-----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, IRtvqRaps41+XcqRqIV6iQHA+YN9H38SdC69xyY6lEwl9teKmS9IgtI+nTVWgeVj ad0k9RRMufFZ70WKdRY7xA== 0000950135-02-004979.txt : 20021113 0000950135-02-004979.hdr.sgml : 20021113 20021113095426 ACCESSION NUMBER: 0000950135-02-004979 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020929 FILED AS OF DATE: 20021113 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: 02818599 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 b44496fse10vq.txt FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 SEPTEMBER 29, 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 September 29, 2002:
TITLE OF EACH CLASS NUMBER OF SHARES ------------------- ---------------- Class A Common Stock, par value $.01 per share 116,959,217 Class B Common Stock, par value $.01 per share --
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 29, 2002 (Unaudited) and December 30, 2001...................... 2 Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 29, 2002 and September 30, 2001.......................................... 3 Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 29, 2002 and September 30, 2001................... 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2002 and September 30, 2001.................................................... 5 Notes to Condensed Consolidated Financial Statements (Unaudited)................................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................................ 37 Item 4. Controls and Procedures..................................... 37 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 38 Item 6. Exhibits and Reports on Form 8-K............................ 38 Signature and Certifications.......................................... 39
1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
SEPTEMBER 29, DECEMBER 30, 2002 2001 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.............................. $ 632.4 $ 504.4 Accounts receivable, net............................... 163.7 133.6 Inventories............................................ 202.1 209.1 Deferred income taxes.................................. 17.5 16.4 Other current assets................................... 17.5 11.3 -------- -------- Total current assets.............................. 1,033.2 874.8 Property, plant and equipment, net.......................... 659.8 663.0 Intangible assets, net...................................... 448.1 479.8 Other assets................................................ 132.4 131.6 -------- -------- Total assets...................................... $2,273.5 $2,149.2 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt...................... $ 0.4 $ 0.4 Accounts payable....................................... 105.7 106.7 Accrued expenses and other current liabilities......... 99.9 92.2 -------- -------- Total current liabilities......................... 206.0 199.3 Long-term debt, less current portion........................ 852.8 1,138.2 Other liabilities........................................... 2.8 3.7 -------- -------- Total liabilities................................. 1,061.6 1,341.2 Commitments and contingencies Stockholders' equity: Class A common stock................................... 1.2 1.0 Class B common stock................................... -- -- Additional paid-in capital............................. 1,221.2 809.7 Retained earnings (deficit)............................ (5.9) 0.1 Accumulated other comprehensive income (loss).......... (0.8) 1.0 Less treasury stock (at cost)............................. (3.8) (3.8) -------- -------- Total stockholders' equity........................ 1,211.9 808.0 -------- -------- Total liabilities and stockholders' equity........ $2,273.5 $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 NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- Revenue: Net sales -- trade...................... $346.4 $303.4 $1,019.4 $1,025.7 Contract manufacturing.................. 14.2 22.0 38.6 57.4 ------ ------ -------- -------- Total revenue........................ 360.6 325.4 1,058.0 1,083.1 Operating expenses: Cost of sales -- trade.................. 259.4 246.0 761.9 769.7 Cost of contract manufacturing.......... 11.1 14.3 30.0 37.7 Research and development................ 20.0 19.1 62.5 64.4 Selling, general and administrative..... 36.4 35.8 108.5 120.1 Amortization of acquisition-related intangibles.......................... 9.5 14.1 28.3 38.7 Purchased in-process research and development.......................... -- 1.0 1.7 13.8 Restructuring and impairments........... -- 0.8 3.6 14.2 ------ ------ -------- -------- Total operating expenses............. 336.4 331.1 996.5 1,058.6 ------ ------ -------- -------- Operating income (loss)................... 24.2 (5.7) 61.5 24.5 Interest expense.......................... 21.1 25.8 78.3 76.4 Interest income........................... (3.6) (2.2) (9.2) (12.7) Other expense, net........................ -- -- 1.6 -- ------ ------ -------- -------- Income (loss) before income taxes......... 6.7 (29.3) (9.2) (39.2) Provision (benefit) for income taxes...... 2.4 (10.2) (3.2) (13.7) ------ ------ -------- -------- Net income (loss)......................... $ 4.3 $(19.1) $ (6.0) $ (25.5) ====== ====== ======== ======== Net income (loss) per common share: Basic................................... $ 0.04 $(0.19) $ (0.06) $ (0.26) ====== ====== ======== ======== Diluted................................. $ 0.04 $(0.19) $ (0.06) $ (0.26) ====== ====== ======== ======== Weighted average common shares: Basic................................... 117.0 99.7 108.1 99.5 ====== ====== ======== ======== Diluted................................. 118.7 99.7 108.1 99.5 ====== ====== ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 3 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- Net income (loss)......................... $4.3 $(19.1) $(6.0) $(25.5) Other comprehensive income (loss), net of tax: Net change associated with hedging transactions......................... 0.8 (1.5) (2.9) 0.4 Net amount reclassed to earnings........ 0.8 -- 1.1 (0.8) ---- ------ ----- ------ Comprehensive income (loss)............... $5.9 $(20.6) $(7.8) $(25.9) ==== ====== ===== ======
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)
NINE MONTHS ENDED ----------------------------- SEPTEMBER 29, SEPTEMBER 30, 2002 2001 ------------- ------------- Cash flows from operating activities: Net loss.................................................... $ (6.0) $ (25.5) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization.......................... 123.0 130.4 Amortization of deferred compensation.................. 2.8 2.9 Restructuring and impairments.......................... 0.7 8.6 Non-cash financing expense............................. 11.7 3.4 Purchased in-process research and development.......... 1.7 13.8 Loss on disposal of property, plant and equipment...... 0.7 7.1 Deferred income taxes.................................. (13.0) (18.8) Non-cash settlement of receivable...................... -- (2.1) Gain on sale of space and defense business............. (20.5) -- Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable.................................... (30.3) 81.1 Inventories............................................ 6.1 9.9 Other current assets................................... (7.6) 4.1 Current liabilities.................................... 5.1 (92.4) Other assets and liabilities, net...................... 0.2 (5.6) ------- ------- Cash provided by operating activities............. 74.6 116.9 ------- ------- Cash flows from investing activities: Capital expenditures................................... (88.0) (101.2) Purchase of molds and tooling.......................... (2.2) (3.5) Purchase of long-term investments...................... -- (3.5) Acquisitions and divestitures, net of cash acquired.... 23.9 (343.1) ------- ------- Cash used in investing activities................. (66.3) (451.3) ------- ------- Cash flows from financing activities: Repayment of long-term debt............................ (285.4) (120.4) Issuance of long-term debt............................. -- 350.0 Proceeds from issuance of common stock and from exercise of stock options, net........................ 409.7 5.1 Purchase of treasury stock............................. (4.6) (5.8) Debt issuance costs.................................... -- (10.9) ------- ------- Cash provided by financing activities............. 119.7 218.0 ------- ------- Net change in cash and cash equivalents..................... 128.0 (116.4) Cash and cash equivalents at beginning of period............ 504.4 401.8 ------- ------- Cash and cash equivalents at end of period.................. $ 632.4 $ 285.4 ======= =======
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. 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:
SEPTEMBER 29, DECEMBER 30, 2002 2001 ------------- ------------ (IN MILLIONS) Raw materials............................................... $ 23.2 $ 27.6 Work in process............................................. 136.4 129.7 Finished goods.............................................. 42.5 51.8 ------ ------ Total inventories......................................... $202.1 $209.1 ====== ======
NOTE 3 -- COMPUTATION OF NET INCOME (LOSS) PER SHARE Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Potentially dilutive common equivalent shares consist of stock options and shares obtainable upon the conversion of the convertible senior subordinated notes. As a result of the net losses reported for the nine months ended September 29, 2002 and the three and nine months ended September 30, 2001, approximately 4.3 million, 4.0 million and 2.9 million common equivalent shares, respectively, have been excluded from the calculation of diluted loss per common share because their effect would have been anti-dilutive. In addition, $1.8 million and $5.4 million was not included in the computation of net loss for the three and nine months ended September 29, 2002, respectively, and 6.7 million 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. NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED ----------------------------- SEPTEMBER 29, SEPTEMBER 30, 2002 2001 ------------- ------------- (IN MILLIONS) Cash paid (received), net for: Income taxes............................................. $(2.6) $10.8 ===== ===== Interest................................................. $64.5 $66.7 ===== =====
6 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. The acquired business, 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 their useful lives 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 during the fourth quarter for impairment of these assets. A summary of acquired intangible assets as of September 29, 2002 is as follows:
AS OF SEPTEMBER 29, 2002 ----------------------------- GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION -------------- ------------ (IN MILLIONS) Identifiable intangible assets: Developed technology..................................... $223.2 $ (51.2) Customer base............................................ 55.8 (24.5) Covenant not to compete.................................. 30.4 (21.1) Trademarks and tradenames................................ 24.9 (21.6) Patents.................................................. 5.3 (3.2) ------ ------- Subtotal.............................................. 339.6 (121.6) Goodwill................................................. 230.1 -- ------ ------- Total................................................. $569.7 $(121.6) ====== =======
7 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The carrying amount of goodwill by reporting unit for the quarter ended September 29, 2002 is as follows:
DISCRETE DOMESTIC POWER ANALOG PRODUCTS OPTOELECTRONICS TOTAL (IN MILLIONS) -------- -------- --------------- ------ - ------------- Balance as of September 29, 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 initial test for impairment of goodwill as required by SFAS No. 142 was completed during the first 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, which are included in the Analog and Discrete segments, respectively, and Optoelectronics, which does not meet the requirements of a reportable segment as defined in SFAS No. 131. For comparative purposes, net loss before goodwill amortization net of tax and related per share amounts for the Company for the three and nine months ended September 30, 2001 are as follows (in millions, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2001 ------------------ ------------------ NET LOSS: Reported........................................ $(19.1) $(25.5) Goodwill amortization........................ 4.7 12.1 Less associated tax effects.................. (1.6) (4.2) ------ ------ Net loss before goodwill amortization............. $(16.0) $(17.6) ====== ====== BASIC LOSS PER SHARE: Net loss.......................................... $(0.19) $(0.26) Goodwill amortization........................ 0.05 0.12 Less associated tax effects.................. (0.02) (0.04) ------ ------ Net loss before goodwill amortization............. $(0.16) $(0.18) ====== ====== DILUTED LOSS PER SHARE: Net loss.......................................... $(0.19) $(0.26) Goodwill amortization........................ 0.05 0.12 Less associated tax effects.................. (0.02) (0.04) ------ ------ Net loss before goodwill amortization............. $(0.16) $(0.18) ====== ======
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.................................... $ 9.5 Fiscal 2003................................................. 33.0 Fiscal 2004................................................. 25.4 Fiscal 2005................................................. 23.6 Fiscal 2006................................................. 23.4 Fiscal 2007................................................. 18.2
8 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 the product line acquired from I-Cube are included in the Interface and Logic reporting segment. The operating results for the business acquired from SPT are included in 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 also recorded in the "Other" category. Management evaluates the contract manufacturing business differently than its other operating segments due in large part to the fact that it is predominantly driven by contractual agreements for limited time periods entered into with National Semiconductor Corporation and Samsung Electronics Co., Ltd in connection with acquisitions from those companies. Selected operating segment financial information for the three and nine months ended September 29, 2002 and September 30, 2001 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- (IN MILLIONS) REVENUE: Analog.......................... $ 89.1 $ 70.4 $ 248.7 $ 226.5 Discrete........................ 188.3 159.4 553.7 493.7 Interface and Logic............. 44.9 52.3 148.3 218.0 Other........................... 38.3 43.3 107.3 144.9 ------ ------ -------- -------- Total........................ $360.6 $325.4 $1,058.0 $1,083.1 ====== ====== ======== ========
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- (IN MILLIONS) OPERATING INCOME: Analog.......................... $11.9 $ 3.7 $ 30.5 $ 10.7 Discrete........................ 20.3 3.4 52.5 36.9 Interface and Logic............. (1.9) (2.8) 2.9 27.6 Other........................... 3.4 5.9 9.2 16.0 ----- ------ ------ ------ Subtotal........................ 33.7 10.2 95.1 91.2 Amortization of acquisition-related intangibles.................. (9.5) (14.1) (28.3) (38.7) Purchased in-process research and development.............. -- (1.0) (1.7) (13.8) Restructuring and impairments... -- (0.8) (3.6) (14.2) ----- ------ ------ ------ Total........................ $24.2 $ (5.7) $ 61.5 $ 24.5 ===== ====== ====== ======
9 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8 -- RESTRUCTURING AND IMPAIRMENTS During the nine months ended September 29, 2002, the Company recorded a pre-tax restructuring charge of $3.6 million, which occurred in the first quarter. 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 and nine months ended September 30, 2001, the Company recorded pre-tax restructuring and impairment charges of $0.8 million and $14.2 million, respectively. In the third quarter of 2001, the charge was due to employee separation costs related to severance and other benefits associated with work force reduction actions in the United States and France. For the nine months ended September 30, 2001, these charges also included $8.3 million for asset impairments relating to the consolidation of the five-inch wafer fabrication line in South Portland, Maine, $1.2 million for employee separation costs recorded in the first quarter and $3.9 million for employee separation costs recorded in the second quarter. These aforementioned workforce reduction actions affected approximately 750 employees primarily in the United States, the Philippines and Malaysia. The following table summarizes the activity in the Company's accrual for restructuring and impairment costs for the nine months ended September 29, 2002 (in millions): Accrual balance 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 Cash payments............................................. (0.9) ----- Accrual balance as of June 30, 2002......................... 0.6 ----- Cash payments............................................. (0.2) ----- Accrual balance as of September 29, 2002.................... $ 0.4 =====
The Company expects that all amounts will be substantially paid before the end of the year. NOTE 9 -- FOLLOW-ON OFFERING AND REDEMPTION OF 10 1/8% SENIOR SUBORDINATED NOTES On May 30, 2002, the Company completed a follow-on public offering of 20,000,000 shares of its Class A Common Stock at a price to the public of $25.65 per share. On June 20, 2002, the underwriters executed their option to cover over-allotments and purchased a further 2,219,196 shares. The underwriting discount was $1.09 per share. The total of 22,219,196 shares included 16,219,196 newly issued shares sold by the Company and 6,000,000 shares sold by an existing stockholder. The Company did not receive any proceeds from shares sold by the existing stockholder. The net proceeds to the Company after the underwriting discount and other related expenses were approximately $397.7 million. On June 28, 2002, the Company used some of the proceeds raised in the follow-on offering to redeem all $285.0 million of its 10 1/8% senior subordinated notes that were due in March 2007, at a price of 105.063% of face value. In connection with the redemption, the company had one-time charges totaling $22.1 million, including $14.5 million for the call premium and other transaction fees and a $7.6 million non-cash write-off of deferred financing fees associated with the original bond offering. 10 FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 -- 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 nine months ended September 29, 2002. No cash flow hedges were derecognized or discontinued for the nine months ended September 29, 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 $0.8 million of net unrealized derivative loss included in OCI will be reclassified into earnings within the next twelve months. NOTE 11 -- CONDENSED CONSOLIDATING FINANCIAL STATEMENTS 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 Fairchild Semiconductor Corporation's 10 3/8% and 10 1/2% Senior Subordinated Notes and its 5% 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)
SEPTEMBER 29, 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.... $ -- $ 607.2 $ -- $ 25.2 $ -- Accounts receivable, net..... -- 26.9 1.0 135.8 -- Inventories.................. -- 107.4 18.2 76.5 -- Deferred income taxes........ -- 16.2 0.8 0.5 -- Other current assets......... -- 6.9 -- 10.6 -- -------- -------- ------ ------ --------- Total current assets....... -- 764.6 20.0 248.6 -- Property, plant and equipment, net.......................... -- 261.3 67.6 330.9 -- Intangible assets, net......... -- 13.9 289.8 144.4 -- Investment in subsidiary....... 1,206.8 937.2 156.0 6.7 (2,306.7) Other assets................... 5.9 109.4 15.4 1.7 -- -------- -------- ------ ------ --------- Total assets............... $1,212.7 $2,086.4 $548.8 $732.3 $(2,306.7) ======== ======== ====== ====== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt....................... $ -- $ 0.4 $ -- $ -- $ -- Accounts payable............. -- 52.0 3.9 49.8 -- Accrued expenses and other current liabilities........ -- 57.5 3.7 38.7 -- -------- -------- ------ ------ --------- Total current liabilities.............. -- 109.9 7.6 88.5 -- Long-term debt, less current portion...................... -- 852.8 -- -- -- Net intercompany (receivable) payable...................... -- (85.9) (2.1) 88.0 -- Other liabilities.............. -- 3.6 2.1 (2.9) -- -------- -------- ------ ------ --------- Total liabilities.......... -- 880.4 7.6 173.6 -- -------- -------- ------ ------ --------- Commitments and contingencies Stockholders' equity: Class A common stock......... 1.2 -- -- -- -- Additional paid-in capital... 1,221.2 -- -- -- -- Retained earnings (deficit).................. (5.9) 1,206.8 541.2 558.7 (2,306.7) Accumulated other comprehensive loss......... -- (0.8) -- -- -- Less treasury stock (at cost)...................... (3.8) -- -- -- -- -------- -------- ------ ------ --------- Total stockholders' equity................... 1,212.7 1,206.0 541.2 558.7 (2,306.7) -------- -------- ------ ------ --------- Total liabilities and stockholders' equity..... $1,212.7 $2,086.4 $548.8 $732.3 $(2,306.7) ======== ======== ====== ====== ========= SEPTEMBER 29, 2002 ------------------- CONSOLIDATED FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. ------------------- (IN MILLIONS) ASSETS Current assets: Cash and cash equivalents.... $ 632.4 Accounts receivable, net..... 163.7 Inventories.................. 202.1 Deferred income taxes........ 17.5 Other current assets......... 17.5 -------- Total current assets....... 1,033.2 Property, plant and equipment, net.......................... 659.8 Intangible assets, net......... 448.1 Investment in subsidiary....... -- Other assets................... 132.4 -------- Total assets............... $2,273.5 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt....................... $ 0.4 Accounts payable............. 105.7 Accrued expenses and other current liabilities........ 99.9 -------- Total current liabilities.............. 206.0 Long-term debt, less current portion...................... 852.8 Net intercompany (receivable) payable...................... -- Other liabilities.............. 2.8 -------- Total liabilities.......... 1,061.6 -------- Commitments and contingencies Stockholders' equity: Class A common stock......... 1.2 Additional paid-in capital... 1,221.2 Retained earnings (deficit).................. (5.9) Accumulated other comprehensive loss......... (0.8) Less treasury stock (at cost)...................... (3.8) -------- Total stockholders' equity................... 1,211.9 -------- Total liabilities and stockholders' equity..... $2,273.5 ========
12 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 29, 2002 --------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED FAIRCHILD FAIRCHILD SEMICONDUCTOR SEMICONDUCTOR GUARANTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES ------------------- -------------- ------------ (IN MILLIONS) Revenue: Net sales -- trade........ $ -- $ 50.3 $ 1.0 Net sales -- intercompany... -- 212.8 34.6 Contract manufacturing.... -- 11.4 -- ----- ------ ------ Total revenue........... -- 274.5 35.6 Operating expenses: Cost of sales............. -- 18.8 3.6 Cost of sales -- intercompany... -- 211.8 33.7 Cost of contract manufacturing........... -- 9.3 -- Research and development............. -- 8.5 5.1 Selling, general and administrative.......... -- 23.7 1.4 Amortization of acquisition-related intangibles............. -- -- 2.3 Purchased in-process research and development............. -- -- -- Restructuring and impairments............. -- -- -- ----- ------ ------ Total operating expenses.............. -- 272.1 46.1 ----- ------ ------ Operating income (loss)..... -- 2.4 (10.5) Interest expense............ -- 21.1 -- Interest income............. -- (3.4) -- Equity in subsidiary (income) loss............. (4.3) (20.1) (15.4) ----- ------ ------ Income before income taxes..................... 4.3 4.8 4.9 Provision for income taxes..................... -- 0.5 -- ----- ------ ------ Net income.................. $ 4.3 $ 4.3 $ 4.9 ===== ====== ====== THREE MONTHS ENDED SEPTEMBER 29, 2002 ------------------------------------------------- CONSOLIDATED NON- FAIRCHILD GUARANTOR SEMICONDUCTOR SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC. ------------ ------------ ------------------- (IN MILLIONS) Revenue: Net sales -- trade........ $295.1 $ -- $346.4 Net sales -- intercompany... 90.2 (337.6) -- Contract manufacturing.... 2.8 -- 14.2 ------ ------- ------ Total revenue........... 388.1 (337.6) 360.6 Operating expenses: Cost of sales............. 237.0 -- 259.4 Cost of sales -- intercompany... 92.1 (337.6) -- Cost of contract manufacturing........... 1.8 -- 11.1 Research and development............. 6.4 -- 20.0 Selling, general and administrative.......... 11.3 -- 36.4 Amortization of acquisition-related intangibles............. 7.2 -- 9.5 Purchased in-process research and development............. -- -- -- Restructuring and impairments............. -- -- -- ------ ------- ------ Total operating expenses.............. 355.8 (337.6) 336.4 ------ ------- ------ Operating income (loss)..... 32.3 -- 24.2 Interest expense............ -- -- 21.1 Interest income............. (0.2) -- (3.6) Equity in subsidiary (income) loss............. -- 39.8 -- ------ ------- ------ Income before income taxes..................... 32.5 (39.8) 6.7 Provision for income taxes..................... 1.9 -- 2.4 ------ ------- ------ Net income.................. $ 30.6 $ (39.8) $ 4.3 ====== ======= ======
13 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 29, 2002 --------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED FAIRCHILD FAIRCHILD SEMICONDUCTOR SEMICONDUCTOR GUARANTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES ------------------- -------------- ------------ (IN MILLIONS) Revenue: Net sales -- trade........ $ -- $157.0 $ 2.8 Net sales -- intercompany... -- 714.4 113.8 Contract manufacturing.... -- 29.4 -- ----- ------ ------ Total revenue........... -- 900.8 116.6 Operating expenses: Cost of sales -- trade.... -- 51.6 0.9 Cost of sales -- intercompany... -- 710.9 111.1 Cost of contract manufacturing........... -- 24.9 -- Research and development............. -- 27.5 16.9 Selling, general and administrative.......... -- 36.4 37.0 Amortization of acquisition-related intangibles............. -- -- 7.0 Purchased in-process research and development............. -- 1.0 0.7 Restructuring and impairments............. -- 1.7 0.7 ----- ------ ------ Total operating expenses.............. -- 854.0 174.3 ----- ------ ------ Operating income (loss)..... -- 46.8 (57.7) Interest expense............ -- 78.3 -- Interest income............. -- (8.6) (0.2) Other income (expense), net....................... -- 22.1 (20.5) Equity in subsidiary (income) loss............. 6.0 (30.6) (47.6) ----- ------ ------ Income (loss) before income taxes..................... (6.0) (14.4) 10.6 Provision (benefit) for income taxes.............. -- (8.4) -- ----- ------ ------ Net income (loss)......... $(6.0) $ (6.0) $ 10.6 ===== ====== ====== NINE MONTHS ENDED SEPTEMBER 29, 2002 ------------------------------------------------- CONSOLIDATED NON- FAIRCHILD GUARANTOR SEMICONDUCTOR SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC. ------------ ------------ ------------------- (IN MILLIONS) Revenue: Net sales -- trade........ $ 859.6 $ -- $1,019.4 Net sales -- intercompany... 258.9 (1,087.1) -- Contract manufacturing.... 9.2 -- 38.6 -------- --------- -------- Total revenue........... 1,127.7 (1,087.1) 1,058.0 Operating expenses: Cost of sales -- trade.... 709.4 -- 761.9 Cost of sales -- intercompany... 265.1 (1,087.1) -- Cost of contract manufacturing........... 5.1 -- 30.0 Research and development............. 18.1 -- 62.5 Selling, general and administrative.......... 35.1 -- 108.5 Amortization of acquisition-related intangibles............. 21.3 -- 28.3 Purchased in-process research and development............. -- -- 1.7 Restructuring and impairments............. 1.2 -- 3.6 -------- --------- -------- Total operating expenses.............. 1,055.3 (1,087.1) 996.5 -------- --------- -------- Operating income (loss)..... 72.4 -- 61.5 Interest expense............ -- -- 78.3 Interest income............. (0.4) -- (9.2) Other income (expense), net....................... -- -- 1.6 Equity in subsidiary (income) loss............. -- 72.2 -- -------- --------- -------- Income (loss) before income taxes..................... 72.8 (72.2) (9.2) Provision (benefit) for income taxes.............. 5.2 -- (3.2) -------- --------- -------- Net income (loss)......... $ 67.6 $ (72.2) $ (6.0) ======== ========= ========
14 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 29, 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 operating activities:................... $ -- $ 30.4 $ 4.9 $ 39.3 $ 74.6 ------- ------- ----- ------ ------- Investing activities: Capital expenditures.......... -- (43.1) (4.9) (40.0) (88.0) Purchase of molds and tooling.................... -- -- -- (2.2) (2.2) Acquisitions and divestitures, net of cash acquired....... -- 23.9 -- -- 23.9 Investment (in) from affiliate.................. (405.1) 405.1 -- -- -- ------- ------- ----- ------ ------- Cash provided by (used in) investing activities..... (405.1) 385.9 (4.9) (42.2) (66.3) ------- ------- ----- ------ ------- Financing activities: Repayment of long-term debt... -- (285.4) -- -- (285.4) Proceeds from issuance of common stock and from issuance of stock options, net........................ 409.7 -- -- -- 409.7 Purchase of treasury stock.... (4.6) -- -- -- (4.6) ------- ------- ----- ------ ------- Cash provided by (used in) financing activities..... 405.1 (285.4) -- -- 119.7 ------- ------- ----- ------ ------- Net change in cash and cash equivalents................... -- 130.9 -- (2.9) 128.0 Cash and cash equivalents at beginning of period........... -- 476.3 -- 28.1 504.4 ------- ------- ----- ------ ------- Cash and cash equivalents at end of period..................... $ -- $ 607.2 $ -- $ 25.2 $ 632.4 ======= ======= ===== ====== ======= Supplemental Cash Flow Information: Cash paid (received), net during the period for: Income taxes............... $ -- $ (4.1) $ -- $ 1.5 $ (2.6) ======= ======= ===== ====== ======= Interest................... $ -- $ 64.5 $ -- $ -- $ 64.5 ======= ======= ===== ====== =======
15 CONDENSED CONSOLIDATING BALANCE SHEET
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........................... -- 258.8 67.6 336.6 -- 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.................... 5.9 108.6 15.9 1.2 -- ------ -------- ------ ------ --------- 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 -- -- -- -- 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........................... 663.0 Intangible assets, net.......... 479.8 Investment in subsidiary........ -- Other assets.................... 131.6 -------- 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 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 ========
16 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2001 ------------------------------------------------------------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED FAIRCHILD FAIRCHILD NON- FAIRCHILD SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC. ------------------- -------------- ------------ ------------ ------------ ------------------- (IN MILLIONS) Revenue: Net sales -- trade...... $ -- $ 50.9 $ 6.0 $246.5 $ -- $303.4 Net sales -- intercompany.. -- 227.5 16.2 73.8 (317.5) -- Contract manufacturing......... -- 18.2 -- 3.8 -- 22.0 ------ ------ ------ ------ ------- ------ Total revenue......... -- 296.6 22.2 324.1 (317.5) 325.4 Operating expenses: Cost of sales........... -- 35.3 0.8 209.9 -- 246.0 Cost of sales--intercompany... -- 225.8 15.3 76.4 (317.5) -- Cost of contract manufacturing......... -- 12.2 -- 2.1 -- 14.3 Research and development........... -- 8.0 5.6 5.5 -- 19.1 Selling, general and administrative........ -- 19.7 4.6 11.5 -- 35.8 Amortization of acquisition-related intangibles........... -- -- 6.7 7.4 -- 14.1 Purchased in-process research and development........... -- 1.0 -- -- -- 1.0 Restructuring and impairments........... -- 0.5 0.1 0.2 -- 0.8 ------ ------ ------ ------ ------- ------ Total operating expenses............ -- 302.5 33.1 313.0 (317.5) 331.1 ------ ------ ------ ------ ------- ------ Operating income (loss)... -- (5.9) (10.9) 11.1 -- (5.7) Interest expense.......... -- 25.8 0.1 (0.1) -- 25.8 Interest income........... -- (1.9) (0.3) -- -- (2.2) Equity in subsidiary (income) loss........... 19.1 1.6 (7.6) -- (13.1) -- ------ ------ ------ ------ ------- ------ Income (loss) before income taxes............ (19.1) (31.4) (3.1) 11.2 13.1 (29.3) Provision (benefit) for income taxes............ -- (12.3) -- 2.1 -- (10.2) ------ ------ ------ ------ ------- ------ Net income (loss)......... $(19.1) $(19.1) $ (3.1) $ 9.1 $ 13.1 $(19.1) ====== ====== ====== ====== ======= ======
17 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2001 ------------------------------------------------------------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED FAIRCHILD FAIRCHILD NON- FAIRCHILD SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC. ------------------- -------------- ------------ ------------ ------------ ------------------- (IN MILLIONS) Revenue: Net sales -- trade...... $ -- $190.3 $ 56.1 $ 779.3 $ -- $1,025.7 Net sales -- intercompany.. -- 686.4 57.4 252.3 (996.1) -- Contract manufacturing......... -- 49.0 -- 8.4 -- 57.4 ------ ------ ------ -------- ------- -------- Total revenue......... -- 925.7 113.5 1,040.0 (996.1) 1,083.1 Operating expenses: Cost of sales........... -- 104.6 48.1 617.0 -- 769.7 Cost of sales -- intercompany.......... -- 679.9 54.2 262.0 (996.1) -- Cost of contract manufacturing......... -- 32.9 -- 4.8 -- 37.7 Research and development........... -- 32.0 16.3 16.1 -- 64.4 Selling, general and administrative........ -- 69.2 14.6 36.3 -- 120.1 Amortization of acquisition-related intangibles........... -- 0.2 16.3 22.2 -- 38.7 Purchased in-process research and development........... -- 1.0 12.8 -- -- 13.8 Restructuring and impairments........... -- 11.3 1.3 1.6 -- 14.2 ------ ------ ------ -------- ------- -------- Total operating expenses............ -- 931.1 163.6 960.0 (996.1) 1,058.6 ------ ------ ------ -------- ------- -------- Operating income (loss)... -- (5.4) (50.1) 80.0 -- 24.5 Interest expense.......... -- 76.2 0.1 0.1 -- 76.4 Interest income........... -- (12.2) (0.2) (0.3) -- (12.7) Other income, net......... -- -- -- -- -- -- Equity in subsidiary (income) loss........... 25.5 (25.5) (39.3) -- 39.3 (0.0) ------ ------ ------ -------- ------- -------- Income (loss) before income taxes............ (25.5) (43.9) (10.7) 80.2 (39.3) (39.2) Provision for income taxes................... -- (18.4) -- 4.7 -- (13.7) ------ ------ ------ -------- ------- -------- Net income (loss)....... $(25.5) $(25.5) $(10.7) $ 75.5 $ (39.3) $ (25.5) ====== ====== ====== ======== ======= ========
18 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2001 ---------------------------------------------------------------------------------------- UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED FAIRCHILD FAIRCHILD NON- FAIRCHILD SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES INTERNATIONAL, INC. ------------------- -------------- ------------ ------------ ------------------- (IN MILLIONS) Cash flows from operating activities:... $ -- $ 78.0 $ 0.6 $ 38.3 $ 116.9 ----- ------- ----- ------ ------- Investing activities: Capital expenditures.................. -- (58.7) (0.2) (42.3) (101.2) Purchase of molds and tooling......... -- -- (0.1) (3.4) (3.5) Purchase of long-term investments..... -- (3.5) -- -- (3.5) Acquisitions, net of cash acquired.... -- (343.1) -- -- (343.1) Investment (in) from affiliate........ 0.7 (0.7) -- -- -- ----- ------- ----- ------ ------- Cash provided by (used in) investing activities............ 0.7 (406.0) (0.3) (45.7) (451.3) ----- ------- ----- ------ ------- Financing activities: Repayment of long-term debt........... -- (120.4) -- -- (120.4) Issuance of long-term debt............ -- 350.0 -- -- 350.0 Proceeds from issuance of common stock and from issuance of stock options, net................................. 5.1 -- -- -- 5.1 Purchase of treasury stock............ (5.8) -- -- -- (5.8) Debt issuance costs................... -- (10.9) -- -- (10.9) ----- ------- ----- ------ ------- Cash provided by (used in) financing activities............ (0.7) 218.7 -- -- 218.0 ----- ------- ----- ------ ------- Net change in cash and cash equivalents........................... -- (109.3) 0.3 (7.4) (116.4) Cash and cash equivalents at beginning of period............................. -- 374.5 -- 27.3 401.8 ----- ------- ----- ------ ------- Cash and cash equivalents at end of period................................ $ -- $ 265.2 $ 0.3 $ 19.9 $ 285.4 ===== ======= ===== ====== ======= Supplemental Cash Flow Information: Cash paid, net during the period for: Income taxes...................... $ -- $ 0.5 $ -- $ 10.3 $ 10.8 ===== ======= ===== ====== ======= Interest.......................... $ -- $ 66.7 $ -- $ -- $ 66.7 ===== ======= ===== ====== =======
19 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 nine months 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 combined 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. The acquired business has added leading-edge converter products to our analog and mixed signal product offering. RESULTS OF OPERATIONS We generated net income (losses) of $4.3 million and $(6.0) million in the third quarter and first nine months of 2002, respectively, compared to net losses of $19.1 million and $25.5 million in the comparable periods 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 third quarter and first nine months of 2001, net losses 20 would have been $16.0 million and $17.6 million, respectively. Excluding unusual (gains) charges and amortization of acquisition-related intangibles, pro forma net income (loss) was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- (IN MILLIONS) Net income (loss)................. $ 4.3 $(19.1) $ (6.0) $(25.5) Restructuring and impairments... -- 0.8 3.6 14.2 Purchased in-process research and development.............. -- 1.0 1.7 13.8 Cost associated with the redemption of the 10 1/8% Notes........................ -- -- 22.1 -- Gain on sale of space and defense product line......... -- -- (20.5) -- Inventory charge associated with Analog restructuring......... -- -- -- 2.5 Amortization of acquisition-related intangibles.................. 9.5 14.1 28.3 38.7 Less associated tax effects..... (3.3) (5.6) (12.3) (20.6) ----- ------ ------ ------ Pro forma net income (loss)....... $10.5 $ (8.8) $ 16.9 $ 23.1 ===== ====== ====== ======
Restructuring and impairments in the first nine months of 2002 include $3.6 million recorded in the first quarter associated with workforce reduction actions. Restructuring and impairments in the third quarter and first nine months of 2001 include $0.8 million recorded in the third quarter for employee severance and benefit costs associated with workforce reduction actions, $3.9 million recorded in the second quarter for employee severance and benefit costs associated with workforce reduction actions, $8.3 million recorded in the first quarter for asset impairment charges related to the consolidation of the five-inch wafer fabrication line in South Portland, Maine and $1.2 million recorded in the first quarter for employee severance and benefit costs associated with workforce reduction actions. 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 was recorded in connection with our acquisitions of Impala in the third quarter of 2001 ($1.0 million), and DPP in the first quarter of 2001 ($12.8 million). Operating income (loss) was $24.2 million and $61.5 million in the third quarter and first nine months of 2002, respectively, compared to $(5.7) million and $24.5 million in the third quarter and first nine months of 2001. Excluding restructuring and impairments, purchased in-process research and development, amortization of acquisition related intangibles and other unusual (gains) charges, pro forma operating income was $33.7 million and $95.1 million in the third quarter and first nine months of 2002, respectively, compared to $10.2 million and $93.7 million in the third quarter and first nine months of 2001. The increase in pro forma operating income in the third quarter of 2002 as compared to the third quarter of 2001 is due to higher revenue and gross profit and lower selling, general and administrative ("SG&A") expenses as a percent of revenue, resulting from cost reduction actions undertaken. The increase in pro forma operating income for the first nine months of 2002 compared to the first nine months of 2001 is due to lower research and development expenses ("R&D") and SG&A, offset by lower gross margins, primarily in the first quarter of 2002. On a segment basis, Analog had operating income of $11.9 million and $30.5 million for the third quarter and first nine months of 2002, respectively, compared to $3.7 million and $10.7 million in the comparable periods of 2001. The increases in Analog's operating income were primarily due to increases in revenues and gross margins as well as decreases in selling, general and administrative expenses. Discrete had operating income of $20.3 million and $52.5 million in the third quarter and first nine months of 2002, respectively, compared to $3.4 million and $36.9 million in the comparable periods of 2001. The increases in Discrete's 21 operating income were primarily due to an increase in gross margins, primarily in the third quarter of 2002. Interface and Logic had an operating income (loss) of $(1.9) million and $2.9 million in the third quarter and first nine months of 2002 compared to operating income (loss)of $(2.8) million and $27.6 million in the comparable periods of 2001. The decreases in Interface and Logic's operating income in the third quarter and first nine months of 2002 were the result of decreases in revenues and gross margins partially offset by decreases in research and development and selling, general and administrative expenses. Excluding depreciation and amortization of $42.9 million and $125.8 million in the third quarter and first nine months of 2002, respectively, and $45.3 million and $133.3 million in the comparable periods of 2001, restructuring and impairments, purchased in-process research and development and other unusual (gains) charges, earnings before interest, taxes depreciation and amortization (EBITDA) were $67.1 million and $192.6 million in the third quarter and first nine months of 2002, respectively, compared to $41.4 million and $188.3 million in the comparable periods 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 and pro forma operating income are presented because we use them as additional measures of our operating performance. EBITDA, pro forma net income, and pro forma operating income should not be considered as alternatives 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 indicators of our operating performance, or as alternatives to cash flow as a measure of liquidity. REVENUES Our revenues consist of trade sales to unaffiliated customers (96.1% and 96.4% of total revenues in the third quarter and first nine months of 2002, respectively, and 93.2% and 94.7% of total revenues in the comparable periods of 2001) and revenues from contract manufacturing services provided to National Semiconductor and Samsung Electronics (3.9% and 3.6% of total revenues in the third quarter and first nine months of 2002, respectively, and 6.8% and 5.3% of total revenues in the comparable periods of 2001). Trade sales increased 14.2% and decreased 0.6% to $346.4 million and $1,019.4 million in the third quarter and first nine months of 2002, respectively, compared to $303.4 million and $1,025.7 million for the comparable periods of 2001. The increase in trade sales in the third quarter resulted primarily from higher unit volumes offset somewhat by lower average selling prices, while the decrease in the first nine months of 2002 was primarily the result of lower average selling prices on flat to slightly higher unit volumes. Analog revenues increased 26.6% and 9.8% to $89.1 million and $248.7 million in the third quarter and first nine months of 2002, respectively, from $70.4 million and $226.5 million in the comparable periods of 2001. The increases are a result of higher sales for power switches and motor drivers, predominantly into consumer and industrial markets. Discrete revenues increased 18.1% and 12.2% to $188.3 million and $553.7 million in the third quarter and first nine months of 2002, respectively, compared to $159.4 million and $493.7 million in the comparable periods of 2001. The increase in the third quarter is the result of stronger sales of high and low power MOSFET's into virtually all end markets. The increase for the first nine months of 2002 was due to higher sales of low power MOSFET's into the computing and communications markets and a full nine months of revenue for our DPP acquisition, which occurred late in the first quarter of 2001. Interface and Logic revenues decreased 14.1% and 32.0% to $44.9 million and $148.3 million in the third quarter and first nine months of 2002, respectively, from $52.3 million and $218.0 million in the comparable periods of 2001. The decreases are due to price competition in our mature logic products and the impact of the wireline communications market slowdown on our interface product lines. 22 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 and nine months ended September 29, 2002 and September 30, 2001:
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- North America..................... 15% 18% 16% 21% Europe............................ 11 14 11 14 Asia/Pacific...................... 53 47 52 47 Korea............................. 21 21 21 18 --- --- --- --- Total................... 100% 100% 100% 100% === === === ===
North American revenues decreased 2% and 25% in the third quarter and first nine months of 2002, respectively, compared to the same periods of 2001. The North American sales region has been impacted by a shrinking market due to the continued migration of component manufacturing offshore. All market segments are exhibiting weakness except for small improvements in automotive. European revenues decreased 9% and 22% in the third quarter and first nine months of 2002, respectively, compared to the same periods of 2001. They have been impacted by the same factors affecting North America, with particular weakness in the communications market. Revenues in our Asia/Pacific sales region increased 27% and 11% in the third quarter and first nine months of 2002, respectively, compared to the same periods of 2001. The year over year increases in Asia/Pacific are due in part to the continued migration of electronics production into the region as well as strength in industrial and computing markets. Sales in our Korean region increased 14% both in the third quarter and first nine months of 2002, compared to the same periods of 2001. This increase was primarily due to strong demand from our largest customer, Samsung Electronics, particularly for products directed towards consumer and computing markets. Contract manufacturing revenues decreased 35.5% and 32.8% to $14.2 million and $38.6 million in the third quarter and first nine months of 2002 compared to $22.0 million and $57.4 million in the third quarter and first nine months 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 and nine months ended September 29, 2002 and September 30, 2001:
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------- ----------------------------- SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, 2002 2001 2002 2001 -------------- -------------- ------------- ------------- (IN MILLIONS) Trade gross profit......... $87.0 25.1% $57.4 18.9% $257.5 25.3% $256.0 25.0% Contract manufacturing gross profit............. 3.1 21.8% 7.7 35.0% 8.6 22.3% 19.7 34.3% ----- ----- ------ ------ Total gross profit......... $90.1 25.0% $65.1 20.0% $266.1 25.2% $275.7 25.5% ===== ===== ====== ======
Excluding non-recurring charges in the first nine months of 2001 associated with an inventory charge as a result of the discontinuance of the digitizer product line in our Analog group ($2.5 million), total gross profit was $278.2 million (25.7%). The increase in gross profit for the third quarter of 2002 compared to the third quarter of 2001 is a result of increased revenues and better factory utilization as well as the effect of cost reductions undertaken. The decrease in gross profit for the first nine months of 2002 compared to the first nine months of 2001 is a result of lower gross profit from contract manufacturing due to reduced demand. Trade gross profit is up slightly on a 23 year to date basis as cost reduction actions and increased factory utilization, particularly in the second and third quarters, have offset price erosion. RESEARCH AND DEVELOPMENT R&D expenses were $20.0 million, or 5.8% of trade sales, in the third quarter of 2002, compared to $19.1 million, or 6.3% of trade sales, in the third quarter of 2001. The increase in the third quarter of 2002 reflects increased R&D spending focused on our interface and power analog products. On a year-to-date basis, R&D was $62.5 million, or 6.1% of trade sales, compared to $64.4 million, or 6.3% of trade sales for the comparable period of 2001. The decrease in the first nine months of 2002 as compared to the first nine months of 2001 was due to spending reductions in response to softer market conditions, offset by increased R&D as a result of a full nine months of R&D expenses in 2002 from our DPP acquisition. SELLING, GENERAL AND ADMINISTRATIVE SG&A were $36.4 million, or 10.5% of trade sales, in the third quarter of 2002, compared to $35.8 million, or 11.8% of trade sales, in the third quarter of 2001. The increase in the third quarter of 2002 is a result of higher selling expenses on increased revenues offset by cost reductions. On a year-to-date basis, SG&A expenses were $108.5 million, or 10.6% of trade sales, compared to $120.1 million, or 11.7% of trade sales, for the comparable period of 2001. In the first nine months of 2002, we have offset incremental SG&A from our acquired businesses with spending reductions in response to softer market conditions. AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES Amortization of acquisition-related intangibles was $9.5 million in the third quarter of 2002, compared to $14.1 million in the third quarter of 2001. The increase in the third quarter of 2002 is a result of higher selling expenses on increased revenue, offset by cost reductions. On a year-to-date basis, amortization of acquisition related intangibles was $28.3 million, compared to $38.7 million for the comparable period of 2001. The decreases in amortization are due to our adoption of SFAS No. 142 offset by an increase in amortization, particularly in the first nine months of 2002 as compared to the comparable period of 2001, due to a full nine months of amortization of intangibles acquired as part of DPP acquisition, our Impala acquisition in the latter part of 2001 and the acquisition of SPT in March of 2002. INTEREST EXPENSE Interest expense was $21.1 million and $78.3 million in the third quarter and first nine months of 2002, respectively, compared to $25.8 million and $76.4 million in the comparable periods of 2001. The decrease in interest expense in the third quarter was principally the result of expense associated with the $200.0 million of 5% Convertible Senior Subordinated Notes we sold in the fourth quarter of 2001, offset by the redemption of $285.0 million of 10 1/8% senior subordinated notes that occurred on June 28, 2002. Year-to-date interest expense increased, impacted by additional expense on the $350.0 million of 10 1/2% Senior Subordinated Notes we sold in the first quarter of 2001. INTEREST INCOME Interest income was $3.6 million and $9.2 million in the third quarter and first nine months of 2002, respectively, compared to $2.2 million and $12.7 million in the comparable periods of 2001. The increase in interest income in the third quarter of 2002 as compared to the third quarter of 2001 is primarily due to interest recognized on an income tax refund and higher average cash balances offset by lower rates of return on our short-term investments. The decrease in interest income for the first nine months of 2002 compared to the comparable periods of 2001 was due to lower rates of return. OTHER EXPENSE, NET During the first nine months of 2002, we recorded other expense, net of $1.6 million. In the second quarter, $22.1 million was recorded for costs associated with the redemption of our 10 1/8% senior subordinated 24 notes. These costs included $14.5 million for the call premium and other transaction fees and a $7.6 million non-cash write-off of deferred financing fees associated with the original bond offering. The year to date expense includes these costs offset by a gain of $20.5 million related to the sale of our military and space-related discrete power product line recorded in the first quarter of 2002. INCOME TAXES Income tax provision (benefit) was $2.4 million and $(3.2) million for the third quarter and first nine months of 2002, respectively, compared to $(10.2) million and $(13.7) million for the third quarter and first nine months of 2001. The effective tax rate for the third quarter and first nine months of 2002 was 35.8% and 34.8%, respectively, compared to 34.8% and 34.9% for the third quarter and first nine months of 2001. 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 September 29, 2002, adjusted for outstanding letters of credit, we had $299.2 million available under this senior credit facility. At September 29, 2002, we had additional outstanding letters of credit and guarantees totaling $5.0 million that were issued on behalf of unaffiliated companies with which we currently have a strategic investment or relationship. These amounts outstanding do not impact available borrowings under the senior credit facility. Our senior credit facility, the indentures governing our 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 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 remainder of the year and for the next twelve months. We intend to invest approximately $125.0 to $135.0 million in 2002 on capital expenditures, including the $88.0 million we have spent through September 29, 2002. This capital primarily will be spent to expand capacity 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. On May 30, 2002, the Company completed a follow-on public offering of 20,000,000 shares of its Class A Common Stock at a price to the public of $25.65 per share. On June 20, 2002, the underwriters of the offering executed their option to cover over-allotments and purchased a further 2,219,196 shares. The underwriting discount was $1.09 per share. The total of 22,219,196 shares included 16,219,196 newly issued shares sold by the Company and 6,000,000 shares sold by an existing stockholder. The Company did not receive any proceeds from shares sold by the existing stockholder. The net proceeds to the Company after the underwriting discount and other related expenses were approximately $397.7 million. 25 On June 28, 2002, the Company used some of the proceeds raised in the follow-on offering to redeem all $285.0 million of its 10 1/8% senior subordinated notes that were due in March 2007, at a price of 105.063% of face value. In connection with the redemption, the company had one-time charges totaling $22.1 million, including $14.5 million for the call premium and other transaction fees and a $7.6 million non-cash write-off of deferred financing fees associated with the original bond offering. As of September 29, 2002, our cash and cash equivalents balance was $632.4 million, an increase of $128.0 million from December 30, 2001, and an increase of $19.0 million from June 30, 2002. During the first nine months of 2002, our operations provided $74.6 million in cash compared to $116.9 million of cash in the first nine months of 2001. The decrease in cash provided by operating activities reflects a decrease in the first nine months of 2002 in net income adjusted for non-cash items of $18.7 million and a decrease in cash flows from changes in operating assets and liabilities of $23.6 million as compared to the first nine months of 2001. Cash used in investing activities during the first nine months of 2002 totaled $66.3 million, compared to $451.3 million in the first nine months of 2001. The decrease primarily results from a net cash inflow for acquisitions and divestitures of $23.9 million in the first nine months of 2002 versus a net cash outflow in the first nine months of 2001 for acquisitions and divestitures of $343.1 million. Cash provided by financing activities of $119.7 million for the first nine months of 2002 was primarily from proceeds from the follow on offering and issuance of common stock upon the exercise of options offset by the cash used to redeem the 10 1/8% senior subordinated notes. Cash provided by financing activities of $218.0 million in the first nine months of 2001 was due primarily to proceeds from the issuance of the 10 1/2% Senior Subordinated Notes, net of debt issuance costs, offset by cash used to repay the outstanding balance on our Senior Credit Facility. 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 September 29, 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 September 29, 2002.
REMAINDER 2-3 4-5 AFTER CONTRACTUAL OBLIGATIONS TOTAL OF 2002 YEARS YEARS 5 YEARS - ----------------------- ------ --------- ----- ----- ------- (IN MILLIONS) Long-Term Debt............................ $853.2 $0.0 $ 0.8 $ 0.7 $851.7 Operating Leases.......................... 90.6 5.5 37.1 12.5 35.5 ------ ---- ----- ----- ------ Total........................... $943.8 $5.5 $37.9 $13.2 $887.2 ====== ==== ===== ===== ======
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 nine months of 2002, nor in the first nine 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 judgments or estimates. Based on this definition, we believe our critical accounting policies include the policies of revenue recognition, 26 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 ongoing 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 claims 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. 27 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. POLICY ON BUSINESS OUTLOOK DISCLOSURE AND QUIET PERIODS 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 October 17, 2002 press release announcing third 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 www.investor.fairchildsemi.com. Toward the end of each quarter, and until that quarter's results are publicly announced, we observe a "quiet period," when the outlook is not updated to reflect management's current expectations. The quiet period for the fourth quarter of 2002 will be from December 14, 2002 to January 16, 2003, when we plan to release our fourth quarter and full year 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 filing 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 of the company's financial results or expectations. OUTLOOK We expect revenues in the fourth quarter of 2002 to be down 4-6% from the third quarter of 2002, as a result of a lower quarter-entering backlog. If our turns business (which consists of orders that are received and shipped during the same quarter) is stronger than anticipated, revenues could be as high as sequentially flat from the third quarter. We expect the pricing environment to remain very competitive and aggressive, especially on turns business. Due to additional depreciation from the start-up of our 6-inch wafer fab in Bucheon, Korea, we anticipate our gross margins to be down roughly 50 basis points in the fourth quarter of 2002, compared to the third quarter. For the fourth quarter of 2002, we expect our research and development and selling, general and administrative expenses (excluding amortization of intangibles) to be lower than the third quarter, resulting in operating income as a percentage of sales roughly flat with third quarter levels. We expect interest expense, net, to be approximately $18.5 million in the fourth quarter. For purposes of computing earnings before interest, taxes, depreciation and amortization (EBITDA), pro forma net income and net income per share, we expect that depreciation and amortization will be roughly 28 $37 million and amortization of acquisition-related intangibles to be approximately $9.5 million for the fourth quarter of 2002. Finally, we expect an outstanding diluted share count of approximately 118 million shares for the fourth quarter of 2002. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In April 2002 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145, Rescission of FASB Statement No's. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections, effective for fiscal years beginning May 15, 2002 or later. It rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements and SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement also amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. We do not believe the impact of adopting SFAS No. 145 will have a material impact on our financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement is effective for fiscal years beginning after December 31, 2002. We do not believe the impact of adopting SFAS No. 146 will have a material impact on our financial statements. 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 significant 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 29 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 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 and others of intellectual property infringement. The semiconductor industry is characterized by claims of and litigation regarding patent and other intellectual property rights. We receive direct, and indirect claims, (including offers to sell us licenses), have been 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, or the costs of avoiding litigation by purchasing licenses rights or by other means, could result in significant expense to our company, adversely affecting sales of the challenged product or technologies and diverting the efforts of our 30 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 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. WE DEPEND ON SUPPLIERS FOR TIMELY DELIVERIES OF RAW MATERIALS OF ACCEPTABLE QUALITY. PRODUCTION TIME AND PRODUCT COSTS COULD INCREASE IF WE WERE TO LOSE A PRIMARY SUPPLIER OR IF A PRIMARY SUPPLIER INCREASED THE 31 PRICES OF RAW MATERIALS. PRODUCT PERFORMANCE COULD BE AFFECTED AND QUALITY ISSUES COULD DEVELOP AS A RESULT OF A SIGNIFICANT DEGRADATION IN THE QUALITY OF RAW MATERIALS WE USE IN OUR PRODUCTS. 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. Results could also be adversely affected if there is a significant degradation in the quality of raw materials used in our products, or if the raw materials give rise to compatibility or performance issues in our products, any of which could lead to an increase in customer returns or product warranty claims. Although we maintain quality rigorous control systems, errors or defects may arise from a supplied raw material and be beyond our detection or control. 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 Amkor, NS Electronics (Bangkok) Ltd., Samsung Electronics, Korea Micro Industry, Enoch Semiconductor, SP Semiconductor Company Ltd. 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. MORE THAN HALF 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 61% of our net trade sales for the nine months ended September 29, 2002. Our five domestic distributors accounted for 5% of our net trade sales for the nine months ended September 29, 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 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. 32 THE SEMICONDUCTOR BUSINESS IS VERY COMPETITIVE, ESPECIALLY IN THE MARKETS WE SERVE, 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. Competitors offer equivalent or similar versions of many of our products and customers may switch from our products to competitors' products on the basis of price, delivery terms, product performance, quality, reliability and customer service or a combination of any of these factors. Competition is especially intense in the multi-market semiconductor segment because it is relatively easier for customers to switch suppliers of more standardized, multi-market products like ours, compared to suppliers of more highly integrated or customized semiconductor products such as processors or system-on-a-chip products, which we do not manufacture. 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. WE MAY FACE PRODUCT WARRANTY OR PRODUCT LIABILITY CLAIMS THAT ARE DISPROPORTIONATELY HIGHER THAN THE VALUE OF THE PRODUCTS INVOLVED. Our products are typically sold at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated. For example, our products that are incorporated into a personal computer would be sold for several dollars, whereas the personal computer would be sold by the computer maker for several hundred dollars. Although we maintain rigorous quality control systems, we manufacture and sell more than 16 billion units per year to customers around the world, and in the ordinary course of our business we receive warranty claims for some of these products that are defective or that do not perform to published specifications. Since a defect or failure in our product could give rise to failures in the goods that incorporate them (and consequential claims for damages against our customers from their customers), we may face claims for damages that are disproportionate to the revenues and profits we receive from the products involved. Although we attempt, through our standard terms and conditions of sale and other customer contracts, to limit our liability for defective products to obligations to replace the defective goods or refund the purchase price, we nevertheless receive claims for other charges, such as for labor and other costs of replacing defective parts, lost profits and other damages. In addition, our ability to reduce such liabilities may be limited by the laws or the customary business practices of the countries where we do business. And, even in cases where we do not believe we have legal liability for such claims, we may choose to pay for them to retain a customer's business or goodwill. Our results of operations and business could be adversely affected as a result of a significant quality or performance issue in our products, if we are required or choose to pay for the damages that result. 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. 33 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 SUPPLY AND SUPPORT CONTRACTS WITH SAMSUNG ELECTRONICS IN CONNECTION WITH OUR ACQUISITION OF ITS POWER DEVICE BUSINESS IN 1999, MOST OF WHICH HAVE NOW ENDED. ANY SIGNIFICANT DECREASE IN PURCHASES BY SAMSUNG ELECTRONICS COULD SUBSTANTIALLY REDUCE OUR FINANCIAL PERFORMANCE. As a result of the acquisition of Samsung Electronics' power device business in 1999, we entered into numerous arrangements with Samsung Electronics, including arrangements relating to product sales, designation as a vendor to affiliated Samsung companies and other services. Although most of these arrangements have expired, Samsung Electronics remains a significant customer, due in part to the historical relationship between the business we acquired and its former parents and affiliates. There can be no assurances that these relationships will continue at historical levels. Samsung Electronics (together with its affiliates) is our largest customer, accounting for more than 11% of total trade sales during the first nine months of 2002. Any material adverse change in the purchases of Samsung Electronics could have a material adverse effect on our results of operations. Although the power device business has historically generated significant revenues from the sale of products to affiliated Samsung companies, contractual arrangements with Samsung designed to maintain such revenues have expired and 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. 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. We are building the first phase of an 800,000 square foot assembly and test facility in Suzhou, China, and expect to begin production there in 2003. Although we expect a significant portion of our production from this 34 new facility will be exported out of China, 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. 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. 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 the cost of compliance with environmental laws has not had a material adverse effect on our results of operations historically, 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 September 29, 2002, affiliates of Citigroup Inc., and our directors and executive officers together owned approximately 19.5% of the outstanding shares of our Class A Common Stock (including shares 35 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 other stockholders or our bondholders. WE ARE A LEVERAGED COMPANY WITH A DEBT TO EQUITY RATIO OF APPROXIMATELY 0.7 TO 1, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR ABILITY TO GROW AND COMPETE. At September 29, 2002, we had total long-term debt of $853.2 million and a ratio of debt to equity of approximately 0.7 to 1. Our substantial indebtedness could have important consequences. For example, it could - require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; - increase the amount of our interest expense, because certain of our borrowings (namely borrowings under our senior credit facility, which is currently undrawn) are at variable rates of interest, which, if interest rates increase, could result in higher interest expense; - increase our vulnerability to general adverse economic and industry conditions; - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; - restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities; - make it more difficult for us to satisfy our obligations with respect to the instruments governing our indebtedness; - place us at a competitive disadvantage compared to our competitors that have less indebtedness; and - limit, along with the financial and other restrictive covenants in our debt instruments, among other things, our ability to borrow additional funds, dispose of assets or pay cash dividends. Failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. DESPITE CURRENT INDEBTEDNESS LEVELS, WE MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE INDEBTEDNESS. INCURRING MORE INDEBTEDNESS COULD EXACERBATE THE RISKS DESCRIBED ABOVE. We may be able to incur substantial additional indebtedness in the future. 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 3/8% Senior Subordinated Notes, its outstanding 10 1/2% Senior Subordinated Notes and the credit agreement relating to the senior credit facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, additional indebtedness incurred in compliance with these restrictions could be substantial. The senior credit facility permits borrowings of up to $300.0 million. As of September 29, 2002 we had $299.2 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. 36 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 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 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 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. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Under new Securities and Exchange Commission (SEC) regulations implementing portions of the Sarbanes-Oxley Act of 2002, our chief executive officer 37 and our chief financial officer are required to certify in this quarterly report their responsibility for establishing and maintaining disclosure controls and procedures designed to ensure that material information relating to our company is made known to them. Our CEO and CFO are also required to certify that they have evaluated the effectiveness of our disclosure controls and procedures as of a date within 90 days prior to the filing of this report, and that they have presented in this report their conclusions about the effectiveness of the disclosure controls and procedures as a result of the evaluation. Based on their evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective, providing them with material information relating to the company as required to be disclosed in the reports we file with the SEC on a timely basis. (b) Changes in internal controls. There were no significant changes in the company's internal controls or in other factors that could significantly affect the company's disclosure controls and procedures subsequent to the date of the CEO and CFO's evaluation discussed in paragraph (a) above, nor were there any significant deficiencies or material weaknesses in the company's internal controls. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time we are involved in actual or threatened legal proceedings in the ordinary course of business. We believe that there is no such ordinary course litigation pending or threatened 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 - ------- ----------- 10.1 Amendment No. 3 dated as of September 18, 2002, superceding Amendment No. 2 dated as of August 3, 2001 and Amendment No. 1 dated as of May 29, 2001, to the Credit Agreement, dated as of June 6, 2000, among Fairchild Semiconductor Corporation, Fairchild Semiconductor International, Inc., Credit Suisse First Boston, Fleet National Bank, ABN Amro Bank NV and certain other lenders. 99.1 Certification, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Kirk P. Pond 99.2 Certification, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Joseph R. Martin.
(b) Reports on Form 8-K On July 24, 2002, we filed a current report on Form 8-K relating to financial information for the three and six months ended June 30, 2002 and forward-looking statements relating to the third quarter of 2002 as announced in a press release issued July 23, 2002. The press release is incorporated in, and filed as an exhibit to, the current report. On August 13, 2002, we filed a current report on Form 8-K relating to the August 12, 2002 submission of sworn statements by Kirk P. Pond, Chairman, President and Chief Executive Officer, and Joseph R. Martin, Executive Vice President and Chief Financial Officer, pursuant to Securities and Exchange Commission Order No. 4-460. Copies of the sworn statements were filed as exhibits to the current report. On September 6, 2002, we filed a current report on Form 8-K relating to the update of our forward-looking guidance for the third quarter of 2002, as announced in a press release dated September 3, 2002. The press release is incorporated in, and filed as an exhibit to, the current report. ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 38 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: November 13, 2002 39 ANNUAL AND QUARTERLY CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kirk P. Pond, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Fairchild Semiconductor International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ KIRK P. POND ------------------------------------ Kirk P. Pond Chairman, President and Chief Executive Officer Date: November 13, 2002 40 ANNUAL AND QUARTERLY CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Joseph R. Martin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Fairchild Semiconductor International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ JOSEPH R. MARTIN ------------------------------------ Joseph R. Martin Executive Vice President and Chief Financial Officer Date: November 13, 2002 41 EX-10.1 3 b44496fsexv10w1.txt AMEND. NO.3 TO THE CREDIT AGREEMENT EXHIBIT 10.1 AMENDMENT NO. 3 dated as of September 18, 2002 (this "Amendment"), to the CREDIT AGREEMENT dated as of June 6, 2000, and as amended by Amendment No. 1 dated as of May 29, 2001, and Amendment No. 2 dated as of August 3, 2001 (the "Credit Agreement"), among FAIRCHILD SEMICONDUCTOR CORPORATION, a Delaware corporation (the "Borrower"), FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC., a Delaware corporation ("Holdings"), the Lenders (as defined in Article I of the Credit Agreement), CREDIT SUISSE FIRST BOSTON, a bank organized under the laws of Switzerland, acting through its New York branch, as swingline lender (in such capacity, the "Swingline Lender"), as an Issuing Bank (as defined in Article I of the Credit Agreement), as administrative agent (in such capacity, the "Administrative Agent") and as collateral agent (in such capacity, the "Collateral Agent") for the Lenders, FLEET NATIONAL BANK, as an Issuing Bank and as syndication agent (in such capacity, the "Syndication Agent"), and ABN AMRO BANK NV, as documentation agent (in such capacity, the "Documentation Agent"). A. Pursuant to the Credit Agreement, the Lenders and the Issuing Banks have extended, and have agreed to extend, credit to the Borrower, in each case pursuant to the terms and subject to the conditions set forth in the Credit Agreement. B. Holdings and the Borrower have requested that certain provisions of the Credit Agreement be amended as provided herein. The Required Lenders, on the terms and subject to the conditions set forth herein, are willing so to amend the Credit Agreement. C. Capitalized terms used but not defined herein shall have the meanings assigned to them in the Credit Agreement, as amended hereby. Accordingly, in consideration of the mutual agreements herein contained and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Amendments to the Credit Agreement. (a) The definition of the term "Cash Equivalents" set forth in Section 1.01 of the Credit Agreement is hereby amended by deleting the words "and (f)" set forth therein and substituting therefor the following: ", (f) senior corporate debt obligations of a U.S. issuer that are rated BBB or better by Standard & Poor's Ratings Service or Baa2 or better by Moody's Investors Service, Inc., that mature not more than three years after the date of acquisition by such person and that are actively traded in a secondary market, and (g)". (b) Section 6.04(a) of the Credit Agreement is hereby amended by inserting after the words "Cash Equivalents" set forth therein the following: ", provided that, in the case of Cash Equivalents, (i) the weighted average life to maturity of all Cash Equivalents held by the Borrower and its Subsidiaries at any time shall not exceed one year and (ii) obligations described in clause (f) of the definition of such term that are rated BBB by Standard & Poor's Rating Service or Baa2 by Moody's Investors Service, Inc. shall not comprise more than 10% of all Cash Equivalents held by the Borrower and its Subsidiaries at any time". SECTION 2. Representations and Warranties. To induce the other parties hereto to enter into this Amendment, each of Holdings and the Borrower represents and warrants to the Administrative Agent, the Collateral Agent, the Issuing Banks and each of the Lenders that: (a) This Amendment has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). (b) After giving effect to this Amendment, the representations and warranties set forth in Article III of the Credit Agreement are true and correct in all material respects on and as of the date hereof with the same effect as though made on and as of the date hereof, except to the extent such representations and warranties expressly relate to an earlier date. (c) After giving effect to this Amendment, no Default or Event of Default has occurred and is continuing. SECTION 3. Effectiveness. This Amendment shall become effective as of the date first above written on the date that the Administrative Agent shall have received counterparts of this Amendment that, when taken together, bear the signatures of Holdings, the Borrower, the Subsidiary Guarantors and the Required Lenders. SECTION 4. Effect of Amendment. Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights and remedies of the Lenders, the Administrative Agent, Holdings or the Borrower under the Credit Agreement or any other Loan Document, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document, all of which are ratified and affirmed in all respects and shall continue in full force and effect. Nothing herein shall be deemed to entitle the Borrower or Holdings to a consent to, or a waiver, amendment, modification or other change of, any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document in similar or different circumstances. After the date hereof, any reference to the Credit Agreement shall mean the Credit Agreement as modified hereby. This Amendment shall constitute a "Loan Document" for all purposes of the Credit Agreement and the other Loan Documents. SECTION 5. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 6. Counterparts. This Amendment may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original but all of which when taken together shall constitute a single contract. Delivery of an executed signature page to this Amendment by facsimile transmission shall be effective as delivery of a manually signed counterpart of this Amendment. SECTION 7. Expenses. The Borrower agrees to reimburse the Administrative Agent for its out-of-pocket expenses in connection with this Amendment, including the reasonable fees, charges and disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent. SECTION 8. Notices. All notices hereunder or in connection herewith shall be given in accordance with the provisions of Section 9.01 of the Credit Agreement. SECTION 9. Headings. The headings of this Amendment are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. SECTION 10. Acknowledgment of Guarantors. Each of the Guarantors hereby acknowledges receipt and notice of, and consents to the terms of, this Amendment.4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. FAIRCHILD SEMICONDUCTOR CORPORATION by /s/ Matthew W. Towse --------------------------------------- Name: Matthew W. Towse Title: Vice President, Treasurer FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. by /s/ Matthew W. Towse --------------------------------------- Name: Matthew W. Towse Title: Vice President, Treasurer EACH OF THE SUBSIDIARY GUARANTORS LISTED ON ANNEX I HERETO, by /s/ Matthew W. Towse ------------------------------------- Name: Matthew W. Towse Title: Vice President, Treasurer CREDIT SUISSE FIRST BOSTON, individually and as Administrative Agent, Collateral Agent, Swingline Lender and an Issuing Bank, by /s/ Robert Hetu -------------------------------------- Name: Robert Hetu Title: Director by /s/ Ian W. Nalitt -------------------------------------- Name: Ian W. Nalitt Title: Associate FLEET NATIONAL BANK, individually and as Syndication Agent and an Issuing Bank, by /s/ William B. Williamson -------------------------------------- Name: William B. Williamson Title: Senior Vice President ABN AMRO BANK NV, individually and as Documentation Agent, by /s/ Richard Da Costa --------------------------------------- Name: Richard Da Costa Title: Group Vice President by /s/ Jana Dombrowski --------------------------------------- Name: Jana Dombrowski Title: Vice President SIGNATURE PAGE TO AMENDMENT NO. 3 DATED AS OF SEPTEMBER 18, 2002 TO THE FAIRCHILD SEMICONDUCTOR CORPORATION CREDIT AGREEMENT DATED AS OF JUNE 6, 2000, AS AMENDED. NAME OF LENDER: General Electric Corporation by /s/ Gregory Hong --------------------------------------- Name: Gregory Hong Title: Duly Authorized Signatory SIGNATURE PAGE TO AMENDMENT NO. 3 DATED AS OF SEPTEMBER 18, 2002 TO THE FAIRCHILD SEMICONDUCTOR CORPORATION CREDIT AGREEMENT DATED AS OF JUNE 6, 2000, AS AMENDED. NAME OF LENDER: LLOYDS TSB BANK by /s/ Matthew A.L. Packham ---------------------------------------------- Name: Matthew A.L. Packham Title: Assistant Director, Acquisition Finance by /s/ Nicholas J. Bruce ---------------------------------------------- Name: Nicholas J. Bruce Title: Credit Services SIGNATURE PAGE TO AMENDMENT NO. 3 DATED AS OF SEPTEMBER 18, 2002 TO THE FAIRCHILD SEMICONDUCTOR CORPORATION CREDIT AGREEMENT DATED AS OF JUNE 6, 2000, AS AMENDED. NAME OF LENDER: CITIZENS BANK OF MASSACHUSETTS by /s/ William F. Granchelli ----------------------------------- Name: William F. Granchelli Title: Senior Vice President SIGNATURE PAGE TO AMENDMENT NO. 3 DATED AS OF SEPTEMBER 18, 2002 TO THE FAIRCHILD SEMICONDUCTOR CORPORATION CREDIT AGREEMENT DATED AS OF JUNE 6, 2000, AS AMENDED. NAME OF LENDER: BANK OF SCOTLAND by /s/ Joseph Fratus -------------------------------- Name: Joseph Fratus Title: First Vice President ANNEX 1 SUBSIDIARY GUARANTORS Fairchild Semiconductor Corporation of California 82 Running Hill Road South Portland, ME 04106 Kota Microcircuits, Inc. 82 Running Hill Road South Portland, ME 04106 QT Optoelectronics, Inc. 82 Running Hill Road South Portland, ME 04106 QT Optoelectronics 82 Running Hill Road South Portland, ME 04106 EX-99.1 4 b44496fsexv99w1.txt CERTIFICATION OF KIRK P. POND EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report Fairchild Semiconductor International, Inc. (the "Company") on Form 10-Q for the period ended September 29, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kirk P. Pond, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Company. /s/ Kirk P. Pond - -------------------------- Kirk P. Pond Chief Executive Officer November 13, 2002 EX-99.2 5 b44496fsexv99w2.txt CERTIFICATION OF JOSEPH R. MARTIN EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report Fairchild Semiconductor International, Inc. (the "Company") on Form 10-Q for the period ended September 29, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph R. Martin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Company. /s/ Joseph R. Martin - -------------------------- Joseph R. Martin Chief Financial Officer November 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----