-----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, QBN4YVAXo7rPiwWTv4zOHIkgYovvd4R0LcX76PkWOgoUL02pPM5gpGy6rsIKKm4Z Sh5metMR6Vxd4rGmD0BuMA== 0000950135-02-002710.txt : 20020515 0000950135-02-002710.hdr.sgml : 20020515 20020515125227 ACCESSION NUMBER: 0000950135-02-002710 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15181 FILM NUMBER: 02649986 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-Q 1 b43116fce10-q.txt FAIRCHILD SEMICONDUCTOR INTERNATIONAL - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
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, MAINE 04106 (Address of principal executive offices, including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (207) 775-8100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the issuer's classes of common stock as of the close of business on March 31, 2002:
TITLE OF EACH CLASS NUMBER OF SHARES ------------------- ---------------- Class A Common Stock, par value $.01 per share 100,481,804 Class B Common Stock, par value $.01 per share 0
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2002 (Unaudited) and December 30, 2001........................... 2 Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2002 and April 1, 2001........................................................ 3 Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2002 and April 1, 2001............................................... 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2002 and April 1, 2001........................................................ 5 Notes to Condensed Consolidated Financial Statements (Unaudited)................................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................................ 33 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 34 Item 6. Exhibits and Reports on Form 8-K............................ 34 Signature............................................................. 35
1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
MARCH 31, DECEMBER 30, 2002 2001 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.............................. $ 512.8 $ 504.4 Accounts receivable, net............................... 156.4 133.6 Inventories............................................ 204.5 209.1 Deferred income taxes.................................. 16.1 16.4 Other current assets................................... 11.4 11.3 -------- -------- Total current assets.............................. 901.2 874.8 Property, plant and equipment, net.......................... 651.3 659.6 Intangible assets, net...................................... 466.5 479.8 Other assets................................................ 133.7 135.0 -------- -------- Total assets...................................... $2,152.7 $2,149.2 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt...................... $ 0.4 $ 0.4 Accounts payable....................................... 106.1 106.7 Accrued expenses and other current liabilities......... 85.3 92.2 -------- -------- Total current liabilities......................... 191.8 199.3 Long-term debt, less current portion........................ 1,138.0 1,138.2 Other liabilities........................................... 3.7 3.7 -------- -------- Total liabilities................................. 1,333.5 1,341.2 Commitments and contingencies Stockholders' equity: Class A common stock................................... 1.0 1.0 Class B common stock................................... -- -- Additional paid-in capital............................. 816.4 809.7 Retained earnings...................................... 2.8 0.1 Accumulated other comprehensive income................. 0.8 1.0 Less treasury stock (at cost).......................... (1.8) (3.8) -------- -------- Total stockholders' equity........................ 819.2 808.0 -------- -------- Total liabilities and stockholders' equity........ $2,152.7 $2,149.2 ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 2 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED -------------------- MARCH 31, APRIL 1, 2002 2001 --------- -------- Revenue: Net sales -- trade........................................ $326.2 $367.8 Contract manufacturing.................................... 10.7 17.5 ------ ------ Total revenue.......................................... 336.9 385.3 Operating expenses: Cost of sales -- trade.................................... 248.6 255.0 Cost of contract manufacturing............................ 8.7 12.2 Research and development.................................. 20.7 23.5 Selling, general and administrative....................... 34.5 43.3 Amortization of acquisition-related intangibles........... 9.3 10.4 Purchased in-process research and development............. 1.7 12.8 Restructuring and impairments............................. 3.6 9.5 ------ ------ Total operating expenses............................... 327.1 366.7 ------ ------ Operating income............................................ 9.8 18.6 Interest expense............................................ 28.6 23.9 Interest income............................................. (2.5) (7.4) Other income................................................ (20.5) -- ------ ------ Income before income taxes.................................. 4.2 2.1 Provision for income taxes.................................. 1.5 0.5 ------ ------ Net income.................................................. $ 2.7 $ 1.6 ====== ====== Net income per common share: Basic..................................................... $ 0.03 $ 0.02 ====== ====== Diluted................................................... $ 0.03 $ 0.02 ====== ====== Weighted average common shares: Basic..................................................... 100.3 99.3 ====== ====== Diluted................................................... 106.1 101.2 ====== ======
See accompanying notes to unaudited condensed consolidated financial statements. 3 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED -------------------- MARCH 31, APRIL 1, 2002 2001 --------- -------- Net income.................................................. $ 2.7 $1.6 Other comprehensive income, net of tax: Net change associated with hedging transactions........... 0.2 2.3 Net amount reclassed to earnings.......................... (0.4) -- ----- ---- Comprehensive income........................................ $ 2.5 $3.9 ===== ====
See accompanying notes to unaudited condensed consolidated financial statements. 4 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED -------------------- MARCH 31, APRIL 1, 2002 2001 --------- -------- Cash flows from operating activities: Net income.................................................. $ 2.7 $ 1.6 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization........................... 40.3 39.8 Amortization of deferred compensation................... 1.0 0.7 Restructuring and impairments........................... 1.8 8.7 Non-cash interest expense............................... 1.5 1.0 Purchased in-process research and development........... 1.7 12.8 Loss (gain) on disposal of property, plant and equipment.............................................. (0.2) 0.6 Deferred income taxes................................... 0.2 (2.4) Gain on sale of space and defense business.............. (20.5) -- Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable..................................... (23.0) 26.1 Inventories............................................. 3.7 (19.4) Other current assets.................................... 0.2 10.1 Current liabilities..................................... (10.2) (41.8) Other assets and liabilities, net....................... 1.8 (4.6) ------ ------- Cash provided by operating activities.............. 1.0 33.2 ------ ------- Cash flows from investing activities: Capital expenditures.................................... (21.0) (47.4) Purchase of molds and tooling........................... (1.3) (1.1) Purchase of long-term investments....................... -- (3.5) Acquisitions and divestitures, net of cash acquired..... 24.6 (343.1) ------ ------- Cash provided by (used) in investing activities.... 2.3 (395.1) ------ ------- Cash flows from financing activities: Repayment of long-term debt............................. (0.2) -- Issuance of long-term debt.............................. -- 350.0 Proceeds from issuance of common stock and from exercise of stock options, net.................................. 5.3 1.8 Purchase of treasury stock.............................. -- (3.4) Debt issuance costs..................................... -- (10.7) ------ ------- Cash provided by financing activities.............. 5.1 337.7 ------ ------- Net change in cash and cash equivalents..................... 8.4 (24.2) Cash and cash equivalents at beginning of period............ 504.4 401.8 ------ ------- Cash and cash equivalents at end of period.................. $512.8 $ 377.6 ====== =======
See accompanying notes to unaudited condensed consolidated financial statements. 5 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The accompanying interim condensed consolidated financial statements of Fairchild Semiconductor International, Inc. (the Company) have been prepared in conformity with accounting principles generally accepted in the United States, consistent in all material respects with those applied in the company's Annual Report on Form 10-K for the year ended December 30, 2001, except as noted below. The interim financial information is unaudited, but reflects all normal adjustments, which are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. The interim financial statements should be read in connection with the financial statements in the company's Annual Report on Form 10-K for the year ended December 30, 2001. Certain amounts for prior periods have been reclassified to conform to the current presentation. NOTE 2 -- INVENTORIES The components of inventories are as follows:
MARCH 31, DECEMBER 30, 2002 2001 --------- ------------ (IN MILLIONS) Raw materials............................................... $ 27.6 $ 27.6 Work in process............................................. 130.7 129.7 Finished goods.............................................. 46.2 51.8 ------ ------ Total inventories......................................... $204.5 $209.1 ====== ======
NOTE 3 -- COMPUTATION OF NET INCOME PER SHARE Basic net income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options. At March 31, 2002, $1.8 million was not included in the computation of net income and 6,666,667 of potential common shares were not included in the computation of diluted earnings per share as a result of the assumed conversion of the convertible senior subordinated notes because the effect would have been anti-dilutive. The following table reconciles basic to diluted weighted average shares outstanding:
THREE MONTHS ENDED -------------------- MARCH 31, APRIL 1, 2002 2001 --------- -------- (IN MILLIONS) Basic weighted average common shares outstanding............ 100.3 99.3 Net effect of dilutive stock options based on the treasury stock method using the average market price............... 5.8 1.9 ----- ----- Diluted weighted average common shares outstanding.......... 106.1 101.2 ===== =====
6 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED -------------------- MARCH 31, APRIL 1, 2002 2001 --------- -------- (IN MILLIONS) Cash paid for: Income taxes.............................................. $ 0.3 $ 3.2 ===== ===== Interest.................................................. $32.8 $18.0 ===== =====
NOTE 5 -- ACQUISITIONS AND DIVESTITURES On March 20, 2002, the Company completed its acquisition of the cross-point switch product line and associated intellectual property of I-Cube, Inc. (I-Cube) for approximately $1.0 million in cash. The acquired cross-point switch products are critical to Internet infrastructure, data communications, telecommunications, broadcast video, test equipment and digital signal processing. The transaction was accounted for as a purchase and the acquired product line's results of operation since the date of acquisition have been included in the accompanying statement of operations. The purchase price was allocated entirely to in-process research and development. On March 20, 2002, the Company sold its military and space-related discrete power product line to International Rectifier Corporation for approximately $29.6 million in cash. As a result of the sale, the Company recorded a gain of $20.5 million, which was net of the assets acquired by International Rectifier, transaction fees and other exit costs associated with the sale. On March 25, 2002, the Company completed its acquisition of the assets of Signal Processing Technologies, Inc. (SPT), a wholly-owned subsidiary of Toko, Inc., for approximately $4.0 million in cash. SPT, located in Colorado Springs, Colorado, markets high performance analog-to-digital and digital-to-analog converters and comparators for the consumer, communications, and industrial markets. The purchase also includes a design center in Horten, Norway. The transaction was accounted for as a purchase and the acquired business's results of operations since the date of acquisition have been included in the accompanying statement of operations. In connection with the SPT purchase, the Company recorded a non-recurring charge of $0.7 million for in-process research and development. The remaining purchase price was allocated to various tangible and identifiable intangible assets, which will be amortized over its useful life of 5 years. NOTE 6 -- GOODWILL Effective December 31, 2001 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, which addresses financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and other intangibles with indefinite lives are no longer amortized. Instead, the Company will perform an annual test for impairment of these assets. 7 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of acquired intangible assets as of March 31, 2002 is as follows:
AS OF MARCH 31, 2002 ----------------------------- GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION -------------- ------------ (IN MILLIONS) Identifiable intangible assets: Developed technology..................................... $222.6 $ (42.8) Customer base............................................ 55.8 (21.0) Covenant not to compete.................................. 30.4 (18.0) Trademarks and tradenames................................ 24.9 (18.3) Patents.................................................. 5.3 (2.5) ------ ------- Subtotal.............................................. 339.0 (102.6) Goodwill................................................. 230.1 -- ------ ------- Total................................................. $569.1 $(102.6) ====== =======
The carrying amount of goodwill by reporting unit for the quarter ended March 31, 2002 is as follows:
DISCRETE DOMESTIC POWER (IN MILLIONS) ANALOG PRODUCTS OPTOELECTRONICS TOTAL - ------------- -------- -------- --------------- ------ Balance as of March 31, 2002................. $15.5 $159.9 $54.7 $230.1
During the quarter, there were no changes to the carrying amount of goodwill due to acquisitions. In addition, the annual test for impairment of goodwill as required by SFAS No. 142 was completed during the quarter. No impairment was indicated. The fair value of the reporting units for purposes of the annual impairment test were estimated using discounted future cash flows. Identified reporting units which carry goodwill include domestic analog, discrete power products and Optoelectronics, which does not meet the requirements of a segment as defined in SFAS No. 131. 8 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For comparative purposes, net income before goodwill amortization net of tax and related per share amounts for the Company for the three months ended April 1, 2001 are as follows (in millions, except per share amounts):
THREE MONTHS ENDED APRIL 1, 2001 ------------------ NET INCOME: Reported.................................................. $ 1.6 Goodwill amortization.................................. 2.1 Less associated tax effects............................ (0.5) ------ Net income before goodwill................................ $ 3.2 ====== BASIC EARNINGS PER SHARE: Net income................................................ $ 0.02 Goodwill amortization.................................. 0.02 Less associated tax effects............................ (0.01) ------ Net income before goodwill................................ $ 0.03 ====== DILUTED EARNINGS PER SHARE: Net income................................................ $ 0.02 Goodwill amortization.................................. 0.02 Less associated tax effects............................ (0.01) ------ Net income before goodwill................................ $ 0.03 ======
The estimated amortization expense for the remainder of Fiscal 2002 and for each of the five succeeding fiscal years is as follows:
ESTIMATED AMORTIZATION EXPENSE: IN MILLIONS - ------------------------------- ----------- Remainder of Fiscal 2002.................................... $28.3 Fiscal 2003................................................. 33.0 Fiscal 2004................................................. 25.8 Fiscal 2005................................................. 24.1 Fiscal 2006................................................. 23.9 Fiscal 2007................................................. 18.5
NOTE 7 -- SEGMENT INFORMATION The Company is currently organized into three reportable segments: the Analog and Mixed Signal Products Group (Analog), the Discrete Products Group (Discrete) and the Interface and Logic Products Group (Interface and Logic). The operating results for I-Cube are included with the Interface and Logic reporting segment. The operating results for SPT are included with the Analog reporting segment. The Company has determined that its Memory (formerly referred to as Configurable Products) business unit and its Optoelectronics Group do not meet the threshold for a separate reportable segment under SFAS No. 131, and accordingly these segments' results are included as part of the "Other" category for all periods presented. The Company's contract manufacturing business is not a separate reportable segment and its results are recorded together with the Memory business unit and the Optoelectronics Group in the "Other" category. Management evaluates the contract manufacturing business differently than its other operating 9 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) segments due in large part to the fact that it is predominantly driven by contractual agreements for limited time periods entered into with National Semiconductor Corporation and Samsung Electronics Co., Ltd. Selected operating segment financial information for the three months ended March 31, 2002 and April 1, 2001 is as follows:
THREE MONTHS ENDED -------------------- MARCH 30, APRIL 1, 2002 2001 --------- -------- (IN MILLIONS) REVENUE: Analog.................................................... $ 77.5 $ 84.1 Discrete.................................................. 178.8 155.2 Interface and Logic....................................... 51.5 92.1 Other..................................................... 29.1 53.9 ------ ------ Total.................................................. $336.9 $385.3 ====== ======
THREE MONTHS ENDED -------------------- MARCH 30, APRIL 1, 2002 2001 --------- -------- (IN MILLIONS) OPERATING INCOME: Analog.................................................... $ 5.6 $ 4.0 Discrete.................................................. 7.3 12.3 Interface and Logic....................................... 2.2 21.2 ----- ------ Subtotal.................................................. 15.1 37.5 Other..................................................... -- 3.4 Purchased in-process research and development............. (1.7) (12.8) Restructuring and impairments............................. (3.6) (9.5) ----- ------ Total.................................................. $ 9.8 $ 18.6 ===== ======
NOTE 8 -- RESTRUCTURING AND IMPAIRMENTS During the three months ended March 31, 2002, the Company recorded a pre-tax restructuring charge of $3.6 million. The restructuring charge consisted of employee separation costs relating primarily to severance and other costs associated with approximately 150 salaried and hourly employees severed in the United States, Europe, Japan and Malaysia. During the three months ended April 1, 2001, the Company recorded a pre-tax restructuring charge of $9.5 million. The restructuring charge consisted of $8.3 million related to non-cash asset impairments and $1.2 million of employee separation costs. The asset impairments related to the consolidation of the five-inch wafer fabrication line in South Portland, Maine. The employee separation costs related primarily to severance and other benefits associated with approximately 300 salaried, hourly and temporary employees severed in Cebu, the Philippines. 10 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the activity in the Company's accrual for restructuring and impairment costs for the three months ended March 31, 2002 (in millions): Accrual balances as of December 30, 2001.................... $ 1.3 Accrual................................................... 3.6 Cash payments............................................. (3.1) Non-cash items............................................ (0.3) -------- Accrual balance as of March 31, 2002........................ $ 1.5 ========
The Company expects that all amounts will be substantially paid before the end of the year. NOTE 9 -- DERIVATIVES The Company uses derivative instruments to manage exposures to foreign currencies. In accordance with SFAS No. 133, the fair value of these hedges is recorded on the balance sheet. Certain forecasted transactions are exposed to foreign currency risks. The Company monitors its foreign currency exposures to maximize the overall effectiveness of its foreign currency hedge positions. Principal currencies hedged include the euro and the Japanese yen. The Company's objectives for holding derivatives are to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures. Changes in the fair value of derivative instruments related to time value are included in the assessment of hedge effectiveness. Hedge ineffectiveness, determined in accordance with SFAS No. 133 and SFAS No. 138, had no impact on earnings for the three months ended March 31, 2002. No cash flow hedges were derecognized or discontinued for the three months ended March 31, 2002. Derivative gains and losses included in other comprehensive income (OCI) are reclassified into earnings at the time the forecasted transaction revenue is recognized. The Company estimates that the entire $0.2 million of net derivative loss included in OCI will be reclassified into earnings within the next twelve months. NOTE 10 -- CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) The Company operates through its wholly owned subsidiary Fairchild Semiconductor Corporation and other indirect wholly owned subsidiaries. Fairchild Semiconductor International, Inc. and certain of Fairchild Semiconductor Corporation's subsidiaries are guarantors under the Senior Subordinated Notes and Convertible Senior Subordinated Notes. These guaranties are full and unconditional. In addition, all guaranties are joint and several. Accordingly, the interim condensed consolidating financial statements are presented below. 11 CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
MARCH 31, 2002 --------------------------------------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED FAIRCHILD FAIRCHILD NON- SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS ------------------- -------------- ------------ ------------ ------------ (IN MILLIONS) ASSETS Current assets: Cash and cash equivalents.... $ -- $ 491.9 $ -- $ 20.9 $ -- Accounts receivable, net..... -- 37.1 0.8 118.5 -- Inventories.................. -- 110.7 20.3 73.5 -- Deferred income taxes........ -- 15.3 0.8 -- -- Other current assets......... -- 3.4 0.1 7.9 -- ------ -------- ------ ------ --------- Total current assets....... -- 658.4 22.0 220.8 -- Property, plant and equipment, net.......................... -- 263.2 65.3 322.8 -- Intangible assets, net......... -- 13.9 294.4 158.2 -- Investment in subsidiary....... 812.5 870.9 154.0 2.0 (1,839.4) Other assets................... 5.9 108.1 15.9 3.8 -- ------ -------- ------ ------ --------- Total assets............... $818.4 $1,914.5 $551.6 $707.6 $(1,839.4) ====== ======== ====== ====== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt....................... $ -- $ 0.4 $ -- $ -- $ -- Accounts payable............. -- 55.6 7.4 43.1 -- Accrued expenses and other current liabilities........ -- 50.8 4.5 30.0 -- ------ -------- ------ ------ --------- Total current liabilities.............. -- 106.8 11.9 73.1 -- Long-term debt, less current portion...................... -- 1,138.0 -- -- -- Net intercompany (receivable) payable...................... -- (149.3) (15.9) 165.2 -- Other liabilities.............. -- 5.7 2.0 (4.0) -- ------ -------- ------ ------ --------- Total liabilities.......... -- 1,101.2 (2.0) 234.3 -- ------ -------- ------ ------ --------- Commitments and contingencies Stockholders' equity: Class A common stock......... 1.0 -- -- -- -- Class B common stock......... -- -- -- -- -- Additional paid-in capital... 816.3 -- -- -- -- Retained earnings............ 2.9 812.5 553.6 473.3 (1,839.4) Accumulated other comprehensive income....... -- 0.8 -- -- -- Less treasury stock (at cost)...................... (1.8) -- -- -- -- ------ -------- ------ ------ --------- Total stockholders' equity................... 818.4 813.3 553.6 473.3 (1,839.4) ------ -------- ------ ------ --------- Total liabilities and stockholders' equity..... $818.4 $1,914.5 $551.6 $707.6 $(1,839.4) ====== ======== ====== ====== ========= MARCH 31, 2002 ------------------- CONSOLIDATED FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. ------------------- (IN MILLIONS) ASSETS Current assets: Cash and cash equivalents.... $ 512.8 Accounts receivable, net..... 156.4 Inventories.................. 204.5 Deferred income taxes........ 16.1 Other current assets......... 11.4 -------- Total current assets....... 901.2 Property, plant and equipment, net.......................... 651.3 Intangible assets, net......... 466.5 Investment in subsidiary....... -- Other assets................... 133.7 -------- Total assets............... $2,152.7 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt....................... $ 0.4 Accounts payable............. 106.1 Accrued expenses and other current liabilities........ 85.3 -------- Total current liabilities.............. 191.8 Long-term debt, less current portion...................... 1,138.0 Net intercompany (receivable) payable...................... -- Other liabilities.............. 3.7 -------- Total liabilities.......... 1,333.5 -------- Commitments and contingencies Stockholders' equity: Class A common stock......... 1.0 Class B common stock......... -- Additional paid-in capital... 816.3 Retained earnings............ 2.9 Accumulated other comprehensive income....... 0.8 Less treasury stock (at cost)...................... (1.8) -------- Total stockholders' equity................... 819.2 -------- Total liabilities and stockholders' equity..... $2,152.7 ========
12 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2002 ------------------------------------------------------------------ UNCONSOLIDATED UNCONSOLIDATED FAIRCHILD FAIRCHILD NON- SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ------------------- -------------- ------------ ------------ (IN MILLIONS) Revenue: Net sales -- trade........ $ -- $54.9 $ 0.9 $270.4 Net sales -- intercompany... -- 252.4 38.1 81.5 Contract manufacturing.... -- 7.9 -- 2.8 ----- ----- ------ ------ Total revenue....... -- 315.2 39.0 354.7 Operating expenses: Cost of sales -- trade.... -- 17.9 (1.6) 232.3 Cost of sales -- intercompany... -- 251.1 37.4 83.5 Cost of contract manufacturing........... -- 7.2 -- 1.5 Research and development............. -- 9.3 5.8 5.6 Selling, general and administrative.......... -- (9.7) 32.8 11.4 Amortization of acquisition-related intangibles............. -- -- 2.4 6.9 Purchased in-process research and development............. -- 1.0 0.7 -- Restructuring and impairments............. -- 1.7 0.7 1.2 ----- ----- ------ ------ Total operating expenses.......... -- 278.5 78.2 342.4 ----- ----- ------ ------ Operating income (loss)..... -- 36.7 (39.2) 12.3 Interest expense............ -- 28.6 -- -- Interest income............. -- (2.3) (0.1) (0.1) Other income................ -- -- (20.5) -- Equity in subsidiary (income) loss............. (2.7) 6.9 (16.2) -- ----- ----- ------ ------ Income (loss) before income taxes..................... 2.7 3.5 (2.4) 12.4 Provision for income taxes..................... -- 0.8 -- 0.7 ----- ----- ------ ------ Net income (loss)........... $ 2.7 $ 2.7 $ (2.4) $ 11.7 ===== ===== ====== ====== THREE MONTHS ENDED MARCH 31, 2002 ---------------------------------- CONSOLIDATED FAIRCHILD SEMICONDUCTOR ELIMINATIONS INTERNATIONAL, INC. ------------ ------------------- (IN MILLIONS) Revenue: Net sales -- trade........ $ -- $326.2 Net sales -- intercompany... (372.0) -- Contract manufacturing.... -- 10.7 ------- ------ Total revenue....... (372.0) 336.9 Operating expenses: Cost of sales -- trade.... -- 248.6 Cost of sales -- intercompany... (372.0) -- Cost of contract manufacturing........... -- 8.7 Research and development............. -- 20.7 Selling, general and administrative.......... -- 34.5 Amortization of acquisition-related intangibles............. -- 9.3 Purchased in-process research and development............. -- 1.7 Restructuring and impairments............. -- 3.6 ------- ------ Total operating expenses.......... (372.0) 327.1 ------- ------ Operating income (loss)..... -- 9.8 Interest expense............ -- 28.6 Interest income............. -- (2.5) Other income................ -- (20.5) Equity in subsidiary (income) loss............. 12.0 -- ------- ------ Income (loss) before income taxes..................... (12.0) 4.2 Provision for income taxes..................... -- 1.5 ------- ------ Net income (loss)........... $ (12.0) $ 2.7 ======= ======
13 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2002 ---------------------------------------------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED FAIRCHILD FAIRCHILD NON- FAIRCHILD SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES INTERNATIONAL, INC. ------------------- -------------- ------------ ------------ ------------------- (IN MILLIONS) Cash flows provided by (used in) operating activities:... $ -- $ 2.3 $ 1.8 $(3.1) $ 1.0 ----- ------ ----- ----- ------ Investing activities: Capital expenditures........ -- (16.4) (0.5) (4.1) (21.0) Purchase of molds and tooling.................. -- -- (1.3) -- (1.3) Purchase of long-term investments.............. -- -- -- -- -- Acquisitions and divestitures, net of cash acquired................. -- 24.6 -- -- 24.6 Investment (in) from affiliate................ (5.3) 5.3 -- -- -- ----- ------ ----- ----- ------ Cash provided by (used in) investing activities............. (5.3) 13.5 (1.8) (4.1) 2.3 ----- ------ ----- ----- ------ Financing activities: Repayment of long-term debt..................... -- (0.2) -- -- (0.2) Issuance of long-term debt..................... -- -- -- -- -- Proceeds from issuance of common stock and from issuance of stock options, net............. 5.3 -- -- -- 5.3 Purchase of treasury stock.................... -- -- -- -- -- Debt issuance costs......... -- -- -- -- -- ----- ------ ----- ----- ------ Cash provided by (used in) financing activities............. 5.3 (0.2) -- -- 5.1 ----- ------ ----- ----- ------ Net change in cash and cash equivalents................. -- 15.6 -- (7.2) 8.4 Cash and cash equivalents at beginning of period......... -- 476.3 -- 28.1 504.4 ----- ------ ----- ----- ------ Cash and cash equivalents at end of period............... $ -- $491.9 $ -- $20.9 $512.8 ===== ====== ===== ===== ====== Supplemental Cash Flow Information: Cash paid during the period for: Income taxes............. $ -- $ 0.1 $ -- $ 0.2 $ 0.3 ===== ====== ===== ===== ====== Interest................. $ -- $ 32.8 $ -- $ -- $ 32.8 ===== ====== ===== ===== ======
14 CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
DECEMBER 30, 2001 --------------------------------------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED FAIRCHILD FAIRCHILD NON- SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS ------------------- -------------- ------------ ------------ ------------ (IN MILLIONS) ASSETS Current assets: Cash and cash equivalents..... $ -- $ 476.3 $ -- $ 28.1 $ -- Accounts receivable, net...... -- 31.8 1.4 100.4 -- Inventories................... -- 113.9 21.0 74.2 -- Deferred income taxes......... -- 15.2 0.8 0.4 -- Other current assets.......... -- 3.9 0.1 7.3 -- ------ -------- ------ ------ --------- Total current assets........ -- 641.1 23.3 210.4 -- Property, plant and equipment, net........................... -- 257.6 67.5 334.5 -- Intangible assets, net.......... -- 14.0 300.8 165.0 -- Investment in subsidiary........ 801.1 894.9 154.0 2.0 (1,852.0) Other assets.................... 5.9 109.8 16.0 3.3 -- ------ -------- ------ ------ --------- Total assets................ $807.0 $1,917.4 $561.6 $715.2 $(1,852.0) ====== ======== ====== ====== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt........................ $ -- $ 0.4 $ -- $ -- $ -- Accounts payable.............. -- 48.1 7.5 51.1 -- Accrued expenses and other current liabilities......... -- 59.3 3.2 29.7 -- ------ -------- ------ ------ --------- Total current liabilities... -- 107.8 10.7 80.8 -- Long-term debt, less current portion....................... -- 1,138.2 -- -- -- Net intercompany (receivable) payable....................... -- (136.1) (22.1) 158.2 -- Other liabilities............... -- 6.4 2.0 (4.7) -- ------ -------- ------ ------ --------- Total liabilities........... -- 1,116.3 (9.4) 234.3 -- ------ -------- ------ ------ --------- Commitments and contingencies Stockholders' equity: Class A common stock.......... 1.0 -- -- -- -- Class B common stock.......... -- -- -- -- -- Additional paid-in capital.... 809.7 -- -- -- -- Retained earnings............. 0.1 800.1 571.0 480.9 (1,852.0) Accumulated other comprehensive income........ -- 1.0 -- -- -- Less treasury stock (at cost)....................... (3.8) -- -- -- -- ------ -------- ------ ------ --------- Total stockholders' equity.................... 807.0 801.1 571.0 480.9 (1,852.0) ------ -------- ------ ------ --------- Total liabilities and stockholders' equity...... $807.0 $1,917.4 $561.6 $715.2 $(1,852.0) ====== ======== ====== ====== ========= DECEMBER 30, 2001 ------------------- CONSOLIDATED FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. ------------------- (IN MILLIONS) ASSETS Current assets: Cash and cash equivalents..... $ 504.4 Accounts receivable, net...... 133.6 Inventories................... 209.1 Deferred income taxes......... 16.4 Other current assets.......... 11.3 -------- Total current assets........ 874.8 Property, plant and equipment, net........................... 659.6 Intangible assets, net.......... 479.8 Investment in subsidiary........ -- Other assets.................... 135.0 -------- Total assets................ $2,149.2 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt........................ $ 0.4 Accounts payable.............. 106.7 Accrued expenses and other current liabilities......... 92.2 -------- Total current liabilities... 199.3 Long-term debt, less current portion....................... 1,138.2 Net intercompany (receivable) payable....................... -- Other liabilities............... 3.7 -------- Total liabilities........... 1,341.2 -------- Commitments and contingencies Stockholders' equity: Class A common stock.......... 1.0 Class B common stock.......... -- Additional paid-in capital.... 809.7 Retained earnings............. 0.1 Accumulated other comprehensive income........ 1.0 Less treasury stock (at cost)....................... (3.8) -------- Total stockholders' equity.................... 808.0 -------- Total liabilities and stockholders' equity...... $2,149.2 ========
15 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED APRIL 1, 2001 ------------------------------------------------------------------ UNCONSOLIDATED FAIRCHILD UNCONSOLIDATED SEMICONDUCTOR FAIRCHILD NON- INTERNATIONAL, SEMICONDUCTOR GUARANTOR GUARANTOR INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ------------------- -------------- ------------ ------------ (IN MILLIONS) Revenue: Net sales -- trade.............. $ -- $ 76.6 $ 7.5 $283.7 Net sales -- intercompany....... -- 230.7 20.1 91.8 Contract manufacturing.......... -- 16.0 -- 1.5 ----- ------ ------ ------ Total revenue............... -- 323.3 27.6 377.0 Operating expenses: Cost of sales -- trade.......... -- 35.9 9.3 209.8 Cost of sales -- intercompany... -- 228.7 19.0 94.9 Cost of contract manufacturing................. -- 11.2 -- 1.0 Research and development........ -- 12.3 5.2 6.0 Selling, general and administrative................ -- 26.4 3.8 13.1 Amortization of acquisition-related intangibles................... -- 0.1 2.8 7.5 Purchased in-process research and development............... -- -- 12.8 -- Restructuring and impairments... -- 8.3 0.4 0.8 ----- ------ ------ ------ Total operating expenses.... -- 322.9 53.3 333.1 ----- ------ ------ ------ Operating income (loss)........... -- 0.4 (25.7) 43.9 Interest expense.................. -- 23.9 -- -- Interest income................... -- (7.3) -- (0.1) Other income...................... -- -- -- -- Equity in subsidiary income....... (1.6) (15.5) (19.3) -- ----- ------ ------ ------ Income (loss) before income taxes........................... 1.6 (0.7) (6.4) 44.0 Provision (benefit) for income taxes........................... -- (2.3) -- 2.8 ----- ------ ------ ------ Net income (loss)................. $ 1.6 $ 1.6 $ (6.4) $ 41.2 ===== ====== ====== ====== THREE MONTHS ENDED APRIL 1, 2001 ---------------------------------- CONSOLIDATED FAIRCHILD SEMICONDUCTOR INTERNATIONAL, ELIMINATIONS INC. ------------ ------------------- (IN MILLIONS) Revenue: Net sales -- trade.............. $ -- $367.8 Net sales -- intercompany....... (342.6) -- Contract manufacturing.......... -- 17.5 ------- ------ Total revenue............... (342.6) 385.3 Operating expenses: Cost of sales -- trade.......... -- 255.0 Cost of sales -- intercompany... (342.6) -- Cost of contract manufacturing................. -- 12.2 Research and development........ -- 23.5 Selling, general and administrative................ -- 43.3 Amortization of acquisition-related intangibles................... -- 10.4 Purchased in-process research and development............... -- 12.8 Restructuring and impairments... -- 9.5 ------- ------ Total operating expenses.... (342.6) 366.7 ------- ------ Operating income (loss)........... -- 18.6 Interest expense.................. -- 23.9 Interest income................... -- (7.4) Other income...................... -- -- Equity in subsidiary income....... 36.4 -- ------- ------ Income (loss) before income taxes........................... (36.4) 2.1 Provision (benefit) for income taxes........................... -- 0.5 ------- ------ Net income (loss)................. $ (36.4) $ 1.6 ======= ======
16 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED APRIL 1, 2001 ---------------------------------------------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED FAIRCHILD FAIRCHILD NON- FAIRCHILD SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES INTERNATIONAL, INC. ------------------- -------------- ------------ ------------ ------------------- (IN MILLIONS) Cash flows provided by operating activities:........................... $ -- $ 19.3 $1.2 $ 12.7 $ 33.2 ----- ------- ---- ------ ------- Investing activities: Capital expenditures.................. -- (22.7) -- (24.7) (47.4) Purchase of molds and tooling......... -- -- -- (1.1) (1.1) Purchase of long-term investments..... -- (3.5) -- -- (3.5) Acquisitions, net of cash acquired.... -- (343.1) -- -- (343.1) Investment (in) from affiliate........ 1.6 (1.6) -- -- -- ----- ------- ---- ------ ------- Cash provided by (used in) investing activities........... 1.6 (370.9) -- (25.8) (395.1) ----- ------- ---- ------ ------- Financing activities: Repayment of long-term debt........... -- -- -- -- -- Issuance of long-term debt............ -- 350.0 -- -- 350.0 Proceeds from issuance of common stock and from issuance of stock options, net................................. 1.8 -- -- -- 1.8 Purchase of treasury stock............ (3.4) -- -- -- (3.4) Debt issuance costs................... -- (10.7) -- -- (10.7) ----- ------- ---- ------ ------- Cash provided by (used in) financing activities........... (1.6) 339.3 -- -- 337.7 ----- ------- ---- ------ ------- Net change in cash and cash equivalents........................... -- (12.3) 1.2 (13.1) (24.2) Cash and cash equivalents at beginning of period............................. -- 374.5 -- 27.3 401.8 ----- ------- ---- ------ ------- Cash and cash equivalents at end of period................................ $ -- $ 362.2 $1.2 $ 14.2 $ 377.6 ===== ======= ==== ====== ======= Supplemental Cash Flow Information: Cash paid during the year for: Income taxes...................... $ -- $ -- $ -- $ 3.2 $ 3.2 ===== ======= ==== ====== ======= Interest.......................... $ -- $ 18.0 $ -- $ -- $ 18.0 ===== ======= ==== ====== =======
17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. UNLESS OTHERWISE INDICATED, REFERENCES IN THIS MD&A TO "WE", "OUR" AND THE "COMPANY" REFER TO FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND ITS SUBSIDIARIES TAKEN AS A WHOLE. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS IN THIS REPORT. SEE "OUTLOOK" AND "BUSINESS RISKS" BELOW. OVERVIEW We are one of the largest independent semiconductor companies focused solely on developing, manufacturing and selling high performance semiconductors critical to multiple end markets. We design, develop and market analog, discrete, interface and logic, non-volatile memory and optoelectronic semiconductors. Within our broad product portfolio, we focus on providing discrete and analog power management and interface solutions. Nearly two-thirds of our trade sales in the first quarter of 2002 were from discrete and analog products used directly in power applications such as voltage conversion, power regulation, power distribution, and power and battery management. With the acquisition in 2001 of the discrete power products business from Intersil Corporation, which we refer to as DPP, we believe that we are now the world's leading supplier of power analog and power discrete products. Our products are used as building block components in a wide variety of electronic applications, including sophisticated computers and internet hardware; communications; networking and storage equipment; industrial power supply and instrumentation equipment; portable digital consumer cameras, displays, audio/video devices, household appliances; and automotive ignition applications. Because of their basic functionality, our products provide customers with greater design flexibility than more highly integrated products and improve the performance of more complex devices or systems. Given these characteristics, our products have a wide range of applications. Our products are sold to customers in the personal computer, industrial, communications, consumer electronics and automotive markets. On March 20, 2002, we acquired the cross-point switch product line and associated intellectual property of I-Cube, Inc. (I-Cube) for approximately $1.0 million in cash, including related acquisition costs. Cross-point switches are critical to Internet infrastructure, data communications, telecommunications, broadcast video, test equipment and digital signal processing. On March 20, 2002, we sold our military and space-related discrete power product line to International Rectifier Corporation for approximately $29.6 million in cash. On March 25, 2002, we acquired Signal Processing Technologies, Inc. (SPT), the data conversion business and related design center of Toko, Inc. for approximately $4.0 million in cash, including related acquisition costs. SPT will add leading-edge converter products to our analog and mixed signal product offering. RESULTS OF OPERATIONS We generated net income of $2.7 million in the first quarter of 2002 compared to $1.6 million in the comparable period of 2001. During the first quarter of 2002, amortization of goodwill was stopped in accordance with SFAS No. 142. Had goodwill not been amortized in the first quarter of 2001, net income would have been $3.2 million. Excluding unusual (gains) charges and amortization of acquisition-related intangibles, pro forma net income (loss) was as follows:
THREE MONTHS ENDED -------------------- MARCH 31, APRIL 1, 2002 2001 --------- -------- (IN MILLIONS) Net income.................................................. $ 2.7 $ 1.6 Restructuring and impairments............................. 3.6 9.5 Purchased in-process research and development............. 1.7 12.8 Gain on sale of space and defense product line............ (20.5) -- Amortization of acquisition-related intangibles........... 9.3 10.4 Less associated tax effects............................... 2.1 (8.2) ------ ----- Pro forma net income (loss)................................. $ (1.1) $26.1 ====== =====
18 Restructuring and impairments in the first quarter of 2002 include $3.6 million for employee severance and other costs associated with approximately 150 salaried and hourly employees severed in the United States, Europe, Japan and Malaysia. Restructuring and impairments in the first quarter of 2001 include asset impairment charges related to the consolidation of the five-inch wafer fabrication line in South Portland, Maine ($8.3 million) as well as employee severance and other costs ($1.2 million) associated with approximately 300 salaried, hourly and temporary employees severed primarily in Cebu, the Philippines. Purchased in-process research and development was recorded in the first quarter of 2002 in connection with our acquisitions of I-Cube ($1.0 million) and SPT ($0.7 million). Purchased in-process research and development of $12.8 million was recorded in connection with our acquisition of DPP in the first quarter of 2001. Operating income was $9.8 million in the first quarter of 2002 compared to $18.6 million in the first quarter of 2001. Excluding restructuring and impairments and purchased in-process research and development, pro forma operating income was $15.1 million in the first quarter of 2002 compared to $40.9 million in the first quarter of 2001. The decrease in operating income is primarily due to an overall decline in the semiconductor industry as well as the economy generally, resulting in lower gross profit driven by lower prices, unit volumes and underutilization of our factories, as well as from lower contract manufacturing revenue. This decrease in lower gross profits has been partially offset by cost reductions in our operating expenses. On a segment basis, Analog had operating income of $5.6 million for the first quarter of 2002, compared to $4.0 million in the first quarter of 2001. The increase in Analog's operating income was primarily due to a decrease in revenues and gross margins offset by decreases in selling, general and administrative expenses and intangibles amortization, as a result of the implementation of SFAS No. 142. Discrete had operating income of $7.3 million in the first quarter of 2002 compared to operating income of $12.3 million in the first quarter of 2001. The decrease in Discrete's operating income was primarily due to a decrease in gross margins, coupled with an increase in research and development and selling, general and administrative expenses due primarily to a full quarter of the DPP expenses in the first quarter of 2002 as compared to the first quarter of 2001. Interface and Logic had operating income of $2.2 million in the first quarter 2002 compared to operating income of $21.2 million in the first quarter of 2001. The decrease in Interface and Logic's operating income was the result of a decrease in gross margin partially offset by decreases in research and development and selling, general and administrative expenses. Excluding depreciation and amortization of $41.3 million in the first quarter of 2002 and $40.5 million in the first quarter of 2001, restructuring and impairments, purchased in-process research and development and other income, earnings before interest, taxes depreciation and amortization (EBITDA) were $56.4 million in the first quarter of 2002 compared to $81.4 million in the first quarter of 2001. EBITDA is presented because we believe that it is a widely accepted financial indicator of an entity's ability to incur and service debt. Pro forma net income (loss) and pro forma operating income are presented because we use them as alternative measures of the operating performance of the business. EBITDA, pro forma net income, and pro forma operating income should not be considered as an alternative to net income, operating income, or other consolidated operations and cash flow data prepared in accordance with accounting principles generally accepted in the United States of America, as an indicator of our operating performance, or as an alternative to cash flow as a measure of liquidity. REVENUES Our revenues consist of trade sales to unaffiliated customers (96.8% of total revenues in the first quarter of 2002 and 95.5% of total revenues in the first quarter of 2001) and revenues from contract manufacturing services provided to National Semiconductor and Samsung Electronics (3.2% of total revenues in the first quarter 2002 and 4.5% of total revenues in the first quarter of 2001). Trade sales were $326.2 million in the first quarter of 2002 compared to $367.8 million for the first quarter of 2001. The decrease in trade sales was the result of lower unit volumes coupled with lower average selling prices. Analog revenues decreased 7.8% to $77.5 million in the first quarter of 2002 from $84.1 million in the first quarter of 2001. The decrease is a result of lower sales for low drop-out regulators and microcontrollers, which 19 are directed towards communications applications, offset by strength in sales of our Fairchild Power Switch, which is directed toward consumer applications. Discrete revenues increased 15.2% to $178.8 million in the first quarter 2002 compared to $155.2 million in the first quarter of 2001. The increase is primarily the result of a full quarter of revenue from our DPP acquisition, which occurred late in the first quarter of 2001. Interface and Logic revenues decreased 44.1% to $51.5 million in the first quarter of 2002 from $92.1 million in the first quarter of 2001. The decrease is a result of lower revenues from our mature products, as well as lower revenue from our Tiny Logic(TM) products as a result of the slow down in the communications market. As a percentage of trade sales, geographic trade sales for North America, Europe, Asia/Pacific (which for our geographic reporting purposes excludes Korea) and Korea were as follows for the three months ended March 31, 2002 and April 1, 2001:
THREE MONTHS ENDED -------------------- MARCH 31, APRIL 1, 2002 2001 --------- -------- North America............................................... 16% 21% Europe...................................................... 11 14 Asia/Pacific................................................ 51 47 Korea....................................................... 22 18 --- --- Total............................................. 100% 100% === ===
North American revenues decreased 33% in the first quarter 2002 compared to the first quarter of 2001. The North American sales region has been hardest hit by the inventory correction occurring in all end market segments, as well as weak economic conditions in the United States. European revenues decreased 28% in the first quarter of 2002 compared to the first quarter of 2001. They have been impacted by the same factors affecting North America. Revenues in our Asia/Pacific sales region decreased 4% in the first quarter of 2002 compared to the first quarter of 2001. The small year over year decrease in Asia/Pacific as compared to other regions is a function of our strong presence in this region. While revenues decreased 4% year over year driven by comparative weakness in the consumer and communications markets, sequentially, revenues in this region increased 1%. Sales in our Korean region increased 8% in the first quarter of 2002 compared to the first quarter of 2001. This increase was due to strong demand from our largest customer, Samsung Electronics. Contract manufacturing revenues decreased 38.9% to $10.7 million in the first quarter of 2002 compared to $17.5 million in the first quarter of 2001. The decrease in contract manufacturing revenue resulted from diminishing demand from both National Semiconductor and Samsung Electronics. GROSS PROFIT Gross profit was as follows for the three months ended March 31, 2001 and April 1, 2001:
THREE MONTHS ENDED ------------------------------------------- MARCH 31, APRIL 1, 2002 2001 --------- -------- (IN MILLIONS) Trade gross profit.................................. $77.6 23.8% $112.8 30.7% Contract manufacturing gross profit................. 2.0 18.7% 5.3 30.3% ----- ------ Total gross profit........................ $79.6 23.6% $118.1 30.7% ===== ======
The decrease in gross profit was primarily due to lower prices and unit volumes, an unfavorable product mix and lower capacity utilization. RESEARCH AND DEVELOPMENT Research and development expenses ("R&D") were $20.7 million, or 6.3% of trade sales, in the first quarter of 2002, compared to $23.5 million, or 6.4% of trade sales, in the first quarter of 2001. The decrease was due to spending reductions in response to softer market conditions, offset by increased R&D as a result of a full quarter of R&D expenses in 2002 from our DPP acquisition. 20 SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses ("SG&A") were $34.5 million, or 10.6% of trade sales, in the first quarter of 2002, compared to $43.3 million, or 11.8% of trade sales, in the first quarter of 2001. We have offset SG&A from our acquired businesses in 2001 with spending reductions in response to softer market conditions. AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES Amortization of acquisition-related intangibles was $9.3 million in the first quarter of 2002, compared to $10.4 million in the first quarter of 2001. The decrease in amortization is due to our adoption of FAS 142 ($2.1 million) offset by increases in intangible amortization as a result of a full quarter of amortization for our DPP acquisition as well as the result of our Impala acquisition in the latter part of 2001 ($1.0 million). INTEREST EXPENSE Interest expense was $28.6 million in the first quarter 2002 compared to $23.9 million in the first quarter of 2001. The increase in interest expense was principally the result of expense associated with the $350.0 million of 10 1/2% Senior Subordinated Notes we sold in the first quarter of 2001 as well as the $200.0 million of 5% Convertible Senior Subordinated Notes we sold in the fourth quarter of 2001. This increase is partially offset by a decrease in interest expense as a result of a reduction in our revolving credit facility balance. INTEREST INCOME Interest income was $2.5 million in the first quarter of 2002 compared to $7.4 million in the first quarter of 2001. The decrease in interest income for the first quarter of 2002 compared to the comparable period of 2001 was due to lower rates of return on our short-term investments. OTHER INCOME In the first quarter of 2002, we recorded a gain of $20.5 million related to the sale of our military and space-related discrete power product line. INCOME TAXES Income tax expense was $1.5 million for the first quarter of 2002 compared to $0.5 million for the first quarter of 2001. The effective tax rate for the first quarter of 2002 was 36% compared to 25% for the first quarter of 2001. The increase in our effective tax rate was due primarily to regional economic conditions resulting in decreased profits in certain low tax jurisdictions. LIQUIDITY AND CAPITAL RESOURCES We have a borrowing capacity of $300.0 million on a revolving basis for working capital and general corporate purposes, including acquisitions, under our senior credit facility. At March 31, 2002, adjusted for outstanding letters of credit, we had $299.2 million available under this senior credit facility. Our senior credit facility, the indentures governing our 10 1/8% Senior Subordinated Notes, 10 3/8% Senior Subordinated Notes, 10 1/2% Senior Subordinated Notes and 5.0% Convertible Senior Subordinated Notes and other debt instruments we may enter into in the future may, impose various restrictions and covenants on us which could potentially limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities. The restrictive covenants include limitations on consolidations, mergers and acquisitions, restrictions on creating liens, restrictions on paying dividends or making other similar restricted payments, restrictions on asset sales, restrictions on capital expenditures and limitations on incurring indebtedness, among other restrictions. The covenants in the senior credit facility relating to financial ratios also include a minimum interest coverage ratio and a maximum senior leverage ratio. Provided there are no further outstanding balances under the senior credit facility, compliance with these ratios is not required until March 31, 2003. The senior credit facility also limits our ability to modify our certificate of incorporation and bylaws, or enter into shareholder agreements, voting trusts or similar arrangements. Under our debt instruments, the subsidiaries of Fairchild Semiconductor Corporation cannot be 21 restricted, except to a limited extent, from paying dividends or making advances to Fairchild Semiconductor Corporation. We believe that funds generated from operations, together with existing cash, will be sufficient to meet our debt obligations over the next twelve months. We expect that existing cash and available funds from our senior credit facility and funds generated from operations will be sufficient to meet our anticipated operating requirements and to fund our research and development and planned capital expenditures for the next twelve months. We intend to invest approximately $145 to $155 million in 2002 to expand capacity primarily in support of in-sourcing of assembly and test capacity, including construction of our new facility in Suzhou, China, and our e-business initiatives. We frequently evaluate opportunities to sell additional equity or debt securities, obtain credit facilities from lenders or restructure our long-term debt to further strengthen our financial position. The sale of additional equity or convertible securities could result in additional dilution to our stockholders. Additional borrowing or equity investment may be required to fund future acquisitions. As of March 31, 2002, our cash and cash equivalents balance was $512.8 million, an increase of $8.4 million from December 30, 2001. During the first quarter of 2002, our operations provided $1.0 million in cash compared to $33.2 million of cash in the first quarter of 2001. The decrease in cash provided by operating activities is due to a decrease in the first quarter of 2002 in net income adjusted for non-cash items compared with the first quarter of 2001. Cash provided by (used in) investing activities during the first quarter of 2002 totaled $2.3 million, compared to ($395.1) million in the first quarter of 2001. The increase primarily results from a net cash inflow for acquisitions and divestitures of $24.6 million in the first quarter of 2002 versus a net cash outflow in the first quarter of 2001 for acquisitions and divestitures of $343.1 million. Cash provided by financing activities of $5.1 million for the first quarter of 2002 was primarily from proceeds from the issuance of common stock upon the exercise of options. Cash provided by financing activities of $337.7 million in the first quarter of 2001 was due primarily to proceeds from the issuance of the 10 1/2% Senior Subordinated Notes, net of debt issuance costs. It is customary practice in the semiconductor industry to enter into guaranteed purchase commitments or "take or pay" arrangements for purchases of certain equipment and raw materials. At March 31, 2002, obligations under these arrangements were not material to our consolidated financial statements. The table below summarizes aggregate maturities of long-term debt and future minimum lease payments under noncancelable operating leases as of March 31, 2002.
REMAINDER 1-3 4-5 AFTER CONTRACTUAL OBLIGATIONS TOTAL OF 2002 YEARS YEARS 5 YEARS - ----------------------- -------- --------- ----- ------ ------- (IN MILLIONS) Long-Term Debt.......................... $1,138.4 $ 0.2 $ 0.8 $210.7 $926.7 Operating Leases........................ 89.4 15.7 29.8 9.4 34.5 -------- ----- ----- ------ ------ Total......................... $1,227.8 $15.9 $30.6 $220.1 $961.2 ======== ===== ===== ====== ======
LIQUIDITY AND CAPITAL RESOURCES OF FAIRCHILD INTERNATIONAL, EXCLUDING SUBSIDIARIES Fairchild Semiconductor International, Inc. is a holding company, the principal asset of which is the stock of its wholly owned subsidiary, Fairchild Semiconductor Corporation. Fairchild Semiconductor International on a stand-alone basis had no cash flow from operations in the first three months of 2002, nor in the first three months of 2001. Fairchild Semiconductor International on a stand-alone basis has no cash requirements for the next twelve months. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The U.S. Securities and Exchange Commission has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and which require our most difficult, complex or subjective judgements or estimates. 22 Based on this definition, we believe our critical accounting policies include the policies of revenue recognition, sales reserves, inventory valuation and the impairment of long-lived assets. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies. On an on going basis, we evaluate the judgments and estimates underlying all of our accounting policies, including those related to customer sales allowances, product returns, bad debts, inventories, impairment of long-lived assets, deferred tax valuation allowances, restructuring reserves and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Materially different results in the amount and timing of our actual results for any period could occur if our management made different judgements or utilized different estimates. Revenue from the sale of semiconductor products is recognized when title transfers to the customer, including distributors, which is generally upon shipment. No revenue is recognized unless there is persuasive evidence of an arrangement, the price to the buyer is fixed or determinable, and the collectibility of the sales price is reasonably assured. Contract manufacturing revenues are recognized upon completion of the contracted service. Sales reserves generally fall into four categories: customer material return reserves, distributor contract sales debit reserves, prompt payment discount reserves, and other distribution reserves. Customer material returns result from product quality, administrative or other defect issues. Distributor contract sales debits are credits given to distributors to ensure distributor profitability on individual resale transactions. Prompt payment discounts are enticements given to customers to ensure payment is made in a timely manner. Customer material reserves, distributor contract sales debit reserves and prompt payment discount reserves are based upon historical rates of return or claim and any known, specifically identified unusual returns. Other sales reserves are recorded based upon individual contracts with distributors that may call for reimbursement of product scrapped or reimbursement of price changes that affect the distributors inventory carrying value. Historically, we have not experienced material differences between our estimated sales reserves and actual results. In determining the net realizable value of our inventories, we review the valuations of inventory considered excessively old and therefore subject to obsolescence and inventory in excess of customer backlog. We also adjust the valuation of inventory when estimated actual cost is significantly different than standard cost and to value inventory at the lower of cost or market. We assess the impairment of long-lived assets on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable based upon an estimate of future undiscounted cash flows. Factors we consider that could trigger an impairment review include the following: - significant underperformance relative to expected historical or projected future operating results - significant changes in the manner of our use of the acquired assets or the strategy for our overall business - significant negative industry or economic trends - significant decline in our stock price for a sustained period - our market capitalization relative to net book value - significant technological changes, which would render equipment and manufacturing process, obsolete. When we determine that the carrying value of any long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure impairment based on the difference between an asset's carrying value and an estimate of fair value, which may be determined based upon quotes or a projected discounted cash flow, using a discount rate determined by our management to be commensurate with our cost of capital and the risk inherent in our current business model. 23 FORWARD LOOKING STATEMENTS This quarterly report includes "forward-looking statements" as that term is defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements can be identified by the use of forward-looking terminology such as "we believe," "we expect," "we intend," "may," "will," "should," "seeks," "approximately," "plans," "estimates," "anticipates," or "hopeful," or the negative of those terms or other comparable terms, or by discussions of our strategy, plans or future performance. For example, the Outlook section below contains numerous forward-looking statements. All forward-looking statements in this quarterly report are made based on management's current expectations and estimates, which involve risks and uncertainties, including those described below and more specifically in the Business Risks section below. Among these factors are the following: changes in regional or global economic or political conditions (including as a result of terrorist attacks and responses to them); changes in demand for our products; changes in inventories at our customers and distributors; technological and product development risks; availability of manufacturing capacity; availability of raw materials; competitors' actions; loss of key customers; order cancellations or reduced bookings; changes in manufacturing yields or output; and significant litigation. Factors that may affect our operating results are described in the Business Risks section in the quarterly and annual reports we file with the Securities and Exchange Commission. Such risks and uncertainties could cause actual results to be materially different from those in the forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements in this quarterly report. It is our current policy to update our business outlook at least twice each quarter. The first update is near the beginning of each quarter, within the press release that announces the previous quarter's results. The business outlook below is consistent with the outlook included in our April 23, 2002 press release announcing first quarter results. The second update is within a press release issued approximately two months into each quarter. The current business outlook is accessible at the Investor Relations section of our website at investor.fairchildsemi.com. Toward the end of each quarter, we observe a "quiet period," when the outlook is not updated to reflect management's current expectations. The quiet period for the second quarter of 2002 will be from June 17, 2002 to July 23, 2002, when we plan to release our second quarter 2002 results. Except during quiet periods, the business outlook posted on our website reflects current guidance unless and until updated through a press release, SEC filing or other public announcement. During quiet periods, our business outlook, as posted on our website, announced in press releases and provided in quarterly, annual and special reports or other filings with the SEC, should be considered to be historical, speaking as of prior to the quiet period only and not subject to update by the company. During quiet periods, Fairchild Semiconductor representatives will not comment about the business outlook or the company's financial results or expectations. OUTLOOK We expect revenues in the second quarter of 2002 to be 3-5% higher than the first quarter, and currently expect revenue growth for the remainder of the year to follow normal seasonal trends, which means sequentially flat sales in the third quarter followed by stronger revenue growth in the fourth quarter. We expect higher factory utilization rates in second quarter to help improve our gross margins by 100-200 basis points sequentially. Pricing is firming for most of our new products but remains aggressive on some of our mature standard logic, linear and discrete product lines. During the second quarter, we will continue to focus on margin improvement through selective price increases and mix management. The full impact of this will not be felt until the beginning of the third quarter. As a result, we expect gross margins to continue to improve throughout the year due to a combination of higher factory utilization, improved product mix and slight price increases on our new products. For the second quarter, we expect our selling, general and administrative expenses (excluding amortization of intangibles) to stay roughly flat as a percentage of sales. We expect interest expense to average approximately $26 million per quarter. For purposes of computing EBITDA, pro forma net income and net income per share, we expect that depreciation and amortization will be roughly $33 million and amortization of acquisition-related intangibles to be approximately $9.5 million for the second quarter. Finally, we expect an outstanding diluted share count of approximately 106.5 million shares for the second quarter of 2002. 24 RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that an assembled workforce may no longer be accounted for as an identifiable intangible asset. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. This provision was effective upon adoption for goodwill acquired after June 30, 2001 and effective December 31, 2001 for goodwill acquired prior to June 30, 2001. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. We adopted the provisions of SFAS No. 141, effective in the third quarter of 2001, and SFAS No. 142 effective December 31, 2001. We were required to evaluate our existing intangible assets and goodwill that were acquired in prior purchase business combinations, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Accordingly, assembled workforce of $3.5 million was reclassified into goodwill in the first quarter of 2002. We were also required to reassess the useful lives and residual values of all identifiable intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments during the first quarter of 2002. No such adjustments were deemed necessary. SFAS No. 142 required us to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this we identified our reporting units and determined the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. Identified reporting units which carry goodwill include domestic analog and power device analog (Korea), which comprise our Analog segment, discrete power products and power device discrete (Korea) which are part of our Discrete segment and Optoelectronics, which does not meet the requirements of a segment as defined in SFAS No. 131. We then determined the fair value of each reporting unit and compared it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and we must perform the second step of the transitional impairment test. In the second step, we must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. We determined the fair value of our reporting units using discounted future cash flows. For each reporting unit, we determined that its fair value exceeded its carrying value, therefore no impairment is indicated. SFAS No. 142 requires that future impairment charges be recorded as a component of operating income. During the first quarter, we adopted SFAS No. 143, Accounting For Asset Retirement Obligations, issued in August 2001, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and for the associated retirement costs. SFAS No. 143 applies to all entities that have a legal obligation associated with the retirement of a tangible long-lived asset. Implementation of SFAS No. 143 did not have a material impact on our financial condition or results of operations. During the first quarter, we adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, issued in October 2001, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Implementation of SFAS No. 144 did not have a material impact on our financial condition or results of operations. 25 BUSINESS RISKS Our business is subject to a number of risks and uncertainties, which could cause actual results to differ materially from those expressed in forward-looking statements. The risks described below are not the only ones facing our company. Additional risks not currently known to us or that we currently deem immaterial also may impair our business operations: DOWNTURNS IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY OR CHANGES IN END USER MARKET DEMANDS COULD REDUCE THE VALUE OF OUR BUSINESS. The semiconductor industry is highly cyclical, and the value of our business may decline during the "down" portion of these cycles. During 1998 and into 1999, we, as well as many others in our industry, experienced significant declines in the pricing of our products as customers reduced demand forecasts and manufacturers reduced prices to keep capacity utilization high. We believe these trends were due primarily to the Asian financial crisis during that period and excess personal computer inventories. Beginning in the fourth quarter of 2000 and throughout 2001, we and the rest of the semiconductor industry experienced backlog cancellations and reduced demand for our products, resulting in revenue declines, due to excess inventories at computer and telecommunications equipment manufacturers and general economic conditions, especially in the technology sector. We may experience renewed, possibly more severe and prolonged, downturns in the future as a result of such cyclical changes. Even as demand increases following such downturns, our profitability may not increase because of price competition that historically accompanies recoveries in demand. In addition, we may experience significant changes in our profitability as a result of variations in sales, changes in product mix, changes in end user markets and the costs associated with the introduction of new products. The markets for our products depend on continued demand for personal computers, cellular telephones and consumer electronics and automotive and industrial goods, and these end user markets may experience changes in demand that will adversely affect our prospects. WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS TO SATISFY CHANGES IN CONSUMER DEMANDS. Our failure to develop new technologies, or react to changes in existing technologies, could materially delay development of new products, which could result in decreased revenues and a loss of market share to our competitors. Rapidly changing technologies and industry standards, along with frequent new product introductions, characterize the semiconductor industry. Our financial performance depends on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. We may not successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner. Products or technologies developed by other companies may render our products or technologies obsolete or noncompetitive. A fundamental shift in technologies in our product markets could have a material adverse effect on our competitive position within our industry. OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD ADVERSELY AFFECT OUR FUTURE PERFORMANCE AND GROWTH. Failure to protect our existing intellectual property rights may result in the loss of valuable technologies or having to pay other companies for infringing on their intellectual property rights. We rely on patent, trade secret, trademark and copyright law to protect such technologies. Some of our technologies are not covered by any patent or patent application, and we cannot assure that: - the patents owned by us or numerous other patents which third parties license to us will not be invalidated, circumvented, challenged or licensed to other companies; - any of our pending or future patent applications will be issued within the scope of the claims sought by us, if at all. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in some foreign countries. We also seek to protect our proprietary technologies, including technologies that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors' rights agreements with our collaborators, advisors, employees and consultants. We cannot assure you that these agreements will not be 26 breached, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of such research. Some of our technologies have been licensed on a non-exclusive basis from National Semiconductor, Samsung Electronics and other companies which may license such technologies to others, including, in the case of National Semiconductor, commencing on March 11, 2002, our competitors. In addition, under a technology licensing and transfer agreement, National Semiconductor has limited royalty-free, worldwide license rights (without right to sublicense) to some of our technologies. If necessary or desirable, we may seek licenses under patents or intellectual property rights claimed by others. However, we cannot assure you that we will obtain such licenses or that the terms of any offered licenses will be acceptable to us. The failure to obtain a license from a third party for technologies we use could cause us to incur substantial liabilities and to suspend the manufacture or shipment of products or our use of processes requiring the technologies. OUR FAILURE TO OBTAIN OR MAINTAIN THE RIGHT TO USE CERTAIN TECHNOLOGIES MAY NEGATIVELY AFFECT OUR FINANCIAL RESULTS. Our future success and competitive position depend in part upon our ability to obtain or maintain proprietary technologies used in our principal products, which is achieved in part by defending claims by competitors of intellectual property infringement. The semiconductor industry is characterized by litigation regarding patent and other intellectual property rights. We are involved in lawsuits, and could become subject to other lawsuits, in which it is alleged that we have infringed upon the patent or other intellectual property rights of other companies. Our involvement in existing and future intellectual property litigation could result in significant expense to our company, adversely affecting sales of the challenged product or technologies and diverting the efforts of our technical and management personnel, whether or not such litigation is resolved in our favor. In the event of an adverse outcome as a defendant in any such litigation, we may be required to: - pay substantial damages; - indemnify our customers for damages they might suffer if the products they purchase from us violate the intellectual property rights of others; - stop our manufacture, use, sale or importation of infringing products; - expend significant resources to develop or acquire non-infringing technologies; - discontinue processes; or - obtain licenses to the intellectual property we are found to have infringed. We cannot assure you that we would be successful in such development or acquisition or that such licenses would be available under reasonable terms. Any such development, acquisition or license could require the expenditure of substantial time and other resources. WE MAY NOT BE ABLE TO CONSUMMATE FUTURE ACQUISITIONS OR SUCCESSFULLY INTEGRATE ACQUISITIONS INTO OUR BUSINESS. We have made nine acquisitions since we became an independent company in 1997 and we plan to pursue additional acquisitions of related businesses. We believe the semiconductor industry is going through a period of consolidation, and we expect to participate in this development. The expense incurred in consummating the future acquisition of related businesses, or our failure to integrate such businesses successfully into our existing businesses, could result in our company incurring unanticipated expenses and losses. In addition, we may not be able to identify or finance additional acquisitions or realize any anticipated benefits from acquisitions we do complete. We are constantly pursuing acquisition opportunities and consolidation possibilities and are in various stages of due diligence or preliminary discussions with respect to a number of potential transactions, some of which would be significant. No material potential transactions are subject to a letter of intent or otherwise so far advanced as to make the transaction reasonably certain. Should we successfully acquire another business, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial 27 resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with acquisitions include: - unexpected losses of key employees or customers of the acquired company; - conforming the acquired company's standards, processes, procedures and controls with our operations; - coordinating new product and process development; - hiring additional management and other critical personnel; - negotiating with labor unions; and - increasing the scope, geographic diversity and complexity of our operations. In addition, we may encounter unforeseen obstacles or costs in the integration of other businesses we acquire. Possible future acquisitions could result in the incurrence of additional debt, contingent liabilities and amortization expenses related to goodwill and other intangible assets, all of which could have a material adverse effect on our financial condition and operating results. PRODUCTION TIME AND THE OVERALL COST OF PRODUCTS COULD INCREASE IF WE WERE TO LOSE ONE OF OUR PRIMARY SUPPLIERS OR IF A PRIMARY SUPPLIER INCREASED THE PRICES OF RAW MATERIALS. Our manufacturing operations depend upon obtaining adequate supplies of raw materials on a timely basis. Our results of operations could be adversely affected if we were unable to obtain adequate supplies of raw materials in a timely manner or if the costs of raw materials increased significantly. We purchase raw materials such as silicon wafers, lead frames, mold compound, ceramic packages and chemicals and gases from a limited number of suppliers on a just-in-time basis. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. In addition, we subcontract a portion of our wafer fabrication and assembly and test operations to other manufacturers, including Carsem, Amkor, NS Electronics (Bangkok) Ltd., Samsung Electronics, Korea Micro Industry and ChipPAC, Inc. Our operations and ability to satisfy customer obligations could be adversely affected if our relationships with these subcontractors were disrupted or terminated. DELAYS IN BEGINNING PRODUCTION AT NEW FACILITIES, EXPANDING CAPACITY AT EXISTING FACILITIES, IMPLEMENTING NEW PRODUCTION TECHNIQUES, OR IN CURING PROBLEMS ASSOCIATED WITH TECHNICAL EQUIPMENT MALFUNCTIONS, ALL COULD ADVERSELY AFFECT OUR MANUFACTURING EFFICIENCIES. Our manufacturing efficiency is an important factor in our profitability, and we cannot assure you that we will be able to maintain our manufacturing efficiency or increase manufacturing efficiency to the same extent as our competitors. Our manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields. In addition, we are currently engaged in an effort to expand capacity at some of our manufacturing facilities. As is common in the semiconductor industry, we have from time to time experienced difficulty in beginning production at new facilities or in effecting transitions to new manufacturing processes. As a consequence, we have suffered delays in product deliveries or reduced yields. We may experience delays or problems in bringing planned new manufacturing capacity to full production. We may also experience problems in achieving acceptable yields, or experience product delivery delays in the future with respect to existing or planned new capacity as a result of, among other things, capacity constraints, construction delays, upgrading or expanding existing facilities or changing our process technologies, any of which could result in a loss of future revenues. Our operating results could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if revenues do not increase proportionately. A SIGNIFICANT PORTION OF OUR SALES ARE MADE BY DISTRIBUTORS WHO CAN TERMINATE THEIR RELATIONSHIPS WITH US WITH LITTLE OR NO NOTICE. THE TERMINATION OF A DISTRIBUTOR COULD REDUCE SALES AND RESULT IN INVENTORY RETURNS. Distributors accounted for 58% of our net trade sales for the three months ended March 31, 2002. Our five domestic distributors accounted for 5% of our net trade sales for the three months ended March 31, 2002. As a general rule, we do not have long-term agreements with our distributors and they may terminate their relationships with us with little or no advance notice. Distributors generally offer competing products. The loss 28 of one or more of our distributors, or the decision by one or more of them to reduce the number of our products they offer or to carry the product lines of our competitors, could have a material adverse effect on our business, financial condition and results of operations. The termination of a significant distributor, whether at our or the distributor's initiative, or a disruption in the operations of one or more of our distributors, could reduce our net sales in a given quarter and could result in an increase in inventory returns. THE SEMICONDUCTOR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD REDUCE THE VALUE OF AN INVESTMENT IN OUR COMPANY. The semiconductor industry is, and the multi-market semiconductor product markets in particular are, highly competitive. Competition is based on price, delivery terms, product performance, quality, reliability and customer service. In addition, even in strong markets, price pressures may emerge as competitors attempt to gain a greater market share by lowering prices. Competition in the various markets in which we participate comes from companies of various sizes, many of which are larger and have greater financial and other resources than we have and thus are better able to pursue acquisition candidates and can better withstand adverse economic or market conditions. In addition, companies not currently in direct competition with us may introduce competing products in the future. OUR INTERNATIONAL OPERATIONS SUBJECT OUR COMPANY TO RISKS NOT FACED BY DOMESTIC COMPETITORS. Through our subsidiaries we maintain significant operations in the Philippines, Malaysia and South Korea and also operate facilities in China and Singapore. We also have sales offices and customers around the world. The following are risks inherent in doing business on an international level: - economic and political instability; - foreign currency fluctuations; - transportation delays; - trade restrictions; - work stoppages; and - the laws, including tax laws of, and the policies of the United States toward, countries in which we manufacture our products. THE POWER DEVICE BUSINESS SUBJECTS OUR COMPANY TO RISKS INHERENT IN DOING BUSINESS IN KOREA, INCLUDING LABOR RISK, POLITICAL RISK AND CURRENCY RISK. As a result of the acquisition of the power device business in 1999, we have significant operations in South Korea and are subject to risks associated with doing business in that country. In addition to other risks disclosed relating to international operations, some businesses in South Korea are subject to labor unrest. Also, relations between South Korea and North Korea have been tense over most of South Korea's history. We cannot assure you as to whether or when this situation will be resolved or change abruptly as a result of current or future events. An adverse change in economic or political conditions in South Korea or in its relations with North Korea could have a material adverse effect on our Korean subsidiary and our company. Our power device business' sales are denominated primarily in U.S. dollars while a significant portion of its costs of goods sold and its operating expenses are denominated in South Korean won. Although we have taken steps to fix the costs subject to currency fluctuations and to balance won revenues and won costs, a significant change in this balance, coupled with a significant change in the value of the won relative to the dollar, could have a material adverse effect on our financial performance and results of operations. In addition, an unfavorable change in the value of the won could require us to write down our won-denominated assets WE ENTERED INTO A NUMBER OF LONG-TERM SUPPLY AND SUPPORT CONTRACTS WITH SAMSUNG ELECTRONICS IN CONNECTION WITH OUR ACQUISITION OF ITS POWER DEVICE BUSINESS IN 1999. ANY DECREASE IN THE PURCHASE REQUIREMENTS OF SAMSUNG ELECTRONICS OR ITS INABILITY TO MEET ITS CONTRACTUAL OBLIGATIONS COULD SUBSTANTIALLY REDUCE OUR FINANCIAL PERFORMANCE. 29 As a result of the acquisition of Samsung Electronics' power device business in 1999, we have numerous arrangements with Samsung Electronics, including arrangements relating to product sales, designation as a vendor to affiliated Samsung companies and other services. Any material adverse change in the purchase requirements of Samsung Electronics, in its ability to supply the agreed-upon services or in its ability to fulfill its other obligations could have a material adverse effect on our results of operations. Although historically the power device business generated significant revenues from the sale of products to affiliated Samsung companies, we cannot assure you that we will be able to sell products to affiliated Samsung companies or that the designation of the power device business as a vendor to those affiliated Samsung companies will generate any revenues for our company. Furthermore, under the Korean Fair Trade Law, the Fair Trade Commission may issue an order requiring a change in the terms and conditions of the agreements between us and Samsung Electronics if it concludes that Samsung Electronics has provided us with undue support or discriminated against our competitors. A CHANGE IN FOREIGN TAX LAWS OR A DIFFERENCE IN THE CONSTRUCTION OF CURRENT FOREIGN TAX LAWS BY RELEVANT FOREIGN AUTHORITIES COULD RESULT IN US NOT RECOGNIZING THE BENEFITS WE ANTICIPATED IN CONNECTION WITH THE TRANSACTION STRUCTURE USED TO CONSUMMATE THE ACQUISITION OF THE POWER DEVICE BUSINESS. The transaction structure we used for the acquisition of the power device business is based on assumptions about the various tax laws, including withholding tax, and other relevant laws of foreign jurisdictions. In addition, our Korean subsidiary was granted a ten-year tax holiday under Korean law in 1999. The first seven years are tax-free, followed by three years of income taxes at 50% of the statutory rate. In 2000, the tax holiday was extended such that the exemption amounts were increased to 75% in the eighth year and a 25% exemption was added to the eleventh year. If our assumptions about tax and other relevant laws are incorrect, or if foreign taxing jurisdictions were to change or modify the relevant laws, or if our Korean subsidiary were to lose its tax holiday, we could suffer adverse tax and other financial consequences or lose the benefits anticipated from the transaction structure we used to acquire that business. WE PLAN TO SIGNIFICANTLY EXPAND OUR MANUFACTURING OPERATIONS IN CHINA AND, AS A RESULT, WILL BE INCREASINGLY SUBJECT TO RISKS INHERENT IN DOING BUSINESS IN CHINA, WHICH MAY ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE. In 2001, we acquired land in Suzhou, Jiangsu Province, People's Republic of China and in February 2002 began construction of the first phase of an 800,000 square foot assembly and test facility there. We are hopeful that a significant portion of our future revenue will result from the Chinese markets in which our products are sold, and from demand in China for goods that include our products. We also plan to export products out of China from the new Suzhou facility. In addition, since 2000 we have operated an optoelectronics manufacturing facility in Wuxi, China. Our ability to operate in China may be adversely affected by changes in that country's laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. In addition, our results of operations in China are subject to the economic and political situation there. We believe that our operations in China are in compliance with all applicable legal and regulatory requirements. However, there can be no assurance that China's central or local governments will not impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures. Changes in the political environment or government policies could result in revisions to laws or regulations or their interpretation and enforcement, increased taxation, restrictions on imports, import duties or currency revaluations. In addition, a significant destabilization of relations between China and the United States could result in restrictions or prohibitions on our operations or the sale of our products in China. The legal system of China relating to foreign trade is relatively new and continues to evolve. There can be no certainty as to the application of its laws and regulations in particular instances. Enforcement of existing laws or agreements may be sporadic and implementation and interpretation of laws inconsistent. Moreover, there is a high degree of fragmentation among regulatory authorities resulting in uncertainties as to which authorities have jurisdiction over particular parties or transactions. 30 WE ARE SUBJECT TO MANY ENVIRONMENTAL LAWS AND REGULATIONS THAT COULD AFFECT OUR OPERATIONS OR RESULT IN SIGNIFICANT EXPENSES. Increasingly stringent environmental regulations restrict the amount and types of pollutants that can be released from our operations into the environment. While historically the cost of compliance with environmental laws has not had a material adverse effect on our results of operations, compliance with these and any future regulations could require significant capital investments in pollution control equipment or changes in the way we make our products. In addition, because we use hazardous and other regulated materials in our manufacturing processes, we are subject to risks of liabilities and claims, regardless of fault, resulting from accidental releases, including personal injury claims and civil and criminal fines, any of which could be material to our cash flow or earnings. For example: - we currently are remediating contamination at some of our operating plant sites; - we have been identified as a potentially responsible party at a number of Superfund sites where we (or our predecessors) disposed of wastes in the past; and - significant regulatory and public attention on the impact of semiconductor operations on the environment may result in more stringent regulations, further increasing our costs. Although most of our known environmental liabilities are covered by indemnities from Raytheon Company, National Semiconductor or Samsung Electronics, these indemnities are limited to conditions that occurred prior to the consummation of those transactions with those companies. Moreover, we cannot assure you that their indemnity obligations to us for the covered liabilities will be adequate to protect us. WE MAY NOT BE ABLE TO ATTRACT OR RETAIN THE TECHNICAL OR MANAGEMENT EMPLOYEES NECESSARY TO REMAIN COMPETITIVE IN OUR INDUSTRY. Our continued success depends on the retention and recruitment of skilled personnel, including technical, marketing, management and staff personnel. In the semiconductor industry, the competition for qualified personnel, particularly experienced design engineers and other technical employees, is intense. There can be no assurance that we will be able to retain our current personnel or recruit the key personnel we require. In addition, we do not have employment agreements with most members of our senior management team. A SUBSTANTIAL NUMBER OF SHARES OF OUR COMPANY'S COMMON STOCK ARE OWNED BY A LIMITED NUMBER OF PERSONS, AND THEIR INTERESTS MAY CONFLICT WITH YOUR INTERESTS. On March 31, 2002, Affiliates of Citigroup Inc., and our directors and executive officers together own approximately 29.4% of the outstanding shares of our Class A Common Stock (including shares underlying vested option held by our directors and executive officers). By virtue of such stock ownership, such persons have the power to significantly influence our affairs and are able to influence the outcome of matters required to be submitted to stockholders for approval, including the election of directors and the amendment of our corporate charter and bylaws. Such persons may exercise their influence over us in a manner detriment to the interests of our stockholders or bondholders. WE ARE A LEVERAGED COMPANY WITH A DEBT TO EQUITY RATIO OF APPROXIMATELY 1.4 TO 1, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR ABILITY TO GROW AND COMPETE. At March 31, 2002, we had total long-term debt of $1,138.0 million and a ratio of debt to equity of approximately 1.4 to 1. Our substantial indebtedness could have important consequences. For example, it could: - require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; - increase the amount of our interest expense, because certain of our borrowings (namely borrowings under our senior credit facility, which is currently undrawn) are at variable rates of interest, which, if interest rates increase, could result in higher interest expense; - increase our vulnerability to general adverse economic and industry conditions; 31 - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; - restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities; - make it more difficult for us to satisfy our obligations with respect to the instruments governing our indebtedness; - place us at a competitive disadvantage compared to our competitors that have less indebtedness; and - limit, along with the financial and other restrictive covenants in our debt instruments, among other things, our ability to borrow additional funds, dispose of assets or pay cash dividends. Failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. DESPITE CURRENT INDEBTEDNESS LEVELS, WE MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE INDEBTEDNESS. INCURRING MORE INDEBTEDNESS COULD EXACERBATE THE RISKS DESCRIBED ABOVE. We may be able to incur substantial additional indebtedness in the future. The indenture governing Fairchild Semiconductor Corporation's outstanding 5% Convertible Senior Subordinated Notes Due 2008 does not limit the amount of additional debt that we may incur. Although the terms of the indentures governing Fairchild Semiconductor Corporation's outstanding 10 1/8% Senior Subordinated Notes, its outstanding 10 3/8% Senior Subordinated Notes, its outstanding 10 1/2% Senior Subordinated Notes and the credit agreement relating to the senior credit facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, additional indebtedness incurred in compliance with these restrictions could be substantial. The senior credit facility permits borrowings of up to $299.2 million. As of March 31, 2002 we had $300.0 million available under this revolving credit facility. If new debt is added to our subsidiaries' current debt levels, the substantial risks described above would intensify. WE MAY NOT BE ABLE TO GENERATE THE NECESSARY AMOUNT OF CASH TO SERVICE OUR INDEBTEDNESS, WHICH MAY REQUIRE US TO REFINANCE OUR INDEBTEDNESS OR DEFAULT ON OUR SCHEDULED DEBT PAYMENTS. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. Our historical financial results have been, and our future financial results are anticipated to be, subject to substantial fluctuations. We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule or at all, or that future borrowings will be available to us under our senior credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. In addition, because our senior credit facility has variable interest rates, the cost of those borrowings will increase if market interest rates increase. If we are unable to meet our expenses and debt obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets or raise equity. We cannot assure you that we would be able to refinance any of our indebtedness, sell assets or raise equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. RESTRICTIONS IMPOSED BY THE CREDIT AGREEMENT RELATING TO OUR SENIOR CREDIT FACILITY, THE INDENTURES GOVERNING FAIRCHILD SEMICONDUCTOR CORPORATION'S 10 1/8% SENIOR SUBORDINATED NOTES, ITS 10 3/8% SENIOR SUBORDINATED NOTES, AND ITS 10 1/2% SENIOR SUBORDINATED NOTES RESTRICT OR PROHIBIT OUR ABILITY TO ENGAGE IN OR ENTER INTO SOME BUSINESS OPERATING AND FINANCING ARRANGEMENTS, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO TAKE ADVANTAGE OF POTENTIALLY PROFITABLE BUSINESS OPPORTUNITIES. The operating and financial restrictions and covenants in most of our debt instruments, such as the credit agreement relating to our senior credit facility, the indenture governing Fairchild Semiconductor Corporation's 10 1/2% Senior Subordinated Notes, the indenture governing its 10 1/8% Senior Subordinated Notes and the indenture governing its 10 3/8% Senior Subordinated Notes may limit our ability to finance our future operations or capital needs or engage in other business activities that may be in our interests. These debt instruments impose significant operating and financial restrictions on us that affect our ability to incur additional indebtedness or create liens on our assets, pay dividends, sell assets, engage in mergers or 32 acquisitions, make investments or engage in other business activities. These restrictions could place us at a disadvantage relative to competitors not subject to such limitations. In addition, the credit agreement governing our senior credit facility contains other and more restrictive covenants and limits us from prepaying our other indebtedness. The senior credit facility also requires us to maintain specified financial ratios. These financial ratios become more restrictive over the life of the senior credit facility. Our ability to meet those financial ratios can be affected by events beyond our control, and we cannot assure you that we will meet those ratios. Provided there are no further outstanding balances under our senior credit facility, compliance with these covenants in the credit agreement is not required until March 31, 2003. After that date, or earlier if we borrow money under the credit facility, a breach of any of these covenants, ratios or restrictions could result in an event of default under the senior credit facility. Upon the occurrence of an event of default under the senior credit facility, the lenders could elect to declare all amounts outstanding under the senior credit facility, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure the indebtedness. If the lenders under the senior credit facility accelerate the payment of the indebtedness, we cannot assure you that our assets would be sufficient to repay in full that indebtedness and our other indebtedness. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosure about Market Risk, in Fairchild Semiconductor International's annual report on Form 10-K for the year ended December 30, 2001 and under the subheading "Quantitative and Qualitative Disclosures about Market Risk" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 48 of the 10-K. 33 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We have agreed in principle to settle the patent infringement lawsuit filed against us by Siliconix Incorporated in 1999 in the United States District Court for the Northern District of California. The terms of the settlement agreed in principle are not material to our financial position and are not expected to have a material effect on our future results of operations. From time to time we are involved in legal proceedings in the ordinary course of business. We believe that there is no such ordinary course litigation pending that could have, individually or in the aggregate, a material adverse effect on our business, financial condition, results of operations or cash flows. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.01 Non-Qualified Stock Option Agreement, dated February 22, 2002, under the Restated Stock Option Plan between the registrant and each of Kirk P. Pond, Joseph R. Martin and Daniel E. Boxer. 10.02 Non-Qualified Stock Option Agreement, dated February 22, 2002, under the Restated Stock Option Plan between the registrant and certain other executive officers. 10.03 Non-Qualified Stock Option Agreement, dated February 7, 2002 or February 28, 2002, under the Restated Stock Option Plan between the registrant and each of its non-employee directors. 10.04 Nonstatutory Stock Option Agreement, dated February 22, 2002, under the 2000 Executive Stock Option Plan between the registrant and each of Kirk P. Pond, Joseph R. Martin and Daniel E. Boxer. 10.05 Nonstatutory Stock Option Agreement, dated February 22, 2002, under the 2000 Executive Stock Option Plan between the registrant and certain other executive officers. 10.06 Employment letter with John M. Watkins, Jr.
(b) Reports on Form 8-K On January 23, 2002, we filed a special report on Form 8-K relating to financial information for the three and twelve months ended December 30, 2001 and forward-looking statements relating to the first quarter of 2002 as announced in a press release issued January 22, 2002. The press release is incorporated in, and filed as an exhibit to, the special report. On February 21, 2002, we filed a special report on Form 8-K relating to the update of our forward-looking guidance for the first quarter of 2002, as announced in a press release dated February 20, 2002. The press release is incorporated in, and filed as an exhibit to, the special report. On March 11, 2002, we filed a special report on Form 8-K relating to the filing of our audited financial statements as of and for the year ended December 30, 2001 together with Management's Discussion and Analysis of Financial Condition and Results of Operations for the periods included in such Financial Statements as well as to announce the agreement in principle reached with Siliconix Incorporated to settle the patent infringement lawsuit filed against us. The press release is incorporated in, and filed as an exhibit to, the special report. ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 34 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Fairchild Semiconductor International, Inc. By: /s/ DAVID A. HENRY ------------------------------------ David A. Henry Vice President, Corporate Controller (Principal Accounting Officer) Date: May 15, 2002 35 EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.01 Non-Qualified Stock Option Agreement, dated February 22, 2002, under the Restated Stock Option Plan between the registrant and each of Kirk P. Pond, Joseph R. Martin and Daniel E. Boxer. 10.02 Non-Qualified Stock Option Agreement, dated February 22, 2002, under the Restated Stock Option Plan between the registrant and certain other executive officers. 10.03 Non-Qualified Stock Option Agreement, dated February 7, 2002 or February 28, 2002, under the Restated Stock Option Plan between the registrant and each of its non-employee directors. 10.04 Nonstatutory Stock Option Agreement, dated February 22, 2002, under the 2000 Executive Stock Option Plan between the registrant and each of Kirk P. Pond, Joseph R. Martin and Daniel E. Boxer. 10.05 Nonstatutory Stock Option Agreement, dated February 22, 2002, under the 2000 Executive Stock Option Plan between the registrant and certain other executive officers. 10.06 Employment letter with John M. Watkins, Jr.
36 EX-10.1 3 b43116fcex10-1.txt NON-QUALIFIED STOCK OPTION AGREEMENT Exhibit 10.01 Non-Qualified Stock Option Agreements in the following form were entered into by each of the following executive officers covering the following respective numbers of underlying shares of common stock: Kirk P. Pond 505,400 shares Joseph R. Martin 303,200 shares Daniel E. Boxer 153,000 shares [Fairchild Semiconductor logo] Fairchild Semiconductor International, Inc. Restated Stock Option Plan Non-Qualified Stock Option Agreement This is a Non-Qualified Stock Option Agreement dated February 22, 2002 (the Grant Date) between Fairchild Semiconductor International, Inc. (the Company) and [name of executive officer], a salaried employee of the Company or one of its subsidiaries (you or the Optionee).
- ------------------------------------------------------------------------------------------------------------------------------------ The Company grants you the option to purchase up to [number of shares] shares of the Company's Class A Option Grant; Common Stock at an exercise price of $23.80 per share. This option grant is subject to the terms of the Exercise Price Company's Restated Stock Option Plan, a copy of which is enclosed with this agreement, as well as to the terms of this agreement, and your Employment Agreement dated March 11, 2000 (your "Employment Agreement"). This grant under the Restated Stock Option Plan has been authorized by the board of directors as part of annual grants to employees of the Company. - ------------------------------------------------------------------------------------------------------------------------------------ The term of your option is 10 years plus one day from the Grant Date. Your option terminates at the end of Option Term; the term and cannot be exercised after the term. You can exercise your option only to the extent it has Vesting vested. Your option will vest in increments, as follows: Vesting Date Percentage Vested (including portion that vested the preceding year) 1st Anniversary of Grant Date.........................................25% 2nd Anniversary of Grant Date.........................................50% 3rd Anniversary of Grant Date.........................................75% 4th Anniversary of Grant Date........................................100% provided that your option will vest in its entirety upon your retirement from the Company after March 11, 2003 in accordance with the terms of your employment agreement with the Company, or otherwise in accordance with other agreements governing your employment. - ------------------------------------------------------------------------------------------------------------------------------------ You must remain an employee of the Company or a subsidiary to be able to exercise your option, except as Termination of follows, or as otherwise provided in any agreement governing your employment with the Company: Employment Death, Disability, Certain Cases of Retirement, Qualifying Termination. In the event your employment terminates as a result of your (i) death, (ii) Disability, (iii) retirement upon or following the expiration of the initial term of your Employment Agreement or (iv) Qualifying Termination, your option may thereafter be exercised in whole or in part at any time before the expiration of the option term. All other cases. If your employment terminates for any reason other than those provided in the preceding paragraph, your option may be exercised to the extent provided by the Company's broad-based stock option plans. - ------------------------------------------------------------------------------------------------------------------------------------ Your option is not transferable except by will or the laws of decent and distribution. During your lifetime Transferability only you can exercise your option. This option shall not be subject to attachment or similar process. Any attempted sale, pledge, assignment, transfer or other disposition of your option contrary to the provisions of this agreement, or the levy of any attachment or similar process upon your option, shall be null and void without effect. - ------------------------------------------------------------------------------------------------------------------------------------ Nothing in this agreement gives you the right to remain employed by the Company of any subsidiary. This Miscellaneous agreement shall be governed by the laws of the State of Maine, without regard to conflicts of laws principles. The section and paragraph headings in this agreement are for convenience of reference only and shall not affect the construction or interpretation of this agreement. - ------------------------------------------------------------------------------------------------------------------------------------ Your signature and the signature of an authorized officer of the Company below indicate your and the Signatures Company's agreement to the terms of this Non-Qualified Stock Option Agreement as of the Grant Date. OPTIONEE: FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. [signature of executive officer] /s/ Kirk P. Pond Kirk P. Pond ------------------------------------- Chairman, President and CEO [name of executive officer] [identification number of executive officer] - ------------------------------------------------------------------------------------------------------------------------------------
EX-10.2 4 b43116fcex10-2.txt NON-QUALIFIED STOCK OPTION AGREEMENT Exhibit 10.02 Non-Qualified Stock Option Agreements in the following form were entered into by each of the following executive officers covering the following respective numbers of underlying shares of common stock: Keith Jackson 72,600 shares John M. Watkins, Jr. 37,300 shares [Fairchild Semiconductor logo] Fairchild Semiconductor International, Inc. Restated Stock Option Plan Non-Qualified Stock Option Agreement This is a Non-Qualified Stock Option Agreement dated February 22, 2002 (the Grant Date) between Fairchild Semiconductor International, Inc. (the Company) and [name of executive officer], a regular salaried employee of the Company or one of its subsidiaries (you or the Optionee).
- ------------------------------------------------------------------------------------------------------------------------------------ Option Grant; The Company grants you the option to purchase up to [number of shares] shares of the Company's Class A Exercise Price Common Stock at an exercise price of $23.80 per share. This option grant is subject to the terms of the Company's Restated Stock Option Plan, a copy of which is enclosed with this agreement, and to the terms of this agreement. If there is a conflict between the terms of this agreement and those of the plan, the terms of the plan will govern. - ------------------------------------------------------------------------------------------------------------------------------------ Option Term; The term of your option is 10 years plus one day from the Grant Date. Your option terminates at the end of Vesting the term and cannot be exercised after the term. You can exercise your option only to the extent it has vested. Your option will vest in increments, as follows: Vesting Date Percentage Vested (included portion that vested the preceding year) 1st Anniversary of Grant Date...........................................25% 2nd Anniversary of Grant Date...........................................50% 3rd Anniversary of Grant Date...........................................75% 4th Anniversary of Grant Date..........................................100% - ------------------------------------------------------------------------------------------------------------------------------------ Termination of You must remain an employee of the Company or a subsidiary to be able to exercise your option, except as Employment follows: Retirement, permanent disability or death. If your employment terminates because of your retirement, permanent disability or death, you (or your estate) will have five years from your termination date to exercise your option, unless the option term ends earlier, in which case you (or your estate) will have until the end of the term to exercise. Retirement means permanently terminating your employment, with no intention of engaging in a full-time job, after reaching age 65, or after reaching age 55 if your age plus your years of service equals 65 or more. This definition of retirement is used only for purposes of this agreement. All other cases. If your employment terminates because you quit, or for any other reason other than retirement, permanent disability or death, you (or your estate, if you die within the period) will have 90 days from your termination date to exercise your option, unless the option term ends earlier, in which case you (or your estate) will have until the end of the term to exercise. Regardless of the cause of your termination, you (or your estate) can exercise your option only to the extent it is vested on your termination date. - ------------------------------------------------------------------------------------------------------------------------------------ Transferability Your option is not transferable except by will or the laws of descent and distribution. During your lifetime only you can exercise your option. This option shall not be subject to attachment or similar process. Any attempted sale, pledge, assignment, transfer or other disposition of your option contrary to the provisions of this agreement, or the levy of any attachment or similar process upon your option, shall be null and void without effect. - ------------------------------------------------------------------------------------------------------------------------------------ Miscellaneous Nothing in this agreement gives you the right to remain employed by the Company or any subsidiary. This agreement shall be governed by the laws of the State of Maine, without regard to conflicts of law principles. The section and paragraph headings in this agreement are for convenience of reference only and shall not affect the construction or interpretation of this agreement. - ------------------------------------------------------------------------------------------------------------------------------------ Signatures Your signature and the signature of an authorized officer of the Company below indicate your and the Company's agreement to the terms of this Non-Qualified Stock Option Agreement as of the Grant Date. OPTIONEE: FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. [signature of executive officer] /s/ Kirk P. Pond [name of executive officer] Kirk P. Pond [identification number of executive officer] Chairman, President and CEO - ------------------------------------------------------------------------------------------------------------------------------------
EX-10.3 5 b43116fcex10-3.txt NON QUALIFIED STOCK OPTION PLAN Exhibit 10.03 Except as noted below, Non-Qualified Stock Option Agreements in the following form were entered into by each of the following non-employee directors of the registrant: Richard M. Cashin, Jr. Charles M. Clough William T. Comfort III Paul C. Schorr IV Ronald W. Shelly William N. Stout Charles P. Carinalli** ** Mr. Carinalli entered into two agreement of the following form, each dated February 28, 2002, the date of his first election to the board of directors of the registrant. The first agreement evidences an option to purchase 20,000 shares and was immediately exercisable upon grant, in accordance with the registrant's current director option program. The second agreement evidences an option to purchase 15,000 shares, subject to the vesting terms of the following form of agreement. The exercise price in each of Mr. Carinalli's agreements is $25.75 per share. [Fairchild Semiconductor logo] Fairchild Semiconductor International, Inc. Restated Stock Option Plan Non-Qualified Stock Option Agreement This is a Non-Qualified Stock Option Agreement dated February 7, 2002 in the case of Mr.Carinalli] (the Grant Date) between Fairchild Semiconductor International, Inc. (the Company) and [name of director], a director of the Company or one of its subsidiaries (you or the Optionee). Option Grant; Exercise Price The Company grants you the option to purchase up to 15,000 shares of the Company's Class A Common Stock at an exercise price of $23.00 per share. This option grant is subject to the terms of the Company's Restated Stock Option Plan, a copy of which is enclosed with this agreement, and to the terms of this agreement. If there is a conflict between the terms of this agreement and those of the plan, the terms of the plan will govern. Option Term; Vesting The term of your option is 10 years plus one day from the Grant Date. Your option terminates at the end of the term and cannot be exercised after the term. Your option will vest in full on the first anniversary of the Grant Date, assuming you remain a director of the Company on that date, and may only be exercised after it has vested. Termination of Service You must remain a director of the Company or a subsidiary to be able to exercise your option, except as follows: If your service as a director terminates other than as a result of your removal from the board for cause (including, without limitation, because of your voluntary resignation from the board, your removal from the board other than for cause or your death or permanent disability), you (or your estate) will have five years from the date of such termination to exercise your option, unless the option term ends earlier, in which case you (or your estate) will have until the end of the term to exercise. If your service as a director terminates as a result of your removal from the board for cause, you (or your estate, if you die within the period) will have 90 days from such date of termination to exercise your option, unless the option term ends earlier, in which case you (or your estate) will have until the end of the term to exercise. Regardless of the cause of termination of your service as a director, you (or your estate) can exercise your option only to the extent it is vested on your termination date. Transferability Your option is not transferable except by will or the laws of descent and distribution. During your lifetime only you can exercise your option. This option shall not be subject to attachment or similar process. Any attempted sale, pledge, assignment, transfer or other disposition of your option contrary to the provisions of this agreement, or the levy of any attachment or similar process upon your option, shall be null and void without effect. Miscellaneous This agreement shall be governed by the laws of the State of Maine, without regard to conflicts of laws principles. The section and paragraph headings in this agreement are for convenience of reference only and shall not affect the construction or interpretation of this agreement. Signatures Your signature and the signature of an authorized officer of the Company below indicate your and the Company's agreement to the terms of this Non-Qualified Stock Option Agreement as of the Grant Date. OPTIONEE: FAIRCHILD EMICONDUCTOR INTERNATIONAL, INC. [signature of director] /s/ Kirk P. Pond Kirk P. Pond - ------------------------------------ Chairman, President and CEO [name of director] [Social Security number of director] EX-10.4 6 b43116fcex10-4.txt NONT STATUTORY STOCK OPTION AGREEMENT EXHIBIT 10.04 The following form of Nonstatutory Stock Option Agreement was entered into by each of the following executive officers covering the following respective numbers of shares of common stock: Kirk P. Pond 582,011 shares Joseph R. Martin 349,207 shares Daniel E. Boxer 174,604 shares FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. 2000 EXECUTIVE STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT Fairchild Semiconductor International, Inc., a Delaware corporation (the "Company"), hereby grants an Option to purchase shares of its Class A Common Stock, par value $.01 per share (the "Shares"), to the Optionee named below. The terms and conditions of the Option are set forth in this cover sheet, in the attachment and in the Company's 2000 Executive Stock Option Plan (the "Plan"). Date of Option Grant: February 22, 2002 Name of Optionee: [name of executive officer] Number of Shares Covered by Option: [number of shares] Exercise Price per Share: $23.80 Vesting Schedule: Subject to all the terms of the attached Agreement, your right to purchase Shares under this Option vests in full on May 16, 2005, or earlier as follows: 20% of the Option shall vest at the time the Share price reaches or exceeds $26.18 on each of any 20 trading days during any period of 30 consecutive trading days; an additional 25% of the Option shall vest at the time the Share price reaches or exceeds $29.75 on each of any 20 trading days during any period of 30 consecutive trading days; an additional 25% of the Option shall vest at the time the Share price reaches or exceeds $33.32 on each of any 20 trading days during any period of 30 consecutive trading days; and the remaining 30% of the Option shall vest at the time the Share price reaches or exceeds $39.27 on each of any 20 days during any period of 30 consecutive trading days. Other provisions of this Agreement affect the vesting of, and your ability to exercise, your Option. BY SIGNING THIS COVER SHEET, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THE ATTACHED AGREEMENT AND IN THE PLAN, A COPY OF WHICH IS ALSO ENCLOSED. Optionee: [signature of executive officer] -------------------------------------------------------------- (Signature) Company: [signature of an officer of the registrant] -------------------------------------------------------------- (Signature) Title: ------------------------------------------------------ Attachment 2 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. 2000 EXECUTIVE STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT THE PLAN AND The text of the Plan is incorporated in this Agreement by reference. OTHER AGREEMENTS Certain capitalized terms used in this Agreement are defined in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this Option. Any prior agreements, commitments or negotiations concerning this Option are superseded. NONSTATUTORY STOCK OPTION This Option is not intended to be an Incentive Stock Option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING This Option is only exercisable before it expires and then only with respect to the vested portion of the Option. This Option will vest according to the Vesting Schedule on the attached cover sheet and as otherwise provided in this Agreement. TERM Your Option will expire in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Date of Option Grant, as shown on the cover sheet. Your Option may expire earlier if your Service terminates, as described below. REGULAR TERMINATION If your Service is terminated by the Company for any reason other than for Cause (as defined in your employment agreement (as amended, supplemented or restated from time to time, your "Employment Agreement")) or is terminated by you with Good Reason (as defined in your Employment Agreement), your Option shall continue to vest according to this Agreement, and you shall have until the end of the option term to exercise such Option. TERMINATION FOR If your Service is terminated by the Company for Cause, as defined CAUSE in your Employment Agreement and determined by the Board in its sole discretion, then you shall immediately forfeit all rights to your unvested Option and the Option shall immediately expire. QUIT WITHOUT GOOD REASON If your Service is terminated by you without Good Reason (as defined in your Employment Agreement), then you shall immediately forfeit all rights to your unvested Option and your vested Option shall expire 90 days after the effective date of your termination. DEATH If your Service terminates because of your death, your Option will fully vest and your estate or heirs may exercise your entire Option over its full term. DISABILITY If your Service terminates because of your Disability, your Option
3 will fully vest and you may exercise your entire Option over its full term. RETIREMENT Upon your Retirement (as defined in your Employment Agreement), your Option shall fully vest, and you shall have until the end of the option term to exercise such Option subject to the non-compete and confidential information provisions specified in your employment agreement. CHANGE IN CONTROL In the event that you are employed by the Company at the time of a Change in Control, as defined below, your Option shall fully vest upon the effective date of the Change in Control, unless the Change in Control is initiated by the Company and you remain employed by the successor corporation in a position of equal rank and responsibility to your position in the Company on the Date of Option Grant. "Change in Control" means the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than (x) Sterling Holding Company, LLC and/or Citicorp Venture Capital Ltd. (either, for purposes of this definition, "CVC"), (y) 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 or (z) any officer, employee or director of the Company or any subsidiary of the Company or any trust, partnership or other entity established solely for the benefit of such officers, employees or directors (any of such persons identified in clauses (x), (y) and (z), a "Permitted Holder"), is or becomes the beneficial owner (as such term is defined in Rules 13d-3 and 13d-5 under the Exchange Act), 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 above), 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 of the Company; (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the board of directors of the Company (together with any new directors 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 at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the board of directors of the Company then in office; or
4 (iii) the merger or consolidation of the Company with or into another corporation or entity or the merger of another corporation or entity with or into the Company, or the sale of all or substantially all the assets of the Company to another corporation or entity (in any of such cases, other than a corporation or entity that prior to such merger, consolidation or sale is controlled by 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 corporation or entity or transferee that represent, immediately after such transaction, at least a majority of the aggregate voting power of the voting stock of the surviving corporation, entity or transferee. LEAVES OF ABSENCE For purposes of this Option, your Service does not terminate when you go on a bona fide leave of absence that was approved by the Company in writing, if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. Your Service terminates in any event when the approved leave ends unless you immediately return to active work. The Company determines which leaves count for this purpose, and when your Service terminates for all purposes under the Plan. NOTICE OF EXERCISE When you wish to exercise this Option, you must notify the Company by filing the proper "Notice of Exercise" form at the address given on the form. Your notice must specify how many Shares you wish to purchase. Your notice must also specify how your Shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when it is received by the Company. If someone else wants to exercise this Option after your death, that person must prove to the Company's satisfaction that he or she is entitled to do so. FORM OF PAYMENT When you submit your notice of exercise, you must include payment of the Option price for the Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: - Cash, your personal check, a cashier's check or a money order. - Shares which have already been owned by you for more than six (6) months and which are surrendered to the Company. The value of the Shares, determined as of the effective date of the Option exercise, will be applied to the Option price.
5 - By delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate exercise price. WITHHOLDING TAXES You will not be allowed to exercise this Option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the Option exercise or sale of Shares acquired under this Option. RESTRICTIONS ON EXERCISE By signing this Agreement, you agree not to exercise this Option or AND RESALE sell any Shares acquired under this Option at a time when applicable laws, regulations or Company trading policies prohibit exercise, sale or issuance of Shares. The Company will not permit you to exercise this Option if the issuance of Shares at that time would violate any law or regulation. The Company shall have the right to designate one or more periods of time, each of which shall not exceed one hundred eighty (180) days in length, during which this Option shall not be exercisable if the Company determines (in its sole discretion) that such limitation on exercise could in any way facilitate a lessening of any restriction on transfer pursuant to the Securities Act or any state securities laws with respect to any issuance of securities by the Company, facilitate the registration or qualification of any securities by the Company under the Securities Act or any state securities laws, or facilitate the perfection of any exemption from the registration or qualification requirements of the Securities Act or any applicable state securities laws for the issuance or transfer of any securities. Such limitation on exercise shall not alter the vesting schedule set forth in this Agreement other than to limit the periods during which this Option shall be exercisable. If the sale of Shares under the Plan is not registered under the Securities Act, but an exemption is available which requires an investment or other representation, you shall represent and agree at the time of exercise that the Shares being acquired upon exercise of this Option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. TRANSFER OF OPTION You shall not assign, alienate, pledge, attach, sell, transfer or encumber this Option. If you attempt to do any of these things, this Option will immediately become invalid. You may, however, dispose of this Option in your will or it may be transferred by the laws of descent and distribution. Notwithstanding the preceding paragraph, if the Company consents, you may transfer this Option, by gift, to a family member. For purposes of this section, "Family Member" is defined to include any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law,
6 son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing your household (other than a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or you) control the management of assets, and any other entity in which these persons (or you) own more than fifty percent of the voting interests. A Family Member transferee is hereafter referred to as a "Permitted Transferee." Before any such transfer of this Option is effectuated, however, the Company must be notified in advance in writing of the terms and conditions of the proposed transfer and the Company must determine that the proposed transfer complies with applicable law and the requirements of the Plan and this Option. Any purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance that does not qualify hereunder shall be void and unenforceable against the Company. The terms of this Option (including the post-termination of Service exercise periods) shall apply to your beneficiaries, executors, administrators and Permitted Transferees (including the beneficiaries, executors and administrators of the Permitted Transferees), including the right to agree to any amendment of this Option, except that Permitted Transferees shall not transfer this Option other than by will or by the laws of descent and distribution. The Company is under no obligation to provide notice to a Permitted Transferee of your termination of Service. This Option shall be exercised only by you (including, in the case of a transferred Option, by a Permitted Transferee), or, in the case of your death, by your executor or administrator (including, in the case of a transferred Option, by the executor or administrator of the Permitted Transferee). Before a Permitted Transferee will be allowed to exercise this option, you must make acceptable arrangements to pay any withholding or other taxes that may be due as a result of exercising this option. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your spouse, nor is the Company obligated to recognize your spouse's interest in your Option in any other way. RETENTION RIGHTS Your Option or this Agreement does not give you the right to be retained by the Company (or any Parent or any Subsidiaries or Affiliates) in any capacity. The Company (or any Parent and any Subsidiaries or Affiliates) reserve the right to terminate your Service in accordance with your Employment Agreement. STOCKHOLDER RIGHTS You, or your estate or heirs, have no rights as a stockholder of the Company until a certificate for your Option's Shares has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued,
7 except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in the Company stock, the number of Shares covered by this Option and the exercise price per Share may be adjusted (and rounded down to the nearest whole number) pursuant to the Plan. Your Option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity. APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of Maine.
BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 8 EX-10.5 7 b43116fcex10-5.txt NON STATUTORY STOCK OPTION EXHIBIT 10.05 The following form of Nonstatutory Stock Option Agreement was entered into by each of the following executive officers covering the following respective numbers of shares of common stock: Keith Jackson 87,302 shares W.T. Greer, Jr. 87,302 shares Izak Bencuya 87,302 shares Ernesto J. D'Escoubet 43,651 shares D.J. Kim 43,651 shares John M. Watkins, Jr. 41,250 shares FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. 2000 EXECUTIVE STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT Fairchild Semiconductor International, Inc., a Delaware corporation (the "Company"), hereby grants an Option to purchase shares of its Class A Common Stock, par value $.01 per share (the "Shares"), to the Optionee named below. The terms and conditions of the Option are set forth in this cover sheet, in the attachment and in the Company's 2000 Executive Stock Option Plan (the "Plan"). Date of Option Grant: February 22, 2002 Name of Optionee: [name of executive officer] Number of Shares Covered by Option: [number of shares] Exercise Price per Share: $23.80 Vesting Schedule: Subject to all the terms of the attached Agreement, your right to purchase Shares under this Option vests in full on May 16, 2005, or earlier as follows: 20% of the Option shall vest at the time the Share price reaches or exceeds $26.18 on each of any 20 trading days during any period of 30 consecutive trading days; an additional 25% of the Option shall vest at the time the Share price reaches or exceeds $29.75 on each of any 20 trading days during any period of 30 consecutive trading days; an additional 25% of the Option shall vest at the time the Share price reaches or exceeds $33.32 on each of any 20 trading days during any period of 30 consecutive trading days; and the remaining 30% of the Option shall vest at the time the Share price reaches or exceeds $39.27 on each of any 20 days during any period of 30 consecutive trading days. Other provisions of this Agreement affect the vesting of, and your ability to exercise, your Option. BY SIGNING THIS COVER SHEET, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THE ATTACHED AGREEMENT AND IN THE PLAN, A COPY OF WHICH IS ALSO ENCLOSED. Optionee: [signature of executive officer] -------------------------------------------------------------- (Signature) Company: [signature of authorized officer of the company] -------------------------------------------------------------- (Signature) Title: ------------------------------------------------------ Attachment 2 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. 2000 EXECUTIVE STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT THE PLAN AND The text of the Plan is incorporated in this Agreement by reference. OTHER AGREEMENTS Certain capitalized terms used in this Agreement are defined in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this Option. Any prior agreements, commitments or negotiations concerning this Option are superseded. NONSTATUTORY STOCK OPTION This Option is not intended to be an Incentive Stock Option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING This Option is only exercisable before it expires and then only with respect to the vested portion of the Option. This Option will vest according to the Vesting Schedule on the attached cover sheet. TERM Your Option will expire in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Date of Option Grant, as shown on the cover sheet. Your Option may expire earlier if your Service terminates, as described below. TERMINATION OF SERVICE If your Service with the Company terminates for any reason, you shall immediately forfeit all rights to the unvested portion of your Option, and your right (or the right of your estate, executor or representative) to exercise the vested portion of your Option after termination shall be governed by the terms of the Company's Restated Stock Option Plan as if the Option had been granted under that plan. CHANGE IN CONTROL In the event that you are employed by the Company at the time of a Change in Control, as defined below, your Option shall fully vest upon the effective date of the Change in Control, unless the Change in Control is initiated by the Company and you remain employed by the successor corporation in a position of equal rank and responsibility to your position in the Company on the Date of Option Grant. "Change in Control" means the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than (x) Sterling Holding Company, LLC and/or Citicorp Venture Capital Ltd. (either, for purposes of this definition, "CVC"), (y) any officer, employee or director of CVC or
3 any trust, partnership or other entity established solely for the benefit of such officers, employees or directors or (z) any officer, employee or director of the Company or any subsidiary of the Company or any trust, partnership or other entity established solely for the benefit of such officers, employees or directors (any of such persons identified in clauses (x), (y) and (z), a "Permitted Holder"), is or becomes the beneficial owner (as such term is defined in Rules 13d-3 and 13d-5 under the Exchange Act), 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 above), 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 of the Company; (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the board of directors of the Company (together with any new directors 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 at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the board of directors of the Company then in office; or (iii) the merger or consolidation of the Company with or into another corporation or entity or the merger of another corporation or entity with or into the Company, or the sale of all or substantially all the assets of the Company to another corporation or entity (in any of such cases, other than a corporation or entity that prior to such merger, consolidation or sale is controlled by 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 corporation or entity or transferee that represent, immediately after such transaction, at least a majority of the aggregate voting power of the voting stock of the surviving corporation, entity or transferee. LEAVES OF ABSENCE For purposes of this Option, your Service does not terminate when you go on a bona fide leave of absence that was approved by the Company in writing, if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. Your Service terminates in any event when the approved leave ends unless you immediately return to active work. The Company determines which leaves count for this purpose, and
4 when your Service terminates for all purposes under the Plan. NOTICE OF EXERCISE When you wish to exercise this Option, you must notify the Company by filing the proper "Notice of Exercise" form at the address given on the form. Your notice must specify how many Shares you wish to purchase. Your notice must also specify how your Shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when it is received by the Company. If someone else wants to exercise this Option after your death, that person must prove to the Company's satisfaction that he or she is entitled to do so. FORM OF PAYMENT When you submit your notice of exercise, you must include payment of the Option price for the Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: - Your personal check, a cashier's check or a money order. - Shares which have already been owned by you for more than six months and which are surrendered to the Company. The value of the Shares, determined as of the effective date of the Option exercise, will be applied to the Option price. - By delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate exercise price. WITHHOLDING TAXES You will not be allowed to exercise this Option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the Option exercise or sale of Shares acquired under this Option. RESTRICTIONS ON EXERCISE By signing this Agreement, you agree not to exercise this Option or AND RESALE sell any Shares acquired under this Option at a time when applicable laws, regulations or Company trading policies prohibit exercise, sale or issuance of Shares. The Company will not permit you to exercise this Option if the issuance of Shares at that time would violate any law or regulation. The Company shall have the right to designate one or more periods of time, each of which shall not exceed one hundred eighty (180) days in length, during which this Option shall not be exercisable if the Company determines (in its sole discretion) that such limitation on exercise could in any way facilitate a lessening of any restriction on transfer pursuant to the Securities Act or any state securities laws with respect to any issuance of securities by the Company, facilitate the registration or qualification of any securities by the Company under the Securities Act or any state securities laws,
5 or facilitate the perfection of any exemption from the registration or qualification requirements of the Securities Act or any applicable state securities laws for the issuance or transfer of any securities. Such limitation on exercise shall not alter the vesting schedule set forth in this Agreement other than to limit the periods during which this Option shall be exercisable. If the sale of Shares under the Plan is not registered under the Securities Act, but an exemption is available which requires an investment or other representation, you shall represent and agree at the time of exercise that the Shares being acquired upon exercise of this Option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. TRANSFER OF OPTION You shall not assign, alienate, pledge, attach, sell, transfer or encumber this Option. If you attempt to do any of these things, this Option will immediately become invalid. You may, however, dispose of this Option in your will or it may be transferred by the laws of descent and distribution. Notwithstanding the preceding paragraph, if the Company consents, you may transfer this Option, by gift, to a Family Member. For purposes of this section, "Family Member" is defined to include any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing your household (other than a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or you) control the management of assets, and any other entity in which these persons (or you) own more than fifty percent of the voting interests. A Family Member transferee is hereafter referred to as a "Permitted Transferee." Before any such transfer of this Option is effectuated, however, the Company must be notified in advance in writing of the terms and conditions of the proposed transfer and the Company must determine that the proposed transfer complies with applicable law and the requirements of the Plan and this Option. Any purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance that does not qualify hereunder shall be void and unenforceable against the Company. The terms of this Option (including the post-termination of Service exercise periods) shall apply to your beneficiaries, executors, administrators and Permitted Transferees (including the beneficiaries, executors and administrators of the Permitted Transferees), including the right to agree to any amendment of this Option, except that Permitted Transferees shall not transfer this Option other than by will or by the laws of descent and distribution. The Company is under no obligation to provide notice to a Permitted Transferee of your
6 termination of Service. This Option shall be exercised only by you (including, in the case of a transferred Option, by a Permitted Transferee), or, in the case of your death, by your executor or administrator (including, in the case of a transferred Option, by the executor or administrator of the Permitted Transferee). Before a Permitted Transferee will be allowed to exercise this option, you must make acceptable arrangements to pay any withholding or other taxes that may be due as a result of exercising this option. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your spouse, nor is the Company obligated to recognize your spouse's interest in your Option in any other way. RETENTION RIGHTS Your Option or this Agreement does not give you the right to be retained by the Company (or any Parent or any Subsidiaries or Affiliates) in any capacity. The Company (or any Parent and any Subsidiaries or Affiliates) reserve the right to terminate your Service at any time. STOCKHOLDER RIGHTS You, or your estate or heirs, have no rights as a stockholder of the Company until a certificate for your Option's Shares has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in the Company stock, the number of Shares covered by this Option and the exercise price per Share may be adjusted (and rounded down to the nearest whole number) pursuant to the Plan. Your Option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity. APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of Maine.
BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. 7 EX-10.6 8 b43116fcex10-6.txt EMPLOYMENT AGREEMENT WITH J.M. WATKINS, JR. EXHIBIT 10.06 - ----------------- 207 775 4603 Tel Direct JOSEPH R. MARTIN F A I R C H I L D 207 761 6020 Fax Executive Vice President - ----------------- Chief Financial Officer SEMICONDUCTOR(TM) Member, Board of Directors Joseph.Martin@fairchildsemi.com FAIRCHILD SEMICONDUCTOR 333 Western Avenue South Portland, ME 04106
Mr. John M. Watkins 11 Hinchley Wood Farmington, CT 06032 On behalf of Fairchild Semiconductor, I am pleased to offer you the position of Senior Vice President, Chief Information Officer and member of the Executive Committee, reporting to me. Your initial annualized salary will be $275,000 to be paid biweekly and you will also be entitled to participate in the Fairchild Incentive Program (FIP) at a target level of 40%; should the company achieve the FIP goals at 100%, you will receive an incentive award equal to 40% of your base salary for the period considered under the plan, subject to the terms of the Program. We agree, however, that your bonus payment covering the Fiscal Year 2000 will be no less than $220,000, which represents a 200% payout under our Incentive Program, and the minimum Incentive Program payments covering Fiscal Years 2001 and 2002 will be $190,000, respectively. To further assist in the transition to Fairchild, this offer also includes a one time bonus of $125,000 payable during your first week of employment with us. The bonus amount quoted is net of withholding requirements. As an additional component of your compensation package, I will recommend to the Fairchild Semiconductor Board of Directors that you be awarded a stock grant of 10,000 shares per year for three years, as well as a stock option grant of 50,000 shares of Fairchild Semiconductor International, Inc. stock. The option grant will be dated as of your date of hire, priced at the closing price of the stock market on your date of hire and subject to the terms of the Fairchild Semiconductor Stock Option Plan. You will also be eligible for additional grants of stock options as awarded by Fairchild's Board of Directors, typically on an annual basis. You will be entitled to accrue four (4) weeks of paid vacation time per year, as well as entitled to all benefits traditionally offered to all exempt employees and participation in the Fairchild Personal Savings and Retirement Plan which features an immediately vested match of 75% of the first 6% of pay contributed to the plan, subject to all legal limits. In addition, you may take advantage of the Benefits Restoration Program, whereby savings up to the Plan limits and corresponding company matches not permitted in the 401k plan due to legal limits may be gathered and invested on a tax deferred basis. This offer includes full, tax protected relocation assistance for you and your family, including home sale assistance and temporary living expenses for up to 18 months, should you so require. Mr. John Watkins Page 2 Suzanne Patterson, our Employment Manager, will coordinate your relocation arrangements. To begin your relocation process, please contact Suzanne at (207) 775-8125. Please allow her as much advance notice as possible in coordinating your relocation. Relocated employees who choose to leave Fairchild Semiconductor's employment during their first year are required to reimburse the company for relocation expenses on a prorated basis. Concurrent with your acceptance of this offer, we ask that you execute an FSC Relocation Agreement; please review, sign, and return the attached Relocation Agreement form. You are welcome to contact Suzanne with any questions you may have concerning your relocation. This offer assumes a start date during the first two weeks of February and will expire on December 17, 1999. If you are unable to respond by that date (verbally or in writing), please call me and the issue will be reviewed at that time. As confirmation of your acceptance, please sign and return to me the entire ORIGINAL offer letter as soon as possible (the copy is yours to keep); please also include the completed and signed W-4 forms, Licensing of Technology Transfer questionnaire, and Relocation Agreement. If you have any questions regarding your offer or regarding Fairchild's policies and procedures, please do not hesitate to contact me at (207) 775-8563. Sincerely, /s/ Joseph R. Martin Executive Vice President and Chief Financial Officer This is to verify my acceptance of the above stated offer. NAME /s/ John M. Watkins DATE START DATE ---------------------- ---------------------- ---------------- -----END PRIVACY-ENHANCED MESSAGE-----