-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B7JBXJbDCC3HI+UuvaobD4J67Lj61gvxyL92G7mPqf5w8b53wRKIpiASukd6Vynn 5VmmMS9qTwa8YUTuCeuQ/Q== 0000950135-01-000919.txt : 20010328 0000950135-01-000919.hdr.sgml : 20010328 ACCESSION NUMBER: 0000950135-01-000919 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC CENTRAL INDEX KEY: 0001036960 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 043363001 STATE OF INCORPORATION: DE FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-15181 FILM NUMBER: 1579520 BUSINESS ADDRESS: STREET 1: 82 RUNNING HILL RD CITY: SOUTH PORTLAND STATE: ME ZIP: 04106 BUSINESS PHONE: 2077758100 MAIL ADDRESS: STREET 1: 82 RUNNING HILL RD CITY: SOUTH PORTLAND STATE: ME ZIP: 04106 FORMER COMPANY: FORMER CONFORMED NAME: FSC SEMICONDUCTOR CORP DATE OF NAME CHANGE: 19970424 10-K405 1 b38142fse10-k405.txt FORM 10-K405 DATED 12/31/00 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 001-15181 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. (Exact name of Registrant as specified in its charter) DELAWARE 04-3363001 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 82 RUNNING HILL ROAD, SOUTH PORTLAND, ME 04106 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207) 775-8100 Securities registered pursuant to Section 12(b) of the Act: Class A Common Stock, par value $.01 per share Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 9, 2001 was $989,149,137. The number of shares outstanding of the Registrant's Class A and Class B Common Stock as of March 9, 2001 was 99,277,935 and -0- respectively. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the period covered by this Annual Report on Form 10-K are incorporated by reference into Parts I and II. 1 2 Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on April 25, 2001 are incorporated by reference into Part III. PART I ITEM 1. BUSINESS Throughout this Annual Report on Form 10-K, the terms "we," "our", "Fairchild" and "Fairchild International" refer to Fairchild Semiconductor International, Inc. and its consolidated subsidiaries, including Fairchild Semiconductor Corporation, our principal operating subsidiary. We refer to specific subsidiaries where appropriate. We have changed our fiscal year-end from the last Sunday in May to the last Sunday in December. Our last fiscal year under our old accounting calendar was the year ended May 30, 1999, which we refer to as "Fiscal 1999." Our first fiscal year following this change was the year ended December 31, 2000, which we refer to as "Calendar 2000" and is the period covered by this Annual Report on Form 10-K. We refer to the transition period from May 31, 1999 to December 26, 1999 as "Stub Year 1999." GENERAL We are one of the largest independent semiconductor companies focused solely on multi-market products. We design, develop and market analog, discrete, interface and logic, non-volatile memory and optoelectronic semiconductors. Within our multi-market products portfolio, we are particularly strong in providing discrete and analog power management and interface solutions. Multi-market products are the building block components for virtually all electronic devices, from sophisticated computers and internet hardware to telecommunications equipment to household appliances. 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 such characteristics, our products have a wide range of applications. Our products are sold to customers in the personal computer, industrial, telecommunications, consumer electronics and automotive markets. With a history dating back more than 35 years, the original Fairchild was one of the founders of the semiconductor industry. Established in 1959 as a provider of memory and logic semiconductors, the Fairchild Semiconductor business was acquired by Schlumberger Limited in 1979 and by National Semiconductor Corporation in 1987. In March 1997, as part of its recapitalization, much of the Fairchild Semiconductor business was sold to a new, independent company -- Fairchild Semiconductor Corporation. At the time of the recapitalization, Fairchild consisted of the discrete, logic and non-volatile memory businesses of National Semiconductor. On December 31, 1997, we acquired Raytheon Semiconductor, Inc., a wholly owned subsidiary of Raytheon Company, for approximately $117.0 million in cash. That business designs, manufactures and markets high-performance analog and mixed signal semiconductors for the personal computer, communications, broadcast video and industrial markets. On April 13, 1999, we purchased the power device business of Samsung Electronics for approximately $414.9 million, including fees and expenses. The power device business designs, manufactures and markets power discrete semiconductors and standard analog integrated circuits serving the personal computer, industrial, telecommunications and consumer electronics markets. The power device business has developed a number of new product designs with industry leading performance characteristics, such as its recent process developments in trench technology and silicon bonding. The acquisition of the power device business not only enhanced our analog and power discrete product offerings, but also provided us with a greater market presence in South Korea. In connection with the acquisition of the power device business, the Korean government granted a ten-year tax holiday. The exemption is 100% for the first seven years of the holiday and 50% for the remaining three years of the holiday. During Calendar 2000, the tax holiday was extended such that the exemption amounts were increased to 75% in the eighth year and a 25% exemption was added to the eleventh year. On May 28, 2000, we purchased QT Optoelectronics, Inc., or QT Opto, for approximately $92.0 million. QT Opto designs, manufactures and markets LED lamps and displays, infrared components, custom optoelectronics and optocouplers and is the world's largest independent company solely focused on optoelectronics. This acquisition gives us a position in a $5.8 billion market. Revenue opportunities exist in being able to offer these products to existing Fairchild customers who were purchasing from competitors. 2 3 On September 8, 2000, we purchased the power management business of Micro Linear Corporation for approximately $11.0 million. Micro Linear's power management business consists of analog products including offline power switches, low power battery management, video filters and bus terminators. This acquisition expands the breadth of our overall position in the power management analog business. On September 8, 2000, we purchased KOTA Microcircuits, Inc., or KOTA, for approximately $12.1 million. KOTA designs, manufactures and markets high-performance operational amplifiers and other standard linear products. This acquisition positions us with leading technology in the operational amplifier market, representing a $2.8 billion total available market in 2000 according to the WSTS, and expands our penetration into markets that include cellular phone, CD-ROM drives and portable applications. On March 16, 2001 we acquired substantially all of the assets of, and assumed certain liabilities of, Intersil Corporation's ("Intersil's") discrete power products business ("DPP") for approximately $338.0 million in cash. DPP is a leading provider of silicon-based discrete power devices for the computer, communications, industrial, automotive, and space and defense markets. In connection with the DPP acquisition, on January 26, 2001, we completed a private offering of $350.0 million of 10 1/2% Senior Subordinated Notes. The proceeds from this offering, excluding underwriting discounts, were used to fund the purchase price of the DPP acquisition. PRODUCTS AND TECHNOLOGY We design, develop and manufacture a broad range of products used in a wide variety of microelectronic applications, including personal computer, industrial, telecommunications, consumer products and automotive systems. Our products are organized into four principal product groups: Analog and Mixed Signal Products, Discrete Products, Interface and Logic Products, and Other Products which include non-volatile memory, optoelectronics and contract manufacturing. ANALOG AND MIXED SIGNAL PRODUCTS We design, manufacture and market high-performance analog and mixed signal integrated circuits for the personal computer, industrial, consumer electronics and broadcast video markets. These products are manufactured using leading-edge CMOS, BiCMOS, DMOS and bipolar technologies. Analog and mixed signal products represent a significant long-term growth area of the semiconductor industry. The increasing demand to integrate high performance microprocessor-based electronics in equipment ranging from personal computers to scientific instrumentation, telecommunications and data communications networks has led analog and mixed signal semiconductor suppliers to create designs that have higher levels of integration to reduce space and power requirements and provide greater functionality, all at lower cost. We offer over 2,600 analog device products, including offerings in all of the top 100 best selling (in terms of volume) analog product types. Major competitors include Analog Devices, Linear Technology, Intersil, ON Semiconductor, Philips and Semtech. Analog. Analog products control continuously variable functions such as light, color, sound and power. They enable human beings to interface with the digital world. We provide analog products relating to power conversion, temperature sensing, management functions, battery chargers and motor controls. Our Smart Power Switch is a proprietary, multichip module consisting of a power management integrated circuit and a MOSFET. Smart Power Switches provide a solution for off-line power converter designs in power supplies, battery chargers, PC peripherals, and home and consumer applications. We also offer a mix of mature products, such as operational amplifiers, audio amplifiers, regulators, comparators, references and timers, ground fault interrupters and 8-bit microprocessors which continue to generate significant revenues due to their long product life cycles. Mixed Signal. Mixed signal products process both analog and digital information. Our mixed signal offerings include analog-to-digital converters, digital-to-analog converters and market-leading digital video encoders and decoders sold to manufacturers of high-end video equipment and set-top boxes. We believe our Analog product portfolio is further enhanced by a wide variety of packaging solutions that we have developed. These solutions include surface mount and tiny packages. 3 4 DISCRETE PRODUCTS Discrete devices are individual diodes or transistors that perform basic signal amplification and switching functions in electronic circuits. Driving the long-term growth of discretes is the increasing importance of power management, particularly in portable applications such as pagers and notebook computers. We participate in both the power and small signal discrete markets using our DMOS and Bipolar technologies, manufacturing semiconductors that condition (or shape) power or signals for use by other devices. The acquisition of the power device business added significantly to our discrete product portfolio, with only small signal transistors overlapping with our existing portfolio. While the world market is dominated by such multinational semiconductor manufacturers as Toshiba, ON Semiconductor and Philips, a significant portion of the industry is fragmented where competition is primarily on a regional basis. Other competitors include Siliconix and International Rectifier. DMOS. DMOS discrete devices are used to convert, switch or otherwise shape or condition electricity. We offer a wide range of DMOS power MOSFETs designed for low and high voltage applications over a wide range of performance characteristics, power handling capabilities and package options. We are focusing on DMOS as our growth area due to the trend towards smaller and lighter products and longer battery life, as well as batteries with built-in smart functions. DMOS products are the focus of our discrete research and development expenditures. These expenditures have been directed primarily toward the development of our leading-edge Trench technology. These products are commonly found in portable computers and peripherals, portable telephones, automobiles and battery-powered devices. Our DMOS products include: Low Voltage MOSFET. This product line is focused on developing products in the Low Voltage DMOS area in support of the trend towards smaller and lighter products, longer battery life expectancy, as well as batteries with built-in smart functions. Research and development efforts and expenditures have been directed toward the development of our leading-edge Power Trench(R) technology. The combination of leading-edge wafer fabrication processes and new packaging technology continues to allow our Low Voltage DMOS product families to set new standards for low resistance and high current performance in miniature surface mount power packaging. Our Low Voltage DMOS products are commonly found in portable computers and peripherals, portable telephones, automobiles and battery-powered devices. High Voltage MOSFET. This product line offers a wide variety of high voltage MOSFET devices designed for high voltage applications (200V to 900V) over a wide range of performance characteristics, power handling capabilities and package options. The product portfolio includes both N channel and P channel devices using proprietary HDMOS process technology. These products are commonly found in power system applications including flyback and forward converters and power factor correction in switch-mode power supplies (SMPS). IGBT. This product line offers very high voltage devices (600V to 1500V) in a variety of package options. Typical applications for these devices are motor control, inverters, robotics, servo controls, power supply and lamp ballast. IGBT will be a focused growth product line as more industrial applications are using this technology. Bipolar. We manufacture and sell a wide range of bipolar discretes, including single junction glass diodes, small signal transistors, bipolar power transistors, JFETs and Zener diodes in a wide variety of package configurations. These devices switch, amplify and otherwise shape or modify electronic signals and are found in nearly every electronic product, including computers, cellular phones, mass storage devices, televisions, radios, VCRs and camcorders. INTERFACE AND LOGIC PRODUCTS We design, develop and manufacture high-performance interface and logic devices utilizing three wafer fabrication processes: CMOS, BiCMOS and Bipolar. Within each of these production processes, we manufacture products that possess advanced performance characteristics, as well as mature products that provide high performance at low cost to customers. Interface Products. The significant growth in the Internet hardware and cellular base station markets has increased demand for interface products. Interface products generally connect signals from one part of a system to another part of a system. Typical interface applications include backplane driving, bus driving, clock driving and signal integrity. These 4 5 applications all require high speed, high current drive and low noise attributes. These types of products are mixed signal in nature and require a high level of analog wave shaping techniques on the output structures, minimizing the number of suppliers with the capability to develop them. We believe we have developed some unique competencies and patented circuit techniques along with a broad range of process technologies which facilitate our expansion into the interface products market. The interface market is divided into two categories: "building block interface" and "standards-specific interface products." Current building block products include our FST and GTL product families with planned expansions into an LVDS family of products and clock driving products. Standards-specific products are normally based on industry standards which are developed by consortiums of hardware suppliers, software suppliers, end segment customers and industry experts. We are an active participant on many committees where industry standards are developed, and have product offerings in printer interface, dual inline memory module drivers and Universal Serial Bus applications. Major competitors include Texas Instruments, National Semiconductor, Maxim and Linear Technology. Logic Products. Since market adoption rates of new standard logic families have historically spanned several years, we continue to generate significant revenues from our mature products. Customers are typically slow to move from an older product to a newer one. Further, for any given product, standard logic customers use several different generations of logic products in their designs. As a result, typical life cycles for logic families are between 20 and 25 years. Since it takes new logic products an average of three to five years to reach full market acceptance, we continue to invest in new products to generate future revenue growth. In addition, many of these investments have established our logic devices as key components for the personal computer and telecommunications markets, particularly in the Internet and networking sector and cellular communications sector. Internet appliances and Internet infrastructure equipment (such as LAN and WAN switches, hubs, routers and servers) require high speed, high drive and low noise characteristics. We offer logic devices using CMOS, BiCMOS and Bipolar processes that are required to achieve these characteristics. Our ABT, LVT and ECL logic devices have all successfully penetrated the Internet hardware market. In addition, cellular communications equipment such as cellular phones, pagers and base stations and consumer set top box require low power and noise generation in very small packages. We believe our Tiny Logic(TM), VHC, LCX and FST switch technologies have established our logic products among the leading technologies addressing these requirements. Major competitors include Texas Instruments, ON Semiconductor and Philips. OTHER PRODUCTS Included within the "Other" reporting segment are non-volatile memory products and optoelectronic products. Non-Volatile Memory Products We design, manufacture and market non-volatile memory circuits, which are storage devices that retain data after power to the device has been shut off. We offer an extensive portfolio of high performance serial EEPROM and EPROM products. EPROMs are electrically programmable read-only memories. These non-volatile memory devices are used in the personal computer, industrial, telecommunications, consumer electronics and automotive systems. Major competitors include ST Microelectronics, Advanced Micro Devices, Atmel, Xicor and Microchip Technology. EEPROMs. EEPROMs are used primarily to store changing information in consumer products and automotive applications such as microwaves, televisions, stereos and automotive controls. Our standard EEPROM products serve each of the three serial bus interface protocols used with all industry standard microcontrollers. EPROMs. The ability of EPROMs to be programmed electrically by the equipment manufacturer enables them to achieve shorter time to market for new products than if they used products that must be programmed by the chip manufacturer. Today, EPROMs are primarily utilized in applications where storage of the instruction sets for microcontrollers requires less than 2Mb in density, which is virtually all segments of the low-end consumer electronic market (e.g., answering machines, garage door openers and washing machines). The EPROM market is declining as FLASH becomes cost-effective at lower densities. As a result, we are incurring minimal research and development expenditures in this product line. We currently sell EPROMs in densities ranging from 64K to 4Mb. Optoelectronic Products 5 6 Optoelectronics covers a wide range of semiconductor devices which emit and sense both visible and infrared light. Of the four major segments of the optoelectronics market we participate in three described below. Optocouplers. Optocouplers incorporate infrared emitter and detector combinations in a single package. These products are used to transmit signals between two electronic circuits operating at different voltage levels while maintaining electrical isolation between them. Major applications for these devices include power supplies, modems, motor controls and power modules. LED Lamps and Displays. General illumination applications currently served by incandescent and fluorescent lighting products are being targeted for replacement by solid state optoelectronic products to gain power savings and longer life. This product line includes stick and frame displays which are used in consumer electronics and appliances as well as T-1 and T-1 3/4 lamps that are used in consumer, industrial/instrument and signage industries. Infrared Products. These devices emit and detect infrared energy instead of visible energy. This product line offers a wide variety of packages including plastic emitters and detectors, metal can emitters and detectors, slotted switches and reflective switches. In addition, custom products address specific types of customer applications. Applications for infrared products include object detection (paper sensing in printers and copiers, garage door safety sensors), data transmission (remote controls in televisions, stereos, VCRs and wireless data links between computers and other electronic devices) and motor control. SALES, MARKETING AND DISTRIBUTION In Calendar 2000, we derived approximately 46% of our trade sales from original equipment manufacturer customers through our regional sales organizations and 54% of our trade sales through distributors. We operate regional sales organizations in Europe, headquartered in Wooton-Bassett, England; the Americas, headquartered in San Jose, California; the Asia/Pacific region, with offices in Hong Kong; the Japan region, with offices in Tokyo; and the Korea region, with offices in Puchon, South Korea. Each of the regional sales organizations, with the exception of Korea, is supported by logistics organizations which manage independently operated free-on-board warehouses. Product orders flow to our manufacturing facilities, where products are made. Products are then shipped either directly to customers or indirectly to customers via independently operated warehouses in Singapore, the United States and the United Kingdom. We have dedicated direct sales organizations operating in Europe, the Americas, the Asia/Pacific region, Japan and Korea that serve our major original equipment manufacturer customers. We also have a large network of distributors and manufacturer's representatives to distribute our products around the world. We believe that maintaining a small, highly focused, direct sales force selling products for each of our businesses, combined with an extensive network of distributors and manufacturer's representatives, is the most efficient way to serve our multi-market customer base. Fairchild also maintains a dedicated marketing organization, which consists of marketing organizations in each product group, including tactical and strategic marketing and applications, as well as marketing personnel located in each of the sales regions. Typically, distributors handle a wide variety of products, including products that compete with our products, and fill orders for many customers. Some of our sales to distributors, primarily in North America, are made under agreements allowing for market price fluctuations and/or the right of return on unsold merchandise, subject to the right terminating after the expiration of a limited time period. Virtually all distribution agreements contain a standard stock rotation provision allowing for minimum levels of inventory returns. In our experience, these inventory returns can usually be resold. Manufacturer's representatives generally do not offer products that compete directly with our products, but may carry complementary items manufactured by others. Manufacturer's representatives do not maintain a product inventory; instead, their customers place large quantity orders directly with us and are referred to distributors for smaller orders. RESEARCH AND DEVELOPMENT Our expenditures for research and development in Fiscal 1998, Fiscal 1999, Stub Year 1999 and Calendar 2000 were $35.7 million, $39.3 million, $35.0 million and $83.9 million, respectively. These expenditures represented 5.6%, 6.0%, 4.9% and 5.0% of trade sales in Fiscal 1998, Fiscal 1999, Stub Year 1999 and Calendar 2000, respectively. Manufacturing technology is a key determinant in the improvement of semiconductor products. Each new generation of 6 7 process technology has resulted in products with higher speed and greater performance produced at lower cost. Infrastructure investments made in recent years will enable us to continue to achieve high volume, high reliability and low-cost production using leading edge process technology. Our research and development efforts are focused on new product development and improvements in process technology in our growth areas: CMOS logic, DMOS power discretes, analog and mixed signal products, and optoelectronic products. Each of our product groups maintains independent research and development organizations. We work closely with our major customers in many research and development situations in order to increase the likelihood that our products will be designed directly into the customers' products and achieve rapid and lasting market acceptance. MANUFACTURING We operate nine manufacturing facilities, four of which are front-end wafer fabrication plants in the United States, South Korea and Singapore, and five of which are back-end assembly and test facilities in the United States and Asia. Our products are manufactured and designed using a broad range of manufacturing processes and proprietary design methods. We use all of the prevalent function-oriented process technologies for wafer fabrication, including CMOS, Bipolar, BiCMOS, DMOS and non-volatile memory technologies. We use primarily through-hole and surface mount technologies in our assembly and test operations, in lead counts from two to fifty-six leads. The table below sets forth information with respect to our manufacturing facilities, products and technologies. MANUFACTURING FACILITIES
LOCATION PRODUCTS TECHNOLOGIES ------------------------------------------------------------------- -------------------------- FRONT-END FACILITIES: South Portland, Maine Bipolar, CMOS and BiCMOS 4-inch fab -- 5.0/3.0 micron Interface and logic products 5-inch fab -- 3.0/1.5 micron Standard Linear products 6-inch fab -- 1.5/0.5 micron Op Amps, Ground Fault Interruptors CMOS and BiCMOS Salt Lake City, Utah EPROMs, EEPROMs, ACE and USB 6-inch fab -- 1.0/0.65 micron Discrete power CMOS EPROM 2.0/0.8 micron CMOS EPROM 2.0 micron DMOS Puchon, South Korea Power discrete semiconductors, 4-inch fab -- 5.0/4.0 micron standard analog integrated circuits Bipolar 5-inch fab -- 2.0/0.8 micron Bipolar and DMOS 6-inch fab -- 2.0/0.8 micron DMOS Singapore Optocoupler/infrared Infrared die fab BACK-END FACILITIES: Penang, Malaysia Bipolar, CMOS and BiCMOS interface MDIP, SOIC, EIAJ, TSSOP, SSOP, and logic products 8-56 Pins, SC-70 Cebu, the Philippines Power and small signal discrete TO92, SOT-23, Super SOT, SOT-223, TO220, TO263, DPAK, SC-70, BGA Kuala Lumpur, Malaysia Optocouplers SOIC, MFP Wuxi, China Infrared/LED Lamps and Displays T-1, T-1 3/4, SMD, Custom Loveland, Colorado Operational Amplifiers Hybrid
As part of the DPP acquisition, we acquired a wafer fabrication facility in Mountaintop, Pennsylvania, which manufactures six-inch and eight-inch silicon wafers. We subcontract a minority of our wafer fabrication needs, primarily to Advanced Semiconductor Manufacturing Corporation of Shanghai, Chartered Semiconductor, Torex Semiconductor and New Japan Radio Corporation. In order to maximize our production capacity, some of our back-end assembly and testing operations are also subcontracted. Primary subcontractors include Carsem, Amkor, NS Electronics (Bangkok) Ltd., Korea Micro Industry, Samsung Electronics and, as a result of the DPP acquisition, ChipPAC, Inc. The power device business also subcontracts manufacturing services from Samsung Electronics. As a result of the acquisition of the power device business, these services are provided under manufacturing agreements with Samsung Electronics. 7 8 Our manufacturing processes use many raw materials, including silicon wafers, copper lead frames, mold compound, ceramic packages and various chemicals and gases. We obtain our raw materials and supplies from a large number of sources on a just-in-time basis. Although supplies for the raw materials used by us are currently adequate, shortages could occur in various essential materials due to interruption of supply or increased demand in the industry. BACKLOG Our trade sales are made primarily pursuant to standard purchase orders that are generally booked from one to twelve months in advance of delivery. Backlog is influenced by several factors including market demand, pricing and customer order patterns in reaction to product lead times. Quantities actually purchased by customers, as well as prices, are subject to variations between booking and delivery to reflect changes in customer needs or industry conditions. We sell products to many key customers pursuant to contracts. Contracts are annual fixed-price agreements with customers setting forth the terms of purchase and sale of specific products. These contracts allow us to schedule production capacity in advance and allow customers to manage their inventory levels consistent with just-in-time principles while shortening the cycle times required to produce ordered products. However, quantity and price agreements under these contracts are, as a matter of industry practice, difficult to maintain and implement. We recognize revenue from contract manufacturing services but do not monitor backlog for these services. For these reasons, we believe that the amount of backlog at a particular date is not meaningful and is not necessarily a relevant indicator of future revenues. SEASONALITY Generally, we are affected by the seasonal trends of the semiconductor and related industries. With the change of our fiscal year end we expect revenues will be higher in the second and fourth quarters, lower in the first quarter due to holidays around the world and lower in the third quarter due to the historically slow summer months. In Stub Year 1999, however, typical seasonality was offset by the effects of the recovery of the overall semiconductor market, as we recorded sequential revenue increases in each quarter. This trend continued through the third quarter of Calendar 2000. In fourth quarter of Calendar 2000, we saw significant backlog pushout and cancellations causing quarter on quarter revenue to decline. COMPETITION Markets for our products are highly competitive. Although only a few companies compete with us in all of our product lines, we face significant competition within each of our product lines from major international semiconductor companies. Some of our competitors may have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing and distribution of their products. Competitors include manufacturers of standard semiconductors, application-specific integrated circuits and fully customized integrated circuits, as well as customers who develop their own integrated circuit products. We compete in different product lines to various degrees on the basis of price, technical performance, product features, product system compatibility, customized design, availability, quality and sales and technical support. Our ability to compete successfully depends on elements both within and outside of our control, including successful and timely development of new products and manufacturing processes, product performance and quality, manufacturing yields and product availability, customer service, pricing, industry trends and general economic trends. TRADEMARKS AND PATENTS Our corporate policy is to protect proprietary products by obtaining patents for such products when practicable. Under a technology licensing and transfer agreement with National Semiconductor entered into in connection with the recapitalization of the Fairchild Semiconductor business, we acquired approximately 150 U.S. patents and obtained perpetual, royalty-free non-exclusive licenses on approximately 250 of National Semiconductor's patents. Pursuant to an acquisition agreement with Raytheon Company, we acquired over 60 patents owned by Raytheon Semiconductor, Inc., as well as licensing rights (similar to those granted to Fairchild by National Semiconductor) for other semiconductor-related intellectual property of Raytheon Company not directly owned by Raytheon Semiconductor, Inc. Similarly, in our acquisition of the power device business, we acquired from Samsung Electronics a significant number of licenses and patents, including approximately 76 U.S. 8 9 patents and over 1,000 Korean patents. We also received all relevant trademarks. Additionally, from the acquisitions of QT Optoelectronics, KOTA and the power management business of Micro Linear Corporation, we have added in excess of 50 U.S. and five foreign patents and patent applications to our intellectual property portfolio. Finally, from the DPP acquisition we obtained over 500 patents worldwide. We believe that we have the right to use all technology used in the production of our products. ENVIRONMENTAL MATTERS Our operations are subject to environmental laws and regulations in the countries in which we operate that regulate, among other things, air and water emissions and discharges at or from our manufacturing facilities; the generation, storage, treatment, transportation and disposal of hazardous materials by our company; the investigation and remediation of environmental contamination; and the release of hazardous materials into the environment at or from properties operated by our company and at other sites. As with other companies engaged in like businesses, the nature of our operations exposes our company to the risk of liabilities and claims, regardless of fault, with respect to such matters, including personal injury claims and civil and criminal fines. Our facilities in South Portland, Maine, and, to a lesser extent, Salt Lake City, Utah, have ongoing remediation projects to respond to releases of hazardous materials that occurred prior to the consummation of the recapitalization. Under the Asset Purchase Agreement with National Semiconductor, as supplemented by ancillary agreements entered into in conjunction with the recapitalization, National Semiconductor has agreed to indemnify Fairchild for the cost of these projects, subject to limitations. Based on the historical costs of these projects, we do not believe that future remediation costs will be material, even without the indemnity. Our previously owned Mountain View, California, facility is listed on the National Priorities List under the Comprehensive Environmental Response, Compensation, and Liability Act. Under the terms of the Acquisition Agreement with Raytheon Company, Raytheon Company retained responsibility for, and has agreed to indemnify us with respect to, remediation costs or other liabilities related to pre-acquisition contamination. The purchaser of the Mountain View, California facility received an environmental indemnity from us similar in scope to the one we received from Raytheon Company. Although we believe that the power device business has no significant environmental liabilities, Samsung Electronics agreed to indemnify Fairchild for environmental liabilities arising out of the power device business, including the Puchon, South Korean plant, subject to limitations. We believe that our operations are in substantial compliance with applicable environmental laws and regulations. Our costs to comply with environmental regulations were immaterial in Fiscal 1998, Fiscal 1999, Stub Year 1999 and Calendar 2000. Future laws or regulations and changes in existing environmental laws or regulations, however, may subject our operations to different, additional or more stringent standards. While historically the cost of compliance with environmental laws has not had a material adverse effect on our results of operations, business or financial condition, we cannot predict with certainty our future costs of compliance because of changing standards and requirements. EMPLOYEES Our worldwide workforce consisted of 11,033 full-and part-time employees as of December 31, 2000, none of whom were represented by collective bargaining agreements. Of the total number of employees, 9,413 were engaged in manufacturing, 411 were engaged in marketing and sales, 993 were engaged in corporate and product line administration and 216 were engaged in research and development. We believe that our relations with our employees are satisfactory. Our wholly owned Korean subsidiary, which we refer to as "Fairchild Korea," sponsors a Power Device Business Labor Council consisting of seven representatives from the non-management workforce and seven members of the management workforce. The Labor Council, under Korean law, is recognized as a representative of the workforce for the purposes of consultation and cooperation only. The Labor Council therefore has no right to take a work action or to strike and is not party to any labor or collective bargaining agreements with Fairchild Korea. We believe that relations with Fairchild Korea employees and the Labor Council are satisfactory. As a result of the consummation of the DPP acquisition, approximately 330 of our employees are covered by a collective bargaining agreement. 9 10 EXECUTIVE OFFICERS OF FAIRCHILD INTERNATIONAL The following table sets forth information with respect to the executive officers of our company.
NAME AGE TITLE ---- --- ----- Kirk P. Pond......... 56 Chairman of the Board of Directors, President and Chief Executive Officer Joseph R. Martin..... 53 Executive Vice President and Chief Financial Officer and Director Daniel E. Boxer...... 55 Executive Vice President and Chief Administrative Officer, General Counsel and Secretary Jerry M. Baker....... 49 Executive Vice President, Global Operations Keith Jackson........ 45 Executive Vice President and General Manager, Analog, Mixed Signal and Non-Volatile Memory Products Group Darrell Mayeux....... 58 Executive Vice President, Worldwide Sales and Marketing Deok J. Kim.......... 49 Senior Vice President, President, Fairchild Korea Semiconductor Ltd. W.T. Greer, Jr....... 59 Senior Vice President and General Manager, Interface and Logic Group Izak Bencuya......... 46 Senior Vice President and General Manager, Discrete Power and Signal Technologies Group Stephen Sherman...... 57 Senior Vice President and General Manager of Optoelectronics Group Ernesto J. D'Escoubet 56 Senior Vice President, Technology and Quality John M. Watkins, Jr.. 58 Senior Vice President, Chief Information Officer David A. Henry....... 39 Vice President, Corporate Controller Matthew W. Towse..... 38 Vice President, Treasurer
Kirk P. Pond, Chairman of the Board of Directors, President and Chief Executive Officer. Mr. Pond has been the President of Fairchild Semiconductor since June 1996. Since 1987, Mr. Pond had held several executive positions with National Semiconductor, most recently Executive Vice President and Chief Operating Officer. Prior executive management positions were with Fairchild Semiconductor Corporation, Texas Instruments and Timex Corporation. Joseph R. Martin, Executive Vice President, Chief Financial Officer and Director. Mr. Martin has been the Executive Vice President and Chief Financial Officer of Fairchild Semiconductor since June 1996. Mr. Martin had held several senior financial positions with National Semiconductor since 1989, most recently as Vice President of Finance, Worldwide Operations. Prior to joining National Semiconductor, Mr. Martin was Senior Vice President and Chief Financial Officer of VTC Incorporated. Mr. Martin is a director of ChipPAC, Inc. Daniel E. Boxer, Executive Vice President and Chief Administrative Officer, General Counsel and Secretary. Mr. Boxer joined our company in March 1997. He has practiced law for 27 years and since 1975 had been a partner at the law firm of Pierce Atwood, Portland, Maine. His practice at Pierce Atwood included advising many large manufacturing companies, including our company, on business, governmental, legal compliance and environmental issues. He was most recently a senior partner and Chairman of the firm's Management Committee. Jerry M. Baker, Executive Vice President, Global Operations. Mr. Baker has been Executive Vice President, Global Operations since February 2000. Previously, Mr. Baker had been Executive Vice President and General Manager, Discrete Power and Signal Technologies Group, since December 1996. He has spent more than 24 years in a variety of engineering and management positions within National Semiconductor, most recently as Vice President and General Manager, Discrete Products Division. Keith Jackson, Executive Vice President and General Manager, Analog, Mixed Signal and Non-Volatile Memory Products Group. Mr. Jackson joined our company in March 1998. He has over 20 years of semiconductor industry experience. Most recently, Mr. Jackson was President of TriTech Microelectronics in Singapore, a manufacturer of analog and mixed signal products, which he joined in 1996. Prior to that, he worked for National Semiconductor for 10 years, most recently as Vice President and General Manager of the Analog and Mixed Signal division. He has also held 10 11 various marketing and engineering positions at National Semiconductor and Texas Instruments. Darrell Mayeux, Executive Vice President, Worldwide Sales and Marketing. Mr. Mayeux has been Executive Vice President, Worldwide Sales and Marketing since November 1996. He had been with National Semiconductor since 1992 as Vice President of Sales and Marketing for Logic Products Group. He previously held engineering, marketing and general management positions with Texas Instruments and Philips. Deok J. Kim, Senior Vice President, President, Fairchild Korea Semiconductor Ltd. Mr. Kim became Senior Vice President, President of Fairchild Korea Semiconductor Ltd. when we acquired the power device business from Samsung Electronics in April 1999. He has over 24 years of experience in the semiconductor industry. Mr. Kim joined the power device business in 1990 as director of power product development and later became managing director and vice president and general manager of the power device business prior to its acquisition by Fairchild International. Before joining Samsung Electronics, Mr. Kim held engineering and development positions with Goldstar Semiconductor, AMI and General Electric. W.T. Greer, Jr., Senior Vice President and General Manager, Interface and Logic Group. Mr. Greer has been Senior Vice President and General Manager, Interface and Logic Group since February 2000. Mr. Greer has over 30 years of engineering and management experience in the semiconductor and electronics industries. Prior to joining our company in 1997 as Vice President of Logic Products, he served for ten years as Vice President and Director of Motorola Semiconductor's Advanced Technologies Division and Military Products Operation. Prior to that, he held various management positions at Texas Instruments. Izak Bencuya, Senior Vice President and General Manager, Discrete Power and Signal Technologies Group. Mr. Bencuya has been Senior Vice President and General Manager, Discrete Power and Signal Technologies Group since February 2000. Mr. Bencuya has worked in the semiconductor and electronics field for 24 years. Prior to his current assignment, Mr. Bencuya spent six years as Director of Power MOSFET Products. Mr. Bencuya also worked at GTE Laboratories and Siliconix in various research and management roles. Stephen Sherman, Senior Vice President and General Manager, Optoelectronics Group. Mr. Sherman became Senior Vice President when we acquired QT Optoelectronics in May 2000. Prior to assuming his current role, he was Chief Executive Officer of QT Optoelectronics for eight years. He previously worked for Commodore International, Amkor Electronics and Texas Instrument, as well as co-founding several companies. Ernesto J. D'Escoubet, Senior Vice President, Technology and Quality. Mr. D'Escoubet has been Senior Vice President, Technology and Quality, since February 2000. Mr. D'Escoubet has over 30 years experience in the semiconductor industry. Prior to assuming his current role, Mr. D'Escoubet spent eight years as Vice President of Operations for the Interface and Logic Group. Prior to that, he held various management positions at National Semiconductor and Harris Corporation. John M. Watkins, Jr., Senior Vice President, Chief Information Officer. Mr. Watkins joined our company in March 2000. Prior to joining our company, Mr. Watkins spent five years as Chief Information Officer of Pratt and Whitney. Prior to that, Mr. Watkins retired as a General after eleven years in the United States Army. His most recent assignment was as Director of the Defense Information Systems Agency in Washington, D.C. David A. Henry, Vice President, Corporate Controller. Mr. Henry has been Corporate Controller since December 1996. Previously, he had been with National Semiconductor for eight years, and held various financial management positions, most recently as Director of Financial Planning and Analysis for the Fairchild Business of National Semiconductor. Mr. Henry previously worked for Amfac, Inc. as well as Ernst and Whinney, and is a Certified Public Accountant. Matthew W. Towse, Vice President, Treasurer. Mr. Towse became Treasurer in March 1997. He had been with National Semiconductor for six years and has held various financial management positions, most recently as Controller for the Fairchild International plant in South Portland, Maine. Mr. Towse previously worked for Ernst & Young and is a Certified Public Accountant. 11 12 STATEMENT REGARDING THE PRIVATE SECURITIES LITIGATION REFORM ACT Some information in this Annual Report on Form 10-K, including but not limited to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, which is incorporated by reference from our annual report to stockholders, may constitute forward-looking statements as such term is defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," "anticipates," or "hopeful," or the negative of those terms or other comparable terminology, or by discussions of strategy, plans or intentions. Forward-looking statements involve risks and uncertainties, including those described in the Risk Factors section set forth below. Such risks and uncertainties could cause actual results to be materially different than those in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We assume no obligation to update such information. RISK FACTORS The risks described below are not the only ones facing our company. Additional risks not currently known to us or that we currently deem immaterial also may impair our business operations. DOWNTURNS IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY OR CHANGES IN END USER MARKET DEMANDS COULD REDUCE THE VALUE OF OUR BUSINESS. The semiconductor industry is highly cyclical, and the value of our business may decline during the "down" portion of these cycles. During the latter half of Fiscal 1998 and most of Fiscal 1999, we, as well as many others in our industry, experienced significant declines in the pricing of our products as customers reduced demand forecasts and manufacturers reduced prices to keep capacity utilization high. We believe these trends were due primarily to the Asian financial crisis during that period and excess personal computer inventories. Beginning in the fourth quarter of Calendar 2000, we and the rest of the semiconductor industry experienced backlog cancellations, resulting in slower revenue growth, due to excess inventories at computer and telecommunications equipment manufacturers. We may experience renewed, possibly more severe and prolonged, downturns in the future as a result of such cyclical changes. In addition, we may experience significant changes in our profitability as a result of variations in sales, changes in product mix, price competition for orders, 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 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: - any of the more than 330 U.S. patents owned by us or numerous other patents which third parties license to us will not be invalidated, circumvented, challenged or licensed to other companies; - any of the more than 500 patents that we acquired or licensed in the acquisition of DPP will not be invalidated, 12 13 circumvented or challenged; or - any of our pending or future patent applications will be issued within the scope of the claims sought by us, if at all. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in some foreign countries. We also seek to protect our proprietary technologies, including technologies that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors' rights agreements with our collaborators, advisors, employees and consultants. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of such research. Some of our technologies have been licensed on a non-exclusive basis from National Semiconductor Corporation, Samsung Electronics Co., Ltd. and other companies which may license such technologies to others, including, in the case of National Semiconductor commencing on March 11, 2002, our competitors. In addition, under a technology licensing and transfer agreement, National Semiconductor has limited royalty-free, worldwide license rights (without right to sublicense) to some of our technologies. If necessary or desirable, we may seek licenses under patents or intellectual property rights claimed by others. However, we cannot assure you that we will obtain such licenses or that the terms of any offered licenses will be acceptable to us. The failure to obtain a license from a third party for technologies we use could cause us to incur substantial liabilities and to suspend the manufacture or shipment of products or our use of processes requiring the technologies. OUR FAILURE TO OBTAIN OR MAINTAIN THE RIGHT TO USE CERTAIN TECHNOLOGIES MAY NEGATIVELY AFFECT OUR FINANCIAL RESULTS. Our future success and competitive position depend in part upon our ability to obtain or maintain proprietary technologies used in our principal products, which is achieved in part by defending claims by competitors of intellectual property infringement. The semiconductor industry is characterized by litigation regarding patent and other intellectual property rights. We are involved in lawsuits, and could become subject to other lawsuits, in which it is alleged that we have infringed upon the intellectual property rights of other companies. See "Legal Proceedings." 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 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 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 13 14 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. None of these potential transactions is subject to a letter of intent or otherwise so far advanced as to make the transaction reasonably certain. Should we successfully acquire another business, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with acquisitions include: - unexpected losses of key employees or customers of the acquired company; - conforming the acquired company's standards, processes, procedures and controls with our operations; - coordinating new product and process development; - hiring additional management and other critical personnel; - negotiating with labor unions; and - increasing the scope, geographic diversity and complexity of our operations. In addition, although Intersil has signed a transitional services agreement to assist us in integrating the DPP operations that we are acquiring from Intersil into our operations, we may encounter unforeseen obstacles or costs in such integration and 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. AS A RESULT OF THE ACQUISITION OF INTERSIL'S DISCRETE POWER BUSINESS, APPROXIMATELY 330 OF OUR EMPLOYEES ARE COVERED BY A COLLECTIVE BARGAINING AGREEMENT. OUR FAILURE TO INTEGRATE THESE EMPLOYEES SUCCESSFULLY COULD ADVERSELY AFFECT US. As of year end, none of our employees were covered by a collective bargaining agreement. As a result of the DPP Acquisition, approximately 330 of our employees are covered by a collective bargaining agreement. We cannot assure you that we will successfully integrate these new employees into our business or what effect, if any, their collective bargaining agreement will have on our employee relations generally. 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 and Korea Micro Industry and, as a result of the acquisition of Intersil's discrete power business, 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 14 15 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 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 50.9% of our net sales for the year ended December 31, 2000. Our five domestic distributors accounted for 8.2% of our total net sales for the year ended December 31, 2000. As a general rule, we do not have long-term agreements with our distributors and they may terminate their relationships with us with little or no advance notice. Distributors generally offer competing products. The loss of one or more of our distributors, or the decision by one or more of them to reduce the number of our products they offer or to carry the product lines of our competitors, could have a material adverse effect on our business, financial condition and results of operations. The termination of a significant distributor, whether at our or the distributor's initiative, or a disruption in the operations of one or more of our distributors, could reduce our net sales in a given quarter and could result in an increase in inventory returns. THE SEMICONDUCTOR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD REDUCE THE VALUE OF AN INVESTMENT IN OUR COMPANY. The semiconductor industry is, and the multi-market semiconductor product markets in particular are, highly competitive. Competition is based on price, product performance, quality, reliability and customer service. In addition, even in strong markets, price pressures may emerge as competitors attempt to gain a greater market share by lowering prices. Competition in the various markets in which we participate comes from companies of various sizes, many of which are larger and have greater financial and other resources than we have and thus are better able to pursue acquisition candidates and can better withstand adverse economic or market conditions. In addition, companies not currently in direct competition with us may introduce competing products in the future. THE COSTS TO OPERATE THE DISCRETE POWER PRODUCTS BUSINESS ACQUIRED FROM INTERSIL MAY INCREASE. Prior to our acquisition of the discrete power products business, Intersil operated that business as a division. During 2000, DPP incurred $34.4 million in costs for research and development, sales and marketing and general and administrative activities. These costs represent expenses incurred directly by DPP and charges allocated to it by Intersil. Although Intersil has agreed to provide certain of these services for a transition period under a transitional services agreement, DPP will need to obtain many of these services on an arm's length basis. We cannot assure you that we will be able to obtain similar services on comparable terms. In addition, although Intersil will aid us in integrating the DPP operations into our operations pursuant to the transitional services agreement, we may encounter unforeseen obstacles or costs in such integration. WE ENTERED INTO A NUMBER OF LONG-TERM SUPPLY AND SUPPORT CONTRACTS WITH SAMSUNG ELECTRONICS IN CONNECTION WITH OUR ACQUISITION OF ITS POWER DEVICE BUSINESS IN 1999. ANY DECREASE IN THE PURCHASE REQUIREMENTS OF SAMSUNG ELECTRONICS OR THE INABILITY OF SAMSUNG ELECTRONICS TO MEET ITS CONTRACTUAL OBLIGATIONS COULD SUBSTANTIALLY REDUCE 15 16 OUR FINANCIAL PERFORMANCE. As a result of the acquisition of the power device business in 1999, we have numerous arrangements with Samsung Electronics, including arrangements relating to product sales, designation as a vendor to affiliated Samsung companies and other services. Any material adverse change in the purchase requirements of Samsung Electronics, in its ability to supply the agreed-upon services or in its ability to fulfill its other obligations could have a material adverse effect on our results of operations. Although historically the power device business generated significant revenues from the sale of products to affiliated Samsung companies, we cannot assure you that we will be able to sell products to affiliated Samsung companies or that the designation of the power device business as a vendor to those affiliated Samsung companies will generate any revenues for our company. Furthermore, under the Korean Fair Trade Law, the Fair Trade Commission may issue an order requiring a change in the terms and conditions of the agreements between us and Samsung Electronics if it concludes that Samsung Electronics has provided us with undue support or discriminated against our competitors. THE POWER DEVICE BUSINESS SUBJECTS OUR COMPANY TO RISKS INHERENT IN DOING BUSINESS IN KOREA, INCLUDING LABOR RISK, POLITICAL RISK AND CURRENCY RISK. As a result of the acquisition of the power device business in 1999, we have significant operations in South Korea and are subject to risks associated with doing business in that country. In addition to other risks disclosed relating to international operations, some businesses in South Korea are subject to labor unrest. Also, relations between South Korea and North Korea have been tense over most of South Korea's history. We cannot assure you as to whether or when this situation will be resolved or change abruptly as a result of current or future events. An adverse change in economic or political conditions in South Korea or in its relations with North Korea could have a material adverse effect on our Korean subsidiary. The power device business' sales are denominated primarily in U.S. dollars while a significant portion of its costs of goods sold and its operating expenses are denominated in South Korean won. Although we have taken steps to fix the costs subject to currency fluctuations and to balance won revenues and won costs, a significant change in this balance, coupled with a significant change in the value of the won relative to the dollar, could have a material adverse effect on our financial performance and results of operations. In addition, an unfavorable change in the value of the won could require us to write down our won-denominated assets. A CHANGE IN FOREIGN TAX LAWS OR A DIFFERENCE IN THE CONSTRUCTION OF CURRENT FOREIGN TAX LAWS BY RELEVANT FOREIGN AUTHORITIES COULD RESULT IN US NOT RECOGNIZING THE BENEFITS WE ANTICIPATED IN CONNECTION WITH THE TRANSACTION STRUCTURE USED TO CONSUMMATE THE ACQUISITION OF THE POWER DEVICE BUSINESS. The transaction structure we used for the acquisition of the power device business is based on assumptions about the various tax laws, including withholding tax, and other relevant laws of foreign jurisdictions. In addition, our Korean subsidiary was granted a ten-year tax holiday under Korean law in 1999. The first seven years are tax-free, followed by three years of income taxes at 50% of the statutory rate. In Calendar 2000, the tax holiday was extended such that the exemption amounts were increased to 75% in the eighth year and a 25% exemption was added to the eleventh year. If our assumptions about tax and other relevant laws are incorrect, or if foreign taxing jurisdictions were to change or modify the relevant laws, or if our Korean subsidiary were to lose its tax holiday, we could suffer adverse tax and other financial consequences or lose the benefits anticipated from the transaction structure we used to acquire that business. OUR INTERNATIONAL OPERATIONS SUBJECT OUR COMPANY TO RISKS NOT FACED BY DOMESTIC COMPETITORS. Through our subsidiaries we maintain significant operations in the Philippines, Malaysia and South Korea and also operate facilities in China and Singapore. We also have sales offices and customers around the world. The following are risks inherent in doing business on an international level: - changes in import duties; - trade restrictions; - transportation delays; 16 17 - work stoppages; - economic and political instability; - foreign currency fluctuations; and - the laws, including tax laws, and policies of the United States and of the countries in which we manufacture our products. WE ARE SUBJECT TO MANY ENVIRONMENTAL LAWS AND REGULATIONS THAT COULD AFFECT OUR OPERATIONS OR RESULT IN SIGNIFICANT EXPENSES. Increasingly stringent environmental regulations restrict the amount and types of pollutants that can be released from our operations into the environment. While historically the cost of compliance with environmental laws has not had a material adverse effect on our results of operations, compliance with these and any future regulations could require significant capital investments in pollution control equipment or changes in the way we make our products. In addition, because we use hazardous and other regulated materials in our manufacturing processes, we are subject to risks of liabilities and claims, regardless of fault, resulting from accidental releases, including personal injury claims and civil and criminal fines, any of which could be material to our cash flow or earnings. For example: - we currently are remediating contamination at some of our operating plant sites; - we have been identified as a potentially responsible party at a number of Superfund sites where we (or our predecessors) disposed of wastes in the past; and - significant regulatory and public attention on the impact of semiconductor operations on the environment may result in more stringent regulations, further increasing our costs. Although most of our known environmental liabilities are covered by indemnities from Raytheon Company or National Semiconductor, these indemnities are limited to conditions that occurred prior to the consummation of those transactions. Moreover, we cannot assure you that their indemnity obligations to us for the covered liabilities will be adequate to protect us. WE MAY NOT BE ABLE TO ATTRACT OR RETAIN THE TECHNICAL OR MANAGEMENT EMPLOYEES NECESSARY TO REMAIN COMPETITIVE IN OUR INDUSTRY. Our continued success depends on the retention and recruitment of skilled personnel, including technical, marketing, management and staff personnel. In the semiconductor industry, the competition for qualified personnel, particularly experienced design engineers and other technical employees, is intense. There can be no assurance that we will be able to retain our current personnel or recruit the key personnel we require. In addition, we do not have employment agreements with most members of our senior management team. A SUBSTANTIAL NUMBER OF SHARES OF OUR COMPANY'S COMMON STOCK ARE OWNED BY A LIMITED NUMBER OF PERSONS, AND THEIR INTERESTS MAY CONFLICT WITH YOUR INTERESTS. Court Square Capital Limited, which is one of our principal stockholders, and our directors and executive officers together own approximately 31.5% of the outstanding shares of our Class A Common Stock (including shares underlying vested options). By virtue of such stock ownership, such persons have the power to significantly influence our affairs and are able to influence the outcome of matters required to be submitted to stockholders for approval, including the election of its directors and amendment of our charter and bylaws. Such persons may exercise their influence over us in a manner detriment to the interests of our stockholders or bondholders. See "Principal Stockholders." AFTER GIVING EFFECT TO THE DEBT OFFERING OF JANUARY 26, 2001 WE ARE A LEVERAGED COMPANY WITH A DEBT TO EQUITY RATIO OF 1.26 TO 1, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR ABILITY TO GROW AND COMPETE. 17 18 After giving effect to the debt offering dated January 26, 2001, as of December 31, 2000 we would have had total indebtedness of $1,055.2 million and a ratio of debt to equity of 1.26 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 are at variable rates of interest, which, if interest rates increase, could result in higher interest expense; - increase our vulnerability to general adverse economic and industry conditions; - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; - restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities; - make it more difficult for us to satisfy our obligations with respect to the instruments governing our indebtedness; - place us at a competitive disadvantage compared to our competitors that have less indebtedness; and - limit, along with the financial and other restrictive covenants in our debt instruments, among other things, our ability to borrow additional funds, dispose of assets or pay cash dividends. Failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. DESPITE CURRENT INDEBTEDNESS LEVELS, WE MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE INDEBTEDNESS. INCURRING MORE INDEBTEDNESS COULD EXACERBATE THE RISKS DESCRIBED ABOVE. We may be able to incur substantial additional indebtedness in the future. Although the terms of the indentures governing Fairchild Semiconductor Corporation's outstanding 10 1/8% Senior Subordinated Notes, its outstanding 10 3/8% Senior Subordinated Notes, its outstanding 10 1/2% Senior Subordinated Notes and the credit agreement relating to the senior credit facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, additional indebtedness incurred in compliance with these restrictions could be substantial. The senior credit facility permits borrowings of up to $300.0 million. As of December 31, 2000 we had $179.8 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 18 19 NOTES RESTRICT OR PROHIBIT OUR ABILITY TO ENGAGE IN OR ENTER INTO SOME BUSINESS OPERATING AND FINANCING ARRANGEMENTS, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO TAKE ADVANTAGE OF POTENTIALLY PROFITABLE BUSINESS OPPORTUNITIES. The operating and financial restrictions and covenants in our debt instruments, such as the credit agreement relating to our senior credit facility, the indenture governing Fairchild Semiconductor Corporation's 10 1/2% Senior Subordinated Notes, the indenture governing its 10 1/8% Senior Subordinated Notes, the indenture governing its 10 3/8% Senior Subordinated Notes may limit our ability to finance our future operations or capital needs or engage in other business activities that may be in our interests. Our debt instruments impose significant operating and financial restrictions on us that affect our ability to incur additional indebtedness or create liens on our assets, pay dividends, sell assets, engage in mergers or acquisitions, make investments or engage in other business activities. These restrictions could place us at a disadvantage relative to competitors not subject to such limitations. In addition, the senior credit facility contains other and more restrictive covenants and prohibits us from prepaying our other indebtedness. The senior credit facility also requires us to maintain specified financial ratios. These financial ratios become more restrictive over the life of the senior credit facility. Our ability to meet those financial ratios can be affected by events beyond our control, and we cannot assure you that we will meet those ratios. A breach of any of these covenants, ratios or restrictions could result in an event of default under the senior credit facility. Upon the occurrence of an event of default under the senior credit facility, the lenders could elect to declare all amounts outstanding under the senior credit facility, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure the indebtedness. If the lenders under the senior credit facility accelerate the payment of the indebtedness, we cannot assure you that our assets would be sufficient to repay in full that indebtedness and our other indebtedness. ITEM 2. PROPERTIES In the United States, our corporate headquarters are located in approximately 120,000 square feet of leased space in South Portland, Maine. Additionally, we have wafer fabrication operations currently located in approximately 240,000 square feet of space in properties that we own in South Portland, Maine. Additional manufacturing, warehouse and office facilities are housed in approximately 300,000 square feet of space in properties that we own in Salt Lake City, Utah. We have manufacturing, warehouse and office facilities located in approximately 55,000 square feet of leased space in Loveland, Colorado. Additional office space is located in leased facilities in South Portland, Maine, Irving, Texas, and San Jose, Sunnyvale and Carlsbad, California. We transferred our analog wafer fabrication capability from our Mountain View, California facility to our South Portland, Maine facility. On April 23, 1999, we sold our Mountain View property for approximately $35.7 million. The sale price was subject to (1) a $3.5 million holdback, which was paid to Fairchild in February 2000; and (2) a $500,000 deposit which was placed into an escrow account and which was released to us upon the demolition of the existing structures on the Mountain View property on January 17, 2001. In connection with the sale of the Mountain View property, we entered into an agreement to lease back the property. We paid monthly rent of $125,000 under the lease, which expired on December 31, 2000. As part of the acquisition of Intersil's discrete power products business, we obtained a 450,000 square foot manufacturing facility in Mountaintop, Pennsylvania. In Asia, we own or lease approximately 35,000 square feet, 70,000 square feet, 397,000 square feet, 170,000 square feet and 766,000 square feet of manufacturing, office and warehouse space in Wuxi, China, Kuala Lumpur, Malaysia, Penang, Malaysia, Cebu, the Philippines and Puchon, South Korea, respectively. Leases affecting the Penang and Cebu facilities are generally in the form of long-term ground leases, while we own improvements on the land. The initial terms of these leases will expire beginning in 2014. In some cases we have the option to renew the lease term, while in others we have the option to purchase the leased premises. We lease additional warehouse space in Singapore. We maintain regional sales offices in leased space in Wooton-Bassett, England, Kowloon, Hong Kong, and Tokyo, Japan. In addition, we maintain smaller sales offices in leased space around the world. We believe that our facilities around the world, whether owned or leased, are well-maintained. Our manufacturing facilities contain sufficient productive capacity to meet our needs for the foreseeable future. 19 20 ITEM 3. LEGAL PROCEEDINGS We are a defendant in a patent infringement lawsuit filed by Siliconix Incorporated in the United States District Court for the Northern District of California. The complaint filed in the suit alleges that some of our products infringe two Siliconix patents and claims an unspecified amount of damages. We intend to continue contesting these claims vigorously. We are a defendant in a patent infringement lawsuit filed by U.S. Philips Corporation in the United States District Court for the Southern District of New York. The complaint filed in the suit alleges that some of our products infringe one Philips patent and claims an unspecified amount of damages. We intend to continue investigating these allegations and contesting these claims vigorously. In addition to the above proceedings, from time to time we are involved in other legal proceedings in the ordinary course of business. We believe that there is no such ordinary course litigation pending that could have, individually or in the aggregate, a material adverse effect on our business, financial condition, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the period beginning October 2, 2000 and ending on December 31, 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Class A Common Stock began trading on the New York Stock Exchange ("NYSE") on August 4, 1999 under the trading symbol "FCS". There is no established public trading market for our Class B Common Stock. The following table sets forth for the periods indicated the high and low sales prices per share of Fairchild Semiconductor International, Inc. Class A Common Stock, as reported by the NYSE:
HIGH LOW ----- ----- CALENDAR 2000 - ------------- Fourth Quarter (from October 2 to December 31, 2000) $29.25 $11.19 Third Quarter (from July 3 to October 1, 2000) $42.75 $27.50 Second Quarter (from April 3, to July 2, 2000) $49.50 $31.25 First Quarter (from December 27, 1999 to April 2, 2000) $44.94 $25.38 STUB YEAR 1999 - -------------- Remainder of Stub Year 1999 (from November 29 to December 26, 1999) $34.13 $24.75 Second Quarter (from August 30 to November 28, 1999) $32.00 $19.50 First Quarter (from August 4, 1999 to August 29, 1999) $28.50 $18.50
As of March 9, 2001, there were approximately 330 holders of record of our Class A Common Stock and no holders of our Class B Common Stock. We have not paid dividends on our Common Stock and have no present intention of so doing. Certain agreements, pursuant to which we have borrowed funds, contain provisions that limit the amount of dividends and stock repurchases that we may make. ITEM 6. SELECTED FINANCIAL DATA The information appearing under the caption "Selected Financial Data" on page 14 of the 2000 Annual Report to Stockholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 15 to 28 of the 2000 Annual Report to Stockholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 27 of the 2000 Annual Report to Stockholders is incorporated herein by reference. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements, related notes and independent auditors' report appearing on pages 29 to 58 of the 2000 Annual Report to Stockholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III 20 21 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors set forth under the caption "Proposal 1 - Election of Directors" appearing in Fairchild International's definitive proxy statement for the Annual Meeting of Stockholders to be held on April 25, 2001, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2000 (the "2001 Proxy Statement"), is incorporated herein by reference. The information regarding executive officers set forth under the caption "Executive Officers of Fairchild International" in Item 1 of this Annual Report on Form 10-K is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation" in the 2001 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN HOLDERS AND MANAGEMENT The information set forth under the caption "Stock Ownership by 5% Stockholders, Directors and Certain Executive Officers" in the 2001 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Relationships and Related Transactions" in the 2001 Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS. The following financial statements are included in Fairchild International's 2000 Annual Report to Stockholders and are incorporated herein by reference. Consolidated Balance Sheets as of December 31, 2000 and December 26, 1999. Consolidated Statements of Operations for the year ended December 31, 2000, the seven months ended December 26, 1999 and for the fiscal years ended May 30, 1999 and May 31, 1998. Consolidated Statements of Stockholders' Equity (Deficit) for the year ended December 31, 2000, the seven months ended December 26, 1999 and for the fiscal years ended May 30, 1999 and May 31, 1998. Consolidated Statements of Cash Flows for the year ended December 31, 2000, the seven months ended December 26, 1999 and for the fiscal years ended May 30, 1999 and May 31, 1998. Notes to Consolidated Financial Statements. Independent Auditors' Report. (2) FINANCIAL STATEMENT SCHEDULES. Financial statement schedules are listed under Item 14(c) in this Annual Report. (3) LIST OF EXHIBITS. See the Exhibit Index beginning on page 25 in this Annual Report. (b) REPORTS ON FORM 8-K: No reports on Form 8-K were filed by the Company during the period beginning October 2, 2000 and ending on December 31, 2000. 21 22 (c) FINANCIAL STATEMENT SCHEDULES. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE The Board of Directors Fairchild Semiconductor International, Inc. Under date of January 31, 2001, we reported on the consolidated balance sheets of Fairchild Semiconductor International, Inc. and subsidiaries as of December 31, 2000 and December 26, 1999, the related consolidated statements of operations, cash flows and stockholders' equity (deficit) for the year ended December 31, 2000, the seven months ended December 26, 1999 and for each of the years in the two-year period ended May 30, 1999. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule listed in Item 14(c). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP BOSTON, MASSACHUSETTS JANUARY 31, 2001 22 23 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS.
Deferred tax Returns and valuation Description Allowances allowance Total ----------- ------------ ----- (in millions) Balances at May 25, 1997 15.9 30.7 46.6 Charged to costs and expenses 41.8 -- 41.8 Deductions (45.5) -- (45.5) Charged to other accounts (1) 2.0 -- 2.0 ------- ------- ------- Balances at May 31, 1998 14.2 30.7 44.9 Charged to costs and expenses 29.8 32.0 61.8 Deductions (34.9) -- (34.9) Charged to other accounts (1) 0.1 -- 0.1 ------- ------- ------- Balances at May 30, 1999 9.2 62.7 71.9 Charged to costs and expenses 20.4 17.6 38.0 Deductions (15.9) -- (15.9) ------- ------- ------- Balances at December 26, 1999 13.7 80.3 94.0 Charged to costs and expenses 32.0 (67.4) (56.8) Balance of acquired company (2) -- 1.3 1.3 Deductions (28.2) -- (9.0) Charged to other accounts (2) 0.8 (12.9) (12.1) ------- ------- ------- Balances at December 31, 2000 $ 18.3 $ 1.3 $ 17.4 ======= ======= =======
- ---------- (1) These amounts represent valuation reserves obtained through the acquisitions of Raytheon Semiconductor and the power device business for $2.0 million and $0.1 million, respectively. (2) For returns and allowances, these amounts represent reserves obtained through the acquisiton of QT Optoelectronics, Inc. For deferred tax valuation allowance, these amounts represent income taxes credited directly to stockholders' equity, and $1.3 million in valuation reserves obtained through the QT Optoelectronics, Inc. acquisition. All other schedules are omitted because of the absence of the conditions under which they are required or because the information required by such omitted schedules is set forth in the financial statements or the notes thereto. 23 24 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. By: /s/ KIRK P. POND ------------------------------------- Kirk P. Pond President and Chief Executive Officer Date: March 26, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- Chairman of the Board of Directors, President and Chief Executive Officer /s/ KIRK P. POND (Principal Executive Officer) March 26, 2001 - ------------------------------ Kirk P. Pond Executive Vice President, Chief Financial Officer and Director /s/ JOSEPH R. MARTIN (Principal Financial Officer) March 26, 2001 - ------------------------------ Joseph R. Martin Vice President, Corporate Controller /s/ DAVID A. HENRY (Principal Accounting Officer) March 26, 2001 - ------------------------------ David A. Henry /s/ WILLIAM N. STOUT Director March 26, 2001 - ------------------------------ William N. Stout Director - ------------------------------ Richard M. Cashin, Jr. /s/ PAUL C. SCHORR IV Director March 26, 2001 - ------------------------------ Paul C. Schorr, IV /s/ RONALD W. SHELLY Director March 26, 2001 - ------------------------------ Ronald W. Shelly /s/ CHARLES M. CLOUGH Director March 26, 2001 - ------------------------------ Charles M. Clough
24 25 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - -------------------------------------------------------------------------------- EXHIBIT INDEX EXHIBIT DESCRIPTION NO. 2.01 Asset Purchase Agreement, dated as of March 11, 1997, between Fairchild Semiconductor Corporation and National Semiconductor Corporation. (1) 2.02 Acquisition Agreement, dated November 25, 1997, among Fairchild Semiconductor Corporation, Thornwood Trust and Raytheon Company. (2) 2.03 Amendment No. 1 to Acquisition Agreement, dated December 29, 1997, among Fairchild Semiconductor Corporation, Thornwood Trust and Raytheon Company. (2) 2.04 Business Transfer Agreement, dated December 20, 1998, between Samsung Electronics Co., Ltd. and Fairchild Semiconductor Corporation. (3) 2.05 Closing Agreement, dated April 13, 1999, among Samsung Electronics Co. Ltd., Fairchild Korea Semiconductor Ltd. and Fairchild Semiconductor Corporation. (3) 2.06 Asset Purchase Agreement, dated as of January 20, 2001, among Intersil Corporation, Intersil (PA) LLC and Fairchild Semiconductor Corporation and Amendment No. 1 thereto dated as of March 16, 2001. 3.01 Restated Certificate of Incorporation. (4) 3.02 Certificate of Amendment to Restated Certificate of Incorporation. (5) 3.03 Restated Bylaws. (6) 4.01 The relevant portions of the Restated Certificate of Incorporation, as amended. (included in Exhibits 3.01 and 3.02) 4.02 The relevant portions of the Restated Bylaws. (included in Exhibit 3.03) 4.03 Registration Rights Agreement, dated March 11, 1997, among Fairchild Semiconductor International, Inc., Sterling Holding Company, LLC, National Semiconductor Corporation and certain management investors. (7) 4.04 Indenture, dated as of March 11, 1997, relating to $300,000,000 aggregate principal amount of 10-1/8% Senior Subordinated Notes due 2007, among Fairchild Semiconductor Corporation, as Issuer, Fairchild Semiconductor International, Inc., as Guarantor and United States Trust Company of New York, as Trustee. (1) 4.05 Form of 10-1/8% Senior Subordinated Notes due 2007. (included in Exhibit 4.04) 4.06 Indenture, dated as of April 7, 1999, relating to $300,000,000 aggregate principal amount of 10-3/8% Senior Subordinated Notes due 2007, among Fairchild Semiconductor Corporation, as Issuer, Fairchild Semiconductor International, Inc., Fairchild Semiconductor Corporation of California, as Guarantors, and United States Trust Company of New York, as Trustee. (7) 4.07 Form of 10-3/8% Senior Subordinated Notes due 2007. (included in Exhibit 4.06) 25 26 4.08 Indenture, dated as of January 31, 2001, relating to $350,000,000 aggregate principal amount of 10-1/2% Senior Subordinated Notes due 2009, among Fairchild Semiconductor Corporation, as Issuer, Fairchild Semiconductor International, Inc., Fairchild Semiconductor Corporation of California, QT Optoelectronics, Inc., QT Optoelectronics, KOTA Microcircuits, Inc., as Guarantors, and United States Trust Company of New York, as Trustee. 4.09 Form of 10-1/2% Senior Subordinated Notes due 2009. (included in Exhibit 4.08) 4.10 Registration Rights Agreement, dated January 26, 2001, among Fairchild Semiconductor Corporation, Fairchild Semiconductor International, Inc., Fairchild Semiconductor Corporation of California, QT Optoelectronics, Inc., QT Optoelectronics, KOTA Microcircuits, Inc., Credit Suisse First Boston Corporation, Lehman Brothers Inc., Deutsche Bank Alex. Brown Inc. and Fleet Securities Inc. 10.01 Technology Licensing and Transfer Agreement, dated March 11, 1997 between National Semiconductor Corporation and Fairchild Semiconductor Corporation. (8) 10.02 Environmental Side Letter, dated March 11, 1997 between National Semiconductor Corporation and Fairchild Semiconductor Corporation. (1) 10.03 Fairchild Benefit Restoration Plan. (1) 10.04 Fairchild Incentive Plan (1) 10.05 FSC Semiconductor Corporation Executive Officer Incentive Plan. (1) 10.06 Fairchild Semiconductor International, Inc. Amended and Restated Stock Option Plan. (4) 10.07 Fairchild Semiconductor International, Inc. 2000 Stock Option Plan. (9) 10.08 Fairchild Semiconductor International, Inc. 2000 Executive Stock Option Plan. (9) 10.09 Form of Executive Stock Option Agreement, under the 2000 Executive Stock Option Plan, between Fairchild Semiconductor International, Inc. and each of Kirk P. Pond, Joseph R. Martin and Daniel E. Boxer. (9) 10.10 Form of Executive Stock Option Agreement, under the 2000 Executive Stock Option Plan, between Fairchild Semiconductor International, Inc. and each of Jerry M. Baker and Keith Jackson. (9) 10.11 Fairchild Semiconductor International, Inc. 2001 Stock Option Plan. 10.12 Employment Agreement, dated March 11, 2000, between Fairchild Semiconductor Corporation and Kirk P. Pond. (9) 10.13 Employment Agreement, dated March 11, 2000, between Fairchild Semiconductor Corporation and Joseph R. Martin. (9) 10.14 Employment Agreement, dated March 11, 2000, between Fairchild Semiconductor Corporation and Daniel E. Boxer. (9) 27 10.15 Product Supply Agreement, dated April 13, 1999, between Samsung Electronics Co., Ltd. and Fairchild Korea Semiconductor Ltd. (7) 10.16 Foundry Sale Agreement dated April 13, 1999 between Samsung Electronics and Fairchild Korea Semiconductor Ltd. (7) 10.17 Intellectual Property License Agreement dated April 13, 1999 Between Samsung Electronics and Fairchild Korea Semiconductor Ltd. (7) 10.18 Assembly and Test Services Agreement (Onyang) dated April 13, 1999 between Samsung Electronics and Fairchild Korea Semiconductor Ltd. (7) 10.19 Assembly and Test Services Agreement (Suzhou) dated April 13, 1999 between SESS Electronics Suzhou Semiconductor Co., Ltd. and Fairchild Korea Semiconductor Ltd. (7) 10.20 EPI Services Agreement dated April 13, 1999 between Samsung Electronics and Fairchild Korea Semiconductor Ltd. (7) 10.21 Fairchild Executive Incentive Plan, as amended and restated, effective June 1, 1998 (7) 10.22 Intellectual Property Assignment and License Agreement, dated December 29, 1997, between Raytheon Semiconductor, Inc. and Raytheon Company (2) 10.23 Credit Agreement, dated as of June 6, 2000, among Fairchild Semiconductor Corporation, Fairchild Semiconductor International, Inc., the leaders named therein and Credit Suisse First Boston Corporation, Fleet National Bank and ABN Amro NV. (9) 13.01 2000 Annual Report to Stockholders (which is not deemed to be "filed" except to the extent that portions thereof are expressly incorporated by reference in this Annual Report on Form 10-K). 21.01 Subsidiaries. 23.01 Consent of KPMG LLP - ---------------------------- (1) Incorporated by reference from Fairchild Semiconductor Corporation's Registration Statement on Form S-4, filed May 12, 1997 (File No. 333-26897). (2) Incorporated by reference from Fairchild Semiconductor International, Inc.'s Current Report on Form 8-K, dated December 31, 1997, filed January 13, 1998. (3) Incorporated by reference from Fairchild Semiconductor International, Inc.'s Current Report on Form 8-K, dated April 13, 1999, filed April 27, 1999. (4) Incorporated by reference from Fairchild Semiconductor International Inc.'s Annual Report on Form 10-K for the fiscal year ended May 30, 1999, filed August 27, 1999. (5) Incorporated by reference from Fairchild Semiconductor International Inc.'s Registration Statement on Form S-8, filed June 29, 2000 (File No. 333-40412). (6) Incorporated by reference from Fairchild Semiconductor International, Inc.'s Registration Statement on Form S-4, filed March 23, 2000 (File No. 333-33082). (7) Incorporated by reference from Amendment No. 1 to Fairchild Semiconductor International, Inc.'s Registration Statement on Form S-1, filed June 30, 1999 (File No. 333-78557). 28 (8) Incorporated by reference from Amendment No. 3 to Fairchild Semiconductor Corporation's Registration Statement on Form S-4, filed July 9, 1997 (File No. 333-28697). (9) Incorporated by reference from Fairchild International's Annual Report on Form 10-K for the fiscal year ended May 30, 1999, filed August 27, 1999. (10) Incorporated by reference from Fairchild Semiconductor International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended July 2, 2000, filed August 16, 2000. EX-2.06 2 b38142fsex2-06.txt ASSET PURCHASE AGREEMENT DATED 1/20/01 1 EXHIBIT 2.06 ASSET PURCHASE AGREEMENT BY AND AMONG INTERSIL CORPORATION INTERSIL (PENNSYLVANIA) LLC AND FAIRCHILD SEMICONDUCTOR CORPORATION DATED AS OF JANUARY 20, 2001 2 TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS AND TERMS...................................................................................1 Section 1.1. Definitions............................................................................1 Section 1.2. Other Definitional Provisions..........................................................9 ARTICLE II PURCHASE AND SALE.....................................................................................10 Section 2.1. Purchase and Sale of Assets of the Business...........................................10 Section 2.2. Nonassignment of Assets...............................................................11 Section 2.3. Excluded Assets of the Business.......................................................12 Section 2.4. Assumption of Certain Obligations of the Business.....................................14 Section 2.5. Retained Liabilities of the Business..................................................15 Section 2.6. Purchase Price........................................................................17 Section 2.7. Allocation of Purchase Price..........................................................18 Section 2.8. Apportionment at Closing and Related Matters..........................................19 ARTICLE III CLOSING..............................................................................................19 Section 3.1. Closing...............................................................................19 ARTICLE IV CONDITIONS TO CLOSING.................................................................................21 Section 4.1. Conditions to the Obligations of Purchaser and Seller.................................21 Section 4.2. Conditions to the Obligations of Purchaser............................................21 Section 4.3. Conditions to the Obligations of Seller...............................................22 ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER...............................................................23 Section 5.1. Organization and Qualification........................................................23 Section 5.2. Authorization.........................................................................23 Section 5.3. Binding Effect........................................................................24 Section 5.4. Non-Contravention.....................................................................24 Section 5.5. Seller Consents and Approvals.........................................................24 Section 5.6. Absence of Material Changes...........................................................24 Section 5.7. No Litigation.........................................................................25 Section 5.8. Compliance with Laws..................................................................25 Section 5.9. Environmental Matters.................................................................26 Section 5.10. Material Contracts....................................................................26 Section 5.11. Intellectual Property.................................................................28 Section 5.12. Real Property.........................................................................28 Section 5.13. Assets................................................................................29 Section 5.14. Inventory.............................................................................29 Section 5.15. Financial Information.................................................................29 Section 5.16. Taxes.................................................................................30 Section 5.17. Employee Benefits.....................................................................30 Section 5.18. Undisclosed Liabilities...............................................................31
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PAGE Section 5.19. Brokers...............................................................................31 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PURCHASER...........................................................32 Section 6.1. Organization and Qualification........................................................32 Section 6.2. Corporate Authorization...............................................................32 Section 6.3. Binding Effect........................................................................32 Section 6.4. Non-Contravention.....................................................................32 Section 6.5. Purchaser Consents and Approvals......................................................32 Section 6.6. No Litigation.........................................................................32 Section 6.7. Financial Capability..................................................................33 Section 6.8. Condition of Conveyed Assets..........................................................33 Section 6.9. Brokers...............................................................................34 ARTICLE VII COVENANTS............................................................................................34 Section 7.1. Information and Documents; Access to Employees........................................34 Section 7.2. Conduct of Business...................................................................34 Section 7.3. Reasonable Best Efforts; Certain Governmental Matters.................................35 Section 7.4. Employees and Employee Benefits.......................................................37 Section 7.5. Bulk Transfer Laws....................................................................42 Section 7.6. Compliance with WARN, Etc.............................................................42 Section 7.7. Insurance.............................................................................43 Section 7.8. Names and Logo........................................................................43 Section 7.9. Covenant Not to Compete; Confidentiality..............................................43 Section 7.10. Further Assurances....................................................................44 Section 7.11. Books and Records.....................................................................44 Section 7.12. Accounts Receivable and Accounts Payable..............................................44 Section 7.13. Supply Agreement......................................................................44 Section 7.14. Cooperation and Exchange of Information...............................................45 Section 7.15. Conveyance Taxes......................................................................45 Section 7.16. Mountaintop Lease.....................................................................46 ARTICLE VIII SURVIVAL AND INDEMNIFICATION........................................................................46 Section 8.1. Survival; Knowledge of Breach.........................................................46 Section 8.2. Indemnification.......................................................................46 Section 8.3. Method of Asserting Claims, etc.......................................................47 Section 8.4. Indemnification Amounts...............................................................49 Section 8.5. Losses Net of Insurance, Etc..........................................................49 Section 8.6. Sole Remedy/Waiver....................................................................50 Section 8.7. No Punitive Damages...................................................................50 Section 8.8. Scope of Damages......................................................................50 Section 8.9. No Set-Off............................................................................50 ARTICLE IX TERMINATION...........................................................................................50 Section 9.1 Termination...........................................................................50
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Section 9.2. Effect of Termination.................................................................51
ARTICLE X MISCELLANEOUS..........................................................................................51 Section 10.1. Notices...............................................................................51 Section 10.2. Amendment; Waiver.....................................................................52 Section 10.3. Assignment............................................................................52 Section 10.4. Entire Agreement......................................................................52 Section 10.5. Fulfillment of Obligations............................................................52 Section 10.6. Parties in Interest...................................................................52 Section 10.7. Public Disclosure.....................................................................53 Section 10.8. Return of Information.................................................................53 Section 10.9. Expenses..............................................................................53 Section 10.10. Schedules.............................................................................53 Section 10.11. Governing Law.........................................................................53 Section 10.12. Counterparts..........................................................................53 Section 10.13. Headings..............................................................................54 Section 10.14. Severability..........................................................................54
iii 5 List of Schedules 1.1(a) "Knowledge of Purchaser" Individuals 1.1(b) "Knowledge of Seller" Individuals 1.1(c) Permitted Encumbrances 2.1(e) Patents 2.3(q) Excluded Assets 2.4(a) Indebtedness of the Business 3.1(b)(ix) Seller's Closing Consents and Approvals 5.5 Seller Consents and Approvals 5.6 Material Changes 5.7 Seller Litigation 5.8(a) Compliance with Laws 5.8(b) Permits and Licenses Necessary at Mountaintop Facility 5.9 Environmental Matters 5.10 Material Contracts 5.11 Intellectual Property 5.12 Real Property 5.13(a) Sufficiency of Assets 5.13(b) Fixed Assets Listing 5.15 Financial Information 5.16 Taxes 5.17 Seller Plans 5.19 Seller Brokers 6.5 Purchaser Consents and Approvals 6.6 Purchaser Litigation 6.9 Purchaser Brokers 7.2 Conduct of Business 7.4(a)(1) Employees 7.4(a)(2) Affected Employees 7.4(j) Collective Bargaining Agreements [In accordance with paragraph (b)(2) of Item 601 of Regulation S-K, copies of the above schedules are not filed herewith. The registrant agrees to furnish supplementally a copy of any such schedule to the Securities and Exchange Commission upon request.] iv 6 List of Exhibits 3.1(b)(ii) Deed 3.1(b)(iii) Bill of Sale 3.1(b)(iv) Assignment and Assumption Agreement 3.1(b)(v) Partial Assignment and Assumption of the ChipPAC Agreement 3.1(b)(vi) IP Agreement 3.1(b)(vii) Transition Services Agreement 3.1(b)(viii) Supply Agreement 4.2(f) Union Letter [In accordance with paragraph (b)(2) of Item 601 of Regulation S-K, copies of the above exhibits are not filed herewith. The registrant agrees to furnish supplementally a copy of any such exhibit to the Securities and Exchange Commission upon request.] v 7 ASSET PURCHASE AGREEMENT This Asset Purchase Agreement is made and entered into as of the 20th day of January, 2001 by and among Intersil Corporation, a Delaware corporation ("Intersil") and Intersil (Pennsylvania) LLC, a Delaware limited liability company (jointly and severally, the "Seller"), and Fairchild Semiconductor Corporation, a Delaware corporation ("Purchaser"). Seller and Purchaser are individually referred to as a "Party" and collectively as the "Parties." Background A. Seller is engaged in the Business (as defined below). B. Seller and its Affiliates own the Conveyed Assets (as defined below). C. The Parties desire that Seller and its Affiliates shall sell and transfer to Purchaser and Purchaser shall purchase from Seller and its Affiliates all of the Conveyed Assets and assume all of the Assumed Liabilities (as defined below), upon the terms and conditions set forth herein. In consideration of the premises and the mutual covenants and undertakings contained herein, subject to and on the terms and conditions herein set forth, and intending to be legally bound hereby, the Parties agree as follows: ARTICLE I DEFINITIONS AND TERMS Section 1.1 Definitions. As used in this Agreement, the following terms shall have the meanings set forth or as referenced below: "Accounts Receivable" shall mean all of the Business's trade and other accounts receivable as of the Closing Date. "Affected Employee" shall mean an Employee who shall accept an offer of employment or offer of continuation of employment by Purchaser on or prior to the Closing Date pursuant to Section 7.4 hereof (or with respect to an Employee subject to Section 7.4(f), after the Closing Date). "Affiliate" shall mean, with respect to any Person, any other person directly or indirectly controlling, controlled by, or under common control with, such Person at any time during the period for which the determination of affiliation is being made; provided, however, that "Affiliate" shall not include any shareholder of Purchaser or Seller or any Person who would be an Affiliate of Purchaser or Seller solely because such Person is an Affiliate of such shareholder. "Agreement" shall mean this Agreement, as the same may be amended or supplemented from time to time in accordance with the terms hereof. "Allocation" shall have the meaning set forth in Section 2.7 hereof. 8 "Asset Allocation Statements" shall have the meaning set forth in Section 2.7 hereof. "Assignment and Assumption" shall have the meaning set forth in Section 3.1(b)(iv) hereof. "Assumed Contracts" shall have the meaning set forth in Section 2.1(c) hereof. "Assumed Liabilities" shall have the meaning set forth in Section 2.4 hereof. "Basket Amount" shall have the meaning set forth in Section 8.4 hereof. "Bill of Sale" shall have the meaning set forth in Section 3.1(b)(iii) hereof. "Business" shall mean Seller's Discrete Power Products semiconductor business, including, without limitation, as conducted by Seller from the Mountaintop Facility and related warehouses and sales offices, wherever located. "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banks in New York City are authorized or obligated by law or executive order to close. "Buyer Indemnitees" shall have the meaning set forth in Section 8.2(a) hereof. "Cap" shall have the meaning set forth in Section 8.4 hereof. "Cash Equivalents" shall mean checks, money orders, marketable or other securities, short-term instruments and other cash equivalents, demand deposits or similar accounts, and any evidence of indebtedness issued or guaranteed by any United States Governmental Authority. "Claim Notice" shall have the meaning set forth in Section 8.3(a) hereof. "Closing" shall mean the closing of the transactions contemplated by this Agreement. "Closing Balance Sheet" shall have the meaning set forth in Section 2.6(d) hereof. "Closing Date" shall have the meaning set forth in Section 3.1(a) hereof. "Closing Date Liabilities" shall mean the amount of the absolute value of those Assumed Liabilities as would be set forth on a balance sheet of the Business as of the Closing Date prepared in accordance with GAAP. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Competing Business" shall have the meaning set forth in Section 7.9(a) hereof. "Confidential Information" shall have the meaning set forth in Section 7.9(b) hereof. -2- 9 "Confidentiality Agreement" shall mean the Confidentiality Agreement, dated October 30, 2000, between Seller and Purchaser. "Conveyance Tax" or "Conveyance Taxes" shall have the meaning set forth in Section 7.15 hereof. "Conveyed Assets" shall have the meaning set forth in Section 2.1 hereof, it being understood that the Conveyed Assets do not include the Excluded Assets. "Deed" shall have the meaning set forth in Section 3.1(b)(ii). "Discrete Devices" shall mean "Semiconductor Products" characterized as "Discretes" in the "Product Definitions for Billings" section (the "Definition Section") of the World Semiconductor Trade Statistics Participant Manual for the year 2001, dated January 14, 2001, to the extent that such characterization does not conflict with those semiconductor products characterized as "Integrated Circuits" in the Definition Section, provided however that nothing in this definition shall be interpreted to prevent Seller and its Subsidiaries from making, using, selling, offering for sale, or importing multi-chip modules using both "Discretes" and "Integrated Circuits" technology as defined or characterized in the Definition Section. "Drop-Dead Date" shall have the meaning set forth in Section 9.1(b) hereof. "Employee" shall mean any individual who as of the Closing Date, (i) shall be (or in the case of clause (ii)(C) below, is scheduled to become) an employee of Seller who primarily performs (or will, on commencing work, primarily perform) services on behalf of the Business and (ii) either (A) shall have been employed and at work on the Closing Date, or (B) shall have been absent on the Closing Date because of illness or on short-term disability (including maternity disability), workers' compensation, layoff, vacation, parental leave of absence, or other absence or leave of absence consistent with Seller's policies, practices and procedures in effect at the time such absence or leave commenced (such Employees under this clause (B), "Inactive Employees"), or (C) shall have received an offer of employment with the Business in the ordinary course of business on or prior to the Closing Date, but shall have not yet commenced work as of the Closing Date. "Environmental Law" shall mean any applicable federal, state or local law, statute, ordinance, rule, regulation, code, order, judgment, decree or injunction relating to the protection of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface or subsurface land) and/or to the Management, Release, or threat of Release of Hazardous Substances, in each case as in effect as of the Closing Date. "Environmental Losses" shall mean the amount of all claims, losses, settlements, fines, liabilities, damages, deficiencies, costs, and expenses, including, without limitation, losses resulting from defense, settlement and/or compromise of a claim and/or demand and/or assessment, reasonable attorneys', accountants', and expert witnesses' fees, interest, penalties, costs and expenses of investigation, and the costs and expenses of enforcing the indemnification provided by Section 8.2(a) of this Agreement for Environmental Losses suffered, sustained, asserted against, incurred or required to be paid by law by any of Buyer Indemnitees and whether -3- 10 known or unknown, foreseen or unforeseen, contingent or otherwise, fixed or absolute, present or future. "Environmental Permits" shall mean a permit held by or for the benefit of Seller pursuant to an Environmental Law and required to carry on the Business as conducted as of the date of this Agreement. "Environmental Site Assessments" shall have the meaning set forth in Section 5.9 hereof. "Equipment" shall have the meaning set forth in Section 2.1(b) hereof. "Equipment Leases" shall have the meaning set forth in Section 2.1(b) hereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" shall have the meaning set forth in Section 5.17(d) hereof. "Excluded Assets" shall have the meaning set forth in Section 2.3 hereof. "Excluded Contract" shall have the meaning set forth in Section 2.3(r) hereof. "Financial Information" shall have the meaning set forth in Section 5.15 hereof. "GAAP" shall mean generally accepted accounting principles and practices in effect in the United States of America from time to time, as consistently applied by Seller. "Governmental Authority" shall mean any supranational, national, federal, state or local judicial, legislative, executive or regulatory authority. "Governmental Authorizations" shall mean all licenses, permits, certificates and other authorizations and approvals required to carry on the Business as conducted as of the date of this Agreement under the applicable laws, ordinances or regulations of any Governmental Authority. "Harris" shall mean Harris Corporation, a Delaware corporation. "Harris Agreement" shall mean that certain Amended and Restated Master Transaction Agreement among Intersil Holding Corporation, Intersil Corporation and Harris, dated June 2, 1999. "Hazardous Substances" shall mean any hazardous, toxic or polluting substances, materials or wastes (including those substances within the meaning of Section 101(14) of the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.Section 9601 et. seq.), and any petroleum and petroleum products. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. -4- 11 "Indemnified Party" shall mean any party entitled to indemnification pursuant to Article VIII hereof. "Indemnifying Party" shall mean any party required to indemnify another party pursuant to Article VIII hereof. "Intellectual Property" shall mean (i) inventions, whether or not patentable, reduced to practice or made the subject of one or more pending patent applications, and whether or not under design or development, (ii) national and multinational statutory invention registrations, Patents , all improvements to the inventions disclosed in each such registration, or Patent, (iii) trademarks, service marks, trade dress, logos, slogans, domain names, trade names and corporate names (whether or not registered) in the United States and all other nations throughout the world, including all variations, derivations, combinations, registrations and applications for registration or renewals of the foregoing and all goodwill associated therewith, (iv) copyrights (whether or not registered) and registrations and applications for registration or renewals thereof in the United States and all other nations throughout the world, including all derivative works, moral rights, renewals, extensions, reversions or restorations associated with such copyrights, now or hereafter provided by law, regardless of the medium of fixation or means of expression, (v) mask works and registrations and applications for registration or renewals thereof in the United States and all other nations throughout the world, (vi) computer software (including source code, object code, firmware, operating systems and specifications), (vii) trade secrets and, whether or not confidential, business information (including pricing and cost information, business and marketing plans and customer and supplier lists) and know-how (including manufacturing and production processes and techniques and research and development information), (viii) industrial designs (whether or not registered), (ix) databases and data collections, (x) copies and tangible embodiments of any of the foregoing, in whatever form or medium (including electronic media), (xi) all rights to obtain and rights to apply for Patents, and to register trademarks and copyrights, (xii) all rights in all of the foregoing provided by treaties, conventions and common law, (xiii) all rights to sue or recover and retain damages and costs and attorneys' fees for past, present and future infringement or misappropriation of any of the foregoing, and (xiv) licenses of any of the foregoing. "Intersil" shall mean Intersil Corporation, a Delaware corporation. "Inventories" shall mean all inventory of the Business held for resale by the Business and all raw materials, work in process, finished products, shipments in transit, wrapping and supply and packaging items primarily used or held for use in the Business, including, without limitation, consigned inventory and inventory of the Business held by customers of the Business, wherever located. "IP Agreement" shall have the meaning set forth in Section 3.1(b)(vi) hereof. "IRS" shall mean the Internal Revenue Service of the United States or any successor agency. "Knowledge of Purchaser" shall mean the actual knowledge, following due inquiry, of the persons set forth on Schedule 1.1(a). -5- 12 "Knowledge of Seller" shall mean the actual knowledge, following due inquiry, of the persons set forth on Schedule 1.1(b). "Laws" shall include any federal, state, foreign or local law, statute, ordinance, rule, regulation, order, injunction, judgment or decree. "Liabilities" shall mean any and all debts, liabilities and obligations, whether accrued or fixed, known or unknown, absolute or contingent, matured or unmatured or determined or determinable. "Liens" shall mean any lien, security interest, mortgage, charge or similar encumbrance. "LLC" shall mean Intersil (Pennsylvania) LLC, a Delaware limited liability company. "Loss" or "Losses" shall have the meaning set forth in Section 8.2(a) hereof. "Manage" or "Management" means to use, recycle, possess, generate, treat, manufacture, process, handle, store, transport or dispose of Hazardous Substances. "Material Adverse Effect" shall mean an effect that is materially adverse to the business results, operations or financial condition of the Business taken as a whole, but shall exclude any effect resulting from (i) general economic conditions or any occurrence or condition affecting the semiconductor industry generally and (ii) any materially adverse change in the Business or Conveyed Assets which is cured (including by payment of money) to Purchaser's reasonable satisfaction before the earlier of the Closing Date or termination of this Agreement. "Material Contracts" shall have the meaning set forth in Section 5.10 hereof. "Minimum Cleanup Standard" shall have the meaning set forth in Section 8.3(b) hereof. "Mortgage to be Released" shall have the meaning set forth in Section 5.12(e). "Mountaintop Facility" shall mean any or all of Seller's manufacturing facility and other operations located at 125 Crestwood Road, Mountaintop, Luzerne County, Pennsylvania. "Mountaintop Lease" shall have the meaning set forth in Section 7.16 hereof. "National Labor Relations Act" shall have the meaning set forth in Section 7.4(f) hereof. "Non-Mountaintop Employees" shall have the meaning set forth in Section 7.4(a) hereof. "Notice Period" shall have the meaning set forth in Section 8.3(a) hereof. -6- 13 "Partial Assignment" shall have the meaning set forth in Section 3.1(b)(v) hereof. "Party" or "Parties" shall have the meaning set forth in the heading of this Agreement. "Patents" shall mean U.S. and non-U.S. patents, patent applications and industrial design registrations, together with any continuations, continuations-in-part or divisional applications thereof, all patents and industrial design registrations issuing thereon, and all patents, industrial design registrations and applications claiming priority therefrom (including reissues, renewals and reexaminations of the foregoing). "Permitted Designee" shall have the meaning set forth in Section 8.3(a) hereof. "Permitted Encumbrances" shall mean (i) all liens, security interests, mortgages, charges or encumbrances approved in writing by Purchaser, (ii) statutory liens, security interests, mortgages, licenses or other rights granted on Intellectual Property, including the license agreements identified in Schedule 2.3(q), charges or encumbrances arising out of operation of Law with respect to a Liability incurred in the ordinary course of business and which is not delinquent, (iii) such imperfections of title as do not materially adversely affect the value or impair the use of the property subject thereto, (iv) liens for Taxes not yet subject to penalties for nonpayment or which are being actively contested in good faith by appropriate proceedings, (v) mechanics', materialmen's, carriers', workmen's, warehousemen's, repairmen's, landlords' or other like liens and security obligations that are not delinquent, (vi) zoning, building and other similar governmental restrictions and liens imposed by operation of law, or (vii) such liens, security interests, mortgages, charges or encumbrances and other imperfections of title scheduled on Schedule 1.1(c). "Person" shall mean an individual, a corporation, a partnership, an association, a joint venture, a limited liability company, a trust or other entity or organization. "Plan" shall mean any material employee benefit plan as defined in Section 3(3) of ERISA sponsored by Seller, for the benefit of any Employee. "Pre-Closing Environmental Liability" or "Pre-Closing Environmental Liabilities" means, regardless of whether any of the following are contained in any disclosure schedule to this Agreement or otherwise disclosed to Purchaser prior to Closing, any and all Environmental Losses arising out of or related to (a) the presence, Release, threat of Release, Management or exposure to the extent occurring prior to the Closing Date (and the migration thereof, regardless of when such migration occurs, and the post-Closing consequences of such presence, Release, threatened Release, Management, or exposure) of or to Hazardous Substances at, on, in or under any of the Conveyed Assets, the Excluded Assets, or any property previously owned, operated, or leased by Seller or any of its Affiliates or predecessors or in connection with the operation of the Business, on-site or off-site; (b) arising from the pre-Closing off-site transportation, storage, treatment, recycling, or Release (including disposal) of Hazardous Substances Managed or Released by Seller or any of its Affiliates or predecessors or in connection with the operation of the Business; or (c) any violation of any Environmental Law to the extent existing as of the Closing Date or related to conditions existing as of the Closing Date -7- 14 (including, without limitation, (1) the wastewater discharge from the Site having a pH of less than 5.0 identified in the letter from the United States Environmental Protection Agency, dated December 1, 2000, (2) the treatment in the wastewater treatment plant of fluoride in the wastewater to the extent required to comply with Environmental Laws as such laws are in effect as of the Closing Date, (3) the treatment of suspended solids in wastewater to the extent required under Environmental Laws and required to be undertaken in connection with the letter, dated December 5, 2000, from the Mountaintop Area Joint Sanitary Authority to Seller, and (4) any other post-Closing consequences and costs and expenses for pollution control equipment required to bring the Conveyed Assets or the Business into compliance with Environmental Laws and fines, penalties and defense costs incurred for such reasonable time after the Closing as it takes Purchaser to come into compliance). "Purchase Price" shall have the meaning set forth in Section 2.6(a) hereof. "Purchase Price Adjustment" shall have the meaning set forth in Section 2.6(b) hereof. "Purchaser" shall have the meaning set forth in the heading of this Agreement. "Purchaser Plan" shall mean any material employee benefit plan as defined in Section 3(3) of ERISA sponsored by Purchaser, for the benefit of any employee of Purchaser. "Purchaser Savings Plan" shall have the meaning set forth in Section 7.4(b)(ii) hereof. "Real Property" shall have the meaning set forth in Section 5.12 hereof. "Reference Amount" shall have the meaning set forth in Section 2.6(b) hereof. "Release" means any spill, leaking, pumping, pouring, emitting, emptying, dumping, injection, deposit, disposal, discharge, dispersal, leaching, or allowing the escape, of any Hazardous Substance, or threat thereof, into surface water, soil, sediment, air or groundwater at or from any property. "Remedial Action" shall mean any action required by applicable Environmental Laws or a Governmental Authority to remediate soil, surface water, groundwater or sediments in response to a Release of Hazardous Substances, including, but not limited to, any associated action taken to investigate, monitor, assess and evaluate the extent and severity of any such Release and post-remediation monitoring of any such Release, and the costs of documenting, reporting, negotiating or resolving the above. "Retained Liabilities" shall have the meaning set forth in Section 2.5 hereof. "Selected Accountants" shall have the meaning set forth in Section 2.6(c) hereof. "Seller" shall have the meaning set forth in the heading of this Agreement. "Seller LTD Plan" shall have the meaning set forth in Section 7.4(g) hereof. -8- 15 "Seller Savings Plan" shall have the meaning set forth in Section 7.4(b)(ii) hereof. "Site" means the parcel of approximately eighty (80) acres which is located at 125 Crestwood Road, Mountaintop, Luzerne County, Pennsylvania as identified in the Deed. "Special Representations" shall have the meaning set forth in Section 8.1(a). "Subsidiary" shall mean an entity as to which Seller or Purchaser or any other relevant entity, as the case may be, owns directly or indirectly 50% or more of the voting power or other similar interests. Any Person which comes within this definition as of the date of this Agreement but thereafter fails to meet such definition shall from and after such time not be deemed to be a Subsidiary of Seller or Purchaser, as the case may be. Similarly, any Person which does not come within such definition as of the date of this Agreement but which thereafter meets such definition shall from and after such time be deemed to be a Subsidiary of Seller or Purchaser, as the case may be, until such time as it no longer qualifies as a subsidiary under the first sentence of this definition. "Supply Agreement" shall have the meaning set forth in Section 3.1(b)(viii) hereof. "Tax" or "Taxes" shall mean all taxes, duties or other similar assessments, including but not limited to, income, excise, property, sales, value added, profits, license, withholding (with respect to compensation or otherwise), payroll, employment, net worth, capital gains, transfer, stamp, social security, and franchise taxes, imposed by any Governmental Authority, and including any interest, penalties and additions attributable thereto. "Tax Return" or "Tax Returns" shall mean any return, report, declaration, information return, statement or other document filed or required to be filed with any Governmental Authority, in connection with the determination, assessment or collection of any Tax or the administration of any Laws relating to any Tax. "Title Commitment" shall have the meaning set forth in Section 7.3(b) hereof. "Title Company" shall have the meaning set forth in Section 4.2(g) hereof. "Transition Services Agreement" shall have the meaning set forth in Section 3.1(b)(vii) hereof. "WARN Act" shall mean the Worker Adjustment and Retraining Notification Act, as amended. Section 1.2 Other Definitional Provisions. (a) The words "hereof", "herein", "hereto" and "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement. -19- 16 (b) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. ARTICLE II PURCHASE AND SALE Section 2.1. Purchase and Sale of Assets of the Business. Upon the terms and subject to the conditions set forth herein, at the Closing, Seller shall, or shall cause its Affiliates to, sell, convey, assign and transfer to Purchaser and Purchaser shall purchase, acquire and accept from Seller and such Affiliates, free and clear of all Liens, other than Permitted Encumbrances (except for the Mortgage to be Released), all right, title and interest of Seller and its Affiliates in the assets, properties and rights owned or held by Seller or its Affiliates on the date hereof (i) constituting or located within the Mountaintop Facility or (ii) relating primarily to the Business, wherever located (except in any case for Excluded Assets and subject to any decreases or dispositions thereof not inconsistent with the terms of this Agreement) (collectively, the "Conveyed Assets"). Without limiting the foregoing, the Conveyed Assets shall include, without limitation all rights, title and interest of Seller and its Affiliates in and to, those certain assets, properties and rights described in the following clauses (a) through (m): (a) the Real Property; (b) the furniture, equipment, machinery, supplies, vehicles, spare parts, tools, personal property and other tangible property owned, leased or licensed by Seller either (i) within or located at the Mountaintop Facility or (ii) primarily used by the Business, wherever located (the "Equipment"), including without limitation a certain ISMECA tester sorter consigned to ChipPAC, Incorporated and any other equipment primarily related to the Business and consigned to subcontractors, and leases relating to such Equipment so leased by Seller (the "Equipment Leases"), together with any rights or claims arising out of the breach of any express or implied warranty by the manufacturers or sellers of any such Equipment or any component thereof; (c) subject to Section 2.2 hereof, except for the Excluded Contracts, the contracts, leases, licenses, agreements and commitments relating primarily to the Business, including, but not limited to, those set forth on Schedule 5.10 and those not required to be disclosed on such Schedule because they do not meet the thresholds set forth in Section 5.10 (excluding contracts, leases, licenses, agreements and commitments relating to the Excluded Assets) (collectively with the Equipment Leases described in clause (b) above and the Intellectual Property licenses transferred pursuant to the IP Agreement, the "Assumed Contracts"); (d) the Inventories of the Business; (e) Intellectual Property assigned in accordance with the IP Agreement. Except as expressly set forth in the IP Agreement, Purchaser expressly understands that Seller is not assigning or transferring to Purchaser any right, title or interest in or to the name "INTERSIL" or any derivation thereof, as well as any related or similar name, or any other -10- 17 related trade names, trademarks, service marks, corporate names and logos or any part, derivation, colorable imitation or combination thereof; (f) transferable Governmental Authorizations and Environmental Permits held by or issued to Seller relating to the Mountaintop Facility or primarily to the Business; (g) all customer and vendor lists to the extent relating to the Business, and all files and documents (including credit information) to the extent relating to customers and vendors of the Business, and other business and financial records, files, books and documents (whether in hard copy or computer format) to the extent relating to the Business; (h) all rights of Seller under express or implied warranties from vendors related to the Conveyed Assets; (i) all goodwill related to the Business; (j) any and all causes of action against third parties to the extent relating to the Conveyed Assets or Assumed Liabilities, including any claims for refunds, prepayments, offsets, recoupment, insurance proceeds, condemnation awards, judgments, and the like, whether received as payment or credit against future liabilities or otherwise; (k) all product efficacy data, advertising materials, marketing plans, distribution programs, cost and pricing information, customer lists and other similar information primarily used or held for use in the Business; (l) all agreements between Seller and any third party regarding confidentiality or non-disclosure of any information related to the Business, the Conveyed Assets or Assumed Liabilities; and (m) any books, ledgers, files, reports, plans, payroll and personnel records and operating records to the extent related to or maintained by, the Business, except those in the possession of Seller's independent public accountants (including the workpapers of such independent public accountants). Notwithstanding anything to the contrary contained in this Agreement, Seller may retain copies of any contracts, books, ledgers, files, reports, plans, operating records, or any other document or materials (i) which also relate to the other businesses of Seller which do not constitute part of the Business or (ii) which it must retain pursuant to any applicable statute, rule, regulation or ordinance or for financial reporting purposes, tax purposes or in connection with the Retained Liabilities, so long as in either case Seller keeps such materials relating to the Business confidential pursuant to Section 7.9(b) hereof. Section 2.2. Nonassignment of Assets. (a) Notwithstanding anything to the contrary contained in this Agreement, to the extent that the sale, assignment, lease, sublease, transfer, conveyance or delivery, or attempted sale, lease, sublease, assignment, transfer, conveyance or delivery, to -11- 18 Purchaser of any Environmental Permits or any asset that would be a Conveyed Asset or any claim or right or any benefit arising thereunder or resulting therefrom is prohibited by any Law or would require any authorization, approval, consent or waiver by any Governmental Authority or Person, and such authorization, approval, consent or waiver shall not have been obtained prior to the Closing, the Closing shall proceed, subject to Article IV, without the sale, assignment, lease, sublease, transfer, conveyance or delivery of such asset (and the failure to obtain such authorization, approval, consent or waiver and the failure to sell, assign, convey or deliver such assets shall not constitute a breach of this Agreement by Seller), and this Agreement shall not constitute a sale, assignment, sublease, transfer, conveyance or delivery of such asset or an attempt thereof. In the event that the Closing proceeds without the transfer, sublease or assignment of any such asset, then following the Closing, the Parties shall use reasonable efforts and cooperate with each other to obtain promptly such authorizations, approvals, consents or waivers; provided, however, that Seller shall not compromise any rights not otherwise required by this Agreement to be compromised for any such authorization, approval, consent or waiver. Pending such authorization, approval, consent or waiver, the Parties shall cooperate with each other in any mutually agreeable, reasonable and lawful arrangements designed to provide to Purchaser the benefits of use of such asset and to Seller the benefits, including any indemnities, that it would have obtained had the asset been conveyed to Purchaser at the Closing. To the extent that Purchaser is provided the benefits pursuant to this Section 2.2 of any contract, Purchaser shall perform for the benefit of the other Persons that are parties thereto the obligations of Seller thereunder and pay, discharge and satisfy any related liabilities that, but for the lack of an authorization, approval, consent or waiver to assign such liabilities to Purchaser, would be Assumed Liabilities. Once authorization, approval, consent or waiver for the sale, assignment, lease, sublease, transfer, conveyance or delivery of any such asset not sold, assigned, leased, subleased, transferred, conveyed or delivered at the Closing is obtained, Seller shall assign, lease, sublease, transfer, convey or deliver such asset to Purchaser at no additional cost to Purchaser. To the extent that any such asset cannot be transferred or the full benefits of use of any such asset cannot be provided to Purchaser following the Closing pursuant to this Section 2.2, then Seller and Purchaser shall enter into such arrangements (including leasing, subleasing, sublicensing or subcontracting) to provide to the Parties the economic (taking into account Tax costs and benefits) and operational equivalent, to the extent permitted, of obtaining such authorization, approval, consent or waiver and the performance by Purchaser of the obligations thereunder. Seller shall pay to Purchaser promptly upon receipt thereof, all income, proceeds and other monies received by Seller in connection with its use of any asset (net of any Taxes and any other costs imposed upon Seller) in connection with the arrangements under this Section 2.2. (b) To the extent that any Material Contract constitutes an Excluded Contract solely as a result of the failure of such Material Contract to be included on Schedule 5.10, Purchaser shall cooperate with Seller to assist Seller in fulfilling Seller's obligations under such Material Contract. Section 2.3. Excluded Assets of the Business. Notwithstanding any provision in this Agreement, Seller shall retain, with respect to the Business, the following (the "Excluded Assets"): (a) Accounts Receivable, cash, Cash Equivalents and all prepaid expenses and other assets of the character that would be included in the line item "Assets-- -12- 19 Other" on a balance sheet of the Business as of the Closing Date prepared on a basis consistent with the Business's practice as of September 30, 2000; (b) certificates of deposit, shares of stock, securities, bonds, debentures, evidences of indebtedness, and interests in any Person; (c) any and all of Seller's rights in any contract or arrangement representing an intercompany transaction between Seller and any Affiliate of Seller, whether or not such transaction relates to the provision of goods and services, payment arrangements, intercompany charges or balances, or the like; (d) all Tax Returns and all losses, loss carry forwards and rights to receive refunds, credits and credit carry forwards with respect to any and all Taxes, including, without limitation, interest thereon, whether or not the foregoing are derived from the Business; (e) the minute books, stock transfer books, corporate seal and other similar books and records of Seller and its Affiliates; (f) all current and prior insurance policies and all rights of any nature with respect thereto, including all insurance recoveries thereunder and rights to assert claims with respect to any such insurance recoveries; (g) except as expressly set forth herein, all assets of any employee benefit plan; (h) except for the limited transitional rights provided in the IP Agreement, all rights, title and interests in or to the name "INTERSIL," or any derivation thereof, as well as any related or similar name, and any other related trade names, trademarks, service marks, corporate names and logos or any part, derivation, colorable imitation or combination thereof; (i) any and all causes of action against third parties to the extent relating to Excluded Assets or Retained Liabilities or not relating to the Business or any of the Conveyed Assets or Assumed Liabilities, including any claims for refunds, prepayments, offsets, recoupment, insurance proceeds, condemnation awards, judgments, and the like, whether received as payment or credit against future liabilities or otherwise; (j) all real property, other than the Real Property; (k) any governmental licenses, permits and approvals (including Environmental Permits) issued to Seller, to the extent their transfer is not permitted by law; (l) any rights in, to and under all contracts, arrangements, permits or licenses of any nature, of which the obligations of Seller thereunder are not expressly assumed by Purchaser hereunder; (m) any books, ledgers, files, reports, plans and operating records that Seller or any of its Affiliates are required to retain pursuant to any applicable statute, rule, -13- 20 regulation or ordinance (copies of which will be made available to Purchaser to the extent permitted by law) or which relate to the Excluded Assets or the Retained Liabilities; (n) all assets not related primarily to the Business; (o) any Intellectual Property not assigned under the IP Agreement; (p) all of Seller's rights under this Agreement and any agreement or other written instrument entered into in connection with the transactions contemplated hereby; (q) those assets listed in Schedule 2.3(q) hereto; (r) any contracts, agreements or arrangements with distributors or independent sales representatives (in either case whether or not relating to the Business), any real property leases, equipment and maintenance agreements with respect to any leased real property, those contracts, agreements or arrangements designated with a notation on Schedule 5.10 hereto, any contract required to be disclosed in Schedule 5.10 hereto but not so disclosed and any other contracts, agreements or arrangements that relate both to the Business and the other businesses of Seller and its Affiliates (any of the foregoing, an "Excluded Contract"); (s) any packaging and test equipment located at Seller's Palm Bay, Florida facility; (t) all assets relating to any and all employee benefit plans, policies, programs and practices maintained or contributed to by Seller or its Affiliates, except as provided in Section 7.4; (u) any equipment located at any location of Seller other than the Mountaintop Facility; and (v) Seller's disaster recovery system located at the Mountaintop Facility. Section 2.4. Assumption of Certain Obligations of the Business. Upon the terms and subject to the conditions of this Agreement, Purchaser agrees, effective at the Closing, to assume all Liabilities of Seller to the extent relating to the Conveyed Assets or the Business and arising in the ordinary course of business, other than the Retained Liabilities, whether accrued or fixed, known or unknown, absolute or contingent, matured or unmatured or determined or determinable as of the Closing Date, (all of the foregoing liabilities and obligations being herein collectively called the "Assumed Liabilities"). Assumed Liabilities shall include, without limitation, the following: (a) the indebtedness of the Business evidenced by the agreements listed on Schedule 2.4(a); (b) product warranty obligations limited to, at Purchaser's option, repair, replace or provide product purchase price credit to customers and contractual obligations with distributors for price adjustments or product repurchase, in each case arising from the -14- 21 manufacture, distribution or sale of any products of the Business prior to, on or after the Closing Date, provided that in no event shall Purchaser's obligations under this Section 2.4(b) be deemed to constitute the assignment of any contract, agreement or arrangement with any distributor or independent sales representative or of any rights thereunder, or the assumption by Purchaser of any obligations or duties under any such contract, agreement or arrangement except as expressly provided in this Section 2.4(b) or Section 2.4(f); (c) any Tax that may be imposed by any Federal, State or local government on the ownership, sale, operation or use of the Conveyed Assets after the Closing Date, except for any income taxes attributable to income received by Seller; (d) all Liabilities of the Business arising and to be performed after the Closing Date under or relating to the Assumed Contracts (but specifically excluding breaches by Seller or any of Seller's Affiliates of any contracts relating to the Business or as a result of the transactions contemplated by this Agreement); (e) all Liabilities with respect to Employees who are Affected Employees or are otherwise employed by Purchaser after the Closing Date (including, without limitation, any Liabilities relating to the hiring, employment or termination of employment by Purchaser of any Employee or other individual, or with respect to vacation accruals or sick leave (in each case to the extent accrued in Closing Date Liabilities) and holiday accruals (whether or not accrued in the Closing Date Liabilities) consistent with Seller's policies as historically applied); and (f) all Liabilities for commissions due to independent sales representatives with respect to orders placed prior to Closing and for which the customer has not yet been billed, provided the revenues associated with such order are recognized by Purchaser, regardless of whether Purchaser assumes any agreement with such sales representative. Purchaser's obligations under this Section 2.4 will not be subject to offset or reduction by reason of any actual or alleged breach of any representation, warranty or covenant contained in this Agreement or any Schedule or Exhibit hereto, or any closing or other document contemplated by this Agreement or any Schedule or Exhibit hereto, any right or alleged right of indemnification hereunder, or for any other reason. Section 2.5. Retained Liabilities of the Business. Notwithstanding any provision in this Agreement, Purchaser shall not assume or in any way be responsible for, and Seller shall retain and be responsible for the following debts, claims, commitments, liabilities and obligations of Seller and the Business (the "Retained Liabilities"): (a) Liabilities for which Seller expressly has responsibility pursuant to the terms of this Agreement or any of the agreements entered into in connection with the transactions contemplated hereby; (b) Liabilities to the extent arising out of or relating to the Excluded Assets; -15- 22 (c) Liabilities of Seller and its Affiliates to any of its employees, including, without limitation, former employees and retirees, and their statutory bargaining representatives, including, without limitation, Liabilities for payroll, withholdings, social security or similar disability related taxes, claims for workers' compensation, harassment, wrongful termination/discharge, employment discrimination, severance or under any benefit plan or collective bargaining agreement or for any retention or stay-on bonuses, except as expressly provided herein, including in Section 7.4 (whether or not any such employee is a member of a union and whether or not any such employee is an Affected Employee); (d) the accounts payable of Seller (including accounts payable relating exclusively to the Business existing as of the Closing Date); (e) all Liabilities for commissions owed to independent sales representatives in respect of the Accounts Receivable; (f) all liabilities relating to any and all employee benefit plans, policies, programs and practices maintained or contributed to by Seller or its Affiliates with respect to any and all Employees except as provided in Section 7.4; (g) all intercompany Liabilities or Liabilities to Seller's Affiliates; (h) all Liabilities relating to Excluded Contracts, except to the extent expressly assumed pursuant to Section 2.4(b) or (f); (i) any and all Liabilities for Taxes related to the Business or the Conveyed Assets for taxable periods prior to and including the Closing Date, except that Seller's sole liability for Conveyance Taxes is limited as set forth in Section 7.15; (j) all Pre-Closing Environmental Liabilities; (k) all Liabilities of Seller or any Seller Affiliate to the extent arising out of or relating to the conduct of any business other than the Business; (l) all Liabilities of Seller or any Seller Affiliate arising out of matters occurring, or obligations incurred, after the Closing; (m) (i) all Liabilities for indebtedness for money borrowed other than under the agreements listed on Schedule 2.4(a), (ii) guaranties of liabilities that would not constitute Assumed Liabilities and (iii) liens other than the Permitted Encumbrances (except for the Mortgage to be Released); (n) all Liabilities of Seller or any Seller Affiliate for indemnification of, or advancement of expenses or payment of insurance proceeds to, any present or former director or officer of (or other person serving in a fiduciary capacity at the request of) Seller or any Seller Affiliate based upon an actual or alleged breach of fiduciary duty of such person prior to Closing; -16- 23 (o) Liabilities of Seller or any Seller Affiliate for any professional, financial advisory or consulting fees and expenses incident to or arising out of the negotiation, preparation, approval or authorization of this Agreement or any of the agreements or transactions contemplated hereby, or any other proposed transaction for the sale of the Business, including without limitation the fees, expenses and disbursements of Seller's counsel, accountants (except as may be specifically agreed separately in writing by Purchaser) and financial advisors; (p) Liabilities to which Purchaser, any Conveyed Assets or the Business become subject arising solely out of a failure to comply with bulk sales laws or any similar laws; (q) all Liabilities arising out of, resulting from or relating to claims, whether founded upon contract, negligence, strict liability, Intellectual Property infringement, in tort or other similar legal theory, seeking compensation or recovery for or relating to Losses, injury to person or damage to property arising out of the conduct of the Business prior to the Closing Date, in any case whether or not disclosed in any Schedule hereto; (r) Liabilities of the Business arising during or related to periods prior to the Closing Date to the extent the amount of such Liability or obligation is covered by a policy of insurance or other indemnity agreement maintained for the benefit of the Business, unless the rights under any such indemnity agreement have been assigned to Purchaser; (s) all liabilities in respect of customer returns and allowances and product warranty claims (except Liabilities expressly assumed by Purchaser under Section 2.4(b)) including without limitation warranty claims for rework costs or equipment repair costs; (t) any Liability or obligation arising out of, or related to, any business or product line formerly owned or operated by Seller or any Seller Affiliate or predecessor thereof but not presently so operated; (u) any Liability or other obligation arising out of, or related to any indemnification or other provision under any contract or other agreement pursuant to which any sale or disposition was made of any business or product line formerly owned or operated by Seller or any Seller Affiliate or any predecessor thereof but not presently so owned or operated; and (v) Liabilities for which Seller has any claim against Harris, its successors or Affiliates. Section 2.6 . Purchase Price. (a) In consideration of the sale and transfer of the Conveyed Assets, Purchaser shall (i) pay to Seller for the benefit of Seller or for appropriate Affiliates thereof, if any, who shall have sold assets under this Agreement pursuant to Section 2.1 an aggregate amount of $338,000,000 (the "Purchase Price"), in immediately available funds, by wire transfer in accordance with written instructions given by Seller to Purchaser not less than two (2) Business Days prior to the Closing, which consideration shall be adjusted pursuant to Section 2.6(b) below and allocated as described in Section 2.7; and (ii) assume the Assumed Liabilities. -17- 24 (b) Notwithstanding any other provision of this Agreement, the Purchase Price shall be adjusted upward or downward on a dollar-for-dollar basis, by the amount by which Closing Date Liabilities, as reflected in the Closing Balance Sheet to be agreed pursuant to Section 2.6(c) below, is greater than or less than $7,800,000 (the "Reference Amount") (as finally determined pursuant to Section 2.6(c) and (d), the "Purchase Price Adjustment"). (c) Within thirty (30) days after the Closing Date, Seller shall submit to Purchaser for Purchaser's review a balance sheet of the Business as of the Closing Date and Seller's calculation of the actual amount of the Closing Date Liabilities and, in this connection, each party reasonably shall make available to the other all relevant books and records. In the event that Seller and Purchaser are unable to agree with respect to any determination of the Closing Date Liabilities within twenty (20) days after the delivery by Seller of the proposed balance sheet, Seller and Purchaser hereby agree that such determination shall be referred to Arthur Andersen LLP (the "Selected Accountants"), which shall promptly make a determination. The determination of the Selected Accountants shall be conclusive and binding on each party. During the review by the Selected Accountants, Purchaser and Seller will each make available to the Selected Accountants such individuals and such information, books and records as may be reasonably required by the Selected Accountants to make their final determination. One-half of the fees of the Selected Accountants shall be borne by Seller, and one-half shall be borne by Purchaser. (d) The balance sheet reflecting the Closing Date Liabilities as agreed by the Parties or as determined by the Selected Accountants in accordance with Section 2.6(c) shall be deemed the "Closing Balance Sheet." Upon the final determination of the Closing Balance Sheet, if the Closing Date Liabilities reflected therein as of the Closing Date are greater than the Reference Amount, Seller shall pay to Purchaser the Purchase Price Adjustment and if the Closing Date Liabilities reflected therein as of the Closing Date are less than the Reference Amount, Purchaser shall pay to Seller the Purchase Price Adjustment, in either case within five (5) Business Days by wire transfer of immediately available funds. Section 2.7 Allocation of Purchase Price. Seller and Purchaser recognize their mutual obligations pursuant to Section 1060 of the Code (and any comparable provisions of any other Tax law) to timely file IRS Form 8594 (or comparable form) and subsequent Forms 8594 (or comparable forms), if any are required, with each of their respective Tax Returns (the "Asset Allocation Statements"). Accordingly, Seller and Purchaser agree to cooperate in the preparation of any Asset Allocation Statements. Seller and Purchaser shall agree that Purchaser shall direct KPMG LLP (a) to perform an appraisal of the fair market value of the Conveyed Assets and allocate the Purchase Price among the Conveyed Assets in a manner that is reasonably acceptable to Purchaser's outside auditors (the "Allocation") and (b) to complete the appraisal and Allocation of the Real Estate prior to the Closing Date and of everything else prior to the later of the Closing Date or March 31, 2001. The cost of the appraisal shall be borne by Purchaser. Each of Seller and Purchaser shall (i) be bound by the Allocation for purposes of determining any Taxes, (ii) prepare and file, and cause its Affiliates to prepare and file, its Tax Returns on a basis consistent with the Allocation, and (iii) take no position, and cause its Affiliates to take no position, inconsistent with the Allocation on any applicable Tax Return or in any proceeding before any taxing authority or otherwise. In the event that the Allocation is -18- 25 disputed by any taxing authority, the Party receiving notice of the dispute shall promptly notify the other Party hereto concerning resolution of the dispute. Seller and Purchaser agree that the Allocation shall be made in accordance with the provisions of Section 1060 of the Code and the Treasury Regulations thereunder. Section 2.8. Apportionment at Closing and Related Matters. (a) At the Closing, the Parties shall make the usual adjustments relating to the Business as of the Closing Date (except that Purchaser shall be fully responsible for those items contained in the Closing Balance Sheet constituting Assumed Liabilities), including prepaid lease payments, security deposits, rents, real estate taxes, local improvements charges, assessments (special and ordinary), sewer impost charges, utility charges, water rents, monthly maintenance charges, rebates and royalties, deposits and prepaid expenses with any public utility or any municipal, governmental or other public authority, wages and any other ongoing charges, if any, and all such payments, taxes and charges shall be apportioned and adjusted as of the Closing Date, and at the Closing the net amount thereof shall be pro rata paid by Seller to Purchaser or paid by Purchaser to Seller, as the case may be. Any such apportionments and adjustments shall be subject to correction for any errors or omissions that subsequently may be discovered provided that the Party discovering such error or omission provides written notice of same to the other Party. Such other Party shall, within 30 days after receipt of such notice, reimburse the Party delivering such notice for the full amount of such error or omission. (b) If at any time after the Closing Date (i) Seller shall come into possession of any of the Assumed Liabilities or Conveyed Assets, Seller shall immediately transfer such assets or liabilities to Purchaser or (ii) Purchaser shall come into possession of any of the Retained Liabilities or Excluded Assets, Purchaser shall immediately transfer such assets or liabilities to Seller. ARTICLE III CLOSING Section 3.1. Closing. (a) The Closing shall take place at the offices of Dechert, 4000 Bell Atlantic Tower, 1717 Arch Street, Philadelphia, Pennsylvania at 10:00 A.M., eastern standard time, on the later of (i) March 21, 2001, or (ii) the third (3rd) Business Day following the satisfaction or waiver of the conditions precedent specified in Article IV (other than the conditions to be satisfied on the Closing Date, but subject to the waiver or satisfaction of such conditions), or at such other times and places as the Parties may mutually agree; provided, however, that the Closing shall not occur later than the date specified in Section 9.1(b) of this Agreement. The date on which the Closing occurs is called the "Closing Date." The Closing shall be deemed to occur and be effective as of the close of business on the Closing Date. (b) At the Closing, Seller shall deliver or cause to be delivered to Purchaser the following: (i) the certificate referred to in Section 4.2(c) hereof; -19- 26 (ii) a deed substantially in the form set forth in Exhibit 3.1(b)(ii) for the Owned Real Property (the "Deed") executed by the LLC; (iii) a Bill of Sale or Bills of Sale substantially in the form set forth in Exhibit 3.1(b)(iii) (the "Bill of Sale") executed by Seller; (iv) an Assignment and Assumption Agreement substantially in the form set forth in Exhibit 3.1(b)(iv) (the "Assignment and Assumption") executed by Seller; (v) a Partial Assignment and Assumption of the ChipPAC Agreement substantially in the form set forth in Exhibit 3.1(b)(v) (the "Partial Assignment") executed by Seller and ChipPAC; (vi) an Intellectual Property Assignment and License Agreement substantially in the form set forth in Exhibit 3.1(b)(vi) (the "IP Agreement") executed by Seller; (vii) a Transition Services Agreement substantially in the form set forth in Exhibit 3.1(b)(vii) (the "Transition Services Agreement") executed by Seller; (viii) a Supply Agreement substantially in the form set forth in Exhibit 3.1(b)(viii) (the "Supply Agreement") executed by Seller; (ix) all other instruments and documents required on Seller's part to effectuate and consummate the transactions contemplated hereby in a form and substance reasonably satisfactory to Purchaser and its counsel, including those consents and approvals listed on Schedule 3.1(b)(ix); and (x) an opinion of Dechert, counsel for Seller/Stephen M. Moran, general counsel for Seller, in a form reasonably satisfactory to Purchaser and Reed Smith LLP, counsel for Purchaser. (c) At the Closing, Purchaser shall deliver to Seller the following: (i) the sum of the Purchase Price by wire transfer in immediately available funds to up to three accounts specified in writing by Seller at least two (2) days prior to the Closing Date; (ii) the certificate referred to in Section 4.3(c) hereof; (iii) the Bill of Sale executed by Purchaser; (iv) the Assignment and Assumption executed by Purchaser; (v) the Partial Assignment and Assumption executed by Purchaser and ChipPAC; (vi) the IP Agreement executed by Purchaser; -20- 27 (vii) the Transition Services Agreement executed by Purchaser; (viii) the Supply Agreement executed by Purchaser; (ix) all other instruments and documents required on Purchaser's part to effectuate and consummate the transactions contemplated hereby in a form and substance reasonably satisfactory to Seller and its counsel, and (x) an opinion of Reed Smith LLP, counsel for Purchaser/Daniel E. Boxer, general counsel for Purchaser in a form reasonably satisfactory to Purchaser and Dechert, counsel for Seller. ARTICLE IV CONDITIONS TO CLOSING Section 4.1. Conditions to the Obligations of Purchaser and Seller. The respective obligations of each of the Parties to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction of the following conditions precedent: (a) there shall not (i) be in effect any statute, regulation, order, decree or judgment which makes illegal or enjoins or prevents in any respect the consummation of the transactions contemplated by this Agreement, or (ii) have been commenced, and shall be continuing, any action or proceeding by any Governmental Authority which seeks to prevent or enjoin in any respect the transactions contemplated by this Agreement; (b) the waiting period required under the HSR Act, including any extensions thereof, shall have expired or have been terminated, and any investigations relating to the sale hereunder that may have been opened by either the Department of Justice or the Federal Trade Commission by means of a request for additional information or otherwise shall have terminated and no other waiting period (including any extensions thereof) or any investigation by a Governmental Authority relating to the transactions contemplated hereby shall be unexpired or pending which investigation, in the reasonable opinion of counsel, is likely to result in an action or proceeding seeking to enjoin the entire transaction contemplated herein; and (c) any approvals or actions of any Governmental Authority having jurisdiction necessary lawfully to consummate the transactions contemplated hereby shall have been given or taken and Seller shall have obtained all those consents and approvals listed on Schedule 3.1(b)(xi). Section 4.2. Conditions to the Obligations of Purchaser. The obligation of Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction of the following conditions precedent: (a) Seller shall have performed in all material respects its agreements and obligations contained in this Agreement required to be performed by it at or before the Closing, and shall have complied in all material respects with each covenant to be performed and complied with hereunder at or before the Closing (other than Seller's covenants with respect to delivery of documents at the Closing which shall be performed in all respects); provided, -21- 28 however, that those agreements, obligations and covenants which are qualified by materiality or absence of Material Adverse Effect shall have been complied with in all respects; (b) the representations and warranties of Seller contained herein that are qualified by materiality limitations shall be true and correct and those that are not qualified by materiality limitations shall be true and correct in all material respects, in each case as of the time of Closing with the same force and effect as though such representations and warranties had been made on, as of and with reference to such time, except those representations and warranties that address matters only as of a particular date which, if qualified by materiality limitations, shall be true and correct and, if not qualified by materiality limitations, shall be true and correct in all material respects as of that date; (c) Purchaser shall have received a certificate of Seller, dated as of the Closing Date and validly executed by an officer of Seller, certifying as to the fulfillment of the matters set forth in paragraphs (a) and (b) of this Section 4.2; (d) Seller shall have received all authorizations and approvals from Governmental Authorities, to the extent required to be obtained prior to Closing for the operation of the Business after Closing and such other consents, authorizations, and approvals listed on Schedule 3(b)(ix); (e) Seller shall have made or caused to be made delivery to Purchaser of the items required by Section 3.1(b); (f) Purchaser shall have received a letter from Local Union No. 177, International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers, AFL-CIO substantially in the form set forth in Exhibit 4.2(f); and (g) Purchaser shall have obtained, at Purchaser's sole cost and expense, from Lawyers Title Insurance Company (the "Title Company"), ALTA owner's policies of title insurance, covering the Real Property, which shall be free and clear of all Liens, easements, rights-of-way, encroachments, and other encumbrances except for the Permitted Encumbrances (except for the Mortgage to be Released). Section 4.3. Conditions to the Obligations of Seller. The obligation of Seller to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction of the following conditions precedent: (a) Purchaser shall have performed in all material respects its agreements and obligations contained in this Agreement required to be performed by it at or before the Closing, and shall have complied in all material respects with each covenant to be performed and complied with hereunder at or before the Closing (other than Purchaser's covenants with respect to delivery of documents at the Closing which shall be performed in all respects); provided, however, that those agreements, obligations and covenants which are qualified by materiality or absence of material adverse effect shall have been complied with in all respects; -22- 29 (b) the representations and warranties of Purchaser contained herein that are qualified by materiality limitations shall be true and correct and those that are not qualified by materiality limitations shall be true and correct in all material respects, in each case as of the time of Closing with the same force and effect as though such representations and warranties had been made on, as of and with reference to such time, except those representations and warranties that address matters only as of a particular date which, if qualified by materiality limitations, shall be true and correct and, if not qualified by materiality limitations, shall be true and correct in all material respects as of that date; (c) Seller shall have received a certificate of Purchaser, dated as of the Closing Date and validly executed by an officer of Purchaser, certifying as to the fulfillment of the matters set forth in paragraphs (a) and (b) of this Section 4.3; and (d) Purchaser shall have made or caused to be made delivery to Seller of the items required by Section 3.1(c). ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Purchaser as follows: Section 5.1. Organization and Qualification. Intersil is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. LLC is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware. Each of Intersil and LLC is qualified to do business as a foreign corporation or foreign limited liability company, as the case may be, and is in good standing under the laws of each jurisdiction in which the nature of the property owned or leased by it in the conduct of the Business requires it to be so qualified, except where the failure to be so qualified and in good standing, would not be reasonably expected to have a Material Adverse Effect. Section 5.2. Authorization. (a) Intersil has all requisite corporate power and corporate authority to carry on its business as it is now being conducted and to execute and deliver this Agreement and the documents contemplated hereby and to perform its obligations hereunder and thereunder. The execution and delivery by Intersil of this Agreement and the documents contemplated hereby, and the performance by Intersil of its obligations hereunder and thereunder, have been duly authorized by all requisite corporate action, including but not limited to shareholder consent, if necessary, and no other corporate proceedings are required by Intersil in connection with the execution, delivery and performance of this Agreement and the documents contemplated hereby. (b) LLC has all requisite limited liability company power and authority to carry on its business as it is now being conducted and to execute and deliver this Agreement and the documents contemplated hereby and to perform its obligations hereunder and thereunder. The execution and delivery by LLC of this Agreement and the documents contemplated hereby, and the performance by LLC of its obligations hereunder and thereunder, have been duly authorized by all requisite action, including but not limited to member consent, if -23- 30 necessary, and no other proceedings are required by LLC in connection with the execution, delivery and performance of this Agreement and the documents contemplated hereby. Section 5.3. Binding Effect. Each of this Agreement and the documents contemplated hereby constitutes a valid and binding obligation of Seller, enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or similar laws affecting creditors' rights generally or by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or law). Section 5.4. Non-Contravention. The execution, delivery and performance of this Agreement and the documents contemplated hereby by Seller and the consummation of the transactions contemplated hereby and thereby does not and will not (i) violate any provision of the certificate of incorporation or bylaws of Intersil, (ii) violate any provision of the Certificate of Formation or Operating Agreement of LLC, (iii) subject to obtaining the consents referred to in Schedule 5.5, conflict with, or result in the breach of, or constitute a default under, or result in the termination, cancellation or acceleration (whether after the giving of notice or the lapse of time or both) of any right or obligation of Seller with respect to, or to a loss of any benefit of the Business to which Seller is entitled with respect to, the Conveyed Assets, (iv) assuming compliance with the matters set forth in Sections 5.5 and 6.5, violate or result in a breach of or constitute a default under any Law or other restriction of any court or Governmental Authority to which Seller is subject, except, with respect to clauses (iii) and (iv), for any violations, conflicts, defaults, terminations, cancellations or accelerations as will not, individually or in the aggregate, be material to the Business as a whole. Section 5.5. Seller Consents and Approvals. Other than as set forth in Schedule 5.5, the execution, delivery and performance of this Agreement and the documents contemplated hereby by Seller do not require any consent or approval of any Governmental Authority or any Person, except (i) for consents or approvals, the failure of which to obtain, will not have a Material Adverse Effect individually or in the aggregate, (ii) for the notification requirements of the HSR Act, (iii) where the failure to obtain such consent, approval, authorization or action, or to make such filing or notification, would not be material to the Business as a whole, and (iv) as may be necessary as a result of facts or circumstances relating solely to Purchaser. Section 5.6. Absence of Material Changes. Since December 29, 2000, except to the extent as set forth in Schedule 5.6, there has not been, with respect to the Business, any: (a) adverse change (or series of related changes) in the Business, financial condition, assets, liabilities or results of operations that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect; (b) damage, destruction, condemnation or loss of any material asset of Seller related to the Business (whether or not covered by insurance) or event that would reasonably be expected to have a Material Adverse Effect; (c) sale, lease, license, abandonment or other disposition by Seller of any material assets, except in the ordinary course of business; -24- 31 (d) material strike, walkout, or other work stoppage or any union organizing effort by or respecting the Employees; (e) increase in the salaries or other compensation or benefits payable or to become payable to Employees (except increases in the ordinary course of business, consistent with past practice) or advance or loan to any officer of the Business or any Employee (except advances of ordinary business expenses or otherwise in the ordinary course of business, consistent with past practice); (f) termination of (other than by expiration) or material amendment to any Material Contract or any relinquishment of any material rights under any Material Contract; (g) liens or encumbrances granted or incurred in respect of any Conveyed Asset (other than Permitted Encumbrances); (h) material Liability incurred which would otherwise be an Assumed Liability, other than those incurred in the ordinary course of business; (i) oral or written notice received by Seller from a material customer of or supplier to the Business that such customer or supplier has breached its obligations to Seller or has or intends to discontinue its relationship with the Business; (j) resignation or termination of employment of any of the key officers or employees of the Business, or oral or written notice received of any impending or threatened resignation or resignations or termination or terminations of employment that would reasonably be expected to have a Material Adverse Effect; (k) material revaluations by Seller of any of the Conveyed Assets; or (l) change in Seller's accounting methods or practices with respect to the condition, operations, properties, assets or Liabilities of the Business. Section 5.7. No Litigation. Except as may be set forth on Schedule 5.7, there are no claims, actions, suits, orders or investigations, either at law or in equity, or any proceedings by or before any court or Governmental Authority or arbitrator pending, or to the Knowledge of Seller, threatened against Seller that (i) if asserted and decided adversely to Seller or any Affiliate, could materially and adversely affect the operations of the Business, or (ii) questions the validity of this Agreement, or (iii) seeks to delay, prohibit or restrict the consummation by Seller of the transactions contemplated by this Agreement. Section 5.8. Compliance with Laws. (a) Except with respect to Environmental Laws (which are the subject of Section 5.9) and except as set forth in Schedule 5.8(a), Seller is in compliance in all material respects with all Laws applicable to the ownership or operation of the Conveyed Assets or the Business; and -25- 32 (b) All permits, licenses and authorizations issued by Governmental Authorities and necessary for the conduct of the Business at the Mountaintop Facility are listed on Schedule 5.8(b) and each such permit, license and authorization is in full force and effect and for the benefit of Seller. Section 5.9. Environmental Matters. To the Knowledge of Seller, and except as set forth in Schedule 5.9, the environmental site assessments and other documentation and correspondence provided to Purchaser by Seller (collectively, the "Environmental Site Assessments"): (a) To the Knowledge of Seller, and except as set forth in Schedule 5.9(a) and the Environmental Site Assessments, the Conveyed Assets (i) are in substantial compliance with Environmental Laws and/or Environmental Permits, and (ii) none of the Conveyed Assets is undergoing, nor has Seller received notice that it is subject to, Remedial Action or enforcement actions under any or all applicable Environmental Laws and/or Environmental Permits; (b) To the Knowledge of Seller, the Business has obtained all Environmental Permits required under all applicable Environmental Laws in relation to the Conveyed Assets, except for such failures that are not reasonably likely to have a Material Adverse Effect; (c) Seller has not received from any Person or Governmental Authority, and is not as of the date of this Agreement subject to, any claim, demand, complaint, order, consent decree, request for information, or written notice of violation which asserts that Seller is or may be in violation of any Environmental Law or that Seller is responsible for a Pre-Closing Environmental Liability at any of the Conveyed Assets; (d) Section 5.9 and Section 5.8(b) to the extent relating to Environmental Permits contain the only and exclusive representations and warranties related to environmental matters made by Seller in this Agreement; and (e) Seller has provided to Purchaser true and complete copies of all correspondence between Seller and any Person or Governmental Authority which constitutes or relates to an environmental claim against Harris and all correspondence between Seller and Harris with respect to all environmental indemnification claims made by Seller relating to the Site pursuant to the Harris Agreement. Seller has provided to Purchaser true and complete copies of the Harris Agreement and all schedules to the Harris Agreement relating to environmental conditions with respect to the Site. Section 5.10. Material Contracts. Except (i) for agreements entered into after the date hereof, (ii) for open purchase orders with customers entered into in the ordinary course of business consistent with past practices or (iii) as set forth on Schedule 5.10, Seller is not a party to or bound by (the following being referred to as the "Material Contracts"): (a) any contract, agreement or other arrangement for the purchase of Inventories, or other personal property with any supplier or for the furnishing of services to the Business the terms of which provide for financial commitments in excess of $250,000; -26- 33 (b) any contract, agreement and other arrangement for the sale of Inventories or other personal property or for the furnishing of services by the Business with firm commitments in excess of one year from the date hereof; (c) any broker, distributor, dealer, manufacturer's representative, franchise or agency agreements relating primarily to the Business the terms of which provide for financial commitments in excess of $250,000; (d) any contracts and agreements relating to indebtedness for borrowed money, factoring arrangements, sale and leaseback transactions, deferred purchase price of property and other similar financing transactions relating primarily to the Business with respect to which Seller is an obligor in excess of $250,000 or which are secured by any Conveyed Asset; (e) any agreements entered into since December 29, 2000, providing for the acquisition or disposition of any Conveyed Assets and having an individual value in excess of $150,000, or an aggregate value in excess of $250,000, other than the sale of Inventories in the ordinary course of business consistent with past practice or the sale of obsolete equipment; (f) any consulting, employment, severance, retention, separation, collective bargaining or similar agreements relating to the Business with respect to which Seller is an obligor in excess of $250,000; (g) any material technology, product or process development agreement or joint venture agreement primarily relating to the Business; (h) any agreements materially limiting the freedom of Seller to conduct the Business in any geographical area and all confidentiality agreements to which Seller is a party primarily related to the Business, the Conveyed Assets or Assumed Liabilities, other than those agreements entered into by Seller in connection with its proposed disposition of the Business; (i) agreements, arrangements or understandings with any Affiliate of Seller primarily related to the Business; (j) real property leases relating to the Mountaintop Facility; and (k) any other agreement which is material to the Business and which is not otherwise disclosed in response to items (a) through (j) above. Each Assumed Contract that constitutes a Material Contract is valid, in full force and effect and enforceable against Seller and to the Knowledge of Seller the other parties thereto in accordance with the terms of such Assumed Contract that constitutes a Material Contract, subject to bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. Except as set forth in Schedule 5.10, there is no material current default or claim of material current default under any Assumed Contract that constitutes a Material Contract and, to -27- 34 the Knowledge of Seller, no event has occurred that, with the passage of time or the giving of notice or both, would constitute a material current default by Seller or any party thereto under any Assumed Contract that constitutes a Material Contract, or would permit material modification, acceleration or termination of any Assumed Contract that constitutes a Material Contract, or result in the creation of a Lien on any of the Conveyed Assets other than Permitted Encumbrances. Section 5.11. Intellectual Property. Schedule 5.11 sets forth a true and complete list of each of the material Intellectual Property included in the Conveyed Assets, subject to the IP Agreement, (excluding software that may be purchased over-the-counter) and all agreements related to such Intellectual Property. (a) Seller has taken reasonable steps in accordance with normal industry practice to maintain the confidentiality of all confidential Intellectual Property assigned or licensed to Purchaser under the IP Agreement. (b) With respect to pending applications and applications for registration of Intellectual Property that is material to the Business, Seller has advanced the prosecution of these applications as it does in the ordinary course of business. Section 5.12. Real Property. Schedule 5.12 sets forth all of the real property which is owned in fee by the LLC (the "Real Property") and used primarily in connection with the Business. Schedule 5.12 sets forth a description of the title insurance policy and survey obtained by the Seller in connection with its acquisition of the Business. The Real Property is owned by the LLC free and clear of any and all Liens, other than Permitted Encumbrances. (a) Seller has delivered to Purchaser (i) a copy of each deed or lease by which the LLC acquired title to or its interest in the Real Property described in Schedule 5.12, (ii) a copy of the title insurance policy Seller has for the Real Property described in Schedule 5.12, and (iii) a copy of the survey Seller has for the Real Property described in Schedule 5.12. (b) All of the buildings and improvements situated upon the Real Property are operable and in normal condition and repair, subject to ordinary wear and tear, except as set forth on Schedule 5.12. (c) Seller has not received any written notice from any Governmental Authority alleging violations of any applicable zoning building or other codes, laws, rules and regulations governing the ownership or use of any of the Real Property. To the Knowledge of Seller, the Real Property and Seller's use thereof complies with all such codes, laws, rules and regulations, except where failure to so comply would not have, individually or in the aggregate, a Material Adverse Effect. (d) Seller has received no written notices from any Governmental Authority of any pending or threatened condemnation or appropriation proceedings against any portion of the Real Property that would create a Material Adverse Effect. (e) Notwithstanding anything in this Section 5.12 or elsewhere in this Agreement to the contrary, the LLC hereby covenants and agrees and represents and warrants -28- 35 that the Open-End Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement made by the LLC (formerly known as Harris Semiconductor (Pennsylvania), LLC in favor of Credit Suisse First Boston dated as of August 13, 1999 and listed as item number 25 on Schedule 1.1(c) hereto (the "Mortgage to be Released") shall be discharged and released of record prior to or at the Closing, and in no event shall such Mortgage to be Released be listed or excepted on the Deed as a "Permitted Exception." Section 5.13. Assets. (a) Other than Permitted Encumbrances or as otherwise provided in this Agreement, Seller owns, leases or has the legal right to use all of the Conveyed Assets (other than Intellectual Property and Real Property, which are the subjects of Sections 5.11 and 5.12, respectively) and has good title to (or in the case of leased Conveyed Assets, valid leasehold interests in) all Conveyed Assets (other than Intellectual Property and Real Property, which are the subjects of Sections 5.11 and 5.12, respectively), in either case except for Permitted Encumbrances. Except as set forth in Schedule 5.13(a) and for the Excluded Assets, the Conveyed Assets (other than Intellectual Property and Real Property, which are the subjects of Sections 5.11 and 5.12, respectively) together with Purchaser's rights under the Partial Assignment, the IP Agreement, the Transition Services Agreement and the Supply Agreement, are sufficient to operate the Business following the Closing as presently conducted by Seller. Schedule 5.13(b) lists all of the fixed assets included among the Conveyed Assets as of December 29, 2000, specifying, as to each, its inventory tag or similar tracking number, type, location and net book value as reflected in Seller's books of account. (b) The Equipment included in the Conveyed Assets includes all manufacturing equipment (except for the packaging and test equipment) necessary to operate the Business following the Closing as presently conducted by Seller. Section 5.14. Inventory. The Inventory is in good condition, suitable for its intended use, consists of a quality and quantity useable and saleable in the ordinary course of business and is valued at the lower of standard cost, which approximates actual costs determined on a first-in-first-out basis, or market, except for obsolete or slow-moving items or items of below-standard quality, all of which have been written off, written down to net realizable value or reserved against in the books and records of the Business. All such non-excepted items of Inventory consist of items of a quality and quantity useable or salable in the ordinary course of business within a reasonable period of time at normal profit margins and such Inventories can be expected to be consumed in the ordinary course of business within a reasonable period of time. Section 5.15. Financial Information. Seller has previously delivered to Purchaser unaudited statements of certain assets and certain liabilities of the Business as of December 31, 1999 and December 29, 2000, together with the related statements of revenues less certain expenses to EBITDA (collectively the "Financial Information"). The Financial Information was derived from the internal books and records of Seller and has been prepared in a manner consistent with Seller's current accounting practices with respect to the Business. Except as set forth in Schedule 5.15, the Financial Information is complete and accurate, is presented in accordance with GAAP and presents fairly, in all material respects, the financial position and the results of operations of the Business for the periods indicated (exclusive of the Excluded Assets -29- 36 and the Retained Liabilities), except for the omission of certain information required to be included in footnotes to the Financial Information, which footnotes have not been prepared by Seller. Seller makes no other representations with regard to the Financial Information. Without limiting any of the foregoing, Purchaser acknowledges that the Financial Information was prepared solely for the purpose of this Agreement and that the Business was not conducted on a stand-alone basis as a separate entity during the periods indicated in the Financial Information. Section 5.16. Taxes. (a) Except as set forth in Schedule 5.16, all material Tax Returns that are required to be filed on or before the date hereof with respect to any Tax by or on behalf of Seller have been filed, such material Tax Returns are true and complete in all material respects, and all Taxes shown to be due and payable on such material Tax Returns have been paid except where such Tax is being contested in good faith by appropriate proceedings or where the failure to so file or pay would not be reasonably likely to create a Material Adverse Effect. To the Knowledge of Seller, there are no Liens for Taxes upon any of the Conveyed Assets, except for Liens for Taxes not yet due and payable or being contested in good faith by appropriate proceedings or which are Permitted Encumbrances. (b) Seller does not have any Liability for Taxes of any Person as a Member of a consolidated group, as transferee or successor, by contract or otherwise which would have a Material Adverse Effect on the Business, the Conveyed Assets or Purchaser following Closing. (c) To the Knowledge of Seller, there is no pending or threatened action that if determined adversely to Seller would result in the assertion of any deficiency for any tax, interest or penalties in connection therewith which would have a Material Adverse Effect on the Business, the Conveyed Assets or Purchaser following Closing. Section 5.17. Employee Benefits. (a) Set forth on Schedule 5.17 is a list of each Plan in effect as of the date of this Agreement. (b) As applicable with respect to each Plan, Seller has made or will make available to Purchaser copies of (i) each Plan and any related trust or other funding instrument, including all amendments thereto, (ii) the current summary plan description and each summary of material modifications thereto, and (iii) for the Seller Savings Plans (the only Plans intended to be tax qualified under Section 401(a) of the Code), the most recent IRS determination letters. (c) None of the Conveyed Assets is subject to any lien under Code Section 401(a)(29), ERISA Section 302(f) or Code Section 412(n), ERISA Section 4068 or arising out of any action filed under ERISA Section 4301(b). (d) Neither Seller nor any other employer (an "ERISA Affiliate") that is, or was at any relevant time, together with Seller, treated as a "single employer" under section -30- 37 414(b), 414(c) or 414(m) of the Code, has incurred any liability which could reasonably be expected to subject Purchaser or any Conveyed Asset to liability under Title IV of ERISA. (e) Neither Seller nor any ERISA Affiliate, while an ERISA Affiliate, has incurred any withdrawal liability, within the meaning of Section 4201 of ERISA, or any contingent withdrawal liability under Section 4204 of ERISA, to any multiemployer pension plan, which could reasonably be expected to subject Purchaser or any of the Conveyed Assets to liability under Title IV of ERISA. (f) The Seller Savings Plans have been administered substantially in accordance with their terms (and with applicable law to the extent not yet required to be reflected in the terms of such Plans)in all material respects; no prohibited transactions or reportable events have occurred with respect to any such Seller Savings Plan within the meaning of Title I of ERISA; no breach of fiduciary duty has occurred in any respect material to any such Seller Savings Plan; and no material liability has been incurred or is accruing for any late, incomplete, inaccurate or unfiled notice or report that is required to be given with respect to any Seller Savings Plan to any participant, beneficiary or governmental agency pursuant to applicable reporting or disclosure provisions of ERISA or the Code. (g) The Seller Savings Plans are both tax-qualified under Code Section 401(a) as of the Closing and have remained tax-qualified since their inception. All contributions due to the Seller Savings Plans for any period prior to and including the Closing Date have been made in full or will be made in the ordinary course before the transfers described in Section 7.4(b). (h) No complaints or disputes, government audits or investigations, or compliance correction procedures (including CAP, VCR and self-corrections) are known to be imminent, pending or needed with respect to any Seller Savings Plan. (i) Seller does not maintain, provide or have any obligation to provide, any medical or other health coverage for any retirees or their spouses, dependents and surviving beneficiaries, except as required by the continuation of coverage provisions of ERISA section 601 and Code section 4980 B or as otherwise disclosed to Purchaser on Schedule 5.17. Section 5.18. Undisclosed Liabilities. Except for the Assumed Liabilities, the Business has no liabilities or obligations that individually or in the aggregate would reasonably be expected to have a Material Adverse Effect. Section 5.19. Brokers. Except as set forth on Schedule 5.19, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Seller. -31- 38 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to Seller as follows: Section 6.1. Organization and Qualification. Purchaser is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation. Section 6.2. Corporate Authorization. Purchaser has all requisite corporate power and authority to execute and deliver this Agreement and the documents contemplated hereby, and to perform its obligations hereunder and thereunder. The execution, delivery and performance by Purchaser of this Agreement and the documents contemplated hereby have been duly authorized by all requisite corporate action on the part of Purchaser and no other corporate proceedings on the part of Purchaser are required in connection with the execution, delivery and performance by Purchaser of this Agreement and the documents contemplated hereby. Section 6.3. Binding Effect. Each of this Agreement and the documents contemplated hereby constitutes a valid and legally binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or similar laws affecting creditors' rights generally or by general principles of equity (regardless or whether enforcement is sought in a proceeding in equity or law). Section 6.4. Non-Contravention. The execution, delivery and performance by Purchaser of this Agreement and the documents contemplated hereby, and the consummation of the transactions contemplated hereby and thereby, do not and will not (i) violate any provision of the certificate of incorporation, bylaws or other organizational documents of Purchaser, (ii) subject to obtaining the consents referred to in Schedule 6.5, violate, conflict with, or result in the breach of, or constitute a default under, or result in the termination, cancellation or acceleration (whether after the giving of notice or the lapse of time or both) of any right or obligation of Purchaser under any agreement, contract or other instrument to which Purchaser is a party or to which its assets are subject which would prevent Purchaser from completing the transactions contemplated by this Agreement or (iii) assuming compliance with the matters set forth in Sections 5.5 and 6.5, violate or result in a breach of or constitute a default under any Law or other restriction of any court or Governmental Authority to which Purchaser is subject which would prevent Purchaser from completing the transactions contemplated by this Agreement. Section 6.5. Purchaser Consents and Approvals. Except as set forth in Schedule 6.5, the execution, delivery and performance of this Agreement and the documents contemplated hereby by Purchaser do not and will not require any consent or approval of any Governmental Authority or any Person, except for (i) the notification requirements of the HSR Act and (ii) as may be necessary as a result of facts or circumstances relating solely to Seller. Section 6.6. No Litigation. Except as may be set forth on Schedule 6.6, no litigation, investigation or proceeding by or before any court or Governmental Authority or arbitrator is -32- 39 pending against or, to the Knowledge of Purchaser, threatened against Purchaser, which will have a material adverse effect on the ability of Purchaser to perform its obligations hereunder. Section 6.7. Financial Capability. On the Closing Date, Purchaser will have sufficient funds to pay the Purchase Price on the terms and conditions contemplated by this Agreement. Section 6.8. Condition of Conveyed Assets. Purchaser and its representatives and agents have had and exercised, prior to the date hereof, the right to enter upon the Real Property and to make all inspections and investigations of the Business and the Conveyed Assets deemed necessary or desirable by Purchaser, provided that no knowledge acquired or capable of being acquired by Purchaser or its representatives in the course of such inspections and investigations shall waive or otherwise limit any representation or warranty of Seller herein or limit any right or remedy of Purchaser, whether based upon any inaccuracy or breach of any such representation or warranty hereunder or otherwise. Purchaser is purchasing the Conveyed Assets based solely on the results of its inspections and investigations, and not on any representation or warranty of Seller other than as set forth in this Agreement. In light of these inspections and investigations and the representations and warranties made to Purchaser by Seller in Article V hereof, Purchaser is relinquishing any right to any claim based on any representations and warranties other than those specifically included in this Agreement. PURCHASER REPRESENTS THAT NEITHER SELLER NOR ANY OTHER PERSON HAS MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY OR COMPLETENESS OF ANY INFORMATION REGARDING ANY OF SELLER, THE BUSINESS, THE CONVEYED ASSETS OR THE ASSUMED LIABILITIES NOT EXPRESSLY SET FORTH IN THIS AGREEMENT, AND NEITHER SELLER NOR ANY OTHER PERSON WILL HAVE OR BE SUBJECT TO ANY LIABILITY TO PURCHASER OR ANY OTHER PERSON RESULTING FROM THE DISTRIBUTION TO PURCHASER OR ITS REPRESENTATIVES OR PURCHASER'S USE OF, ANY SUCH INFORMATION RELATING TO THE BUSINESS, ANY OFFERING MEMORANDUM OR OTHER PUBLICATION PROVIDED TO PURCHASER OR ITS REPRESENTATIVES, OR ANY OTHER DOCUMENT OR INFORMATION PROVIDED TO PURCHASER OR ITS REPRESENTATIVES IN CONNECTION WITH THE SALE OF THE BUSINESS OTHER THAN AS SET FORTH IN THIS AGREEMENT. PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT IT HAS HAD AN OPPORTUNITY TO DISCUSS THE ENVIRONMENTAL CONDITION OF THE CONVEYED ASSETS WITH VARIOUS EMPLOYEES, AGENTS AND/OR REPRESENTATIVES OF SELLER, BUT NO KNOWLEDGE ACQUIRED OR CAPABLE OF BEING ACQUIRED BY PURCHASER THEREBY SHALL WAIVE OR OTHERWISE LIMIT ANY REPRESENTATION OR WARRANTY OF SELLER HEREIN RELATING THERETO. PURCHASER HAS INVESTIGATED AND HAS KNOWLEDGE OF OPERATIVE OR PROPOSED GOVERNMENTAL LAWS AND REGULATIONS INCLUDING, BUT NOT LIMITED TO, ENVIRONMENTAL AND LAND USE LAWS AND REGULATIONS TO WHICH THE CONVEYED ASSETS ARE OR MAY BE SUBJECT AND PURCHASER IS PURCHASING THE CONVEYED ASSETS UPON THE BASIS OF ITS REVIEW AND DETERMINATION OF THE APPLICABILITY AND EFFECT OF SUCH LAWS AND REGULATIONS, AND THE REPRESENTATIONS AND WARRANTIES REGARDING SUCH MATTERS SET FORTH HEREIN, AND PROVIDED THAT ANY RIGHT OF PURCHASER HEREUNDER BASED UPON THE BREACH OF ANY SUCH REPRESENTATION OR WARRANTY, OR -33- 40 ANY COVENANT OF SELLER HEREIN, WILL NOT BE AFFECTED BY ANY SUCH INVESTIGATION OR KNOWLEDGE ACQUIRED (OR CAPABLE OF BEING ACQUIRED) BY PURCHASER AT ANY TIME, WHETHER BEFORE OR AFTER THE EXECUTION OF THIS AGREEMENT OR THE CLOSING DATE. Section 6.9. Brokers. Except as set forth on Schedule 6.9, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Purchaser. ARTICLE VII COVENANTS Section 7.1. Information and Documents; Access to Employees. (a) From and after the date hereof and pending the Closing, upon reasonable advance notice, Seller shall permit Purchaser and its representatives to have reasonable access, during regular business hours to the assets, employees (including for purposes of discussions relating to significant developments, transactions and proposals relating to the Business), books and records of Seller relating to the Business, and shall furnish, or cause to be furnished, to Purchaser, such financial, tax and operating data and other available information with respect to the Business as Purchaser shall from time to time reasonably request; provided, that no such access shall unreasonably interfere with Seller's operation of its business, including, without limitation, the Business; and Purchaser and its representatives shall not be permitted to perform any intrusive investigations (including, without limitation, soil, ground water, sediment, building material, surface water or air sampling) without Seller's consent, which may be withheld in its sole discretion; provided further, that all information received by Purchaser and given by or on behalf of Seller in connection with this Agreement and the transactions contemplated hereby will be held by Purchaser and its agents and representatives as Proprietary Information, as defined in, and pursuant to the terms of, the Confidentiality Agreement. (b) From and after the date hereof, each of Purchaser and Seller shall cooperate with the other in its defense or prosecution of any claim relating to a Retained Liability or an Assumed Liability, as the case may be, involving a third party, and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested in connection therewith. Such cooperation shall include, but not be limited to, making Employees available on a mutually convenient basis (at the reasonable cost and expense of the requesting party) in connection with the other party's compliance with the provisions of this Section 7.1(b). Section 7.2. Conduct of Business. From and after the date hereof and to the Closing, except as otherwise contemplated by this Agreement, for the actions set forth on Schedule 7.2, or as Purchaser shall otherwise consent in writing, which consent shall not be unreasonably withheld, Seller shall conduct the Business, and will cause the Business to be conducted, in the ordinary and usual course consistent with past practice, and use commercially reasonable efforts to preserve intact the Business and related relationships with customers, suppliers and other third parties. From and after the date hereof and to Closing, except as otherwise contemplated by this -34- 41 Agreement, for the actions set forth on Schedule 7.2, or as Purchaser shall otherwise consent in writing, which consent shall not be unreasonably withheld, or as may be necessary to remove or preserve the Excluded Assets, Seller covenants and agrees that it shall: (a) maintain insurance coverage at levels consistent with presently existing levels; (b) not incur, create or assume any Lien with respect to any Conveyed Asset other than Permitted Encumbrances; (c) not dispose of any of the Conveyed Assets except for (i) dispositions of Inventories in the ordinary course of business consistent with past practice and (ii) dispositions of assets (other than Inventories and the Patents listed on Schedules 2.1(e) and 2.3(q)) with an aggregate value not in excess of $100,000. (d) not enter into any new or otherwise amend any term of, or waive any right under, any existing Material Contract outside of the ordinary course of business consistent with past practice; (e) not acquire any Conveyed Asset or make any new commitment or increase any previous commitment to acquire any Conveyed Asset, except for (i) acquisitions of Inventories in the ordinary course of business consistent with past practice, (ii) capital expenditures for the Business with an aggregate value not in excess of $2,000,000 and (iii) other non-capitalized assets (other than Inventories) with an aggregate value not in excess of $100,000; (f) not increase compensation and benefits to Employees, except in the ordinary course of business consistent with past practice; (g) not settle any litigation or dispute relating to the Conveyed Assets, or any Assumed Liability or Employee for an amount in excess of $500,000; (h) collect the accounts receivable and pay the accounts payable of the Business in the ordinary course of business consistent with past practice; and (i) not agree to take any of the foregoing actions (except in subsections (a) and (h). Nothing in this Agreement shall diminish Seller's sole title to the Business or shall be construed to limit Seller's discretion to operate the Business in the ordinary course (subject to the limitations set forth above in this Section 7.2), or shall give Purchaser any ownership rights to the Conveyed Assets, before the Closing Date. Section 7.3. Reasonable Best Efforts; Certain Governmental Matters. (a) Upon the terms and subject to the conditions herein provided (including, without limitation, Section 2.2 hereof), each of the Parties hereto agrees to use commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary for it to do under applicable laws and regulations to consummate and -35- 42 make effective the transactions contemplated by this Agreement and to cause the satisfaction of the conditions set forth in Article IV, including the execution and delivery of any further instruments or documents which are reasonably requested by the other Party or its counsel in order to evidence or facilitate the consummation of the transactions contemplated hereby. (b) Seller shall cooperate with Purchaser in obtaining, at Purchaser's cost, (i) a good and valid, irrevocable ALTA title insurance commitment (the "Title Commitment"), in final form, from the Title Company, irrevocably committing the Title Company (subject only to the satisfaction of any industry standard requirements contained in the Title Commitment and reasonably acceptable to Purchaser) to issuing ALTA form of title insurance policies insuring good, valid, indefeasible fee simple title to the Owned Real Property in the amount requested by Purchaser and reasonably acceptable to Seller prior to Closing, subject to no other encumbrances or other exceptions to title other than the Permitted Encumbrances (except for the Mortgage to be Released). (c) Not later than five business days after the date hereof and pursuant to the applicable requirements of the HSR Act and the rules and regulations thereunder, the Parties shall cause to be filed with the Federal Trade Commission and the Antitrust Division of the Department of Justice all requisite documents and notifications in connection with the transactions contemplated by this Agreement. Each Party shall inform the other Party of any material communication such Party has with the Federal Trade Communication or the Antitrust Division of the Department of Justice. Each Party shall use its commercially reasonable best efforts to obtain an early termination of the applicable waiting period. Purchaser and Seller shall use their commercially reasonable best efforts to resolve diligently and expeditiously any objections that may be asserted by the Federal Trade Commission or the Antitrust Division of the Department of Justice with respect to the transactions contemplated by this Agreement and shall cooperate fully and in good faith in connection with overcoming any such objections and in expeditiously providing additional information or documentation pursuant to a request for additional information. Purchaser shall have no obligation to enter into any agreement or accept any order requiring it to divest any assets or business and shall have no obligation to contest any order, ruling or other action conditioning approval of the consummation of the transactions contemplated by this Agreement on such divestiture or any conditions affecting Purchaser's operation of its existing businesses or the Business after Closing. (d) The Parties shall cooperate with one another (i) in determining whether any other action by or in respect of, or filing with, any Governmental Authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any Material Contracts, in connection with the consummation of the transactions contemplated by this Agreement, and (ii) in taking such actions or making any such filings, in furnishing such information as may be required in connection therewith, and in seeking timely to obtain any such actions, consents, approvals or waivers. (e) Seller and Purchaser shall keep the other reasonably apprised of the status of matters relating to the completion of the transactions contemplated hereby and work cooperatively in connection with obtaining all required approvals or consents of any Governmental Authority. In that regard, each party shall without limitation (to the extent permitted by applicable law): (i) promptly notify the other of, and if in writing, furnish the other -36- 43 with copies of (or, in the case of material oral communications, advise the other orally of) any communications from or with any Governmental Authority with respect to the transactions contemplated by this Agreement, (ii) permit the other to review and discuss in advance, and consider in good faith the views of the other in connection with, any proposed written (or any material proposed oral) communication with any such Governmental Authority, (iii) not participate in any meeting with any such Governmental Authority unless it notifies and, to the extent reasonably practicable, consults with the other in advance and, to the extent permitted by such Governmental Authority, gives the other the opportunity to attend and participate thereat, (iv) furnish the other with copies of all material correspondence, filing and communications (and memoranda setting forth the substance thereof) between it and any such Governmental Authority with respect to this Agreement, and (v) furnish the other with such necessary information and reasonable assistance as Seller or Purchaser may reasonably request in connection with its preparation of necessary filings or submissions of information to any such Governmental Authority. Seller and Purchaser may, as each deems advisable and necessary, reasonably designate any competitively sensitive material provided to the other under this Section as "outside counsel only." Such materials and the information contained therein shall be given only to the outside legal counsel of the recipient and will not be disclosed by such outside counsel to employees, officers, or directors of the recipient unless express permission is obtained in advance from the source of the materials (Seller or Purchaser, as the case may be) or their or its legal counsel. (f) Seller shall comply with and file all necessary notices and filings under Title 72, Section 1403 of the Pennsylvania Statutes (72 P.S. 1403) in due course. Section 7.4. Employees and Employee Benefits. (a) Employees - Offer of Employment; Continued Employment; Severance. Purchaser shall offer employment as of 12:01 a.m. on the day immediately following the Closing Date to (i) each Employee at the Mountaintop Facility and (ii) those other Employees listed on Schedule 7.4(a)(1) (the "Non-Mountaintop Employees"), at the same or comparable position and at a rate of pay at least equal to the Employee's rate of pay in effect on the Closing Date and with benefits which shall be comparable to the employee benefits provided to Purchaser's similarly situated Employees as of the Closing Date, provided, however, that offers of employment to Inactive Employees shall, subject to Section 7.4(e), not be made until such time as such Employee returns to active status and provided, further, that as to those Non-Mountaintop Employees designated as "Conditional" on Schedule 7.4(a)(1), such offers shall be conditioned upon such Employee's agreement to relocate, at Purchaser's expense in accordance with Purchaser's relocation policy, to a Purchaser work location if requested by Purchaser. Seller shall use its commercially reasonable best efforts to assist Purchaser in hiring those Employees to whom Purchaser extends an offer of employment. For purposes of this Section 7.4, references to "pay" shall include base pay plus any commission, bonus or incentive pay, but exclude retention and retention/performance allowances. With respect to Affected Employees at the Mountaintop Facility only, such employment shall be at a location within a 25-mile radius of the Affected Employee's location of employment as of the Closing Date. Schedule 7.4(a)(2) (which shall be updated by Seller on the Closing Date) shall set forth the name of each Employee, and his or her current rate of pay, position and date of hire. Purchaser shall have no obligation whatsoever with regard to (i) former employees of the Business who are retired, or -37- 44 who are not or shall have ceased to be Employees as of the Closing Date, (ii) Employees who do not accept the offer of employment or continuation of employment given by Purchaser in accordance with this Section 7.4(a) or (iii) formerly active Employees of the Business who are on inactive status for any reason as of the Closing Date; except that Purchaser shall be obligated to offer employment to those inactive Employees referenced in (iii) if and when they cease inactive status in accordance with Section 7.4(f) below. Purchaser shall be solely responsible for all wages and other compensation (including bonuses, incentive payments and commissions) accruing after the Closing Date with respect to the Affected Employees, as well as compliance with all legal duties owed to such Employees or their statutory bargaining representatives following the Closing Date. Purchaser may, at its discretion but subject to any existing collective bargaining agreements, change the conditions of employment after the Closing Date except for (i) the location requirement described in this Section 7.4(a) and (ii) the pay and benefits comparability requirements described in this Section 7.4(a). To the extent allowed by law, each Employee hired by Purchaser in connection with this transaction shall be provided credit, under each Purchaser Plan (including any severance plan) for which such Employee is or becomes eligible, for all service with Seller and its Affiliates to the same extent as such service was credited for the same respective benefits purposes as of the Closing Date by Seller and its Affiliates, but nothing in this sentence shall entitle any such Employee to commence participation in any Purchaser Plan as of any date prior to the Closing Date or to have any contribution made on his or her behalf to any Purchaser Plan with respect to any service credited for any period prior to the Closing Date, or to duplicate any benefit provided under Seller's Benefit Plans. (b) Savings Plans. Effective as of 12:01 a.m. on the day immediately following the Closing Date, each participant in the Seller Savings Plans (as defined in Section 7.4(b)(i) below) who is hired by Purchaser immediately in connection with this transaction shall (i) cease to be an active participant under each such Seller Savings Plan and (ii) become fully vested in such Seller Savings Plans. Each such employee may become eligible to participate in Purchaser's 401(k) plan after the Closing Date in accordance with the terms of said plan, taking into account any pre-Closing service credited under Section 7.4(a) above. Seller shall deliver, or cause to be delivered, to Purchaser such records and data concerning participants in Seller Savings Plans as shall be reasonably satisfactory to Purchaser for purposes of administering its 401(k) plan with respect to Employees whom Purchaser employs after the Closing. (i) As soon as practicable after the Closing Date, Seller and Purchaser shall, if necessary, file IRS Form 5310-A for each of their respective tax qualified 401(k) plans, giving 30 days advance notice of a transfer of assets from the Intersil Corporation Retirement Plans (the "Seller Savings Plans") to the Purchaser Savings Plans which are 401(k) plans (the "Purchaser Savings Plans"). As soon as practicable after the 30-day periods from the dates of filing of the IRS Forms 5310-A have been completed, or if such filings are unnecessary, as soon as practicable, but in no event more than 180 days after Closing, Seller shall cause the Seller Savings Plans to transfer the account balances of all Affected Employees to the Purchaser Savings Plans. The assets of the account balances to be transferred shall consist of cash, including the proceeds of any necessary liquidation of shares held in the Harris Stock Fund under Seller Savings Plans, notes reflecting loans from Seller Savings Plans to the Affected Employees held in those accounts, and such other assets as the trustee(s) of Purchaser Savings Plans shall agree to accept. Purchaser, on the one hand, and Seller, on the other hand, each agree to use its -38- 45 reasonable efforts and to cooperate with the other to effect as promptly as possible the transfers of assets contemplated under this Section 7.4(b)(ii), subject to Seller's receipt of satisfactory evidence that the Purchaser Savings Plans are in compliance with all relevant Tax and labor Laws; such evidence shall include, but not be limited to, a current determination letter from the IRS, if available, and satisfactory representations from the administrators of the Purchaser Savings Plans concerning Tax qualifications under Section 401 of the Code. If a current determination letter has not been obtained, Purchaser shall provide an opinion of legal counsel that the Purchaser Savings Plans are reasonably believed to be qualified under Section 401(a) of the Code, together with a copy of the latest IRS determination letter (if such a letter was ever received), and a representation that a timely application for a determination letter will be filed or is pending and that Purchaser will take all reasonable steps necessary to secure a determination letter. Prior to any transfer of assets from the Seller Savings Plans to the Purchaser Savings Plans, Seller shall provide Purchaser with satisfactory evidence that the Seller Savings Plans are in compliance with all relevant Tax and Labor Laws; such evidence shall include, but not be limited to a current determination letter from the IRS and satisfactory representations from the administrators of the Seller Savings Plans concerning tax qualification of those Plans under Code Section 401(a). If a current determination letter is not available, then Seller shall provide an opinion of legal counsel that the Seller Savings Plans are reasonably believed to be tax-qualified under Section 401(a) of the Code, together with a copy of the latest IRS determination letter for each such Plan (if such a letter was ever received) and a representation that a timely application for a determination letter will be filed, or is pending, and that Seller will take all reasonable steps necessary to secure a determination letter. (ii) Seller will give Purchaser reasonable access to and at Purchaser's request a copy of the records of Seller necessary to administer the retirement benefits of Affected Employees transferred to the Purchaser Savings Plans. The Affected Employees initially shall be enrolled (automatically, if feasible) in the appropriate Purchaser Savings Plan at the same salary deferral contribution level in effect at the Closing Date for that participant under the Seller Savings Plans, subject to the Affected Employees' right to change that contribution level after his or her enrollment in the Purchaser Savings Plan according to the terms of that Plan. The Purchaser Savings Plans also shall honor (to the extent feasible) any beneficiary designations and other administrative elections in effect under the Seller Savings Plans for Affected Employees as of the Closing Date, but such elections shall be administered according to the terms of the Purchaser Savings Plans thereafter. Purchaser shall amend the Purchaser Savings Plans as needed to preserve any benefit rights from the Seller Savings Plans that must be protected in accordance with Code Section 411(d)(6) with respect to each Affected Employee' transferred account, and to vest the transferred accounts to the same respective extent they were vested under the Sellers Savings Plans. (c) Accrued Entitlements. Purchaser shall be responsible for all accrued entitlements to the extent and up to the amounts reflected on the Closing Balance Sheet, including, but not limited to, vacation days, for Affected Employees as of the Closing Date, consistent with Seller's policy in respect thereof. Seller shall give Purchaser reasonable access to and a copy of the records of Seller necessary to determine and administer the vacation and other accrued entitlements of Affected Employees as reflected on the Closing Balance Sheet. -39- 46 (d) Success Sharing and Leadership Incentive Plans. At or reasonably promptly after Closing, Seller shall pay to the Affected Employees any Success Sharing, Leadership Incentive or Deferred Profit Sharing payments due, but unpaid, to any such affected Employees with respect to the year 2000. In addition, Seller will also pay to those Affected Employees who would reasonably have expected to receive Success Sharing or Leadership Incentive Plan payments for 2001 a pro rata portion of those bonuses. That pro rata portion will be the portion of the reasonably expected bonuses, as calculated by Seller in accordance with its applicable plans, multiplied by a fraction, the numerator of which is the number of days beginning January 1, 2001 and ending on the Closing Date and the denominator of which is 365. Purchaser shall have no obligation to provide for the Affected Employees any benefits comparable to the Success Sharing, Leadership Incentive or Deferred Profit Sharing benefits maintained by Seller. However, to the extent any Affected Employees would be eligible, by virtue of job position, salary level or other plan eligibility criteria, to participate in any similar type of incentive plan currently maintained by Purchaser, after pre-Closing service is credited under Section 7.4(a), then such Affected Employees' participation in such Purchaser's incentive or similar plan shall not be precluded due to the Employee's job location or prior affiliation with Seller; provided, however, that to avoid duplication no benefit shall be paid to such Affected Employees under any such Purchaser Plan based on any part of year 2001 for which the Employee received a benefit from Seller in accordance with this Section 7.4(d). (e) Medical and Welfare Plan Obligations. (i) Any Employees of Seller or its Affiliates who are hired by Purchaser immediately after the Closing, shall become eligible for such medical and welfare benefit plans as Purchaser then maintains in accordance with the terms of each such respective plan, taking into account for eligibility purposes any pre-Closing service credited to such employees under Section 7.4(a) above. Purchaser shall have no obligation to provide welfare benefit coverage for any Employees of Seller or its Affiliates other than as provided in this Section 7.4(e) and shall not assume any liabilities arising under or with respect to any medical or other welfare benefit plans maintained by Seller or its Affiliates and attributable to matters arising before or existing at Closing or arising in connection with this transaction. Seller shall deliver, or cause to be delivered, to Purchaser such records and data concerning participants in Seller's medical and other welfare benefits plans as shall be reasonably satisfactory to Purchaser for purposes of administering its medical and welfare benefits plans with respect to Employees whom Purchaser employs after the Closing. (i) Purchaser shall use reasonable efforts to contract with the two existing HMO's that cover Affected Employees at the Mountaintop Facility to provide uninterrupted medical coverage (as a new coverage option under Purchaser's group medical plan) to those Affected Employees immediately after the Closing Date on substantially the same terms and conditions as coverage had been provided as of the Closing Date. Affected Employees for whom such uninterrupted HMO coverage is arranged shall continue such coverage after the Closing Date, without the need to re-enroll (if feasible), subject to any future change of enrollment rights under Purchaser's group medical plan. Any Affected Employees who are not covered by either of those two HMOs as of the Closing Date shall be eligible to enroll in any applicable coverage options available under Purchaser's group medical plan, subject to the terms of such coverage options. Coverage under Purchaser's existing CIGNA group medical insurance policy shall be the automatic default coverage option for any Affected Employees who are not eligible for continuing uninterrupted coverage immediately after the Closing Date under one of -40- 47 Seller's two HMOs referenced above, subject to such Employee having sufficient eligibility service after crediting pre-Closing service under Section 7.4(a). Affected Employees shall be credited under Purchaser's group medical plan for the year 2001 with any deductibles and co-payments they have made and satisfied under Seller's group medical plan as of the Closing Date. Dental coverage for Affected Employees shall be handled the same as group medical coverage under this Section 7.4(e). (ii) Purchaser shall not assume or have any liability or responsibility for providing or funding health coverage for any individual who retired from employment with Seller on or prior to the Closing Date. (f) Inactive Employees - Offer of Employment; Continued Employment; Severance. When an Inactive Employee seeks to return to active employment within any deadline imposed by Seller, Purchaser or applicable Law, Purchaser shall offer immediate employment to such Employee in the same or a comparable position to that which the Employee occupied before such absence but only at such time that the Employee is capable of performing the essential functions of the position occupied immediately before such absence. In addition, immediate employment in the same (or, where permissible under the statute to which leave was taken, comparable) positions will be offered to those Employees returning from authorized leaves of absence such as parental, family and medical, and military leaves or other leaves where return to work is subject to statutory requirements. Such Employees shall be deemed Affected Employees upon their commencement of employment with Purchaser and, from the date of their employment with Purchaser, will be subject to the same pay, benefits, severance and all other policies, plans, programs and arrangements as stipulated in this Section 7.4 for similarly situated Employees. Purchaser shall have no obligation or liability to provide any pay, work or benefits for any such Inactive Employees with respect to any period prior to the time such Inactive Employee actually commences employment with Purchaser under this Section 7.4(f). (g) Inactive Employees on Short Term Disability. Any Inactive Employee, as described in Section 7.4(f) above, who is on short term disability leave on the Closing Date, and who subsequently, without having again become capable of performing the essential functions of the position held by such employee immediately prior to such leave, so as to be entitled to an offer of employment from Purchaser under Section 7.4(f), qualifies for long term disability benefits in accordance with the applicable terms of Seller's Long Term Disability Benefit Plan ("Seller LTD Plan") shall be entitled to such benefits under, and in accordance with the terms of, the Seller LTD Plan. (h) Stock Purchase Plan. Contributions by Affected Employees to Seller's Employee Stock Purchase Plan shall be frozen as of the Closing Date. Any such contributions not applied, as of the Closing Date, to the purchase of Seller stock under that Plan will be so applied at the end of the Plan's purchase period that includes the Closing Date and, as soon as practicable thereafter, in accordance with the terms of Seller's Employee Stock Purchase Plan, all shares of Seller stock so purchased, and any remaining contributions by the Affected Employees, will be distributed to those Affected Employees. Purchaser shall have no obligation to offer or maintain any stock purchase plan for any Affected Employees after the Closing Date. -41- 48 (i) Employee Loans. Effective upon Closing, Seller will forgive those unpaid loans, made to Affected Employees in 1988, in the amount of one 1988 week's pay. With respect to the amount of the forgiven loan, Seller will effect any legally required tax withholding and either (1) Seller will include the amount of the forgiven loan in the final Form W-2 (and any equivalent state or local reports) issued to such Affected Employees by Seller, or (2) if the parties elect the application of the Alternate Procedure set forth in Rev. Proc. 96-60, 1996-2 C.B. 399, Purchaser will include such amount in all such required reports. (j) Assumption of Labor Contracts. Purchaser shall, as of the Closing Date, assume, be solely responsible for, and hold Seller harmless (pursuant to Section 8.2 hereof) from, all liabilities arising under the collective bargaining agreements listed on Schedule 7.4(j) hereto; provided, however, that it is acknowledged and understood that subject to the results of any negotiations or collective bargaining with applicable bargaining representatives over changes in benefits for bargaining unit members in connection with the assumption by Purchaser of the aforesaid collective bargaining agreements, Purchaser shall make all reasonable efforts to provide, immediately following the Closing, comparable employee benefits for bargaining unit members hired by Purchaser. Purchaser shall execute such agreements with the labor organizations listed as signatories to such agreements listed on Schedule 7.4(j) to effect the assumption of such labor agreements pursuant to the National Labor Relations Act and in accordance with this Section 7.4(h). Purchaser shall recognize and bargain with such labor organizations as required by the National Labor Relations Act and/or any other applicable law. (k) No Third Party Beneficiaries. Nothing contained herein, expressed or implied, is intended to confer upon any Employee of Seller any benefits under any benefit plans, programs, policies or other arrangements, including, but not limited to, severance benefits or right to employment or continued employment with Purchaser for any period by reason of this Agreement. In addition, the provisions of this Agreement, in particular this Section 7.4, are for the sole benefit of the Parties to this Agreement and are not for the benefit of any third party. Section 7.5. Bulk Transfer Laws. Purchaser acknowledges that Seller has not taken, and does not intend to take, any action required to comply with any applicable bulk sale or bulk transfer laws or similar laws. Section 7.6. Compliance with WARN, Etc. Purchaser shall be solely responsible for compliance with any notice obligations under the Worker Adjustment and Retraining Notification Act ("WARN Act"), 29 U.S.C. Section 2101 et seq. (and all state and local analogues of said Act) arising from its failure to hire and retain any of the Employees that it is required to hire pursuant to Section 7.4 hereof; and Purchaser shall indemnify and hold Seller harmless, pursuant to Section 8.2 hereof, for any claims arising from its failure to hire any of the Employees that Purchaser is obligated to hire hereunder or arising from any action resulting in employment loss of any such Employees after the Closing Date. Seller shall be solely responsible for compliance with any notice obligations under the WARN Act (and all state and local analogues of said Act) arising from any action resulting in employment loss of any Employees prior to or on the Closing Date; and Seller shall indemnify and hold Purchaser harmless, pursuant to Section 8.2 hereof, for any claims arising from any action resulting in employment loss of any Employees prior to or on the Closing Date or arising from any action resulting in employment loss prior to or on the Closing Date of any Employee that Purchaser is not required to hire hereunder. -42- 49 Section 7.7. Insurance. As of the Closing Date, the coverage under all insurance policies related to the Business shall continue in force only for the benefit of Seller and its Affiliates and not for the benefit of Purchaser. Purchaser agrees to arrange for its own insurance policies with respect to the Business covering all periods and agrees not to seek, through any means, to benefit from any of Seller's or its Affiliates' insurance policies which may provide coverage for claims relating in any way to the Business on or prior to the Closing Date. Section 7.8. Names and Logo. Except as provided in the IP Agreement, as soon as reasonably practicable after the Closing Date, Purchaser shall, or shall cause its Subsidiaries to, revise product literature, change signage and stationery, and discontinue the use of any name or logo set forth in Section 2.3(h). Section 7.9. Covenant Not to Compete; Confidentiality. (a) Seller agrees that, during the four year period immediately following the Closing, Seller and its Subsidiaries shall not, directly or indirectly, engage in, or have any financial or other interest in, or manage or operate, or provide or arrange any financing for any Person or business (whether as director, officer, employee, agent, representative, security holder, equity owner, partner, member, consultant or otherwise) involving or engaged in any firm, corporation, partnership, proprietorship or other business entity that engages in the business of manufacturing, selling or distributing Discrete Devices as being conducted by Seller on the date hereof (a "Competing Business"); provided, however, that it shall not be a violation of this Section 7.9 for Seller or any of its Affiliates (i) to own, directly or indirectly, solely as an investment, securities of any Person that are traded on a national securities exchange or the Nasdaq Stock Market (or a recognized securities exchange outside the United States) if Seller or any of its Affiliates (x) is not a controlling Person or a member of a group that controls such Person and (y) does not, directly or indirectly, own more than 7.5% or more of the voting securities of such Person, (ii) to directly or indirectly acquire any Person, provided that not more than 25% of the revenues of such acquired Person for the twelve months preceding the acquisition were derived from the Competing Business and provided that Seller disposes of such Competing Business within eighteen months after the closing date of such acquisition, (iii) to continue operating existing lines of business, other than the Business, or any of the Excluded Assets or (iv) any business permitted to be engaged in by Seller pursuant to the terms of the IP Agreement. (b) Seller acknowledges and agrees that, to the extent the Conveyed Assets include information concerning the Business which had been previously delivered by Seller to Purchaser prior to the Closing ("Confidential Information"), such Confidential Information effective at the Closing will be acquired by Purchaser and will become the property of Purchaser. Effective upon the Closing, at no time from the Closing Date to the tenth anniversary thereof shall Seller or any Affiliate of Seller disclose any Confidential Information to any person or entity for any reason or purpose whatsoever other than to Purchaser, nor shall any Seller or any Affiliate of Seller make use of any Confidential Information for its own benefit or for the benefit of any other Person or entity unless the prior written consent to such disclosure or use is obtained from Purchaser. The foregoing restriction shall not apply to any disclosure of Confidential Information at any time after the Closing to the extent that (i) such Confidential Information subsequently becomes publicly available without breach of any obligation of -43- 50 confidentiality; (ii) such Confidential Information becomes available to Seller or its Affiliates on a non-confidential basis from a third party that is, to the Knowledge of Seller or its Affiliates, not bound by a confidentiality agreement with or subject to any obligation or duty of confidentiality; (iii) disclosure of Confidential Information is required to Harris Corporation, a governmental authority or any other party in connection with a claim for environmental indemnification by Purchaser, including any claim for environmental indemnification made by Seller against Harris Corporation under the Harris Agreement; or (iv) such disclosure is required by applicable law or any rule, regulation or order of any Governmental Authority, provided that Seller or its Affiliates shall provide Purchaser with prompt notice of any such order prior to disclosure so that appropriate protective orders may be sought. Section 7.10. Further Assurances. At any time after the date hereof, Seller and Purchaser shall promptly execute, acknowledge and deliver any other assurances or documents reasonably requested by Seller or Purchaser, as the case may be, and necessary for Seller or Purchaser, as the case may be, to satisfy its obligations hereunder. Section 7.11. Books and Records. Seller and Purchaser agree that from and after the Closing, each Party shall make available to the other Party (at such other Party's expense), during normal business hours and upon reasonable notice, and subject to any applicable privileges, the Party's respective books and records, but only to the extent that such books and records pertain to (a) any Taxes owed to a taxing authority or information necessary to complete a Tax Return; (b) compliance with reporting, filing or other requirements related to the conduct of the business imposed on such Party by the Government Authority or taxing authority; or (c) the assertion or defense of any claims or allegations in any arbitration or in any administrative or legal proceeding related to the conduct of the Business other than claims or allegations which one Party to the Agreement has asserted against the other. Section 7.12. Accounts Receivable and Accounts Payable. After the Closing Date, Seller shall collect the Accounts Receivable and shall pay its trade payables relating to the Business (to the extent not included in the Assumed Liabilities) in the ordinary course of business consistent with past practice. Section 7.13. Supply Agreement. Purchaser and Intersil shall negotiate in good faith the terms of a supply agreement pursuant to which Purchaser will supply to Intersil after the Closing MOSFET die. Such supply agreement shall be in substantially the form of the Supply Agreement to the extent applicable. Section 7.14. Cooperation and Exchange of Information. Seller and Purchaser will provide each other with such cooperation and information as either of them may reasonably request of the other in preparing and filing any Tax Return, amended Tax Return or claim for refund, determining or contesting a liability for Taxes or a right to a refund of Taxes, or participating in or conducting any audit or other proceeding in respect of Taxes. Seller and Purchaser shall make their respective officers, employees, agents and representatives available on a basis mutually convenient to Purchaser and Seller to provide explanations of any documents or information provided hereunder. Seller and Purchaser shall retain all Tax Returns, schedules and work papers, records and other documents in its possession relating to Tax matters with regard to the Conveyed Assets for each taxable period first ending after the Closing Date and for -44- 51 all prior taxable periods until the later of (i) the expiration of the statute of limitations of the taxable periods to which such Tax Returns and other documents relate, without regard to extensions except to the extent notified by the other party in writing of such extensions for the respective Tax periods, or (ii) six years following the due date (without extension) for such Tax Returns. Section 7.15. Conveyance Taxes. Purchaser and Seller shall be responsible and liable for and shall indemnify and hold the other harmless against one-half of any realty transfer, sales, use, transfer, value added and other similar Taxes, and any transfer, recording, registration and other fees which become payable in connection with or by reason of the transactions contemplated by this Agreement ("Conveyance Taxes"). Purchaser, after reasonable review and consent by Seller, shall file such applications and documents as shall permit any such Tax to be assessed and paid on or prior to the Closing Date in accordance with any available pre-sale filing procedure. Seller shall execute and deliver all instruments and certificates reasonably necessary to enable Purchaser to comply with the foregoing. Purchaser shall timely complete and execute any available resale or other exemption certificates with respect to the inventory or other items sold hereunder, and shall provide Seller with executed copies thereof. Notwithstanding the foregoing, (a) Seller shall not be responsible for more than $250,000 of Pennsylvania state and local realty transfer tax imposed in connection with the transfer of the Real Property to Purchaser (as well as any interest and/or penalties relating thereto) and if the Pennsylvania state and local realty transfer tax (and interest and/or penalties, if any) exceeds $500,000, Purchaser shall pay 100 percent of such excess and (b) to the extent that Purchaser is entitled to receive a credit of or a refund of any of the foregoing Conveyance Taxes upon Purchaser's disposition of the property upon which such tax was imposed, Purchaser shall pay 100 percent of any such tax. No tax for which Seller may be liable hereunder shall be paid without first obtaining Seller's consent, which consent shall not be unreasonably withheld. Notwithstanding anything to the contrary set forth herein, Seller will not be liable for any state sales or use tax if Purchaser could have supplied an appropriate exemption form thereto. Purchaser and Seller shall agree prior to the Closing Date as to any amount (or reasonable estimate thereof) for which Purchaser is and is not entitled to receive a credit or refund, such agreement not to be unreasonably withheld. Additionally, where appropriate and required to minimize or eliminate any Conveyance Tax, the Parties shall provide to each other certificates or other documents such as sale for resale certificates. Section 7.16. Mountaintop Lease. Seller and Purchaser covenant and agree that prior to the Closing, the Commercial Lease from Intersil (PA), LLC (successor by merger to Harris Semiconductor (PA), Inc.) to Intersil, Inc. (as assignee of Harris Corporation acting through its semiconductor sector) dated as of April 7, 1998, as heretofore amended (as so amended, the "Mountaintop Lease") shall be either (i) terminated, or (ii) amended to provide that the rents due thereunder during any renewal term thereof would be at current fair market rents determined at the time such renewal/extension option is exercised. -45- 52 ARTICLE VIII SURVIVAL AND INDEMNIFICATION Section 8.1. Survival; Knowledge of Breach. (a) (i) The representations and warranties contained in this Agreement, other than those contained in Section 5.9 (Environmental), Section 5.11 (Intellectual Property), the first sentence of Section 5.13 (Assets), Section 5.16 (Taxes), Section 5.19 and Section 6.9 (Brokers) (such representations and warranties hereinafter referred to as the "Special Representations"), shall survive the Closing until the date that is eighteen (18) months after the Closing Date; (ii) the representations and warranties contained in Section 5.11 (Intellectual Property) shall survive the Closing until the date which is three (3) years after the Closing Date; (iii) the representations and warranties contained in Section 5.16 (Taxes) shall survive until 60 days following the expiration of the applicable statute of limitations; (iv) the representations and warranties contained in the first sentence of Section 5.13 (Assets), and Sections 5.19 and 6.9 (Brokers) shall survive the Closing indefinitely; (v) the representations and warranties contained in Section 5.9 (Environmental Matters) shall survive the Closing until the date which is five (5) years after the Closing Date; and (vi) the covenants contained in this Agreement shall survive the Closing indefinitely except the covenant set forth in Section 7.2 (Conduct of Business) which shall survive the Closing until the date that is eighteen (18) months after the Closing Date. (b) The right to indemnification, payment of damages or other remedy based on the representations, warranties, covenants and obligations in this Agreement will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy or compliance with, any such representation, warranty, covenant or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of damages or other remedy based on such representation, warranties, covenants or obligations. Section 8.2. Indemnification. (a) From and after the Closing Date and subject to Sections 8.1 and 8.4, Seller agrees to indemnify, defend and hold harmless Purchaser and its Affiliates, officers, directors, employees, representatives, agents and stockholders (collectively, "Buyer Indemnitees") against and in respect of any and all Environmental Losses resulting or arising from or relating to any Pre-Closing Environmental Liabilities or the failure to have obtained any authorization, consent, order, approval, or notification required under Environmental Laws prior to the Closing. In addition, Seller agrees to indemnify, defend and hold harmless the Buyer Indemnities against and in respect of any and all losses, claims, damages, liabilities, reasonable costs and expenses, including reasonable legal fees and expenses, but excluding any amount that was included in the Closing Date Liabilities as finally determined pursuant to Section 2.6 ("Losses"), resulting or arising from or otherwise relating to (i) any breaches of Seller's representations and warranties set forth in this Agreement, or in the certificates contemplated by Section 4.2(c), (ii) any nonfulfillment of or failure to comply with any covenant set forth in this Agreement by Seller or (iii) any Retained Liability. -46- 53 (b) From and after the Closing Date and subject to Sections 8.1 and 8.4, Purchaser shall indemnify, defend and hold harmless Seller and Seller's respective Affiliates, officers, directors, employees, representatives, agents and stockholders against and in respect of any and all Losses resulting or arising from or otherwise relating to (i) any breaches of Purchaser's representations and warranties set forth in this Agreement, or in the certificate contemplated by Section 4.3(c), (ii) any nonfulfillment of or failure to comply with any covenant set forth in this Agreement by Purchaser, (iii) the operation of the Business or the Conveyed Assets or actions relating thereto taken by or on behalf of Purchaser after the Closing, or (iv) any Assumed Liability. (c) Any payments pursuant to this Article VIII shall be treated as an adjustment to the Purchase Price. Section 8.3. Method of Asserting Claims, etc. All claims for indemnification by any Indemnified Party hereunder shall be asserted and resolved as set forth in this Section 8.3. (a) In the event that an Indemnified Party obtains knowledge of any claim as to which recovery may be sought against Indemnifying Party pursuant to the indemnity provided for in Section 8.2, or of the commencement of any legal proceedings against an Indemnified Party by any third party as to which such recovery may be sought under Section 8.2, the Indemnified Party shall promptly, but in no event later than 15 days after obtaining such knowledge, give notice to the Indemnifying Party of such claim or proceedings, including the amount or the estimated amount thereof to the extent then feasible (which estimate shall not be conclusive of the final amount of such claim and demand) (the "Claim Notice"). Failure to give the Claim Notice in accordance with the foregoing terms shall relieve Indemnifying Party of any liability hereunder only to the extent that Indemnifying Party has suffered actual prejudice thereby. The Indemnifying Party shall have 30 days from the personal delivery or mailing of the Claim Notice (the "Notice Period") to notify the Indemnified Party whether or not it desires to defend (or permit any of its predecessors (a "Permitted Designee") to defend) the Indemnified Party against such claim or demand. Failure by the Indemnifying Party to notify the Indemnified Party of its election to defend the Indemnified Party within the Notice Period shall be deemed a waiver by Indemnifying Party of its right to defend such action. An election to assume the defense of such claim or demand shall be deemed to be an admission that the claim or demand relating thereto is within the scope of indemnification hereunder. The Indemnified Party shall permit the Indemnifying Party to assume the defense of any such claim or proceedings or litigation resulting therefrom only so long as (i) the Indemnifying Party is represented by counsel reasonably satisfactory to the Indemnified Party and (ii) such claim is solely for monetary damages (except with respect to Remedial Actions, as set forth below). All costs and expenses incurred by the Indemnifying Party in defending such claim or demand shall be a liability of, and shall be paid by, the Indemnifying Party; provided, however, that the amount of such expenses shall be a liability of the Indemnifying Party hereunder, subject to the limitations set forth in this Article VIII. In the event that the Indemnifying Party notifies the Indemnified Party within the Notice Period that it desires to defend or permit a Permitted Designee to defend or conduct Remedial Action for, as the case may be, the Indemnified Party against such claim or demand, except as hereinafter provided, the Indemnifying Party shall have the right to defend the Indemnified Party by appropriate proceedings. If Indemnifying Party undertakes a Remedial Action at the Site, such actions shall be taken in a manner which minimizes any adverse impact -47- 54 to the operations of Purchaser's business at the Site. If any Indemnified Party desires to participate in any such defense or settlement for which the Indemnifying Party has elected, pursuant to the prior sentence to defend, or permit its Permitted Designee to defend or conduct Remedial Action for, as the case may be, the Indemnified Party may do so at its sole cost and expense. The Indemnified Party shall not settle a claim or demand without the consent of the Indemnifying Party, which shall not be unreasonably withheld. The Indemnifying Party shall not, without the prior written consent of the Indemnified Party, which shall not be unreasonably withheld, settle, compromise or offer to settle or compromise any such claim or demand on a basis which would result in the imposition of a consent order, injunction or decree that would restrict the future activity or conduct of the Indemnified Party or any Subsidiary or Affiliate thereof. If the Indemnifying Party elects not to defend the Indemnified Party against a claim or demand for which the Indemnifying Party has an indemnification obligation hereunder, whether by not giving the Indemnified Party timely notice as provided above or otherwise, then the amount of any such claim or demand, or, if the same shall be contested by the Indemnified Party, then that portion thereof as to which such contest is unsuccessful (and the reasonable costs and expenses pertaining to such contest) shall be the liability of the Indemnifying Party hereunder, subject to the limitations set forth in this Article VIII. To the extent the Indemnifying Party shall control or participate in the defense or settlement of any third party claim or demand, the Indemnified Party will give the Indemnifying Party, its counsel and any Permitted Designee (with respect to any liability for which the Indemnifying Party may have an indemnity claim pursuant to any agreement it had made with such Permitted Designee as in effect as of the date hereof), access to, during normal business hours, the property and relevant business records and other documents, and shall permit them to consult with the employees and counsel of the Indemnified Party. The Indemnified Party shall use its best efforts in the defense of all such claims. Any notice of a claim by reason of any of the representations, warranties or covenants contained in this Agreement shall state specifically the representation, warranty, or covenant with respect to which the claim is made, the facts giving rise to an alleged basis for the claim, and the amount of the liability asserted against the Indemnifying Party by reason of the claim. (b) With respect to any Loss for which any Indemnified Party is indemnified under Section 8.2 of this Agreement, the resolution of which involves Remedial Action, the Indemnifying Party shall have the right, upon timely written notice, to conduct or control the Remedial Action, or permit their Permitted Designee to conduct or control such Remedial Action (if the Indemnifying Party is required to permit such Permitted Designee to assume and control such Remedial Action pursuant to any agreement it has made with such Permitted Designee as in effect as of the date hereof), and any such Remedial Action shall only be required to meet the "Minimum Cleanup Standard." For purposes of this Agreement, the "Minimum Cleanup Standard" shall mean the least stringent standard acceptable under applicable Environmental Laws. Seller shall not be responsible for Losses with respect to Pre-Closing Environmental Liabilities as a result of the aggravation or exacerbation of any Pre-Closing Environmental Liability resulting from any negligence of the Purchaser, any agent or invitee after the Closing Date. It is intended that the scope of the indemnity for Pre-Closing Environmental Liabilities with respect to the time period prior to the Seller's acquisition of the Business from Harris Corporation shall be no greater than the indemnity given by Harris Corporation to Seller in the Harris Agreement; provided however that any failure of Harris to pay or failure of Harris to agree to their responsibility with respect to a claim between Seller and Harris shall not be dispositive of any claim under this Agreement. Notwithstanding any other -48- 55 provision of this Section 8.3(b) or of the Agreement, and notwithstanding any response which Harris may give Seller regarding Seller's claims against Harris under the Harris Agreement, it is understood that Purchaser shall be entitled under Section 8.2 of the Agreement to indemnification from Seller for any and all costs to negotiate or to document with a Governmental Authority a response to the requirements of any Governmental Authority to address, or to obtain, install or modify, but not operate, any equipment needed to comply with the requirements of any Governmental Authority to address: (1) wastewater discharges having pH of less than 5.0 as described in a December 1, 2000 letter from the United States Environmental Protection Agency to Seller; (2) treatment in the wastewater treatment plant of fluoride in the wastewater; or (3) treatment of suspended solids in wastewater as described in a December 5, 2000 letter from the Mountaintop Area Joint Sanitary Authority to Seller. Section 8.4. Indemnification Amounts. No Indemnifying Party shall have liability under Sections 8.2(a)(i) or 8.2(b)(i) until the aggregate amount of Losses to an Indemnified Party exceeds $2,625,000 (the "Basket Amount"), in which case the Indemnified Party shall be entitled to Losses in an amount up to 25% of the Purchase Price (the "Cap") in the aggregate; provided, however, that the Indemnifying Party shall be liable only for the amount by which all Losses exceed the Basket Amount and provided, further that the Cap shall be unlimited in respect of all claims for indemnification hereunder other than those under Section 8.2(a)(i) or 8.2(b)(i). Notwithstanding the foregoing, the Basket Amount shall be zero ($0) and the Cap shall equal the Purchase Price with respect to an Indemnifying Party's obligations to indemnify an Indemnified Party under Sections 8.2(a)(i) and 8.2(b)(i) solely with respect to the Special Representations made by the Indemnifying Party. Section 8.5. Losses Net of Insurance, Etc. The amount of any Losses or Environmental Losses for which indemnification is provided under this Agreement shall be net of any amounts actually recovered by the Indemnified Party from third parties (including amounts actually recovered under insurance policies, but only to the extent any recovered insurance proceeds exceed costs of collecting such proceeds and premium increases, whether retrospective or prospective, that are certified by the underwriter to result from the claim for such proceeds) with respect to such Losses. Any Indemnifying Party hereunder shall be subrogated to the rights of the Indemnified Party upon payment in full of the amount of the relevant indemnifiable loss. An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto or, solely by virtue of the indemnification provision hereof, have any subrogation rights with respect thereto. If any Indemnified Party recovers an amount from a third-party in respect of an indemnifiable loss for which indemnification is provided in this Agreement after the full amount of such indemnifiable loss has been paid by an Indemnifying Party or after an Indemnifying Party has made a partial payment of such indemnifiable loss and the amount received from the third-party exceeds the remaining unpaid balance of such indemnifiable loss, then the Indemnified Party shall promptly remit to the Indemnifying Party the excess of (A) the sum of the amount theretofore paid by such Indemnifying Party in respect of such indemnifiable loss plus the amount received from the third-party in respect thereof, less (B) the full amount of such Losses. Section 8.6. Sole Remedy/Waiver. The Parties hereto acknowledge and agree that the remedies provided for in this Agreement shall be the Parties' sole and exclusive remedy with respect to the subject matter of this Agreement. -49- 56 Section 8.7. No Punitive Damages. Notwithstanding anything to the contrary contained herein, no Indemnifying Party shall be liable to or otherwise responsible to any Indemnified Party for punitive damages that arise out of or relate to this Agreement or the performance or breach thereof or any liability retained or assumed hereunder. Section 8.8. Scope of Damages. The Indemnified Party shall use its reasonable business judgment in minimizing any Loss upon becoming aware of any event that would reasonably be expected to, or does, give rise thereto. Section 8.9. No Set-Off. Neither Seller nor Purchaser shall have any right to set-off any Losses against any payments to be made by either of them pursuant to this Agreement or otherwise. ARTICLE IX TERMINATION Section 9.1. Termination. This Agreement may be terminated at any time prior to the Closing: (a) by written agreement of Seller and Purchaser; (b) by either Seller or Purchaser, by giving written notice of such termination to the other Party, if the Closing shall not have occurred on or prior to March 21, 2001 (the "Drop Dead Date") (unless the failure to consummate the Closing by such date shall be due to the failure of the Party seeking to terminate this Agreement to have fulfilled any of its obligations under this Agreement); provided, however, if any consent required from a Governmental Authority has not been obtained on or prior to the Drop Dead Date, the Drop Dead Date shall be automatically extended to the third Business Day after all such consents have been obtained but in no event shall the Drop Dead Date be extended beyond July 19, 2001; (c) by either Seller or Purchaser if any court of competent jurisdiction or other competent Governmental Authority shall have issued a statute, rule, regulation, order, decree or injunction or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such statute, rule, regulation, order, decree or injunction or other action shall have become final and nonappealable; and (d) by the non-breaching Party, by giving written notice of such termination to the other Party, if there has been a material breach by such other Party of any representation, warranty, covenant or agreement in this Agreement and such breach is not cured by the earlier of the Closing Date and fifteen Business Days after the breaching Party's receipt of written notice of such breach. Section 9.2. Effect of Termination. In the event of the termination of this Agreement in accordance with Section 9.1 hereof, this Agreement shall thereafter become void and have no effect, and no Party hereto shall have any liability to the other Party hereto or their respective Affiliates, directors, officers or employees, except for the obligations of the Parties hereto contained in this Section 9.2 and in Sections 10.7, 10.8, 10.9 and 10.11 hereof, and except that nothing herein will relieve any Party from liability for any breach of any covenant set forth in -50- 57 this Agreement prior to such termination, including liability for attorneys' fees reasonably incurred by the terminating Party in connection with the transactions contemplated hereby. ARTICLE X MISCELLANEOUS Section 10.1. Notices. All notices or other communications hereunder shall be deemed to have been duly given and made if in writing and if served by personal delivery upon the Party for whom it is intended, if delivered by registered or certified mail, return receipt requested, or by a national courier service, or if sent by fax, provided that the fax is promptly confirmed by telephone confirmation thereof, to the person at the address set forth below, or such other address as may be designated in writing hereafter, in the same manner, by such person: To Seller: Intersil Corporation 7585 Irvine Center Drive Suite 100 Irvine, CA 92618 Phone: 949.341.7062 (Williams) 949.341.7040 (Moran) Fax: 949.341.7053 Attn: Gregory L. Williams Stephen M. Moran, Esq. with a copy to: Dechert 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103 Phone: 215.994.2762 Fax: 215.994.2222 Attn: G. Daniel O'Donnell, Esq. To Purchaser: Fairchild Semiconductor Corporation 82 Running Hill Road South Portland, ME 04106 Phone: 207.775.8100 Fax: 207.761.6020 Attn: General Counsel -51- 58 with a copy to: Reed Smith LLP 2500 One Liberty Place 1650 Market Street Philadelphia, PA 19103-7301 Phone: 215.851.8136 Fax: 215.851.1420 Attn: Lori L. Lasher, Esq. Section 10.2. Amendment; Waiver. Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by Seller and Purchaser, or in the case of a waiver, by the Party against whom the waiver is to be effective. No failure or delay by any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. Section 10.3. Assignment. No Party to this Agreement may assign any of its rights or obligations under this Agreement including by sale of stock, operation of law in connection with a merger or sale of substantially all the assets of such Party, without the prior written consent of the other Party hereto. Any attempted assignment in contravention hereof shall be null and void. Notwithstanding the foregoing, Purchaser may assign this Agreement in whole or in part to a Subsidiary, so long as Purchaser agrees to remain directly liable to Seller for all of Purchaser's obligations hereunder. Section 10.4. Entire Agreement. This Agreement (including all Schedules and Exhibits hereto) and the Confidentiality Agreement contain the entire agreement between the Parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters other than any written agreement of the Parties that expressly provides that it is not superseded by this Agreement. Section 10.5. Fulfillment of Obligations. Any obligation of any Party to any other Party under this Agreement, which obligation is performed, satisfied or fulfilled by an Affiliate of such Party, shall be deemed to have been performed, satisfied or fulfilled by such Party. Section 10.6. Parties in Interest. This Agreement shall inure to the benefit of and be binding upon the Parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer upon any Person other than Seller, Purchaser, or their successors or permitted assigns, any rights or remedies under or by reason of this Agreement. Section 10.7. Public Disclosure. Notwithstanding anything herein to the contrary, each of the Parties to this Agreement hereby agrees with the other Party hereto that, except as may be required to comply with the requirements of any applicable Laws, and the rules and regulations of each stock exchange upon which the securities of one of the Parties is listed, if any, no press release or similar public announcement or communication shall, if prior to the Closing, be made -52- 59 or caused to be made concerning the execution or performance of this Agreement unless the Parties shall have consulted in advance with respect thereto. Section 10.8. Return of Information. If for any reason whatsoever the transactions contemplated by this Agreement are not consummated, Purchaser shall promptly return to Seller all books and records furnished by Seller, any of its Affiliates or any of their respective agents, employees, or representatives (including all copies, summaries and abstracts, if any, thereof) in accordance with the terms of the Confidentiality Agreement. Section 10.9. Expenses. Except as otherwise expressly provided in this Agreement, whether or not the transactions contemplated by this Agreement are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the Party incurring such expenses. Notwithstanding the foregoing, (i) all Taxes relating to the transfer of the Conveyed Assets shall be paid by Purchaser, except as set forth in Section 7.15 and (ii) Seller shall be responsible for all filing, recordation and software transfer fees and any other payments required to obtain any consent required to convey any Environmental Permits or any Conveyed Assets, whether incurred prior to or subsequent to the Closing. In the event that the amount of such fees and payments is less than $3 million, Seller shall pay to Purchaser one-half of the amount by which it is less than $3 million. Fees under the HSR Act shall be paid by each Party in respect of its filings thereunder. Section 10.10. Schedules. The disclosure of any matter in any Schedule to this Agreement, as may be amended or supplemented prior to the Closing, shall be deemed to be a disclosure for all purposes of this Agreement where disclosure is apparent on its face, but shall expressly not be deemed to constitute an admission by Seller or Purchaser, or to otherwise imply, that any such matter is material for the purposes of this Agreement. Section 10.11. Governing Law. THE AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA, ITS RULES OF CONFLICT OF LAWS NOTWITHSTANDING. Seller and Purchaser hereby agree and consent to be subject, non-exclusively, to the jurisdiction of the United States District Court for the Eastern District of Pennsylvania and in the absence of such Federal jurisdiction, the Parties consent to be subject, non-exclusively, to the jurisdiction of the Court of Common Pleas of the Commonwealth of Pennsylvania, County of Philadelphia. Section 10.12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same agreement. Section 10.13. Headings. The heading references herein and the table of contents hereto are for convenience purposes only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. Section 10.14. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any Person or entity or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may -53- 60 be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other Persons, entities or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction. -54- 61 IN WITNESS WHEREOF, the Parties have executed or caused this Agreement to be executed as of the date first written above. INTERSIL CORPORATION By: /s/ Daniel Henegan -------------------------------------- Name: Danial Henegan Title: Chief Financial Officer INTERSIL (PENNSYLVANIA) LLC By: /s/ Daniel Henegan -------------------------------------- Name: Daniel Henegan Title: Chief Financial Officer FAIRCHILD SEMICONDUCTOR CORPORATION By: /s/ Joseph R. Martin -------------------------------------- Name: Joseph R. Martin Title: Executive Vice President Chief Financial Officer -55- 62 AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT This is Amendment No. 1 by and among Intersil Corporation, a Delaware corporation ("Intersil"), Intersil (PA) LLC, a Delaware limited liability company ("Intersil PA" and, together with Intersil, the "Sellers") and Fairchild Semiconductor Corporation, a Delaware corporation ("Fairchild"), dated as of March 16, 2001 (the "Amendment") to the Agreement. Background Intersil, Intersil PA and Fairchild have entered into an Asset Purchase Agreement, dated as of January 20, 2001 (the "Agreement"), providing for the sale to Fairchild by Sellers of certain assets relating to the Business. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Agreement. The parties desire to amend the Agreement as more particularly set forth herein. Terms In consideration of the premises and of the mutual covenants and agreements contained herein and intending to be legally bound, the parties hereto hereby agree as follows: (a) Schedule 1.1(c) to the Agreement shall be superseded and replaced in its entirety by Schedule 1.1(c) attached hereto. (b) Schedule 2.2(c) referred to in Section 17 below is attached hereto as Schedule 2.2(c). (c) Schedule 2.3(q) to the Agreement shall be superseded and replaced in its entirety by Schedule 2.3(q) attached hereto. (d) Schedule 2.4(a) to the Agreement shall be superseded and replaced in its entirety by Schedule 2.4(a) attached hereto. (e) Schedule 3.1(b)(ix) to the Agreement shall be superseded and replaced in its entirety by Schedule 3.1(b)(ix) attached hereto. (f) Schedule 5.5 to the Agreement shall be superseded and replaced in its entirety by Schedule 5.5 attached hereto. (g) Schedule 5.10 to the Agreement shall be superseded and replaced in its entirety by Schedule 5.10 attached hereto. (h) Schedule 5.11 to the Agreement shall be superseded and replaced in its entirety by Schedule 5.11 attached hereto. (i) Schedule 7.4(a)(2) to the Agreement shall be superseded and replaced in its entirety by Schedule 7.4(a)(2) attached hereto. 63 (j) Exhibit 3.1(b)(vi) to the Agreement (the IP Agreement) shall be superseded and replaced in its entirety by Exhibit 3.1(b)(vi) hereto. (k) Exhibit 3.1(b)(vii) to the Agreement (the Transition Services Agreement) shall be superseded and replaced in its entirety by Exhibit 3.1(b)(vii) hereto. (l) Exhibit 3.1(b)(viii) to the Agreement (the Supply Agreement) shall be superseded and replaced in its entirety by Exhibit 3.1(b)(viii) hereto. (m) Exhibit 7.13 attached hereto shall be deemed to satisfy the requirements of Section 7.13 of the Agreement. (n) Seller represents and warrants to Purchaser that: (i) Intersil Europe Sarl ("Swiss Sub") is a corporation duly organized, validly existing and in good standing under the laws of Switzerland. Swiss Sub is qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction in which the nature of the property owned or leased by it in the conduct of the Business requires it to be so qualified, except where the failure to be so qualified and in good standing, would not be reasonably expected to have a Material Adverse Effect. (ii) Swiss Sub has all requisite corporate power and corporate authority to carry on its business as it is now being conducted and to execute and deliver the Partial Assignment and to perform its obligations thereunder. The execution and delivery by Swiss Sub of the Partial Assignment and the documents contemplated thereby, and the performance by Swiss Sub of its obligations thereunder, have been duly authorized by all requisite corporate action, including but not limited to shareholder consent, if necessary, and no other corporate proceedings are required by Swiss Sub in connection with the execution, delivery and performance of the Partial Assignment and the documents contemplated thereby. (iii) The Partial Assignment and the documents contemplated thereby constitutes a valid and binding obligation of Swiss Sub, enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or similar laws affecting creditors' rights generally or by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or law). (iv) The execution, delivery and performance of the Partial Assignment and the documents contemplated thereby by Swiss Sub and the consummation of the transactions contemplated thereby does not and will not (i) violate any provision of the governing documents of Swiss Sub, (ii) subject to obtaining the consent of ChipPAC, conflict with, or result in the breach of, or constitute a default under, or result in the termination, cancellation or acceleration (whether after the giving of notice or the lapse of time or both) of any right or obligation of Swiss Sub with respect to, or to a loss of any benefit of the Business to which Seller or Swiss Sub is entitled with respect to, the Conveyed Assets, (iii) assuming compliance with the matters set forth in Sections 5.5 and 6.5 of the Agreement, violate or result in a breach of or constitute a default under any Law or other -2- 64 restriction of any court or Governmental Authority to which Swiss Sub is subject, except, with respect to clauses (ii) and (iii), for any violations, conflicts, defaults, terminations, cancellations or accelerations as will not, individually or in the aggregate, be material to the Business as a whole. (o) Notwithstanding anything in the Agreement to the contrary, with respect to any Material Contract designated on Schedule 5.10 of the Agreement, as amended hereby, as not being transferred to the Purchaser (except for the Credit Agreement among Intersil, Intersil Holding Corporation, the Lenders named therein and Credit Suisse First Boston, dated August 13, 1999), and which designated Material Contract has not by its terms expired prior to the Closing Date, Sellers shall, to the extent permitted to do so and as requested by Purchaser, purchase on behalf of Purchaser the goods and services represented by such Material Contracts on the same terms and conditions as those available to Intersil at the time of any such purchase until the first anniversary of the Closing Date. Purchaser shall reimburse Sellers for any costs related to such benefits (in accordance with the terms of the applicable Material Contract) received by Purchaser under such Material Contracts (or shall pay such amounts directly to the third party provider). Notwithstanding the foregoing, Sellers represent and warrant to Purchaser that, to the extent Sellers are not permitted to purchase on behalf of Purchaser the goods and services represented by such Material Contracts, the failure to purchase such goods and services shall not materially affect Purchaser's ability to run the Business. (p) All references in the Agreement to "Intersil (Pennsylvania) LLC" shall be changed to "Intersil (PA) LLC". (q) Section 2.2 of the Agreement is hereby amended by adding the following Section 2.2(c): "(c) In the event that the Closing proceeds without Purchaser receiving substantially similar rights to those represented by the software-related agreements set forth on Schedule 2.2(c) hereto as are currently being received by the Business (the "Software Agreements"), then following the Closing, Seller shall obtain promptly such rights for Purchaser at Seller's expense, either by the transfer with applicable licensor's consent, of seats and/or rights under existing Seller licenses to existing Purchaser licenses, or by the purchase of a new license on Purchaser's behalf; provided, however, that Seller shall not compromise any rights not otherwise required by this Agreement to be compromised for obtaining such rights under the Software Agreements. The Parties shall cooperate with each other in all such transfers or license purchases. Until such time as Purchaser shall receive such rights, the Parties shall cooperate with each other in any mutually agreeable, reasonable and lawful arrangements designed to provide to Purchaser the benefits of use of the Software Agreements (to the extent Seller is permitted by the terms of such agreements to do so). To the extent that Purchaser is provided the benefits pursuant to this Section 2.2(c) of any Software Agreement, Purchaser shall perform for the benefit of the other Persons that are parties thereto the obligations of Seller thereunder and pay, discharge and satisfy any related liabilities that relate to the rights, other than any fees relating to the transfer or purchase of such rights as provided hereunder." (r) Section 3.1(b)(iii) shall be amended and replaced in its entirety by the following Section 3.1(b)(iii): -3- 65 "(iii) (A) a Bill of Sale in favor of Purchaser, (B) a Bill of Sale in favor of Fairchild Semiconductor Limited, (C) a Bill of Sale in favor of Fairchild Semiconductor Hong Kong Limited, (D) a Bill of Sale in favor of Fairchild Semiconductor SAS, (E) a Bill of Sale in favor of Fairchild Semiconductor Srl, and (F) a Bill of Sale in favor of Fairchild Semiconductor GmbH, each substantially in the form set forth in Exhibit 3.1(b)(iii) (the "Bill of Sale") executed by Seller. (s) Section 4.1 of the Agreement is hereby amended by (i) deleting the "and" as the last word of Section 4.1(b), (ii) replacing the period (".") at the end of Section 4.1(c) with a semicolon (";") and adding the word "and" immediately thereafter and (iii) adding the following Section 4.1(d): "(d) both parties shall have entered into the Sales Services Agreement substantially in the form of Exhibit 4.1(d) hereto." (t) The second sentence of Section 10.9 is hereby amended and replaced in its entirety by the following sentence: "Notwithstanding the foregoing, (i) all Taxes relating to the transfer of the Conveyed Assets shall be paid by Purchaser, except as set forth in Section 7.15, (ii) Seller shall be responsible for all filing, recordation and software transfer fees and any other payments required to obtain any consent required to convey any Environmental Permits or any Conveyed Assets and (iii) Seller shall be responsible for all software transfer fees and any other payments required to obtain the rights for Purchaser under the Software Agreements, in the case of any of the foregoing, whether incurred prior to or subsequent to the Closing." (u) (a) Section 2.4 of the Agreement is hereby amended by (i) deleting the "and" as the last word of Section 2.4(e), (ii) replacing the period (".") at the end of Section 2.4(f) with a semicolon (";") and (iii) adding the following: "(g) Pension Liabilities to Affected Employees located in Germany arising by operation of German law (the "German Pension Liabilities"); and (h) Certain bonus payments to Affected Employees in Kuala Lumpur, Malaysia (the "KL Bonuses")." (b) Section 2.5(c) is hereby amended by adding, at the beginning, the phrase "Except as provided in Sections 2.4(g) and 2.4(h),". (c) The definition of Closing Date Liabilities in Section 1.1 is hereby amended and replaced in its entirety by the following: " "Closing Date Liabilities" shall mean (i) the amount of the absolute value of those Assumed Liabilities as would be set forth on a balance sheet of the Business as of the Closing Date prepared in accordance with GAAP, other than the German Pension Liabilities and accrued KL Bonuses, plus (ii) the amount of German Pension Liabilities as of the Closing Date to the extent required to be -4- 66 recorded under applicable German law, plus (iii) half the amount by which the projected actual amount of German Pension Liabilities, as determined in accordance with FAS 87, exceeds the amount determined under clause (ii) above." (v) Section 2.5 of the Agreement is hereby amended by (i) deleting the "and" as the last word of Section 2.5(u), (ii) replacing the period (".") at the end of Section 2.5(v) with a semicolon (";") and adding the word "and" immediately thereafter and (iii) adding the following: "(w) all Losses of Purchaser, whether or not incurred or relating to periods prior to or after the Closing, relating to that certain claim of infringement by Fortrend Engineering Corp. against Asyst Technologies, Inc. ("Asyst") with respect to certain Asyst equipment which are included as Conveyed Assets as more fully set forth in that certain letter dated February 7, 2001 from Niro, Scavone, Haller & Niro to Mr. Ray Ford, Plant Manager of the Mountaintop Facility (the "Fortrend Claims"). For purposes of Section 18(j) of the IP Agreement, all Losses with respect to the Fortrend Claims shall not be deemed "Seller Expenses"." (w) All Losses incurred by either party to the Agreement resulting from (i) the Closing taking place and (ii) all Governmental Authority consents in the Republic of China (Taiwan) not having been obtained prior thereto shall be shared equally by the Intersil and Purchaser. Intersil and Purchaser agree to indemnify and hold harmless each other to the extent that either party bears Losses in excess of half of all the Losses related thereto (x) Section 7.1(b) of the Agreement is hereby amended and replaced in its entirety by the following Section 7.1(b): "(b) From and after the Closing, Sellers and Purchaser will provide to each other and to their respective officers, employees, counsel and other representatives, upon request (subject to any limitations that are reasonably required to preserve any applicable attorney-client privilege) reasonable access to their respective officers and employees and reasonable access for inspection and copying of all records and any other information existing at the Closing Date and relating to the conduct of the Business, will furnish such testimony and attend such conferences, discovery proceedings, hearings, trials and appeals, and will make their respective officers and employees available, to the extent such availability does not unreasonably interfere with the conduct of the Business by Purchaser, or the conduct of its business by Sellers, as the case may be, as is reasonably necessary to enable the party requesting such information to: (i) comply with reporting, filing or other requirements related to the conduct of the Business and imposed on such party by any local, state or federal court, agency or regulatory body or taxing authority; (ii) assert or defend any claims or allegations in any arbitration or in any administrative or legal proceeding related to the conduct of the Business other than claims or allegations which one party to this Agreement has asserted against the other; (iii) comply with any of its requirements or exercise any of its rights with respect to the Excluded Assets or the Retained Liabilities or the Conveyed Assets or the Assumed Liabilities, as the case may be, or (iv) subject to clause (ii) above, perform its obligations under this Agreement. Sellers and Purchaser shall each maintain all of the foregoing information in accordance with their normal document retention policies and if either party desires to destroy or dispose of any of the foregoing which are material to the other party at any time prior to the fifth anniversary of the Closing, such party will offer first in writing -5- 67 at least 60 days prior to such destruction or disposition to surrender them to the other party. The party requesting the information and assistance provided in this Section 7.1(b) shall reimburse the other party for all out-of-pocket costs and expenses incurred by such party in providing such information and in rendering such assistance. The access to files, books and records contemplated by this Section 7.1(b) shall be during normal business hours and upon not less than two Business Days prior written request and shall be subject to such reasonable limitations as the party having custody or control thereof may impose to preserve the confidentiality of information contained therein." (y) Except as expressly modified by this Amendment, the provisions of the Agreement shall remain in full force and effect. Execution and delivery of this Amendment shall not constitute or be deemed to be a waiver by either party of any rights that such party may have under the Agreement or an agreement by either party that any of the conditions to such party's obligations under the Agreement have been satisfied or waived. This Amendment may be executed in any number of counterparts with the same effect as if the signatures thereto were upon one instrument. This Amendment shall be governed by and construed and enforced in accordance with the internal laws (as opposed to the conflicts of laws provisions) of the Commonwealth of Pennsylvania. -6- 68 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered on the day and year first above written. INTERSIL CORPORATION By: /s/ Daniel Henegan -------------------------------------- Name: Danial Henegan Title: Chief Financial Officer INTERSIL (PA) LLC By: /s/ Daniel Henegan -------------------------------------- Name: Danial Henegan Title: Chief Financial Officer FAIRCHILD SEMICONDUCTOR CORPORATION By: /s/ Joseph R. Martin -------------------------------------- Name: Joseph R. Martin Title: Executive Vice President Chief Financial Officer -7- EX-4.08 3 b38142fsex4-08.txt INDENTURE DATED 1/31/01 1 Exhibit 4.08 ================================================================================ FAIRCHILD SEMICONDUCTOR CORPORATION, Issuer FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC., Guarantor FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, Guarantor QT OPTOELECTRONICS, INC., Guarantor QT OPTOELECTRONICS, Guarantor KOTA MICROCIRCUITS, INC., Guarantor 10-1/2% Senior Subordinated Notes Due February 1, 2009 INDENTURE Dated as of January 31, 2001 UNITED STATES TRUST COMPANY OF NEW YORK, Trustee ================================================================================ 2 3 CROSS-REFERENCE TABLE
TIA Indenture Section Section - ------- ------- 310(a)(1) .............................. 7.10 (a)(2) .............................. 7.10 (a)(3) .............................. N.A. (a)(4) .............................. N.A. (b) .............................. 7.08; 7.10 (c) .............................. N.A. 311(a) .............................. 7.11 (b) .............................. 7.11 (c) .............................. N.A. 312(a) .............................. 2.05 (b) .............................. 13.03 (c) .............................. 13.03 313(a) .............................. 7.06 (b)(1) .............................. N.A. (b)(2) .............................. 7.06 (c) .............................. 13.02 (d) .............................. 7.06 314(a) .............................. 4.02; 4.11; 13.02 (b) .............................. N.A. (c)(1) .............................. 13.04 (c)(2) .............................. 13.04 (c)(3) .............................. N.A. (d) .............................. N.A. (e) .............................. 13.05 (f) .............................. 4.11 315(a) .............................. 7.01 (b) .............................. 7.05; 13.02 (c) .............................. 7.01 (d) .............................. 7.01 (e) .............................. 6.11 316(a)(last sentence) .............................. 13.06 (a)(1)(A) .............................. 6.05 (a)(1)(B) .............................. 6.04 (a)(2) .............................. N.A. (b) .............................. 6.07 317(a)(1) .............................. 6.08 (a)(2) .............................. 6.09 (b) .............................. 2.04 318(a) .............................. 13.01
N.A. means Not Applicable. - ------------------ Note: This Cross-Reference Table shall not, for any purpose, be deemed to be part of the Indenture. 3 TABLE OF CONTENTS
ARTICLE 1 Page ---- Definitions and Incorporation by Reference SECTION 1.01. Definitions ............................ 1 SECTION 1.02. Other Definitions ...................... 28 SECTION 1.03. Incorporation by Reference of Trust Indenture Act ............... 28 SECTION 1.04. Rules of Construction .................. 29 ARTICLE 2 The Securities SECTION 2.01. Form and Dating ........................ 30 SECTION 2.02. Execution and Authentication ........... 30 SECTION 2.03. Registrar and Paying Agent ............. 31 SECTION 2.04. Paying Agent To Hold Money in Trust..... 31 SECTION 2.05. Securityholder Lists ................... 32 SECTION 2.06. Transfer and Exchange .................. 32 SECTION 2.07. Replacement Securities ................. 33 SECTION 2.08. Outstanding Securities ................. 33 SECTION 2.09. Temporary Securities ................... 34 SECTION 2.10. Cancellation ........................... 34 SECTION 2.11. Defaulted Interest ..................... 34 SECTION 2.12. CUSIP Numbers .......................... 35 SECTION 2.13. Issuance of Additional Securities....... 35 ARTICLE 3 Redemption SECTION 3.01. Notices to Trustee ..................... 36 SECTION 3.02. Selection of Securities To Be Redeemed .................... 36 SECTION 3.03. Notice of Redemption ................... 36 SECTION 3.04. Effect of Notice of Redemption ......... 37 SECTION 3.05. Deposit of Redemption Price ............ 38 SECTION 3.06. Securities Redeemed in Part ............ 38
4 2 ARTICLE 4 Covenants SECTION 4.01. Payment of Securities .................. 38 SECTION 4.02. SEC Reports ............................ 38 SECTION 4.03. Limitation on Indebtedness ............. 39 SECTION 4.04. Limitation on Restricted Payments ...... 42 SECTION 4.05. Limitation on Restrictions on Distributions from Restricted Subsidiaries................. 46 SECTION 4.06. Limitation on Sales of Assets and Subsidiary Stock ............ 47 SECTION 4.07. Limitation on Affiliate Transactions ... 52 SECTION 4.08. Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries ................ 53 SECTION 4.09. Change of Control ...................... 54 SECTION 4.10. Future Guarantors ...................... 55 SECTION 4.11. Compliance Certificate ................. 56 SECTION 4.12. Further Instruments and Acts ........... 56 ARTICLE 5 Successor Companies SECTION 5.01. When Company May Merge or Transfer Assets ...................... 56 ARTICLE 6 Defaults and Remedies SECTION 6.01. Events of Default ...................... 59 SECTION 6.02. Acceleration ........................... 61 SECTION 6.03. Other Remedies ......................... 62 SECTION 6.04. Waiver of Past Defaults ................ 62 SECTION 6.05. Control by Majority .................... 63 SECTION 6.06. Limitation on Suits .................... 63 SECTION 6.07. Rights of Holders To Receive Payment ... 64 SECTION 6.08. Collection Suit by Trustee ............. 64 SECTION 6.09. Trustee May File Proofs of Claim ....... 64 SECTION 6.10. Priorities ............................. 64 SECTION 6.11. Undertaking for Costs .................. 65 SECTION 6.12. Waiver of Stay or Extension Laws ....... 65
5 3 ARTICLE 7 Trustee SECTION 7.01. Duties of Trustee ...................... 65 SECTION 7.02. Rights of Trustee ...................... 67 SECTION 7.03. Individual Rights of Trustee ........... 67 SECTION 7.04. Trustee's Disclaimer ................... 68 SECTION 7.05. Notice of Defaults ..................... 68 SECTION 7.06. Reports by Trustee to Holders .......... 68 SECTION 7.07. Compensation and Indemnity ............. 68 SECTION 7.08. Replacement of Trustee ................. 69 SECTION 7.09. Successor Trustee by Merger ............ 70 SECTION 7.10. Eligibility; Disqualification .......... 71 SECTION 7.11. Preferential Collection of Claims Against Company ............. 71 ARTICLE 8 Discharge of Indenture; Defeasance SECTION 8.01. Discharge of Liability on Securities; Defeasance .................. 71 SECTION 8.02. Conditions to Defeasance ............... 73 SECTION 8.03. Application of Trust Money ............. 74 SECTION 8.04. Repayment to Company ................... 74 SECTION 8.05. Indemnity for Government Obligations ................. 74 SECTION 8.06. Reinstatement ............................. 74 ARTICLE 9 Amendments SECTION 9.01. Without Consent of Holders ............. 75 SECTION 9.02. With Consent of Holders ................ 76 SECTION 9.03. Compliance with Trust Indenture ........ 77 SECTION 9.04. Revocation and Effect of Consents and Waivers ................. 77 SECTION 9.05. Notation on or Exchange of Securities .................. 78 SECTION 9.06. Trustee To Sign Amendments ................ 78 SECTION 9.07. Payment for Consent .................... 78 6 4 ARTICLE 10 Subordination SECTION 10.01. Agreement To Subordinate ................. 79 SECTION 10.02. Liquidation, Dissolution, Bankruptcy ................. 79 SECTION 10.03. Default on Senior Indebtedness ........... 80 SECTION 10.04. Acceleration of Payment of Securities ................. 82 SECTION 10.05. When Distribution Must Be Paid Over ....................... 82 SECTION 10.06. Subrogation .............................. 82 SECTION 10.07. Relative Rights .......................... 82 SECTION 10.08. Subordination May Not Be Impaired by Company ................. 83 SECTION 10.09. Rights of Trustee and Paying Agent ...................... 83 SECTION 10.10. Distribution or Notice to Representative ............. 83 SECTION 10.11. Article 10 Not To Prevent Events of Default or Limit Right To Accelerate ................. 83 SECTION 10.12. Trust Moneys Not Subordinated ............ 84 SECTION 10.13. Trustee Entitled To Rely ................. 84 SECTION 10.14. Trustee To Effectuate Subordination .............. 84 SECTION 10.15. Trustee Not Fiduciary for Holders of Senior Indebtedness ..... 85 SECTION 10.16. Reliance by Holders of Senior Indebtedness on Subordination Provisions .................. 85 ARTICLE 11 Guaranties SECTION 11.01. Guaranties ............................. 85 SECTION 11.02. Limitation on Liability; Contribution .. 88 SECTION 11.03. Successors and Assigns ................. 88 SECTION 11.04. No Waiver .............................. 88 SECTION 11.05. Modification ........................... 88 SECTION 11.06. Release of Subsidiary Guarantor ........ 89 7 5 ARTICLE 12 Subordination of Guaranties SECTION 12.01. Agreement to Subordinate ............... 89 SECTION 12.02. Liquidation, Dissolution, Bankruptcy ... 89 SECTION 12.03. Default on Senior Indebtedness of Guarantor ............. 90 SECTION 12.04. Demand for Payment ..................... 91 SECTION 12.05. When Distribution Must Be Paid Over .... 91 SECTION 12.06. Subrogation ............................ 91 SECTION 12.07. Relative Rights ........................ 92 SECTION 12.08. Subordination May Not Be Impaired by Company ............... 92 SECTION 12.09. Rights of Trustee and Paying Agent ..... 92 SECTION 12.10. Distribution or Notice to Representative ........... 93 SECTION 12.11. Article 12 Not to Prevent Defaults Under a Guaranty or Limit Right To Demand Payment 93 SECTION 12.12. Trustee Entitled To Rely ............... 93 SECTION 12.13. Trustee To Effectuate Subordination .... 93 SECTION 12.14. Trustee Not Fiduciary for Holders of Senior Indebtedness of Guarantor .............. 94 SECTION 12.15. Reliance by Holders of Senior Indebtedness on Subordination Provisions ........... 94 ARTICLE 13 Miscellaneous SECTION 13.01. Trust Indenture Act Controls .......... 94 SECTION 13.02. Notices ............................... 94 SECTION 13.03. Communication by Holders with Other Holders .................. 95 SECTION 13.04. Certificate and Opinion as to Conditions Precedent ..... 95 SECTION 13.05. Statements Required in Certificate or Opinion ............... 96 SECTION 13.06. When Securities Disregarded ............ 96 SECTION 13.07. Rules by Trustee, Paying Agent and Registrar ................ 96 SECTION 13.08. Legal Holidays ......................... 96 SECTION 13.09. Governing Law .......................... 97 SECTION 13.10. No Recourse Against Others ............. 97 SECTION 13.11. Successors ............................. 97 SECTION 13.12. Multiple Originals ..................... 97 SECTION 13.13. Table of Contents; Headings ............ 97 Exhibit A - Form of Security Rule 144A/Regulation S Appendix 8 6 Exhibit 1 to Rule 144A/Regulation S Appendix 9 INDENTURE dated as of January 31, 2001, among FAIRCHILD SEMICONDUCTOR CORPORATION, a Delaware corporation (the "Company"), FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. ("Parent"), as Guarantor, FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA ("Fairchild California"), as Guarantor, QT OPTOELECTRONICS, INC. ("QT Inc."), as Guarantor, QT OPTOELECTRONICS ("QT"), as Guarantor, KOTA MICROCIRCUITS, INC. ("KOTA"), as Guarantor, and UNITED STATES TRUST COMPANY OF NEW YORK, a New York banking corporation (the "Trustee"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of (1) the Company's 10-1/2% Senior Subordinated Notes Due February 1, 2009 (the "Initial Securities"), (2) if and when issued pursuant to a registered exchange for Initial Securities, the Company's 10-1/2% Senior Subordinated Notes Due February 1, 2009 (the "Exchange Securities"), (3) if and when issued pursuant to a private exchange for Initial Securities, the Company's 10-1/2% Senior Subordinated Notes Due February 1, 2009 (the "Private Exchange Securities"), and (4) if and when issued any Additional Securities (as defined herein, and together with the Private Exchange Securities, the Exchange Securities and the Initial Securities, the "Securities"): ARTICLE 1 Definitions and Incorporation by Reference SECTION 1.01. Definitions. "Acquisition" means the Company's acquisition of the discrete power products division of Intersil Corporation pursuant to the Acquisition Agreement. "Acquisition Agreement" means the asset purchase agreement dated as of January 20, 2001, by and among Intersil Corporation, Intersil (Pennsylvania) and the Company. 10 2 "Additional Assets" means (1) any property or assets (other than Indebtedness and Capital Stock) in a Related Business; (2) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary; or (3) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiary; provided, however, that any such Restricted Subsidiary described in clauses (2) or (3) above is primarily engaged in a Related Business. "Additional Securities" means, subject to the Company's compliance with Section 4.03, 10-1/2% Senior Subordinated Notes Due February 1, 2009 issued from time to time after the Issue Date under the terms of this Indenture (other than pursuant to Section 2.06, 2.07, 2.09 or 3.06 and other than Exchange Securities or Private Exchange Securities issued pursuant to an exchange offer for other Securities outstanding under this Indenture). "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of Sections 4.04, 4.06 and 4.07 only, "Affiliate" shall also mean any beneficial owner of Capital Stock representing 10% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Capital Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (1) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary), (2) all or substantially all the assets of any division or line of business of the Company or any Restricted Subsidiary or (3) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary (other than, in the case of (1), (2) and (3) above, (x) a disposition by a Restricted Subsidiary to the Company or by the Company or a 11 3 Restricted Subsidiary to a Wholly Owned Subsidiary, (y) for purposes of Section 4.06 only, a disposition that constitutes a Restricted Payment permitted by Section 4.04 and (z) disposition of assets with a fair market value of less than $100,000). "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate borne by the Securities, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended). "Average Life" means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing (1) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (2) the sum of all such payments. "Banks" has the meaning specified in the Credit Agreement. "Bank Indebtedness" means all Obligations pursuant to the Credit Agreement. "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means each day which is not a Legal Holiday. "Capital Lease Obligations" means an obligation that is required to be classified and accounted for as a capital lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. 12 4 "Change of Control" means the occurrence of any of the following events: (1) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purpose of this clause (1) such person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total voting power of the Voting Stock of the Company; provided, however, that the Permitted Holders beneficially own (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, in the aggregate a lesser percentage of the total voting power of the Voting Stock of the Company than such other person and do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board of Directors (for the purposes of this clause (1), such other person shall be deemed to beneficially own any Voting Stock of a person (the "specified entity") held by any other person (the "parent entity"), if such other person is the beneficial owner (as defined in this clause (1)), directly or indirectly, of more than 35% of the voting power of the Voting Stock of such parent entity and the Permitted Holders beneficially own (as defined in this clause (1)), directly or indirectly, in the aggregate a lesser percentage of the voting power of the Voting Stock of such parent entity and do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the board of directors of such parent entity); provided, however, that notwithstanding the foregoing, CVC shall be deemed to beneficially own a majority of the voting power of the Voting Stock of Sterling (or any successor) so long as CVC, employees, officers and directors of CVC and corporations, partnerships and other entities at least a majority of the equity in which is held in the aggregate by CVC and its employees, officers and directors hold in the aggregate no less than a majority of the economic interests in Sterling (or such successor); (2) individuals who on the Issue Date constituted the Board of Directors (together with any new directors (a) whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors of the Company then still in office who were either directors on the Issue Date or whose election or nomination for election was previously so approved or 13 5 (b) who were elected to the Board of Directors pursuant to the Stockholders' Agreement, as amended, modified or supplemented from time to time) cease for any reason to constitute a majority of the Board of Directors then in office; or (3) the merger or consolidation of the Company with or into another Person or the merger of another Person with or into the Company, or the sale of all or substantially all the assets of the Company to another Person (other than a Person that is controlled by the Permitted Holders), if the securities of the Company that are outstanding immediately prior to such transaction and which represent 100% of the aggregate voting power of the Voting Stock of the Company are changed into or exchanged for cash, securities or property, unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving Person or transferee that represent, immediately after such transaction, at least a majority of the aggregate voting power of the Voting Stock of the surviving Person or transferee. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means the party named as such in this Indenture until a successor replaces it and, thereafter, means the successor and, for purposes of any provision contained herein and required by the TIA, each other obligor on the indenture securities. "Consolidated Coverage Ratio" as of any date of determination means the ratio of (a) the aggregate amount of EBITDA for the period of the most recent four consecutive fiscal quarters ending at least 45 days (or, if less, the number of days after the end of such fiscal quarter as the consolidated financial statements of the Company shall be provided to the Securityholders pursuant hereto) prior to the date of such determination to (b) Consolidated Interest Expense for such four fiscal quarters; provided, however, that: (1) if the Company or any Restricted Subsidiary has Incurred any Indebtedness since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period and the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness 14 6 as if such discharge had occurred on the first day of such period; (2) if the Company or any Restricted Subsidiary has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the beginning of such period or if any Indebtedness is to be repaid, repurchased, defeased or otherwise discharged (in each case other than Indebtedness Incurred under any revolving credit facility unless such Indebtedness has been permanently repaid and has not been replaced) on the date of the transaction giving rise to the need to calculate the Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for such period shall be calculated on a pro forma basis as if such discharge had occurred on the first day of such period and as if the Company or such Restricted Subsidiary has not earned the interest income actually earned during such period in respect of cash or Temporary Cash Investments used to repay, repurchase, defease or otherwise discharge such Indebtedness; (3) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets which are the subject of such Asset Disposition for such period, or increased by an amount equal to the EBITDA (if negative), directly attributable thereto for such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Disposition for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale); (4) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any person which becomes a Restricted Subsidiary) or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction requiring a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such 15 7 period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of such period; and (5) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition, any Investment or acquisition of assets that would have required an adjustment pursuant to clause (3) or (4) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition occurred on the first day of such period. For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest of such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months). "Consolidated Current Liabilities" as of the date of determination means the aggregate amount of liabilities of the Company and its consolidated Restricted Subsidiaries which may properly be classified as current liabilities (including taxes accrued as estimated), on a consolidated basis, after eliminating (1) all intercompany items between the Company and any Restricted Subsidiary and (2) all current maturities of long-term Indebtedness, all as determined in accordance with GAAP consistently applied. "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent incurred by the Company or its Restricted Subsidiaries, without duplication: (1) interest expense attributable to Capital Lease Obligations and the interest expense attributable to leases constituting part of a Sale/Leaseback Transaction; 16 8 (2) amortization of debt discount and debt issuance cost; (3) capitalized interest; (4) non-cash interest expenses; (5) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; (6) net costs associated with Hedging Obligations involving any Interest Rate Agreement (including amortization of fees); (7) Preferred Stock dividends accrued by consolidated Restricted Subsidiaries in respect of all Preferred Stock held by Persons other than the Company or a Restricted Subsidiary; (8) interest incurred in connection with Investments in discontinued operations; (9) interest accruing on any Indebtedness of any other Person to the extent such Indebtedness is Guaranteed by (or secured by the assets of) the Company or any Restricted Subsidiary and (10) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Indebtedness Incurred by such plan or trust. 17 9 "Consolidated Net Income" means, for any period, the net income of the Company and its consolidated Subsidiaries; provided, however, that there shall not be included in such Consolidated Net Income: (1) any net income of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that (A) subject to the exclusion contained in clause (4) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to a Restricted Subsidiary, to the limitations contained in clause (3) below) and (B) the Company's equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income; (2) any net income (or loss) of any Person acquired by the Company or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition; (3) any net income of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions by such Restricted Subsidiary, directly or indirectly, to the Company, except that (A) subject to the exclusion contained in clause (4) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash that could have been distributed by such Restricted Subsidiary consistent with such restrictions during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to another Restricted Subsidiary, to the limitation contained in this clause) and (B) the Company's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income; (4) any gain (or loss) realized upon the sale or other disposition of any assets of the Company or its consolidated Subsidiaries (including pursuant to any sale-and-leaseback arrangement) which is not sold or otherwise disposed of in the ordinary course of business and any gain (or loss) realized upon the sale or other disposition of any Capital Stock of any Person; 18 10 (5) extraordinary gains or losses; and (6) the cumulative effect of a change in accounting principles. Notwithstanding the foregoing, for the purpose of Section 4.04 only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such Section pursuant to clause (a)(3)(D) thereof. "Consolidated Net Tangible Assets" as of any date of determination, means the total amount of assets (less accumulated depreciation and amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) which would appear on a consolidated balance sheet of the Company and its consolidated Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP, and after giving effect to purchase accounting and after deducting therefrom Consolidated Current Liabilities and, to the extent otherwise included, the amounts of: (1) minority interests in consolidated Subsidiaries held by Persons other than the Company or a Restricted Subsidiary; (2) excess of cost over fair value of assets of businesses acquired, as determined in good faith by the Board of Directors; (3) any revaluation or other write-up in book value of assets subsequent to the Issue Date as a result of a change in the method of valuation in accordance with GAAP consistently applied; (4) unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items; (5) treasury stock; (6) cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of Capital Stock to the extent such obligation is not reflected in Consolidated Current Liabilities; and 19 11 (7) Investments in and assets of Unrestricted Subsidiaries. "Consolidated Net Worth" means the total of the amounts shown on the balance sheet of the Company and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of the end of the most recent fiscal quarter of the Company ending at least 45 days prior to the taking of any action for the purpose of which the determination is being made, as (1) the par or stated value of all outstanding Capital Stock of the Company plus (2) paid-in capital or capital surplus relating to such Capital Stock plus (3) any retained earnings or earned surplus less (A) any accumulated deficit and (B) any amounts attributable to Disqualified Stock. "Credit Agreement" means the Credit Agreement dated as of June 6, 2000, among Fairchild Holdings, the Company, the lenders referred to therein, Credit Suisse First Boston, as Lead Arranger and Administrative Agent, Fleet National Bank, as Syndication Agent, and ABN AMRO Bank NV, as Documentation Agent, together with the related documents thereto (including without limitation the revolving loans thereunder, any guarantees and security documents), as amended, extended, renewed, restated, supplemented or otherwise modified (in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement (and related document) governing Indebtedness incurred to refund or refinance, in whole or in part, the borrowings and commitments then outstanding or permitted to be outstanding under such Credit Agreement or a successor Credit Agreement, whether by the same or any other lender or group of lenders. "Currency Agreement" means in respect of a Person any foreign exchange contract, currency swap agreement or other similar agreement to which such Person is a party or beneficiary. "CVC" means Citicorp Venture Capital Ltd. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Designated Senior Indebtedness" means (1) the Bank Indebtedness; provided, however, that Bank Indebtedness outstanding under any Credit Agreement that Refinanced in part, but not in whole, the previously outstanding Bank Indebtedness shall only constitute Designated Senior Indebtedness if it meets the requirements of succeeding clause (2); and (2) any other Senior Indebtedness of the Company which, at the date of determination, has an aggregate principal amount outstanding of, or under which, 20 12 at the date of determination, the holders thereof are committed to lend up to, at least $10.0 million and is specifically designated by the Company in the instrument evidencing or governing such Senior Indebtedness as "Designated Senior Indebtedness" for purposes of this Indenture. "Disqualified Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or upon the happening of any event (1) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (2) is convertible or exchangeable for Indebtedness or Disqualified Stock or (3) is redeemable at the option of the holder thereof, in whole or in part, in each case on or prior to the first anniversary of the Stated Maturity of the Securities; provided, however, that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the first anniversary of the Stated Maturity of the Securities shall not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than the provisions of Sections 4.06 and 4.09. "EBITDA" for any period means the sum of Consolidated Net Income, plus Consolidated Interest Expense plus the following to the extent deducted in calculating such Consolidated Net Income: (1) all income tax expense of the Company and its consolidated Restricted Subsidiaries; (2) depreciation expense of the Company and its consolidated Restricted Subsidiaries; (3) amortization expense of the Company and its consolidated Restricted Subsidiaries (excluding amortization expense attributable to a prepaid cash item that was paid in a prior period); and (4) all other non-cash charges of the Company and its consolidated Restricted Subsidiaries (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenditures in any future period): in each case for such period. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent 21 13 (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its stockholders. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Notes" means the Company's 10_% Senior Subordinated Notes Due March 15, 2007 and the Company's 10_% Senior Subordinated Notes Due October 1, 2007. "Foreign Subsidiary" means any Restricted Subsidiary not created or organized in the United States of America or any State thereof and that conducts substantially all its operations outside of the United States. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Reference Date, including those set forth in (1) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (2) statements and pronouncements of the Financial Accounting Standards Board, (3) such other statements by such other entity as approved by a significant segment of the accounting profession and (4) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC. All ratios and computations based on GAAP contained in this Indenture shall be computed in conformity with GAAP. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (1) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (2) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, 22 14 that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Guarantor" means the Parent and each Subsidiary Guarantor. "Guaranty" means the Parent Guaranty or any Subsidiary Guaranty. "Guaranty Agreement" means a supplemental indenture, in a form satisfactory to the Trustee, pursuant to which a successor to Parent, Fairchild California, QT Inc., QT, KOTA or any Subsidiary Guarantor (other than Fairchild California, QT Inc., QT or KOTA) becomes subject to the applicable terms and conditions hereof. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement. "Holder" or "Securityholder" means the Person in whose name a Security is registered on the Registrar's books. "Incur" means issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used as a noun shall have a correlative meaning. The accretion of principal of a non-interest bearing or other discount security shall not be deemed the Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person on any date of determination (without duplication): (1) the principal of and premium (if any) in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (2) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale/Leaseback Transactions entered into by such Person; (3) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); 23 15 (4) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (1) through (3) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the tenth Business Day following payment on the letter of credit); (5) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person, the liquidation preference with respect to, any Preferred Stock (but excluding, in each case, any accrued dividends); (6) all obligations of the type referred to in clauses (1) through (5) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; (7) all obligations of the type referred to in clauses (1) through (6) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such property or assets or the amount of the obligation so secured; and (8) to the extent not otherwise included in this definition, Hedging Obligations of such Person. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided, however, that the amount outstanding at any time of any Indebtedness issued with original issue discount shall be deemed to be the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such indebtedness at such time as determined in accordance with GAAP. "Indenture" means this Indenture as amended or supplemented from time to time. "Interest Rate Agreement" means in respect of a Person any interest rate swap agreement, interest rate cap 24 16 agreement or other financial agreement or arrangement designed to protect such Person against fluctuations in interest rates. "Intersil Corporation" means Intersil Corporation, a Delaware corporation. "Intersil (Pennsylvania)" means Intersil (Pennsylvania) LLC, a Delaware limited liability company. "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extensions of credit (including by way of Guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such Person. For purposes of the definition of "Unrestricted Subsidiary", the definition of "Restricted Payment" and Section 4.04: (1) "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if positive) equal to (x) the Company's "Investment" in such Subsidiary at the time of such redesignation less (y) the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of such Subsidiary at the time of such redesignation; and (2) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined in good faith by the Board of Directors. "Issue Date" means the date on which the Initial Securities are originally issued. "KOTA" means KOTA Microcircuits, Inc., a Colorado corporation. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). 25 17 "Net Available Cash" from an Asset Disposition means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to such properties or assets or received in any other non-cash form), in each case net of: (1) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such Asset Disposition; (2) all payments made on any Indebtedness which is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law, be repaid out of the proceeds from such Asset Disposition; (3) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Disposition; and (4) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the property or other assets disposed in such Asset Disposition and retained by the Company or any Restricted Subsidiary after such Asset Disposition. "Net Cash Proceeds", with respect to any issuance or sale of Capital Stock, means the cash proceeds of such issuance or sale net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Obligations" means with respect to any Indebtedness all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements and other amounts payable pursuant to the documentation governing such Indebtedness. 26 18 "Officer" means the Chairman of the Board, the President, any Vice President, the Treasurer or the Secretary of the Company. "Officers' Certificate" means a certificate signed by two Officers. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "Parent" means Fairchild Semiconductor International, Inc., a Delaware corporation. "Parent Guaranty" means the Guaranty by Parent of the Company's obligations with respect to the Securities contained herein. "Permitted Holders" means (1) CVC, (2) any officer, employee or director of CVC or any trust, partnership or other entity established solely for the benefit of such officers, employees or directors, (3) any officer, employee or director of Parent, the Company or any Subsidiary or any trust, partnership or other entity established solely for the benefit of such officers, employees or directors, and (4) in the case of any individual, any Permitted Transferee of such individual (as defined in the Stockholders' Agreement), except a Permitted Transferee by virtue of Section 3.4(b)(iv) thereof; provided, however, that in no event shall individuals collectively be deemed to be "Permitted Holders" with respect to more than 30% of the total voting power of Parent or the Company. "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary in: (1) a Restricted Subsidiary or a Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided, however, that the primary business of such Restricted Subsidiary is a Related Business; (2) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Restricted Subsidiary; provided, however, that such Person's primary business is a Related Business; (3) Temporary Cash Investments; (4) receivables owing to the Company or any Restricted Subsidiary if created or acquired in the 27 19 ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Company or any such Restricted Subsidiary deems reasonable under the circumstances; (5) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (6) loans or advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary; (7) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary or in satisfaction of judgments; (8) any Person to the extent such Investment represents the non-cash portion of the consideration received for an Asset Disposition as permitted pursuant to Section 4.06; (9) so long as no Default shall have occurred and be continuing (or result therefrom), any Person engaged in a Related Business in an aggregate amount which, when added together with the amount of all the Investments made pursuant to this clause (9) which at such time have not been repaid through repayments of loans or advances or other transfers of assets, does not exceed $30.0 million. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock", as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. "principal" of a Security means the principal of the Security plus the premium, if any, payable on the Security which is due or overdue or is to become due at the relevant time. 28 20 "Public Equity Offering" means an underwritten primary public offering of common stock of (1) the Company or (2) the Parent (to the extent the proceeds thereof are contemporaneously contributed to the Company), in each case pursuant to an effective registration statement under the Securities Act. "QT" means QT Optoelectronics, a California corporation. "QT Inc." means QT Optoelectronics, Inc., a Delaware corporation. "Reference Date" means April 7, 1999. "Refinance" means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings. "Refinancing Indebtedness" means Indebtedness that Refinances any Indebtedness of the Company or any Restricted Subsidiary existing on the Issue Date or Incurred in compliance with this Indenture, including Indebtedness that Refinances Refinancing Indebtedness; provided, however, that (1) such Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced, (2) such Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being Refinanced and (3) such Refinancing Indebtedness has an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding or committed (plus fees and expenses, including any premium and defeasance costs) under the Indebtedness being Refinanced; provided further, however, that Refinancing Indebtedness shall not include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary. "Related Business" means any business related, ancillary or complementary to the businesses of the Company and the Restricted Subsidiaries on the Issue Date. "Representative" means any trustee, agent or representative (if any) for an issue of Senior Indebtedness of the Company; provided, however, that if and for so long as any Senior Indebtedness lacks such a representative, then the Representative for such Senior Indebtedness shall at all 29 21 times be the holders of a majority in outstanding principal amount of such Senior Indebtedness. "Restricted Payment" with respect to any Person means: (1) the declaration or payment of any dividends or any other distributions of any sort in respect of its Capital Stock (including any payment in connection with any merger or consolidation involving such Person) or similar payment to the direct or indirect holders of its Capital Stock (other than dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock) and dividends or distributions payable solely to the Company or a Restricted Subsidiary, and other than pro rata dividends or other distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or owners of an equivalent interest in the case of a Subsidiary that is an entity other than a corporation)); (2) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company held by any Person or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the Company (other than a Restricted Subsidiary), including the exercise of any option to exchange any Capital Stock (other than into Capital Stock of the Company that is not Disqualified Stock); (3) the purchase, repurchase, redemption, defeasance or other acquisition or retirement for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment of any Subordinated Obligations (other than the purchase, repurchase or other acquisition of Subordinated Obligations purchased in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of acquisition); or (4) the making of any Investment in any Person (other than a Permitted Investment). "Restricted Subsidiary" means any Subsidiary of the Company that is not an Unrestricted Subsidiary. "Revolving Credit Facilities" means the revolving credit facility contained in the Credit Agreement and any other facility or financing arrangement that Refinances or replaces, in whole or in part, any such revolving credit facility. "Sale/Leaseback Transaction" means an arrangement 30 22 relating to property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such property to a Person and the Company or a Restricted Subsidiary leases it from such Person. "SEC" means the Securities and Exchange Commission. "Secured Indebtedness" means any Indebtedness of the Company secured by a Lien. "Securities" means the Securities issued under this Indenture. "Senior Indebtedness" of any Person means all (1) Bank Indebtedness of or guaranteed by such Person, whether outstanding on the Issue Date or thereafter Incurred, and (2) Indebtedness of such Person, whether outstanding on the Issue Date or thereafter Incurred, including interest thereon, in respect of (A) Indebtedness for money borrowed, (B) Indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable and (C) Hedging Obligations, unless, in the case of (1) and (2), in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are subordinate in right of payment to the obligations under the Securities; provided, however, that Senior Indebtedness shall not include (i) any obligation of such Person to any subsidiary of such Person, (ii) any liability for Federal, state, local or other taxes owed or owing by such Person, (iii) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities), (iv) any Indebtedness of such Person (and any accrued and unpaid interest in respect thereof) which is subordinate or junior by its terms to any other Indebtedness or other obligation of such Person (including, in the case of the Company, the Securities and the Existing Notes) or (v) that portion of any Indebtedness which at the time of Incurrence is Incurred in violation of this Indenture (but as to any such Indebtedness under the Credit Agreement, no such violation shall be deemed to exist if the Representative of the Lenders thereunder shall have received an officers' certificate of the Company to the effect that the issuance of such Indebtedness does not violate such covenant and setting forth in reasonable detail the reasons therefor). "Senior Subordinated Indebtedness" means (1) with respect to the Company, the Securities, the Existing Notes and any other Indebtedness of the Company that specifically provides that such Indebtedness is to rank pari passu with the Securities in right of payment and is not subordinated by its terms in right of payment to any Indebtedness or 31 23 other obligation of the Company which is not Senior Indebtedness of the Company and (2) with respect to the Parent or a Subsidiary Guarantor, their respective Guarantees of the Securities and the Existing Notes and any other indebtedness of such Person that specifically provides that such Indebtedness rank pari passu with such Guarantee in respect of payment and is not subordinated by its terms in respect of payment to any Indebtedness or other obligation of such Person which is not Senior Indebtedness of such Person. "Significant Subsidiary" means any Restricted Subsidiary that would be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the final payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency unless such contingency has occurred). "Sterling" means Sterling Holding Company LLC, a Delaware limited liability company. "Stockholders' Agreement" means the Securities Purchase and Holders Agreement among the stockholders of Parent, as in effect on the Issue Date. "Subordinated Obligation" means any Indebtedness of the Company or any Subsidiary Guarantor (whether outstanding on the Issue Date or thereafter Incurred) which is subordinate or junior in right of payment to, in the case of the Company, the Securities or, in the case of such Subsidiary Guarantor, its Subsidiary Guaranty, pursuant to a written agreement to that effect. "Subsidiary" means, in respect of any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (1) such Person, (2) such Person and one or more Subsidiaries of such Person or (3) one or more Subsidiaries of such Person. "Subsidiary Guarantor" means Fairchild California, QT Inc., QT, KOTA and any other subsidiary of the Company that guarantees the Company's obligations with respect to the Securities. 32 24 "Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the Company's obligations with respect to the Securities. "Temporary Cash Investments" means any of the following: (1) any investment in direct obligations of the United States of America or any agency thereof or obligations guaranteed by the United States of America or any agency thereof; (2) investments in time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50.0 million (or the foreign currency equivalent thereof) and has outstanding debt that is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor; (3) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (1) above entered into with a bank meeting the qualifications described in clause (2) above; (4) investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings Group; and (5) investments in securities with maturities of six months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc. 33 25 "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of this Indenture. "Trustee" means the party named as such in this Indenture until a successor replaces it and, thereafter, means the successor. "Trust Officer" means the Chairman of the Board, the President or any other officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Uniform Commercial Code" means the New York Uniform Commercial Code as in effect from time to time. "Unrestricted Subsidiary" means (1) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (2) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that either (A) the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has assets greater than $1,000, such designation would be permitted under Section 4.04. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to such designation (x) the Company could Incur $1.00 of additional Indebtedness under Section 4.03(a) and (y) no Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership 34 26 interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital Stock of which (other than directors' qualifying shares) is owned by the Company or one or more Wholly Owned Subsidiaries. SECTION 1.02. Other Definitions.
Defined in Term Section ---- ------- "Affiliate Transaction" ................ 4.08 "Bankruptcy Law" ....................... 6.01 "Blockage Notice" ...................... 10.03 "covenant defeasance option" ........... 8.01(b) "Custodian" ............................ 6.01 "Event of Default" ..................... 6.01 "Indenture Obligations" ................ 11.01 "legal defeasance option" .............. 8.01(b) "Legal Holiday" ........................ 13.08 "Offer" ................................ 4.07(b) "Offer Amount" ........................ 4.07(c)(2) "Offer Period" ........................ 4.07(c)(2) "pay its Guaranty" .................... 12.03 "pay the Securities" .................. 10.03 "Paying Agent" ........................ 2.03 "Payment Blockage Period" ............. 10.03 "Payment Default" ..................... 10.03 "Purchase Date" ....................... 4.07(c)(1) "Registrar"............................ 2.03 "Special Redemption" .................. Form of Security "Successor Company" ................... 5.01
SECTION 1.03. Incorporation by Reference of Trust Indenture Act. This Indenture is subject to the mandatory provisions of the TIA which are incorporated by reference in and made a part of this Indenture. The following TIA terms have the following meanings: "Commission" means the SEC; "indenture securities" means the Securities and each Guaranty; "indenture security holder" means a Securityholder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and 35 27 "obligor" on the indenture securities means the Company, each Guarantor and any other obligor on the indenture securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. SECTION 1.04. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) "including" means including without limitation; (5) words in the singular include the plural and words in the plural include the singular; (6) unsecured Indebtedness shall not be deemed to be subordinate or junior to Secured Indebtedness merely by virtue of its nature as unsecured Indebtedness; (7) the principal amount of any noninterest bearing or other discount security at any date shall be the principal amount thereof that would be shown on a balance sheet of the issuer dated such date prepared in accordance with GAAP; (8) the principal amount of any Preferred Stock shall be (i) the maximum liquidation value of such Preferred Stock or (ii) the maximum mandatory redemption or mandatory repurchase price with respect to such Preferred Stock, whichever is greater; (9) all references to the date the Securities were originally issued shall refer to the date the Initial Securities were originally issued; and (10) all references to any amount of interest or any other amount payable on or with respect to any of the Securities shall be deemed to include payment of any additional interest pursuant to the Registration Rights Agreement (as defined in the Appendix). 36 28 ARTICLE 2 The Securities SECTION 2.01. Form and Dating. Provisions relating to the Initial Securities, the Private Exchange Securities and the Exchange Securities are set forth in the Rule 144A/Regulation S Appendix attached hereto (the "Appendix") which is hereby incorporated in and expressly made part of this Indenture. The Initial Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit 1 to the Appendix which is hereby incorporated in and expressly made a part of this Indenture. The Exchange Securities, the Private Exchange Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A, which is hereby incorporated in and expressly made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). Each Security shall be dated the date of its authentication. The terms of the Securities set forth in the Appendix and Exhibit A are part of the terms of this Indenture. SECTION 2.02. Execution and Authentication. Two Officers shall sign the Securities for the Company by manual or facsimile signature. The Company's seal shall be impressed, affixed, imprinted or reproduced on the Securities and may be in facsimile form. If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. On the Issue Date, the Trustee shall authenticate and deliver $350.0 million of 10-1/2% Senior Subordinated Notes Due February 1, 2009 and, at any time and from time to time thereafter, the Trustee shall authenticate and deliver Securities for original issue upon a written order of the Company signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company. Such order shall specify the amount of the Securities to be authenticated and the date on which the original issue of Securities is to be authenticated and, in the case of an issuance of Additional Securities pursuant to 37 29 Section 2.13 after the Issue Date, shall certify that such issuance is in compliance with Section 4.03. The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate the Securities. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Registrar, Paying Agent or agent for service of notices and demands. SECTION 2.03. Registrar and Paying Agent. The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities may be presented for payment (the "Paying Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-registrar not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.07. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar, co-registrar or transfer agent. The Company initially appoints the Trustee as Registrar and Paying Agent in connection with the Securities. SECTION 2.04. Paying Agent To Hold Money in Trust. Prior to each due date of the principal and interest on any Security, the Company shall deposit with the Paying Agent a sum sufficient to pay such principal and interest when so becoming due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Securityholders or the Trustee all money held by the Paying Agent for the payment of principal of or interest on the Securities and shall notify the Trustee of any default by the Company in making any such payment, and while any such default continues, the Trustee may require the Paying Agent to pay all money held by it to the Trustee. If the Company or a Subsidiary acts as Paying Agent, it shall segregate the 38 30 money held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed by the Paying Agent. Upon complying with this Section, the Paying Agent shall have no further liability for the money delivered to the Trustee. SECTION 2.05. Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee, in writing at least five Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Securityholders. SECTION 2.06. Transfer and Exchange. The Securities shall be issued in registered form and shall be transferable only upon the surrender of a Security for registration of transfer. When a Security is presented to the Registrar or a co-registrar with a request to register a transfer, the Registrar shall register the transfer as requested if the requirements of Section 8-401(1) of the Uniform Commercial Code are met. When Securities are presented to the Registrar or a co-registrar with a request to exchange them for an equal principal amount of Securities of other denominations, the Registrar shall make the exchange as requested if the same requirements are met. To permit registration of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Securities at the Registrar's or co-registrar's request. The Company may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges in connection with any transfer or exchange pursuant to this Section. The Company shall not be required to make and the Registrar need not register transfers or exchanges of Securities selected for redemption (except, in the case of Securities to be redeemed in part, the portion thereof not to be redeemed) or any Securities for a period of 15 days before a selection of Securities to be redeemed or 15 days before an interest payment date. Prior to the due presentation for registration of transfer of any Security, the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar may deem and treat the person in whose name a Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and (subject to the provisions of the Securities with respect to record dates) interest on such Security and for all other purposes whatsoever, whether or not such Security is overdue, and none of the Company, the Trustee, the Paying Agent, the 39 31 Registrar or any co-registrar shall be affected by notice to the contrary. All Securities issued upon any transfer or exchange pursuant to the terms of this Indenture will evidence the same debt and will be entitled to the same benefits under this Indenture as the Securities surrendered upon such transfer or exchange. SECTION 2.07. Replacement Securities. If a mutilated Security is surrendered to the Registrar or if the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the requirements of Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies any other reasonable requirements of the Trustee. If required by the Trustee or the Company, such Holder shall furnish an indemnity bond sufficient in the judgment of the Company and the Trustee to protect the Company, the Trustee, the Paying Agent, the Registrar and any co-registrar from any loss which any of them may suffer if a Security is replaced. The Company and the Trustee may charge the Holder for their expenses in replacing a Security. Every replacement Security is an additional obligation of the Company. SECTION 2.08. Outstanding Securities. Securities outstanding at any time are all Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation and those described in this Section as not outstanding. A Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security. If a Security is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee and the Company receive proof satisfactory to them that the replaced Security is held by a bona fide purchaser, in which case the replacement Security shall cease to be outstanding, subject to the provisions of Section 8-405 of the Uniform Commercial Code. If the Paying Agent segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date money sufficient to pay all principal and interest payable on that date with respect to the Securities (or portions thereof) to be redeemed or maturing, as the case may be, and the Paying Agent is not prohibited from paying such money to the Securityholders on that date pursuant to the terms of this Indenture, then on and after that date such Securities (or portions thereof) cease to be outstanding and interest on them ceases to accrue. 40 32 SECTION 2.09. Temporary Securities. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities and deliver them in exchange for temporary Securities. SECTION 2.10 Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel and destroy all Securities surrendered for registration of transfer, exchange, payment or cancellation and deliver a certificate of such destruction to the Company unless the Company directs the Trustee to deliver canceled Securities to the Company. The Company may not issue new Securities to replace Securities it has redeemed, paid or delivered to the Trustee for cancellation. SECTION 2.11. Defaulted Interest. If the Company defaults in a payment of interest on the Securities, the Company shall pay defaulted interest (plus interest on such defaulted interest to the extent lawful) in any lawful manner. The Company may pay the defaulted interest to the persons who are Securityholders on a subsequent special record date. The Company shall fix or cause to be fixed any such special record date and payment date to the reasonable satisfaction of the Trustee and shall promptly mail to each Securityholder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. SECTION 2.12. CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. SECTION 2.13. Issuance of Additional Securities. The Company shall be entitled, subject to its compliance with Section 4.03, to issue Additional Securities under this Indenture which shall have identical terms as the Initial Securities issued on the Issue Date, other than with respect to the date of issuance, issue price and amount of interest 41 33 payable on the first payment date applicable thereto. The Initial Securities issued on the Issue Date, any Additional Securities and all Exchange Securities or Private Exchange Securities issued in exchange therefor shall be treated as a single class for all purposes under this Indenture. With respect to any Additional Securities, the Company shall set forth in a resolution of the Board of Directors and an Officers' Certificate, a copy of each which shall be delivered to the Trustee, the following information: (1) the aggregate principal amount of such Additional Securities to be authenticated and delivered pursuant to this Indenture; (2) the issue price and the issue date of such Additional Securities and the amount of interest payable on the first payment date applicable thereto; provided, however, that no Additional Securities may be issued at a price that would cause such Additional Securities to have "original issue discount" within the meaning of Section 1273 of the Code; and (3) whether such Additional Securities shall be transfer restricted securities and issued in the form of Initial Securities as set forth in the Appendix to this Indenture or shall be issued in the form of Exchange Securities as set forth in Exhibit A. ARTICLE 3 Redemption SECTION 3.01. Notices to Trustee. If the Company elects to redeem the Securities pursuant to paragraph 5 of the Securities or is required to redeem the Securities pursuant to paragraph 6 of the Securities, it shall notify the Trustee in writing of the redemption date, the principal amount of Securities to be redeemed and the paragraph of the Securities pursuant to which the redemption will occur. Except in the case of a Special Redemption, the Company shall give each notice to the Trustee provided for in this Section at least 45 days before the redemption date unless the Trustee consents to a shorter period. The Company shall give the notice with respect to a Special Redemption when required by paragraph 6 of the Securities. Each such notice shall be accompanied by an Officers' Certificate and an Opinion of Counsel from the Company to the effect that such redemption will comply with the conditions herein. 42 34 SECTION 3.02. Selection of Securities To Be Redeemed. If fewer than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed pro rata or by lot or by a method that complies with applicable legal and securities exchange requirements, if any, and that the Trustee in its sole discretion considers to be fair and appropriate. The Trustee shall make the selection from outstanding Securities not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities that have denominations larger than $1,000. Securities and portions of them the Trustee selects shall be in amounts of $1,000 or a whole multiple of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Company promptly of the Securities or portions of Securities to be redeemed. SECTION 3.03. Notice of Redemption. At least 30 days but not more than 60 days before a date for an optional redemption of Securities, the Company shall mail a notice of redemption by first-class mail to each Holder of Securities to be redeemed at such Holder's registered address. In the case of a Special Redemption, the Company shall mail a notice of redemption by first-class mail to each Holder of Securities no later than the fifth Business Day following the date on which the event causing the Special Redemption occurs. The notice shall identify the Securities to be redeemed and shall state: (1) the redemption date; (2) the redemption price; (3) the name and address of the Paying Agent; (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; (5) if fewer than all the outstanding Securities are to be redeemed, the identification and principal amounts of the particular Securities to be redeemed; (6) that, unless the Company defaults in making such redemption payment or the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture, interest on Securities (or portion thereof) called for redemption ceases to accrue on and after the redemption date; 43 35 (7) the paragraph of the Securities pursuant to which the Securities called for redemption are being redeemed; and (8) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Securities. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. In such event, the Company shall provide the Trustee with the information required by this Section. SECTION 3.04. Effect of Notice of Redemption. Once notice of redemption is mailed, Securities called for redemption become due and payable on the redemption date and at the redemption price stated in the notice. Upon surrender to the Paying Agent, such Securities shall be paid at the redemption price stated in the notice, plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date). Failure to give notice or any defect in the notice to any Holder shall not affect the validity of the notice to any other Holder. SECTION 3.05. Deposit of Redemption Price. Prior to the redemption date, the Company shall deposit with the Paying Agent (or, if the Company or a Subsidiary is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the redemption price of and accrued interest (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date) on all Securities to be redeemed on that date other than Securities or portions of Securities called for redemption which have been delivered by the Company to the Trustee for cancellation. SECTION 3.06. Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part, the Company shall execute and the Trustee shall authenticate for the Holder (at the Company's expense) a new Security equal in principal amount to the unredeemed portion of the Security surrendered. 44 36 ARTICLE 4 Covenants SECTION 4.01. Payment of Securities. The Company shall promptly pay the principal of and interest on the Securities on the dates and in the manner provided in the Securities and in this Indenture. Principal and interest shall be considered paid on the date due if on such date the Trustee or the Paying Agent holds in accordance with this Indenture money sufficient to pay all principal and interest then due and the Trustee or the Paying Agent, as the case may be, is not prohibited from paying such money to the Securityholders on that date pursuant to the terms of this Indenture. The Company shall pay interest on overdue principal at the rate specified therefor in the Securities, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. SECTION 4.02. SEC Reports. Whether or not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the SEC and provide the Trustee and Securityholders with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections at the times specified for such filings under such Sections; provided, however that this obligation can be satisfied by Parent filing and providing such information, documents and reports so long as Parent owns all of the Capital Stock of the Company; provided further, however that the Company will not be required to file any reports, documents or other information if the SEC will not accept such a filing. The Company also shall comply with the other provisions of TIA Section 314(a). SECTION 4.03. Limitation on Indebtedness. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness except that the Company may Incur Indebtedness if, after giving effect thereto, the Consolidated Coverage Ratio exceeds 2.0 to 1.0. (b) Notwithstanding the foregoing paragraph (a), the Company and its Restricted Subsidiaries may Incur any or all of the following Indebtedness: 45 37 (1) Indebtedness of the Company or any Restricted Subsidiary Incurred pursuant to the Revolving Credit Facilities; provided, however, that, immediately after giving effect to any such Incurrence, the aggregate principal amount of all Indebtedness incurred under this clause (1) and then outstanding does not exceed the greater of (A) $300.0 million and (B) the sum of 50% of the book value of the inventory of the Company and its Restricted Subsidiaries and 65% of the book value of the accounts receivables of the Company and its Restricted Subsidiaries; (2) Intentionally omitted; (3) Indebtedness of the Company or any Restricted Subsidiary owed to and held by the Company or a Wholly Owned Subsidiary; provided, however, that any subsequent issuance or transfer of any Capital Stock which results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of such Indebtedness (other than to the Company or another Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the issuer thereof; (4) Indebtedness of the Company or any Restricted Subsidiary owed to and held by any Restricted Subsidiary (other than a Wholly Owned Subsidiary); provided, however, that (A) any such Indebtedness shall be unsecured Subordinated Obligations of the Company or such Restricted Subsidiary, as applicable, and (B) any subsequent issuance or transfer of any Capital Stock of such Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to the Company, a Wholly Owned Subsidiary or another Restricted Subsidiary) shall be deemed to constitute the Incurrence of such Indebtedness by the issuer thereof; (5) the Securities (other than Additional Securities); (6) Indebtedness outstanding on the Issue Date (other than Indebtedness described in clause (1), (2), (3), (4) or (5) of this Section 4.03(b)), including the Existing Notes; (7) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to Section 4.03(a) or pursuant to clause (5) or (6) of this Section 4.03(b) or this clause (7); (8) Hedging Obligations of the Company or any Restricted Subsidiary under or with respect to Interest Rate Agreements and Currency Agreements entered into in 46 38 the ordinary course of business and not for the purpose of speculation; (9) Indebtedness of the Company or any Restricted Subsidiary in respect of performance bonds and surety or appeal bonds entered into by the Company and the Restricted Subsidiaries in the ordinary course of their business; (10) Indebtedness consisting of the Subsidiary Guaranties and the Guarantees of Indebtedness Incurred pursuant to paragraph (a) or pursuant to clause (1), (2), (5), (6) or (7) above or (15) below; (11) Indebtedness of the Company or any Restricted Subsidiary arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business, provided that such Indebtedness is satisfied within five business days of Incurrence; (12) Indebtedness consisting of Capital Lease Obligations in an aggregate principal amount which, when added together with the amount of indebtedness incurred pursuant to this clause (12) and then outstanding, does not exceed $15.0 million; provided, however, that the assets subject to the related capital lease are not owned or used by the Company or any Restricted Subsidiary on the Issue Date or on the Acquisition Closing Date; (13) Indebtedness of the Company or any Restricted Subsidiary consisting of indemnification, adjustment of purchase price or similar obligations, in each case incurred in connection with the disposition of any assets of the Company or any Restricted Subsidiary in a principal amount not to exceed the gross proceeds actually received by the Company or any Restricted Subsidiary in connection with such disposition; (14) Indebtedness of a Foreign Subsidiary Incurred to finance the purchase, lease or improvement of property (real or personal) or equipment, in each case incurred no more than 180 days after such purchase, lease or improvement of such property, and any Refinancing Indebtedness in respect of such Indebtedness; provided, however, that, except in the case of the Incurrence of any such Refinancing Indebtedness, at the time of the Incurrence of such Indebtedness and after giving effect thereto, (i) the Company would be able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) above and 47 39 (ii) the aggregate amount of all Indebtedness Incurred pursuant to this clause (14) and then outstanding (including any such Refinancing Indebtedness) shall not exceed 20% of Consolidated Net Tangible Assets as of the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Incurrence; and (15) Indebtedness of the Company in an aggregate principal amount which, together with all other Indebtedness of the Company and the Restricted Subsidiaries outstanding on the date of such Incurrence (other than Indebtedness permitted by clauses (1) through (14) of this Section 4.03(b) or Section 4.03(a)) does not exceed $50.0 million. (c) Notwithstanding the foregoing, the Company shall not, and shall not permit any Restricted Subsidiary to, Incur any Indebtedness pursuant to Section 4.03(b) if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations unless such Indebtedness shall be subordinated to the Securities or the relevant Subsidiary Guaranty, as applicable, to at least the same extent as such Subordinated Obligations. (d) For purposes of determining compliance with this Section 4.03, (1) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described herein, the Company, in its sole discretion, will classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of the above clauses and (2) an item of Indebtedness may be divided and classified in more than one of the types of Indebtedness described herein. (e) Notwithstanding Section 4.03(a) or 4.03(b), the Company shall not, and shall not permit any Subsidiary Guarantor to, Incur (1) any Indebtedness if such Indebtedness is subordinate or junior in ranking in any respect to any Senior Indebtedness of the Company or such Subsidiary Guarantor, as applicable, unless such Indebtedness is Senior Subordinated Indebtedness or is expressly subordinated in right of payment to Senior Subordinated Indebtedness or (2) any Secured Indebtedness (other than trade payables incurred in the ordinary course of business) that is not Senior Indebtedness unless contemporaneously therewith effective provision is made to secure the Securities or the relevant Subsidiary Guaranty, as applicable, equally and ratably with such Secured Indebtedness for so long as such Secured Indebtedness is secured by a Lien. 48 40 SECTION 4.04. Limitation on Restricted Payments. (a) The Company shall not, and shall not permit any Restricted Subsidiary, directly or indirectly, to make a Restricted Payment if at the time the Company or such Restricted Subsidiary makes such Restricted Payment: (1) a Default shall have occurred and be continuing (or would result therefrom); (2) the Company is not able to Incur an additional $1.00 of Indebtedness under Section 4.03(a); or (3) the aggregate amount of such Restricted Payment and all other Restricted Payments since the Reference Date would exceed the sum of: (A) 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter immediately following the fiscal quarter in which the Reference Date occurred to the end of the most recent fiscal quarter ending at least 45 days (or, if less, the number of days after the end of such fiscal quarter as the consolidated financial statements of the Company shall be provided to Securityholders hereunder) prior to the date of such Restricted Payment (or, in case such Consolidated Net Income shall be a deficit, minus 100% of such deficit); (B) the aggregate Net Cash Proceeds received by the Company from the issuance or sale of its Capital Stock (other than Disqualified Stock) subsequent to the Reference Date (other than an issuance or sale to a Subsidiary of the Company and other than an issuance or sale to an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees to the extent that the purchase by such plan or trust is financed by Indebtedness of such plan or trust to the Company or any Subsidiary or Indebtedness Guaranteed by the Company or any Subsidiary); (C) the amount by which Indebtedness of the Company or any Restricted Subsidiary is reduced on the Company's consolidated balance sheet upon the conversion or exchange (other than by a Subsidiary of the Company) subsequent to the Reference Date of any Indebtedness of the Company or any Restricted Subsidiary convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Company (less the amount of any cash, or the fair value of any other property, distributed 49 41 by the Company or any Restricted Subsidiary upon such conversion or exchange); and (D) an amount equal to the sum of (i) the net reduction in Investments in Unrestricted Subsidiaries resulting from dividends, repayments of loans or advances or other transfers of assets subsequent to the Reference Date, in each case to the Company or any Restricted Subsidiary from Unrestricted Subsidiaries, and (ii) the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any Unrestricted Subsidiary, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary. (b) The provisions of Section 4.04(a) shall not prohibit: (1) any Restricted Payment made by exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees to the extent that the purchase by such plan or trust is financed by Indebtedness of such plan or trust to the Company or any Subsidiary of the Company or Indebtedness Guaranteed by the Company or any Subsidiary of the Company); provided, however, that (A) such Restricted Payment shall be excluded in the calculation of the amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall be excluded from the calculation of amounts under clause (3)(B) of Section 4.04(a); (2) any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Obligations made by exchange for, or out of the proceeds of the substantially concurrent sale of, Indebtedness which is permitted to be Incurred pursuant to Section 4.03; provided, however, that such purchase, repurchase, redemption, defeasance or other acquisition or retirement for value shall be excluded in the calculation of the amount of Restricted Payments; (3) any purchase or redemption of Disqualified Stock of the Company or a Restricted Subsidiary made by 50 42 exchange for, or out of the proceeds of the substantially concurrent sale of, Disqualified Stock of the Company or a Restricted Subsidiary which is permitted to be Incurred pursuant to Section 4.03; provided, however, that such purchase or redemption shall be excluded in the calculation of the amount of Restricted Payments; (4) any purchase or redemption of Subordinated Obligations from Net Available Cash to the extent permitted by Section 4.06; provided, however, that such purchase or redemption shall be excluded in the calculation of the amount of Restricted Payments; (5) upon the occurrence of a Change of Control and within 60 days after the completion of the offer to repurchase the Securities pursuant to Section 4.09 (including the purchase of the Securities tendered), any purchase or redemption of Subordinated Obligations required pursuant to the terms thereof as a result of such Change of Control at a purchase or redemption price not to exceed the outstanding principal amount thereof, plus accrued and unpaid interest (if any); provided, however, that (A) at the time of such purchase or redemption no Default shall have occurred and be continuing (or would result therefrom), (B) the Company would be able to Incur an additional $1.00 of Indebtedness pursuant to Section 4.03(a) after giving pro forma effect to such Restricted Payment and (C) such purchase or redemption shall be included in the calculation of the amount of Restricted Payments; (6) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with Section 4.04(a)); provided, however, that at the time of payment of such dividend, no other Default shall have occurred and be continuing (or result therefrom); provided further, however, that such dividend shall be included in the calculation of the amount of Restricted Payments (7) the repurchase or other acquisition of shares of, or options to purchase shares of, common stock of the Company or any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors), pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell or are granted the option to purchase or sell, shares of such common stock; provided, however, that the aggregate amount of such repurchases and other 51 43 acquisitions shall not exceed the sum of $7.0 million and the Net Cash Proceeds from the sale of Capital Stock to members of management or directors of the Company and its Subsidiaries that occurs after the Reference Date (to the extent the Net Cash Proceeds from the sale of such Capital Stock have not otherwise been applied to the payment of Restricted Payments by virtue of clause (3)(B) of Section 4.04(a); provided further, however, that (A) such repurchases shall be excluded in the calculation of the amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall be excluded from the calculation of amounts under clause (3)(B) of Section 4.04(a); (8) dividends or advances to Parent in an amount necessary to pay holding company expenses, such amount not to exceed $500,000 in any fiscal year of the Company; provided, however, that such dividends and advances shall be excluded in the calculation of the amount of Restricted Payments; or (9) Restricted Payments not exceeding $25.0 million in the aggregate; provided, however, that (A) at the time of such Restricted Payments, no Default shall have occurred and be continuing (or would result therefrom) and (B) such Restricted Payments shall be included in the calculation of the amount of Restricted Payments. SECTION 4.05. Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Company shall not, and shall not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (a) pay dividends or make any other distributions on its Capital Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company, (b) make any loans or advances to the Company or (c) transfer any of its property or assets to the Company, except: (1) any encumbrance or restriction pursuant to an agreement in effect at or entered into on the Issue Date; (2) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior to the date on which such Restricted Subsidiary was acquired by the Company (other than Indebtedness Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or 52 44 was acquired by the Company) and outstanding on such date; (3) any encumbrance or restriction pursuant to an agreement effecting a Refinancing of Indebtedness Incurred pursuant to an agreement referred to in clause (1) or (2) of this Section 4.05 or this clause (3) or contained in any amendment to an agreement referred to in clause (1) or (2) of this Section 4.05 or this clause (3); provided, however, that the encumbrances and restrictions with respect to such Restricted Subsidiary contained in any such refinancing agreement or amendment are no more restrictive in any material respect than the encumbrances and restrictions with respect to such Restricted Subsidiary contained in such agreements; (4) any such encumbrance or restriction consisting of customary nonassignment provisions in leases governing leasehold interests to the extent such provisions restrict the transfer of the lease or the property leased thereunder; (5) in the case of clause (c) above, restrictions contained in security agreements or mortgages securing Indebtedness of a Restricted Subsidiary to the extent such restrictions restrict the transfer of the property subject to such security agreements or mortgages; (6) any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition; and (7) any restriction in any agreement that is not more restrictive than the restrictions under the terms of the Credit Agreement as in effect on the Issue Date. SECTION 4.06. Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Disposition unless: (1) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value (including as to the value of all non-cash consideration), as determined in good faith by the Board of Directors, of the shares and assets subject to such Asset Disposition; 53 45 (2) at least 85% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or cash equivalents; and (3) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company (or such Restricted Subsidiary, as the case may be): (A) first, to the extent the Company elects (or is required by the terms of any Indebtedness), to prepay, repay, redeem or purchase Senior Indebtedness or Indebtedness (other than any Disqualified Stock) of a Wholly Owned Subsidiary (in each case other than Indebtedness owed to the Company or an Affiliate of the Company) within one year from the later of the date of such Asset Disposition and the receipt of such Net Available Cash; (B) second, to the extent of the balance of such Net Available Cash after application in accordance with clause (A), to the extent the Company elects, to acquire Additional Assets within one year from the later of the date of such Asset Disposition and the receipt of such Net Available Cash; (C) third, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A) and (B), to make an Offer to the holders of the Securities (and to holders of other Senior Subordinated Indebtedness designated by the Company) to purchase Securities (and such other Senior Subordinated Indebtedness) pursuant to and subject to the conditions of Section 4.06(b); and (D) fourth, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A), (B) and (C), to (x) the acquisition by the Company or any Wholly Owned Subsidiary of Additional Assets or (y) the prepayment, repayment or purchase of Indebtedness (other than any Disqualified Stock) of the Company (other than Indebtedness owed to an Affiliate of the Company) or Indebtedness of any Subsidiary (other than Indebtedness owed to the Company or an Affiliate of the Company), in each case within one year from the later of the receipt of such Net Available Cash and the date the offer described in Section 4.06(b) is consummated; provided, however, that in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (A), (C) or (D) above, the Company or such Restricted Subsidiary shall permanently retire such Indebtedness and shall cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or 54 46 purchased. Notwithstanding the foregoing provisions of this Section 4.06, the Company and the Restricted Subsidiaries shall not be required to apply any Net Available Cash in accordance with this Section 4.06(a) except to the extent that the aggregate Net Available Cash from all Asset Dispositions which are not applied in accordance with this Section 4.06(a) exceeds $10.0 million. Pending application of Net Available Cash pursuant to this Section 4.06(a), such Net Available Cash shall be invested in Permitted Investments or used to reduce loans outstanding under any revolving credit facility. For the purposes of this Section 4.06, the following are deemed to be cash or cash equivalents: (x) the assumption of Indebtedness of the Company or any Restricted Subsidiary and the release of the Company or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition and (y) securities received by the Company or any Restricted Subsidiary from the transferee that are promptly converted by the Company or such Restricted Subsidiary into cash. (b) In the event of an Asset Disposition that requires the purchase of Securities (and other Senior Subordinated Indebtedness) pursuant to Section 4.06(a)(3)(C), the Company shall be required to purchase Securities tendered pursuant to an offer by the Company for the Securities (and other Senior Subordinated Indebtedness) (the "Offer") at a purchase price of 100% of their principal amount (without premium) plus accrued but unpaid interest (or, in respect of such other Senior Subordinated Indebtedness, such lesser price, if any, as may be provided for by the terms of such Senior Subordinated Indebtedness) in accordance with the procedures (including prorating in the event of oversubscription) set forth in Section 4.06(c). If the aggregate purchase price of Securities (and any other Senior Subordinated Indebtedness) tendered pursuant to the Offer is less than the Net Available Cash allotted to the purchase thereof, the Company shall be required to apply the remaining Net Available Cash in accordance with Section 4.06(a)(3)(D). If the aggregate purchase price of the Securities (and any other Senior Subordinated Indebtedness) tendered exceeds the Net Available Cash allotted to the purchase thereof, the Company will select the Securities (and any other Senior Subordinated Indebtedness) to be purchased on a pro rata basis but in denominations of $1,000 or multiples thereof. The Company shall not be required to make an Offer to purchase Securities (and other Senior Subordinated Indebtedness) pursuant to this Section 4.06 if the Net Available Cash available therefor is less than $10.0 million (which lesser amount shall be carried forward for purposes of determining whether such an Offer is required with respect to the Net Available Cash from any subsequent Asset Disposition). 55 47 (c) (1) Promptly, and in any event within 10 days after the Company becomes obligated to make an Offer, the Company shall be obligated to deliver to the Trustee and send, by first-class mail to each Holder, a written notice stating that the Holder may elect to have his Securities purchased by the Company either in whole or in part (subject to prorating as hereinafter described in the event the Offer is oversubscribed) in integral multiples of $1,000 of principal amount, at the applicable purchase price. The notice shall specify a purchase date not less than 30 days nor more than 60 days after the date of such notice (the "Purchase Date") and shall contain such information concerning the business of the Company which the Company in good faith believes will enable such Holders to make an informed decision (which at a minimum will include (i) the most recently filed Annual Report on Form 10-K (including audited consolidated financial statements) of the Company, the most recent subsequently filed Quarterly Report on Form 10-Q and any Current Report on Form 8-K of the Company filed subsequent to such Quarterly Report, other than Current Reports describing Asset Dispositions otherwise described in the offering materials (or corresponding successor reports or, until such time as the Company shall become subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, a corresponding report prepared pursuant to Section 4.02), (ii) a description of material developments in the Company's business subsequent to the date of the latest of such Reports, and (iii) if material, appropriate pro forma financial information) and all instructions and materials necessary to tender Securities pursuant to the Offer, together with the information contained in clause (3). (2) Not later than the date upon which written notice of an Offer is delivered to the Trustee as provided above, the Company shall deliver to the Trustee an Officers' Certificate as to (i) the amount of the Offer (the "Offer Amount"), (ii) the allocation of the Net Available Cash from the Asset Dispositions pursuant to which such Offer is being made and (iii) the compliance of such allocation with the provisions of Section 4.06(a). On such date, the Company shall also irrevocably deposit with the Trustee or with a paying agent other than the Company in Temporary Cash Investments, maturing on the last day prior to the Purchase Date or on the Purchase Date if funds are immediately available by open of business, an amount equal to the Offer Amount to be held for payment in accordance with the provisions of this Section. Upon the expiration of the period for which the Offer remains open (the "Offer Period"), the Company shall deliver to the Trustee for cancellation the Securities or portions thereof which have been properly tendered to and are to be accepted by the Company. The Trustee shall, on the Purchase Date, mail or deliver payment to each tendering Holder in the amount of the purchase price. In the event that the aggregate purchase price of 56 48 the Securities delivered by the Company to the Trustee is less than the Offer Amount, the Trustee shall deliver the excess to the Company immediately after the expiration of the Offer Period for application in accordance with this Section. (3) Holders electing to have a Security purchased shall be required to surrender the Security, with an appropriate form duly completed, to the Company at the address specified in the notice at least three Business Days prior to the Purchase Date. Holders shall be entitled to withdraw their election if the Trustee or the Company receives, not later than one Business Day prior to the Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Security purchased. If at the expiration of the Offer Period the aggregate principal amount of Securities (and any other Senior Subordinated Indebtedness included in the Offer) surrendered pursuant to the Offer exceeds the Offer Amount, the Company shall select the Securities and other Senior Subordinated Indebtedness to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Securities and other Senior Subordinated Indebtedness in denominations of $1,000, or integral multiples thereof, shall be purchased). Holders whose Securities are purchased only in part shall be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. (4) At the time the Company delivers Securities to the Trustee which are to be accepted for purchase, the Company shall also deliver an Officers' Certificate stating that such Securities are to be accepted by the Company pursuant to and in accordance with the terms of this Section 4.06. A Security shall be deemed to have been accepted for purchase at the time the Trustee, directly or through an agent, mails or delivers payment therefor to the surrendering Holder. (d) The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Securities pursuant to this Section. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section by virtue thereof. SECTION 4.07. Limitation on Affiliate Transactions. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, enter into or permit to 57 49 exist any transaction (including the purchase, sale, lease or exchange of any property, employee compensation arrangements or the rendering of any service) with any Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof: (1) are no less favorable to the Company or such Restricted Subsidiary than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not such an Affiliate; (2) if such Affiliate Transaction involves an amount in excess of $1.0 million, (A) are set forth in writing and (B) have been approved by a majority of the members of the Board of Directors having no personal stake in such Affiliate Transaction; and (3) if such Affiliate Transaction involves an amount in excess of $10.0 million, have been determined by (A) a nationally recognized investment banking firm to be fair, from a financial standpoint, to the Company and its Restricted Subsidiaries or (B) an accounting or appraisal firm nationally recognized in making such determinations to be on terms that are not less favorable to the Company and its Restricted Subsidiaries than the terms that could be obtained in an arm's-length transaction from a Person that is not an Affiliate of the Company. (b) The provisions of Section 4.07(a) shall not prohibit: (1) any Restricted Payment permitted to be paid pursuant to Section 4.04; (2) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors; (3) the grant of stock options or similar rights to employees and directors of the Company pursuant to plans approved by the Board of Directors; (4) loans or advances to employees in the ordinary course of business in accordance with the past practices of the Company or its Restricted Subsidiaries, but in any event not to exceed $5.0 million in the aggregate outstanding at any one time; (5) reasonable fees, compensation or employee benefit arrangements to and indemnity provided for the benefit of directors, officers or employees of the Company or any Subsidiary in the ordinary course of business; 58 50 (6) any Affiliate Transaction between the Company and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries; (7) any Affiliate Transaction with National Semiconductor Corporation pursuant to written agreements in effect on the Issue Date and as amended, renewed or extended from time to time; provided, however, that any such amendment, renewal or extension shall not contain terms which are materially less favorable to the Company than those in the agreements in effect on the Issue Date; and (8) the issuance or sale of any Capital Stock (other than Disqualified Stock) of the Company. SECTION 4.08. Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries. The Company shall not sell or otherwise dispose of any Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any of its Capital Stock except: (1) to the Company or a Wholly Owned Subsidiary; (2) if, immediately after giving effect to such issuance, sale or other disposition, neither the Company nor any of its Subsidiaries own any Capital Stock of such Restricted Subsidiary; (3) if, immediately after giving effect to such issuance, sale or other disposition, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect thereto would have been permitted to be made under the covenant described in Section 4.04 if made on the date of such issuance, sale or other disposition; or (4) directors' qualifying shares. SECTION 4.09. Change of Control. (a) Upon the occurrence of a Change of Control, each Holder shall have the right to require that the Company repurchase such Holder's Securities at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), in accordance with the terms contemplated in Section 4.09(b). In the event that at the time of such Change of Control the terms of any Senior Indebtedness of the Company restrict or prohibit any offer pursuant to this Section or the repurchase of Securities pursuant to this 59 51 Section, then prior to the mailing of the notice to Holders provided for in Section 4.09(b) below but in any event within 30 days following any Change of Control, the Company shall (1) repay in full all such Senior Indebtedness or offer to repay in full all such Senior Indebtedness and repay such Senior Indebtedness of each lender who has accepted such offer or (2) obtain the requisite consent under the agreements governing such Senior Indebtedness to permit the repurchase of the Securities as provided for in Section 4.09(b). The Company must first comply with the covenant described in the preceding sentence before it will be required to purchase Securities in the event of a Change of Control; provided, however, that the Company's failure to comply with the covenant described in the preceding sentence or to make a Change of Control offer because of any such failure shall constitute a Default described in Section 6.01(4) (and not under Section 6.01(2)). (b) Within 30 days following any Change of Control but subject to the provisions of Section 4.09(a), the Company shall mail a notice to each Holder with a copy to the Trustee stating: (1) that a Change of Control has occurred and that such Holder has the right to require the Company to purchase such Holder's Securities at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest (if any) to the date of purchase (subject to the right of Holders of record on the relevant record date to receive interest on the relevant interest payment date); (2) the circumstances and relevant facts regarding such Change of Control; (3) the repurchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and (4) the instructions determined by the Company, consistent with this Section, that a Holder must follow in order to have its Securities purchased. (c) Holders electing to have a Security purchased will be required to surrender the Security, with an appropriate form duly completed, to the Company at the address specified in the notice at least three Business Days prior to the purchase date. Holders will be entitled to withdraw their election if the Trustee or the Company receives not later than one Business Day prior to the purchase date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Security purchased. 60 52 (d) On the purchase date, all Securities purchased by the Company under this Section shall be delivered by the Trustee for cancellation, and the Company shall pay the purchase price plus accrued and unpaid interest, if any, to the Holders entitled thereto. (e) The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Securities pursuant to this Section. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section by virtue thereof. SECTION 4.10. Future Guarantors. In the event that, after the Issue Date, any Restricted Subsidiary (other than a Foreign Subsidiary) (1) Incurs any Indebtedness pursuant to paragraph (a) or pursuant to clause (1) or (10) of Section 4.03(b) and (2) until the termination of the Credit Agreement, either has Guaranteed or will as a result of such Incurrence be required to Guarantee any Obligations under the Credit Agreement, the Company shall cause such Restricted Subsidiary to Guarantee the Securities by executing a supplemental indenture hereto and shall cause all Indebtedness of such Restricted Subsidiary owing to the Company or any other Subsidiary of the Company and not previously discharged to be converted into Capital Stock of such Restricted Subsidiary (other than Disqualified Stock). SECTION 4.11. Compliance Certificate. The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company a certificate of the principal executive officer, the principal financial officer or the principal accounting officer of the Company stating that in the course of the performance by the signer of his or her duties as an officer of the Company such officer would normally have knowledge of any Default and whether or not the signer knows of any Default that occurred during such period. If such signer does, the certificate shall describe the Default, its status and what action the Company is taking or proposes to take with respect thereto. The Company also shall comply with TIA Section 314(a)(4). SECTION 4.12. Further Instruments and Acts. Upon request of the Trustee, the Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. 61 53 ARTICLE 5 Successor Companies SECTION 5.01. When Company May Merge or Transfer Assets. (a) The Company shall not consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, all or substantially all its assets to, any Person, unless: (1) the resulting, surviving or transferee Person (the "Successor Company") shall be a Person organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Company (if not the Company) shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Securities and this Indenture; (2) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Company or any Subsidiary as a result of such transaction as having been Incurred by the Successor Company or such Subsidiary at the time of such transaction), no Default shall have occurred and be continuing; (3) immediately after giving effect to such transaction, the Successor Company would be able to Incur an additional $1.00 of Indebtedness pursuant to Section 4.03(a); (4) immediately after giving effect to such transaction, the Successor Company shall have Consolidated Net Worth in an amount that is not less than the Consolidated Net Worth of the Company immediately prior to such transaction; and (5) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with this Indenture; provided, however, that clauses (3) and (4) above shall not apply if, in the good faith determination of the Board of Directors, whose determination shall be evidenced by a resolution of the Board of Directors, the principal purpose and effect of such transaction is to change the jurisdiction of incorporation of the Company. The Successor Company shall be the successor to the Company and shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture, but the predecessor Company in the case of a 62 54 conveyance, transfer or lease shall not be released from the obligation to pay the principal of and interest on the Securities. (b) The Company shall not permit any Subsidiary Guarantor to consolidate with or merge with or into, or convey, transfer or lease, in one transaction or series of transactions, all or substantially all of its assets to any Person unless: (1) the resulting, surviving or transferee Person (if not such Subsidiary) shall be a Person organized and existing under the laws of the jurisdiction under which such Subsidiary was organized or under the laws of the United States of America, or any State thereof or the District of Columbia, and such Person shall expressly assume, by executing a Guaranty Agreement, in a form acceptable to the Trustee, all the obligations of such Subsidiary, if any, under its Subsidiary Guaranty; (2) immediately after giving effect to such transaction or transactions on a pro forma basis (and treating any Indebtedness which becomes an obligation of the resulting, surviving or transferee Person as a result of such transaction as having been issued by such Person at the time of such transaction), no Default shall have occurred and be continuing; and (3) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such Guaranty Agreement, if any, complies with this Indenture. The provisions of clauses (i) and (ii) above shall not apply to any one or more transactions which constitute an Asset Disposition if the Company has complied with the applicable provisions of Section 4.06. The Person who shall be the successor to a Subsidiary Guarantor shall succeed to, and be substituted for, and may exercise every right and power of, the predecessor Subsidiary Guarantor under this Indenture, but the predecessor Subsidiary Guarantor in the case of a conveyance, transfer or lease shall not be released from its obligations under its Subsidiary Guaranty. (c) Parent will not merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, all or substantially all of its assets to any Person unless: (1) the resulting, surviving or transferee Person (if not Parent) shall be a Person organized and existing under the laws of the jurisdiction under which 63 55 Parent was organized or under the laws of the United States of America, or any State thereof or the District of Columbia, and such Person shall expressly assume, by executing a Guaranty Agreement, in a form acceptable to the Trustee, all the obligations of Parent, if any, under the Parent Guaranty; (2) immediately after giving effect to such transaction or transactions on a pro forma basis (and treating any Indebtedness which becomes an obligation of the resulting, surviving or transferee Person as a result of such transaction as having been issued by such Person at the time of such transaction), no Default shall have occurred and be continuing; and (3) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such Guaranty Agreement, if any, complies with this Indenture. The Person who shall be the successor to the Parent shall succeed to, and be substituted for, and may exercise every right and power of, the Parent under this Indenture, but the Parent in the case of a conveyance, transfer or lease shall not be released from its obligations under the Parent Guaranty. ARTICLE 6 Defaults and Remedies SECTION 6.01. Events of Default. An "Event of Default" occurs if: (1) the Company defaults in any payment of interest on any Security when the same becomes due and payable, whether or not such payment shall be prohibited by Article 10, and such default continues for a period of 30 days; (2) the Company (i) defaults in the payment of the principal of any Security when the same becomes due and payable at its Stated Maturity, upon redemption, upon declaration or otherwise, whether or not such payment shall be prohibited by Article 10, or (ii) fails to redeem or purchase Securities when required pursuant to this Indenture or the Securities, whether or not such redemption or purchase shall be prohibited by Article 10; (3) the Company or Parent fails to comply with Section 5.01; 64 56 (4) the Company fails to comply with Section 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09 or 4.10 (other than a failure to purchase Securities when required under Section 4.06 or 4.09) and such failure continues for 30 days after the notice specified below; (5) the Company fails to comply with any of its agreements in the Securities or this Indenture (other than those referred to in clause (1), (2), (3) or (4) above) and such failure continues for 60 days after the notice specified below; (6) Indebtedness of the Company or any Significant Subsidiary is not paid within any applicable grace period after final maturity or is accelerated by the holders thereof because of a default and the total amount of such Indebtedness unpaid or accelerated exceeds $10.0 million, or its foreign currency equivalent at the time; (7) the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case; (B) consents to the entry of an order for relief against it in an involuntary case; (C) consents to the appointment of a Custodian of it or for any substantial part of its property; or (D) makes a general assignment for the benefit of its creditors; or takes any comparable action under any foreign laws relating to insolvency; (8) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any Significant Subsidiary in an involuntary case; (B) appoints a Custodian of the Company or any Significant Subsidiary or for any substantial part of its property; or (C) orders the winding up or liquidation of the Company or any Significant Subsidiary; or any similar relief is granted under any foreign laws and the order or decree remains unstayed and in effect for 60 days; 65 57 (9) any judgment or decree for the payment of money in excess of $10.0 million or its foreign currency equivalent at the time is entered against the Company or any Significant Subsidiary, remains outstanding for a period of 60 days following the entry of such judgment or decree and is not discharged, waived or the execution thereof stayed within 10 days after the notice specified below; or (10) the Parent Guaranty or any Subsidiary Guaranty ceases to be in full force and effect (other than in accordance with the terms of such Guaranty) or Parent or any Subsidiary Guarantor denies or disaffirms its obligations under the Parent Guaranty or any Subsidiary Guaranty, as applicable. The foregoing will constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. The term "Bankruptcy Law" means Title 11, United States Code, or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. A Default under clause (4), (5), or (9) is not an Event of Default until the Trustee or the holders of at least 25% in principal amount of the outstanding Securities notify the Company of the Default and the Company does not cure such Default within the time specified after receipt of such notice. Such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default". The Company shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice in the form of an Officers' Certificate of any Event of Default under clause (6) or (10) and any event which with the giving of notice or the lapse of time would become an Event of Default under clause (4), (5) or (9), its status and what action the Company is taking or proposes to take with respect thereto. SECTION 6.02. Acceleration. If an Event of Default (other than an Event of Default specified in Section 6.01(7) or (8) with respect to the Company) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the Securities by notice to the Company and the Trustee, may declare the principal of and accrued but unpaid interest on 66 58 all the Securities to be due and payable. Upon such a declaration, such principal and interest shall be due and payable immediately; provided, however, that if upon such declaration there are any amounts outstanding under the Credit Agreement and the amounts thereunder have not been accelerated, such principal and interest shall be due and payable upon the earlier of the time such amounts are accelerated and five Business Days after receipt by the Company and the Representative under the Credit Agreement of such declaration. If an Event of Default specified in Section 6.01(7) or (8) with respect to the Company occurs, the principal of and interest on all the Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Securityholders. The Holders of a majority in principal amount of the outstanding Securities by notice to the Trustee may rescind an acceleration with respect to the Securities and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of acceleration. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.04. Waiver of Past Defaults. The Holders of a majority in principal amount of the Securities by notice to the Trustee may waive an existing Default and its consequences except (1) a Default in the payment of the principal of or interest on a Security or (2) a Default in respect of a provision that under Section 9.02 cannot be amended without the consent of each Securityholder affected. When a Default is waived, it is deemed cured, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. SECTION 6.05. Control by Majority. The Holders of a majority in principal amount of the Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising 67 59 any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or, subject to Section 7.01, that the Trustee determines is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability; provided, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. SECTION 6.06. Limitation on Suits. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no Securityholder may pursue any remedy with respect to this Indenture or the Securities unless: (1) the Holder gives to the Trustee written notice stating that an Event of Default is continuing; (2) the Holders of at least 25% in principal amount of the Securities make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee reasonable security or indemnity against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of security or indemnity; and (5) the Holders of a majority in principal amount of the Securities do not give the Trustee a direction inconsistent with the request during such 60-day period. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. SECTION 6.07. Rights of Holders To Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of and interest on the Securities held by such Holder, on or after the respective due dates expressed in the Securities, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. Collection Suit by Trustee. If an Event of Default specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its 68 60 own name and as trustee of an express trust against the Company for the whole amount then due and owing (together with interest on any unpaid interest to the extent lawful) and the amounts provided for in Section 7.07. SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Securityholders allowed in any judicial proceedings relative to the Company, its creditors or its property and, unless prohibited by law or applicable regulations, may vote on behalf of the Holders in any election of a trustee in bankruptcy or other Person performing similar functions. The Trustee shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims, and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and its counsel, and any other amounts due the Trustee under Section 7.07. SECTION 6.10. Priorities. If the Trustee collects any money or property pursuant to this Article 6, it shall pay out the money or property in the following order: FIRST: to the Trustee for amounts due under Section 7.07; SECOND: to holders of Senior Indebtedness of the Company to the extent required by Article 10; THIRD: to Securityholders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and FOURTH: to the Company. The Trustee may fix a record date and payment date for any payment to Securityholders pursuant to this Section. At least 15 days before such record date, the Company shall mail to each Securityholder and the Trustee a notice that states the record date, the payment date and amount to be paid. SECTION 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an 69 61 undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% in principal amount of the Securities. SECTION 6.12. Waiver of Stay or Extension Laws. The Company (to the extent it may lawfully do so) shall not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE 7 Trustee SECTION 7.01. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent Person would exercise or use under the circumstances in the conduct of such Person's own affairs. (b) Except during the continuance of an Event of Default: (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions which, by any provision hereof, are required to be furnished to the Trustee, the Trustee shall examine such certificates and opinions to determine whether or not they conform to the requirements of this Indenture. 70 62 (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that: (1) this paragraph does not limit the effect of paragraph (b) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05. (d) Every provision of this Indenture that in any way relates to the Trustee, other than paragraph (g) of this Section, is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. (f) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (h) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section and to the provisions of the TIA. SECTION 7.02. Rights of Trustee. (a) The Trustee may conclusively rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any 71 63 action it takes or omits to take in good faith in reliance on the Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) Subject to Section 7.01(c), the Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (e) The Trustee may consult with counsel, and the advice or opinion of counsel with respect to legal matters relating to this Indenture and the Securities shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. SECTION 7.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar, co-registrar or co-paying agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement of the Company in the Indenture or in any document issued in connection with the sale of the Securities or in the Securities other than the Trustee's certificate of authentication. SECTION 7.05. Notice of Defaults. If a Default occurs and is continuing and if it is actually known to the Trustee, or upon written notice from the Company or any Securityholder or upon a Payment Default, the Trustee shall mail to each Securityholder notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of principal of or interest on any Security (including payments pursuant to the mandatory redemption provisions of such Security, if any), the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Securityholders. SECTION 7.06. Reports by Trustee to Holders. By July 15 of each year, beginning with the July 15 following the date of this Indenture, the Trustee shall mail to each 72 64 Securityholder a brief report dated as of May 15 of each year that complies with TIA Section 313(a). The Trustee also shall comply with TIA Section 313(b). A copy of each report at the time of its mailing to Securityholders shall be filed with the SEC and each stock exchange (if any) on which the Securities are listed. The Company agrees to notify promptly the Trustee whenever the Securities become listed on any stock exchange and of any delisting thereof. SECTION 7.07. Compensation and Indemnity. The Company shall pay to the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable out-of-pocket expenses, disbursements and advances incurred or made by it, including costs of collection, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Trustee's agents, counsel, accountants and experts. The Company shall indemnify the Trustee against any and all loss, liability or expense (including attorneys' reasonable fees) incurred by it in connection with the administration of this trust and the performance of its duties hereunder, including the costs and expenses of enforcing this Indenture (including this Section 7.07) against the Company and defending itself against any claim (whether asserted by any Securityholder or any other Person) or liability in connection with the exercise or performance of any of its powers or duties hereunder, except to the extent that any such loss, liability or expense is attributable to its negligence or bad faith. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder unless such failure prejudices the Company. The Company shall defend the claim and the Trustee may have separate counsel and the Company shall pay the fees and expenses of such counsel. The Company need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee through the Trustee's own wilful misconduct, negligence or bad faith. The Company need not pay for any settlement made by the Trustee without the Company's consent, such consent not to be unreasonably withheld. To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee other than money or property held in trust to pay principal of and interest on particular Securities. 73 65 The Company's payment obligations, and the lien granted to the Trustee, pursuant to this Section shall survive the discharge of this Indenture. When the Trustee incurs expenses or renders services after the occurrence of a Default specified in Section 6.01(7) or (8) with respect to the Company, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under the Bankruptcy Law. SECTION 7.08. Replacement of Trustee. The Trustee may resign at any time by so notifying the Company. The Holders of a majority in principal amount of the Securities may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee. The Company shall remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged bankrupt or insolvent; (3) a receiver or other public officer takes charge of the Trustee or its property; or (4) the Trustee otherwise becomes incapable of acting. If the Trustee resigns, is removed by the Company or by the Holders of a majority in principal amount of the Securities and such Holders do not reasonably promptly appoint a successor Trustee, or if a vacancy exists in the office of Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Company shall promptly appoint a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided that the amounts owing to the Trustee hereunder have been paid and subject to the lien provided for in Section 7.07. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee or the Holders of 10% in principal amount of the Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Securityholder may petition any court of competent 74 66 jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding the replacement of the Trustee pursuant to this Section, the Company's obligations under Section 7.07 shall continue for the benefit of the retiring Trustee. SECTION 7.09. Successor Trustee by Merger. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee provided that such successor shall be eligible and qualified under Section 7.10. In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have. SECTION 7.10. Eligibility; Disqualification. The Trustee shall at all times satisfy the requirements of TIA Section 310(a). The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. SECTION 7.11. Preferential Collection of Claims Against Company. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. 75 67 ARTICLE 8 Discharge of Indenture; Defeasance SECTION 8.01. Discharge of Liability on Securities; Defeasance. (a) When (1) the Company delivers to the Trustee all outstanding Securities (other than Securities replaced pursuant to Section 2.07) for cancellation or (2) all outstanding Securities have become due and payable, whether at maturity or as a result of the mailing of a notice of redemption pursuant to Article 3 hereof and the Company irrevocably deposits with the Trustee funds sufficient to pay at maturity or upon redemption all outstanding Securities, including interest thereon to maturity or such redemption date (other than Securities replaced pursuant to Section 2.07), and if in either case the Company pays all other sums payable hereunder by the Company, then this Indenture shall, subject to Sections 8.01(c), cease to be of further effect. The Trustee shall acknowledge satisfaction and discharge of this Indenture on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Company. (b) Subject to Sections 8.01(c) and 8.02, the Company at any time may terminate (1) all its obligations under the Securities and this Indenture ("legal defeasance option") or (2) its obligations under Sections 4.02 (subject to any requirements of the TIA), 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09 and 4.10 and the operation of Sections 6.01(4), 6.01(6), 6.01(7), 6.01(8) and 6.01(9) (but, in the case of Sections 6.01(7) and (8), with respect only to Significant Subsidiaries) and the limitations contained in Sections 5.01(a)(3) and (4) ("covenant defeasance option"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Securities may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the Securities may not be accelerated because of an Event of Default specified in Sections 6.01(4), 6.01(6), 6.01(7), 6.01(8) and 6.01(9) (but, in the case of Sections 6.01(7) and (8), with respect only to Significant Subsidiaries) or because of the failure of the Company to comply with Section 5.01(a)(3) or (4) or because of the failure of Parent to comply with Section 5.01. If the Company exercises its legal defeasance option or its covenant defeasance option, Parent shall be released from all its obligations with respect to the Parent Guaranty and each Subsidiary Guarantor, if any, shall be released from all its obligations with respect to its Subsidiary Guaranty. Upon satisfaction of the conditions set forth herein and upon request of the Company, the Trustee shall 76 68 acknowledge in writing the discharge of those obligations that the Company terminates. (c) Notwithstanding clauses (a) and (b) above, the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive until the Securities have been paid in full. Thereafter, the Company's obligations in Sections 7.07, 8.04 and 8.05 shall survive. SECTION 8.02. Conditions to Defeasance. The Company may exercise its legal defeasance option or its covenant defeasance option only if: (1) the Company irrevocably deposits in trust with the Trustee money or U.S. Government Obligations for the payment of principal of and interest on the Securities to maturity or redemption, as the case may be; (2) the Company delivers to the Trustee a certificate from a nationally recognized firm of independent accountants expressing their opinion that the payments of principal and interest when due and without reinvestment on the deposited U.S. Government Obligations plus any deposited money without investment will provide cash at such times and in such amounts as will be sufficient to pay principal and interest when due on all the Securities to maturity or redemption, as the case may be; (3) 123 days pass after the deposit is made and during the 123-day period no Default specified in Sections 6.01(7) or (8) with respect to the Company occurs which is continuing at the end of the period; (4) the deposit does not constitute a default under any other agreement binding on the Company and is not prohibited by Article 10; (5) the Company delivers to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940; (6) in the case of the legal defeasance option, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of this Indenture there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Securityholders will not recognize income, gain or loss for Federal income 77 69 tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (7) in the case of the covenant defeasance option, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Securityholders will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (8) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Securities as contemplated by this Article 8 have been complied with. Before or after a deposit, the Company may make arrangements satisfactory to the Trustee for the redemption of Securities at a future date in accordance with Article 3. SECTION 8.03. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to this Article 8. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of and interest on the Securities. Money and securities so held in trust are not subject to Article 10. SECTION 8.04. Repayment to Company. The Trustee and the Paying Agent shall promptly turn over to the Company upon request any excess money or securities held by them at any time. Subject to any applicable abandoned property law, the Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for two years, and, thereafter, Securityholders entitled to the money must look to the Company for payment as general creditors. SECTION 8.05. Indemnity for Government Obligations. The Company shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against deposited U.S. Government Obligations or the principal and interest received on such U.S. Government Obligations. 78 70 SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article 8 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article 8 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article 8; provided, however, that, if the Company has made any payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE 9 Amendments SECTION 9.01. Without Consent of Holders. The Company and the Trustee may amend this Indenture or the Securities without notice to or consent of any Securityholder: (1) to cure any ambiguity, omission, defect or inconsistency; (2) to comply with Article 5; (3) to provide for uncertificated Securities in addition to or in place of certificated Securities; provided, however, that the uncertificated Securities are issued in registered form for purposes of Section 163(f) of the Code or in a manner such that the uncertificated Securities are described in Section 163(f)(2)(B) of the Code; (4) to make any change in Article 10 or 12 that would limit or terminate the benefits available to any holder of Senior Indebtedness (or Representatives therefor) under Article 10 or Article 12; (5) to add guarantees with respect to the Securities, including any Subsidiary Guaranties, or to secure the Securities; (6) to add to the covenants of the Company for the benefit of the Holders or to surrender any right or power herein conferred upon the Company; 79 71 (7) to comply with any requirements of the SEC in connection with qualifying, or maintaining the qualification of, this Indenture under the TIA; (8) to make any change that does not adversely affect the rights of any Securityholder; or (9) to release a Subsidiary Guaranty when permitted by the terms of this Indenture. An amendment under this Section may not make any change that adversely affects the rights under Article 10 or 12 of any holder of Senior Indebtedness then outstanding unless the holders of such Senior Indebtedness (or any group or representative thereof authorized to give a consent) consent to such change. After an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment under this Section. SECTION 9.02. With Consent of Holders. The Company and the Trustee may amend this Indenture or the Securities without notice to any Securityholder but with the written consent of the Holders of at least a majority in principal amount of the Securities then outstanding (including consents obtained in connection with a tender offer or exchange for the Securities). However, without the consent of each Securityholder affected thereby, an amendment may not: (1) reduce the amount of Securities whose Holders must consent to an amendment; (2) reduce the rate of or extend the time for payment of interest on any Security; (3) reduce the principal of or extend the Stated Maturity of any Security; (4) reduce the premium payable upon the redemption of any Security or change the time at which any Security may or shall be redeemed in accordance with Article 3; (5) make any Security payable in money other than that stated in the Security; (6) impair the right of any holder of the Securities to receive payment of principal of and interest on such holder's Securities on or after the 80 72 due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder's Securities; (7) make any change in Article 10 that adversely affects the rights of any Securityholder under Article 10; (8) make any change in Section 6.04 or 6.07 or the second sentence of this Section; (9) make any change in the Parent Guaranty or any Subsidiary Guaranty (including the subordination provisions of any such Guaranty) that would adversely affect the Securityholders; or (10) make any change in the provisions described under paragraph 6 of the Securities. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. An amendment under this Section may not make any change that adversely affects the rights under Article 10 or 12 of any holder of Senior Indebtedness then outstanding unless the holders of such Senior Indebtedness (or any group or representative thereof authorized to give a consent) consent to such change. After an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment under this Section. SECTION 9.03. Compliance with Trust Indenture Act. Every amendment to this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 9.04. Revocation and Effect of Consents and Waivers. A consent to an amendment or a waiver by a Holder of a Security shall bind the Holder and every subsequent Holder of that Security or portion of the Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent or waiver is not made on the Security. However, any such Holder or subsequent Holder may revoke the consent or waiver as to such Holder's Security or portion of the Security if the Trustee receives the notice of revocation before the date the amendment or waiver becomes effective. After an amendment or waiver becomes effective, it shall bind every Security- 81 73 holder. An amendment or waiver becomes effective upon the execution of such amendment or waiver by the Trustee. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Securityholders entitled to give their consent or take any other action described above or required or permitted to be taken pursuant to this Indenture. If a record date is fixed, then notwithstanding the immediately preceding paragraph, those Persons who were Securityholders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 120 days after such record date. SECTION 9.05. Notation on or Exchange of Securities. If an amendment changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security regarding the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment. SECTION 9.06. Trustee To Sign Amendments. The Trustee shall sign any amendment authorized pursuant to this Article 9 if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may but need not sign it. In signing any amendment the Trustee shall be entitled to receive indemnity reasonably satisfactory to it and to receive, and (subject to Section 7.01) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment is authorized or permitted by this Indenture. SECTION 9.07. Payment for Consent. Neither the Company nor any Affiliate of the Company shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Securities unless such consideration is offered to be paid to all Holders that so consent, waive or agree to amend in the time frame set forth in solicitation documents relating to such consent, waiver or agreement. 82 74 ARTICLE 10 Subordination SECTION 10.01. Agreement To Subordinate. The Company agrees, and each Securityholder by accepting a Security agrees, that the Indebtedness evidenced by the Securities is subordinated in right of payment, to the extent and in the manner provided in this Article 10, to the prior payment in full in cash of all Obligations with respect to Senior Indebtedness of the Company and that the subordination is for the benefit of and enforceable by the holders of such Senior Indebtedness. The Securities shall in all respects rank pari passu with all other Senior Subordinated Indebtedness of the Company and only Indebtedness of the Company which is Senior Indebtedness shall rank senior to the Securities in accordance with the provisions set forth herein. All provisions of this Article 10 shall be subject to Section 10.12. SECTION 10.02. Liquidation, Dissolution, Bankruptcy. Upon any payment or distribution of the assets of the Company to creditors upon a total or partial liquidation or a total or partial dissolution or winding up of the Company or upon any assignment for the benefit of creditors or marshalling of assets of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, whether voluntary or involuntary: (1) the holders of Senior Indebtedness of the Company shall be entitled to receive payment in full in cash of all Obligations with respect to such Senior Indebtedness (including all interest accruing subsequent to the filing of a petition in bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) before Securityholders shall be entitled to receive any payment or distribution with respect to the Securities; and (2) until all Obligations with respect to such Senior Indebtedness are paid in full in cash, any payment or distribution to which Securityholders would be entitled but for this Article 10 shall be made to holders of such Senior Indebtedness as their interests may appear, except that Securityholders may receive, in exchange for the Securities in any proceeding of the type described above in this Section 10.02, (x) equity securities of the Company which, in any case, do not provide for any mandatory redemption or similar retirement prior to the maturity of the Securities or (y) unsecured debt securities of the Company which are subordinated to at least the same extent as the Securities to the payment of all Senior Indebtedness of 83 75 the Company and which, in any case, do not mature or become subject to a mandatory redemption obligation prior to the maturity of the Securities. SECTION 10.03. Default on Senior Indebtedness. The Company may not pay (in cash, property or other assets) the principal of, premium, if any, or interest on the Securities or make any deposit pursuant to Section 8.01 and may not repurchase, redeem or (except for Securities delivered to the Trustee pursuant to the second sentence of paragraph 6 of the Securities) otherwise retire any Securities (collectively, "pay the Securities") if either of the following occurs (each a "Payment Default"): (1) any Obligations with respect to Senior Indebtedness are not paid in full when due or (2) any other default on Senior Indebtedness occurs and the maturity of such Senior Indebtedness is accelerated in accordance with its terms unless, in either case, (x) the default has been cured or waived and any such acceleration has been rescinded in writing or (y) such Senior Indebtedness has been paid in full in cash; provided, however, that the Company may pay the Securities without regard to the foregoing if the Company and the Trustee receive written notice approving such payment from the Representative of such Senior Indebtedness. During the continuance of any default (other than a default described in clause (1) or (2) of the preceding sentence) with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may be accelerated immediately without further notice (except such notice as may be required to effect such acceleration) or the expiration of any applicable grace periods, the Company may not pay the Securities for a period (a "Payment Blockage Period") commencing upon the receipt by the Company and the Trustee of written notice (a "Blockage Notice") of such default from the Representative of such Designated Senior Indebtedness specifying an election to effect a Payment Blockage Period and ending 179 days thereafter or earlier if such Payment Blockage Period is terminated: (1) by written notice to the Trustee and the Company from the Person or Persons who gave such Blockage Notice; (2) because no defaults continue in existence which would permit the acceleration of the maturities of any Designated Senior Indebtedness at such time; or (3) because such Designated Senior Indebtedness has been repaid in full in cash. Notwithstanding the provisions described above, unless the holders of such Designated Senior Indebtedness or the Representative of such holders shall have accelerated the maturity of such Designated Senior Indebtedness, or any Payment Default otherwise exists, the Company may resume 84 76 payments on the Securities after termination of such Payment Blockage Period. The Securities shall not be subject to more than one Payment Blockage Period in any consecutive 360-day period, except that if any Blockage Notice is delivered to the Trustee by or on behalf of holders of Designated Senior Indebtedness (other than holders of the Bank Indebtedness), a Representative of holders of Bank Indebtedness may give another Blockage Notice within such period. However, in no event may the total number of days during which any Payment Blockage Period or Periods is in effect exceed 179 days in the aggregate during any 360 consecutive day period, and there must be 181 days during any 360-day consecutive period during which no Payment Blockage Period is in effect. For purposes of this Section, no default or event of default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Indebtedness initiating such Payment Blockage Period shall be, or be made, the basis of the commencement of a subsequent Payment Blockage Period by the Representative of such Designated Senior Indebtedness, whether or not within a period of 360 consecutive days, unless such default or event of default shall have been cured or waived for a period of not less than 90 consecutive days (it being acknowledged and agreed that (x) any default or event of default as a result of a continued failure to meet a financial covenant or test for a period ended subsequent to the commencement of a Payment Blockage Period shall constitute a new default or event of default, as the case may be, and shall be deemed not to be a continuing default or event of default, as the case may be, for purposes of this sentence and (y) any subsequent action which would give rise to a default or an event of default pursuant to any provision under which a default or event of default previously existed or was continuing shall constitute a new default or event of default, as the case may be, for this purpose and shall be deemed not to be a continuing default or event of default, as the case may be, for purposes of this sentence). SECTION 10.04. Acceleration of Payment of Securities. If payment of the Securities is accelerated because of an Event of Default, the Company or the Trustee shall promptly notify the holders of the Designated Senior Indebtedness (or their Representatives) of the acceleration. If any Designated Senior Indebtedness is outstanding at the time of such acceleration, neither the Company nor any Subsidiary Guarantor may pay the Securities until five Business Days after the Representatives of all the issues of Designated Senior Indebtedness receive notice of such acceleration and, thereafter, may pay the Securities only if the Indenture otherwise permits payment at that time. 85 77 SECTION 10.05. When Distribution Must Be Paid Over. If a distribution is made to Securityholders that because of this Article 10 should not have been made to them, the Securityholders who receive the distribution shall hold it in trust for holders of Senior Indebtedness of the Company and pay it over to them as their interests may appear. SECTION 10.06. Subrogation. After all Senior Indebtedness of the Company is paid in full in cash and until the Securities are paid in full, Securityholders shall be subrogated to the rights of holders of such Senior Indebtedness to receive distributions applicable to such Senior Indebtedness. A distribution made under this Article 10 to holders of such Senior Indebtedness which otherwise would have been made to Securityholders is not, as between the Company and Securityholders, a payment by the Company on such Senior Indebtedness. SECTION 10.07. Relative Rights. This Article 10 defines the relative rights of Securityholders and holders of Senior Indebtedness of the Company. Nothing in this Indenture shall: (1) impair, as between the Company and Securityholders, the obligation of the Company, which is absolute and unconditional, to pay principal of and interest on the Securities in accordance with their terms; or (2) prevent the Trustee or any Securityholder from exercising its available remedies upon a Default, subject to the rights of holders of Senior Indebtedness of the Company to receive distributions otherwise payable to Securityholders. SECTION 10.08. Subordination May Not Be Impaired by Company. No right of any holder of Senior Indebtedness of the Company to enforce the subordination of the Indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Company or by its failure to comply with this Indenture. SECTION 10.09. Rights of Trustee and Paying Agent. Notwithstanding Section 10.03, the Trustee or Paying Agent may continue to make payments on the Securities and shall not be charged with knowledge of the existence of facts that would prohibit the making of any such payments unless, not less than two Business Days prior to the date of such payment, a Trust Officer of the Trustee receives notice satisfactory to it that payments may not be made under this Article 10. The Company, the Registrar or co-registrar, the Paying Agent, a Representative or a holder of Senior Indebtedness may give the notice. 86 78 The Trustee in its individual or any other capacity may hold Senior Indebtedness of the Company with the same rights it would have if it were not Trustee. The Registrar and co-registrar and the Paying Agent may do the same with like rights. The Trustee shall be entitled to all the rights set forth in this Article 10 with respect to any Senior Indebtedness of the Company which may at any time be held by it, to the same extent as any other holder of such Senior Indebtedness; and nothing in Article 7 shall deprive the Trustee of any of its rights as such holder. Nothing in this Article 10 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.07. SECTION 10.10. Distribution or Notice to Representative. Whenever a distribution is to be made or a notice given to holders of Senior Indebtedness of the Company, the distribution may be made and the notice given to their Representative (if any). SECTION 10.11. Article 10 Not To Prevent Events of Default or Limit Right To Accelerate. The failure to make a payment pursuant to the Securities by reason of any provision in this Article 10 shall not be construed as preventing the occurrence of a Default. Nothing in this Article 10 shall have any effect on the right of the Securityholders or the Trustee to accelerate the maturity of the Securities. SECTION 10.12. Trust Moneys Not Subordinated. Notwithstanding anything contained herein to the contrary, payments from money or the proceeds of U.S. Government Obligations held in trust under Article 8 by the Trustee for the payment of principal of and interest on the Securities shall not be subordinated to the prior payment of any Senior Indebtedness or subject to the restrictions set forth in this Article 10, and none of the Securityholders shall be obligated to pay over any such amount to the Company or any holder of Senior Indebtedness of the Company or any other creditor of the Company, so long as the foregoing subordination provisions contained in this Article 10 were not violated at the time the respective amounts were deposited pursuant to the defeasance provisions of Article 8. SECTION 10.13. Trustee Entitled To Rely. Upon any payment or distribution pursuant to this Article 10, the Trustee and the Securityholders shall be entitled to rely (i) upon any order or decree of a court of competent jurisdiction in which any proceedings of the nature referred to in Section 10.02 are pending, (ii) upon a certificate of the liquidating trustee or agent or other Person making such payment or distribution to the Trustee or to the Securityholders or (iii) upon the Representatives for the holders of Senior Indebtedness of the Company for the purpose of ascertaining the Persons entitled to participate in such 87 79 payment or distribution, the holders of such Senior Indebtedness and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. In the event that the Trustee determines, in good faith, that evidence is required with respect to the right of any Person as a holder of Senior Indebtedness of the Company to participate in any payment or distribution pursuant to this Article 10, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and other facts pertinent to the rights of such Person under this Article 10, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. The provisions of Sections 7.01 and 7.02 shall be applicable to all actions or omissions of actions by the Trustee pursuant to this Article 10. SECTION 10.14. Trustee To Effectuate Subordination. Each Securityholder by accepting a Security authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination between the Securityholders and the holders of Senior Indebtedness of the Company as provided in this Article 10 and appoints the Trustee as attorney-in-fact for any and all such purposes. SECTION 10.15. Trustee Not Fiduciary for Holders of Senior Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holders if it shall mistakenly pay over or distribute to Securityholders or the Company or any other Person, money or assets to which any holders of Senior Indebtedness of the Company shall be entitled by virtue of this Article 10 or otherwise. SECTION 10.16. Reliance by Holders of Senior Indebtedness on Subordination Provisions. Each Securityholder by accepting a Security acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Senior Indebtedness of the Company, whether such Senior Indebtedness was created or acquired before or after the issuance of the Securities, to acquire and continue to hold, or to continue to hold, such Senior Indebtedness and such holder of such Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Indebtedness. 88 80 ARTICLE 11 Guaranties SECTION 11.01. Guaranties. Each Guarantor hereby unconditionally and irrevocably guarantees, jointly and severally, on a Senior Subordinated basis, to each Holder and to the Trustee and its successors and assigns (a) the full and punctual payment of principal of and interest on the Securities when due, whether at maturity, by acceleration, by redemption or otherwise, and all other monetary obligations of the Company under this Indenture and the Securities and (b) the full and punctual performance within applicable grace periods of all other obligations of the Company under this Indenture and the Securities (all the foregoing being hereinafter collectively called the "Indenture Obligations"). Each Guarantor further agrees that the Indenture Obligations may be extended or renewed, in whole or in part, without notice or further assent from such Guarantor and that such Guarantor will remain bound under this Article 11 notwithstanding any extension or renewal of any Indenture Obligation. Each Guarantor waives presentation to, demand of, payment from and protest to the Company of any of the Indenture Obligations and also waives notice of protest for nonpayment. Each Guarantor waives notice of any default under the Securities or the Indenture Obligations. The obligations of each Guarantor hereunder shall not be affected by (a) the failure of any Holder or the Trustee to assert any claim or demand or to enforce any right or remedy against the Company or any other Person under this Indenture, the Securities or any other agreement or otherwise; (b) any extension or renewal of any thereof; (c) any rescission, waiver, amendment or modification of any of the terms or provisions of this Indenture, the Securities or any other agreement; (d) the release of any security held by any Holder or the Trustee for the Indenture Obligations or any of them; (e) the failure of any Holder or the Trustee to exercise any right or remedy against any other guarantor of the Indenture Obligations; or (f) any change in the ownership of such Guarantor. Each Guarantor further agrees that its Guaranty herein constitutes a guarantee of payment, performance and compliance when due (and not a guarantee of collection) and waives any right to require that any resort be had by any Holder or the Trustee to any security held for payment of the Indenture Obligations. Each Guaranty is, to the extent and in the manner set forth in Article 12, subordinated and subject in right of payment to the prior payment in full in cash of all Obligations with respect to all Senior Indebtedness of the 89 81 Guarantor giving such Guaranty and each Guaranty is made subject to such provisions of this Indenture. Except as expressly set forth in Sections 8.01(b), 11.02 and 11.06, the obligations of each Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense of setoff, counterclaim, recoupment or termination whatsoever or by reason of the invalidity, illegality or unenforceability of the Indenture Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of each Guarantor herein shall not be discharged or impaired or otherwise affected by the failure of any Holder or the Trustee to assert any claim or demand or to enforce any remedy under this Indenture, the Securities or any other agreement, by any waiver or modification of any thereof, by any default, failure or delay, willful or otherwise, in the performance of the obligations, or by any other act or thing or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of such Guarantor or would otherwise operate as a discharge of such Guarantor as a matter of law or equity. Each Guarantor further agrees that its Guarantee herein shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Indenture Obligation is rescinded or must otherwise be restored by any Holder or the Trustee upon the bankruptcy or reorganization of the Company or otherwise. In furtherance of the foregoing and not in limitation of any other right which any Holder or the Trustee has at law or in equity against any Guarantor by virtue hereof, upon the failure of the Company to pay the principal of or interest on any Indenture Obligation when and as the same shall become due, whether at maturity, by acceleration, by redemption or otherwise, or to perform or comply with any other Indenture Obligation, each Guarantor hereby promises to and will, upon receipt of written demand by the Trustee, forthwith pay, or cause to be paid, in cash, to the Holders or the Trustee an amount equal to the sum of (1) the unpaid amount of such Indenture Obligations, (2) accrued and unpaid interest on such Indenture Obligations (but only to the extent not prohibited by law) and (3) all other monetary Indenture Obligations of the Company to the Holders and the Trustee. Each Guarantor agrees that it shall not be entitled to any right of subrogation in respect of any Indenture Obligations guaranteed hereby until payment in full of all Indenture Obligations and all obligations to which the Indenture Obligations are subordinated as provided in Article 12. Each Guarantor further agrees that, as 90 82 between it, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the Indenture Obligations Guaranteed hereby may be accelerated as provided in Article 6 for the purposes of such Guarantor's Guaranty herein, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Indenture Obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such obligations as provided in Article 6, such Indenture Obligations (whether or not due and payable) shall forthwith become due and payable by such Guarantor for the purposes of this Section. Each Guarantor also agrees to pay any and all costs and expenses (including reasonable attorneys' fees) incurred by the Trustee or any Holder in enforcing any rights under this Section. SECTION 11.02. Limitation on Liability; Contribution. Any term or provision of this Indenture to the contrary notwithstanding, the maximum, aggregate amount of the Indenture Obligations guaranteed hereunder by any Subsidiary Guarantor shall not exceed the maximum amount that can be hereby guaranteed without rendering this Indenture, as it relates to such Subsidiary Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. Each Subsidiary Guarantor that makes a payment under its Subsidiary Guaranty will be entitled to a contribution from each other Subsidiary Guarantor in an amount equal to such other Subsidiary Guarantor's pro rata portion of such payment based on the respective net assets of all the Subsidiary Guarantors at the time of such payment determined in accordance with GAAP. SECTION 11.03. Successors and Assigns. This Article 11 shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of the successors and assigns of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges conferred upon that party in this Indenture and in the Securities shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions of this Indenture. SECTION 11.04. No Waiver. Neither a failure nor a delay on the part of either the Trustee or the Holders in exercising any right, power or privilege under this Article 11 shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Trustee and the Holders herein 91 83 expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which either may have under this Article 11 at law, in equity, by statute or otherwise. SECTION 11.05. Modification. No modification, amendment or waiver of any provision of this Article 11, nor the consent to any departure by any Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Trustee, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any Guarantor in any case shall entitle such Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 11.06. Release of Subsidiary Guarantor. Upon the sale (including any sale pursuant to any exercise of remedies by a holder of Senior Indebtedness) or other disposition (including by way of consolidation or merger) of a Subsidiary Guarantor or the sale or disposition of all or substantially all the assets of such Subsidiary Guarantor (in each case other than to the Company or an Affiliate of the Company), such Subsidiary Guarantor shall be deemed released from all obligations under this Article 11 without any further action required on the part of the Trustee or any Holder. At the request of the Company, the Trustee shall execute and deliver an appropriate instrument evidencing such release. ARTICLE 12 Subordination of Guaranties SECTION 12.01. Agreement To Subordinate. Each Guarantor agrees, and each Securityholder by accepting a Security agrees, that the Indenture Obligations (as used in this Article 12, the "Indenture Obligations" of each Guarantor shall mean all Indenture Obligations guaranteed by such Guarantor pursuant to Article 11 hereof) of such Guarantor are subordinated in right of payment, to the extent and in the manner provided in this Article 12, to the prior payment in full in cash of all Obligations with respect to Senior Indebtedness of such Guarantor and that the subordination is for the benefit of and enforceable by the holders of such Senior Indebtedness. The Indenture Obligations of a Guarantor shall in all respects rank pari passu with all other Senior Subordinated Indebtedness of such Guarantor and only Senior Indebtedness of such Guarantor (including such Guarantor's Guarantee of Senior Indebtedness of the Company) shall rank senior to the Indenture Obligations of such Guarantor in accordance with the provisions set forth herein. 92 84 SECTION 12.02. Liquidation, Dissolution, Bankruptcy. Upon any payment or distribution of the assets of any Guarantor to creditors upon a total or partial liquidation or a total or partial dissolution or winding up of such Guarantor or upon any assignment for the benefit of creditors or marshalling of assets for such Guarantor or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to such Guarantor or its property, whether voluntary or involuntary: (1) the holders of Senior Indebtedness of such Guarantor shall be entitled to receive payment in full in cash of all Obligations with respect to such Senior Indebtedness (including all interest accruing subsequent to the filing of a petition in bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) before Securityholders shall be entitled to receive any payment or distribution with respect to any Indenture Obligations of such Guarantor; and (2) until all Obligations with respect to the Senior Indebtedness of any Guarantor is paid in full in cash, any payment or distribution to which Securityholders would be entitled but for this Article 12 shall be made to holders of such Senior Indebtedness as their interests may appear, except that securityholders may, in any proceeding of the type described in Section 10.02 with respect to such Guarantor, receive securities of the Parent and/or the Company as provided in clause (2) of Section 10.02, which, in the case of debt securities of the Company, may be guaranteed by the Guarantors on substantially the same basis as provided in Article 11, so long as such guarantees are expressly subordinated to all Senior Indebtedness at least to the same extent as provided in this Article 12. SECTION 12.03. Default on Senior Indebtedness of Guarantor. No Guarantor may make any payment (in cash, property or other assets) pursuant to any of its Indenture Obligations or repurchase, redeem or otherwise retire or defease any Securities or other Indenture Obligations (collectively, "pay its Guaranty") if either of the following Payment Default occurs: (1) any Obligations with respect to Senior Indebtedness of the Company is not paid in full when due or (2) any other default on Senior Indebtedness of the Company occurs and the maturity of such Senior Indebtedness is accelerated in accordance with its terms unless, in either case, (x) the default has been cured or waived and any such acceleration has been rescinded in writing or (y) such Senior Indebtedness has been paid in full in cash; provided, however, that any Guarantor may pay its Guaranty without regard to the foregoing if such 93 85 Guarantor and the Trustee receive written notice approving such payment from the Representatives of such Senior Indebtedness. No Guarantor may pay its Guaranty during the continuance of any Payment Blockage Period after receipt by the Company and the Trustee (with a copy to the Company) of a Blockage Notice under Section 10.03. Notwithstanding the provisions described in the immediately preceding sentence (but subject to the provisions contained in the first sentence of this Section), unless the holders of Designated Senior Indebtedness giving such Blockage Notice or the Representative of such holders shall have accelerated the maturity of such Designated Senior Indebtedness, any Guarantor may resume payments pursuant to its Guaranty after termination of such Payment Blockage Period. SECTION 12.04. Demand for Payment. If a demand for payment is made on a Guarantor pursuant to Article 11, the Trustee shall promptly notify the holders of the Designated Senior Indebtedness (or their Representatives) of such demand. If any Designated Senior Indebtedness is outstanding at the time of such acceleration, neither the Company nor any Subsidiary Guarantor may pay the Securities until five Business Days after the Representatives of all the issues of Designated Senior Indebtedness receive notice of such acceleration and, thereafter, may pay the Securities only if the Indenture otherwise permits payment at that time. SECTION 12.05. When Distribution Must Be Paid Over. If a distribution is made to Securityholders that because of this Article 12 should not have been made to them, the Securityholders who receive the distribution shall hold it in trust for holders of the relevant Senior Indebtedness and pay it over to them or their Representatives as their interests may appear. SECTION 12.06. Subrogation. After all Senior Indebtedness of a Guarantor is paid in full in cash and until the Securities are paid in full, Securityholders shall be subrogated to the rights of holders of such Senior Indebtedness to receive distributions applicable to Senior Indebtedness. A distribution made under this Article 12 to holders of such Senior Indebtedness which otherwise would have been made to Securityholders is not, as between the relevant Guarantor and Securityholders, a payment by such Guarantor on such Senior Indebtedness. 94 86 SECTION 12.07. Relative Rights. This Article 12 defines the relative rights of Securityholders and holders of Senior Indebtedness of a Guarantor. Nothing in this Indenture shall: (1) impair, as between a Guarantor and Securityholders, the obligation of such Guarantor, which is absolute and unconditional, to pay the Indenture Obligations to the extent set forth in Article 11 or the relevant Guaranty; or (2) prevent the Trustee or any Securityholder from exercising its available remedies upon a default by such Guarantor under the Indenture Obligations, subject to the rights of holders of Senior Indebtedness of such Guarantor to receive distributions otherwise payable to Securityholders. SECTION 12.08. Subordination May Not Be Impaired by Company. No right of any holder of Senior Indebtedness of any Guarantor to enforce the subordination of the Indenture Obligations of such Guarantor shall be impaired by any act or failure to act by such Guarantor or by its failure to comply with this Indenture. SECTION 12.09. Rights of Trustee and Paying Agent. Notwithstanding Section 12.03, the Trustee or Paying Agent may continue to make payments on any Guaranty and shall not be charged with knowledge of the existence of facts that would prohibit the making of any such payments unless, not less than two Business Days prior to the date of such payment, a Trust Officer of the Trustee receives written notice satisfactory to it that payments may not be made under this Article 12. The Company, the relevant Guarantor, the Registrar or co-registrar, the Paying Agent, a Representative or a holder of Senior Indebtedness of the relevant Guarantor may give the notice. The Trustee in its individual or any other capacity may hold Senior Indebtedness with the same rights it would have if it were not the Trustee. The Registrar and co-registrar and the Paying Agent may do the same with like rights. The Trustee shall be entitled to all the rights set forth in this Article 12 with respect to any Senior Indebtedness of any Guarantor which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness; and nothing in Article 7 shall deprive the Trustee of any of its rights as such holder. Nothing in this Article 12 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.07. 95 87 SECTION 12.10. Distribution or Notice to Representative. Whenever a distribution is to be made or a notice given to holders of Senior Indebtedness of any Guarantor, the distribution may be made and the notice given to their Representative (if any). SECTION 12.11. Article 12 Not To Prevent Defaults Under a Guaranty or Limit Right To Demand Payment. The failure to make a payment pursuant to a Guaranty by reason of any provision in this Article 12 shall not be construed as preventing the occurrence of a default under such Guaranty. Nothing in this Article 12 shall have any effect on the right of the Securityholders or the Trustee to make a demand for payment on any Guarantor pursuant to Article 11 or the relevant Guaranty. SECTION 12.12. Trustee Entitled To Rely. Upon any payment or distribution pursuant to this Article 12, the Trustee and the Securityholders shall be entitled to rely (1) upon any order or decree of a court of competent jurisdiction in which any proceedings of the nature referred to in Section 12.02 are pending, (2) upon a certificate of the liquidating trustee or agent or other Person making such payment or distribution to the Trustee or to the Securityholders or (3) upon the Representatives for the holders of Senior Indebtedness of any Guarantor for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of such Senior Indebtedness and other indebtedness of such Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 12. In the event that the Trustee determines, in good faith, that evidence is required with respect to the right of any Person as a holder of Senior Indebtedness of any Guarantor to participate in any payment or distribution pursuant to this Article 12, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness of such Guarantor held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and other facts pertinent to the rights of such Person under this Article 12, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. The provisions of Sections 7.01 and 7.02 shall be applicable to all actions or omissions of actions by the Trustee pursuant to this Article 12. SECTION 12.13. Trustee To Effectuate Subordination. Each Securityholder by accepting a Security authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination between the Securityholders and the holders of Senior Indebtedness of any Guarantor as 96 88 provided in this Article 12 and appoints the Trustee as attorney-in-fact for any and all such purposes. SECTION 12.14. Trustee Not Fiduciary for Holders of Senior Indebtedness of Guarantor. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness of any Guarantor and shall not be liable to any such holders if it shall mistakenly pay over or distribute to Securityholders or the Company or any other Person, money or assets to which any holders of such Senior Indebtedness shall be entitled by virtue of this Article 12 or otherwise. SECTION 12.15. Reliance by Holders of Senior Indebtedness on Subordination Provisions. Each Securityholder by accepting a Security acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Senior Indebtedness of any Guarantor, whether such Senior Indebtedness was created or acquired before or after the issuance of the Securities, to acquire and continue to hold, or to continue to hold, such Senior Indebtedness and such holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Indebtedness. ARTICLE 13 Miscellaneous SECTION 13.01. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. SECTION 13.02. Notices. Any notice or communication shall be in writing and delivered in person or mailed by first-class mail addressed as follows: if to Parent, the Company or any Subsidiary Guarantor: Fairchild Semiconductor Corporation 82 Running Hill Road South Portland, Maine 04106 Attention: General Counsel if to the Trustee: United States Trust Company of New York 114 West 47th Street New York, New York 10036 Attention: Corporate Trust Division 97 89 The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Securityholder shall be mailed to the Securityholder at the Securityholder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 13.03. Communication by Holders with Other Holders. Securityholders may communicate pursuant to TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 13.04. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take or refrain from taking any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 13.05. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include: (1) a statement that the individual making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; 98 90 (3) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such individual, such covenant or condition has been complied with. SECTION 13.06. When Securities Disregarded. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee knows are so owned shall be so disregarded. Also, subject to the foregoing, only Securities outstanding at the time shall be considered in any such determination. SECTION 13.07. Rules by Trustee, Paying Agent and Registrar. The Trustee may make reasonable rules for action by or a meeting of Securityholders. The Registrar and the Paying Agent may make reasonable rules for their functions. SECTION 13.08. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions are not required to be open in the State of New York. If a payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. If a regular record date is a Legal Holiday, the record date shall not be affected. SECTION 13.09. Governing Law. This Indenture and the Securities shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. SECTION 13.10. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company or any Guarantor shall not have any liability for any obligations of the Company or any Guarantor under the Securities, any Guaranty or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities. 99 91 SECTION 13.11. Successors. All agreements of the Company in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 13.12. Multiple Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. SECTION 13.13. Table of Contents; Headings. The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. 100 92 IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. FAIRCHILD SEMICONDUCTOR CORPORATION, by /s/ David A. Henry Name: Title: FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC., as Guarantor, by /s/ David A. Henry Name: Title: FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, as Guarantor by /s/ David A. Henry Name: Title: QT OPTOELECTRONICS, INC., as Guarantor, by /s/ Stephen C. Sherman Name: Stephen C. Sherman Title: President and Chief Executive Officer QT OPTOELECTRONICS, as Guarantor by /s/ Stephen C. Sherman Name: Stephen C. Sherman Title:President and Chief Executive Officer 101 93 KOTA MICROCIRCUITS, INC., as Guarantor by /s/ David A. Henry Name: Title: UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee, by /s/ Glenn E. Mitchell Name: Glenn E. Mitchell Title: Vice President 102 94 RULE 144A/REGULATION S APPENDIX FOR OFFERINGS TO QUALIFIED INSTITUTIONAL BUYERS PURSUANT TO RULE 144A AND TO CERTAIN PERSONS IN OFFSHORE TRANSACTIONS IN RELIANCE ON REGULATION S. PROVISIONS RELATING TO INITIAL SECURITIES, PRIVATE EXCHANGE SECURITIES AND EXCHANGE SECURITIES 1. Definitions 1.1 Definitions For the purposes of this Appendix the following terms shall have the meanings indicated below: "Depository" means The Depository Trust Company, its nominees and their respective successors. "Exchange Securities" means (i) the 10-1/2% Senior Subordinated Notes Due February 1, 2009, to be issued pursuant to this Indenture in connection with a Registered Exchange Offer pursuant to the Registration Rights Agreement and (ii) Additional Securities, if any, issued pursuant to a registration statement filed with the SEC under the Securities Act. "Initial Purchasers" means (i) with respect to the Initial Securities issued on the Issue Date, Credit Suisse First Boston Corporation, Lehman Brothers Inc., Deutsche Banc Alex. Brown Inc. and Fleet Securities, Inc. and (ii) with respect to each issuance of Additional Securities, the Persons purchasing such Additional Securities under the related Purchase Agreement. "Initial Securities" means (i) $350,000,000 10-1/2% Senior Subordinated Notes Due February 1, 2009, issued under this Indenture on the Issue Date and (ii) Additional Securities, if any, issued in a transaction exempt from the registration requirements of the Securities Act. "Private Exchange" means the offer by the Company, pursuant to the Registration Rights Agreement, to the Initial Purchasers to issue and deliver to the relevant Initial Purchaser, in exchange for the Initial Securities held by the Initial Purchaser as part of its initial distribution, if any, a like aggregate principal amount of Private Exchange Securities. 103 95 "Private Exchange Securities" means any 10-1/2% Senior Subordinated Notes Due February 1, 2009, issued in connection with a Private Exchange. "Purchase Agreement" means (i) with respect to the Initial Securities issued on the Issue Date the Purchase Agreement dated January 26, 2001, among the Company, the Guarantors named therein and the Initial Purchasers and (ii) with respect to each issuance of Additional Securities, the purchase agreement or underwriting agreement among the Company and the Persons purchasing such Additional Securities. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Registered Exchange Offer" means the offer by the Company, pursuant to the Registration Rights Agreement, to certain Holders of Initial Securities, to issue and deliver to such Holders, in exchange for the Initial Securities, a like aggregate principal amount of Exchange Securities registered under the Securities Act. "Registration Rights Agreement" means (i) with respect to the Initial Securities issued on the Issue Date, the Registration Rights Agreement dated January 26, 2001, among the Company, the Guarantors named therein and the Initial Purchasers and (ii) with respect to each issuance of Additional Securities issued in a transaction exempt from the registration requirements of the Securities Act, the registration rights agreement, if any, among the Company and the Persons purchasing such Additional Securities under the related Purchase Agreement. "Securities" means the Initial Securities, the Exchange Securities and the Private Exchange Securities, treated as a single class. "Securities Act" means the Securities Act of 1933. "Securities Custodian" means the custodian with respect to a Global Security (as appointed by the Depository), or any successor person thereto and shall initially be the Trustee. "Shelf Registration Statement" means the registration statement issued by the Company, in connection with the offer and sale of Initial Securities or Private Exchange Securities, pursuant to the Registration Rights Agreement. 104 96 "Transfer Restricted Securities" means Securities that bear or are required to bear the legend set forth in Section 2.3(b) hereto. 105 97 1.2 Other Definitions
Defined in Term Section: ---- -------- "Agent Members"................................................... 2.1(b) "Global Security"................................................. 2.1(a) "Regulation S".................................................... 2.1(a) "Rule 144A"....................................................... 2.1(a)
2. The Securities. 2.1 Form and Dating. The Initial Securities are being offered and sold by the Company pursuant to the Purchase Agreement. (a) Global Securities. Initial Securities offered and sold to a QIB in reliance on Rule 144A under the Securities Act ("Rule 144A") or in reliance on Regulation S under the Securities Act ("Regulation S"), in each case as provided in the Purchase Agreement, shall be issued initially in the form of one or more permanent global Securities in definitive, fully registered form without interest coupons with the global securities legend and restricted securities legend set forth in Exhibit 1 hereto (each, a Global Security"), which shall be deposited on behalf of the purchasers of the Initial Securities represented thereby with the Trustee, at its New York office, as custodian for the Depository (or with such other custodian as the Depository may direct), and registered in the name of the Depository or a nominee of the Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depository or its nominee as hereinafter provided. (b) Book-Entry Provisions. This Section 2.1(b) shall apply only to a Global Security deposited with or on behalf of the Depository. The Company shall execute and the Trustee shall, in accordance with this Section 2.1(b), authenticate and deliver initially one or more Global Securities that (a) shall be registered in the name of the Depository for such Global Security or Global Securities or the nominee of 106 98 such Depository and (b) shall be delivered by the Trustee to such Depository or pursuant to such Depository's instructions or held by the Trustee as custodian for the Depository. Members of, or participants in, the Depository ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depository or by the Trustee as the custodian of the Depository or under such Global Security, and the Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Agent Members, the operation of customary practices of such Depository governing the exercise of the rights of a holder of a beneficial interest in any Global Security. (c) Certificated Securities. Except as provided in this Section 2.1 or Section 2.3 or 2.4, owners of beneficial interests in Global Securities will not be entitled to receive physical delivery of certificated Securities. 2.2 Authentication. The Trustee shall authenticate and deliver: (1) On the Issue Date, $350.0 million 10-1/2% Senior Subordinated Notes Due February 1, 2009, (2) Any Additional Securities for an original issue in an aggregate principal amount specified in the written order of the Company pursuant to Section 2.02 of the Indenture and (3) Exchange Securities or Private Exchange Securities in exchange therefor for issue only in a Registered Exchange Offer or a Private Exchange, respectively, pursuant to the Registration Rights Agreement, for a like principal amount of Initial Securities, in each case upon a written order of the Company signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company. Such order shall specify the amount of the Securities to be authenticated and the date on which the original issue of Securities is to be authenticated and whether the Securities are to be Initial Securities, Exchange Securities or Private Exchange Securities. In addition, in the case of an issuance of Additional Securities pursuant to Section 2.13 of the Indenture, such 107 99 order shall certify that such issuance is in compliance with Section 4.03 of the Indenture. 2.3 Transfer and Exchange. (a) Transfer and Exchange of Global Securities. (i) The transfer and exchange of Global Securities or beneficial interests therein shall be effected through the Depository, in accordance with this Indenture (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Depository therefor. A transferor of a beneficial interest in a Global Security shall deliver to the Registrar a written order given in accordance with the Depositary's procedures containing information regarding the participant account of the Depositary to be credited with a beneficial interest in the Global Security. The Registrar shall, in accordance with such instructions instruct the Depositary to credit to the account of the Person specified in such instructions a beneficial interest in the Global Security and to debit the account of the Person making the transfer the beneficial interest in the Global Security being transferred. (ii) Notwithstanding any other provisions of this Appendix (other than the provisions set forth in Section 2.4), a Global Security may not be transferred as a whole except by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. (iii) In the event that a Global Security is exchanged for Securities in definitive registered form pursuant to Section 2.4 or Section 2.09 of the Indenture, prior to the consummation of a Registered Exchange Offer or the effectiveness of a Shelf Registration Statement with respect to such Securities, such Securities may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of this Section 2.3 (including the certification requirements set forth on the reverse of the Initial Securities intended to ensure that such transfers comply with Rule 144A or Regulation S, as the case may be) and such other procedures as may from time to time be adopted by the Company. (b) Legend. 108 100 (i) Except as permitted by the following paragraphs (ii), (iii) and (iv), each Security certificate evidencing the Global Securities (and all Securities issued in exchange therefor or in substitution thereof) shall bear a legend in substantially the following form: "THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (IV) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE." (ii) Upon any sale or transfer of a Transfer Restricted Security represented by a Global Security pursuant to Rule 144 under the Securities Act, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a certificated Security that does not bear the legend set forth above and rescind any restriction on the transfer of such 109 101 Transfer Restricted Security, if the Holder certifies in writing to the Registrar that its request for such exchange was made in reliance on Rule 144 (such certification to be in the form set forth on the reverse of the Security). (iii) After a transfer of any Initial Securities or Private Exchange Securities during the period of the effectiveness of a Shelf Registration Statement with respect to such Initial Securities or Private Exchange Securities, as the case may be, all requirements pertaining to legends on such Initial Security or such Private Exchange Security will cease to apply, the requirements requiring any such Initial Security or such Private Exchange Security issued to certain Holders be issued in global form will cease to apply, and a certificated Initial Security or Private Exchange Security without legends will be available to the transferee of the Holder of such Initial Securities or Private Exchange Securities upon exchange of such transferring Holder's certificated Initial Security or Private Exchange Security or directions to transfer such Holder's interest in the Global Security, as applicable. (iv) Upon the consummation of a Registered Exchange Offer with respect to the Initial Securities pursuant to which Holders of such Initial Securities are offered Exchange Securities in exchange for their Initial Securities, all requirements pertaining to such Initial Securities that Initial Securities issued to certain Holders be issued in global form will cease to apply and certificated Initial Securities with the restricted securities legend set forth in Exhibit 1 hereto will be available to Holders of such Initial Securities that do not exchange their Initial Securities, and Exchange Securities in certificated or global form will be available to Holders that exchange such Initial Securities in such Registered Exchange Offer. (v) Upon the consummation of a Private Exchange with respect to the Initial Securities pursuant to which Holders of such Initial Securities are offered Private Exchange Securities in exchange for their Initial Securities, all requirements pertaining to such Initial Securities that Initial Securities issued to certain Holders be issued in global form will still apply, and Private Exchange Securities in global form 110 102 with the Restricted Securities Legend set forth in Exhibit 1 hereto will be available to Holders that exchange such Initial Securities in such Private Exchange. (C) Cancellation or Adjustment of Global Security. At such time as all beneficial interests in a Global Security have been exchanged for certificated Securities, redeemed, repurchased or canceled, such Global Security shall be returned to the Depository for cancellation or retained and canceled by the Trustee. At any time prior to such cancellation, if any beneficial interest in a Global Security is exchanged for certificated Securities, redeemed, repurchased or canceled, the principal amount of Securities represented by such Global Security shall be reduced and an adjustment shall be made on the books and records of the Trustee (if it is then the Securities Custodian for such Global Security) with respect to such Global Security, by the Trustee or the Securities Custodian, to reflect such reduction. (D) Obligations with Respect to Transfers and Exchanges of Securities. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate certificated Securities and Global Securities at the Registrar's or co-registrar's request. (ii) No service charge shall be made for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax, assessments, or similar governmental charge payable in connection therewith (other than any such transfer taxes, assessments or similar governmental charge payable upon exchange or transfer pursuant to Sections 3.06, 4.09 and 9.05), (iii) The Registrar or co-registrar shall not be required to register the transfer of or exchange of (a) any certificated Security selected for redemption in whole or in part pursuant to Article 3 of this Indenture, except the unredeemed portion of any certificated Security being redeemed in part, or (b) any Security for a period beginning 15 Business Days before the mailing of a notice of an offer to 111 103 repurchase or redeem Securities or 15 Business Days before an interest payment date. (iv) Prior to the due presentation for registration of transfer of any Security, the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar may deem and treat the person in whose name a Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and interest on such Security and for all other purposes whatsoever, whether or not such Security is overdue, and none of the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar shall be affected by notice to the contrary. (v) All Securities issued upon any transfer or exchange pursuant to the terms of this Indenture shall evidence the same debt and shall be entitled to the same benefits under this Indenture as the Securities surrendered upon such transfer or exchange. (E) No Obligation of the Trustee. (i) The Trustee shall have no responsibility or obligation to any beneficial owner of a Global Security, a member of, or a participant in the Depository or other Person with respect to the accuracy of the records of the Depository or its nominee or of any participant or member thereof, with respect to any ownership interest in the Securities or with respect to the delivery to any participant, member, beneficial owner or other Person (other than the Depository) of any notice (including any notice of redemption) or the payment of any amount, under or with respect to such Securities. All notices and communications to be given to the Holders and all payments to be made to Holders under the Securities shall be given or made only to or upon the order of the registered Holders (which shall be the Depository or its nominee in the case of a Global Security). The rights of beneficial owners in any Global Security shall be exercised only through the Depository subject to the applicable rules and procedures of the Depository. The Trustee may rely and shall be fully protected in relying upon information furnished by the Depository with respect to its members, participants and any beneficial owners. (ii) The Trustee shall have no obligation or duty to 112 104 monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Depository participants, members or beneficial owners in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. 2.4 Certificated Securities. (a) A Global Security deposited with the Depository or with the Trustee as custodian for the Depository pursuant to Section 2.1 shall be transferred to the beneficial owners thereof in the form of certificated Securities in an aggregate principal amount equal to the principal amount of such Global Security, in exchange for such Global Security, only if such transfer complies with Section 2.3 and (i) the Depository notifies the Company that it is unwilling or unable to continue as Depository for such Global Security or if at any time such Depository ceases to be a "clearing agency" registered under the Exchange Act and, in either case, a successor depositary is not appointed by the Company within 90 days of such notice, or (ii) an Event of Default has occurred and is continuing or (iii) the Company, in its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of certificated Securities under this Indenture. (b) Any Global Security that is transferable to the beneficial owners thereof pursuant to this Section shall be surrendered by the Depository to the Trustee located in the Borough of Manhattan, The City of New York, to be so transferred, in whole or from time to time in part, without charge, and the Trustee shall authenticate and deliver, upon such transfer of each portion of such Global Security, an equal aggregate principal amount of certificated Initial Securities of authorized denominations. Any portion of a Global Security transferred pursuant to this Section shall be executed, authenticated and delivered only in denominations of $1,000 and any integral multiple thereof and registered in such names as the Depository shall direct. Any certificated Initial Security delivered in exchange for an interest in the Global Security shall, except as 113 105 otherwise provided by Section 2.3(b), bear the restricted securities legend set forth in Exhibit 1 hereto. (c) Subject to the provisions of Section 2.4(b), the registered Holder of a Global Security may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. (d) In the event of the occurrence of any of the events specified in Section 2.4(a), the Company will promptly make available to the Trustee a reasonable supply of certificated Securities in definitive, fully registered form without interest coupons. 114 EXHIBIT 1 to RULE 144A/REGULATION S APPENDIX [FORM OF FACE OF INITIAL SECURITY] [Global Securities Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. [Restricted Securities Legend] THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHER WISE TRANSFERRED, ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED 115 2 STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (IV) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE. 116 3 No. ________ $___________ CUSIP NO. ISIN NO. 10-1/2% Senior Subordinated Notes Due February 1, 2009 Fairchild Semiconductor Corporation, a Delaware corporation, promises to pay to CEDE & CO., or registered assigns, the principal sum of Dollars on February 1, 2009. Interest Payment Dates: February 1 and August 1 (commencing August 1, 2001) Record Dates: January 15 and July 15 Additional provisions of this Security are set forth on the other side of this Security. Dated: January 31, 2001 FAIRCHILD SEMICONDUCTOR CORPORATION, by ------------------------------- Name: Title: by ------------------------------- Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION UNITEDSTATES TRUST COMPANY OF NEW YORK, as Trustee, certifies that this is one of the Securities referred to in the Indenture. by ----------------------------- Authorized Signatory 117 4 [FORM OF REVERSE SIDE OF INITIAL SECURITY] 10-1/2% Senior Subordinated Note Due February 1, 2009 1. Interest Fairchild Semiconductor Corporation, a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above; provided, however, that if a Registration Default (as defined in the Registration Rights Agreement) occurs, additional interest will accrue on this Security at a rate of 0.50% per annum, for the first 90-day period immediately following the occurrence of a Registration Default, and such rate will increase by an additional 0.50% per annum with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum additional interest rate of 2.0% per annum, from and including the date on which any such Registration Default shall occur to but excluding the date on which all such Registration Defaults have been cured. The Company will pay interest semiannually on February 1 and August 1 of each year, commencing August 1, 2001. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from [January 31, 2001]. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal at the rate borne by the Securities plus 1% per annum, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. 2. Method of Payment The Company will pay interest on the Securities (except defaulted interest) to the Persons who are registered holders of Securities at the close of business on January 15 or July 15 next preceding the interest payment date even if Securities are canceled after the record date and on or before the interest payment date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. 118 5 Payments in respect of the Securities represented by a Global Security (including principal, premium and interest) will be made by wire transfer of immediately available funds to the accounts specified by The Depository Trust Company. The Company will make all payments in respect of a certificated Security (including principal, premium and interest) by mailing a check to the registered address of each Holder thereof; provided, however, that payments on a certificated Security will be made by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States if such Holder elects payment by wire transfer by giving written notice to the Trustee or the Paying Agent to such effect designating such account no later than 30 days immediately preceding the relevant due date for payment (or such other date as the Trustee may accept in its discretion). 3. Paying Agent and Registrar Initially, United States Trust Company of New York, a New York banking corporation ("Trustee"), will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar. 4. Indenture The Company issued the Securities under an Indenture dated as of January 31, 2001 ("Indenture"), among the Company, Fairchild Semiconductor International, Inc., Fairchild Semiconductor Corporation of California, QT Optoelectronics, Inc., QT Optoelectronics, KOTA Microcircuits, Inc. and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the Act for a statement of those terms. The Company's obligations under the Securities are guaranteed by the Parent and certain Restricted Subsidiaries of the Company. 119 6 The Securities are general unsecured obligations of the Company. The Company shall be entitled, subject to its compliance with Section 4.03 of the Indenture, to issue Additional Securities pursuant to Section 2.13 of the Indenture. The Initial Securities issued on the Issue Date, any Additional Securities and all Exchange Securities or Private Exchange Securities issued in exchange therefor will be treated as a single class for all purposes under the Indenture. The Indenture limits, among other things (i) the incurrence of additional debt by the Company and its subsidiaries, (ii) the payment of dividends on capital stock of the Company and the purchase, redemption or retirement of capital stock or subordinated indebtedness, (iii) certain transactions with affiliates, (iv) sales of assets, including capital stock of subsidiaries, and (v) certain consolidations, mergers and transfers of assets. The Indenture also prohibits certain restrictions on distributions from subsidiaries. All of these limitations and prohibitions, however, are subject to a number of important qualifications contained in the Indenture. 5. Optional Redemption Except as set forth in the next paragraph and in paragraph 6 below, the Securities may not be redeemed prior to February 1, 2005. On and after that date, the Company may redeem the Securities in whole at any time or in part from time to time at the following redemption prices (expressed in percentages of principal amount), plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the related interest payment date): if redeemed during the 12-month period beginning February 1,
Period Percentage ------ ---------- 2005...................................................... 105.250% 2006...................................................... 103.500 2007...................................................... 101.750 2008 and thereafter....................................... 100.000
120 7 In addition, at any time prior to February 1, 2004, the Company may redeem up to 35% of the aggregate principal amount of Securities (which includes Additional Securities, if any) with the proceeds of a Public Equity Offering, at any time or from time to time, at a redemption price of 110.50% of the principal amount thereof, plus accrued interest to redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the related interest payment date); provided, however, that: (1) at least 65% of such aggregate principal amount of Securities (which includes Additional Securities, if any) remains outstanding immediately after the occurrence of each such redemption (other than the Securities held, directly or indirectly, by the Company or its Affiliates); and (2) each such redemption occurs within 90 days after the date of the related Public Equity Offering. 6. Special Redemption In the event that the Acquisition is not consummated by the 180th day following the Issue Date or, if earlier, the Acquisition Agreement is terminated, the Company must redeem the Securities (the "Special Redemption") at a redemption price of 100% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon (subject to the right of holders of record on the relevant date to receive interest due on such date) to the date of redemption. The Company will prepare and deliver to the Trustee the notice of the Special Redemption on the first Business Day immediately following the date on which the event causing the Special Redemption occurs, and the Trustee will send by first class mail a copy of such notice to the Holders of Securities on or prior to the fifth Business Day following the date on which the event causing the Special Redemption occurs. The Company will redeem the Securities no later than the fifteenth day after such notice is mailed. 7. Notice of Redemption Except as set forth in paragraph 6 above, notice of optional redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder of Securities to be redeemed at his registered 121 8 address. Securities in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued interest on all Securities (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Securities (or such portions thereof) called for redemption. 8. Put Provisions Upon a Change of Control, any Holder of Securities will have the right, subject to certain conditions, to cause the Company to repurchase all or any part of the Securities of such Holder at a repurchase price equal to 101% of the principal amount of the Securities to be repurchased plus accrued interest to the date of repurchase (subject to the right of holders of record on the relevant record date to receive interest due on the related interest payment date) as provided in, and subject to the terms of, the Indenture. 9. Subordination The Securities are subordinated to Senior Indebtedness, as defined in the Indenture. To the extent provided in the Indenture, Senior Indebtedness must be paid before the Securities may be paid. The Company agrees, and each Securityholder by accepting a Security agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give it effect and appoints the Trustee as attorney-in-fact for such purpose. 10. Denominations; Transfer; Exchange The Securities are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed) or any Securities for a period of 15 days before a selection of Securities to be redeemed or 15 days before an interest payment date. 122 9 11. Persons Deemed Owners The registered Holder of this Security may be treated as the owner of it for all purposes. 12. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 13. Discharge and Defeasance Subject to certain conditions, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Securities to redemption or maturity, as the case may be. 14. Amendment, Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended with the written consent of the Holders of at least a majority in principal amount outstanding of the Securities and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount outstanding of the Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Securityholder, the Company and the Trustee may amend the Indenture or the Securities to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, or to provide for uncertificated Securities in addition to or in place of certificated Securities, or to add guarantees with respect to the Securities or to secure the Securities, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any request of the SEC in connection with qualifying the Indenture under the Act, or to make certain changes in the subordination provisions, or to release a Subsidiary Guaranty when permitted by the Indenture, or to make any change that does not adversely affect the rights of any Securityholder. 123 10 15. Defaults and Remedies Under the Indenture, Events of Default include (i) default for 30 days in payment of interest on the Securities; (ii) default in payment of principal on the Securities at maturity, upon redemption pursuant to paragraph 5 of the Securities, upon acceleration or otherwise, or failure by the Company to redeem or purchase Securities when required; (iii) failure by the Company to comply with other agreements in the Indenture or the Securities, in certain cases subject to notice and lapse of time; (iv) certain accelerations (including failure to pay within any grace period after final maturity) of other Indebtedness of the Company if the amount accelerated (or so unpaid) exceeds $10.0 million; (v) certain events of bankruptcy or insolvency with respect to the Company and the Significant Subsidiaries; (vi) certain judgments or decrees for the payment of money in excess of $10.0 million; and (vii) certain events with respect to the guarantees of the Securities by the Parent and certain Restricted Subsidiaries of the Company. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Securities may declare all the Securities to be due and payable immediately, subject to certain conditions. Certain events of bankruptcy or insolvency are Events of Default which will result in the Securities being due and payable immediately upon the occurrence of such Events of Default. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing Default (except a Default in payment of principal or interest) if it determines that withholding notice is in the interest of the Holders. 16. Trustee Dealings with the Company Subject to certain limitations imposed by the Act, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect 124 11 obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 17. No Recourse Against Others A director, officer, employee or stockholder, as such, of the Company or the Trustee shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 18. Authentication This Security shall not be valid until an authorized signatory of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Security. 19. Abbreviations Customary abbreviations may be used in the name of a Securityholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 20. Holders' Compliance with Registration Rights Agreement. Each Holder of a Security, by acceptance hereof, acknowledges and agrees to the provisions of the Registration Rights Agreement, including, without limitation, the obligations of the Holders with respect to a registration and the indemnification of the Company to the extent provided therein. 21. Governing Law. THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS 125 12 OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. THE COMPANY WILL FURNISH TO ANY SECURITYHOLDER UPON WRITTEN REQUEST AND WITHOUT CHARGE TO THE SECURITYHOLDER A COPY OF THE INDENTURE WHICH HAS IN IT THE TEXT OF THIS SECURITY IN LARGER TYPE. REQUESTS MAY BE MADE TO: FAIRCHILD SEMICONDUCTOR CORPORATION 82 RUNNING HILL ROAD SOUTH PORTLAND, ME 04106 ATTENTION: GENERAL COUNSEL 126 13 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. - -------------------------------------------------------------------------------- Date: Your Signature: ---------------- --------------------------------- - -------------------------------------------------------------------------------- Sign exactly as your name appears on the other side of this Security. In connection with any transfer of any of the Securities evidenced by this certificate occurring prior to the expiration of the period referred to in Rule 144(k) under the Securities Act after the later of the date of original issuance of such Securities and the last date, if any, on which such Securities were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Securities are being transferred in accordance with its terms: CHECK ONE BOX BELOW (1) [ ] to the Company; or (2) [ ] pursuant to an effective registration statement under the Securities Act of 1933; or (3) [ ] inside the United States to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act of 1933) that 127 14 purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that such transfer is being made in reliance on Rule 144A, in each case pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or (4) [ ] outside the United States in an offshore transaction within the meaning of Regulation S under the Securities Act in compliance with Rule 904 under the Securities Act of 1933; or (5) [ ] pursuant to another available exemption from registration provided by Rule 144 under the Securities Act of 1933. Unless one of the boxes is checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (4) or (5) is checked, the Trustee may require, prior to registering any such transfer of the Securities, such legal opinions, certifications and other information as the Company has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. --------------------- Signature Signature Guarantee: - ---------------------------- --------------------- Signature must be guaranteed Signature 128 15 TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ----------------- ------------------------------------------- NOTICE: To be executed by an executive officer 129 16 [TO BE ATTACHED TO GLOBAL SECURITIES] SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY The following increases or decreases in this Global Security have been made:
Date of Amount of Amount of Principal Signature of Exchange decrease in increase in amount of this authorized Principal Principal Global officer of Amount of this Amount of Security Trustee or Global Security this Global following such Securities Security decrease or Custodian increase
130 17 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.06 or 4.09 of the Indenture, check the box: / / If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.06 or 4.09 of the Indenture, state the amount in principal amount: $ Date: Your Signature: --------------- ------------------------------------- (Sign exactly as your name appears on the other side of this Security.) Signature Guarantee: -------------------------------------------------------- (Signature must be guaranteed) 131 EXHIBIT A [FORM OF FACE OF EXCHANGE SECURITY OR PRIVATE EXCHANGE SECURITY] [*/] [**/] No. _______ $__________ 10-1/2% Senior Subordinated Notes Due February 1, 2009 Fairchild Semiconductor Corporation, a Delaware corporation, promises to pay to CEDE & CO., or registered assigns, the principal sum of Dollars on February 1, 2009. Interest Payment Dates: February 1 and August 1 (commencing on August 1, 2001) Record Dates: January 15 and July 15 - -------- */ If the Security is to be issued in global form add the Global Securities Legend from Exhibit 1 to Appendix A and the attachment from such Exhibit 1 captioned "[TO BE ATTACHED TO GLOBAL SECURITIES] - SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY". **/ If the Security is a Private Exchange Security issued in a Private Exchange to an Initial Purchaser holding an unsold portion of its initial allotment, add the Restricted Securities Legend from Exhibit 1 to Appendix A and replace the Assignment Form included in this Exhibit A with the Assignment Form included in such Exhibit 1. 132 Additional provisions of this Security are set forth on the other side of this Security. Dated: January 31, 2001 FAIRCHILD SEMICONDUCTOR CORPORATION, by _______________________ Name: Title: by _______________________ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee, certifies that this is one of the Securities referred to in the Indenture. by ______________________________ Authorized Signatory 133 3 [FORM OF REVERSE SIDE OF EXCHANGE SECURITY OR PRIVATE EXCHANGE SECURITY] 10-1/2% Senior Subordinated Note Due February 1, 2009 1. Interest Fairchild Semiconductor Corporation, a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above [; provided, however, that if a Registration Default (as defined in the Registration Rights Agreement) occurs, additional interest will accrue on this Security at a rate of 0.50% per annum, for the first 90-day period immediately following the occurrence of a Registration Default, and such rate will increase by an additional 0.50% per annum with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum additional interest rate of 2.0% per annum, from and including the date on which any such Registration Default shall occur to but excluding the date on which all such Registration Defaults have been cured]***/. The Company will pay interest semiannually on February 1 and August 1 of each year, commencing on August 1, 2001. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from [January 31, 2001]. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal at the rate borne by the Securities plus 1% per annum, and it shall pay - ---------- ***/ Insert if at the time of issuance of the Exchange Security or Private Exchange Security (as the case may be) neither the Registered Exchange Offer has been consummated nor a Shelf Registration Statement has been declared effective in accordance with the Registration Rights Agreement. 134 4 interest on overdue installments of interest at the same rate to the extent lawful. 2. Method of Payment The Company will pay interest on the Securities (except defaulted interest) to the Persons who are registered holders of Securities at the close of business on January 15 or July 15 next preceding the interest payment date even if Securities are canceled after the record date and on or before the interest payment date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. Payments in respect of Securities (including principal, premium and interest) will be made by wire transfer of immediately available funds to the accounts specified by the holders thereof or, if no U.S. dollar account maintained by the payee with a bank in the United States is designated by any holder to the Trustee or the Paying Agent at least 30 days prior to the relevant due date for payment (or such other date as the Trustee may accept in its discretion), by mailing a check to the registered address of such holder. 3. Paying Agent and Registrar Initially, United States Trust Company of New York, a New York banking corporation ("Trustee"), will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar. 4. Indenture The Company issued the Securities under an Indenture dated as of January 31, 2001 ("Indenture"), among the Company, Fairchild Semiconductor International, Inc., Fairchild Semiconductor Corporation of California, QT Optoelectronics, Inc., QT Optoelectronics, KOTA Microcircuits, Inc. and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Terms defined in the Indenture and not defined herein have the 135 5 meanings ascribed thereto in the Indenture. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the Act for a statement of those terms. The Company's obligations under the Securities are guaranteed by the Parent and certain Restricted Subsidiaries of the Company. The Securities are general unsecured obligations of the Company. The Company shall be entitled, subject to its compliance with Section 4.03 of the Indenture, to issue Additional Securities pursuant to Section 2.13 of the Indenture. The Initial Securities issued on the Issue Date, any Additional Securities and all Exchange Securities or Private Exchange Securities issued in exchange therefor will be treated as a single class for all purposes under the Indenture. The Indenture limits, among other things (i) the incurrence of additional debt by the Company and its subsidiaries, (ii) the payment of dividends on capital stock of the Company and the purchase, redemption or retirement of capital stock or subordinated indebtedness, (iii) certain transactions with affiliates, (iv) sales of assets, including capital stock of subsidiaries, and (v) certain consolidations, mergers and transfers of assets. The Indenture also prohibits certain restrictions on distributions from subsidiaries. All of these limitations and prohibitions, however, are subject to a number of important qualifications contained in the Indenture. 5. Optional Redemption Except as set forth in the next paragraph and in paragraph 6 below, the Securities may not be redeemed prior to February 1, 2005. On and after that date, the Company may redeem the Securities in whole at any time or in part from time to time at the following redemption prices (expressed in percentages of principal amount), plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the related interest payment date): if redeemed during the 12-month period beginning February 1,
Period Percentage ------ ---------- 2005.................................................. 105.250% 2006.................................................. 103.500 2007.................................................. 101.750 2008 and thereafter................................... 100.000
136 6 In addition, at any time prior to February 1, 2004, the Company may redeem up to 35% of the aggregate principal amount of Securities (which includes Additional Securities, if any,) with the proceeds of a Public Equity Offering, at any time or from time to time, at a redemption price of 110.50% of the principal amount thereof, plus accrued interest to redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the related interest payment date); provided, however, that: (1) at least 65% of such aggregate principal amount of Securities (which includes Additional Securities, if any) remains outstanding immediately after the occurrence of each such redemption (other than the Securities held, directly or indirectly, by the Company or its Affiliates); and (2) each such redemption occurs within 90 days after the date of the related Public Equity Offering. 6. Special Redemption In the event that the Acquisition is not consummated by the 180th day following the Issue Date or, if earlier, the Acquisition Agreement is terminated, the Company must redeem the Securities (the "Special Redemption") at a redemption price of 100% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon (subject to the right of holders of record on the relevant date to receive interest due on such date) to the date of redemption. The Company will prepare and deliver to the Trustee the notice of the Special Redemption on the first Business Day immediately following the date on which the event causing the Special Redemption occurs, and the Trustee will send by first class mail a copy of such notice to the Holders of Securities on or prior to the fifth Business Day following the date on which the event causing the Special Redemption occurs. The Company will redeem the Securities no later than the fifteenth day after such notice is mailed. 7. Notice of Redemption Except as set forth in paragraph 6 above, notice of optional redemption will be mailed at least 30 days but 137 7 not more than 60 days before the redemption date to each Holder of Securities to be redeemed at his registered address. Securities in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued interest on all Securities (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Securities (or such portions thereof) called for redemption. 8. Put Provisions Upon a Change of Control, any Holder of Securities will have the right, subject to certain conditions, to cause the Company to repurchase all or any part of the Securities of such Holder at a repurchase price equal to 101% of the principal amount of the Securities to be repurchased plus accrued interest to the date of repurchase (subject to the right of holders of record on the relevant record date to receive interest due on the related interest payment date) as provided in, and subject to the terms of, the Indenture. 9. Subordination The Securities are subordinated to Senior Indebtedness, as defined in the Indenture. To the extent provided in the Indenture, Senior Indebtedness must be paid before the Securities may be paid. The Company agrees, and each Securityholder by accepting a Security agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give it effect and appoints the Trustee as attorney-in-fact for such purpose. 10. Denominations; Transfer; Exchange The Securities are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed) or any Securities for a period of 138 8 15 days before a selection of Securities to be redeemed or 15 days before an interest payment date. 11. Persons Deemed Owners The registered Holder of this Security may be treated as the owner of it for all purposes. 12. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 13. Discharge and Defeasance Subject to certain conditions, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Securities to redemption or maturity, as the case may be. 14. Amendment, Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended with the written consent of the Holders of at least a majority in principal amount outstanding of the Securities and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount outstanding of the Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Securityholder, the Company and the Trustee may amend the Indenture or the Securities to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, or to provide for uncertificated Securities in addition to or in place of certificated Securities, or to add guarantees with respect to the Securities or to secure the Securities, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any request of the SEC in connection with qualifying the Indenture under the Act, or to make certain changes in the subordination provisions, or to release a Subsidiary Guaranty when 139 9 permitted by the Indenture, or to make any change that does not adversely affect the rights of any Securityholder. 15. Defaults and Remedies Under the Indenture, Events of Default include (i) default for 30 days in payment of interest on the Securities; (ii) default in payment of principal on the Securities at maturity, upon redemption pursuant to paragraph 5 of the Securities, upon acceleration or otherwise, or failure by the Company to redeem or purchase Securities when required; (iii) failure by the Company to comply with other agreements in the Indenture or the Securities, in certain cases subject to notice and lapse of time; (iv) certain accelerations (including failure to pay within any grace period after final maturity) of other Indebtedness of the Company if the amount accelerated (or so unpaid) exceeds $10.0 million; (v) certain events of bankruptcy or insolvency with respect to the Company and the Significant Subsidiaries; (vi) certain judgments or decrees for the payment of money in excess of $10.0 million; and (vii) certain events with respect to the guarantees of the Securities by the Parent and certain Restricted Subsidiaries of the Company. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Securities may declare all the Securities to be due and payable immediately, subject to certain conditions. Certain events of bankruptcy or insolvency are Events of Default which will result in the Securities being due and payable immediately upon the occurrence of such Events of Default. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing Default (except a Default in payment of principal or interest) if it determines that withholding notice is in the interest of the Holders. 16. Trustee Dealings with the Company Subject to certain limitations imposed by the Act, the Trustee under the Indenture, in its individual or any 140 10 other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 17. No Recourse Against Others A director, officer, employee or stockholder, as such, of the Company or the Trustee shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 18. Authentication This Security shall not be valid until an authorized signatory of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Security. 19. Abbreviations Customary abbreviations may be used in the name of a Securityholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 20. CUSIP NUMBERS Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures the Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Securityholders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 141 11 21. Holders' Compliance with Registration Rights Agreement. Each Holder of a Security, by acceptance hereof, acknowledges and agrees to the provisions of the Registration Rights Agreement, including, without limitation, the obligations of the Holders with respect to a registration and the indemnification of the Company to the extent provided therein. 22. Governing Law. THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. THE COMPANY WILL FURNISH TO ANY SECURITYHOLDER UPON WRITTEN REQUEST AND WITHOUT CHARGE TO THE SECURITYHOLDER A COPY OF THE INDENTURE WHICH HAS IN IT THE TEXT OF THIS SECURITY IN LARGER TYPE. REQUESTS MAY BE MADE TO: FAIRCHILD SEMICONDUCTOR CORPORATION 82 RUNNING HILL ROAD SOUTH PORTLAND, ME 04106 ATTENTION: GENERAL COUNSEL 142 12 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. - -------------------------------------------------------------------------------- Date: Your Signature: ---------------- -------------------------------- - -------------------------------------------------------------------------------- Sign exactly as your name appears on the other side of this Security. 143 13 OPTION OF HOLDER TO ELECT PURCHASE IF YOU WANT TO ELECT TO HAVE THIS SECURITY PURCHASED BY THE COMPANY PURSUANT TO SECTION 4.06 OR 4.09 OF THE INDENTURE, CHECK THE BOX: / / IF YOU WANT TO ELECT TO HAVE ONLY PART OF THIS SECURITY PURCHASED BY THE COMPANY PURSUANT TO SECTION 4.06 OR 4.09 OF THE INDENTURE, STATE THE AMOUNT: $ DATE: YOUR SIGNATURE: ------------------ ------------------------------- (SIGN EXACTLY AS YOUR NAME APPEARS ON THE OTHER SIDE OF THE SECURITY) SIGNATURE GUARANTEE: ---------------------------------------------------- (SIGNATURE MUST BE GUARANTEED BY A MEMBER FIRM OF THE NEW YORK STOCK EXCHANGE OR A COMMERCIAL BANK OR TRUST COMPANY) EX-4.10 4 b38142fsex4-10.txt REGISTRATION RIGHTS AGREEMENT 1 Exhibit 4.10 $350,000,000 FAIRCHILD SEMICONDUCTOR CORPORATION 10-1/2% SENIOR SUBORDINATED NOTES DUE FEBRUARY 1, 2009 REGISTRATION RIGHTS AGREEMENT January 26, 2001 CREDIT SUISSE FIRST BOSTON CORPORATION (acting through its affiliate, DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION) LEHMAN BROTHERS INC. DEUTSCHE BANK ALEX. BROWN INC. FLEET SECURITIES, INC. c/o CREDIT SUISSE FIRST BOSTON CORPORATION Eleven Madison Avenue New York, New York 10010-3629 Ladies and Gentlemen: 2 Fairchild Semiconductor Corporation, a Delaware corporation ("FAIRCHILD"), proposes to issue and sell to Credit Suisse First Boston Corporation (acting through its affiliate, Donaldson, Lufkin & Jenrette Securities Corporation), Lehman Brothers Inc., Deutsche Bank Alex. Brown Inc. and Fleet Securities, Inc. (collectively, the "INITIAL PURCHASERS"), upon the terms set forth in a purchase agreement dated January 26, 2001 (the "PURCHASE AGREEMENT"), $350,000,000 aggregate principal amount of its 10-1/2% Senior Subordinated Notes Due February 1, 2009 (the "INITIAL SECURITIES"). The Initial Securities will be unconditionally guaranteed on a senior subordinated basis by Fairchild Semiconductor International, Inc., a Delaware corporation ("FSC SEMICONDUCTOR"), and each existing and subsequently organized domestic subsidiary of Fairchild who become guarantors under the Credit Agreement (as defined in the Purchase Agreement) (together with FSC Semiconductor, the "GUARANTORS" and, together with Fairchild, the "Company"). The Initial Securities will be issued pursuant to an Indenture, dated as of January 31, 2001 (the "INDENTURE"), among Fairchild, the Guarantors and United States Trust Company of New York, as trustee (the "TRUSTEE"). As an inducement to the Initial Purchasers to enter into the Purchase Agreement, the Company agrees with the several Initial Purchasers, for the benefit of the holders of the Initial Securities (including, without limitation, the Initial Purchasers), the Exchange Securities (as defined below) and the Private Exchange Securities (as defined below) (collectively the "HOLDERS"), as follows: 1. Registered Exchange Offer. The Company shall, at its own cost, prepare and, not later than 90 days after (or if the 90th day is not a business day, the first business day thereafter) the date of original issue of the Initial Securities (the "ISSUE DATE"), file with the Securities and Exchange Commission (the "COMMISSION") a registration statement (the "EXCHANGE OFFER REGISTRATION STATEMENT") on an appropriate form under the Securities Act of 1933, as amended (the "SECURITIES ACT"), with respect to a proposed offer (the "REGISTERED EXCHANGE OFFER") to the Holders of Transfer Restricted Securities (as defined in Section 6 hereof), who are not prohibited by any law or policy of the Commission from participating in the Registered Exchange Offer, to issue and deliver to such Holders, in exchange for the Initial Securities, a like aggregate principal amount of debt securities (the "EXCHANGE SECURITIES") issued by Fairchild and guaranteed by the Guarantors under the Indenture and identical in all material respects to the Initial Securities (except for the transfer restrictions relating to the Initial Securities and the provisions relating to the matters described in Section 6 hereof) that would be registered under the Securities Act. The Company shall use its reasonable best efforts to cause such Exchange Offer Registration Statement to become effective under the Securities Act within 150 days (or if the 150th day is not a business day, the first business day thereafter) after the Issue Date of the Initial Securities and shall keep the Exchange Offer Registration Statement effective for not less than 30 days (or longer, if required by applicable law) after the date notice of the Registered Exchange Offer is mailed to the Holders (such period being called the "EXCHANGE OFFER REGISTRATION PERIOD"). If the Company effects the Registered Exchange Offer, the Company will be entitled to close the Registered Exchange Offer 30 days after the commencement thereof; provided that the Company has accepted all the Initial Securities theretofore validly tendered in accordance with the terms of the Registered Exchange Offer. Following the declaration of the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder of Transfer Restricted Securities (as defined in Section 6 hereof) electing to exchange the Initial Securities for Exchange Securities (assuming that such Holder is not an affiliate of the Company within the meaning of the Securities Act, acquires the Exchange Securities in the ordinary course of such Holder's business and has no arrangements with any person to participate in the distribution of the Exchange Securities and is not prohibited by any law or policy of the Commission from participating in the Registered Exchange Offer) to trade such Exchange Securities from and after their receipt without any limitations or restrictions under the Securities Act and without material restrictions under the securities laws of the several states of the United States. 3 The Company acknowledges that, pursuant to current interpretations by the Commission's staff of Section 5 of the Securities Act, in the absence of an applicable exemption therefrom, (i) each Holder which is a broker-dealer electing to exchange Initial Securities, acquired for its own account as a result of market making activities or other trading activities, for Exchange Securities (an "EXCHANGING DEALER"), is required to deliver a prospectus containing the information set forth in (a) Annex A hereto on the cover, (b) Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section, and (c) Annex C hereto in the "Plan of Distribution" section of such prospectus in connection with a sale of any such Exchange Securities received by such Exchanging Dealer pursuant to the Registered Exchange Offer and (ii) an Initial Purchaser that elects to sell Securities (as defined below) acquired in exchange for Initial Securities constituting any portion of an unsold allotment is required to deliver a prospectus containing the information required by Items 507 or 508 of Regulation S-K under the Securities Act, as applicable, in connection with such sale. The Company shall use its reasonable best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the prospectus contained therein, in order to permit such prospectus to be lawfully delivered by all persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such persons must comply with such requirements in order to resell the Exchange Securities; provided, however, that (i) in the case where such prospectus and any amendment or supplement thereto must be delivered by an Exchanging Dealer or an Initial Purchaser, such period shall be the lesser of 180 days after the expiration date of the Registered Exchange Offer and the date on which all Exchanging Dealers and the Initial Purchasers have sold all Exchange Securities held by them (unless such period is extended pursuant to Section 3(j) below) and (ii) the Company shall make such prospectus and any amendment or supplement thereto available to any broker-dealer for use in connection with any resale of any Exchange Securities for a period not less than 180 days after the consummation of the Registered Exchange Offer (or such shorter period during which Participating Broker-Dealers (as defined below) are required by law to deliver such prospectus). If, upon consummation of the Registered Exchange Offer, any Initial Purchaser holds Initial Securities acquired by it as part of its initial distribution, the Company, simultaneously with the delivery of the Exchange Securities pursuant to the Registered Exchange Offer, shall issue and deliver to the Initial Purchaser upon the written request of such Initial Purchaser, in exchange (each, a "PRIVATE EXCHANGE" and collectively, the "PRIVATE EXCHANGES") for the Initial Securities held by such Initial Purchaser, a like principal amount of debt securities issued by Fairchild and guaranteed by the Guarantors under the Indenture and identical in all material respects (including the existence of restrictions on transfer under the Securities Act and the securities laws of the several states of the United States, but excluding provisions relating to the matters described in Section 6 hereof) to the Initial Securities (the "PRIVATE EXCHANGE SECURITIES"). The Initial Securities, the Exchange Securities and the Private Exchange Securities are herein collectively called the "SECURITIES". In connection with the Registered Exchange Offer, the Company shall: (a) mail to each Holder a copy of the prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (b) keep the Registered Exchange Offer open for not less than 30 days (or longer, if required by applicable law) after the date notice thereof is mailed to the Holders; (c) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York, which may be the Trustee or an affiliate of the Trustee; 3 4 (d) permit Holders to withdraw tendered Initial Securities at any time prior to the close of business, New York time, on the last business day on which the Registered Exchange Offer shall remain open; and (e) otherwise comply with all applicable laws. As soon as practicable after the close of the Registered Exchange Offer or the Private Exchange, as the case may be, the Company shall: (x) accept for exchange all the Initial Securities validly tendered and not withdrawn pursuant to the Registered Exchange Offer and the Private Exchange; (y) deliver to the Trustee for cancellation all the Initial Securities so accepted for exchange; and (z) cause the Trustee to authenticate and deliver promptly to each Holder of the Initial Securities, Exchange Securities or Private Exchange Securities, as the case may be, equal in principal amount to the Initial Securities of such Holder so accepted for exchange. The Indenture will provide that the Exchange Securities will not be subject to the transfer restrictions set forth in the Indenture and that all the Securities will vote and consent together on all matters as one class and that none of the Securities will have the right to vote or consent as a class separate from one another on any matter. Interest on each Exchange Security and Private Exchange Security issued pursuant to the Registered Exchange Offer and in the Private Exchange will accrue from the last interest payment date on which interest was paid on the Initial Securities surrendered in exchange therefor or, if no interest has been paid on the Initial Securities, from the date of original issue of the Initial Securities. Each Holder participating in the Registered Exchange Offer shall be required to represent to the Company in writing that at the time of the consummation of the Registered Exchange Offer (i) any Exchange Securities received by such Holder will be acquired in the ordinary course of business, (ii) such Holder will have no arrangements or understanding with any person to participate in the distribution of the Securities within the meaning of the Securities Act, (iii) such Holder is not an "AFFILIATE", as defined in Rule 405 of the Securities Act, of the Company or if it is an affiliate, such Holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (iv) if such Holder is not a broker-dealer, that it is not engaged in, and does not intend to engage in, the distribution of the Exchange Securities and (v) if such Holder is a broker-dealer, that it will receive Exchange Securities for its own account in exchange for Initial Securities that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. Notwithstanding any other provisions hereof, the Company will ensure that (i) any Exchange Offer Registration Statement and any amendment thereto and any prospectus forming part thereof and any supplement thereto complies in all material respects with the Securities Act and the rules and regulations thereunder, (ii) any Exchange Offer Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any prospectus forming part of any Exchange Offer Registration Statement, and any supplement to such prospectus, does 4 5 not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 2. Shelf Registration. If, (i) because of any change in law or in applicable interpretations thereof by the staff of the Commission, the Company is not permitted to effect a Registered Exchange Offer, as contemplated by Section 1 hereof, (ii) the Registered Exchange Offer is not consummated within 190 days of the date of this Agreement, (iii) any Initial Purchaser so requests, following consummation of the Registered Exchange Offer, with respect to the Initial Securities (or the Private Exchange Securities) not eligible to be exchanged for Exchange Securities in the Registered Exchange Offer and held by it following consummation of the Registered Exchange Offer or (iv) any Holder (other than an Exchanging Dealer) is not eligible to participate in the Registered Exchange Offer or, in the case of any Holder (other than an Exchanging Dealer) that participates in the Registered Exchange Offer, such Holder does not receive freely tradeable Exchange Securities on the date of the exchange, the Company shall take the following actions: (a) The Company shall, at its cost, promptly (but in no event more than 30 days after so required or requested pursuant to this Section 2) file with the Commission and thereafter shall use its reasonable best efforts to cause to be declared effective ((1) with respect to clause (i) above, on or prior to the 190th calendar day following the date hereof and (2) with respect to clauses (ii), (iii) and (iv) above, on or prior to the 60th day after the date on which the Shelf Registration Statement is required to be filed) a registration statement (the "SHELF REGISTRATION STATEMENT" and, together with the Exchange Offer Registration Statement, a "REGISTRATION STATEMENT") on an appropriate form under the Securities Act relating to the offer and sale of the Transfer Restricted Securities (as defined in Section 6 hereof) by the Holders thereof from time to time in accordance with the methods of distribution set forth in the Shelf Registration Statement and Rule 415 under the Securities Act (hereinafter, the "SHELF REGISTRATION"); provided, however, that no Holder (other than an Initial Purchaser) shall be entitled to have the Securities held by it covered by such Shelf Registration Statement unless such Holder agrees in writing to be bound by all the provisions of this Agreement applicable to such Holder. (b) The Company shall use its reasonable best efforts to keep the Shelf Registration Statement continuously effective in order to permit the prospectus included therein to be lawfully delivered by the Holders of the relevant Securities, for a period of two years (or for such longer period if extended pursuant to Section 3(j) below) from the date of its effectiveness or such shorter period that will terminate when all the Securities covered by the Shelf Registration Statement (i) have been disposed of pursuant thereto or (ii) can be sold pursuant to Rule 144 or any successor rule thereof without limitations under clauses (c), (e), (f) and (h) of Rule 144 under the Securities Act, or any successor provisions thereof. The Company shall be deemed not to have used its reasonable best efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of Securities covered thereby not being able to offer and sell such Securities during that period, unless such action is required by applicable law. (c) Notwithstanding any other provisions of this Agreement to the contrary, the Company shall cause the Shelf Registration Statement and the related prospectus and any amendment or supplement thereto, as of the effective date of the Shelf Registration Statement, amendment or supplement, (i) to comply in all material respects with the applicable requirements of the Securities Act and the rules and regulations of the Commission and (ii) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or 5 6 necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3. Registration Procedures. In connection with any Shelf Registration contemplated by Section 2 hereof and, to the extent applicable, any Registered Exchange Offer contemplated by Section 1 hereof, the following provisions shall apply: (a) The Company shall (i) furnish to each Initial Purchaser, prior to the filing thereof with the Commission, a copy of the Registration Statement and each amendment thereof and each supplement, if any, to the prospectus included therein and, in the event that an Initial Purchaser (with respect to any portion of an unsold allotment from the original offering) is participating in the Registered Exchange Offer or the Shelf Registration Statement, the Company shall use its reasonable best efforts to reflect in each such document, when so filed with the Commission, such comments as such Initial Purchaser reasonably may propose; (ii) include the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section and in Annex C hereto in the "Plan of Distribution" section of the prospectus forming a part of the Exchange Offer Registration Statement and include the information set forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the Registered Exchange Offer; (iii) if requested by an Initial Purchaser, include the information required by Items 507 or 508 of Regulation S-K under the Securities Act, as applicable, in the prospectus forming a part of the Exchange Offer Registration Statement; (iv) include within the prospectus contained in the Exchange Offer Registration Statement a section entitled "Plan of Distribution", reasonably acceptable to the Initial Purchasers, which shall contain a summary statement of the positions taken or policies made by the staff of the Commission with respect to the potential "underwriter" status of any broker-dealer that is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) of Exchange Securities received by such broker-dealer in the Registered Exchange Offer (a "PARTICIPATING BROKER-DEALER"), whether such positions or policies have been publicly disseminated by the staff of the Commission or such positions or policies, in the reasonable judgment of the Initial Purchasers based upon advice of counsel (which may be in-house counsel), represent the prevailing views of the staff of the Commission; and (v) in the case of a Shelf Registration Statement, include the names of the Holders who propose to sell Securities pursuant to the Shelf Registration Statement as selling securityholders. (b) The Company shall advise (and confirm such advice in writing if requested by the recipient of the advice) the Initial Purchasers, the Holders of the Securities and any Participating Broker-Dealer from whom the Company has received prior written notice that it will be a Participating Broker-Dealer in the Registered Exchange Offer (which notice pursuant to clauses (ii)-(v) hereof shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made): (i) when the Registration Statement or any amendment thereto has not been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the prospectus included therein or for additional information; 6 7 (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iv) of the receipt by the Company or its legal counsel of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) of the happening of any event that requires the Company to make changes in the Registration Statement or the prospectus in order that the Registration Statement or the prospectus does not contain an untrue statement of a material fact nor omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the prospectus, in light of the circumstances under which they were made) not misleading. (c) The Company shall make every reasonable effort to obtain the withdrawal, at the earliest possible time, of any order suspending the effectiveness of the Registration Statement. (d) The Company shall furnish to each Holder of Securities included within the coverage of the Shelf Registration, without charge, at least one copy of the Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference). (e) The Company shall deliver to each Exchanging Dealer and each Initial Purchaser, and to any other Holder who so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if any Initial Purchaser or any such Holder requests, all exhibits thereto (including those incorporated by reference). (f) The Company shall, during the Shelf Registration Period, deliver to each Holder of Securities included within the coverage of the Shelf Registration, without charge, as many copies of the prospectus (including each preliminary prospectus) included in the Shelf Registration Statement and any amendment or supplement thereto as such person may reasonably request. The Company consents, subject to the provisions of this Agreement, to the use of the prospectus or any amendment or supplement thereto by each of the selling Holders of the Securities in connection with the offering and sale of the Securities covered by the prospectus, or any amendment or supplement thereto, included in the Shelf Registration Statement. (g) The Company shall deliver to each Initial Purchaser, any Exchanging Dealer, any Participating Broker-Dealer and such other persons required to deliver a prospectus following the Registered Exchange Offer, without charge, as many copies of the final prospectus included in the Exchange Offer Registration Statement and any amendment or supplement thereto as such persons may reasonably request. The Company consents, subject to the provisions of this Agreement, to the use of the prospectus or any amendment or supplement thereto by any Initial Purchaser, if necessary, any Participating Broker-Dealer and such other persons required to deliver a prospectus following the Registered Exchange Offer in connection with the offering and sale of the Exchange Securities covered by the prospectus, or any amendment or supplement thereto, included in such Exchange Offer Registration Statement. 7 8 (h) Prior to any public offering of the Securities pursuant to any Registration Statement, the Company shall register or qualify or cooperate with the Holders of the Securities included therein and their respective counsel in connection with the registration or qualification of the Securities for offer and sale under the securities or "blue sky" laws of such states of the United States as any Holder of the Securities reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the Securities covered by such Registration Statement; provided, however, that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it is not then so qualified or (ii) take any action which would subject it to general service of process or to taxation in any jurisdiction where it is not then so subject. (i) The Company shall cooperate with the Holders of the Securities to facilitate the timely preparation and delivery of certificates representing the Securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as the Holders may request a reasonable period of time prior to sales of the Securities pursuant to such Registration Statement. (j) Upon the occurrence of any event contemplated by paragraphs (ii) through (v) of Section 3(b) above during the period for which the Company is required to maintain an effective Registration Statement, the Company shall promptly prepare and file a post-effective amendment to the Registration Statement or a supplement to the related prospectus and any other required document so that, as thereafter delivered to Holders of the Securities or purchasers of Securities, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Initial Purchasers, the Holders of the Securities and any known Participating Broker-Dealer in accordance with paragraphs (ii) through (v) of Section 3(b) above to suspend the use of the prospectus until the requisite changes to the prospectus have been made, then the Initial Purchasers, the Holders of the Securities and any such Participating Broker-Dealers shall suspend use of such prospectus, and the period of effectiveness of the Shelf Registration Statement provided for in Section 2(b) above and the Exchange Offer Registration Statement provided for in Section 1 above shall each be extended by the number of days from and including the date of the giving of such notice to and including the date when the Initial Purchasers, the Holders of the Securities and any known Participating Broker-Dealer shall have received such amended or supplemented prospectus pursuant to this Section 3(j). (k) Not later than the effective date of the applicable Registration Statement, the Company will provide a CUSIP number for the Initial Securities, the Exchange Securities or the Private Exchange Securities, as the case may be, and provide the applicable trustee with printed certificates for the Initial Securities, the Exchange Securities or the Private Exchange Securities, as the case may be, in a form eligible for deposit with The Depository Trust Company. (l) The Company will comply with all rules and regulations of the Commission to the extent and so long as they are applicable to the Registered Exchange Offer or the Shelf Registration and will make generally available to its security holders copies of such reports which it is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. (m) The Company shall cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended, in a timely manner and containing such changes, if any, as shall be necessary for such qualification. In the event that such qualification would require the 8 9 appointment of a new trustee under the Indenture, the Company shall appoint a new trustee thereunder pursuant to the applicable provisions of the Indenture. (n) The Company may require each Holder of Securities to be sold pursuant to the Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of the Securities as the Company may from time to time reasonably require for inclusion in the Shelf Registration Statement, and the Company may exclude from such registration the Securities of any Holder that unreasonably fails to furnish such information within a reasonable time after receiving such request. (o) The Company shall enter into such customary agreements (including, if requested, an underwriting agreement in customary form) and take all such other action, if any, as any Holder of the Securities shall reasonably request in order to facilitate the disposition of the Securities pursuant to any Shelf Registration. (p) In the case of any Shelf Registration, the Company shall (i) make reasonably available for inspection by the Holders of the Securities, any underwriter participating in any disposition pursuant to the Shelf Registration Statement and any attorney, accountant or other agent retained by the Holders of the Securities or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and (ii) cause the Company's officers, directors, employees, accountants and auditors to supply all relevant information reasonably requested by the Holders of the Securities or any such underwriter, attorney, accountant or agent in connection with the Shelf Registration Statement, in each case, as shall be reasonably necessary to enable such persons, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; provided, however, that the foregoing inspection and information gathering shall be coordinated, on behalf of the Initial Purchasers by you and on behalf of the other parties, by one counsel designated by and on behalf of such other parties as described in Section 4 hereof and provided, further, that as to any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery, such information shall be kept confidential by the Holder or by any such underwriter, attorney, accountant or other agent. (q) In the case of any Shelf Registration, the Company, if requested by any Holder of Securities covered thereby, shall cause (i) its counsel to deliver an opinion and updates thereof relating to the Securities in customary form addressed to such Holders and the managing underwriters, if any, thereof and dated, in the case of the initial opinion, the effective date of such Shelf Registration Statement (it being agreed that the matters to be covered by such opinion shall include such matters as are customarily included in opinions requested in underwritten offerings of such type); (ii) its officers to execute and deliver all customary documents and certificates and updates thereof reasonably requested by any underwriters of the applicable Securities and (iii) its independent public accountants and the independent public accountants with respect to any other entity for which financial information is provided in the Shelf Registration Statement to provide to the selling Holders of the applicable Securities and any underwriter therefor a comfort letter in customary form and covering matters of the type customarily covered in comfort letters in connection with primary underwritten offerings, subject to receipt of appropriate documentation as contemplated, and only if permitted, by Statement of Auditing Standards No. 72. (r) In the case of the Registered Exchange Offer, if requested by any Initial Purchaser or any known Participating Broker-Dealer, the Company shall cause (i) its counsel to deliver to such Initial Purchaser or such Participating Broker-Dealer a signed opinion in the form set forth in 9 10 Sections 6(f) and 6(g) of the Purchase Agreement with such changes as are customary in connection with the preparation of a Registration Statement and (ii) its independent public accountants and the independent public accountants with respect to any other entity for which financial information is provided in the Registration Statement to deliver to such Initial Purchaser or such Participating Broker-Dealer a comfort letter, in customary form, meeting the requirements as to the substance thereof as set forth in Section 6(a) of the Purchase Agreement, with appropriate date changes. (s) If a Registered Exchange Offer or a Private Exchange is to be consummated, upon delivery of the Initial Securities by Holders to the Company (or to such other Person as directed by the Company) in exchange for the Exchange Securities or the Private Exchange Securities, as the case may be, the Company shall mark, or cause to be marked, on the Initial Securities so exchanged that such Initial Securities are being canceled in exchange for the Exchange Securities or the Private Exchange Securities, as the case may be; in no event shall the Initial Securities be marked as paid or otherwise satisfied. (t) The Company will use its reasonable best efforts to (a) if the Initial Securities have been rated prior to the initial sale of such Initial Securities, confirm such ratings will apply to the Securities covered by a Registration Statement or (b) if the Initial Securities were not previously rated, cause the Securities covered by a Registration Statement to be rated with the appropriate rating agencies, if so requested by Holders of a majority in aggregate principal amount of Securities covered by such Registration Statement, or by the managing underwriters, if any. (u) In the event that any broker-dealer registered under the Exchange Act shall underwrite any Securities or participate as a member of an underwriting syndicate or selling group or "assist in the distribution" (within the meaning of the Conduct Rules (the "RULES") of the National Association of Securities Dealers, Inc. ("NASD")) thereof, whether as a Holder of such Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Company shall use its reasonable best efforts to assist such broker-dealer in complying with the requirements of such Rules, including, without limitation, by (i) if such Rules, including Rule 2720, shall so require, engaging a "qualified independent underwriter" (as defined in Rule 2720) to participate in the preparation of the Registration Statement relating to such Securities, to exercise usual standards of due diligence in respect thereto and, if any portion of the offering contemplated by such Registration Statement is an underwritten offering or is made through a placement or sales agent, to recommend the yield of such Securities, (ii) indemnifying any such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 5 hereof and (iii) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the Rules. (v) The Company shall use its reasonable best efforts to take all other steps necessary to effect the registration of the Securities covered by a Registration Statement contemplated hereby. 4. Registration Expenses. The Company shall bear all fees and expenses incurred in connection with the performance of its obligations under Sections 1 through 3 hereof (including the reasonable fees and expenses, if any, of Cravath, Swaine & Moore, counsel for the Initial Purchasers, incurred in connection with the Registered Exchange Offer), whether or not the Registered Exchange Offer or a Shelf Registration is filed or becomes effective, and, in the event of a Shelf Registration, shall bear or reimburse the Holders of the Securities covered thereby for the reasonable fees and disbursements of one firm of counsel designated by the Holders of a majority in principal amount of the Securities covered thereby to act as counsel for the Holders of the Securities in connection therewith. 10 11 5. Indemnification. (a) The Company agrees to indemnify and hold harmless each Holder of the Securities, any Participating Broker-Dealer and each person, if any, who controls such Holder or such Participating Broker-Dealer within the meaning of the Securities Act or the Exchange Act (each Holder, any Participating Broker-Dealer and such controlling persons are referred to collectively as the "Indemnified Parties") from and against any losses, claims, damages or liabilities, joint or several, or any actions in respect thereof (including, but not limited to, any losses, claims, damages, liabilities or actions relating to purchases and sales of the Securities) to which each Indemnified Party may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus or in any amendment or supplement thereto or in any prospectus relating to a Shelf Registration, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse, as incurred, the Indemnified Parties for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action in respect thereof; provided, however, that (i) the Company shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration in reliance upon and in conformity with written information pertaining to such Holder and furnished to the Company by or on behalf of such Holder specifically for inclusion therein and (ii) with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus relating to a Shelf Registration Statement, the indemnity agreement contained in this subsection (a) shall not inure to the benefit of any Holder or Participating Broker-Dealer from whom the person asserting any such losses, claims, damages or liabilities purchased the Securities concerned, to the extent that a prospectus relating to such Securities was required to be delivered by such Holder or Participating Broker-Dealer under the Securities Act in connection with such purchase and any such loss, claim, damage or liability of such Holder or Participating Broker-Dealer results from the fact that there was not sent or given to such person, at or prior to the written confirmation of the sale of such Securities to such person, a copy of the amended, supplemented or final prospectus if the Company had previously furnished copies thereof to such Holder or Participating Broker-Dealer; provided further, however, that this indemnity agreement will be in addition to any liability which the Company may otherwise have to such Indemnified Party. The Company shall also indemnify underwriters, their officers and directors and each person who controls such underwriters within the meaning of the Securities Act or the Exchange Act to the same extent as provided above with respect to the indemnification of the Holders of the Securities if requested by such Holders. (b) Each Holder of the Securities, severally and not jointly, will indemnify and hold harmless (i) the Company and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, (ii) each of their respective directors and (iii) each of their respective officers who signs a Registration Statement from and against any losses, claims, damages or liabilities or any actions in respect thereof, to which the Company or any such controlling person, director or officer may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with written information pertaining to such Holder and furnished to the Company by or on behalf of such Holder 11 12 specifically for inclusion therein; and, subject to the limitation set forth immediately preceding this clause, shall reimburse, as incurred, the Company for any legal or other expenses reasonably incurred by the Company or any such controlling person in connection with investigating or defending any loss, claim, damage, liability or action in respect thereof. This indemnity agreement will be in addition to any liability which such Holder may otherwise have to the Company or any of its controlling persons. (c) Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action or proceeding (including a governmental investigation), such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 5, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof the indemnifying party will not be liable to such indemnified party under this Section 5 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action. No indemnifying party shall be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with its written consent or if there be a final judgment for the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 5 is unavailable or insufficient to hold harmless an indemnified party under subsections (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the exchange of the Securities, pursuant to the Registered Exchange Offer, or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof) as well as any other relevant equitable considerations. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or such Holder or such other indemnified party, as the case may be, on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred 12 13 by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding any other provision of this Section 5(d), the Holders of the Securities shall not be required to contribute any amount in excess of the amount by which the net proceeds received by such Holders from the sale of the Securities pursuant to a Registration Statement exceeds the amount of damages which such Holders have otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this paragraph (d), each person, if any, who controls such indemnified party within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as such indemnified party and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as the Company. (e) The agreements contained in this Section 5 shall survive the sale of the Securities pursuant to a Registration Statement and shall remain in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of any indemnified party. 6. Additional Interest Under Certain Circumstances. (a) Additional interest (the "ADDITIONAL INTEREST") with respect to the Initial Securities and the Private Exchange Securities shall be assessed as follows if any of the following events occur (each such event in clauses (i) through (vi) below a "REGISTRATION DEFAULT"): (i) If by May 1, 2001, the Exchange Offer Registration Statement has not been filed with the Commission; (ii) If by June 30, 2001, neither the Registered Exchange Offer is declared effective under the Securities Act nor, if required in lieu thereof, the Shelf Registration Statement is declared effective by the Commission; (iii) If the Exchange Offer is not consummated on or before the 40th day after the Exchange Offer Registration Statement is declared effective; (iv) If the Company is obligated to file the Shelf Registration Statement, the Company fails to file the Shelf Registration Statement with the Commission on or prior to the 30th day after the date (the "SHELF FILING DATE") on which the obligation to file a Shelf Registration Statement arises; (v) If the Company is obligated to file a Shelf Registration Statement pursuant to Section 2(a)(2) above, the Shelf Registration Statement is not declared effective on or prior to the 60th day after the Shelf Filing Date; or (vi) After the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, is declared effective, such Registration Statement thereafter ceases to be effective or usable (except as permitted in paragraph (b)). Additional Interest shall accrue on the Initial Securities and the Private Exchange Securities over and above the interest set forth in the title of the Initial Securities from and including the date on which any such Registration Default shall occur to but excluding the date on which all such Registration Defaults have been cured, at a rate of 0.50% per year (the "ADDITIONAL INTEREST RATE") for the first 90-day period immediately following the occurrence of such Registration Default. The Additional Interest Rate shall 13 14 increase by an additional 0.50% per year with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum Additional Interest Rate of 2.0% per year. (b) A Registration Default referred to in Section 6(a)(vi) hereof shall be deemed not to have occurred and be continuing in relation to a Shelf Registration Statement or the related prospectus if (i) such Registration Default has occurred solely as a result of (x) the filing of a post-effective amendment to such Shelf Registration Statement to incorporate annual audited financial information with respect to the Company where such post-effective amendment is not yet effective and needs to be declared effective to permit Holders to use the related prospectus or (y) other material events, with respect to the Company that would need to be described in such Shelf Registration Statement or the related prospectus and (ii) in the case of clause (y), the Company is proceeding promptly and in good faith to amend or supplement such Shelf Registration Statement and related prospectus to describe such events; provided, however, that in any case if such Registration Default occurs for a continuous period in excess of 30 days, Additional Interest shall be payable in accordance with the above paragraph from the day following such 30 day period until the date on which such Registration Default is cured. (c) Any amounts of Additional Interest due pursuant to clause (i), (ii), (iii), (iv), (v) or (vi) of Section 6(a) above will be payable in cash on the regular interest payment dates with respect to the Securities. The amount of Additional Interest will be determined by multiplying the applicable Additional Interest rate by the principal amount of the Initial Securities or Private Exchange Securities, as the case may be, multiplied by a fraction, the numerator of which is the number of days such Additional Interest rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months), and the denominator of which is 360. (d) "TRANSFER RESTRICTED SECURITIES" means each Security until (i) the date on which such Security has been exchanged by a person other than a broker-dealer for a freely transferable Exchange Security in the Registered Exchange Offer, (ii) following the exchange by a broker-dealer in the Registered Exchange Offer of an Initial Security for an Exchange Note, the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Security has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iv) the date on which such Security is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. 7. Rules 144 and 144A. The Company shall use its reasonable best efforts to file the reports required to be filed by it under the Securities Act and the Exchange Act in a timely manner and, if at any time the Company is not required to file such reports, it will, upon the request of any Holder of Transfer Restricted Securities, make publicly available other information so long as necessary to permit sales of their securities pursuant to Rules 144 and 144A. The Company covenants that it will take such further action as any Holder of Transfer Restricted Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell Transfer Restricted Securities without registration under the Securities Act within the limitation of the exemptions provided by Rules 144 and 144A (including the requirements of Rule 144A(d)(4)). The Company will provide a copy of this Agreement to prospective purchasers of Initial Securities identified to the Company by the Initial Purchasers upon request. Upon the request of any Holder of Initial Securities, the Company shall deliver to such Holder a written statement as to whether it has complied with such requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be deemed to require the Company to register any of its securities pursuant to the Exchange Act. 14 15 8. Underwritten Registrations. If any of the Transfer Restricted Securities covered by any Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering ("MANAGING UNDERWRITERS") will be selected by the Holders of a majority in aggregate principal amount of such Transfer Restricted Securities to be included in such offering. No person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's Transfer Restricted Securities on the basis reasonably provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 9. Miscellaneous. (a) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, except by the Company and the written consent of the Holders of a majority in principal amount of the Securities affected by such amendment, modification, supplement, waiver or consents. (b) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, first-class mail, facsimile transmission, or air courier which guarantees overnight delivery: (1) if to a Holder of the Securities, at the most current address given by such Holder to the Company. (2) if to the Initial Purchasers; Credit Suisse First Boston Corporation Eleven Madison Avenue New York, NY 10010-3629 Fax No.: (212) 325-8278 Attn.: Transactions Advisory Group with a copy to: Cravath, Swaine & Moore Worldwide Plaza 825 Eighth Avenue New York, NY 10019-7475 Fax No.: (212) 474-3700 Attn.: Kris F. Heinzelman, Esq. (3) if to the Company, at its address as follows: Fairchild Semiconductor Corporation 82 Running Hill Road South Portland, ME 04106 Fax No. (207) 761-6020 Attn.: Daniel E. Boxer, Esq. 15 16 with copies to: Gibson, Dunn & Crutcher LLP 200 Park Avenue New York, NY 10166 Fax No.: (212) 351-4035 Attn.: Steven R. Finley, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; three business days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged by recipient's facsimile machine operator, if sent by facsimile transmission; and on the day delivered, if sent by overnight air courier guaranteeing next day delivery. (c) No Inconsistent Agreements. The Company has not, as of the date hereof, entered into, nor shall it, on or after the date hereof, enter into, any agreement with respect to its securities that is inconsistent with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (d) Successors and Assigns. This Agreement shall be binding upon the successors and assigns of each of the parties. (e) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. (h) Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (i) Securities Held by the Company. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities is required hereunder, Securities held by the Company or its affiliates (other than subsequent Holders of Securities if such subsequent Holders are deemed to be affiliates solely by reason of their holdings of such Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. 16 17 If the foregoing is in accordance with your understanding of our agreement, please sign and return to Fairchild a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the several Initial Purchasers, Fairchild and the Guarantors in accordance with its terms. Very truly yours, FAIRCHILD SEMICONDUCTOR CORPORATION, by /s/ David A. Henry ------------------------------------- Name: David A. Henry Title: Vice President, Controller FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC., by /s/ David A. Henry ------------------------------------- Name: David A. Henry Title: Vice President, Controller FAIRCHILD SEMICONDUCTOR CORPORATION OF CALIFORNIA, by /s/ David A. Henry ------------------------------------- Name: David A. Henry Title: Vice President QT OPTOELECTRONICS, INC., by /s/ Stephen C. Sherman ------------------------------------- Name: Stephen C. Sherman Title: President, CEO and Chairman of the Board QT OPTOELECTRONICS, by /s/ Stephen C. Sherman ------------------------------------- Name: Stephen C. Sherman Title: President, CEO and Chairman of the Board 17 18 KOTA MICROCIRCUITS, INC., by /s/ David A. Henry ------------------------------------- Name: David A. Henry Title: Vice President The foregoing Registration Rights Agreement is hereby confirmed and accepted as of the date first above written. Credit Suisse First Boston Corporation (acting through its affiliate Donaldson, Lufkin & Jenrette Securities Corporation) Lehman Brothers Inc. Deutsche Banc Alex. Brown Inc. Fleet Securities, Inc. by: CREDIT SUISSE FIRST BOSTON CORPORATION, by /s/ William Spiro ----------------------------------- Name: William Spiro Title: Director DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION, by /s/ William Spiro ----------------------------------- Name: William Spiro Title: Senior Vice President 18 19 ANNEX A Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Initial Securities where such Initial Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date (as defined herein), it will make this Prospectus available to any broker-dealer for use in connection with any such resale (or such shorter period during which participating broker-dealers are required by law to deliver such prospectuses). See "Plan of Distribution." 19 20 ANNEX B Each broker-dealer that receives Exchange Securities for its own account in exchange for Initial Securities, where such Initial Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. See "Plan of Distribution." 20 21 ANNEX C PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Initial Securities where such Initial Securities were acquired as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date (or such shorter period during which participating broker-dealers are required by law to deliver such prospectus), it will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until , 200 , all dealers effecting transactions in the Exchange Securities may be required to deliver a prospectus.(1) The Company will not receive any proceeds from any sale of Exchange Securities by broker-dealers. Exchange Securities received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Securities or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such Exchange Securities. Any broker-dealer that resells Exchange Securities that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Securities may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Securities and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date (or such shorter period during which participating broker-dealers are required by law to deliver such prospectus) the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the Holders of the Securities) other than commissions or concessions of any brokers or dealers and will indemnify the Holders - -------- (1) In addition, the legend required by Item 502(e) of Regulation S-K will appear on the back cover page of the Exchange Offer prospectus. 21 22 of the Securities (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. 22 23 ANNEX D / / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: __________________________________________________ Address: __________________________________________________ If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Securities. If the undersigned is a broker-dealer that will receive Exchange Securities for its own account in exchange for Initial Securities that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Securities; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. 23 EX-10.11 5 b38142fsex10-11.txt 2001 STOCK OPTION PLAN 1 EXHIBIT 10.11 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. 2001 STOCK OPTION PLAN 1. TITLE OF PLAN The title of this plan is the Fairchild Semiconductor International, Inc. 2001 Stock Option Plan, hereinafter referred to as the "Plan." 2. PURPOSE The Plan is intended to align the interests of eligible key employees of Fairchild Semiconductor International, Inc. (hereinafter called the "Company") and its subsidiaries (as hereinafter defined) and of the non-employee directors of the Company with the interests of the stockholders of the Company and to provide incentives for such employees and non-employee directors to exert maximum efforts for the success of the Company. By extending to key employees and non-employee directors the opportunity to acquire proprietary interests in the Company and to participate in its success, the Plan may be expected to benefit the Company and its stockholders by making it possible for the Company to attract and retain the best available talent and by rewarding key management and technical personnel for their part in increasing the value of the Company's shares. It is further intended that options granted pursuant to this Plan may be incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or may be options which are not incentive stock options (hereinafter called "non-qualified stock options"). The total number of shares of the Company's Class A Common Stock, par value $.01 per share ("Stock"), available under the Plan is 5,000,000. 3. STOCK SUBJECT TO THE PLAN There will be reserved for issue upon the exercise of options granted under the Plan 5,000,000 shares of Stock, subject to adjustment as provided in Paragraph 8, which may be unissued shares, reacquired shares, or shares bought on the market. If any option that has been granted expires or terminates for any reason without having been exercised in full, the unpurchased shares shall again become available for the purposes of the Plan (unless the Plan shall have been terminated). 4. ADMINISTRATION The Plan shall be administered by a committee of the board of directors of the Company (the "Committee"), consisting of two or more members of the board of directors. The Committee shall be constituted to permit the Plan to comply with (i) Rule l6b-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and any successor 2 rule and (ii) United States Treasury regulations issued under Section 162(m) of the Code. (a) The Committee shall have the plenary power, subject to and within the limits of the express provisions of the Plan: (i) To determine from time to time which of the eligible persons shall be granted options under the Plan; the time or times (during the term of the option) within which all or portions of each option may be exercised and the number of shares for which an option or options shall be granted to each of them. (ii) To construe and interpret the Plan and options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Committee, in the exercise of this power, shall generally determine all questions of policy and expediency that may arise, may correct any defect, or supply any omission or reconcile any inconsistency in the Plan or in any option agreement in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To prescribe the terms and provisions of each option granted (which need not be identical). (iv) To determine whether options granted shall be incentive stock options or non-qualified stock options. (v) To establish sub-plans under the Plan pursuant to which specified options shall be governed. (vi) To determine whether options granted shall be transferable without consideration to immediate family members or family trusts for the benefit of an optionee's immediate family members. As used herein, "immediate family" means parents, spouses and children. (b) The Committee shall not have the authority to grant new options in exchange for the cancellation of stock options previously granted under the Plan or under any other stock option plan of the Company. 5. ELIGIBILITY Options may be granted only to regular salaried officers and key employees of the Company and its subsidiaries and to members of the board of directors of the Company who are not also employees of the Company. However, only employees of the Company shall be eligible to receive incentive stock options. The term "subsidiary" shall mean any company in which the 3 Company controls, directly or indirectly, 50% or more of the combined voting power of all classes of capital stock. 6. TERMS OF OPTION AND OPTION AGREEMENTS Each option shall be evidenced by a written Stock Option Agreement which shall expressly identify the options as incentive stock options or as non-qualified stock options, and be in such form and contain such provisions as the Committee shall from time to time deem appropriate; provided, however, that the grant of a non-qualified option pursuant to this Plan shall in no way be construed to be an alternative to the right of an employee to purchase stock pursuant to any incentive stock option heretofore or hereafter granted to an employee pursuant to any stock option plans now in existence or hereafter adopted by the Company. The terms of the option agreements need not be identical, but each option agreement shall include, by appropriate language, or be subject to, the substance of all of the applicable following provisions: (a) The purchase price under each option granted shall be as determined by the Committee but, in the case of incentive stock options, shall in no instance be less than 100% of fair market value on the date of grant. The fair market value on the date of grant shall not be less than the last sale price reported for the Stock on the New York Stock Exchange ("NYSE") on such date or if there was no sale on such date, the last date preceding such date on which a sale was reported. The maximum term of any incentive stock option shall be ten years from the date it was granted. (b) The maximum term of any non-qualified stock option shall be ten years and one day from the date it was granted. (c) An option may not be exercised to any extent, either by the person to whom it was granted or by the grantee's transferee, or by any person after the grantee's death, unless the person to whom the option was granted has remained in the continuous employ of the Company, or of a subsidiary, for not less than six months from the date when the option was granted. Otherwise, each option shall be exercisable as determined by the Committee. (d) The Company, during the terms of options granted under the Plan, at all times will keep available the number of shares of stock required to satisfy such options. (e) The Company will seek to obtain from each regulatory commission or agency having jurisdiction such authority as may be required to issue and sell shares of stock to satisfy such options. Inability of the Company to obtain from any such regulatory commission or agency authority which counsel for the Company deems necessary for the lawful issuance and sale of its stock to satisfy such options shall relieve the Company from any liability for failure to issue and sell stock to satisfy such options pending the time when such authority is obtained or is obtainable. 4 (f) Neither a person to whom an option is granted nor his or her transferee, legal representative, heir, legatee or distributee, shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option unless and until he or she has exercised his or her option pursuant to the terms thereof. (g) No incentive stock option may be transferable except by will or by the laws of descent or distribution. During the lifetime of the person to whom an incentive stock option is granted, he or she alone may exercise such option. (h) Unless otherwise specified by the Committee in the terms and conditions of a particular option grant, an option shall terminate and may not be exercised if the person to whom it is granted ceases to be continuously employed by the Company, or by a subsidiary of the Company, or to serve as a director of the Company, except (subject nevertheless to the second-to-last sentence of this paragraph): (1) if the grantee's continuous employment or other service is terminated for any reason other than (i) retirement, (ii) permanent disability or (iii) death, the grantee may exercise the option to the extent that the grantee was entitled to exercise such option at the date of such termination at any time within a period of 90 days following the date of such termination; (2) if the grantee's continuous employment or other service is terminated by (i) retirement, (ii) permanent disability or (iii) death, the option may be exercised in accordance with its terms and conditions at any time within a period of five years following the date of such termination by the grantee, or, in the event of the grantee's death, by the persons to whom the grantee's rights under the option shall pass by will or by the laws of descent or distribution, provided that, in all cases under clauses (1) and (2) an option shall only be exercisable to the extent the grantee was entitled to exercise such option at the date of such termination; (3) if the grantee's continuous employment is terminated and within a period of 90 days thereafter the grantee is recalled to the active payroll, the Committee may reinstate any portion of the option previously granted but not exercised. Nothing contained in this subparagraph (h) is intended to extend the stated term of the option and in no event may an option be exercised by anyone after the expiration of its stated term. With respect to non-qualified stock options, termination of employment or service as an employee or director shall not be treated as a termination of employment or service for purposes of this Section 6(h) if the grantee continues without interruption to serve thereafter in another such capacity for the Company. (i) Option agreements evidencing incentive stock options shall contain such terms and provisions as may be necessary to render them incentive stock options pursuant to Section 422 of the Code and the income tax regulations thereunder, as the same or any successor statute or regulations may at the time be in effect. (j) In order to facilitate the making of any grant of options under the Plan, the Committee may provide for such modifications and additional terms and conditions ("special terms") in grants to grantees who are employed by the Company or any subsidiary of the Company outside the United States (or who are foreign nationals temporarily within the United States) as the Committee may consider necessary or appropriate to accommodate differences in local law, policy or custom or to facilitate administration of the Plan. The special terms may provide that the grant of an option is subject to (i) applicable governmental or regulatory approval or other compliance with local legal requirements and/or (ii) execution by the grantee 5 and return to the Company of a written instrument in the form specified by the Plan Administrator. In the event such conditions are not satisfied, the grant shall be void. The special terms may also provide that a grant shall become exercisable if a grantee's employment with the Company or subsidiary of the Company ends as a result of workforce reduction, realignment or similar measure and the Committee may designate a person or persons to make such determination for a location. The Committee may approve such appendices or supplements to or amendments, restatements, sub-plans or alternative versions of the Plan as it may consider necessary or appropriate for purposes of implementing any special terms, without thereby affecting the terms of the Plan as in effect for any other purpose. (k) Nothing in this Plan or in any option granted hereunder shall confer on any optionee any right to continue in the employ or other service of the Company or any of its subsidiaries, or to interfere in any way with the right of the Company or any of its subsidiaries to terminate his or her employment or other service at any time. 7. TIME OF GRANTING OPTION The Committee shall determine the date on which options are granted under the Plan. All options granted must be approved at a meeting of the Committee by a majority of the members of the Committee. If an option agreement is not executed by an employee and returned to the Company on or prior to 90 days after the date the option agreement is received by the employee (or such earlier date as the Committee may specify), such option shall terminate. 8. ADJUSTMENT IN NUMBER OF SHARES AND IN OPTION PRICE In the event there is any change in the shares of the Company through the declaration of stock dividends or a stock split-up, or through recapitalization resulting in share split-ups, or combinations or exchanges of shares, or otherwise, the number of shares available for option, as well as the shares subject to any option and the option price thereof, shall be appropriately adjusted by the Committee, in its sole discretion. Any such determination by the Committee shall be final and binding. 9. PAYMENT OF PURCHASE PRICE AND WITHHOLDING TAXES (a) The purchase price for all shares purchased pursuant to options exercised must be either paid in full in cash, or paid in full, with the consent of the Committee, in Common Stock of the Company valued at fair market value on the date of exercise or a combination of cash and Common Stock. Fair market value on the date of exercise shall be determined in the same manner as provided in Section 6(a) hereof. (b) The Committee may permit the payment of all or part of the applicable withholding taxes due upon exercise of an option, up to the highest marginal rates then in effect, by the withholding of shares otherwise issuable upon exercise of the option. Option shares withheld in payment of such taxes shall be valued at the fair market value of the Company's 6 Common Stock on the date of exercise as provided in Section 6(a) hereof. (c) The Committee may require, as a condition of exercise, that the optionee pay to the Company any required withholding taxes. (d) The Committee may permit same day sale or "cashless exercise" methods of exercising the option. 10. CHANGE IN CONTROL In the event the Company is merged into or acquired by another entity in a transaction involving a change in control, the Committee shall have the complete authority and discretion, but not the obligation, to accelerate the vesting of any outstanding options granted hereunder. The Committee may also ask the board of directors to negotiate, as part of any agreement involving a sale or merger of the Company, a sale of substantially all the Company's assets or similar transaction, terms providing protection for employees holding options under the Plan. Any options not exercised or assumed as part of the transaction or otherwise provided for shall terminate as of the effective date of the transaction. 11. NON-U.S. ELIGIBLE PERSONS Notwithstanding any provision of the Plan to the contrary, in order to foster and promote achievement of the purposes of the Plan or to comply with provisions of laws in other countries in which the Company or any subsidiary operates or has key employees or non-employee directors, the Committee, in its discretion, shall have the power and authority to (i) determine which (if any) eligible persons rendering services or employed outside the United States are eligible to participate in the Plan; (ii) determine which non-United States-based subsidiaries or operations (e.g., branches, representative offices) participate in the Plan or any type of options hereunder; (iii) modify the terms and conditions of any options made to such eligible persons, or with respect to such non-United States-based subsidiaries or operations; and (iv) establish sub-plans, modified exercise, payment and other terms and procedures to the extent deemed necessary or desirable by the Committee. 12. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN (a) The board of directors of the Company may amend, modify, suspend or terminate the Plan for the purpose of meeting or addressing any changes in legal requirements or for any other purpose permitted by law. The board may seek stockholder approval of an amendment if determined to be required by or advisable under regulations of the Securities and Exchange Commission or the Department of Treasury, the rules of any stock exchange on which the Company's stock is listed, or other applicable law or regulation. 7 (b) The Plan shall continue in effect until all shares available for issuance under the Plan have been issued. An option may not be granted while the Plan is suspended or after it is terminated. (c) The rights and obligations under any options granted while the Plan is in effect shall not be altered or impaired by amendment, suspension or termination of the Plan, except with the consent of the person to whom the option was granted or the grantee's transferee or the person to whom rights under an option shall have passed by will or by the laws of descent and distribution. 13. EFFECTIVE DATE This Plan is effective as of January 1, 2001, and applies to any option grant made on or after such date. EX-13.01 6 b38142fsex13-01.txt SELECTED FINANCIAL DATA 1 Exhibit 13.01 SELECTED FINANCIAL DATA The following table sets forth our selected historical consolidated financial data. The historical consolidated financial data as of December 31, 2000 and December 26, 1999 and for the year ended December 31, 2000, the seven months ended December 26, 1999, the fiscal years ended May 30, 1999 and May 31, 1998 is derived from our audited consolidated financial statements included elsewhere in this Annual Report. The historical consolidated financial data as of May 30, 1999, May 31, 1998, May 25, 1997 and May 26, 1996 and for the fiscal years ended May 25, 1997 and May 26, 1996 are derived from our audited consolidated financial statements which are not included in this Annual Report. The historical consolidated financial data as of and for the year ended December 26, 1999 and the seven months ended December 27, 1998 is derived from our unaudited consolidated financial statements which are not included in this Annual Report. We believe that such unaudited consolidated financial statements included all adjustments necessary for the fair presentation of our financial condition and the results of operations for such periods and as of such dates. This information should be read in conjunction with our audited consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report.
Year Ended Seven Months Ended Fiscal Year Ended -------------------------- -------------------------- -------------------------------------- December 31, December 26, December 26, December 27, May 30, May 31, May 25, May 26, 2000 1999 1999 1998 1999 1998 1997 1996 ----------- ------------ ----------- ----------- -------- -------- -------- -------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Trade revenue $1,681.6 $1,037.6 $ 714.0 $ 322.3 $ 654.1 $ 635.8 $ 587.8 $ 688.7 Contract manufacturing revenue 101.6 116.9 72.2 38.0 81.0 153.4 104.2 87.6 -------- -------- -------- -------- -------- -------- -------- -------- Total revenue $1,783.2 $1,154.5 $ 786.2 $ 360.3 $ 735.1 $ 789.2 $ 692.0 $ 776.3 ======== ======== ======== ======== ======== ======== ======== ======== Trade gross profit $ 602.9 $ 273.2 $ 214.1 $ 69.7 $ 135.7 $ 194.2 $ 145.7 $ 216.8 % of trade revenue 35.9% 26.3% 30.0% 21.6% 20.7% 30.5% 24.8% 31.5% Contract manufacturing gross profit 36.3 32.6 20.8 5.1 16.6 36.3 6.8 -- % of contract manufacturing revenue 35.7% 27.9% 28.8% 13.4% 20.5% 23.7% 6.5% -- Total gross profit 639.2 305.8 234.9 74.8 152.3 230.5 152.5 216.8 % of total revenue 35.8% 26.5% 29.9% 20.8% 20.7% 29.2% 22.0% 27.9% Net income (loss) (1) 273.1 (52.6) 21.3 (30.5) (114.1) 20.6 15.5 72.3 OTHER FINANCIAL DATA: EBIT (2) $ 325.9 $ 113.6 $ 90.8 $ 0.6 $ 23.3 $ 102.8 $ 51.3 $ 72.1 Depreciation and other amortization 113.5 104.8 62.8 53.2 95.4 83.4 77.1 64.2 Amortization of intangibles 37.6 26.0 19.5 1.9 8.4 1.4 -- -- EBITDA (2) 477.0 244.4 173.1 55.7 127.1 187.6 128.4 136.3 Adjusted net income (loss) (3) 282.5 54.6 54.5 (25.3) (33.4) 33.5 34.9 72.3 Capital expenditures 301.9 97.2 74.8 24.1 46.2 78.0 47.1 153.9 CONSOLIDATED BALANCE SHEET DATA (END OF PERIOD): Inventories $ 192.8 $ 166.3 $ 166.3 $ 148.6 $ 108.0 $ 73.1 $ 93.1 Total assets 1,837.5 1,137.6 1,137.6 1,095.7 634.3 555.0 432.7 Long-term debt, less current portion 705.2 717.2 717.2 1,045.9 526.7 487.9 -- Redeemable preferred stock -- -- -- 90.1 80.5 71.8 -- Stockholders' equity (deficit) 837.7 213.2 213.2 (240.4) (116.6) (133.3) 349.2
(1) Prior to March 11, 1997, the amounts presented include all revenues and costs attributable to the Fairchild Semiconductor business including an allocation of the costs of shared facilities and overhead of National Semiconductor. In addition, certain costs incurred at Fairchild plants for the benefit of other National Semiconductor product lines were allocated from Fairchild to National Semiconductor. All of the allocations and estimates were based on assumptions that management believes were reasonable under the circumstances. However, these allocations and estimates are not necessarily indicative of the costs that would have resulted if the Fairchild Semiconductor business had been operated on a stand-alone basis. 2) Excludes other (income) expense and the non-recurring (gains) and charges detailed below:
Year Ended Seven Months Ended Fiscal Year Ended ------------------------------------------------------------------------------------- December 31, December 26, December 26, December 27, May 30, May 31, May 25, 2000 1999 1999 1998 1999 1998 1997 ----------- ------------ ----------- ----------- -------- -------- -------- Distributor and inventory reserves in connection with Memory $(5.4) $15.4 $ -- $ -- $15.4 $ -- $ -- Restructuring Restructuring charges (2.1) 16.8 -- 4.5 21.3 -- 5.3 Purchased in-process Research and 9.0 34.0 -- -- 34.0 15.5 -- Development Gain on sale of former Mountain View, (3.5) -- -- -- -- -- -- California facility Forgiveness of certain Management tax related loans -- 8.3 8.3 -- -- -- -- Retention bonuses -- -- -- -- -- -- 14.1 $(2.0) $74.5 $8.3 $4.5 $70.7 $15.5 $19.4 ------- ------ ----- ----- ------ ------ ------
3) Adjusted net income (loss) is net income (loss) excluding restructuring and other non-recurring gains and charges, as shown above, and amortization of acquisition related intangibles, net of tax. For the year ended December 31, 2000, it also excludes the one-time reduction of deferred tax asset valuation allowances of $26.3 million and the write-off of deferred financing fees of $3.6 million. For the year ended December 26, 1999, it also excludes the write-off of deferred financing fees of $12.4 million. For the seven months ended December 26, 1999 it also excludes the write-off of deferred financing fees of $7.2 million. 1 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES BACKGROUND We are a leading designer, manufacturer and supplier of analog, discrete, interface and logic, non-volatile memory and optoelectronic semiconductors serving the personal computer, industrial, telecommunications, consumer electronics and automotive markets. Our predecessor company was renowned as one of the pioneering companies of the semiconductor industry. The original Fairchild Semiconductor invented the planar process of manufacturing semiconductors, regarded as one of the most significant achievements in the semiconductor industry since the invention of the transistor. These early innovations form the base of a rich company history. Acquired in 1979 by Schlumberger Limited, we continued to innovate, introducing logic products such as FAST(R) (Fairchild Advanced Schottky Technology) and FACT(TM) (Fairchild Advanced CMOS Technology), which remain industry standard products today. In 1987, our business was acquired by National Semiconductor and integrated into its operations. The assets of our business were separated from National Semiconductor in March 1997 and we began operating as a stand-alone entity. At that time, our business consisted of the Logic Products Group, historically our core business, the Discrete Products Group and the Non-Volatile Memory Products Group, historically multi-market businesses of National Semiconductor. On December 31, 1997, we acquired Raytheon Semiconductor, Inc. for approximately $117.0 million in cash. That business designs, manufactures and markets high-performance analog and mixed signal semiconductors with long product lives for the personal computer, communications, broadcast video and industrial markets. On April 13, 1999, we acquired the power device business of Samsung Electronics Co., Ltd. for $414.9 million in cash. The power device business designs, manufactures and markets power discrete semiconductors and standard analog integrated circuits serving the personal computer, industrial, telecommunications and consumer electronics markets. On May 28, 2000, we acquired QT Optoelectronics, Inc. for approximately $92.0 million in cash and common stock. In addition, in conjunction with the acquisition, we assumed and immediately repaid $14.0 million of its long-term debt. That business designs, manufactures and markets optoelectronic products, including optocouplers, LED lamps and displays and infrared components. On September 8, 2000 we acquired KOTA Microcircuits, Inc. ("KOTA") and the power management business of Micro Linear Corporation ("Micro Linear") for a combined $23.1 million in cash and common stock. These businesses design and market analog products, including operational amplifiers, offline power switches and low power battery management. The acquisitions were accounted for as purchases, and accordingly, our operating results include the operating results of the businesses from their respective dates of acquisition. FISCAL YEAR CHANGE We have changed our fiscal year-end from the last Sunday in May to the last Sunday in December. Our last fiscal year under our old accounting calendar was the year ended May 30, 1999. Our first full fiscal year following this change was the year ended December 31, 2000, which we refer to as Calendar 2000. The seven-month transition period is referred to as Stub Year 1999. 2 3 SEGMENT INFORMATION The following table sets forth the composition of trade revenue by reportable segments and contract manufacturing services as a percentage of total revenues, excluding one-time charges in Fiscal 1999 and the twelve months ended December 26, 1999, which we refer to as Calendar 1999, totaling $5.5 million in the Memory Division, which is included in the other segment along with optoelectronics products. Also excluded from the other segment in Calendar 2000 is a gain of $2.1 million resulting from the adjustment of distributor reserves originally recorded in connection with the 1999 Memory restructuring.
Year Ended December Stub Year Fiscal Year Ended May ------------------------------------------------------------------------- 2000 1999 1999 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Analog 21.2% 20.2% 22.6% 13.5% 5.1% 0.0% Discrete 42.0 37.9 40.3 30.1 23.7 23.8 Interface & Logic 23.8 26.7 23.4 36.1 38.4 41.2 Other 7.3 5.1 4.5 9.4 13.4 19.9 - ------------------------------------------------------------------------------------------------------------------ Subtotal trade Sales 94.3 89.9 90.8 89.1 80.6 84.9 Contract manufacturing services 5.7 10.1 9.2 10.9 19.4 15.1 - ------------------------------------------------------------------------------------------------------------------ Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ==================================================================================================================
3 4 YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 26, 1999 Comparative financial information for Calendar 2000 and Calendar 1999 is as follows:
Calendar Calendar 1999 (In millions) 2000 (unaudited) - --------------------------------------------------------------------------------------- Revenue: Net sales--trade $1,681.6 $1,037.6 Contract manufacturing 101.6 116.9 - --------------------------------------------------------------------------------------- Total revenue 1,783.2 1,154.5 Operating expenses: Cost of sales--trade 1,078.7 764.4 Cost of contract manufacturing 65.3 84.3 Research and development 83.9 53.1 Selling, general and administrative 224.0 162.8 Purchased in-process research and development 9.0 34.0 Restructuring and impairments (5.6) 16.8 - --------------------------------------------------------------------------------------- Total operating expenses 1,455.3 1,115.4 - --------------------------------------------------------------------------------------- Operating income (loss) 327.9 39.1 Interest expense 81.3 94.6 Interest income (23.3) (0.7) Other (income) expense, net (0.8) -- - --------------------------------------------------------------------------------------- Income (loss) before income taxes 270.7 (54.8) Provision (benefit) for income taxes (2.4) (2.2) - --------------------------------------------------------------------------------------- Net income (loss) $273.1 $(52.6) =======================================================================================
Results of Operations. We generated net income of $273.1 million in Calendar 2000, compared to a net loss of $(52.6) million in Calendar 1999. Excluding unusual charges (gains) and amortization of acquisition-related intangibles, net of tax effects, adjusted net income was as follows for Calendar 2000 and Calendar 1999, respectively: 4 5
Calendar Calendar (In millions) 2000 1999 - ------------------------------------------------------------------------------------------ Net income (loss) $273.1 $(52.6) Restructuring and impairments (5.6) 16.8 Purchased in-process research and development 9.0 34.0 Non-recurring (gains) charges (1.8) 36.1 Non-recurring release of deferred tax asset valuation allowance (26.3) -- Amortization of acquisition-related intangibles 37.6 26.0 Less associated tax effects (3.5) (5.7) --------------------------- Adjusted net income $282.5 $54.6
For Calendar 2000, restructuring and impairments were associated with an adjustment to reserves recorded in connection with the Memory restructuring, and a one-time gain on the sale of our former Mountain View, California facility. Purchased in-process research and development was recorded in connection with our acquisitions. Non-recurring (gains) charges included a $3.6 million write-off of deferred financing fees associated with the refinancing of our senior credit facility offset by a $(5.4) million adjustment to other reserves associated with the Memory restructuring action in 1999. Finally, we adjusted our deferred tax valuation reserves in Calendar 2000 as we determined that it was more likely than not that we would utilize our deferred tax assets. For Calendar 1999, restructuring and impairments we recorded in connection with our Analog and Memory restructuring actions. Purchased in-process research and development was recorded in connection with the acquisition of our power device business. Non-recurring charges included $15.4 million for other reserves associated with our Memory restructuring action, $12.4 million for the write-off of deferred financing fees and an $8.3 million charge for forgiveness of certain management tax loans in connection with our initial public offering. Operating income was $327.9 million in Calendar 2000, compared to $39.1 million in Calendar 1999. Excluding unusual charges (gains) detailed above, operating income was $325.9 million in Calendar 2000, compared to $113.6 million in Calendar 1999. The increase in operating income is due to higher revenues and gross profits due to improved pricing, new product introductions and improved business conditions, resulting in higher factory utilization. In addition, operating income improved due to a full year of power device results in Calendar 2000, compared to approximately nine months in Calendar 1999, and the effect on operating income from the acquisitions consummated in Calendar 2000. Excluding depreciation and amortization of $151.1 million and $130.8 million in Calendar 2000 and Calendar 1999, respectively, unusual charges (gains) and other (income) expense, earnings before interest, taxes, depreciation and amortization ("EBITDA") were $477.0 million in Calendar 2000 compared to $244.4 million in Calendar 1999. EBITDA is presented because we believe that it is a widely accepted financial indicator of an entity's ability to incur and service debt. EBITDA should not be considered as an alternative to net income, operating income, or other consolidated operations and cash flow data prepared in accordance with generally accepted accounting principles, as an indicator of our operating performance, or as an alternative to cash flows as a measure of liquidity. Revenues. Our revenues consist of trade sales to unaffiliated customers (94.3% and 89.9% of total revenues in Calendar 2000 and Calendar 1999, respectively) and revenues from contract manufacturing services provided to National Semiconductor and Samsung Electronics (5.7% and 10.1% of total revenues in Calendar 2000 and Calendar 1999, respectively). Trade sales increased 62.1% to $1,681.6 million in Calendar 2000 compared with $1,037.6 million in Calendar 1999. The increase in our trade sales resulted from higher sales volume reflecting strength in end markets, the effect of acquisitions, higher average selling prices and an improved sales mix due to new product introductions. Geographically, 23.4%, 13.5%, 45.5% and 17.6% of trade sales were derived from North America, Europe, Asia/Pacific and Korea, respectively, in Calendar 2000, compared to 23.9%, 13.5%, 44.9% and 17.7%, respectively, in Calendar 1999. North American revenues increased 57.9% in Calendar 2000 from Calendar 1999. This increase was 5 6 due to strong distribution sales in both the industrial and consumer markets and improvements in communications and computing, as well as the effect of acquisitions. Revenues in the Europe region increased 61.5% in Calendar 2000 from Calendar 1999. The increase in Europe was due to improvements in the communications, consumer and distribution markets, as well as the effect of acquisitions. Asia/Pacific region revenues increased 63.7% in Calendar 2000 from Calendar 1999. The increase is due to strength in the consumer segment, improved regional economic conditions, expansion into the China markets, the expansion of customers using Asian contract manufacturing locations and the effect of acquisitions. Our Korean region increased 60.5% in Calendar 2000 from Calendar 1999. This was primarily the result of the effect of a full year of power device business revenues in Calendar 2000. Contract manufacturing revenues decreased 13.1% to $101.6 million in Calendar 2000 compared to $116.9 million in Calendar 1999. The decrease in contract manufacturing revenues was due primarily to diminishing demand from National Semiconductor. Gross Profit. Gross profit increased 109.0% to $639.2 million, or 35.8% of sales, in Calendar 2000 compared to $305.8 million, or 26.5% of sales, in Calendar 1999. Excluding non-recurring charges (gains) associated with the Memory restructuring of $(5.4) million and $15.4 million in Calendar 2000 and Calendar 1999, respectively, gross profit increased 97.3% to $633.8 million in Calendar 2000 as compared to $321.2 million in Calendar 1999. Trade gross profits increased 120.7% to $602.9 million in Calendar 2000 from $273.2 million in Calendar 1999. Excluding non-recurring charges (gains) associated with the Memory restructuring action of ($5.4) million in Calendar 2000 and $15.4 million in Calendar 1999, trade gross profits increased 107.0% to $597.5 million in Calendar 2000 from $288.6 million in Calendar 1999. The increase in trade gross profit on both an historical and adjusted basis was due in part to a better sales mix resulting from new product introductions and slightly higher average selling prices, as well as the favorable effect of increased factory utilization. Contract manufacturing gross profits increased 11.4% to $36.3 million in Calendar 2000 from $32.6 million in Calendar 1999. The increase in contract manufacturing gross profit was due to favorable pricing adjustments and improved factory utilization, as well as incremental business with Samsung Electronics as a result of the acquisition of the power device business. Research and Development. Research and development expenses ("R&D") were $83.9 million, or 5.0% of trade sales, in Calendar 2000, compared to $53.1 million, or 5.1% of trade sales, in Calendar 1999. The increase in R&D spending was primarily due to spending on new product development and spending from our acquired businesses in Calendar 2000 which was not included in Calendar 1999. R&D efforts are focused on our growth products (Analog, Power MOSFET, Interface, CMOS, Logic and Optoelectronics). Selling, General and Administrative. Selling, general and administrative ("SG&A") expenses were $224.0 million, or 13.3% of trade sales, in Calendar 2000, compared to $162.8 million, or 15.7% of trade sales, in Calendar 1999. SG&A expenses for Calendar 1999 include an unusual charge of $8.3 million for the forgiveness of certain loans made to management investors for payment of individual income tax liabilities resulting from their ownership of our common stock. Excluding this unusual charge, SG&A was $154.5 million, or 14.9% of trade sales, in Calendar 1999. The increase in SG&A expenses (excluding the unusual charge) is primarily the result of higher selling expenses in support of higher sales volumes and the incremental SG&A associated with our acquired businesses including increased amortization of acquisition-related intangibles. Purchased In-process Research and Development. Purchased in-process research and development ("IPR&D") was $9.0 million for Calendar 2000. This was derived from the acquisitions of QT Optoelectronics, Inc., KOTA Microcircuits, Inc., and the power management business of Micro Linear Corporation. IPR&D for Calendar 1999 of $34.0 million represents the amount derived from the acquisition of the power device business of Samsung Electronics. Restructuring. We incurred a pre-tax restructuring gain of $5.6 million in Calendar 2000. The gain is a result of proceeds from the sale of our former Mountain View, California facility ($3.5 million) and the adjustment to restructuring reserves ($2.1 million) based upon final execution of several prior year plans. Restructuring and impairments of $16.8 million were recorded in Calendar 1999. We recorded charges taken in connection with the transfer of assembly and test activities from our former Mountain View, California facility to Penang, Malaysia ($2.7 6 7 million) and its wafer production to South Portland, Maine ($10.0 million). In addition, we recorded a charge related to the 1999 Memory restructuring action ($4.1 million). Interest Expense. Interest expense was $81.3 million in Calendar 2000, compared to $94.6 million in Calendar 1999. Interest expense in Calendar 2000 and Calendar 1999 includes unusual charges of $3.6 million and $12.4 million, respectively, for the write-off of deferred financing fees associated with the refinancing of our senior bank facilities in Calendar 2000 and Calendar 1999, as well as a write-off associated with the repayment of long-term debt in Calendar 1999. Excluding these charges, interest expense was $77.7 million in Calendar 2000 compared to $82.2 million in Calendar 1999. The decrease, excluding the unusual charges, is principally the result of reduced indebtedness, which was retired with the proceeds of the initial public offering of our common stock in August 1999, and the refinancing of our senior credit facilities in June 2000. Interest Income. Interest income was $23.3 million in Calendar 2000, compared to $0.7 million in Calendar 1999. The increase is due to higher cash balances in Calendar 2000 due in part from proceeds received from our January 2000 secondary stock offering. Other (Income) Expense. In Calendar 2000 we recorded a gain on the buy-back of $15.0 million of our 10 1/8% senior subordinated notes. This gain of $0.8 million is included in other (income) expense. Income Taxes. Income tax benefit was $2.4 million in Calendar 2000, compared to a tax benefit of $2.2 million in Calendar 1999. Included in Calendar 2000 is a one-time tax benefit of $26.3 million, recorded in the fourth quarter, related to a reduction in the deferred tax asset valuation allowance. Management now believes that it is more likely than not these assets will be realizable and, accordingly, reduced the valuation allowance on those deferred tax assets. Without the effect of the one-time benefit, our tax expense would have been $23.9 million, or an effective tax rate of 8.9%, compared to an effective tax rate of 4.0% in Calendar 1999. The increase in our effective tax rate, excluding the one-time benefit, is due to a tax provision recorded in the United States in Calendar 2000 which was not recorded in Calendar 1999. In accordance with the provisions of SFAS No. 131, comparative disclosures of selected operating results of our reportable segments is as follows: Analog and Mixed Signal Products Group. In Calendar 2000, our Analog Group expanded due to the acquisitions of KOTA and Micro Linear. Its product offerings include standard linear products such as operational amplifiers, low drop out regulators and ground fault interrupters, motor control integrated circuits, smart power switches and D/C to D/C converters. Analog revenues increased 62.1% to $378.7 million in Calendar 2000 from $233.6 million in Calendar 1999. The increase in Analog revenue reflects improved business conditions resulting in both higher sales volumes and increased prices, the benefit of a full year of analog power device revenues, the introduction of new products and incremental sales from the KOTA and Micro Linear acquisitions. Analog had operating income of $40.6 million in Calendar 2000 as compared to $22.9 million in Calendar 1999. The increase in Analog's operating income was due to higher revenues, the beneficial effect of moving wafer manufacturing to South Portland, Maine, the benefit of a full year of operating income from analog power device products and incremental operating income generated by the addition of KOTA and Micro Linear, offset by higher costs on certain subcontracted wafers. Discrete Products Group. Our Discrete Group designs, manufactures and markets a broad line of Power MOSFETs, IGBT, power bipolar transistors for both high and low voltage applications, small signal transistors and diodes. An increasing volume of DMOS power MOSFETs are manufactured using our leading edge Trench technology. Discrete revenues increased 71.0% to $749.0 million in Calendar 2000, compared to $437.9 million in Calendar 1999. The increase was across all product lines, as both volume and prices increased over the comparable prior year period. The increase was also a result of a full year of discrete power device revenues. Discrete had operating income of $129.7 million in Calendar 2000 as compared to $25.8 million in Calendar 1999. The increase in Discrete operating income was due to higher revenues and improved gross profits due to a better sales mix resulting from new product introductions, including Power MOSFET products, improved factory utilization and the benefit of a full year of operating income from discrete power device products. 7 8 Interface and Logic Products Group. Our Interface and Logic Group designs, manufactures and markets a broad line of high-performance interface and standard logic products. Its interface products include building block products such as FST and GTL, and standards-specific products such as dual inline memory drivers and Universal Serial Bus. Its logic products focus on the growing CMOS logic market, from industry standard FACT and HCMOS to new products such as TinyLogic, LCX and LVT. Its products also include mature bipolar logic products such as FAST, LS and TTL. Logic revenues increased 37.9% to $424.2 million in Calendar 2000, compared to $307.7 million in Calendar 1999. The increase in Interface and Logic revenues was due to volume increases, resulting from strengthened demand, average selling price increases and improved mix due to new product introductions. Interface and Logic had operating income of $106.5 million in Calendar 2000, compared to $33.4 million in Calendar 1999. The increase in operating income was due to higher revenues and improved gross profits due to improved pricing, a better sales mix resulting from new product introductions, particularly Interface and Tiny Logic, and improved factory utilization. SEVEN MONTHS ENDED DECEMBER 26, 1999 COMPARED TO SEVEN MONTHS ENDED DECEMBER 27, 1998 Comparative financial information for the Stub Year 1999 and the seven months ended December 27, 1998, which we refer to as the first seven months of Fiscal 1999, is as follows:
Seven Months Ended Stub Year December 27, (In millions) 1999 1998 - -------------------------------------------------------------------------------- (unaudited) Revenue: Net sales -- trade $714.0 $322.3 Contract manufacturing 72.2 38.0 - -------------------------------------------------------------------------------- Total revenue 786.2 360.3 Operating expenses: Cost of sales -- trade 499.9 252.6 Cost of contract manufacturing 51.4 32.9 Research and development 35.0 21.3 Selling, general and administrative 117.4 52.9 Restructuring and impairments -- 4.5 - -------------------------------------------------------------------------------- Total operating expenses 703.7 364.2 - -------------------------------------------------------------------------------- Operating income (loss) 82.5 (3.9) Interest expense 56.5 34.3 Interest income (0.3) (0.1) - -------------------------------------------------------------------------------- Income (loss) before income taxes 26.3 (38.1) Provision (benefit) for income taxes 5.0 (7.6) - -------------------------------------------------------------------------------- Net income (loss) $21.3 $(30.5) ================================================================================
Results of Operations. We generated net income of $21.3 million in Stub Year 1999, compared to a net loss of $30.5 million in the first seven months of Fiscal 1999. Excluding unusual charges and amortization of acquisition-related intangibles of $15.5 million and $19.5 million, respectively, in Stub Year 1999, and $4.5 million and $2.0 million, respectively, in the first seven months of Fiscal 1999, net of tax effects, we had adjusted net income of $54.5 million for Stub Year 1999 compared to an adjusted net loss of $25.3 million in the first seven months of Fiscal 1999. Unusual charges in Stub Year 1999 included initial public offering-related charges of $8.3 million, recorded in selling, general and administrative expenses ("SG&A"), for the forgiveness of certain loans made to our management investors for payment of individual income tax liabilities resulting from their ownership of our common stock, and $7.2 million, recorded in interest expense, for the write-off of deferred financing fees associated with the debt repaid with the proceeds from the initial public offering. Unusual charges in the first seven months of Fiscal 1999 were due to restructuring charges as a result of a workforce reduction. Operating income was $82.5 million in Stub Year 1999, 8 9 compared to an operating loss of $3.9 million in the first 0 0 seven months of Fiscal 1999. Excluding unusual charges, operating income was $90.8 million in Stub Year 1999, compared to $0.6 million in the first seven months of Fiscal 1999. The increase in operating income is due to the acquisition of the power device business from Samsung Electronics and higher revenues and gross profits due to new product introductions and improved business conditions, resulting in higher factory utilization in Stub Year 1999 as compared to the first seven months of Fiscal 1999. Excluding depreciation and amortization of $82.3 million and $55.1 million in Stub Year 1999 and the first seven months of Fiscal 1999, respectively, and unusual charges, EBITDA was $173.1 million in Stub Year 1999 compared to $55.7 million in the first seven months of Fiscal 1999. Revenues. Our revenues consist of trade sales to unaffiliated customers (90.8% and 89.5% of total revenues in Stub Year 1999 and the first seven months of Fiscal 1999, respectively) and revenues from contract manufacturing services provided to National Semiconductor and Samsung Electronics (9.2% and 10.5% of total revenues in Stub Year 1999 and the first seven months of Fiscal 1999, respectively). Trade sales increased 121.5% to $714.0 million in Stub Year 1999 compared with $322.3 million in the first seven months of Fiscal 1999. Trade sales for Stub Year 1999 include sales from the power device business. Excluding sales from the power device business, trade sales increased 28.9% in Stub Year 1999 over the first seven months of Fiscal 1999, as higher sales volume offset lower average selling prices. The increase in trade sales is attributable to improved demand due to strength in end-markets such as personal computers and telecommunications and an economic recovery in the Asia/Pacific region. Geographically, 20.7%, 12.2%, 45.6% and 21.5% of trade sales were derived from North America, Europe, Asia/Pacific and Korea, respectively, in Stub Year 1999. Excluding sales from the power device business, 31.8%, 17.5% and 50.7% of trade sales were derived from North America, Europe and Asia/Pacific (including Korea), respectively, in Stub Year 1999, compared to 40.3%, 18.4% and 41.3%, respectively, in the first seven months of Fiscal 1999. Excluding sales from the power device business, Asia/Pacific region revenues increased 58.2% in Stub Year 1999 over the first seven months of Fiscal 1999. The increase in the Asia/Pacific region is due to strength in the consumer and personal computer markets, as well as improved economic conditions. Revenues in the Europe region increased 22.5% in Stub Year 1999 over the first seven months of Fiscal 1999. The increase in Europe is due to improved telecommunications, consumer and distribution markets. North American revenues increased 2.0% in Stub Year 1999 over the first seven months of Fiscal 1999. The increase in North America is the result of improved market conditions off set by the continued move of contract manufacturers to locations outside North America. Contract manufacturing revenues increased 90.0% to $72.2 million in Stub Year 1999 compared to $38.0 million in the first seven months of Fiscal 1999. Excluding contract manufacturing services provided to Samsung Electronics, contract manufacturing revenues increased 42.1% in Stub Year 1999 as compared to the first seven months of Fiscal 1999, reflecting increased demand from National Semiconductor. Gross Profit. Gross profit increased 214.0% to $234.9 million in Stub Year 1999 compared to $74.8 million in the first seven months of Fiscal 1999. Excluding the gross profit derived from power device products, gross profit increased 71.8% in Stub Year 1999 over the first seven months of Fiscal 1999. As a percentage of trade sales, gross trade profits were 30.0% in Stub Year 1999. Excluding the power device business, gross trade profits as a percentage of trade sales were 28.4% in Stub Year 1999 compared to 21.6% in the first seven months of Fiscal 1999. The increase in gross trade profit as a percentage of trade sales was due to the favorable effect of increased factory utilization and the full benefit of cost reduction actions undertaken in Fiscal 1999, offset by lower average selling prices. Average selling prices for Stub Year 1999 were lower than the first seven months of Fiscal 1999, despite higher average selling prices in the second half of Stub Year 1999 over the first half of Stub Year 1999, particularly for Discrete and Logic products. Contract manufacturing gross profit increased 307.8% to $20.8 million in Stub Year 1999 compared to $5.1 million in the first seven months of Fiscal 1999. The increase in contract manufacturing gross profit is due to incremental business with Samsung Electronics as a result of the acquisition of the power device business and greater demand from National Semiconductor reflective of improved market conditions. Contract manufacturing gross profit for the first seven months of Fiscal 1999 included $13.0 million of fixed cost reimbursement under our manufacturing agreements with National Semiconductor. 9 10 Research and Development. R&D was $35.0 million, or 4.9% of trade sales, in Stub Year 1999, compared to $21.3 million, or 6.6% of trade sales, in the first seven months of Fiscal 1999. The increase in R&D expenses is driven by the dedicated R&D costs incurred by the power device business in Stub Year 1999 which we did not incur in the first seven months of Fiscal 1999. R&D efforts are focused on our growth products (Analog, DMOS power and CMOS logic). R&D expenditures for these growth products were 5.7% and 9.0% of trade sales in Stub Year 1999 and the first seven months of Fiscal 1999, respectively. R&D expenditures for our mature products (Bipolar Logic, Bipolar Discretes and EPROM) were less than 1% of trade sales for both Stub Year 1999 and the first seven months of Fiscal 1999. The decrease in R&D expenditures for growth products as a percentage of trade sales is due to the relatively smaller R&D requirements of the power device business as a percentage of sales. Selling, General and Administrative. SG&A expenses were $117.4 million, or 16.4% of trade sales, in Stub Year 1999, compared to $52.9 million, or 16.4% of trade sales, in the first seven months of Fiscal 1999. SG&A expenses for Stub Year 1999 include an unusual charge of $8.3 million for the forgiveness of certain loans made to our management investors for payment of individual income tax liabilities resulting from their ownership of our common stock. Excluding this unusual charge, SG&A was $109.1 million, or 15.3% of trade sales, in Stub Year 1999. The increase in SG&A expenses (excluding the unusual charge) is primarily the result of the incremental SG&A expenses of the power device business which we did not incur in the first seven months of Fiscal 1999, including amortization of acquisition-related intangibles, and increased selling expenses for the pre-existing business due to higher sales volume. Restructuring. We incurred a pre-tax restructuring charge of approximately $4.5 million in the first seven months of Fiscal 1999. The charge consisted of $0.8 million related to non-cash asset impairments and $3.7 million of employee separation costs related to the reduction of approximately 600 salaried, hourly and temporary positions, then representing approximately 10% of our payroll. Interest Expense. Interest expense was $56.5 million in Stub Year 1999, compared to $34.3 million in the first seven months of Fiscal 1999. Interest expense in Stub Year 1999 includes an unusual charge of $7.2 million for the write-off of deferred financing fees associated with debt retired with the proceeds from the initial public offering. Excluding this charge, interest expense was $49.3 million in Stub Year 1999. The increase, excluding the unusual charges, is principally the result of indebtedness incurred to finance the power device business acquisition, which occurred in the fourth quarter of Fiscal 1999. Interest Income. Interest income was $0.3 million for Stub Year 1999 compared to $0.1 million for the first seven months of Fiscal 1999. This was due to higher average cash balances in Stub Year 1999 compared to the first seven months of Fiscal 1999. Income Taxes. Income tax expense (benefit) was $5.0 million for Stub Year 1999, compared to a tax benefit of $7.6 million in the first seven months of Fiscal 1999. The effective tax rates for Stub Year 1999 and the first seven months of Fiscal 1999 on book pre-tax income were 19.0% and 19.9%, respectively. In Stub Year 1999, the current tax provision is based on income generated from our foreign operations, excluding Korea where we benefit from a tax holiday. The decrease in deferred tax benefits is due to profits earned in Stub Year 1999 and our limited ability to recognize the future benefit of U.S. net operating loss carryforwards. In addition, deferred tax expense was booked in Korea to account for future book deductions in excess of future tax deductions arising beyond the tax holiday period. Comparative financial information for our reportable segments is as follows: Analog and Mixed Signal Products Group. We formed the Analog and Mixed Signal Products Group upon completion of the acquisition of Raytheon. This division has expanded due to the inclusion of the analog products of the power device business. Analog revenues increased 334.2% to $177.6 million in Stub Year 1999 from $40.9 million in the first seven months of Fiscal 1999. Stub Year 1999 includes the analog revenues of the power device business, which is not included in the first seven months of Fiscal 1999. Normalized to exclude power device products, Analog revenues were $47.0 million in Stub Year 1999, an increase of 14.9% from the first seven months of Fiscal 1999. The increase is due to improved business conditions and new product revenues, which more than offset revenue decreases in mature products. Analog had operating income of $19.6 million in Stub Year 1999 as compared to a loss of $6.7 million in the first seven months of Fiscal 1999. Excluding analog power device products, Analog had an operating loss of $12.4 million in Stub Year 1999. The increase in Analog's operating loss (excluding analog power device products) was due 10 11 to an unfavorable sales mix and increased valuation reserves in anticipation of the closure of the Mountain View, California wafer fab, which occurred in the latter part of Stub Year 1999. Discrete Products Group. In Stub Year 1999, Discrete expanded due to the inclusion of the discrete products of the power device business. Discrete revenues increased 229.8% to $316.9 million in Stub Year 1999, compared to $96.1 million in the first seven months of Fiscal 1999. Stub Year 1999 includes the discrete revenues of the power device business which are not included in the first seven months of Fiscal 1999. Excluding discrete power device products, Discrete revenues increased 54.6% to $148.6 million in Stub Year 1999 from the first seven months of Fiscal 1999. The increase was across all product lines. DMOS products increased 81.9% over the first seven months of Fiscal 1999. Revenues for mature Bipolar products grew 13.7% in Stub Year 1999 over the first seven months of Fiscal 1999. Discrete had operating income of $24.6 million in Stub Year 1999 as compared to $5.3 million in the first seven months of Fiscal 1999. Excluding discrete power device products, Discrete had operating income of $13.3 million in Stub Year 1999. The increase in Discrete operating income was due to higher revenues and improved gross profits due to improved factory utilization and higher average selling prices. Interface and Logic Products Group. Interface and Logic revenues increased 27.9% to $184.0 million in Stub Year 1999, compared to $144.0 million in the first seven months of Fiscal 1999. Revenues for interface products grew 224.4% in Stub Year 1999 over the first seven months of Fiscal 1999, due to success of new product introductions. Logic products revenues increased 22.8% in Stub Year 1999 over the first seven months of Fiscal 1999. The increase in logic products revenues was across all product lines. CMOS revenues grew 34.6%, while Bipolar revenues grew 2.5% in Stub Year 1999 over the first seven months of Fiscal 1999. Logic had operating income of $20.9 million in Stub Year 1999, compared to $6.3 million in the first seven months of Fiscal 1999. The increase in operating income was due to higher revenues and improved gross profits due to improved factory utilization. YEAR ENDED MAY 30, 1999 COMPARED TO YEAR ENDED MAY 31, 1998 Results of Operations. We incurred a net loss of $114.1 million in Fiscal 1999, compared to net income of $20.6 million in Fiscal 1998. The net loss in Fiscal 1999 includes pre-tax charges totaling $75.9 million for in-process research and development ($34.0 million) and the write-off of deferred financing fees in connection with a refinancing of our senior credit facilities ($5.2 million) as part of the acquisition of the power device business of Samsung Electronics in April 1999, and restructuring and related charges totaling $36.7 million. The Fiscal 1999 restructuring charges pertain to a workforce reduction undertaken in the first quarter ($4.5 million), the transfer of Analog assembly and test operations in the third quarter ($2.7 million), the closure of the Mountain View facility ($10.0 million) recorded in the fourth quarter and the restructuring of the Memory business ($19.5 million), also in the fourth quarter. The charge for the Memory restructuring includes $5.5 million and $9.9 million recorded as a reduction to revenue and an increase to cost of sales, respectively, for additional sales and inventory reserves associated with the restructuring. Net income in Fiscal 1998 includes pre-tax charges of $15.5 million for in-process research and development associated with the acquisition of Raytheon and an after-tax charge of $1.5 million for the cumulative effect of a change in accounting principle. Excluding unusual charges, net of tax effect, and amortization of acquisition-related intangibles of $8.4 million and $1.4 million in Fiscal 1999 and Fiscal 1998, respectively, we incurred a net loss of $33.4 million in Fiscal 1999, compared to net income of $33.5 million in Fiscal 1998. The decrease is due primarily to soft market conditions in the semiconductor industry that persisted for much of Fiscal 1999, which resulted in severe price competition and factory underutilization, particularly in the first half of Fiscal 1999, which negatively impacted gross profit. We incurred an operating loss of $47.4 million in Fiscal 1999, compared to operating income of $87.3 million in Fiscal 1998. Excluding unusual charges, operating income was $23.3 million in Fiscal 1999, compared to $102.8 million in Fiscal 1998. Excluding unusual charges and depreciation and amortization of $103.7 million and $84.6 million in Fiscal 1999 and Fiscal 1998, respectively, EBITDA was $127.0 million in Fiscal 1999, compared to $187.4 million in Fiscal 1998. Revenues. Our revenues consist of trade sales to unaffiliated customers (89.0% and 80.6% of total revenues in Fiscal 1999 and Fiscal 1998, respectively) and contract manufacturing services to National Semiconductor (11.0% and 19.4% of total revenues in Fiscal 1999 and Fiscal 1998, respectively). Trade sales increased 2.9% to $654.1 million in 11 12 Fiscal 1999 from $635.8 million in Fiscal 1998. Trade sales in Fiscal 1999 include those of the power device business since the acquisition date of April 13, 1999, and a full-year of Analog. Additionally, trade sales have been reduced by $5.5 million in Fiscal 1999 for one-time charges for additional sales reserves as a result of the Memory restructuring. Trade sales in Fiscal 1998 include those of Analog since the acquisition date of December 31, 1997. Excluding Power Device revenues, one time charges and normalizing Analog sales for the non-comparable periods, trade sales decreased 14.0% in Fiscal 1999 from Fiscal 1998. All segments reported trade sales decreases from the prior year, due to industry-wide soft market conditions that were prevalent for much of Fiscal 1999. These soft market conditions, caused by the Asian financial crisis and excess capacity in the semiconductor industry as a whole, resulted in severe price pressures, which accounted for the majority of the revenue shortfall on a comparable basis. Unit volume was flat for Fiscal 1999 as compared to Fiscal 1998. Geographically, 33%, 17% and 50% of our trade sales in Fiscal 1999 were generated in the United States, Europe and Asia, respectively, compared to 38%, 21% and 41%, respectively, in Fiscal 1998. Soft market conditions prevalent in Fiscal 1999 negatively impacted all geographic regions. Trade sales in the United States decreased 9.8% in Fiscal 1999 from Fiscal 1998. Excluding one-time charges, trade sales decreased 7.6%. Trade sales in Europe decreased 16.1% in Fiscal 1999 from Fiscal 1998. Trade sales in Asia increased 24.3% in Fiscal 1999 over Fiscal 1998. Asia sales include those in Southeast Asia, Korea and Japan. The increase in trade sales is due entirely to the acquisition of the power device business. Excluding the power device business, Asia trade sales decreased 2.1% in Fiscal 1999 from Fiscal 1998. Contract manufacturing revenues decreased 47.2% to $81.0 million in Fiscal 1999, compared to $153.4 million in Fiscal 1998. Contract manufacturing revenues in Fiscal 1999 include $18.7 million of billings under the guaranteed annual revenue and fixed cost recovery provisions of the manufacturing agreements with National Semiconductor. The decrease was due to reduced demand from National Semiconductor. Gross Profit. Gross profit decreased 33.9% to $152.3 million in Fiscal 1999 from $230.5 million in Fiscal 1998. Gross trade profit in Fiscal 1999 was negatively impacted by one-time charges of $15.4 million for additional sales and inventory reserves as a result of the Memory restructuring action. Excluding one-time charges, gross profit decreased 27.2% to $167.7 million in Fiscal 1999. Gross profit includes $16.6 million and $36.3 million in Fiscal 1999 and Fiscal 1998, respectively, attributable to contract manufacturing services provided to National Semiconductor. As a percentage of trade sales, gross trade profit, which excludes contract manufacturing, was 20.7% in Fiscal 1999 compared to 30.5% in Fiscal 1998. Excluding one-time charges, gross trade profit as a percentage of trade sales was 22.9% in Fiscal 1999. The decrease in gross trade profits as a percentage of sales in Fiscal 1999 from Fiscal 1998 was due to lower average trade selling prices and the negative effects of significantly decreased demand from National Semiconductor. Contract manufacturing gross profit decreased 54.3% in Fiscal 1999 from Fiscal 1998. As a percentage of contract manufacturing revenue, contract manufacturing gross profit was 20.5% in Fiscal 1999, compared to 23.7% in Fiscal 1998. The decrease in contract manufacturing gross profit as a percent of contract manufacturing revenues is due to the negative effects of lower factory utilization due to reduced demand from National Semiconductor and an unfavorable sales mix toward ABiC wafers produced in our six-inch fab in South Portland, Maine. Research and Development. R&D expenses were $39.3 million, or 6.0% of trade sales in Fiscal 1999, compared to $35.7 million, or 5.6% of trade sales in Fiscal 1998. The increase in R&D expenses is due to the addition of the R&D expenses of the power device business and a full year of Analog R&D expenses in Fiscal 1999, as compared to five months of Analog R&D expenses recorded in Fiscal 1998. R&D efforts are focused on our growth products (CMOS logic, DMOS, Analog and the power device business products). In Fiscal 1999, R&D expenditures were 7.7% of trade sales for these growth products, and 3.0% of trade sales for all other products. In Fiscal 1998, R&D expenditures were 8.7% and 2.7% for growth and all other products, respectively. The decrease in R&D expenditures for growth products as a percentage of trade sales is due to the relatively small R&D requirements of the power device business as a percentage of sales. Selling, General and Administrative. SG&A expenses were $105.1 million, or 16.1% of trade sales in Fiscal 1999, compared to $92.0 million or 14.5% of trade sales in Fiscal 1998. The increase in SG&A expenses is due to the addition of the SG&A expenses of the power device business, a full year of Analog SG&A expenses in Fiscal 1999, as compared to five months of Analog SG&A expenses recorded in Fiscal 1998, and amortization of acquisition-related 12 13 intangibles, including a full year of amortization of intangibles related to the Raytheon acquisition in Fiscal 1999 as compared to five months in Fiscal 1998. Restructuring. Fiscal 1999 included restructuring charges of $21.3 million, as we took several actions during Fiscal 1999 to reduce costs and improve profitability in a number of areas. In the fourth quarter of Fiscal 1999, we took a pre-tax charge of $4.1 million for actions to improve the profitability of the Memory Products Group. These actions include transferring wafer fabrication activities in Salt Lake City, Utah to third-party subcontractors and obsoleting Memory product lines. The charge consists of $3.9 million for non-cash asset impairments at our facilities in Salt Lake City, Utah and Sunnyvale, California, and $0.2 million for severance and employee separation costs. In addition, we took charges of $5.5 million and $9.9 million recorded to revenue and cost of sales, respectively, for additional sales and inventory reserves. Including these charges, the total charge for the Memory restructuring was $19.5 million. In the fourth quarter of Fiscal 1999, we took a pre-tax charge of $10.0 million for the closure of our Mountain View facility, which supports the Analog Products Group. We are transferring Analog wafer fabrication activities to our facility in South Portland, Maine. As a result of this transfer, we expect a substantial reduction in Analog wafer costs and improved gross profit. The charge consists of $4.0 million for severance and employee separation costs, $4.5 million for non-cash asset impairments, including a one-time loss for the sale of the Mountain View facility of $1.9 million and $1.5 million in other exit costs. In March 1999, we sold the facility for $30.2 million, net of closing costs, $0.5 million in escrow to cover demolition costs, and a $3.5 million holdback, payment of which is contingent upon either favorable action or no action within one year of the sale date by the City of Mountain View with respect to the buyer's application to increase the building density on the site. We view the holdback as a contingent gain, and as such did not record this amount in the Statement of Operations. We expect, however, that a favorable ruling will be granted which will enable us to record a one-time gain from receipt of the holdback in a subsequent period. In the third quarter of Fiscal 1999, we took a pre-tax charge of $2.7 million for the transfer of Analog assembly and test activities from its Mountain View facility to our facility in Penang, Malaysia and various third- party subcontractors. The charge consisted of $1.9 million for non-cash asset impairments and $0.8 million for severance and employee separation costs. Total charges for Analog restructuring activities, including the loss on sale of the Mountain View facility, were $12.7 million in Fiscal 1999. In the first quarter of Fiscal 1999, we took a pre-tax restructuring charge of $4.5 million in connection with a plan to reduce costs and improve operating efficiencies. The charge consisted of $3.7 million for severance and employee separation costs related to the reduction of approximately 600 salaried, hourly and temporary positions in the United States and Cebu, the Philippines, representing approximately 10% of our payroll. In addition, $0.8 million was recorded for the write-off of various idle assets in our Mountain View and Salt Lake City facilities. Interest expense. Interest expense was $72.3 million in Fiscal 1999, compared to $56.5 million in Fiscal 1998. The increase was due to the write-off of deferred financing fees of $5.2 million in connection with the refinancing of its senior credit facilities as part of the acquisition of the power device business, incremental interest expense as a result of additional indebtedness incurred to finance the acquisition, a full year of interest expense on borrowings to finance the Raytheon acquisition, as compared to five months in Fiscal 1998 and interest expense on short-term borrowings in Fiscal 1999 which did not occur in Fiscal 1998. Interest income. Interest income was $0.5 million in Fiscal 1999, compared to $2.0 million in Fiscal 1998. The decrease is due to lower average cash balances in Fiscal 1999 compared to Fiscal 1998. Income Taxes. Income tax expense (benefit) was a benefit of $(5.1) million in Fiscal 1999, compared to income tax expense of $10.7 million in Fiscal 1998. The effective tax rate for Fiscal 1999 was 4.3%, compared to 32.6% in Fiscal 1998. The decrease in the effective rate is due to our inability to carry back our Fiscal 1999 operating loss due to the short time we have operated as a stand-alone entity and a tax holiday for income generated by our Korean subsidiary, Fairchild Korea Semiconductor Ltd., formed as a result of the acquisition of the power device business. Fairchild Korea Semiconductor Ltd. has been granted a ten year tax holiday. The first seven years are tax-free, followed by three years of income taxes at 50% of the statutory rate. Comparative financial information for our reportable segments is as follows: Analog and Mixed Signal Products Group. Analog revenues increased 149.3% to $99.7 million in Fiscal 1999 from $40.0 million in Fiscal 1998. Fiscal 1999 includes the analog revenues of the power device business since the date 13 14 of acquisition. Fiscal 1998 includes revenues of Analog from the acquisition date of Raytheon. Normalized to exclude power device products and the non-comparable period of Analog sales in Fiscal 1999, Analog revenues were $29.4 million in Fiscal 1999, a decrease of 26.5% from Fiscal 1998. The decrease for the comparable period in Fiscal 1999 from Fiscal 1998 is due to revenue decreases in its mature products, combined with lower than anticipated new product revenues. Analog generated an operating loss of $4.5 million in Fiscal 1999 excluding restructuring charges, compared to operating income of $1.1 million in Fiscal 1998. Excluding the effect of the power device business and normalized for the non-comparable period of Analog operating results in Fiscal 1999, Analog generated an operating loss of $15.3 million in Fiscal 1999. The decrease in operating income is primarily driven by the decline in revenues. Discrete Products Group. Discrete revenues increased 19.0% to $222.8 million in Fiscal 1999, compared to $187.3 million in Fiscal 1998. Fiscal 1999 includes the discrete revenues of the power device business since the date of acquisition. Excluding discrete power device products, Discrete revenues decreased 3.7% in Fiscal 1999 from Fiscal 1998. The decrease is attributable to lower revenues for its mature Bipolar products, which decreased 18.1% from Fiscal 1998, partially offset by higher revenues for its DMOS products, which increased 7.9% from Fiscal 1998. Discrete generated operating income of $16.8 million in Fiscal 1999, compared to operating income of $35.6 million in Fiscal 1998. Excluding the effect of the power device business, Discrete generated operating income of $14.6 million in Fiscal 1999. The decrease was due primarily to lower gross profit as a result of unfavorable sales mix, the negative effect of underutilization of the Salt Lake City fab, and inventory write-downs in the Cebu, the Philippines assembly and test facility. Interface and Logic Products Group. Price competition was particularly intense in Interface and Logic in Fiscal 1999. Interface and Logic revenues decreased 11.7% to $267.6 million in Fiscal 1999, compared to $303.0 million in Fiscal 1998. Revenues for interface products grew 573% in Fiscal 1999 over Fiscal 1998, due to success of new product introductions. This increase was more than offset by a 14.4% decrease in logic products revenues. The decrease in logic products revenues is primarily attributable to lower bipolar logic revenues, which decreased 29.4% from Fiscal 1998. CMOS revenues decreased 2.9% in Fiscal 1999 over Fiscal 1998. Overall, new product revenues doubled in Fiscal 1999 over Fiscal 1998. Interface and Logic generated operating income of $18.8 million in Fiscal 1999, compared to $43.1 million in Fiscal 1998. The decrease in operating income is attributable to lower average selling prices due to soft market conditions in Fiscal 1999. IN-PROCESS RESEARCH AND DEVELOPMENT Acquisition of the Power Device Business. In connection with the acquisition of the power device business we allocated $34.0 million of the purchase price to in-process research and development projects in Fiscal 1999. This allocation represents the estimated fair value based on risk-adjusted cash flows related to the incomplete products. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. Our management assessed and allocated values to the in-process research and development. The value assigned to these assets was determined by identifying significant research projects for which technological feasibility had not been established, including development, engineering and testing activities associated with the introduction of the power device business' next generation products. A discussion of the most significant projects follows. Smart Power Switch ("SPS"). This product line combines a Power Discrete MOSFET and an analog IC in a single package to provide customers with low cost, high functionality, high reliability and high productivity solutions. These products are used in power chargers, and power supplies for PCs, TVs, VCRs and monitors. Research and development is focused on cost reduction and further reliability improvement of existing products. Long-term research and development is focused on proprietary chip-on-chip assembly technology as well as developing a one-chip solution. Motor IC. This product line specializes in IC products that control various motor drives. These products are 14 15 used for driving motors in automotive, camera, CD-ROM, CD player, floppy disk drive, hard disk drive and video recorder applications. Current research and development is focused on adding more channels as well as adding more intelligence/functionality onto the IC chips. Integrated Gate Bipolar Transistor ("IGBT"). This product line uses a proprietary silicon bonding process to fabricate devices for very high voltage applications. Industrial segment applications include power supplies, welding machines, robotics, ignition controls and battery chargers. Consumer segment applications include lighting ballasts, camera strobes, induction heaters, microwave ovens and washing machines. Research and development is focused on developing IGBTs that will work with products that operate at higher frequency ranges as well as higher voltages and higher currents. The fair values assigned to each of the significant projects and estimated time to complete are reported below. The estimated costs to complete for these projects, which were estimated to be $4.7 million at the time of acquisition, were expected to be spent evenly for the remainder of their respective development cycles.
Fair Man-Months Product (In millions) Value To Complete - ------------------------------------------------------------------------- Smart Power Switch $ 13.9 57 Motor IC 8.2 131 IGBT 6.5 25 All Others 5.4 147 - ------------------------------------------------------------------------- Total $ 34.0 360 =========================================================================
The material risks associated with the successful completion of the in-process technology are associated with the power device business' ability to successfully finish the creation of viable prototypes and successful design of the chips and masks required. We expect to benefit from the in-process projects as the individual products that contain the in-process technology are put into production and sold to end-users. The release dates for each of the products within the product families are varied. The initial benefit received from the significant in-process technologies occurred during the second half of calendar year 1999. The methodology used to assign value to purchased in-process research and development was the income approach, which included an analysis of the markets, cash flows and risks associated with achieving such cash flows. Significant assumptions that had to be made using this approach included revenue and operating margin projections and determination of the applicable discount rate. The forecast for the in-process project related products relied on sales projections that were based on targeted market share and pricing estimates over the expected product life cycles. In the model used to value the in-process research and development projects, total projected revenues were expected to exceed $200.0 million by 2003. Operating expenses for these products included cost of goods sold and selling, general and administrative expenses. Operating expenses were estimated as a percentage of revenue and were consistent with historical results. The forecasts used by us in valuing in-process research and development were based upon assumptions we believe to be reasonable but which are inherently uncertain and unpredictable. We cannot assure you that the underlying assumptions used to estimate expected project sales or profits, or the events associated with such projects, will transpire as estimated. Our assumptions may be incomplete or inaccurate, and unanticipated events and circumstances are likely to occur. For these reasons, actual results may vary from the projected results. The discount rate selected for power device business' in-process technology was 20%. This discount rate is greater than our weighted average cost of capital (approximately 15% at the date of acquisition of the power device business) and reflects the risk premium associated with achieving the forecasted cash flows associated with these projects. These risks include the uncertainties in the economic estimates described above; the inherent uncertainty surrounding the successful development of the purchased in-process technology; the useful life of such technology; the profitability levels of such technology; and the uncertainty of technological advances that are unknown at this time. As of December 31, 2000, revenues recognized from these product families were not lower than the forecasted revenues used in the calculation of the in-process research and development value. 15 16 Acquisition of Raytheon. In connection with the acquisition of Raytheon, we allocated $15.5 million of the purchase price to in-process research and development projects in Fiscal 1998. This allocation represents the estimated fair value based on risk-adjusted cash flows related to the incomplete products. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the R&D in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. Our management assessed and allocated values to the in-process research and development. The values assigned to each purchased R&D project were determined by identifying significant research projects for which technological feasibility had not been established, including development, engineering and testing activities associated with the introduction of the related products. The products associated with these projects include a broad range of semiconductor products used in power management and video integrated circuits, including personal computers, broadcast video and data communications. The projects identified can be categorized in the analog or video product families. Analog Family. This family's strategy focuses on (i) a higher integration of ground fault interruptor chips and (ii) power for desktop personal computers, notebook personal computers and cellular telephones. As of the acquisition date, the remaining efforts for the projects to be completed included starting and completing the beta testing phase of the development process, with a total remaining cost to complete the testing of approximately $2.5 million and anticipated release dates by the end of fiscal 1998. Video Family. This family's in-process research and development was identified in the following projects: (i) decoders and genlocks; (ii) digital video encoders; and (iii) personal computer to television plug-n-play converters. The remaining efforts for the projects to be completed included the completion of the beta-testing phase of the development process for each project. As of the acquisition date, remaining costs to complete were estimated to be approximately $1.0 million for anticipated release dates by the end of fiscal 1998. Decoders and Genlocks. These adaptive, combination based video decoders are optimized for the video professional, allowing flexibility in system performance while utilizing a common design approach. The genlocking analog to digital converter is a companion product for both the new product decoders and encoders. The products include analog, high-performance encoders which are in the beta testing phase of development; a digital design, improved decoder for personal computer and television applications which is in the alpha testing phase of development; an improved genlocking digitizer which is in the design phase of development; and an analog, genlocking decoder which is in the concept phase of development. Digital Video Encoders. The in-process product in this category is a digital design video data processor, which is in the concept phase of development. Personal Computer to Television Plug-N-Play Converter. The in-process product in this category is an analog personal computer to television plug-n-play converter, which is in the beta testing stage of development. This product will be the next generation of the current offering with many enhancements. The material risks associated with the successful completion of the in-process technology include our ability to successfully finish the creation of viable prototypes, design the chips and masks required and achieve a high degree of market acceptance of these new products. As of the acquisition date, we expected to benefit from the in-process projects as the individual products that contain the in-process technology are put into production and sold to end-users. The methodology used to assign value to purchased in-process research and development projects was the income approach, which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows. Significant assumptions that had to be made using this approach included projected revenues, operating margins and determining an appropriate discount rate. The forecast for the in-process project related products relied on sales estimates that were based on targeted market share, pricing estimates and expected product life cycles. In the model used to value the in-process research and development projects, total projected revenues from these products were expected to exceed $150.0 million by fiscal 2002. Revenues were expected to peak in fiscal 2001 and decline thereafter as other new products and technologies were expected to enter the market. Operating expenses for these products included cost of goods sold and selling, general and administrative expenses. Operating expenses were estimated as a percentage of revenues and were consistent with historical results. The discount rate utilized for the acquired in-process 16 17 technologies was estimated at 22.5% in consideration of our 15% weighted average cost of capital. The discount rate utilized for the in-process technology was determined to be higher than our weighted average cost of capital due to the fact that the technology had not yet reached technological feasibility as of the date of valuation. As of December 31, 2000, total actual revenues in the analog and video families associated with the in-process R&D projects were approximately 60% of total expected revenues, impacting both analog and video products. The revenue shortfall in the analog family and the associated reduction in expected cash flows was driven by lower demand from personal computer customers. The revenue and cash flow shortfall in the video family was driven by unfavorable market conditions which existed during fiscal 1999 from which we were not able to recover. The weaker cash flows from these projects has not had, nor is expected to have, any material adverse impact on our results of operations or our financial position, including the recoverability of intangible assets. 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 December 31, 2000, we had drawn approximately $120.2 million under our senior credit facility. Our senior credit facility, the indenture governing the 10 1/8% Senior Subordinated Notes and the indenture governing the 10 3/8% Senior Subordinated Notes do, and other debt instruments we may enter into in the future may, impose various restrictions and covenants on us which could potentially limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities. The restrictive covenants include limitations on consolidations, mergers and acquisitions, restrictions on creating liens, restrictions on paying dividends or making other similar restricted payments, restrictions on asset sales and limitations on incurring indebtedness, among other restrictions. The covenants relating to financial ratios include minimum fixed charge and interest coverage ratios and a maximum leverage ratio. The senior credit facility also limits our ability to modify our certificate of incorporation, bylaws, stockholder agreements, voting trusts or similar arrangements. In addition, the senior credit facility, the indenture governing the 10 1/8% Senior Subordinated Notes and the indenture governing the 10 3/8% Senior Subordinated Notes contain additional restrictions limiting the ability of our subsidiaries to pay dividends or make advances to us. However, our subsidiaries are permitted without material restrictions under our debt instruments to pay dividends or make advances to us. We believe that those funds permitted to be transferred to us, together with existing cash, will be sufficient to meet our cash obligations. We expect that our existing cash and available funds from our senior credit facility and funds generated from operations, will be sufficient to meet our anticipated operating requirements and to fund our research and development and capital expenditures for the next twelve months. We had capital expenditures of approximately $301.9 million in 2000, primarily to expand capacity at all of our major manufacturing fabs and assembly and test centers. Additional borrowing or equity investment may be required to fund future acquisitions. On January 25, 2000, we completed a follow-on public offering of 23,500,000 shares of our Class A Common Stock at a price of $33.4375 per share. In addition, we sold 1,410,000 shares and 2,115,000 shares were sold by an existing stockholder pursuant to the underwriter's overallotment option. The underwriting discount was $1.50 per share. The 23,500,000 shares included 6,140,880 newly issued shares and 17,359,120 shares sold by existing stockholders, including all remaining shares owned by National Semiconductor, our former parent. We did not receive any proceeds from shares sold by existing stockholders. Our net proceeds after the underwriting discount and other related expenses were approximately $240.0 million. On June 6, 2000, we refinanced our senior credit facility, converting approximately $117.8 million of outstanding senior term debt into a new revolving credit line with total borrowing capacity of $300.0 million. Borrowings under the new credit agreement accrue interest based on either the bank's rate or the Eurodollar rate, at our option. The interest rate at December 31, 2000 was 7.8%. Borrowings under the agreement are secured by a pledge of common stock of Fairchild Semiconductor Corporation and certain of its subsidiaries. The maturity date of the senior credit facility is June 6, 2004. As of December 31, 2000, our cash and cash equivalents balance was $401.8 million, an increase of $263.1 million from December 26, 1999. During Calendar 2000, our operations provided $381.1 million in cash compared to $172.4 million of cash in 17 18 Calendar 1999. The increase in cash provided by operating activities primarily reflects the increase in net income in Calendar 2000 compared to Calendar 1999. Cash used in investing activities during Calendar 2000 totaled $346.7 million, compared to $483.9 million in Calendar 1999. The decrease in cash used in investing activities is a result of an increase in capital expenditures, offset by a decrease in cash used for acquisitions. Cash provided by financing activities of $228.7 million for Calendar 2000 was primarily from the issuance of common stock in our secondary offering in January 2000. Cash provided by financing activities of $447.0 million in Calendar 1999 was due primarily to proceeds from the initial public offering of our common stock, issuance of 10 1/8% Senior Subordinated Notes and refinancing of our revolving credit facility, offset by repayment of long-term debt. LIQUIDITY AND CAPITAL RESOURCES OF FAIRCHILD INTERNATIONAL, EXCLUDING OUR SUBSIDIARIES Fairchild International is a holding company, the principal asset of which is the stock of its subsidiary, Fairchild Semiconductor Corporation. Fairchild International on a stand-alone basis had no cash flow from operations in Stub Year 1999, nor in the first seven months of Fiscal 1999. Fairchild International on a stand-alone basis has no cash requirements for the next twelve months. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks, we utilize derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes. All of the potential changes noted below are based on sensitivity analyses performed on our financial position at December 31, 2000. Actual results may differ materially. We use currency forward and concentration option contracts to hedge firm commitments and currency option contracts to hedge anticipated transactions. Beginning in 2001, similar instruments will be used to hedge a portion of our forecasted foreign exchange denominated revenues. Gains and losses on these foreign currency exposures would generally be offset by corresponding losses and gains on the related hedging instruments, resulting in negligible net exposure to us. A majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we do conduct these activities by way of transactions denominated in other currencies, primarily the Korean won, Malaysian ringgit, Philippine peso, Japanese yen, British pound, and the Euro. Exposures in the Korean won are minimal as won denominated revenues and costs generally offset one another. To protect against reductions in value and the volatility of future cash flows caused by changes in other foreign exchange rates, we have established hedging programs. We utilize currency forward contracts and currency option contracts in these hedging programs. Our hedging programs reduce, but do not always entirely eliminate, the short-term impact of foreign currency exchange rate movements. For example, during the twelve months ended December 31, 2000, an adverse change in any one exchange rate (defined as 20%) over the course of the year would have resulted in an adverse impact on income before taxes of less than $5.0 million. We have no interest rate exposure due to rate changes for the 10 1/8% Senior Subordinated Notes and the 10 3/8% Senior Subordinated Notes. However, we do have interest rate exposure with respect to the $120.2 million outstanding balance of the revolving credit facility due to its variable LIBOR pricing. For example, a 50 basis point increase in interest rates would result in increased annual interest expense of $1.5 million. From time to time, we may enter into interest rate swaps or interest rate caps, primarily to reduce its interest rate exposure. As of December 31, 2000, we had no such instruments in place. FORWARD LOOKING STATEMENTS This annual report includes "forward-looking statements" as that term is defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," "anticipates" or "hopeful," or the negative of those terms or other comparable terminology, or by discussions of strategy, plans or intentions. For example, the Outlook section below contains numerous forward-looking statements. All forward-looking statements in this annual report are made based upon management's current expectations and estimates, which involve risks and uncertainties, including those described in the following paragraph. Among these factors are the following: changes in overall economic conditions; changes in demand for our products; changes in inventories at our customers and distributors; technological and product development risks; availability of manufacturing capacity; availability of raw materials; competitors' actions; loss of key customers; order cancellations 18 19 or reduced bookings; changes in manufacturing yields or output; and significant litigation. Other factors that may affect the company's future operating results are described in our annual report on Form 10-K, under the Risk Factors caption in the Business section. Such risks and uncertainties could cause actual results to be materially different than those in the forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements in this annual report. We assume no obligation to update such information. OUTLOOK Going forward, we remain positive in our long-term outlook, although in the near term we are cautious in our forecasting. During the fourth quarter we saw significant backlog pushouts and cancellations from the PC and wireless communications segments. In addition, we saw customers desiring to operate at lower backlog commitment levels, which had the effect of dampening bookings. Industry-wide, we believe there is considerable inventory in the distribution channel associated with the PC market that, we believe, will take most of the first quarter to correct itself. As a result, we expect bookings to remain subdued through the first half with some price erosion occurring. During this slowing market period, we have seen more aggressive pricing from many of our competitors, mainly in the mature area of our product mix, which accounts for approximately 30% to 40% of our overall sales. In the second half of the year, we anticipate improving growth rates and see our revenue expectations in line with the rest of the semiconductor industry. Due to pricing pressures and increased depreciation, we anticipate overall gross margins to be down in the first half of the year with slow recovery occurring in the second half of the year. We have initiated several cost-cutting programs, including manufacturing in-sourcing, yield improvements, and subcontract vendor reduction to help mitigate the impacts of lower manufacturing volumes and lower pricing. For Calendar 2000, our effective tax rate was approximately 8.9%, as adjusted for the one-time reduction of the deferred tax asset valuation allowances of $26.3 million in the fourth quarter of 2000. We now believes it is more likely than not that the majority of our deferred tax assets will be realized. We expect our effective tax rate for 2001 to be approximately 25%. Had we experienced a 25% effective tax rate in Calendar 2000, net income would have been reduced by approximately $70.1 million, or $0.69 per diluted share of common stock. As a result of this change in the effective tax rate, we expect that net income in 2001 will be lower than Calendar 2000. On January 20, 2001, we announced an agreement to acquire the discrete power business of Intersil Corporation ("DPP"), which includes power MOSFET's, IGBT and rectifier product lines. The purchase price of approximately $338.0 million plus fees will be financed through a $350.0 million offering of 10 1/2% Senior Subordinated Notes. With this acquisition, we also will gain a valuable portfolio of intellectual property, including discrete power patents. We will obtain the industry's only 8-inch wafer fab dedicated solely to the manufacture of discrete power products. We expect our expanded presence in the automotive and industrial markets that we gain from the DPP acquisition to help offset cyclicality in our other segments. We also expect that this acquisition will be accretive to diluted earnings per share in 2001. Potential factors that may preclude us from realizing any or all of these expectations include, but are not limited to, further softening of industry-wide demand, renewed and strengthened industry-wide price competition, failure to execute new product development plans and failure to execute on cost-cutting initiatives. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS During the first quarter of 2001, we will adopt Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS No. 138 "Accounting for Certain Derivative Instruments and Hedging Activities -- An Amendment of FASB Statement No. 133." SFAS 133 requires that all derivatives, including foreign currency exchange contracts, be recognized on the balance sheet at fair value. Derivatives that are not hedges must be recorded at fair value through earnings. If a derivative is a qualifying hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the underlying assets or liabilities through earnings or recognized in Accumulated Other Comprehensive Income until the underlying hedge is recognized in earnings. The ineffective portion of a derivative's change in fair value is to be immediately recognized in earnings. We currently only participate in hedge transactions of assets, liabilities and firm commitments, and plan additionally to hedge a portion of 2001 future cash flows. The adoption of this Statement will not have a material impact on the financial statements as the gains and losses on the hedge transactions offset the losses and gains on the underlying item being hedged. 19 20 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report.................................................................................. 21 Consolidated Balance Sheets................................................................................... 22 Consolidated Statements of Operations......................................................................... 23 Consolidated Statements of Cash Flows......................................................................... 24 Consolidated Statements of Stockholders' Equity (Deficit)..................................................... 25 Notes to Consolidated Financial Statements.................................................................... 26
20 21 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Fairchild Semiconductor International, Inc.: We have audited the accompanying consolidated balance sheets of Fairchild Semiconductor International, Inc. and subsidiaries (the "Company") as of December 31, 2000 and December 26, 1999, the related consolidated statements of operations, cash flows and stockholders' equity (deficit) for the year ended December 31, 2000, the seven months ended December 26, 1999, and for each of the years in the two-year period ended May 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2000 and December 26, 1999, the results of operations and cash flows for the year ended December 31, 2000, the seven months ended December 26, 1999 and for each of the years in the two-year period ended May 30, 1999, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 17 to the consolidated financial statements, the Company changed its method of accounting for business process reengineering costs in the year ended May 31, 1998, to adopt the provisions of the Emerging Issues Task Force Issue 97-13, "Accounting for Business Process Reengineering Costs". /s/ KPMG LLP Boston, Massachusetts January 31, 2001 21 22 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 26, 2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 401.8 $ 138.7 Accounts receivable, net of allowances of $18.3 and $13.7 at December 31, 2000 and December 26, 1999, respectively 225.0 140.3 Inventories 192.8 166.3 Deferred income taxes 47.3 5.6 Prepaid and other current assets 9.5 8.1 -------- -------- Total current assets 876.4 459.0 Property, plant and equipment, net 596.6 375.8 Deferred income taxes 6.8 3.8 Intangible assets, net 298.1 261.4 Other assets 59.6 37.6 -------- -------- Total assets $1,837.5 $1,137.6 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ -- $ 1.4 Accounts payable 155.3 109.3 Accrued expenses and other current liabilities 136.9 96.0 -------- -------- Total current liabilities 292.2 206.7 Long-term debt, less current portion 705.2 717.2 Other liabilities 2.4 0.5 -------- -------- Total liabilities 999.8 924.4 -------- -------- Commitments and contingencies Stockholders' equity: Class A common stock, $.01 par value, voting; 140,000,000 shares authorized, 82,335,912 and 60,668,500 shares issued and 82,043,635 and 60,382,969 outstanding at December 31, 2000 December 26, 1999, respectively 0.8 0.6 Class B common stock, $.01 par value, nonvoting; 140,000,000 shares authorized, and 17,281,000 and 28,396,000 shares issued and outstanding at December 31, 2000 and December 26, 1999, respectively 0.2 0.3 Additional paid-in capital 801.1 449.5 Accumulated earnings (deficit) 41.8 (231.3) Less treasury stock (at cost) (6.2) (5.9) -------- -------- Total stockholders' equity 837.7 213.2 -------- -------- Total liabilities and stockholders' equity $1,837.5 $1,137.6 ======== ========
See accompanying notes to consolidated financial statements. 22 23 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN MILLIONS, EXCEPT PER SHARE DATA)
SEVEN YEAR ENDED YEAR ENDED MONTHS ENDED -------------------------- DECEMBER 31, DECEMBER 26, MAY 30, MAY 31, 2000 1999 1999 1998 ------------ ------------ --------- --------- Revenue: Net sales--trade $ 1,681.6 $ 714.0 $ 654.1 $ 635.8 Contract manufacturing 101.6 72.2 81.0 153.4 --------- --------- --------- --------- Total revenue 1,783.2 786.2 735.1 789.2 Operating expenses: Cost of sales--trade 1,078.7 499.9 518.4 441.6 Cost of contract manufacturing 65.3 51.4 64.4 117.1 Research and development 83.9 35.0 39.3 35.7 Selling, general and administrative 224.0 117.4 105.1 92.0 Purchased in-process research and development 9.0 -- 34.0 15.5 Restructuring and impairments (5.6) -- 21.3 -- --------- --------- --------- --------- Total operating expenses 1,455.3 703.7 782.5 701.9 --------- --------- --------- --------- Operating income (loss) 327.9 82.5 (47.4) 87.3 Interest expense 81.3 56.5 72.3 56.5 Interest income (23.3) (0.3) (0.5) (2.0) Other (income) expense, net (0.8) -- -- -- --------- --------- --------- --------- Income (loss) before income taxes 270.7 26.3 (119.2) 32.8 Provision (benefit) for income taxes (2.4) 5.0 (5.1) 10.7 --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle 273.1 21.3 (114.1) 22.1 Cumulative effect of change in accounting principle, net of tax effect of $0.8 million -- -- -- (1.5) --------- --------- --------- --------- Net income (loss) $ 273.1 $ 21.3 $ (114.1) $ 20.6 ========= ========= ========= ========= Net income (loss) applicable to common stockholders $ 273.1 $ 19.3 $ (123.9) $ 11.9 ========= ========= ========= ========= Basic earnings (loss) per common share: Income (loss) before cumulative effect of change in accounting principle $ 2.80 $ 0.24 $ (1.97) $ 0.21 Cumulative effect of change in accounting principle -- -- -- (0.02) --------- --------- --------- --------- $ 2.80 $ 0.24 $ (1.97) $ 0.19 ========= ========= ========= ========= Diluted earnings (loss) per common share: Income (loss) before cumulative effect of change in accounting principle $ 2.69 $ 0.23 $ (1.97) $ 0.20 Cumulative effect of change in accounting principle -- -- -- (0.02) --------- --------- --------- --------- $ 2.69 $ 0.23 $ (1.97) $ 0.18 ========= ========= ========= ========= Weighted average common shares: Basic 97.5 80.0 62.9 62.8 ========= ========= ========= ========= Diluted 101.4 83.7 62.9 65.0 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 23 24 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
SEVEN MONTHS YEAR ENDED YEAR ENDED ENDED ---------------------- DECEMBER 31, DECEMBER 26, MAY 30, MAY 31, 2000 1999 1999 1998 ----------- ------------ ------- ------- Cash flows from operating activities: Net income (loss) $273.1 $ 21.3 $(114.1) $ 20.6 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of deferred compensation 3.5 1.4 0.1 0.2 Cumulative effect of change in accounting principle, net -- -- -- 1.5 Restructuring, net of cash expended (5.6) -- 17.3 -- Depreciation and amortization 147.6 80.9 103.7 84.6 Loss on disposal of fixed assets 2.7 0.2 0.3 0.9 Non-cash interest expense 7.1 13.7 19.8 12.5 Purchased in-process research and development 9.0 -- 34.0 15.5 Deferred income taxes (33.4) 1.0 (2.4) (0.4) Gain on repurchase of notes (0.8) -- -- -- Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (72.9) (10.6) (53.2) 18.6 Inventories (8.4) (19.9) 8.5 (21.3) Other current assets (0.7) 3.7 2.3 (1.6) Accounts payable 37.6 15.1 21.4 (6.5) Accrued expenses and other current liabilities 33.4 11.0 12.5 13.7 Other assets and liabilities, net (11.1) (2.1) (6.1) (2.2) ------ ------ ------ ------ Cash provided by operating activities 381.1 115.7 44.1 136.1 ------ ------ ------ ------ Cash flows from investing activities: Capital expenditures (301.9) (74.8) (46.2) (78.0) Proceeds from sale of property, plant and equipment 3.5 0.9 31.2 -- Purchase of molds and tooling (6.6) (1.3) (3.8) (5.7) Purchase of long-term investments (7.2) -- -- -- Refund (payment) of value added tax paid in connection with acquisition -- 40.9 (40.9) -- Acquisitions, net of cash acquired (34.5) -- (414.9) (116.8) ------ ------ ------ ------ Cash used in investing activities (346.7) (34.3) (474.6) (200.5) ------ ------ ------ ------ Cash flows from financing activities: Repayment of long-term debt (133.6) (345.8) (151.3) (58.7) Issuance of long-term debt 120.2 -- 660.0 90.0 Proceeds from issuance of common stock and from exercise of stock options, net 248.7 346.6 -- -- Purchase of treasury stock (4.5) (5.9) -- -- Debt issuance costs (2.1) -- (22.3) (1.1) ------ ------ ------ ------ Cash provided by (used in) financing activities 228.7 (5.1) 486.4 30.2 ------ ------ ------ ------ Net change in cash and cash equivalents 263.1 76.3 55.9 (34.2) Cash and cash equivalents at beginning of period 138.7 62.4 6.5 40.7 ------ ------ ------ ------ Cash and cash equivalents at end of period $401.8 $138.7 $ 62.4 $ 6.5 ====== ====== ====== ====== Supplemental Cash Flow Information: Cash paid during the period for: Income taxes $ 5.7 $ 1.8 $ -- $ 8.9 Interest $ 72.6 $ 42.1 $ 46.6 $ 43.8 Non-cash transactions: Accumulated dividends on redeemable preferred stock $ -- $ 2.0 $ 9.8 $ 8.6 Stock issued for acquisitions $ 90.8 $ -- $ -- $ -- Tax effect of exercise of options $ 12.9 $ -- $ -- $ --
See accompanying notes to consolidated financial statements. 24 25 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN MILLIONS)
CLASS A CLASS B ADDITIONAL RETAINED TREASURY STOCKHOLDERS' CLASS A CLASS B PAR PAR PAID-IN EARNINGS STOCK EQUITY SHARES SHARES VALUE VALUE CAPITAL (DEFICIT) (AT COST) (DEFICIT) ------- ------- ------- ------- ---------- --------- --------- ------------- Balances at May 25, 1997 28.8 33.6 $ 0.1 $ 0.1 $ 7.6 $(141.1) $ -- $(133.3) Net income -- -- -- -- -- 20.6 -- 20.6 Dividends on redeemable preferred stock -- -- -- -- -- (8.6) -- (8.6) Adjustment to business equity assumed -- -- -- -- -- 2.4 -- 2.4 Issuance of common stock 0.4 -- -- -- -- -- -- -- Common stock split issued in the form of a stock dividend (4-1) -- -- 0.2 0.2 (0.4) -- -- -- Deferred compensation related to the grant of stock options -- -- -- -- 0.2 -- -- 0.2 Tax benefit from compensation related to lifting of restrictions on common stock owned by management investors -- -- -- -- 2.1 -- -- 2.1 ------------------------------------------------------------------------------------ Balances at May 31, 1998 29.2 33.6 0.3 0.3 9.5 (126.7) -- (116.6) Net loss -- -- -- -- -- (114.1) -- (114.1) Dividends on redeemable preferred stock -- -- -- -- -- (9.8) -- (9.8) Issuance of common stock 0.2 -- -- -- -- -- -- -- Conversion of common stock 0.2 (0.2) -- -- -- -- -- -- Deferred compensation related to the grant of stock options -- -- -- -- 0.1 -- -- 0.1 ------------------------------------------------------------------------------------ Balances at May 30, 1999 29.6 33.4 0.3 0.3 9.6 (250.6) -- (240.4) Net income -- -- -- -- -- 21.3 -- 21.3 Dividends on redeemable preferred stock -- -- -- -- -- (2.0) -- (2.0) Conversion of redeemable preferred stock 5.3 -- 0.1 -- 92.1 -- -- 92.2 Exercise of stock options 0.8 -- -- -- 1.6 -- -- 1.6 Issuance of common stock in initial public offering 20.0 -- 0.2 -- 344.8 -- -- 345.0 Conversion of common stock 5.0 (5.0) -- -- -- -- -- -- Deferred compensation related to the grant of stock options -- -- -- -- 1.4 -- -- 1.4 Purchase of treasury stock (0.3) -- -- -- -- -- (5.9) (5.9) ------------------------------------------------------------------------------------ Balances at December 26, 1999 60.4 28.4 0.6 0.3 449.5 (231.3) (5.9) 213.2 Net income -- -- -- -- -- 273.1 -- 273.1 Exercise of stock options and shares issued under stock purchase plan 0.9 -- -- -- 4.5 -- 4.2 8.7 Issuance of common stock, net of tax 9.7 -- 0.1 -- 330.7 -- -- 330.8 Tax effect of exercise of stock options -- -- -- 11.0 -- -- 11.0 Conversion of common stock 11.1 (11.1) 0.1 (0.1) -- -- -- -- Deferred compensation related -- to the grant of stock options -- -- -- -- 3.5 -- -- 3.5 Purchase of treasury stock (0.1) -- -- -- -- -- (4.5) (4.5) Additional tax benefit from compensation related to lifting of restrictions on common stock owned by management investors -- -- -- -- 1.9 -- -- 1.9 ------------------------------------------------------------------------------------ Balances at December 31, 2000 82.0 17.3 $ 0.8 $ 0.2 $801.1 $ 41.8 $ (6.2) $837.7
See accompanying notes to consolidated financial statements. 25 26 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION BACKGROUND Fairchild Semiconductor International, Inc. ("Fairchild International" or the "Company") designs, develops and markets analog, discrete, interface and logic, non-volatile memory and optoelectronic semiconductors through its wholly-owned subsidiary Fairchild Semiconductor Corporation ("Fairchild"). The Company is focused solely on multi-market products. Multi-market products are building block components for virtually all electronic devices, from sophisticated computers and internet hardware to telecommunications equipment to household appliances. Because of their basic functionality, its products provide customers with greater design flexibility and improve the performance of more complex devices or systems. Given such characteristics, its products have a wide range of applications and are sold to customers in the personal computer, industrial, telecommunications, consumer electronics and automotive markets. The Company is headquartered in South Portland, Maine and has manufacturing operations in South Portland, Maine, Loveland, Colorado, West Jordan, Utah, Cebu, the Philippines, Penang, Malaysia, Kuala Lampur, Malaysia, Singapore, Puchon, South Korea and Wuxi, China. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR During 1999, the Company changed its fiscal year end from the last Sunday in May to the last Sunday in December. The Company's results for the year ended December 31, 2000 (Calendar 2000), for the seven months ended December 26, 1999 (Stub Year 1999) and for the fiscal years ended May 30, 1999 (Fiscal 1999) and May 31, 1998 (Fiscal 1998) consist of 53 weeks, 30 weeks, 52 weeks and 53 weeks, respectively. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts and operations of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION Revenue from the sale of semiconductor products is recognized when shipped, when persuasive evidence of an arrangement exists, when the price to the buyer is fixed or determinable, and collectibility of the sales price is reasonably assured. A provision for estimated returns and allowances is recorded at the time of shipment. Contract manufacturing revenues are recognized upon completion of the contracted services. RESEARCH AND DEVELOPMENT COSTS The Company's research and development expenditures are charged to expense as incurred. RELATED PARTY ACTIVITY The Company was formed on March 10, 1997, for the purpose of purchasing the discrete, logic and non-volatile memory business of National Semiconductor Corporation (the Recapitalization). In conjunction with this transaction, Fairchild International and National Semiconductor executed several agreements, which governed the performance of manufacturing services by Fairchild International on behalf of National Semiconductor and by National Semiconductor on behalf of Fairchild International. In addition, National Semiconductor provided a number of business support services to Fairchild International. These agreements expired at various dates through May 2000. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. 26 27 INVENTORIES Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost and is generally depreciated based upon the following estimated useful lives: buildings and improvements, ten to thirty years, and machinery and equipment, three to ten years. Depreciation is principally provided under the straight-line method. GOODWILL AND INTANGIBLE ASSETS Goodwill is recorded when the consideration paid for acquisitions exceeds the fair value of net tangible and intangible assets acquired. Goodwill and other acquisition-related intangibles are amortized on a straight-line basis over their estimated lives, which are generally three to fifteen years (See Notes 3 and 16). OTHER ASSETS Other assets include deferred financing costs which represent costs incurred related to the issuance of the Company's long-term debt. The costs are being amortized using the effective interest method over the related term of the borrowings, which ranges from five to ten years, and are included in interest expense. Also included in other assets are mold and tooling costs. Molds and tools are amortized over their expected useful lives, generally one to three years. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates the recoverability of long-lived assets not held for sale, including intangible assets, by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. Based on these evaluations, there were no adjustments to the carrying value of long-lived assets in Calendar Year 2000, Stub Year 1999, Fiscal 1999 and Fiscal 1998, except as discussed in Note 11. CURRENCIES The Company's functional currency for all operations worldwide is the U.S. dollar. Accordingly, gains and losses from translation of foreign currency financial statements are included in current results. In addition, cash conversion of foreign currency and foreign currency transactions are included in current results. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The Company utilizes various off-balance sheet financial instruments to manage market risks associated with the fluctuations in certain interest rates and foreign currency exchange rates. It is the Company's policy to use derivative financial instruments to protect against market risk arising from the normal course of business. Gains and losses on financial instruments that are intended to hedge an identifiable firm commitment are deferred and included in the measurement of the underlying transaction. Gains and losses on hedges of anticipated transactions are deferred until such time as the underlying transactions are recognized or immediately when the transaction is no longer expected to occur. The criteria the Company uses for designating an instrument as a hedge include the instrument's effectiveness in risk reduction and one-to-one matching of derivative instruments to underlying transactions. In addition, the Company uses forward and option contracts to hedge certain non-U.S. denominated asset and liability positions. Gains and losses on these contracts are matched with the underlying gains and losses resulting from currency movement on these balance sheet positions. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, accounts receivable and payable, and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. Fair values of long term debt, interest rate swaps and caps, currency forward contracts and currency options are based on quoted market prices or pricing models using prevailing financial market information at the date of measurement (See Note 14). 27 28 USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. NET INCOME (LOSS) PER COMMON SHARE Basic income (loss) per share was computed by dividing net income (loss) applicable to common stockholders by the weighted average shares of common stock outstanding. Diluted income (loss) per share also gives effect to all dilutive potential common shares outstanding, consisting solely of outstanding stock options. The following table reconciles basic to diluted weighted average shares outstanding and net income (loss) to net income (loss) applicable to common stockholders:
STUB FISCAL CALENDAR YEAR ----------------------- (IN MILLIONS) 2000 1999 1999 1998 -------- ------ ------- ------ Basic weighted average common shares outstanding 97.5 80.0 62.9 62.8 Net effect of dilutive stock options based on the treasury stock method using the average market price 3.9 3.7 -- 2.2 ------ ------ ------- ------ Diluted weighted average common shares outstanding 101.4 83.7 62.9 65.0 ====== ====== ====== ====== Net income (loss) $273.1 $ 21.3 $(114.1) $ 20.6 Dividends on redeemable preferred stock -- 2.0 9.8 8.7 ------ ------ ------- ------ Net income (loss) applicable to common stockholders $273.1 $ 19.3 $(123.9) $ 11.9 ====== ====== ====== ======
Options to purchase 7,478,080, 82,435, 4,282,570 and 750,000 shares of common stock were outstanding at December 31, 2000, December 26, 1999, May 30, 1999 and May 31, 1998, respectively, but were not included in the computation of diluted earnings per share because the effect of including such options would have been anti-dilutive. EMPLOYEE STOCK PLANS The Company accounts for its stock option plans and its stock purchase plan in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company provides the disclosure requirements of SFAS No. 123. RECLASSIFICATION Certain prior year amounts have been reclassified to conform with the current year presentation. 28 29 NOTE 3 -- FINANCIAL STATEMENT DETAILS
DECEMBER 31, DECEMBER 26, 2000 1999 -------- -------- (IN MILLIONS) Inventories Raw materials $ 24.8 $ 17.1 Work in process 123.9 99.3 Finished goods 44.1 49.9 -------- -------- $ 192.8 $ 166.3 ======== ======== Property, plant and equipment Land $ 23.2 $ 19.0 Buildings and improvements 215.4 178.2 Machinery and equipment 816.7 704.9 Construction in progress 173.1 49.3 -------- -------- Total property, plant and equipment 1,228.4 951.4 Less accumulated depreciation 631.8 575.6 -------- -------- $ 596.6 $ 375.8 ======== ========
PERIOD OF AMORTIZATION ------------ (IN MILLIONS) Intangible assets Developed technology 15 years $169.1 $171.0 Goodwill 15 years 69.7 -- Customer base 8 years 55.6 54.4 Covenant not to compete 5 years 30.2 31.0 Trademarks and tradenames 4 years 24.7 25.3 Assembled workforce 3 years 10.3 9.1 Patents 4 Years 5.5 -- ------ ------ Total intangible assets 365.1 290.8 Less accumulated amortization (67.0) (29.4) ------ ------ $298.1 $261.4 ====== ====== Accrued expenses Payroll and employee related accruals 75.5 $ 44.4 Accrued interest 19.3 17.1 Restructuring and related allowances -- 2.6 Income taxes payable 19.6 2.3 Other 22.5 29.6 ------ ------ $136.9 $ 96.0 ====== ======
NOTE 4 -- LONG-TERM DEBT Long-term debt consists of the following at:
DECEMBER 31, DECEMBER 26, 2000 1999 ------ ------ (IN MILLIONS) Revolving Credit Facility $120.2 $ -- Tranche B Term Loan -- 118.6 Senior subordinated notes payable 585.0 600.0 ------ ------ Total long-term debt 705.2 718.6 Less current portion -- 1.4 ------ ------ Long-term portion $705.2 $717.2 ====== ======
29 30 On April 14, 1999 Fairchild entered into a Senior Credit Facilities Agreement ("Original Credit Agreement") in order to finance the acquisition of the Power Device Business (See Note 16). On June 6, 2000, Fairchild entered into a new Senior Credit Facilities Agreement ("Credit Agreement") with a syndicate of financial institutions in order to refinance the facilities under the Original Credit Agreement. Under this refinancing, Fairchild converted approximately $117.8 million of outstanding senior term debt into a new revolving credit line ("Revolving Credit Facility") with total borrowing capacity of $300.0 million and a maturity of June 6, 2004. Borrowings under the Original Credit Agreement were segregated into two tranches: $100.0 million Tranche A Term Loans and $210.0 million Tranche B Term Loans. In connection with the Company's initial public offering in August 1999 ("IPO"), the Tranche A Term Loans were paid in full, and approximately $90.6 million of the Tranche B Term Loans were repaid. In connection with the refinancing, Fairchild paid approximately $2.1 million in deferred financing costs and wrote-off $3.6 million of deferred financing costs associated with the retired term debt. Borrowings under the Credit Agreement accrue interest based on either the bank's rate or the Eurodollar rate, at the option of the Company. The interest rate was 7.8% for the Revolving Credit Facility at December 31, 2000. The interest rate was 8.4% for the Tranche B Term Loan at December 26, 1999. Borrowings under the Credit Agreement are secured by a pledge of common stock of the Company and its subsidiaries. Fairchild pays a commitment fee of 0.3% per annum of the unutilized commitments under the Revolving Credit Facility. On April 7, 1999, Fairchild issued $300.0 million of 10 3/8% Senior Subordinated Notes (the "10 3/8% Notes") at face value. The 10 3/8% Notes pay interest on April 1 and October 1 of each year commencing October 1, 1999 and are due October 1, 2007. The 10 3/8% Notes are unsecured and are subordinated to all existing and future senior indebtedness of Fairchild. Until April 1, 2002, Fairchild can redeem an amount not to exceed 35% of the 10 3/8% Notes with proceeds raised from certain public equity offerings. On or after April 1, 2003, the 10 3/8% Notes are redeemable by Fairchild, in whole or in part, at redemption prices ranging from 100% to approximately 105% of the principal amount. On March 11, 1997, Fairchild issued $300.0 million of 10 1/8% Senior Subordinated Notes (the "10 1/8% Notes" and, together with the 10 3/8% Notes, the "Notes") at face value. The 10 1/8% Notes pay interest on March 15 and September 15 of each year commencing September 15, 1997. The 10 1/8% Notes are unsecured and are subordinated to all existing and future senior indebtedness of Fairchild. The 10 1/8% Notes are redeemable by Fairchild, in whole or in part, on or after March 15, 2002 at redemption prices ranging from 100% to approximately 105% of the principal amount. Fairchild is required to redeem $150.0 million principal amount of 10 1/8% Notes on March 15, 2005 and $75.0 million principal amount of 10 1/8% Notes on March 15, 2006 and 2007, respectively, in each case at a redemption price of 100% of the principal amount plus accrued interest to the date of redemption. During December 2000, the Company repurchased 10 1/8% Notes with a face value of $15.0 million. The payment of principal and interest on the Credit Agreement and the Notes is fully and unconditionally guaranteed by Fairchild International. Fairchild International is the parent company of Fairchild and currently conducts no business and has no significant assets other than the capital stock of Fairchild. Fairchild has sixteen direct subsidiaries and nine indirect subsidiaries, of which four direct subsidiaries, Fairchild Semiconductor Corporation of California ("Fairchild California"), KOTA Microcircuits, Inc., QT Optoelectronics, Inc., and QT Optoelectronics are guarantors on the Credit Agreement and the Notes. The remaining direct and indirect subsidiaries are foreign-based and do not guarantee either the Credit Agreement or the Notes. On April 13, 1999, in connection with the acquisition of the power device business, the Company entered into a Subordinated Credit Agreement with Citicorp Mezzanine Partners, L.P. ("CMP Note") in the principal amount of $50.0 million. The CMP Note bears interest at 12.5% per annum and matures on April 13, 2008. If the Company voluntarily prepays any or all of the loan, the interest rate on the amount prepaid is increased to 18% per annum retroactive to April 13, 1999. On August 9, 1999, the Company prepaid the CMP Note, plus accrued interest, with proceeds from its IPO. As this was considered a voluntary prepayment, interest paid on the CMP Note was at a rate of 18% per annum. In connection with the issuance of the CMP Note, Fairchild International issued a warrant for the purchase of 3,538,228 shares of common stock of Fairchild International at an exercise price of $0.01 per share. As a result of the IPO, this warrant became unexerciseable. The Credit Agreement and the indentures under which the Notes were issued contain certain restrictive financial and operating covenants, including limitations on stock repurchases and prohibitions on the payment of dividends, with which the Company was in compliance at December 31, 2000. Aggregate maturities of long-term debt for each of the next five years and thereafter are as follows: 30 31
(IN MILLIONS) 2001 $ -- 2002 -- 2003 -- 2004 120.2 2005 135.0 Thereafter 450.0 ------ $705.2 ======
NOTE 5 -- INCOME TAXES In conjunction with the acquisition of the power device business, the Korean government granted a ten year tax holiday to Fairchild Korea Semiconductor Ltd. The exemption is 100% for the first seven years of the holiday and 50% for the remaining three years of the holiday. In Calendar 2000, the tax holiday was extended such that the exemption amounts were increased to 75% in the eighth year and a 25% exemption was added to the eleventh year. Taxes exempted include income taxes, dividend withholding taxes, acquisition tax, registration tax, property tax and aggregate land tax. As such, no current provision for income taxes for Korea has been provided. The tax holiday increased net income by $32.0 million, or $0.32 per diluted common share for Calendar 2000 and $18.0 million or $0.22 per diluted common share for Stub Year 1999. The provision (benefit) for income taxes attributable to income from continuing operations for Calendar 2000, Stub Year 1999, Fiscal 1999 and Fiscal 1998 consisted of the following:
STUB CALENDAR YEAR FISCAL FISCAL 2000 1999 1999 1998 ------ ------ ------ ------ (IN MILLIONS) Income (loss) before income taxes: U.S $113.8 $(46.6) $(103.7) $ 14.6 Foreign 156.9 72.9 (15.5) 18.2 ------ ------ ------ ------ $270.7 $ 26.3 $(119.2) $ 32.8 ====== ====== ====== ====== Income tax provision (benefit): Current: U.S. federal $ 8.3 $ -- $ (4.8) $ 7.1 U.S. state and local 0.7 -- -- 1.5 Foreign 16.9 4.0 2.1 3.3 ------ ------ ------ ------ 25.9 4.0 (2.7) 11.9 Deferred: U.S. federal (25.4) (2.1) (2.5) (2.0) U.S. state and local (2.4) (0.2) 0.1 (0.4) Foreign (0.5) 3.3 -- 1.2 ------ ------ ------ ------ (28.3) 1.0 (2.4) (1.2) Total income tax provision (benefit): U.S. federal (17.1) (2.1) (7.3) 5.1 U.S. state and local (1.7) (0.2) 0.1 1.1 Foreign 16.4 7.3 2.1 4.5 ------ ------ ------ ------ $ (2.4) $ 5.0 $ (5.1) $ 10.7 ====== ====== ====== ======
In addition to income tax expense (benefit) attributable to income from continuing operations, for Calendar 2000 the Company recorded income taxes of $(5.3) million in noncurrent intangible assets for the initial recognition of acquired tax 31 32 benefits that were previously included in the valuation allowance. The Company also recorded income taxes of $(12.9) million and $(2.1) million for Calendar 2000 and Fiscal 1998, respectively, in stockholders' equity for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes. The reconciliation between the income tax rate computed by applying the U.S. federal statutory rate and the reported worldwide tax rate follows:
STUB CALENDAR YEAR FISCAL FISCAL (In millions) 2000 1999 1999 1998 ---- ---- ---- ---- U.S. federal statutory rate 35.0% 35.0% 35.0% 35.0% U.S. state and local taxes (benefit), net of federal benefit 3.2 (0.5) 1.4 3.3 Tax differential related to foreign income (13.3) (65.0) (8.7) (5.8) Non-deductible expenses including goodwill amortization 1.1 0.2 0.1 0.1 Change in valuation allowance (26.9) 49.3 (23.5) -- ---- ---- ---- ---- (0.9)% 19.0% 4.3% 32.6% ==== ==== ==== ====
The tax effects of temporary differences in the recognition of income and expense for tax and financial reporting purposes that give rise to significant portions of the deferred tax assets and the deferred tax liabilities at December 31, 2000 and December 26, 1999 are presented below:
DECEMBER 31, DECEMBER 26, (In millions) 2000 1999 ----- ----- Deferred tax assets: Net operating loss carryforwards $23.6 $60.1 Reserves and accruals 24.0 21.7 Intangibles, primarily intellectual property 7.7 9.8 Tax credit and capital allowance carryovers 6.2 1.4 ----- ----- Total gross deferred tax assets 61.5 93.0 Valuation allowance (1.3) (80.3) ----- ----- Net deferred tax assets 60.2 12.7 Deferred tax liabilities: Plant and equipment (6.1) (3.3) ----- ----- Total deferred tax liabilities (6.1) (3.3) Net deferred tax assets $54.1 $ 9.4 ===== =====
The deferred tax valuation allowance decreased by $79.0 million and increased by $17.6 million for Calendar 2000 and Stub Year 1999, respectively. In assessing the realizability of deferred tax assets, the Company considered its current and future taxable earnings and the expected timing of the reversal of temporary differences. During Calendar 2000, the Company reversed all of the valuation allowance against its domestic deferred tax assets, including net operating losses and tax credits, since the Company believes that the deferred tax assets will more likely than not be realized. Deferred tax assets and liabilities are classified in the consolidated balance sheet based on the classification of the related asset or liability. Net operating loss, research and development credit and foreign tax credit carryforwards totaled $63.8 million, $0.2 million and $2.7 million, respectively, as of December 31, 2000. The net operating losses expire in 2018 through 2019. The research and development credits expire in varying amounts in 2012 through 2015. The foreign tax credits expire in varying amounts in 2002 through 2005. The Company also has alternative minimum tax credit carryforwards of $1.8 million, which are available to reduce future federal regular income taxes over an indefinite period. In addition, the Company has Malaysian unabsorbed capital allowance of approximately $4.7 million, which can be used to offset future year's taxable income of the Malaysian subsidiary. 32 33 The Company's ability to utilize its net operating loss and credit carryforwards may be limited in the future if the Company experiences an ownership change as a result of future transactions. An ownership change occurs when the ownership percentage of 5% or greater stockholders changes by more than 50% over a three year period. The Company does not expect that a subsequent ownership change would place any material limitation on the utilization of the loss carryforward. Deferred income taxes have not been provided for the undistributed earnings of the Company's foreign subsidiaries, which aggregated approximately $214.3 million at December 31, 2000. The Company plans to reinvest all such earnings for future expansion. The undistributed earnings will be subject to U.S. taxation upon repatriation as dividends to the U.S. parent. The amount of taxes attributable to these undistributed earnings is not practicably determinable. NOTE 6 -- STOCK BASED COMPENSATION The Company has two stock option plans, the 1997 Stock Option Plan, as amended and restated (1997 Plan) and the 2000 Stock Option Plan (2000 Plan), under which key employees and non-employee directors may be granted options to purchase shares of the Company's authorized but unissued common stock. The executive officers of the Company are also eligible for awards under the 1997 Plan. The Company also has a stock option plan (the 2000 Executive Stock Option Plan), under which key executives, including officers, may be granted stock options. Under the 1997 Plan and the 2000 Plan, the Company may grant options for up to 8,507,666 and 3,873,664 shares of Class A common stock, respectively. Options granted under the Plans may be either (a) options intended to constitute incentive stock options ("ISOs") under the Internal Revenue Code or (b) non-qualified stock options. The exercise price of each option granted under the 1997 Plan and the 2000 Plan is determined by a Committee of the Company's Board of Directors (the "Committee"). The maximum term of any option is ten years from the date of grant for incentive stock options and ten years and one day from the date of grant for non-qualified stock options. Options granted under the Plans are exercisable at the determination of the Committee, currently vesting ratably over approximately five years. Individuals receiving options under the Plans may not receive in any one-year period options to purchase more than 200,000 shares of common stock. Under the 2000 Executive Stock Option Plan, the Company may grant options for up to 3,500,000 shares of common stock. Options granted under the Plan are intended to be non-qualified options. The exercise price and term of each option granted under the 2000 Executive Plan is determined by the Committee. Options granted under the 2000 Executive Plan are exercisable at the determination of the Committee. Individuals receiving options under the Plan may not receive in any one year options to purchase more than 1,500,000 shares. A summary of the status of the Company's stock option plans as of December 31, 2000, December 26, 1999, May 30, 1999 and May 31, 1998, and changes during the periods then ended are presented in the table below:
CALENDAR 2000 STUB YEAR 1999 FISCAL 1999 FISCAL 1998 -------------------- --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE (000'S) PRICE (000'S) PRICE (000'S) PRICE (000'S) PRICE ------- -------- ------- -------- ------- -------- ------- -------- Outstanding at beginning of year 6,964 $ 9.60 4,283 $ 3.82 3,584 $ 2.20 2,029 $ 0.13 Granted 7,723 37.55 3,549 14.83 972 10.00 1,777 4.29 Exercised (783) 5.22 (805) 2.06 (93) 0.13 (142) 0.13 Canceled (542) 17.97 (63) 7.12 (180) 6.83 (80) 0.13 -------------------- ---------------------- --------------------- --------------------- Outstanding at end of year 13,362 $ 26.07 6,964 $ 9.60 4,283 $ 3.82 3,584 $ 2.20 ==================== ===================== ===================== ===================== Exercisable at end of year 2,358 $ 7.96 1,331 $ 5.56 1,612 $ 1.82 798 $ 0.13 Weighted average fair value of options granted $ 24.23 $ 9.68 $ 0.09 $ 0.22
33 34 Information with respect to stock options outstanding and stock options exercisable at December 31, 2000, is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - --------------------------------------------------------------------------------------------------------------- Weighted-Average (000) Remaining Weighted-Average (000) Weighted-Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - --------------------------------------------------------------------------------------------------------------- $.13 -.13 1,598 6.5 $ 0.13 1,049 $ 0.13 $10.00 - $15.00 2,304 8.1 10.17 737 10.00 $15.01 - 22.00 1,757 8.6 18.61 525 18.50 $22.01 - 33.00 232 9.3 28.69 22 28.25 $33.01 - 49.00 7,471 9.5 38.20 25 37.32 ------------------------------------------------------------------------------------- 13,362 8.8 $26.07 2,358 $ 7.96
The Company maintains the Fairchild Semiconductor International, Inc. Employee Stock Purchase Plan which started on April 1, 2000. The stock purchase plan authorizes the issuance of up to 4,000,000 shares of common stock in quarterly offerings to eligible employees at a price that is equal to 85 percent of the lower of the common stock's fair value at the beginning or the end of a quarterly period. During Calendar 2000, 70,202 shares were issued under the stock purchase plan at a weighted average price of $27.02 per share. The Company accounts for its stock-based compensation plans in accordance with the provisions of APB No. 25. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. During Calendar 2000, Stub Year 1999 and Fiscal 1999, the Company granted 5,000, 1,358,700 and 25,600 stock options, respectively, with exercise prices less than the market price of the underlying stock on the date of the grant, and recorded total deferred compensation of $0.2 million, $13.6 million and $0.3 million, respectively. Had compensation cost for the Company's stock Plans been determined consistent with SFAS Statement No. 123, the Company would have reported the following pro forma information:
STUB CALENDAR YEAR FISCAL FISCAL (In millions, except per share data) 2000 1999 1999 1998 ------- ------- ------- ------- Pro forma net income (loss) $ 239.6 $ 13.6 $(114.3) $ 20.6 Pro forma basic earnings (loss) per share $ 2.46 $ 0.17 $ (1.82) $ 0.33 Pro forma diluted earnings (loss) per share $ 2.36 $ 0.16 $ (1.82) $ 0.32
The Company estimates the fair value of each option as of the date of grant using a Black-Scholes pricing model with the following weighted average assumptions:
STUB CALENDAR YEAR FISCAL FISCAL 2000 1999 1999 1998 ---- ---- ---- ---- Expected volatility 60% 49% 49% -- Dividend yield -- -- -- -- Risk-free interest rate 6.32% 4.89% 4.43% 5.88% Expected life, in years 5.0 4.0 3.4 2.9
NOTE 7 -- RETIREMENT PLANS 34 35 The Company sponsors the Fairchild Personal Savings and Retirement Plan (the "Retirement Plan"), a contributory savings plan which qualifies under section 401(k) of the Internal Revenue Code. The Retirement Plan covers substantially all employees in the United States. The Company provides a matching contribution equal to 75% of employee elective deferrals up to a maximum of 6% of an employee's annual compensation. The Company also maintains a non-qualified Benefit Restoration Plan, under which employees who have otherwise exceeded annual IRS limitations for elective deferrals can continue to contribute to their retirement savings. The Company matches employee elective deferrals to the Benefit Restoration Plan on the same basis as the Retirement Plan. Total expense recognized under these plans was $4.4 million, $2.3 million, $3.5 million and $3.4 million for Calendar 2000, Stub Year 1999 and Fiscal 1999 and Fiscal 1998, respectively. Employees in Korea who have been with the Company for over one year are entitled by Korean law to receive lump-sum payments upon termination of their employment. The payments are based on current rates of pay and length of service through the date of termination. It is the Company's policy to accrue for this estimated liability as of each balance sheet date. Amounts recognized as expense were $6.3 million, $2.4 million and $0.3 million for Calendar 2000, Stub Year 1999 and Fiscal 1999, respectively. Employees in Malaysia participate in a defined contribution plan. The Company has funded accruals for this plan in accordance with statutory regulations in Malaysia. Contributions made by the Company under this plan were $2.2 million, $0.9 million, $1.2 million and $1.5 million for Calendar 2000, Stub Year 1999, Fiscal 1999 and Fiscal 1998, respectively. Employees in the Philippines participate in a defined benefit plan. The benefits are based on years of service and a multiple of the employee's final monthly salary. The Company's funding policy is to contribute annually the amount necessary to maintain the plan on an actuarially sound basis. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The contributions made for Calendar 2000, Stub Year 1999, Fiscal 1999 and Fiscal 1998 were not material to the consolidated financial statements. Employees in England, Italy, Germany, Hong Kong, China and Singapore and Japan are also covered by a variety of defined benefit and or defined contribution pension plans that are administered consistent with local statutes and practices. The contributions made under each of the respective plans for Calendar 2000, Stub Year 1999, Fiscal 1999 and Fiscal 1998 were not material to the consolidated financial statements. Certain executives of the Company are eligible for post-retirement health benefits which are being accrued ratably over the three year term of the related employment agreements entered into by the executives with the Company in Calendar 2000. At December 31, 2000, the accrual for post-retirement health benefits is not material to the consolidated financial statements. NOTE 8 -- LEASE COMMITMENTS Rental expense related to certain facilities and equipment of the Company's plants was $10.5 million, $8.2 million, $12.5 million and $9.5 million for Calendar 2000, Stub Year 1999, Fiscal 1999, and Fiscal 1998, respectively. Future minimum lease payments under noncancelable operating leases as of December 31, 2000 are as follows:
YEAR ENDED DECEMBER, (IN MILLIONS) 2001 $ 9.1 2002 8.0 2003 6.5 2004 3.7 2005 3.5 13.5 Thereafter ------ $ 44.3 ======
NOTE 9 -- REDEEMABLE PREFERRED STOCK Concurrent with the Recapitalization, the Company authorized 70,000 shares of redeemable preferred stock at a par value of $.01, all of which were designated as 12% Series A cumulative compounding preferred stock (the "Redeemable 35 36 Preferred Stock"). The Redeemable Preferred Stock had a stated value of $1,000 per share and was entitled to annual dividends when, as and if declared, which dividends were cumulative, whether or not earned or declared, and accrued at a rate of 12%, compounding annually. On August 9, 1999, in connection with the IPO, all of the shares of the Company's previously authorized Redeemable Preferred Stock were converted into shares of the Company's Class A Common Stock. Each preferred stockholder received 75.714571 shares of Class A Common Stock per share of preferred stock, reflecting the $1,000 liquidation value of the preferred stock, plus accumulated unpaid dividends to the date of conversion, converted into common stock on the basis of $17.39 per share. As a result of the conversion, 70,000 shares of preferred stock were converted into 5,300,020 shares of common stock. The total liquidation value of the Redeemable Preferred Stock at August 9, 1999 was $92.2 million. NOTE 10 -- STOCKHOLDERS' EQUITY PREFERRED STOCK Under the Company's Restated Certificate of Incorporation, the Company's Board of Directors has the authority to issue up to 100,000 shares of preferred stock, but only in connection with the adoption of a stockholder rights plan. At December 31, 2000, no shares were issued. PUBLIC OFFERINGS On January 25, 2000, the Company completed a follow-on public offering of 23,500,000 shares of its Class A Common Stock at a price of $33.4375 per share. In addition, the Company sold 1,410,000 shares and 2,115,000 shares were sold by an existing stockholder pursuant to the underwriter's overallotment option. The underwriting discount was $1.50 per share. The 23,500,000 shares included 6,140,880 newly issued shares sold by the Company and 17,359,120 shares sold by existing stockholders, including all remaining shares owned by National Semiconductor, the Company's former parent. The Company did not receive any proceeds from shares sold by existing stockholders. The net proceeds to the Company after the underwriting discount and other related expenses were approximately $240.0 million. On August 9, 1999, the Company completed an initial public offering ("IPO") of its Class A Common Stock and sold an aggregate of 20,000,000 shares at a price of $18.50 per share. The underwriting discount was $1.11 per share. The net proceeds after the underwriting discount and other IPO expenses were approximately $345.0 million. In addition, National Semiconductor Corporation, one of the Company's principal stockholders, sold 3,000,000 additional shares pursuant to the underwriters' overallotment option. The Company received no proceeds from this sale, which closed on August 12, 1999. Concurrent with the IPO, all of the shares of the Company's previously authorized 12% Series A Cumulative Compounding Preferred Stock were converted into shares of the Company's Class A Common Stock. COMMON STOCK On January 5, 1998, the Board of Directors approved a four-for-one common stock split in the form of a stock dividend. Stockholders received three additional shares for each share held. Such distribution was made on April 29, 1998 to stockholders of record on that date. All share amounts in the accompanying consolidated financial statements have been restated to retroactively reflect the split. The Company has authorized 280,000,000 shares of common stock at a par value of $.01 per share, divided into two classes consisting of 140,000,000 shares of Class A stock and 140,000,000 shares of Class B stock. The holders of Class A stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Except as required by law, the holders of Class B stock have no voting rights. A holder of either class of common stock may convert any or all of his shares into an equal number of shares of the other class of common stock provided that in the case of a conversion from Class B stock, which is nonvoting, into Class A stock, which is voting, such conversion would be permitted only to the extent that the holder of shares to be converted would be permitted under applicable law to hold the total number of shares of Class A stock which would be held after giving effect to the conversion. In connection with the issuance of the CMP Note (see Note 4), the Company issued a warrant for the purchase of 3,538,228 shares of Class A common stock of the Company at an exercise price of $0.01 per share to Citicorp Mezzaine Partners, L.P. On August 9, 1999, the CMP Note was paid in full, and the warrant became unexercisable. Certain amendments to the Securities Purchase and Holders Agreement, dated as of March 11, 1997 (the "Stockholders Agreement"), which were effected in May 1998, resulted in the lapse of certain risks of forfeiture by the management investors with respect to their stock ownership of the Company. The lapse of such restrictions resulted in the incurrence by the Company of deductible compensation expense for income tax purposes of $10.4 million in Fiscal 1998. The tax effect 36 37 of the compensation expense of $2.1 million was recorded as a reduction in income taxes payable and an increase to additional paid-in capital at May 31, 1998. The tax effect was recorded using the alternative minimum tax rate of 20%. In connection with this transaction, loans aggregating $5.0 million were made by the Company to the management investors to pay their federal and state individual income tax liabilities in June 1998. Such loans (including accrued but unpaid interest thereon) were cancelled as a result of the Company's IPO of its Class A Common Stock. The Company also paid such executive officers amounts sufficient to enable them to discharge all tax liabilities arising out of the cancellation of such loans (as well as all tax liabilities arising out of such payments). A total charge of $8.3 million was recorded in selling, general and administrative expense during Stub Year 1999. Under a shelf registration statement filed with the Securities and Exchange Commission on December 18, 2000, the Company may issue up to 10,000,000 shares of additional common stock. Shares of stock covered by this shelf registration statement may be issued from time to time by Fairchild International in connection with strategic acquisitions of other businesses, assets or securities, authorized by the company's board of directors. The amounts, prices and other terms of share issuances would be determined at the time of particular transactions. NOTE 11 -- RESTRUCTURING AND IMPAIRMENTS Restructuring and impairments in Calendar 2000 include gains in the first quarter resulting from additional funds received in connection with the sale of the Company's former Mountain View, California facility ($3.5 million) and the adjustment of restructuring reserves upon final execution of several prior year actions ($2.1 million). In the first quarter of Fiscal 1999, in connection with management's plan to reduce costs and improve operating efficiencies, the Company recorded a pre-tax restructuring charge of approximately $4.5 million. The restructuring charge consisted of $0.8 million related to non-cash asset impairments and $3.7 million of employee separation costs. The asset impairments relate to idle production equipment in the Company's former Mountain View, California and West Jordan, Utah facilities. As of December 31, 2000 these assets have been disposed of. The charge for employee separation arrangements provided for severance and other benefits associated with the approximately 600 salaried, hourly and temporary employees severed as a result of this action. The affected employees, who worked in production, engineering, sales and marketing and administration, were located in the United States and Cebu, the Philippines. In the third quarter of Fiscal 1999, the Company recorded a pre-tax restructuring charge of approximately $2.7 million related to the transfer of all assembly and test work performed at its former Mountain View, California facility to its Penang, Malaysia facility. The charge consisted of $1.9 million of non-cash asset impairments and $0.8 million for severance and other benefits for 54 production employees terminated as a result of the transfer. The asset impairments consisted of production equipment that were idled as a result of this action. At December 31, 2000, these assets had all been disposed of. In connection with the sale of its former Mountain View, California facility on April 2, 1999, the Company announced the transfer of all wafer production to its South Portland, Maine facility. In the fourth quarter of Fiscal 1999, the Company recorded a pre-tax restructuring charge of approximately $10.0 million, which consisted of $2.6 million of non-cash asset impairments, $4.0 million for severance and employee benefits, $1.9 million for a loss on sale of the facility and $1.5 million for other exit costs. This action resulted in the termination of approximately 170 salaried, hourly and temporary employees, all of whom worked for the Company's Analog and Mixed Signal Division in Mountain View or San Diego, California in the areas of production, engineering, selling and marketing and administration. Other exit costs include $1.0 million paid under a non-cancelable operating lease after operations ceased as well as other incremental costs associated with the facility closure. The non-cash asset impairments primarily consisted of production equipment that were not transferred to South Portland, Maine. At December 31, 2000 these assets had all been disposed of. During the fourth quarter of Fiscal 1999, the Company also recorded a pre-tax charge of $4.1 million related to the restructuring of its memory product lines, whereby the Company streamlined its operations to focus solely on its most profitable products. The charge included $3.9 million for non-cash asset impairments and $0.2 million for employee separation costs all of which were paid by May 30, 1999. The non-cash impairments consisted of production equipment and other equipment in West Jordan, Utah, and Sunnyvale, California, that became idle as a result of the plan. The assets were disposed of during the first half of 2000. The Memory Division product line restructuring plan also included the write-off of inventories ($9.9 million) as well as provisions for additional distribution sales allowances required as a result of this action ($5.5 million). These costs have been excluded from the restructuring charge and have been recorded as a reduction against net sales in the case of the distribution sales allowances and as a charge to cost of sales for the inventory write-offs. 37 38 All amounts have been expended with respect to the Company's restructuring actions. NOTE 12 -- RELATED PARTY TRANSACTIONS The Company provides contract manufacturing services to National Semiconductor which held an equity interest in the Company. On January 25, 2000, National Semiconductor sold its remaining ownership interest in the Company and, as such, is no longer a related party. During Stub Year 1999, Fiscal 1999 and Fiscal 1998, National Semiconductor provided business support services under a transaction services agreement. The amounts for contract manufacturing services for National Semiconductor and business support services provided by National Semiconductor to the Company are as follows:
STUB YEAR FISCAL FISCAL 1999 1999 1998 ----- ----- ----- (IN MILLIONS) Manufacturing services performed by National Semiconductor plants $ 1.0 $ 5.6 $14.0 Headquarters, freight, duty, warehousing and other elements of cost of sales -- 4.4 17.9 ----- ----- ----- $ 1.0 $10.0 $31.9 ===== ===== ===== Cost of business support services provided by National Semiconductor $ 0.1 $10.7 $28.7 ===== ===== =====
NOTE 13 -- CONTINGENCIES The Company's facilities in South Portland, Maine and West Jordan, Utah have ongoing remediation projects to respond to certain releases of hazardous substances that occurred prior to the Recapitalization. Pursuant to the Asset Purchase Agreement, National Semiconductor has agreed to indemnify the Company for the future costs of these projects. The costs incurred to respond to these conditions were not material to the consolidated financial statements for any period presented. The Company's former Mountain View, California, facility is located on a contaminated site under the Comprehensive Environmental Response, Compensation and Liability Act. Under the terms of the Acquisition Agreement with Raytheon Company, dated December 31, 1997, Raytheon Company has assumed responsibility for all remediation costs or other liabilities related to historical contamination. On November 2, 1999, our principal operating subsidiary, Fairchild Semiconductor Corporation, was named as a defendant in a patent infringement lawsuit filed by Siliconix Incorporated in the United States District Court for the Northern District of California. The complaint filed in the suit alleges that some of our products infringe two Siliconix patents and claims an unspecified amount of damages. The Company intends to continue contesting these claims vigorously. On or about October 3, 2000, Fairchild Semiconductor Corporation was named as a defendant in a patent infringement lawsuit filed by U.S. Philips Corporation in the United States District Court for the Southern District of New York. The complaint filed in the suit alleges that some of Fairchild's products infringe one Philips patent. The Company intends to continue investigating these allegations and contesting these claims vigorously. In addition, in the normal course of business, the Company is subject to proceedings, lawsuits and other claims, including proceedings under laws and regulations related to environmental and other matters. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. Consequently, the Company is unable to ascertain the 38 39 ultimate aggregate amount of monetary liability or financial impact with respect to these additional matters at December 31, 2000. It is management's opinion that after final disposition, any monetary liability or financial impact to the Company would not be material to the Company's financial position, annual results of operations or cash flows. NOTE 14 -- FINANCIAL INSTRUMENTS FOREIGN CURRENCY INSTRUMENTS The objective of the Company's foreign exchange risk management policy is to preserve the U.S. dollar value of after-tax cash flows in relation to foreign currency fluctuations. The Company uses forward and option contracts to hedge firm commitments and option contracts to hedge anticipated transactions. Gains and losses on financial instruments that are intended to hedge an identifiable firm commitment are deferred and included in the measurement of the underlying transaction. Gains and losses on hedges of anticipated transactions are deferred until such time as the underlying transactions are recognized or immediately when the transaction is no longer expected to occur. In addition, the Company uses forward and option contracts to hedge certain non-U.S. denominated asset and liability positions. Gains and losses on these contracts are matched with the underlying gains and losses resulting from currency movement on these balance sheet positions. Gains and losses on any instruments not meeting the above criteria are recognized in income in the current period. Net gains and losses from foreign currency transactions were not material to the consolidated financial statements for any period presented. FAIR VALUE AND NOTIONAL PRINCIPAL OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The table below shows the fair value and notional principal of the Company's off-balance sheet financial instruments as of December 31, 2000 and December 26, 1999. The notional principal amounts for off-balance sheet financial instruments provide one measure of the transaction volume outstanding as of year end and do not represent the amount of the Company's exposure to credit or market loss. The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information as of December 31, 2000 and December 26, 1999. Although the following table reflects the notional principal and fair value of amounts of off-balance sheet financial instruments, it does not reflect the gains or losses associated with the exposures and transactions that the off-balance sheet financial instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
DECEMBER 31, 2000 DECEMBER 26, 1999 ------------------------------------- --------------------------------------- NOTIONAL CARRYING ESTIMATED NOTIONAL CARRYING ESTIMATED PRINCIPAL AMOUNT FAIR VALUE PRINCIPAL AMOUNT FAIR VALUE --------- -------- ---------- --------- -------- ---------- (IN MILLIONS) Purchased Options $29.0 $ -- $ 0.5 $73.0 $ -- $(0.1)
FAIR VALUE OF FINANCIAL INSTRUMENTS A summary table of estimated fair values of financial instruments follows:
DECEMBER 31, 2000 DECEMBER 26, 1999 -------------------------- ------------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------------------------- ------------------------- (IN MILLIONS) Long-Term Debt Senior subordinated notes $585.0 $545.6 $600.0 $608.3 Term loans -- -- 118.6 118.6 Revolving Credit Facility borrowings 120.2 120.2 -- --
NOTE 15 -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION 39 40 Fairchild designs, develops, manufactures and markets high performance multi-market semiconductors. The Company is currently organized into three reportable segments: Analog and Mixed Signal Products Group ("Analog"), Discrete Products Group ("Discrete") and Interface and Logic Products Group ("Interface and Logic"). The Company has determined that its Configurable Products business unit (formally known as the Non-Volatile Memory Division which was reported as a separate segment) and its Optoelectronics Group do not meet the threshold for a separate reportable segment under SFAS No. 131, and accordingly these segments' results are included as part of the "Other" category for all periods presented. Management evaluates the contract manufacturing business differently than its other operating segments due in large part to the fact that it is predominantly driven by contractual agreements for limited time periods entered into with National Semiconductor and Samsung Electronics. In addition to the operating segments mentioned above, the Company also operates global operations, sales and marketing, information systems, finance and administration groups that are led by vice presidents who report to the Chief Executive Officer. The expenses of these groups are allocated to the operating segments and are included in the operating results reported below. The Company does not allocate income taxes to its operating segments, and while interest expense allocations are made for informational purposes, the operating segments are principally evaluated on operating profit before interest and taxes. The Company does not specifically identify and allocate all assets by operating segment. It is the Company's policy to fully allocate depreciation and amortization to its operating segments. Operating segments do not sell products to each other, and accordingly, there are no inter-segment revenues to be reported. The accounting policies for segment reporting are the same as for the Company as a whole. Statement of operations information on reportable segments for Calendar 2000, Stub Year 1999, Fiscal 1999, and Fiscal 1998 is as follows:
STUB CALENDAR YEAR FISCAL FISCAL 2000 1999 1999 1998 -------- -------- -------- -------- (IN MILLIONS) REVENUE AND OPERATING INCOME (LOSS): Analog and Mixed Signal Products Group Trade revenue $ 378.7 $ 177.6 $ 99.7 $ 40.0 Operating income 40.6 19.6 (4.5) 1.1 -------- -------- -------- -------- Discrete Products Group Trade revenue $ 749.0 $ 316.9 $ 222.8 $ 187.3 Operating income 129.7 24.6 16.8 35.6 -------- -------- -------- -------- Interface and Logic Products Group Trade revenue $ 424.2 $ 184.0 $ 267.6 $ 303.0 Operating income 106.5 20.9 18.8 43.1 -------- -------- -------- -------- Other Trade revenue (1) $ 129.7 $ 35.5 $ 64.0 $ 105.5 Contract manufacturing revenue 101.6 72.2 81.0 153.4 Operating income (loss) (2) 51.1 17.4 (78.5) 7.5 -------- -------- -------- -------- Total Consolidated Trade revenue $1,681.6 $ 714.0 $ 654.1 $ 635.8 Contract manufacturing revenue 101.6 72.2 81.0 153.4 Operating income (loss) 327.9 82.5 (47.4) 87.3
- --------------- (1) Includes $5.5 million reduction to trade sales due to the memory restructuring action in Fiscal 1999. 40 41 (2) Other includes in Calendar 2000, a $3.5 million gain resulting from additional funds received in connection with the sale of the Company's former Mountain View, California facility, a $2.1 million gain for the adjustment of restructuring reserves upon final execution of several prior year actions and $9.0 million of in-process research and development costs associated with the Company's QT Optoelectronics, KOTA and Micro Linear acquisitions; in Stub Year 1999, an $8.3 million charge for the forgiveness of certain loans made to the Company's management investors for payment of individual income tax liabilities resulting from their ownership of Fairchild International's common stock; in Fiscal 1999, charges of $34.0 million for purchased in-process research and development, $21.3 million for restructuring, $15.4 million for additional charges taken for asset impairments in connection with the Memory restructuring and $1.1 million of other charges not allocated to the operating segments; and, in Fiscal 1998, purchased in-process research and development of $15.5 million. Depreciation and amortization by reportable operating segment were as follows:
STUB CALENDAR YEAR FISCAL FISCAL 2000 1999 1999 1998 ------ ------ ------ ------ (IN MILLIONS) Analog and Mixed Signal Products Group $ 30.8 $ 16.0 $ 12.0 $ 3.3 Discrete Products Group 58.1 32.5 28.6 20.8 Interface and Logic Products Group 51.7 31.3 53.2 51.7 Other 10.5 2.5 10.0 9.0 ------ ------ ------ ------ Total $151.1 $ 82.3 $103.8 $ 84.8 ====== ====== ====== ======
Geographic revenue information are based on the locations of the selling entities within the indicated geographic areas. No individual foreign country except Korea is material to total revenues. Revenues by geographic region were as follows:
STUB CALENDAR YEAR FISCAL FISCAL 1998 2000 1999 1999 -------- -------- -------- -------- (IN MILLIONS) TOTAL REVENUES: United States $ 470.3 $ 201.2 $ 299.5 $ 395.7 Korea 321.0 172.3 68.8 -- Asia / Pacific 764.9 325.6 255.5 260.9 Europe 227.0 87.1 111.3 132.6 -------- -------- -------- -------- Total $1,783.2 $ 786.2 $ 735.1 $ 789.2 ======== ======== ======== ========
In Calendar 2000, Stub Year 1999, Fiscal 1999 and Fiscal 1998, National Semiconductor accounted for 4.3%, 6.9%, 11.0% and 19.4%, respectively, of the Company's total revenues. In Calendar 2000 and in Stub Year 1999, sales to Samsung Electronics accounted for 8.9% and 7.0%, respectively, of the Company's total revenues. Geographic property, plant and equipment balances as of December 31, 2000 and December 26, 1999 are based on the physical locations within the indicated geographic areas and are as follows: 41 42
DECEMBER 31, DECEMBER 26, 2000 1999 ---- ---- PROPERTY, PLANT & EQUIPMENT: United States $255.1 $172.3 Korea 186.6 108.2 Philippines 58.0 47.1 Malaysia 84.7 43.1 All Others 12.2 5.1 ------ ------ Total $596.6 $375.8 ====== ======
NOTE 16 -- ACQUISITIONS On September 8, 2000, the Company completed its acquisition of the power management business of Micro Linear Corporation for a purchase price of approximately $11.0 million in cash. Micro Linear's power management business consists of analog products including offline power switches, low power battery management, video filters and bus terminators. The transaction was accounted for as a purchase and Micro Linear's results of operations since the date of acquisition have been included in the accompanying statements of operations. In connection with the Micro Linear acquisition, the Company recorded a non-recurring charge of $3.3 million for in-process research and development. The purchase price in excess of the fair value of net tangible and identifiable intangible assets was recorded as goodwill in the amount of $0.4 million. On September 8, 2000, the Company also completed its acquisition of KOTA Microcircuits, Inc. ("KOTA") for approximately $12.1 million, paid in the Company's common stock. For the KOTA acquisition, the Company issued 247,192 shares of common stock with 59,034 held in escrow. KOTA designs manufactures and markets high-performance operational amplifiers and other standard linear products. The transaction was accounted for as a purchase and KOTA's results of operations since the date of acquisition have been included in the accompanying statements of operations. In connection with the KOTA acquisition, the Company recorded a non-recurring charge of $2.5 million for in-process research and development. The purchase price in excess of the fair value of net tangible and identifiable intangible assets was recorded as goodwill in the amount of $7.9 million. On May 28, 2000, the Company completed its acquisition of QT Optoelectronics, Inc. ("QTO") for approximately $92.0 million, 86.6 percent paid in the Company's common stock (1,918,002 shares) with the remainder paid in cash. In addition, in conjunction with the acquisition, the Company assumed and immediately repaid $14.0 million of QTO's long-term debt. QTO designs, manufactures and markets LED lamps and displays, infrared components, custom optoelectronics and optocouplers and is the world's largest independent company solely focused on optoelectronics. The transaction was accounted for as a purchase and QTO's results of operations since the date of acquisition have been included in the accompanying statements of operations. In connection with the QTO acquisition, the Company recorded a non-recurring charge of $3.2 million for in-process research and development. The purchase price in excess of the fair value of net tangible and identifiable intangible assets was recorded as goodwill in the amount of $61.4 million. In April 1999, the Company completed the acquisition of the power device business of Samsung Electronics for a purchase price of approximately $414.9 million, including related acquisition expenses. The power device business designs, manufactures and markets power discrete semiconductors and standard analog integrated circuits serving the personal computer, industrial, telecommunications and consumer electronics markets. The purchase includes all of the worldwide operations and assets of the power device business, which are comprised in part of a high volume wafer fabrication plant along with design and development operations in Pucheon, South Korea, secured services for high volume assembly and test operations and worldwide sales and marketing operations. The purchase price was financed through a combination of borrowings under the Company's Senior Credit Facilities, the CMP Note and the 10 3/8% Notes. (See Note 4) The power device business acquisition was accounted for by the purchase method of accounting and accordingly, the results of operations of the power device business are included in the accompanying consolidated financial statements since the acquisition date. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The purchase price exceeded the fair value of the net tangible assets acquired by approximately $289.5 million. Approximately $34.0 million of the purchase price in excess of fair value of net tangible assets was allocated to purchased in-process research and development. Accordingly, the Company recorded a non-recurring charge for this 42 43 purchased in-process research and development concurrent with the acquisition in Fiscal 1999. The remaining purchase price in excess of fair value of net tangible assets was allocated to various intangible assets. On December 31, 1997, the Company acquired all of the outstanding common stock of Raytheon Semiconductor, Inc. or approximately $117.0 million in cash plus transaction expenses. Raytheon, based in Mountain View, California, designs, manufactures and markets high performance analog and mixed signal integrated circuits for the personal computer, communications, broadcast video and industrial markets. The acquisition was accounted for by the purchase method of accounting and accordingly, the results of operations of Raytheon are included in the accompanying consolidated financial statements since that date. The purchase price exceeded the fair value of the net tangible assets by approximately $48.4 million. Approximately $15.5 million of the purchase price in excess of fair value of net tangible assets was allocated to purchased in-process research and development. Accordingly, the Company recorded a non-recurring charge for this purchased in-process research and development concurrent with the acquisition in Fiscal 1998. The remaining purchase price in excess of fair value of net tangible assets was allocated to various intangible assets. All acquisitions completed for Calendar 2000 are immaterial and, therefore, no pro forma results of operations are presented. The following unaudited pro forma consolidated results of operations are presented as if the power device business and Raytheon acquisitions were made at the beginning of the periods presented below:
FISCAL FISCAL 1999 1998 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Revenues $ 1,111.9 $ 1,300.7 Net income (loss) (155.9) 20.6 Net income (loss) applicable to common stockholders (165.7) 11.9 Net earnings (loss) per share: Basic $ (2.63) $ 0.19 Diluted $ (2.63) $ 0.18
The pro forma results of operations include adjustments to give effect to the contracts the Company entered into with Samsung Electronics, additional depreciation and amortization related to the increased value of acquired fixed assets and identifiable intangibles, interest expense on debt assumed issued to finance the purchases, as well as adjustments to eliminate historical expenses which will not be incurred by the Company. The unaudited pro forma information is not necessarily indicative of the results of operations that would have occurred had the acquisitions been made at the beginning of the periods presented or the future results of the combined operations NOTE 17 -- CHANGE IN ACCOUNTING PRINCIPLE Effective in the third quarter of Fiscal 1998, the Company adopted the provisions of Emerging Issues Task Force Issue 97-13 "Accounting for Business Process Reengineering Costs." This Issue requires companies to write-off business process reengineering costs that had been previously capitalized. The Company had been capitalizing such costs in conjunction with its enterprise software implementation project. The Issue requires companies to write-off these costs in the quarter that contains November 20, 1997. The cumulative effect of adoption of this Issue resulted in a charge of $1.5 million; net of taxes of $0.8 million for the year ended May 31, 1998. Of the pre-tax write-off, $1.6 million applies to costs incurred in Fiscal 1998, while $0.7 million applies to costs incurred in Fiscal 1997. The charge relates specifically to costs incurred to assess the system's capabilities in light of the Company's current business processes, which under prior guidance was capitalizable to the cost of the software. NOTE 18 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Fairchild International and certain of Fairchild Semiconductor Corporation's subsidiaries are guarantors under the 10 1/8% and 10 3/8% Senior Subordinated Notes. Accordingly, presented below are condensed consolidating balance sheets of Fairchild International as of December 31, 2000 and December 26, 1999 and related condensed consolidating statements of operations and cash flows for Calendar 2000, Stub Year 1999, Fiscal 1999 and Fiscal 1998. 43 44 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEETS (IN MILLIONS)
December 31, 2000 ----------------------------------------------------------------------------------------- Unconsolidated Consolidated Fairchild Unconsolidated Fairchild Semiconductor Fairchild Non- Semiconductor International, Semiconductor Guarantor Guarantor International, Inc. Corporation Subsidiaries Subsidiaries Eliminations Inc. -------------- -------------- ------------ ------------ ------------ -------------- ASSETS Current assets: Cash and cash equivalents $ -- $ 374.5 $ -- $ 27.3 $ -- $ 401.8 Accounts receivable, net -- 53.7 5.1 166.2 -- 225.0 Inventories -- 102.4 9.7 80.7 -- 192.8 Deferred income taxes 46.5 0.8 47.3 Other current assets -- 1.6 3.9 4.0 -- 9.5 -------- -------- -------- -------- -------- -------- Total current assets -- 578.7 19.5 278.2 -- 876.4 Property, plant and equipment, net -- 252.4 2.8 341.4 -- 596.6 Deferred income taxes 5.9 3.9 9.6 (12.6) -- 6.8 Intangible assets, net -- 11.6 102.4 184.1 -- 298.1 Investment in subsidiary 831.8 601.6 146.5 -- (1,579.9) -- Other assets -- 32.2 7.1 20.3 -- 59.6 -------- -------- -------- -------- --------- -------- Total assets $ 837.7 $1,480.4 $ 287.9 $ 811.4 $(1,579.9) $1,837.5 ======== ======== ======== ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ -- $ -- $ -- $ -- $ -- $ -- Accounts payable -- 86.2 0.7 68.4 -- 155.3 Accrued expenses and other current liabilities -- 77.1 5.9 53.9 -- 136.9 -------- -------- -------- -------- -------- -------- Total current liabilities -- 163.3 6.6 122.3 -- 292.2 Long-term debt, less current portion -- 705.2 -- -- -- 705.2 Net intercompany (receivable) payable -- (213.0) (31.1) 244.1 -- Other liabilities -- (6.9) 0.3 9.0 -- 2.4 -------- -------- -------- -------- -------- -------- Total liabilities -- 648.6 (24.2) 375.4 -- 999.8 -------- -------- -------- -------- -------- -------- Commitments and contingencies Stockholders' equity: Class A common stock 0.8 -- -- -- -- 0.8 Class B common stock 0.2 -- -- -- -- 0.2 Additional paid-in capital 801.1 -- -- -- -- 801.1 Accumulated earnings 41.8 831.8 312.1 436.0 (1,579.9) 41.8 Less treasury stock (at cost) (6.2) -- -- -- -- (6.2) -------- -------- -------- -------- -------- -------- Total stockholders' equity 837.7 831.8 312.1 436.0 (1,579.9) 837.7 -------- -------- -------- -------- --------- -------- Total liabilities and stockholders' equity $ 837.7 $1,480.4 $ 287.9 $ 811.4 $(1,579.9) $1,837.5 ======== ======== ======== ======== ========= ========
44 45 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (IN MILLIONS)
Year Ended December 31, 2000 -------------------------------------------------------------------------------------------- Unconsolidated Consolidated Fairchild Unconsolidated Fairchild Semiconductor Fairchild Non- Semiconductor International, Semiconductor Guarantor Guarantor International, Inc. Corporation Subsidiaries Subsidiaries Eliminations Inc. --------------- -------------- ------------ ------------ ------------ -------------- Revenue: Net sales--trade $ -- $ 390.1 $ 42.3 $1,249.2 $ -- $1,681.6 Net sales--intercompany -- 1,063.3 19.2 97.8 (1,180.3) -- Contract manufacturing -- 76.5 -- 25.1 -- 101.6 -------- -------- -------- -------- -------- -------- Total revenue -- 1,529.9 61.5 1,372.1 (1,180.3) 1,783.2 Operating expenses: Cost of sales -- 121.2 31.0 926.5 -- 1,078.7 Cost of sales--intercompany -- 1,085.0 18.3 77.0 (1,180.3) -- Cost of contract manufacturing -- 54.5 -- 10.8 -- 65.3 Research and development -- 48.9 14.0 21.0 -- 83.9 Selling, general and administrative -- 29.1 16.7 178.2 -- 224.0 Purchased in-process research and development -- 5.8 -- 3.2 -- 9.0 Restructuring and impairments -- (2.3) (3.3) -- -- (5.6) -------- -------- -------- -------- -------- -------- Total operating expenses -- 1,342.2 76.7 1,216.7 (1,180.3) 1,455.3 -------- -------- -------- -------- -------- -------- Operating income (loss) -- 187.7 (15.2) 155.4 -- 327.9 Interest expense, net -- 59.1 (0.2) (0.9) -- 58.0 Other income, net -- (0.8) -- -- -- (0.8) Equity in subsidiary income (267.2) (133.1) (98.0) -- 498.3 -- -------- -------- -------- -------- -------- -------- Income before income taxes 267.2 262.5 83.0 156.3 (498.3) 270.7 Provision (benefit) for income taxes (5.9) (4.7) (8.2) 16.4 -- (2.4) -------- -------- -------- -------- -------- -------- Net income $ 273.1 $ 267.2 $ 91.2 $ 139.9 $ (498.3) $ 273.1 ======== ======== ======== ======== ======== ========
45 46 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (IN MILLIONS)
Year Ended December 31, 2000 --------------------------------------------------------------------------------- Unconsolidated Consolidated Fairchild Unconsolidated Fairchild Semiconductor Fairchild Non- Semiconductor International, Semiconductor Guarantor Guarantor International, Inc. Corporation Subsidiaries Subsidiaries Inc. -------------- -------------- ------------ ------------ -------------- Cash flows provided by (used in) operating activities: $ -- $271.2 $(70.3) $180.2 $381.1 ------ ------ ------ ------ ------ Cash flows from investing activities: Capital expenditures -- (134.0) (0.2) (167.7) (301.9) Proceeds from sale of property, plant and equipment -- -- 3.5 -- 3.5 Purchase of molds and tooling -- -- -- (6.6) (6.6) Purchase of long term investments -- (7.2) -- -- (7.2) Acquisitions, net of cash acquired -- (10.7) (23.8) -- (34.5) Investment (in) from affiliate (244.2) 153.4 90.8 -- -- ------ ------ ------ ------ ------ Cash provided by (used in) investing activities (244.2) 1.5 70.3 (174.3) (346.7) ------ ------ ------ ------ ------ Cash flows from financing activities: Repayment of long-term debt -- (133.6) -- -- (133.6) Issuance of long-term debt -- 120.2 -- -- 120.2 Proceeds from issuance of common stock, net 248.7 -- -- 248.7 Purchase of treasury stock (4.5) -- -- -- (4.5) Debt issuance costs -- (2.1) -- -- (2.1) ------ ------ ------ ------ ------ Cash provided by (used in) financing activities 244.2 (15.5) -- -- 228.7 ------ ------ ------ ------ ------ Net change in cash and cash equivalents -- 257.2 -- 5.9 263.1 Cash and cash equivalents at beginning of period -- 117.3 -- 21.4 138.7 ------ ------ ------ ------ ------ Cash and cash equivalents at end of period $ -- $374.5 $ -- $ 27.3 $401.8 ====== ====== ====== ====== ====== Supplemental Cash Flow Information: Cash paid (refunded) during the year for: Income taxes $ -- $ 1.2 $ -- $ 4.5 $ 5.7 ====== ====== ====== ====== ====== Interest $ -- $ 72.6 $ -- $ -- $ 72.6 ====== ====== ====== ====== ======
46 47 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. CONSOLIDATING CONDENSED BALANCE SHEET (IN MILLIONS)
December 26, 1999 ------------------------------------------------------------------------------------------- Unconsolidated Consolidated Fairchild Unconsolidated Fairchild Semiconductor Fairchild Non- Semiconductor International, Semiconductor Guarantor Guarantor International, Inc. Corporation Subsidiary Subsidiaries Eliminations Inc. --------------- -------------- ---------- ------------ ------------ -------------- ASSETS Current assets: Cash and cash equivalents $ -- $117.3 $ -- $ 21.4 $ -- $ 138.7 Accounts receivable, net -- 39.5 0.5 100.3 -- 140.3 Inventories -- 93.0 10.3 63.0 -- 166.3 Other current assets -- 8.4 0.2 5.1 -- 13.7 ------- ------ ------ ------ ------- -------- Total current assets -- 258.2 11.0 189.8 -- 459.0 Property, plant and equipment, net -- 168.2 4.1 203.5 -- 375.8 Deferred income taxes, net -- 14.7 7.5 (18.4) -- 3.8 Intangible assets, net -- 7.5 26.5 227.4 -- 261.4 Investment in subsidiaries 209.9 335.0 148.4 -- (693.3) -- Other assets -- 25.8 1.0 10.8 -- 37.6 ------- ------ ------ ------ ------- -------- Total assets $ 209.9 $809.4 $198.5 $613.1 $(693.3) $1,137.6 ======= ====== ====== ====== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ -- $ 1.4 $ -- $ -- $ -- $ 1.4 Accounts payable -- 52.2 0.6 56.5 -- 109.3 Accrued expenses and other current liabilities -- 58.4 5.2 32.4 -- 96.0 ------- ------ ------ ------ ------- -------- Total current liabilities -- 112.0 5.8 88.9 -- 206.7 Long-term debt, less current portion -- 717.2 -- -- -- 717.2 Net intercompany (receivable) payable (3.3) (231.1) (33.0) 267.4 -- -- Other liabilities -- 1.4 -- (0.9) -- 0.5 ------- ------ ------ ------ ------- -------- Total liabilities (3.3) 599.5 (27.2) 355.4 -- 924.4 ------- ------ ------ ------ ------- -------- Commitments and contingencies Stockholders' equity: Class A common stock 0.6 -- -- -- -- 0.6 Class B common stock 0.3 -- -- -- -- 0.3 Additional paid-in capital 449.5 -- -- -- -- 449.5 Accumulated earnings (deficit) (231.3) 209.9 225.7 257.7 (693.3) (231.3) Less treasury stock (at cost) (5.9) -- -- -- -- (5.9) ------- ------ ------ ------ ------- -------- Total stockholders' equity 213.2 209.9 225.7 257.7 (693.3) 213.2 ------- ------ ------ ------ ------- -------- Total liabilities and stockholders' equity $ 209.9 $809.4 $198.5 $613.1 $(693.3) $1,137.6 ======= ====== ====== ====== ======= ========
47 48 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (IN MILLIONS)
Seven Months Ended December 26, 1999 ----------------------------------------------------------------------------------------- Unconsolidated Consolidated Fairchild Unconsolidated Fairchild Semiconductor Fairchild Non- Semiconductor International, Semiconductor Guarantor Guarantor International, Inc. Corporation Subsidiary Subsidiaries Eliminations Inc. --------------- -------------- ---------- ----------- ------------ -------------- Revenue: Net sales--trade $ -- $116.8 $ 12.4 $584.8 $ -- $714.0 Net sales--intercompany -- 466.9 7.9 82.7 (557.5) -- Contract manufacturing -- 72.2 -- -- -- 72.2 ------ ------ ------ ------ ------ ------ Total revenue -- 655.9 20.3 667.5 (557.5) 786.2 Operating expenses: Cost of sales--trade -- 23.1 8.5 468.3 -- 499.9 Cost of sales--intercompany -- 493.0 7.7 56.8 (557.5) -- Cost of contract manufacturing -- 51.4 -- -- -- 51.4 Research and development -- 17.5 6.7 10.8 -- 35.0 Selling, general and administrative -- 52.9 5.5 59.0 -- 117.4 ------ ------ ------ ------ ------ ------ Total operating expenses -- 637.9 28.4 594.9 (557.5) 703.7 ------ ------ ------ ------ ------ ------ Operating income (loss) -- 18.0 (8.1) 72.6 -- 82.5 Interest expense, net 4.4 52.0 -- (0.2) -- 56.2 Equity in subsidiary income (25.7) (57.1) (55.1) -- 137.9 -- ------ ------ ------ ------ ------ ------ Income before income taxes 21.3 23.1 47.0 72.8 (137.9) 26.3 Provision (benefit) for income taxes -- (2.6) 0.4 7.2 -- 5.0 ------ ------ ------ ------ ------ ------ Net income $ 21.3 $ 25.7 $ 46.6 $ 65.6 $(137.9) $ 21.3 ====== ====== ====== ====== ====== ======
48 49 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (IN MILLIONS)
Seven Months Ended December 26, 1999 ---------------------------------------------------------------------------- Unconsolidated Consolidated Fairchild Unconsolidated Fairchild Semiconductor Fairchild Non- Semiconductor International, Semiconductor Guarantor Guarantor International, Inc. Corporation Subsidiary Subsidiaries Inc. --------------- -------------- ---------- ------------ -------------- Cash flows provided by (used in) operating activities: $ 0.0 $ 97.0 $ (0.8) $ 19.5 $115.7 -------- ------ ------- ------ ------ Cash flows from investing activities: Capital expenditures -- (31.4) (0.4) (43.0) (74.8) Proceeds from sale of property, plant and equipment -- -- 0.9 -- 0.9 Purchase of molds and tooling -- -- -- (1.3) (1.3) Refund of value added tax paid in connection with acquisition -- -- -- 40.9 40.9 Investment (in) from affiliate (192.2) 182.1 -- 10.1 -- -------- ------ ------ ------ ------ Cash provided by (used in) investing activities (192.2) 150.7 0.5 6.7 (34.3) -------- ------ ------ ------ ------ Cash flows from financing activities: Repayment of long-term debt (154.4) (191.4) -- -- (345.8) Proceeds from issuance of common stock and from issuance of stock options 346.6 -- -- -- 346.6 Purchase of treasury stock -- (5.9) -- -- (5.9) Net intercompany financing -- 33.8 -- (33.8) -- -------- ------ ------ ------ ------ Cash provided by (used in) financing activities 192.2 (163.5) -- (33.8) (5.1) -------- ------ ------ ------ ------ Net change in cash and cash equivalents -- 84.2 (0.3) (7.6) 76.3 Cash and cash equivalents at beginning of period -- 33.1 0.3 29.0 62.4 -------- ------ ------ ------ ------ Cash and cash equivalents at end of period $ -- $117.3 $ (0.0) $ 21.4 $138.7 ======== ====== ====== ====== ====== Supplemental Cash Flow Information: Cash paid (refunded) during the year for: Income taxes $ -- $ (0.3) $ -- $ 2.1 $ 1.8 ======== ====== ====== ====== ====== Interest $ -- $ 42.1 $ -- $ -- $ 42.1 ======== ====== ====== ====== ======
49 50 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (IN MILLIONS)
YEAR ENDED MAY 30, 1999 ----------------------------------------------------------------------------------------------- UNCONSOLIDATED CONSOLIDATED FAIRCHILD UNCONSOLIDATED FAIRCHILD SEMICONDUCTOR FAIRCHILD NON- SEMICONDUCTOR INTERNATIONAL, SEMICONDUCTOR GUARANTOR GUARANTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES ELIM INC. --------------- -------------- ---------- ------------ ------ -------------- Revenue: Net sales--trade $ -- $177.1 $ 64.2 $412.8 $ -- $654.1 Net sales--intercompany -- 536.8 -- 101.1 (637.9) -- Contract mfg--National Semiconductor -- 81.0 -- -- -- 81.0 ------- ------- ------ ------ ------- ------- Total revenue -- 794.9 64.2 513.9 (637.9) 735.1 Operating expenses: Cost of sales--trade -- 57.1 39.7 421.6 -- 518.4 Cost of sales--intercompany -- 596.9 -- 41.0 (637.9) -- Cost of contract manufacturing -- 64.4 -- -- -- 64.4 --National Semiconductor Research and development -- 26.1 10.8 2.4 -- 39.3 Selling, general and administrative -- 62.9 13.8 28.4 -- 105.1 Purchased in-process R&D -- -- -- 34.0 -- 34.0 Restructuring and impairments -- 8.6 12.7 -- -- 21.3 ------- ------- ------ ------ ------- ------- Total operating expenses -- 816.0 77.0 527.4 (637.9) 782.5 ------- ------- ------ ------ ------- ------- Operating income (loss) -- (21.1) (12.8) (13.5) -- (47.4) Interest expense, net 11.3 54.1 4.4 2.0 -- 71.8 Equity in subsidiary (income) loss 102.7 33.6 22.8 -- (159.1) -- ------- ------- ------ ------ ------- ------- Income (loss) before income taxes (114.0) (108.8) (40.0) (15.5) 159.1 (119.2) Provision (benefit) for income taxes 0.1 (6.1) (1.2) 2.1 -- (5.1) ------- ------- ------ ------ ------- ------- Net income (loss) $(114.1) $(102.7) $(38.8) $(17.6) $ 159.1 $(114.1) ======= ======= ====== ====== ======= =======
50 51 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (IN MILLIONS) YEAR ENDED MAY 30, 1999 ------------------------------------------------------------------------------------ Unconsolidated Consolidated Fairchild Unconsolidated Fairchild Semiconductor Fairchild Non- Semiconductor International, Semiconductor Guarantor Guarantor International, Inc. Corporation Subsidiary Subsidiaries Inc. --------------- -------------- ---------- ------------ -------------- Cash flows provided by (used in) operating activities: $ -- $(14.7) $(29.4) $ 88.2 $ 44.1 ------ ------ ------ ------ ------ Cash flows from investing activities: Capital expenditures -- (26.6) (0.5) (19.1) (46.2) Proceeds from sale of property, plant and equipment -- 1.0 30.2 -- 31.2 Purchase of molds and tooling -- -- -- (3.8) (3.8) Refundable payment of value added tax -- -- -- (40.9) (40.9) associated with acquisitions Investment (in) from affiliate (50.0) 50.0 -- -- -- Net intercompany investing (406.8) -- 406.8 -- Acquisitions, net of cash acquired -- (8.1) -- (406.8) (414.9) ------ ------ ------ ------ ------ Cash provided by (used in) investing activities (50.0) (390.5) 29.7 (63.8) (474.6) ------ ------ ------ ------ ------ Cash flows from financing activities: Repayment of long-term debt -- (151.3) -- -- (151.3) Issuance of long-term debt 50.0 610.0 -- -- 660.0 Debt issuance costs -- (22.3) -- -- (22.3) ------ ------ ------ ------ ------ Cash provided by financing activities 50.0 436.4 -- -- 486.4 ------ ------ ------ ------ ------ Net change in cash and cash equivalents -- 31.2 0.3 24.4 55.9 Cash and cash equivalents at beginning of period -- 1.9 -- 4.6 6.5 ------ ------ ------ ------ ------ Cash and cash equivalents at end of period $ -- $ 33.1 $ 0.3 $ 29.0 $ 62.4 ====== ====== ====== ====== ====== Supplemental Cash Flow Information: Cash paid (refunded) during the year for: Income taxes $ -- $ (2.0) $ -- $ 2.0 $ -- ====== ====== ====== ====== ====== Interest $ -- $ 46.6 $ -- $ -- $ 46.6 ====== ====== ====== ====== ======
51 52 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (IN MILLIONS)
YEAR ENDED MAY 31, 1998 -------------------------------------------------------------------------------------- UNCONSOLIDATED CONSOLIDATED FAIRCHILD UNCONSOLIDATED FAIRCHILD SEMICONDUCTOR FAIRCHILD NON- SEMICONDUCTOR INTERNATIONAL, SEMICONDUCTOR GUARANTOR GUARANTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARY SUBSIDIARIES ELIM INC. -------------- -------------- ---------- ------------ ------ -------------- Revenue: Net sales--trade $ -- $ 222.1 $ 32.1 $ 381.6 $ -- $ 635.8 Net sales--intercompany -- 786.6 -- 114.4 (901.0) -- Contract mfg--National Semiconductor -- 153.4 -- -- -- 153.4 -------- -------- -------- -------- -------- -------- Total revenue -- 1,162.1 32.1 496.0 (901.0) 789.2 Operating expenses: Cost of sales--trade -- 39.3 20.0 382.3 -- 441.6 Cost of sales--intercompany -- 830.0 -- 71.0 (901.0) -- Cost of contract mfg--National Semiconductor -- 117.1 -- -- -- 117.1 Research and development -- 30.1 4.6 1.0 -- 35.7 Selling, general and administrative -- 65.8 5.1 21.1 -- 92.0 Purchased in-process R&D -- 15.5 -- -- -- 15.5 -------- -------- -------- -------- -------- -------- Total operating expenses -- 1,097.8 29.7 475.4 (901.0) 701.9 -------- -------- -------- -------- -------- -------- Operating income -- 64.3 2.4 20.6 -- 87.3 Interest expense, net 9.8 43.0 1.8 (0.1) -- 54.5 Equity in subsidiary income (28.7) (16.9) -- -- 45.6 -- -------- -------- -------- -------- -------- -------- Income before income taxes 18.9 38.2 0.6 20.7 (45.6) 32.8 Provision (benefit) for income taxes (3.2) 9.5 0.2 4.2 -- 10.7 -------- -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting principle 22.1 28.7 0.4 16.5 (45.6) 22.1 Cumulative effect of change in accounting principle, net of tax effect of $0.8 million (1.5) -- -- -- -- (1.5) -------- -------- -------- -------- -------- -------- Net income $ 20.6 $ 28.7 $ 0.4 $ 16.5 $ (45.6) $ 20.6 -------- -------- -------- -------- -------- --------
52 53 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (IN MILLIONS)
YEAR ENDED MAY 31, 1998 ------------------------------------------------------------------------------------- Unconsolidated Consolidated Fairchild Unconsolidated Fairchild Semiconductor Fairchild Non- Semiconductor International, Semiconductor Guarantor Guarantor International, Inc. Corporation Subsidiary Subsidiaries Inc. --------------- -------------- ---------- ------------ -------------- Cash flows provided by operating activities: $ -- $105.4 $ 0.4 $ 30.3 $136.1 ------ ------ ------ ------ ------ Cash flows from investing activities: Capital expenditures -- (48.7) (0.4) (28.9) (78.0) Purchase of molds and tooling -- -- -- (5.7) (5.7) Acquisitions, net of cash acquired -- (116.8) -- -- (116.8) ------ ------ ------ ------ ------ Cash used by investing activities -- (165.5) (0.4) (34.6) (200.5) ------ ------ ------ ------ ------ Cash flows from financing activities: Repayment of long-term debt -- (58.7) -- -- (58.7) Issuance of long-term debt -- 90.0 -- -- 90.0 Debt issuance costs -- (1.1) -- -- (1.1) ------ ------ ------ ------ ------ Cash provided by financing activities -- 30.2 -- -- 30.2 ------ ------ ------ ------ ------ Net change in cash and cash equivalents -- (29.9) -- (4.3) (34.2) Cash and cash equivalents at beginning of period -- 31.8 -- 8.9 40.7 ------ ------ ------ ------ ------ Cash and cash equivalents at end of period $ -- $ 1.9 $ -- $ 4.6 $ 6.5 ====== ====== ====== ====== ====== Supplemental Cash Flow Information: Cash paid during the year for: Income taxes $ -- $ 7.7 $ -- $ 1.2 $ 8.9 ====== ====== ====== ====== ====== Interest $ -- $ 43.8 $ -- $ -- $ 43.8 ====== ====== ====== ====== ======
53 54 NOTE 19 -- UNAUDITED QUARTERLY FINANCIAL INFORMATION The following is a summary of unaudited quarterly financial information for Calendar 2000, Stub Year 1999 and Fiscal 1999 (in millions, except per share amounts):
Calendar 2000 ----------------------------------------------------------- First Second Third Fourth ----- ------ ----- ------ Total revenue $ 401.7 $436.7 $476.0 $ 468.8 Gross profit 137.2 160.6 173.7 167.7 Net income (a) (b) 50.0 59.7 69.7 93.7 Net income applicable to common stockholders (a) (b) 50.0 59.7 69.7 93.7 Basic earnings per common share $ 0.53 $ 0.61 $ 0.70 $ 0.94 Diluted earnings per common share $ 0.51 $ 0.59 $ 0.68 $ 0.92
Stub Year 1999 ------------------------------------------- First Second Third (f) ----- ------ --------- Total revenue $324.5 $356.8 $ 104.9 Gross profit 95.5 113.3 26.1 Net income (loss) (c) (8.0) 22.5 6.8 Net income (loss) applicable to common stockholders (c) (10.0) 22.5 6.8 Basic earnings (loss) per common share $ (0.15) $ 0.25 $ 0.08 Diluted earnings (loss) per common share $ (0.15) $ 0.24 $ 0.07
Fiscal 1999 ------------------------------------------------------------ First Second Third Fourth ----- ------ ----- ------ Total revenue (e) $ 151.3 $ 167.9 $ 169.4 $ 246.5 Gross profit (e) 36.7 35.6 41.0 45.3 Net (loss) (d) (e) (16.2) (9.9) (11.1) (76.9) Net loss applicable to common stockholders (d) (e) (18.5) (12.3) (13.6) (79.5) Basic loss per common share $ (0.29) $(0.20) $(0.22) $ (1.26) Diluted loss per common share $ (0.29) $(0.20) $(0.22) $ (1.26)
- --------------- Note: Amounts may not add due to rounding (a) In the second and third quarters of Calendar 2000, the Company recorded a gain of $11.0 million for the adjustment of reserves related to the restructuring of its memory product lines and additional proceeds from the sale of the Mountain View, California facility and charges of $9.0 million for purchased in-process research and development and $3.6 million for the write-off of deferred financing fees. (b) In the fourth quarter of Calendar 2000, the Company recorded a gain of $26.3 million for the reduction of deferred tax valuation allowances. (c) During the first quarter of Stub Year 1999, the Company recorded a charge of $8.3 million for the forgiveness of certain loans made to the Company's management investors for payment of individual income tax liabilities resulting from their ownership of Fairchild International's common stock. (See Note 10) (d) During the first, third and fourth quarters of Fiscal 1999, the Company recorded charges of $4.5 million, $2.7 million and $48.1 million, respectively, for restructuring charges and purchased in-process research and development. (See Notes 11 and 16.) 54 55 (e) In the fourth quarter of Fiscal 1999, the Company recorded charges to write-off inventories ($9.9 million) and to increase sales reserves ($5.5 million) in connection with the Memory Division product line restructuring plan. (See Note 11.) (f) The third quarter represents the period beginning November 29, 1999 and ending December 26, 1999. NOTE 20 -- SUBSEQUENT EVENT On January 20, 2001, the Company entered into an asset purchase agreement to acquire substantially all of the assets of, and assume certain liabilities of, Intersil Corporation's discrete power products business ("DPP") for cash consideration of approximately $338.0 million. DPP is a leading provider of silicon-based discrete power devices for the computer, communications, industrial, automotive, and space and defense markets. In connection with the financing of the DPP acquisition, on January 31, 2001, the Company finalized an offering of $350.0 million of 10 1/2% senior subordinated notes. The proceeds from this offering, excluding underwriting discounts, will be held in escrow until the final closing of the DPP acquisition. Interest on the notes will be paid semi-annually on February 1 and August 1 each year, beginning August 1, 2001. The Company may redeem the notes on or after February 1, 2005. Prior to February 1, 2004, the Company may redeem up to 35% of the notes from the proceeds of equity offerings. In the event that the acquisition is not consummated by July 30, 2001, the Company will be required to redeem the notes plus accrued and unpaid interest. 55 EX-21.01 7 b38142fsex21-01.txt SUBSIDIARIES 1 EXHIBIT 21.01 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. WORLDWIDE SUBSIDIARY LIST
PERCENTAGE STATE/COUNTRY OF OWNERSHIP INCORPORATION --------- ------------- Fairchild Semiconductor Corporation 100% Delaware Fairchild Semiconductor Corporation of California 100% Delaware Fairchild Semiconductor Limited 100% England Fairchild Semiconductor GmbH 100% Germany Fairchild Semiconductor S.r.l 100% Italy Fairchild Semiconductor Japan Ltd. 100% Japan Fairchild Semiconductor Hong Kong Limited 100% Hong Kong Fairchild Semiconductor Hong Kong (Holdings) Limited 100% Hong Kong Fairchild Semiconductor Asia Pacific Pte. Ltd. 100% Singapore Fairchild Semiconductor (Malaysia) Sdn. Bhd. 100% Malaysia Fairchild Korea Semiconductor Ltd. 100% Korea Fairchild Korea Trading Company 100% Korea KOTA Microcircuits, Inc. 100% Colorado Fairchild Semiconductor de Mexico S.de.R.L.de C.V. 100% Mexico Fairchild Semiconductor S.A.S. 100% France QT Optoelectronics, Inc. 100% Delaware QT Optoelectronics 100% California QT Optoelectronics (M) Sdn. Bhd. 100% Malaysia QT Optoelectronics Singapore Pte. Ltd. 100% Singapore QT Optoelectronics (Wuxi) Ltd. 100% China QT Optoelectronics Europe N.V. 100% Belgium QT Optoelectronics Deutschland GmbH 100% Germany QT Optoelectronics UK Limited 100% England
EX-23.01 8 b38142fsex23-01.txt CONSENT OF KPMG LLP 1 Exhibit 23.01 INDEPENDENT AUDITORS' CONSENT The Board of Directors Fairchild Semiconductor International, Inc.: We consent to incorporation by reference in the registration statement (No. 333-52060) on Form S-4 and the registration statements (Nos. 333-31812, 333-40412, 333-40416, 333-44432, 333-53620, 333-84439 and 333-84747) on Form S-8 of Fairchild Semiconductor International, Inc. of our reports dated January 31, 2001, relating to the consolidated balance sheets of Fairchild Semiconductor International, Inc. and subsidiaries as of December 31, 2000 and December 26, 1999, the related consolidated statements of operations, cash flows and stockholders' equity (deficit) for the year ended December 31, 2000, the seven months ended December 26, 1999, and for each of the years in the two-year period ended May 30, 1999, and the related schedule, which reports are incorporated by reference in the annual report on Form 10-K of Fairchild Semiconductor International, Inc. for the year ended December 31, 2000. Our report refers to a change in the method of accounting for business process reengineering costs as a result of the Company adopting the provisions of the Emerging Issues Task Force Issue 97-13, "Accounting for Business Process Reengineering Costs." /s/ KPMG LLP Boston, Massachusetts March 23, 2001 -----END PRIVACY-ENHANCED MESSAGE-----