTHS ENDED
--------------------
MARCH 30, APRIL 1,
2002 2001
--------- --------
(IN MILLIONS)
OPERATING INCOME:
Analog.................................................... $ 5.6 $ 4.0
Discrete.................................................. 7.3 12.3
Interface and Logic....................................... 2.2 21.2
----- ------
Subtotal.................................................. 15.1 37.5
Other..................................................... -- 3.4
Purchased in-process research and development............. (1.7) (12.8)
Restructuring and impairments............................. (3.6) (9.5)
----- ------
Total.................................................. $ 9.8 $ 18.6
===== ======
</Table>
NOTE 8 -- RESTRUCTURING AND IMPAIRMENTS
During the three months ended March 31, 2002, the Company recorded a
pre-tax restructuring charge of $3.6 million. The restructuring charge consisted
of employee separation costs relating primarily to severance and other costs
associated with approximately 150 salaried and hourly employees severed in the
United States, Europe, Japan and Malaysia.
During the three months ended April 1, 2001, the Company recorded a pre-tax
restructuring charge of $9.5 million. The restructuring charge consisted of $8.3
million related to non-cash asset impairments and $1.2 million of employee
separation costs. The asset impairments related to the consolidation of the
five-inch wafer fabrication line in South Portland, Maine. The employee
separation costs related primarily to severance and other benefits associated
with approximately 300 salaried, hourly and temporary employees severed in Cebu,
the Philippines.
10
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity in the Company's accrual for
restructuring and impairment costs for the three months ended March 31, 2002 (in
millions):
<Table>
Accrual balances as of December 30, 2001.................... $ 1.3
Accrual................................................... 3.6
Cash payments............................................. (3.1)
Non-cash items............................................ (0.3)
--------
Accrual balance as of March 31, 2002........................ $ 1.5
========
</Table>
The Company expects that all amounts will be substantially paid before the
end of the year.
NOTE 9 -- DERIVATIVES
The Company uses derivative instruments to manage exposures to foreign
currencies. In accordance with SFAS No. 133, the fair value of these hedges is
recorded on the balance sheet. 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 No. 133 and SFAS No. 138, had no impact on
earnings for the three months ended March 31, 2002. No cash flow hedges were
derecognized or discontinued for the three months ended March 31, 2002.
Derivative gains and losses included in other comprehensive income (OCI)
are reclassified into earnings at the time the forecasted transaction revenue is
recognized. The Company estimates that the entire $0.2 million of net derivative
loss included in OCI will be reclassified into earnings within the next twelve
months.
NOTE 10 -- 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 Senior
Subordinated Notes and Convertible Senior Subordinated Notes. These guaranties
are full and unconditional. In addition, all guaranties are joint and several.
Accordingly, the interim condensed consolidating financial statements are
presented below.
11
CONDENSED CONSOLIDATING
BALANCE SHEET
(UNAUDITED)
<Table>
<Caption>
MARCH 31, 2002
---------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD NON-
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS
------------------- -------------- ------------ ------------ ------------
(IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents.... $ -- $ 491.9 $ -- $ 20.9 $ --
Accounts receivable, net..... -- 37.1 0.8 118.5 --
Inventories.................. -- 110.7 20.3 73.5 --
Deferred income taxes........ -- 15.3 0.8 -- --
Other current assets......... -- 3.4 0.1 7.9 --
------ -------- ------ ------ ---------
Total current assets....... -- 658.4 22.0 220.8 --
Property, plant and equipment,
net.......................... -- 263.2 65.3 322.8 --
Intangible assets, net......... -- 13.9 294.4 158.2 --
Investment in subsidiary....... 812.5 870.9 154.0 2.0 (1,839.4)
Other assets................... 5.9 108.1 15.9 3.8 --
------ -------- ------ ------ ---------
Total assets............... $818.4 $1,914.5 $551.6 $707.6 $(1,839.4)
====== ======== ====== ====== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt....................... $ -- $ 0.4 $ -- $ -- $ --
Accounts payable............. -- 55.6 7.4 43.1 --
Accrued expenses and other
current liabilities........ -- 50.8 4.5 30.0 --
------ -------- ------ ------ ---------
Total current
liabilities.............. -- 106.8 11.9 73.1 --
Long-term debt, less current
portion...................... -- 1,138.0 -- -- --
Net intercompany (receivable)
payable...................... -- (149.3) (15.9) 165.2 --
Other liabilities.............. -- 5.7 2.0 (4.0) --
------ -------- ------ ------ ---------
Total liabilities.......... -- 1,101.2 (2.0) 234.3 --
------ -------- ------ ------ ---------
Commitments and contingencies
Stockholders' equity:
Class A common stock......... 1.0 -- -- -- --
Class B common stock......... -- -- -- -- --
Additional paid-in capital... 816.3 -- -- -- --
Retained earnings............ 2.9 812.5 553.6 473.3 (1,839.4)
Accumulated other
comprehensive income....... -- 0.8 -- -- --
Less treasury stock (at
cost)...................... (1.8) -- -- -- --
------ -------- ------ ------ ---------
Total stockholders'
equity................... 818.4 813.3 553.6 473.3 (1,839.4)
------ -------- ------ ------ ---------
Total liabilities and
stockholders' equity..... $818.4 $1,914.5 $551.6 $707.6 $(1,839.4)
====== ======== ====== ====== =========
<Caption>
MARCH 31, 2002
-------------------
CONSOLIDATED
FAIRCHILD
SEMICONDUCTOR
INTERNATIONAL, INC.
-------------------
(IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents.... $ 512.8
Accounts receivable, net..... 156.4
Inventories.................. 204.5
Deferred income taxes........ 16.1
Other current assets......... 11.4
--------
Total current assets....... 901.2
Property, plant and equipment,
net.......................... 651.3
Intangible assets, net......... 466.5
Investment in subsidiary....... --
Other assets................... 133.7
--------
Total assets............... $2,152.7
========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt....................... $ 0.4
Accounts payable............. 106.1
Accrued expenses and other
current liabilities........ 85.3
--------
Total current
liabilities.............. 191.8
Long-term debt, less current
portion...................... 1,138.0
Net intercompany (receivable)
payable...................... --
Other liabilities.............. 3.7
--------
Total liabilities.......... 1,333.5
--------
Commitments and contingencies
Stockholders' equity:
Class A common stock......... 1.0
Class B common stock......... --
Additional paid-in capital... 816.3
Retained earnings............ 2.9
Accumulated other
comprehensive income....... 0.8
Less treasury stock (at
cost)...................... (1.8)
--------
Total stockholders'
equity................... 819.2
--------
Total liabilities and
stockholders' equity..... $2,152.7
========
</Table>
12
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31, 2002
------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD NON-
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES
------------------- -------------- ------------ ------------
(IN MILLIONS)
Revenue:
Net sales -- trade........ $ -- $54.9 $ 0.9 $270.4
Net
sales -- intercompany... -- 252.4 38.1 81.5
Contract manufacturing.... -- 7.9 -- 2.8
----- ----- ------ ------
Total revenue....... -- 315.2 39.0 354.7
Operating expenses:
Cost of sales -- trade.... -- 17.9 (1.6) 232.3
Cost of
sales -- intercompany... -- 251.1 37.4 83.5
Cost of contract
manufacturing........... -- 7.2 -- 1.5
Research and
development............. -- 9.3 5.8 5.6
Selling, general and
administrative.......... -- (9.7) 32.8 11.4
Amortization of
acquisition-related
intangibles............. -- -- 2.4 6.9
Purchased in-process
research and
development............. -- 1.0 0.7 --
Restructuring and
impairments............. -- 1.7 0.7 1.2
----- ----- ------ ------
Total operating
expenses.......... -- 278.5 78.2 342.4
----- ----- ------ ------
Operating income (loss)..... -- 36.7 (39.2) 12.3
Interest expense............ -- 28.6 -- --
Interest income............. -- (2.3) (0.1) (0.1)
Other income................ -- -- (20.5) --
Equity in subsidiary
(income) loss............. (2.7) 6.9 (16.2) --
----- ----- ------ ------
Income (loss) before income
taxes..................... 2.7 3.5 (2.4) 12.4
Provision for income
taxes..................... -- 0.8 -- 0.7
----- ----- ------ ------
Net income (loss)........... $ 2.7 $ 2.7 $ (2.4) $ 11.7
===== ===== ====== ======
<Caption>
THREE MONTHS ENDED MARCH 31, 2002
----------------------------------
CONSOLIDATED
FAIRCHILD
SEMICONDUCTOR
ELIMINATIONS INTERNATIONAL, INC.
------------ -------------------
(IN MILLIONS)
Revenue:
Net sales -- trade........ $ -- $326.2
Net
sales -- intercompany... (372.0) --
Contract manufacturing.... -- 10.7
------- ------
Total revenue....... (372.0) 336.9
Operating expenses:
Cost of sales -- trade.... -- 248.6
Cost of
sales -- intercompany... (372.0) --
Cost of contract
manufacturing........... -- 8.7
Research and
development............. -- 20.7
Selling, general and
administrative.......... -- 34.5
Amortization of
acquisition-related
intangibles............. -- 9.3
Purchased in-process
research and
development............. -- 1.7
Restructuring and
impairments............. -- 3.6
------- ------
Total operating
expenses.......... (372.0) 327.1
------- ------
Operating income (loss)..... -- 9.8
Interest expense............ -- 28.6
Interest income............. -- (2.5)
Other income................ -- (20.5)
Equity in subsidiary
(income) loss............. 12.0 --
------- ------
Income (loss) before income
taxes..................... (12.0) 4.2
Provision for income
taxes..................... -- 1.5
------- ------
Net income (loss)........... $ (12.0) $ 2.7
======= ======
</Table>
13
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31, 2002
----------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES INTERNATIONAL, INC.
------------------- -------------- ------------ ------------ -------------------
(IN MILLIONS)
Cash flows provided by (used
in) operating activities:... $ -- $ 2.3 $ 1.8 $(3.1) $ 1.0
----- ------ ----- ----- ------
Investing activities:
Capital expenditures........ -- (16.4) (0.5) (4.1) (21.0)
Purchase of molds and
tooling.................. -- -- (1.3) -- (1.3)
Purchase of long-term
investments.............. -- -- -- -- --
Acquisitions and
divestitures, net of cash
acquired................. -- 24.6 -- -- 24.6
Investment (in) from
affiliate................ (5.3) 5.3 -- -- --
----- ------ ----- ----- ------
Cash provided by (used
in) investing
activities............. (5.3) 13.5 (1.8) (4.1) 2.3
----- ------ ----- ----- ------
Financing activities:
Repayment of long-term
debt..................... -- (0.2) -- -- (0.2)
Issuance of long-term
debt..................... -- -- -- -- --
Proceeds from issuance of
common stock and from
issuance of stock
options, net............. 5.3 -- -- -- 5.3
Purchase of treasury
stock.................... -- -- -- -- --
Debt issuance costs......... -- -- -- -- --
----- ------ ----- ----- ------
Cash provided by (used
in) financing
activities............. 5.3 (0.2) -- -- 5.1
----- ------ ----- ----- ------
Net change in cash and cash
equivalents................. -- 15.6 -- (7.2) 8.4
Cash and cash equivalents at
beginning of period......... -- 476.3 -- 28.1 504.4
----- ------ ----- ----- ------
Cash and cash equivalents at
end of period............... $ -- $491.9 $ -- $20.9 $512.8
===== ====== ===== ===== ======
Supplemental Cash Flow
Information:
Cash paid during the period
for:
Income taxes............. $ -- $ 0.1 $ -- $ 0.2 $ 0.3
===== ====== ===== ===== ======
Interest................. $ -- $ 32.8 $ -- $ -- $ 32.8
===== ====== ===== ===== ======
</Table>
14
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
<Table>
<Caption>
DECEMBER 30, 2001
---------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD NON-
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS
------------------- -------------- ------------ ------------ ------------
(IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents..... $ -- $ 476.3 $ -- $ 28.1 $ --
Accounts receivable, net...... -- 31.8 1.4 100.4 --
Inventories................... -- 113.9 21.0 74.2 --
Deferred income taxes......... -- 15.2 0.8 0.4 --
Other current assets.......... -- 3.9 0.1 7.3 --
------ -------- ------ ------ ---------
Total current assets........ -- 641.1 23.3 210.4 --
Property, plant and equipment,
net........................... -- 257.6 67.5 334.5 --
Intangible assets, net.......... -- 14.0 300.8 165.0 --
Investment in subsidiary........ 801.1 894.9 154.0 2.0 (1,852.0)
Other assets.................... 5.9 109.8 16.0 3.3 --
------ -------- ------ ------ ---------
Total assets................ $807.0 $1,917.4 $561.6 $715.2 $(1,852.0)
====== ======== ====== ====== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt........................ $ -- $ 0.4 $ -- $ -- $ --
Accounts payable.............. -- 48.1 7.5 51.1 --
Accrued expenses and other
current liabilities......... -- 59.3 3.2 29.7 --
------ -------- ------ ------ ---------
Total current liabilities... -- 107.8 10.7 80.8 --
Long-term debt, less current
portion....................... -- 1,138.2 -- -- --
Net intercompany (receivable)
payable....................... -- (136.1) (22.1) 158.2 --
Other liabilities............... -- 6.4 2.0 (4.7) --
------ -------- ------ ------ ---------
Total liabilities........... -- 1,116.3 (9.4) 234.3 --
------ -------- ------ ------ ---------
Commitments and contingencies
Stockholders' equity:
Class A common stock.......... 1.0 -- -- -- --
Class B common stock.......... -- -- -- -- --
Additional paid-in capital.... 809.7 -- -- -- --
Retained earnings............. 0.1 800.1 571.0 480.9 (1,852.0)
Accumulated other
comprehensive income........ -- 1.0 -- -- --
Less treasury stock (at
cost)....................... (3.8) -- -- -- --
------ -------- ------ ------ ---------
Total stockholders'
equity.................... 807.0 801.1 571.0 480.9 (1,852.0)
------ -------- ------ ------ ---------
Total liabilities and
stockholders' equity...... $807.0 $1,917.4 $561.6 $715.2 $(1,852.0)
====== ======== ====== ====== =========
<Caption>
DECEMBER 30, 2001
-------------------
CONSOLIDATED
FAIRCHILD
SEMICONDUCTOR
INTERNATIONAL, INC.
-------------------
(IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents..... $ 504.4
Accounts receivable, net...... 133.6
Inventories................... 209.1
Deferred income taxes......... 16.4
Other current assets.......... 11.3
--------
Total current assets........ 874.8
Property, plant and equipment,
net........................... 659.6
Intangible assets, net.......... 479.8
Investment in subsidiary........ --
Other assets.................... 135.0
--------
Total assets................ $2,149.2
========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt........................ $ 0.4
Accounts payable.............. 106.7
Accrued expenses and other
current liabilities......... 92.2
--------
Total current liabilities... 199.3
Long-term debt, less current
portion....................... 1,138.2
Net intercompany (receivable)
payable....................... --
Other liabilities............... 3.7
--------
Total liabilities........... 1,341.2
--------
Commitments and contingencies
Stockholders' equity:
Class A common stock.......... 1.0
Class B common stock.......... --
Additional paid-in capital.... 809.7
Retained earnings............. 0.1
Accumulated other
comprehensive income........ 1.0
Less treasury stock (at
cost)....................... (3.8)
--------
Total stockholders'
equity.................... 808.0
--------
Total liabilities and
stockholders' equity...... $2,149.2
========
</Table>
15
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED APRIL 1, 2001
------------------------------------------------------------------
UNCONSOLIDATED
FAIRCHILD UNCONSOLIDATED
SEMICONDUCTOR FAIRCHILD NON-
INTERNATIONAL, SEMICONDUCTOR GUARANTOR GUARANTOR
INC. CORPORATION SUBSIDIARIES SUBSIDIARIES
------------------- -------------- ------------ ------------
(IN MILLIONS)
Revenue:
Net sales -- trade.............. $ -- $ 76.6 $ 7.5 $283.7
Net sales -- intercompany....... -- 230.7 20.1 91.8
Contract manufacturing.......... -- 16.0 -- 1.5
----- ------ ------ ------
Total revenue............... -- 323.3 27.6 377.0
Operating expenses:
Cost of sales -- trade.......... -- 35.9 9.3 209.8
Cost of sales -- intercompany... -- 228.7 19.0 94.9
Cost of contract
manufacturing................. -- 11.2 -- 1.0
Research and development........ -- 12.3 5.2 6.0
Selling, general and
administrative................ -- 26.4 3.8 13.1
Amortization of
acquisition-related
intangibles................... -- 0.1 2.8 7.5
Purchased in-process research
and development............... -- -- 12.8 --
Restructuring and impairments... -- 8.3 0.4 0.8
----- ------ ------ ------
Total operating expenses.... -- 322.9 53.3 333.1
----- ------ ------ ------
Operating income (loss)........... -- 0.4 (25.7) 43.9
Interest expense.................. -- 23.9 -- --
Interest income................... -- (7.3) -- (0.1)
Other income...................... -- -- -- --
Equity in subsidiary income....... (1.6) (15.5) (19.3) --
----- ------ ------ ------
Income (loss) before income
taxes........................... 1.6 (0.7) (6.4) 44.0
Provision (benefit) for income
taxes........................... -- (2.3) -- 2.8
----- ------ ------ ------
Net income (loss)................. $ 1.6 $ 1.6 $ (6.4) $ 41.2
===== ====== ====== ======
<Caption>
THREE MONTHS ENDED APRIL 1, 2001
----------------------------------
CONSOLIDATED
FAIRCHILD
SEMICONDUCTOR
INTERNATIONAL,
ELIMINATIONS INC.
------------ -------------------
(IN MILLIONS)
Revenue:
Net sales -- trade.............. $ -- $367.8
Net sales -- intercompany....... (342.6) --
Contract manufacturing.......... -- 17.5
------- ------
Total revenue............... (342.6) 385.3
Operating expenses:
Cost of sales -- trade.......... -- 255.0
Cost of sales -- intercompany... (342.6) --
Cost of contract
manufacturing................. -- 12.2
Research and development........ -- 23.5
Selling, general and
administrative................ -- 43.3
Amortization of
acquisition-related
intangibles................... -- 10.4
Purchased in-process research
and development............... -- 12.8
Restructuring and impairments... -- 9.5
------- ------
Total operating expenses.... (342.6) 366.7
------- ------
Operating income (loss)........... -- 18.6
Interest expense.................. -- 23.9
Interest income................... -- (7.4)
Other income...................... -- --
Equity in subsidiary income....... 36.4 --
------- ------
Income (loss) before income
taxes........................... (36.4) 2.1
Provision (benefit) for income
taxes........................... -- 0.5
------- ------
Net income (loss)................. $ (36.4) $ 1.6
======= ======
</Table>
16
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED APRIL 1, 2001
----------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES INTERNATIONAL, INC.
------------------- -------------- ------------ ------------ -------------------
(IN MILLIONS)
Cash flows provided by operating
activities:........................... $ -- $ 19.3 $1.2 $ 12.7 $ 33.2
----- ------- ---- ------ -------
Investing activities:
Capital expenditures.................. -- (22.7) -- (24.7) (47.4)
Purchase of molds and tooling......... -- -- -- (1.1) (1.1)
Purchase of long-term investments..... -- (3.5) -- -- (3.5)
Acquisitions, net of cash acquired.... -- (343.1) -- -- (343.1)
Investment (in) from affiliate........ 1.6 (1.6) -- -- --
----- ------- ---- ------ -------
Cash provided by (used in)
investing activities........... 1.6 (370.9) -- (25.8) (395.1)
----- ------- ---- ------ -------
Financing activities:
Repayment of long-term debt........... -- -- -- -- --
Issuance of long-term debt............ -- 350.0 -- -- 350.0
Proceeds from issuance of common stock
and from issuance of stock options,
net................................. 1.8 -- -- -- 1.8
Purchase of treasury stock............ (3.4) -- -- -- (3.4)
Debt issuance costs................... -- (10.7) -- -- (10.7)
----- ------- ---- ------ -------
Cash provided by (used in)
financing activities........... (1.6) 339.3 -- -- 337.7
----- ------- ---- ------ -------
Net change in cash and cash
equivalents........................... -- (12.3) 1.2 (13.1) (24.2)
Cash and cash equivalents at beginning
of period............................. -- 374.5 -- 27.3 401.8
----- ------- ---- ------ -------
Cash and cash equivalents at end of
period................................ $ -- $ 362.2 $1.2 $ 14.2 $ 377.6
===== ======= ==== ====== =======
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes...................... $ -- $ -- $ -- $ 3.2 $ 3.2
===== ======= ==== ====== =======
Interest.......................... $ -- $ 18.0 $ -- $ -- $ 18.0
===== ======= ==== ====== =======
</Table>
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
UNLESS OTHERWISE INDICATED, REFERENCES IN THIS MD&A TO "WE", "OUR" AND THE
"COMPANY" REFER TO FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND ITS
SUBSIDIARIES TAKEN AS A WHOLE. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON FORWARD-LOOKING STATEMENTS IN THIS REPORT. SEE "OUTLOOK" AND "BUSINESS RISKS"
BELOW.
OVERVIEW
We are one of the largest independent semiconductor companies focused
solely on developing, manufacturing and selling high performance semiconductors
critical to multiple end markets. We design, develop and market analog,
discrete, interface and logic, non-volatile memory and optoelectronic
semiconductors. Within our broad product portfolio, we focus on providing
discrete and analog power management and interface solutions. Nearly two-thirds
of our trade sales in the first quarter of 2002 were from discrete and analog
products used directly in power applications such as voltage conversion, power
regulation, power distribution, and power and battery management. With the
acquisition in 2001 of the discrete power products business from Intersil
Corporation, which we refer to as DPP, we believe that we are now the world's
leading supplier of power analog and power discrete products. Our products are
used as building block components in a wide variety of electronic applications,
including sophisticated computers and internet hardware; communications;
networking and storage equipment; industrial power supply and instrumentation
equipment; portable digital consumer cameras, displays, audio/video devices,
household appliances; and automotive ignition applications. Because of their
basic functionality, our products provide customers with greater design
flexibility than more highly integrated products and improve the performance of
more complex devices or systems. Given these characteristics, our products have
a wide range of applications. Our products are sold to customers in the personal
computer, industrial, communications, consumer electronics and automotive
markets.
On March 20, 2002, we acquired the cross-point switch product line and
associated intellectual property of I-Cube, Inc. (I-Cube) for approximately $1.0
million in cash, including related acquisition costs. Cross-point switches are
critical to Internet infrastructure, data communications, telecommunications,
broadcast video, test equipment and digital signal processing.
On March 20, 2002, we sold our military and space-related discrete power
product line to International Rectifier Corporation for approximately $29.6
million in cash.
On March 25, 2002, we acquired Signal Processing Technologies, Inc. (SPT),
the data conversion business and related design center of Toko, Inc. for
approximately $4.0 million in cash, including related acquisition costs. SPT
will add leading-edge converter products to our analog and mixed signal product
offering.
RESULTS OF OPERATIONS
We generated net income of $2.7 million in the first quarter of 2002
compared to $1.6 million in the comparable period of 2001. During the first
quarter of 2002, amortization of goodwill was stopped in accordance with SFAS
No. 142. Had goodwill not been amortized in the first quarter of 2001, net
income would have been $3.2 million. Excluding unusual (gains) charges and
amortization of acquisition-related intangibles, pro forma net income (loss) was
as follows:
<Table>
<Caption>
THREE MONTHS ENDED
--------------------
MARCH 31, APRIL 1,
2002 2001
--------- --------
(IN MILLIONS)
Net income.................................................. $ 2.7 $ 1.6
Restructuring and impairments............................. 3.6 9.5
Purchased in-process research and development............. 1.7 12.8
Gain on sale of space and defense product line............ (20.5) --
Amortization of acquisition-related intangibles........... 9.3 10.4
Less associated tax effects............................... 2.1 (8.2)
------ -----
Pro forma net income (loss)................................. $ (1.1) $26.1
====== =====
</Table>
18
Restructuring and impairments in the first quarter of 2002 include $3.6
million for employee severance and other costs associated with approximately 150
salaried and hourly employees severed in the United States, Europe, Japan and
Malaysia. Restructuring and impairments in the first quarter of 2001 include
asset impairment charges related to the consolidation of the five-inch wafer
fabrication line in South Portland, Maine ($8.3 million) as well as employee
severance and other costs ($1.2 million) associated with approximately 300
salaried, hourly and temporary employees severed primarily in Cebu, the
Philippines.
Purchased in-process research and development was recorded in the first
quarter of 2002 in connection with our acquisitions of I-Cube ($1.0 million) and
SPT ($0.7 million). Purchased in-process research and development of $12.8
million was recorded in connection with our acquisition of DPP in the first
quarter of 2001.
Operating income was $9.8 million in the first quarter of 2002 compared to
$18.6 million in the first quarter of 2001. Excluding restructuring and
impairments and purchased in-process research and development, pro forma
operating income was $15.1 million in the first quarter of 2002 compared to
$40.9 million in the first quarter of 2001. The decrease in operating income is
primarily due to an overall decline in the semiconductor industry as well as the
economy generally, resulting in lower gross profit driven by lower prices, unit
volumes and underutilization of our factories, as well as from lower contract
manufacturing revenue. This decrease in lower gross profits has been partially
offset by cost reductions in our operating expenses.
On a segment basis, Analog had operating income of $5.6 million for the
first quarter of 2002, compared to $4.0 million in the first quarter of 2001.
The increase in Analog's operating income was primarily due to a decrease in
revenues and gross margins offset by decreases in selling, general and
administrative expenses and intangibles amortization, as a result of the
implementation of SFAS No. 142. Discrete had operating income of $7.3 million in
the first quarter of 2002 compared to operating income of $12.3 million in the
first quarter of 2001. The decrease in Discrete's operating income was primarily
due to a decrease in gross margins, coupled with an increase in research and
development and selling, general and administrative expenses due primarily to a
full quarter of the DPP expenses in the first quarter of 2002 as compared to the
first quarter of 2001. Interface and Logic had operating income of $2.2 million
in the first quarter 2002 compared to operating income of $21.2 million in the
first quarter of 2001. The decrease in Interface and Logic's operating income
was the result of a decrease in gross margin partially offset by decreases in
research and development and selling, general and administrative expenses.
Excluding depreciation and amortization of $41.3 million in the first
quarter of 2002 and $40.5 million in the first quarter of 2001, restructuring
and impairments, purchased in-process research and development and other income,
earnings before interest, taxes depreciation and amortization (EBITDA) were
$56.4 million in the first quarter of 2002 compared to $81.4 million in the
first quarter of 2001. EBITDA is presented because we believe that it is a
widely accepted financial indicator of an entity's ability to incur and service
debt. Pro forma net income (loss) and pro forma operating income are presented
because we use them as alternative measures of the operating performance of the
business. EBITDA, pro forma net income, and pro forma 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 (96.8% of
total revenues in the first quarter of 2002 and 95.5% of total revenues in the
first quarter of 2001) and revenues from contract manufacturing services
provided to National Semiconductor and Samsung Electronics (3.2% of total
revenues in the first quarter 2002 and 4.5% of total revenues in the first
quarter of 2001).
Trade sales were $326.2 million in the first quarter of 2002 compared to
$367.8 million for the first quarter of 2001. The decrease in trade sales was
the result of lower unit volumes coupled with lower average selling prices.
Analog revenues decreased 7.8% to $77.5 million in the first quarter of
2002 from $84.1 million in the first quarter of 2001. The decrease is a result
of lower sales for low drop-out regulators and microcontrollers, which
19
are directed towards communications applications, offset by strength in sales of
our Fairchild Power Switch, which is directed toward consumer applications.
Discrete revenues increased 15.2% to $178.8 million in the first quarter 2002
compared to $155.2 million in the first quarter of 2001. The increase is
primarily the result of a full quarter of revenue from our DPP acquisition,
which occurred late in the first quarter of 2001. Interface and Logic revenues
decreased 44.1% to $51.5 million in the first quarter of 2002 from $92.1 million
in the first quarter of 2001. The decrease is a result of lower revenues from
our mature products, as well as lower revenue from our Tiny Logic(TM) products
as a result of the slow down in the communications market.
As a percentage of trade sales, geographic trade sales for North America,
Europe, Asia/Pacific (which for our geographic reporting purposes excludes
Korea) and Korea were as follows for the three months ended March 31, 2002 and
April 1, 2001:
<Table>
<Caption>
THREE MONTHS ENDED
--------------------
MARCH 31, APRIL 1,
2002 2001
--------- --------
North America............................................... 16% 21%
Europe...................................................... 11 14
Asia/Pacific................................................ 51 47
Korea....................................................... 22 18
--- ---
Total............................................. 100% 100%
=== ===
</Table>
North American revenues decreased 33% in the first quarter 2002 compared to
the first quarter of 2001. The North American sales region has been hardest hit
by the inventory correction occurring in all end market segments, as well as
weak economic conditions in the United States. European revenues decreased 28%
in the first quarter of 2002 compared to the first quarter of 2001. They have
been impacted by the same factors affecting North America. Revenues in our
Asia/Pacific sales region decreased 4% in the first quarter of 2002 compared to
the first quarter of 2001. The small year over year decrease in Asia/Pacific as
compared to other regions is a function of our strong presence in this region.
While revenues decreased 4% year over year driven by comparative weakness in the
consumer and communications markets, sequentially, revenues in this region
increased 1%. Sales in our Korean region increased 8% in the first quarter of
2002 compared to the first quarter of 2001. This increase was due to strong
demand from our largest customer, Samsung Electronics.
Contract manufacturing revenues decreased 38.9% to $10.7 million in the
first quarter of 2002 compared to $17.5 million in the first quarter of 2001.
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 months ended March 31, 2001 and
April 1, 2001:
<Table>
<Caption>
THREE MONTHS ENDED
-------------------------------------------
MARCH 31, APRIL 1,
2002 2001
--------- --------
(IN MILLIONS)
Trade gross profit.................................. $77.6 23.8% $112.8 30.7%
Contract manufacturing gross profit................. 2.0 18.7% 5.3 30.3%
----- ------
Total gross profit........................ $79.6 23.6% $118.1 30.7%
===== ======
</Table>
The decrease in gross profit was primarily due to lower prices and unit
volumes, an unfavorable product mix and lower capacity utilization.
RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $20.7 million, or 6.3% of
trade sales, in the first quarter of 2002, compared to $23.5 million, or 6.4% of
trade sales, in the first quarter of 2001. The decrease was due to spending
reductions in response to softer market conditions, offset by increased R&D as a
result of a full quarter of R&D expenses in 2002 from our DPP acquisition.
20
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were $34.5 million,
or 10.6% of trade sales, in the first quarter of 2002, compared to $43.3
million, or 11.8% of trade sales, in the first quarter of 2001. We have offset
SG&A from our acquired businesses in 2001 with spending reductions in response
to softer market conditions.
AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES
Amortization of acquisition-related intangibles was $9.3 million in the
first quarter of 2002, compared to $10.4 million in the first quarter of 2001.
The decrease in amortization is due to our adoption of FAS 142 ($2.1 million)
offset by increases in intangible amortization as a result of a full quarter of
amortization for our DPP acquisition as well as the result of our Impala
acquisition in the latter part of 2001 ($1.0 million).
INTEREST EXPENSE
Interest expense was $28.6 million in the first quarter 2002 compared to
$23.9 million in the first quarter of 2001. The increase in interest expense was
principally the result of expense associated with the $350.0 million of 10 1/2%
Senior Subordinated Notes we sold in the first quarter of 2001 as well as the
$200.0 million of 5% Convertible Senior Subordinated Notes we sold in the fourth
quarter of 2001. This increase is partially offset by a decrease in interest
expense as a result of a reduction in our revolving credit facility balance.
INTEREST INCOME
Interest income was $2.5 million in the first quarter of 2002 compared to
$7.4 million in the first quarter of 2001. The decrease in interest income for
the first quarter of 2002 compared to the comparable period of 2001 was due to
lower rates of return on our short-term investments.
OTHER INCOME
In the first quarter of 2002, we recorded a gain of $20.5 million related
to the sale of our military and space-related discrete power product line.
INCOME TAXES
Income tax expense was $1.5 million for the first quarter of 2002 compared
to $0.5 million for the first quarter of 2001. The effective tax rate for the
first quarter of 2002 was 36% compared to 25% for the first quarter of 2001. The
increase in our effective tax rate was due primarily to regional economic
conditions resulting in decreased profits in certain 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 March 31, 2002, adjusted for outstanding letters
of credit, we had $299.2 million available under this senior credit facility.
Our senior credit facility, the indentures governing our 10 1/8% Senior
Subordinated Notes, 10 3/8% Senior Subordinated Notes, 10 1/2% Senior
Subordinated Notes and 5.0% Convertible Senior Subordinated Notes 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 in the senior credit facility relating to financial
ratios also include a minimum interest coverage ratio and a maximum senior
leverage ratio. Provided there are no further outstanding balances under the
senior credit facility, compliance with these ratios is not required until March
31, 2003. The senior credit facility also limits our ability to modify our
certificate of incorporation and bylaws, or enter into shareholder agreements,
voting trusts or similar arrangements. Under our debt instruments, the
subsidiaries of Fairchild Semiconductor Corporation cannot be
21
restricted, except to a limited extent, from paying dividends or making advances
to Fairchild Semiconductor Corporation. We believe that funds generated from
operations, together with existing cash, will be sufficient to meet our debt
obligations over the next twelve months. 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 planned capital expenditures for the
next twelve months. We intend to invest approximately $145 to $155 million in
2002 to expand capacity primarily in support of in-sourcing of assembly and test
capacity, including construction of our new facility in Suzhou, China, and our
e-business initiatives. We frequently evaluate opportunities to sell additional
equity or debt securities, obtain credit facilities from lenders or restructure
our long-term debt to further strengthen our financial position. The sale of
additional equity or convertible securities could result in additional dilution
to our stockholders. Additional borrowing or equity investment may be required
to fund future acquisitions.
As of March 31, 2002, our cash and cash equivalents balance was $512.8
million, an increase of $8.4 million from December 30, 2001.
During the first quarter of 2002, our operations provided $1.0 million in
cash compared to $33.2 million of cash in the first quarter of 2001. The
decrease in cash provided by operating activities is due to a decrease in the
first quarter of 2002 in net income adjusted for non-cash items compared with
the first quarter of 2001. Cash provided by (used in) investing activities
during the first quarter of 2002 totaled $2.3 million, compared to ($395.1)
million in the first quarter of 2001. The increase primarily results from a net
cash inflow for acquisitions and divestitures of $24.6 million in the first
quarter of 2002 versus a net cash outflow in the first quarter of 2001 for
acquisitions and divestitures of $343.1 million. Cash provided by financing
activities of $5.1 million for the first quarter of 2002 was primarily from
proceeds from the issuance of common stock upon the exercise of options. Cash
provided by financing activities of $337.7 million in the first quarter of 2001
was due primarily to proceeds from the issuance of the 10 1/2% Senior
Subordinated Notes, net of debt issuance costs.
It is customary practice in the semiconductor industry to enter into
guaranteed purchase commitments or "take or pay" arrangements for purchases of
certain equipment and raw materials. At March 31, 2002, obligations under these
arrangements were not material to our consolidated financial statements. The
table below summarizes aggregate maturities of long-term debt and future minimum
lease payments under noncancelable operating leases as of March 31, 2002.
<Table>
<Caption>
REMAINDER 1-3 4-5 AFTER
CONTRACTUAL OBLIGATIONS TOTAL OF 2002 YEARS YEARS 5 YEARS
- ----------------------- -------- --------- ----- ------ -------
(IN MILLIONS)
Long-Term Debt.......................... $1,138.4 $ 0.2 $ 0.8 $210.7 $926.7
Operating Leases........................ 89.4 15.7 29.8 9.4 34.5
-------- ----- ----- ------ ------
Total......................... $1,227.8 $15.9 $30.6 $220.1 $961.2
======== ===== ===== ====== ======
</Table>
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 three months of
2002, nor in the first three months of 2001. Fairchild Semiconductor
International on a stand-alone basis has no cash requirements for the next
twelve months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. The U.S. Securities and Exchange Commission has defined critical
accounting policies as those that are both most important to the portrayal of
our financial condition and results and which require our most difficult,
complex or subjective judgements or estimates.
22
Based on this definition, we believe our critical accounting policies include
the policies of revenue recognition, sales reserves, inventory valuation and the
impairment of long-lived assets. For all financial statement periods presented,
there have been no material modifications to the application of these critical
accounting policies.
On an on going basis, we evaluate the judgments and estimates underlying
all of our accounting policies, including those related to customer sales
allowances, product returns, bad debts, inventories, impairment of long-lived
assets, deferred tax valuation allowances, restructuring reserves and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Materially different results in the amount and timing of our
actual results for any period could occur if our management made different
judgements or utilized different estimates.
Revenue from the sale of semiconductor products is recognized when title
transfers to the customer, including distributors, which is generally upon
shipment. No revenue is recognized unless there is persuasive evidence of an
arrangement, the price to the buyer is fixed or determinable, and the
collectibility of the sales price is reasonably assured. Contract manufacturing
revenues are recognized upon completion of the contracted service.
Sales reserves generally fall into four categories: customer material
return reserves, distributor contract sales debit reserves, prompt payment
discount reserves, and other distribution reserves. Customer material returns
result from product quality, administrative or other defect issues. Distributor
contract sales debits are credits given to distributors to ensure distributor
profitability on individual resale transactions. Prompt payment discounts are
enticements given to customers to ensure payment is made in a timely manner.
Customer material reserves, distributor contract sales debit reserves and prompt
payment discount reserves are based upon historical rates of return or claim and
any known, specifically identified unusual returns. Other sales reserves are
recorded based upon individual contracts with distributors that may call for
reimbursement of product scrapped or reimbursement of price changes that affect
the distributors inventory carrying value. Historically, we have not experienced
material differences between our estimated sales reserves and actual results.
In determining the net realizable value of our inventories, we review the
valuations of inventory considered excessively old and therefore subject to
obsolescence and inventory in excess of customer backlog. We also adjust the
valuation of inventory when estimated actual cost is significantly different
than standard cost and to value inventory at the lower of cost or market.
We assess the impairment of long-lived assets on an ongoing basis and
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable based upon an estimate of future undiscounted cash flows.
Factors we consider that could trigger an impairment review include the
following:
- significant underperformance relative to expected historical or projected
future operating results
- significant changes in the manner of our use of the acquired assets or
the strategy for our overall business
- significant negative industry or economic trends
- significant decline in our stock price for a sustained period
- our market capitalization relative to net book value
- significant technological changes, which would render equipment and
manufacturing process, obsolete.
When we determine that the carrying value of any long-lived asset may not
be recoverable based upon the existence of one or more of the above indicators
of impairment, we measure impairment based on the difference between an asset's
carrying value and an estimate of fair value, which may be determined based upon
quotes or a projected discounted cash flow, using a discount rate determined by
our management to be commensurate with our cost of capital and the risk inherent
in our current business model.
23
FORWARD LOOKING STATEMENTS
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, the Outlook section below
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
below and more specifically in the Business Risks section below. Among these
factors are the following: changes in regional or global economic or political
conditions (including as a result of terrorist attacks and responses to them);
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 the
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. It is our current policy to update our business outlook at
least twice each quarter. The first update is near the beginning of each
quarter, within the press release that announces the previous quarter's results.
The business outlook below is consistent with the outlook included in our April
23, 2002 press release announcing first quarter results. The second update is
within a press release issued approximately two months into each quarter. The
current business outlook is accessible at the Investor Relations section of our
website at investor.fairchildsemi.com. Toward the end of each quarter, we
observe a "quiet period," when the outlook is not updated to reflect
management's current expectations. The quiet period for the second quarter of
2002 will be from June 17, 2002 to July 23, 2002, when we plan to release our
second quarter 2002 results. Except during quiet periods, the business outlook
posted on our website reflects current guidance unless and until updated through
a press release, SEC filing or other public announcement. During quiet periods,
our business outlook, as posted on our website, announced in press releases and
provided in quarterly, annual and special reports or other filings with the SEC,
should be considered to be historical, speaking as of prior to the quiet period
only and not subject to update by the company. During quiet periods, Fairchild
Semiconductor representatives will not comment about the business outlook or the
company's financial results or expectations.
OUTLOOK
We expect revenues in the second quarter of 2002 to be 3-5% higher than the
first quarter, and currently expect revenue growth for the remainder of the year
to follow normal seasonal trends, which means sequentially flat sales in the
third quarter followed by stronger revenue growth in the fourth quarter.
We expect higher factory utilization rates in second quarter to help
improve our gross margins by 100-200 basis points sequentially. Pricing is
firming for most of our new products but remains aggressive on some of our
mature standard logic, linear and discrete product lines. During the second
quarter, we will continue to focus on margin improvement through selective price
increases and mix management. The full impact of this will not be felt until the
beginning of the third quarter. As a result, we expect gross margins to continue
to improve throughout the year due to a combination of higher factory
utilization, improved product mix and slight price increases on our new
products.
For the second quarter, we expect our selling, general and administrative
expenses (excluding amortization of intangibles) to stay roughly flat as a
percentage of sales. We expect interest expense to average approximately $26
million per quarter.
For purposes of computing EBITDA, pro forma 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 $9.5
million for the second quarter. Finally, we expect an outstanding diluted share
count of approximately 106.5 million shares for the second quarter of 2002.
24
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (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 requires 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.
This provision was effective upon adoption for goodwill acquired after June 30,
2001 and effective December 31, 2001 for goodwill acquired prior to June 30,
2001. SFAS No. 142 also requires 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 adopted the provisions of SFAS No. 141, effective in the third quarter
of 2001, and SFAS No. 142 effective December 31, 2001. We were required to
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. Accordingly, assembled workforce of $3.5 million was reclassified
into goodwill in the first quarter of 2002. We were also 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 during the first quarter of 2002. No such adjustments were
deemed necessary.
SFAS No. 142 required 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 identified our reporting units and determined the carrying value of each
reporting unit by assigning assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of the date of
adoption. Identified reporting units which carry goodwill include domestic
analog and power device analog (Korea), which comprise our Analog segment,
discrete power products and power device discrete (Korea) which are part of our
Discrete segment and Optoelectronics, which does not meet the requirements of a
segment as defined in SFAS No. 131. We then determined the fair value of each
reporting unit and compared 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, 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. We determined the fair value of our
reporting units using discounted future cash flows. For each reporting unit, we
determined that its fair value exceeded its carrying value, therefore no
impairment is indicated. SFAS No. 142 requires that future impairment charges be
recorded as a component of operating income.
During the first quarter, we adopted SFAS No. 143, Accounting For Asset
Retirement Obligations, issued in August 2001, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and for the associated retirement costs. SFAS No. 143
applies to all entities that have a legal obligation associated with the
retirement of a tangible long-lived asset. Implementation of SFAS No. 143 did
not have a material impact on our financial condition or results of operations.
During the first quarter, we adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, issued in October 2001, which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. Implementation of SFAS No. 144 did not have a material impact
on our financial condition or results of operations.
25
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 1998 and
into 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
2000 and throughout 2001, we and the rest of the semiconductor industry
experienced backlog cancellations and reduced demand for our products, resulting
in revenue declines, 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
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:
- the 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 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
26
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, Samsung Electronics 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;
- 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 have made nine acquisitions since we became an independent company in
1997 and 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 are 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
27
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.
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 58% of our net trade sales for the three months
ended March 31, 2002. Our five domestic distributors accounted for 5% of our net
trade sales for the three months ended March 31, 2002. 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
28
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,
delivery terms, 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.
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:
- economic and political instability;
- foreign currency fluctuations;
- transportation delays;
- trade restrictions;
- work stoppages; and
- the laws, including tax laws of, and the policies of the United States
toward, countries in which we manufacture our products.
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
and our company.
Our 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
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 ITS INABILITY TO MEET ITS CONTRACTUAL OBLIGATIONS COULD
SUBSTANTIALLY REDUCE OUR FINANCIAL PERFORMANCE.
29
As a result of the acquisition of Samsung Electronics' 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.
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 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.
WE PLAN TO SIGNIFICANTLY EXPAND OUR MANUFACTURING OPERATIONS IN CHINA AND,
AS A RESULT, WILL BE INCREASINGLY SUBJECT TO RISKS INHERENT IN DOING BUSINESS IN
CHINA, WHICH MAY ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
In 2001, we acquired land in Suzhou, Jiangsu Province, People's Republic of
China and in February 2002 began construction of the first phase of an 800,000
square foot assembly and test facility there. We are hopeful that a significant
portion of our future revenue will result from the Chinese markets in which our
products are sold, and from demand in China for goods that include our products.
We also plan to export products out of China from the new Suzhou facility. In
addition, since 2000 we have operated an optoelectronics manufacturing facility
in Wuxi, China. Our ability to operate in China may be adversely affected by
changes in that country's laws and regulations, including those relating to
taxation, import and export tariffs, environmental regulations, land use rights,
property and other matters. In addition, our results of operations in China are
subject to the economic and political situation there. We believe that our
operations in China are in compliance with all applicable legal and regulatory
requirements. However, there can be no assurance that China's central or local
governments will not impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures. Changes in the
political environment or government policies could result in revisions to laws
or regulations or their interpretation and enforcement, increased taxation,
restrictions on imports, import duties or currency revaluations. In addition, a
significant destabilization of relations between China and the United States
could result in restrictions or prohibitions on our operations or the sale of
our products in China. The legal system of China relating to foreign trade is
relatively new and continues to evolve. There can be no certainty as to the
application of its laws and regulations in particular instances. Enforcement of
existing laws or agreements may be sporadic and implementation and
interpretation of laws inconsistent. Moreover, there is a high degree of
fragmentation among regulatory authorities resulting in uncertainties as to
which authorities have jurisdiction over particular parties or transactions.
30
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, National Semiconductor or Samsung
Electronics, these indemnities are limited to conditions that occurred prior to
the consummation of those transactions with those companies. 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.
On March 31, 2002, Affiliates of Citigroup Inc., and our directors and
executive officers together own approximately 29.4% of the outstanding shares of
our Class A Common Stock (including shares underlying vested option held by our
directors and executive officers). 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 of directors and the amendment of our corporate
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 APPROXIMATELY 1.4
TO 1, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR ABILITY TO
GROW AND COMPETE.
At March 31, 2002, we had total long-term debt of $1,138.0 million and a
ratio of debt to equity of approximately 1.4 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;
31
- 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.
The indenture governing Fairchild Semiconductor Corporation's outstanding 5%
Convertible Senior Subordinated Notes Due 2008 does not limit the amount of
additional debt that we may incur. 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 $299.2
million. As of March 31, 2002 we had $300.0 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
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 most of 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 and 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. These 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
32
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 credit agreement governing our 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. Provided there are no further outstanding
balances under our senior credit facility, compliance with these covenants in
the credit agreement is not required until March 31, 2003. After that date, or
earlier if we borrow money under the credit facility, 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 30, 2001 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 48 of the 10-K.
33
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have agreed in principle to settle the patent infringement lawsuit filed
against us by Siliconix Incorporated in 1999 in the United States District Court
for the Northern District of California. The terms of the settlement agreed in
principle are not material to our financial position and are not expected to
have a material effect on our future results of operations.
From time to time we are involved in legal proceedings in the ordinary
course of business. We believe that there is no such ordinary course litigation
pending that could have, individually or in the aggregate, a material adverse
effect on our business, financial condition, results of operations or cash
flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.01 Non-Qualified Stock Option Agreement, dated February 22,
2002, under the Restated Stock Option Plan between the
registrant and each of Kirk P. Pond, Joseph R. Martin and
Daniel E. Boxer.
10.02 Non-Qualified Stock Option Agreement, dated February 22,
2002, under the Restated Stock Option Plan between the
registrant and certain other executive officers.
10.03 Non-Qualified Stock Option Agreement, dated February 7, 2002
or February 28, 2002, under the Restated Stock Option Plan
between the registrant and each of its non-employee
directors.
10.04 Nonstatutory Stock Option Agreement, dated February 22,
2002, under the 2000 Executive Stock Option Plan between the
registrant and each of Kirk P. Pond, Joseph R. Martin and
Daniel E. Boxer.
10.05 Nonstatutory Stock Option Agreement, dated February 22,
2002, under the 2000 Executive Stock Option Plan between the
registrant and certain other executive officers.
10.06 Employment letter with John M. Watkins, Jr.
</Table>
(b) Reports on Form 8-K
On January 23, 2002, we filed a special report on Form 8-K relating to
financial information for the three and twelve months ended December 30, 2001
and forward-looking statements relating to the first quarter of 2002 as
announced in a press release issued January 22, 2002. The press release is
incorporated in, and filed as an exhibit to, the special report.
On February 21, 2002, we filed a special report on Form 8-K relating to the
update of our forward-looking guidance for the first quarter of 2002, as
announced in a press release dated February 20, 2002. The press release is
incorporated in, and filed as an exhibit to, the special report.
On March 11, 2002, we filed a special report on Form 8-K relating to the
filing of our audited financial statements as of and for the year ended December
30, 2001 together with Management's Discussion and Analysis of Financial
Condition and Results of Operations for the periods included in such Financial
Statements as well as to announce the agreement in principle reached with
Siliconix Incorporated to settle the patent infringement lawsuit filed against
us. The press release is incorporated in, and filed as an exhibit to, the
special report.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
34
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: May 15, 2002
35
EXHIBITS INDEX
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.01 Non-Qualified Stock Option Agreement, dated February 22,
2002, under the Restated Stock Option Plan between the
registrant and each of Kirk P. Pond, Joseph R. Martin and
Daniel E. Boxer.
10.02 Non-Qualified Stock Option Agreement, dated February 22,
2002, under the Restated Stock Option Plan between the
registrant and certain other executive officers.
10.03 Non-Qualified Stock Option Agreement, dated February 7, 2002
or February 28, 2002, under the Restated Stock Option Plan
between the registrant and each of its non-employee
directors.
10.04 Nonstatutory Stock Option Agreement, dated February 22,
2002, under the 2000 Executive Stock Option Plan between the
registrant and each of Kirk P. Pond, Joseph R. Martin and
Daniel E. Boxer.
10.05 Nonstatutory Stock Option Agreement, dated February 22,
2002, under the 2000 Executive Stock Option Plan between the
registrant and certain other executive officers.
10.06 Employment letter with John M. Watkins, Jr.
</Table>
36