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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
SPECIAL FINANCIAL REPORT
__________________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 25, 1997
OR
[ ] 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: 333-26897
FSC Semiconductor Corporation
(Exact name of registrant as specified in its charter)
Delaware 77-0449095
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
333 Western Avenue, M.S. 01-00, South Portland, Maine 04106
(Address of principal executive offices) (Zip Code)
(207) 775-8100
(Registrant's telephone number, including area code)
__________________
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: NONE
__________________
Pursuant to Rule 15d-2 of the Act, this annual report contains
only financial statements for the fiscal year ended May 25, 1997.
[PAGE]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ ] Yes [X] No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-
affiliates of the registrant is $0.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date.
Number of Shares Outstanding
Class August 15, 1997
Class A Common Stock, Par Value
$.01 Per Share 7,191,120
Class B Common Stock, Par Value
$.01 Per Share 8,408,880
DOCUMENTS INCORPORATED BY REFERENCE
NONE
2[PAGE]
PART II
Item 8. Financial Statements and Supplementary Data.
This Annual Report on Form 10-K for the fiscal year ended May 25,
1997 is being filed pursuant to Rule 15d-2 under the Securities
Exchange Act of 1934 and contains only certified financial
statements as required by Rule 15d-2. Rule 15d-2 provides
generally that, if a registrant files a registration statement
under the Securities Act of 1933, as amended, which does not
contain certified financial statements for the registrant's last
full fiscal year (or for the life of the registrant if less than
a full year), then the registrant shall, within 90 days of the
effective date of the registration statement, file a special
report furnishing certified financial statements for such last
fiscal year or other period as the case may be. Rule 15d-2
further provides that such special financial report is to be
filed under cover of the facing sheet appropriate for the annual
report of the registrant. Fairchild Semiconductor Corporation's
Registration Statement on Form S-4 (Registration No. 333-26897),
declared effective July 9, 1997, did not contain the certified
financial statements for the Registrant's last full fiscal year,
that is, the fiscal year ended May 25, 1997. Therefore, as
required by Rule 15d-2, certified financial statements for the
fiscal year ended May 25, 1997 are filed herewith.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) (1) Financial Statements:
INDEX TO FINANCIAL STATEMENTS
FSC Semiconductor Corporation and Subsidiaries
Independent Auditor's Report.................................5
Balance Sheets as of May 25, 1997 and May 26, 1996 of
FSC Semiconductor Corporation and Subsidiaries...............6
Statements of Operations for the years ended May 25, 1997,
May 26, 1996 and May 28, 1995 of FSC Semiconductor
Corporation and Subsidiaries.................................7
Statements of Equity for the years ended May 25, 1997,
May 26, 1996 and May 28, 1995 of FSC Semiconductor
Corporation and Subsidiaries.................................8
Notes to Financial Statements................................9
(2) Financial Statement Schedules: Schedule II - Valuation
and Qualifying Accounts
(c) Exhibits:
(27) Financial Data Schedule
All other schedules and exhibits are omitted because they are
either not applicable or not required in this filing.
3[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Financial Statements
May 25, 1997 and May 26, 1996
(With Independent Auditors' Report Thereon)
4[PAGE]
Independent Auditors' Report
The Board of Directors
FSC Semiconductor Corporation:
We have audited the accompanying balance sheet of FSC
Semiconductor Corporation (the "Company") as of May 25, 1997, the
combined balance sheet of the FSC Semiconductor Business of
National Semiconductor Corporation (the "Business") as of May 26,
1996 and the related consolidated and combined statements of
operations and equity for each of the years in the three-year
period ended May 25, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
The accompanying financial statements were prepared on the basis
of presentation as described in Note 1. Prior to March 11, 1997,
the statements present the combined assets, liabilities and
business equity and the related combined revenues less direct
expenses before taxes of the Business, and are not intended to be
a complete presentation of the Business' financial position,
results of operations or cash flows. The results of operations
before taxes are not necessarily indicative of the results of
operations before taxes that would have been recorded by the
Company on a stand-alone basis.
In our opinion, the accompanying financial statements present
fairly, in all material respects, the consolidated financial
position of the Company as of May 25, 1997, the combined assets,
liabilities and business equity of the Business as of May 26,
1996, and the results of operations for each of the years in the
three year period ended May 25, 1997, on the basis described in
Note 1, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
June 5, 1997
5[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Balance Sheets
(In millions)
May 25, May 26,
Assets 1997 1996
Current assets:
Cash $ 40.7 -
Accounts receivable, net of distributor allowances
of $15.5 million in 1997 (note 12) 79.6 -
Inventories (note 3) 73.1 93.1
Prepaid expenses and other current assets (note 3) 16.6 10.8
Deferred income taxes (note 5) 2.1 -
Total current assets 212.1 103.9
Property, plant and equipment, net (note 3) 295.0 318.3
Deferred income taxes (note 5) 18.5 -
Other assets 29.4 10.5
Total assets $ 555.0 432.7
Liabilities and Equity
Current liabilities:
Current portion of long-term debt (note 4) $ 11.0 -
Accounts payable (note 12) 77.1 64.6
Accrued expenses and other current liabilities (note 3) 42.0 18.9
Total current liabilities 130.1 83.5
Long-term debt, less current portion (note 4) 486.0 -
Other liabilities 0.4 -
Total liabilities 616.5 83.5
Redeemable preferred stock - 12% Series A cumulative
compounding preferred stock, $.01 par value, $1,000
stated value; 70,000 shares authorized, issued and
outstanding in 1997 (note 9) 71.8 -
Commitments and contingencies (notes 7, 8 and 13)
Equity:
Common equity (note 10):
Class A common stock, $.01 par value, voting;
30,000,000 shares authorized, 7,191,120 shares
issued and outstanding in 1997 0.1 -
Class B common stock, $.01 par value, nonvoting;
30,000,000 shares authorized, 8,408,880 shares
issued and outstanding in 1997 0.1 -
Additional paid-in capital 7.6 -
Accumulated deficit (141.1) -
Business equity (note 1) - 349.2
Total equity (133.3) 349.2
Total liabilities and equity $ 555.0 432.7
See accompanying notes to financial statements.
6[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Statements of Operations
(In millions)
May 25, May 26, May 28,
1997 1996 1995
Revenue:
Net sales - trade $ 587.1 687.8 629.6
Contract manufacturing - National
Semiconductor 104.2 87.6 50.7
Total revenue 691.3 775.4 680.3
Direct and allocated costs and expenses:
Cost of sales 442.7 472.7 425.8
Cost of contract manufacturing - National
Semiconductor 97.4 87.6 50.7
Research and development 18.9 30.3 31.0
Selling and marketing 46.5 65.6 56.8
General and administrative 49.1 48.4 43.5
Restructuring (note 11) 5.3 - -
Total operating costs and expenses 659.9 704.6 607.8
Interest expense 11.2 - -
Other (income) expense 0.9 (1.5) (1.8)
Revenues less direct and allocated expenses
before income taxes 19.3 72.3 74.3
Income taxes (note 5) 3.8
Revenues less direct and allocated expenses
and income taxes $15.5
See accompanying notes to financial statements.
7[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Statements of Equity
(In millions)
Common Stock
Class A Class B Additional
Class A Class B Par Par Paid-in Accumulated Business Total
Shares Shares Value Value Capital Deficit Equity Equity
Balances at May 29, 1994 - - $ - - - - 161.1 161.1
Revenues less expenses - - - - - - 74.3 74.3
Net intercompany activity - - - - - - (2.2) (2.2)
Balances at May 28, 1995 - - - - - - 233.2 233.2
Revenues less expenses - - - - - - 72.3 72.3
Net intercompany activity - - - - - - 43.7 43.7
Balances at May 26, 1996 - - - - - - 349.2 349.2
Revenues less expenses - - - - - - 9.6 9.6
Net intercompany activity - - - - - - (25.4) (25.4)
Balances at March 10, 1997 - - - - - - 333.4 334.4
Recapitalization of Business - - - - - 333.4 (333.4) -
Distribution to National
Semiconductor by
Fairchild (note 10) - - - - - (401.6) - (401.6)
PIK Note issued as additional
purchase consideration
for the stock of
Fairchild (note 10) - - - - - (77.0) - (77.0)
Issuance of common stock 7.2 8.4 0.1 0.1 7.6 - - 7.8
Net income for the period
from March 11 through
May 25, 1997 - - - - - 5.9 - 5.9
Accretion on redeemable
preferred stock - - - - - (1.8) - (1.8)
Balances at May 25, 1997 7.2 8.4 $ 0.1 0.1 7.6 (141.1) - 133.3
See accompanying notes to financial statements.
8[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
May 25, 1997 and May 26, 1996
(1) Background and Basis of Presentation
Background
FSC Semiconductor Corporation ("Fairchild Holdings" or the
"Company") was incorporated on March 10, 1997 by National
Semiconductor Corporation ("National Semiconductor"). On
March 11, 1997, National Semiconductor consummated an
Agreement and Plan of Recapitalization
("Recapitalization"). As part of the Recapitalization,
National Semiconductor transferred all of the capital
stock of Fairchild Semiconductor Corporation ("Fairchild")
and approximately $12.8 million in cash to Fairchild
Holdings in exchange for shares of Fairchild Holdings' 12%
Series A Cumulative Compounding Preferred Stock, Fairchild
Holdings' common stock and a promissory note in the
principal amount of approximately $77 million.
In addition, National Semiconductor transferred substantially
all of the assets and liabilities of the Fairchild
Semiconductor Business (the "Business") to Fairchild. The
Business was defined as the logic, discrete and memory
divisions of National Semiconductor including flash memory
but excluding public networks, programmable products and
mil/aero products. The Recapitalization was accounted for
as a leveraged recapitalization, whereby the Company
assumed the historical operating results of the Business.
The Company is headquartered in South Portland, Maine,
and has manufacturing operations in South Portland, Salt
Lake City, Utah, Cebu, the Philippines, and Penang,
Malaysia.
Basis of Presentation
The consolidated financial statements at May 25, 1997, and
for the period from March 11 through May 25, 1997, include
the accounts and operations of the Company and its wholly-
owned subsidiary.
Prior to March 11, 1997, the combined balance sheets reflect
the assets and liabilities that were directly related to
the Business as they were operated within National
Semiconductor. These balance sheets do not include
National Semiconductor's corporate assets or liabilities
not specifically identifiable to Fairchild. National
Semiconductor performed cash management on a centralized
basis and processed related receivables and certain
payables, payroll and other activity for Fairchild. These
systems did not track receivables, liabilities and cash
receipts and payments on a business specific basis.
Accordingly, it was not practical to determine certain
assets and liabilities associated with the Business;
therefore, such assets and liabilities were not included
in the accompanying balance sheet. Given these
constraints, certain supplemental cash flow information is
presented in lieu of a statement of cash flows. (See Note
16.). The financial condition and cash flows may have
been significantly different if not for the centralized
cash management system of National Semiconductor.
The combined statements of operations included all revenues
and costs attributable to the Business including an
allocation of the costs of shared facilities and overhead
of National Semiconductor. In addition, certain costs
incurred at Fairchild plants for the benefit of other
National Semiconductor product lines were allocated from
Fairchild to National Semiconductor. All of the
allocations and estimates in the combined statements of
operations were based on assumptions that management
believes were reasonable under the circumstances.
However, these allocations and estimates are not
necessarily
(Continued)
9[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
indicative of the costs that would have resulted if the
Business had been operated on a stand alone basis.
Transactions with National Semiconductor have been identified
in the financial statements as transactions between
related parties to the extent practicable (See Note 12).
(2) Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the Sunday on or nearest
preceding May 31.
Basis of Combination
Commencing with the Recapitalization, the consolidated
financial statements include the accounts of the Company
and its wholly-owned subsidiaries.
Revenue Recognition
Revenue from the sale of semiconductor products is recognized
when shipped, with a provision for estimated returns and
allowances recorded at the time of shipment. Contract
manufacturing revenues are recognized upon completion of
respective stages of production, defined as wafer
fabrication, sort, assembly and test.
Related Party Activity
In conjunction with the Recapitalization, Fairchild and
National Semiconductor executed several agreements which
govern the performance of manufacturing services by
Fairchild on behalf of National Semiconductor and by
National Semiconductor on behalf of Fairchild. In
addition, National Semiconductor provides a number of
business support services to Fairchild to assist in
Fairchild's transition to an independent business
enterprise.
Prior to the Recapitalization, the Business performed
contract manufacturing services for National
Semiconductor. The revenues for these services are
reflected at cost in the accompanying consolidated
statements of operations.
Manufacturing costs were generally apportioned between
National Semiconductor and the Business product lines
based upon budgeted and actual factory production loading.
Certain manufacturing costs (e.g., material costs) that
were specifically identifiable with a particular product
line were charged or credited directly without
apportionment.
National Semiconductor also performed manufacturing services
for the Business and incurred other elements of cost of
sales on behalf of the Business, including freight, duty,
warehousing, and purchased manufacturing services from
third party vendors.
Shared or common costs, including certain general and
administrative, sales and marketing, and research and
development, have been allocated from National
Semiconductor's corporate office, selling and marketing
locations, and manufacturing sites to the Business or from
the Business' plants to National Semiconductor product
lines on a basis which is considered to fairly and
reasonably reflect the utilization of the services
provided to, or benefit obtained by, the business
receiving the charge. National Semiconductor had net
interest income on a consolidated basis for all periods
presented prior to the Recapitalization. Although not
material, these amounts have been allocated to the
Business prior to the Recapitalization on the basis of net
assets and are included in other (income) expense.
(Continued)
10[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
Inventories
Inventories are stated at the lower of standard cost, which
approximates actual cost on a first-in, first-out basis,
or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost.
Effective May 29, 1995, for new purchases, the Company
calculates depreciation using the straight-line method for
machinery and equipment placed in service on or after that
date. For purchases prior to May 29, 1995, the Company
calculates depreciation using the 150 percent declining
balance method. Buildings are depreciated using the
straight-line method. The effect of the change was a
decrease in depreciation expense of approximately $5.4
million for 1996.
In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which
requires recognition of impairment of long-lived assets in
the event the carrying value of such assets exceeds the
future undiscounted cash flows attributable to such
assets. SFAS No. 121 became effective in fiscal year 1997
for the Company. Adoption of SFAS No. 121 did not have a
material impact on the Company's financial position or
results of operations.
Other Assets
Other assets includes debt acquisition costs which represent
costs incurred related to the issuance of the Company's
long-term debt. The costs are being amortized using the
effective interest method over the related term of the
borrowings, which ranges from five to ten years, and are
included in interest expense. Also included in other
assets are mold and tooling costs. Molds and tools are
amortized over their expected useful lives, generally one
to three years.
Currencies and Foreign Currency Instruments
The Company's functional currency for all operations
worldwide is the U.S. dollar. Accordingly, gains and
losses from translation of foreign currency financial
statements into U.S. dollars are included in current
results. Gains and losses resulting from foreign currency
transactions are also included in current results. The
Company's policy is to utilize foreign exchange contracts
when deemed necessary to minimize exposure to foreign
currency exchange fluctuations. Gains and losses on
financial instruments that are intended to hedge an
identifiable firm commitment are deferred and included in
the measurement of the underlying transaction. Gains and
losses on hedges of anticipated transactions are deferred
until such time as the underlying transactions are
recognized or immediately when the transaction is no
longer expected to occur. The Company presently has only
limited involvement with derivative financial instruments
and does not use them for trading purposes. The Company
has entered into an interest rate swap agreement which is
accounted for as a hedge of the obligation and,
accordingly, the net swap settlement amount is accrued as
an adjustment to interest expense in the period incurred
(see Note 4).
The aggregate net translation and transaction gain or loss
was allocated by National Semiconductor for 1997, 1996 and
1995 and was included in other (income) expense and was
not significant.
(Continued)
11[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Income Taxes
Upon the Recapitalization, the Company became responsible for
its income taxes and will file its own income tax returns.
Therefore, the provision for income taxes included in the
accompanying 1997 statement of operations is for the
period March 11 through May 25, 1997. Prior to the
Recapitalization, the Business did not file separate
income tax returns but rather was included in the income
tax returns filed by National Semiconductor and its
subsidiaries in various domestic and foreign
jurisdictions. Therefore, no provision for income taxes
has been recorded in the accompanying consolidated
financial statements for the period May 27, 1996 through
March 10, 1997 and for the years ended May 26, 1996 and
May 28, 1995.
Income taxes are accounted for under the asset and liability
method. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial
statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in
which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
Compensation," in 1997. This standard gives entities the
choice of recognizing stock-based compensation by adopting
the new fair value method or to continue to measure
compensation expense using the intrinsic value approach
under Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees." The Company
has chosen to account for stock-based compensation under
APB No. 25. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted
market price of the Company's common stock at the date of
the grant over the amount an employee must pay to acquire
the stock. No compensation cost has been recognized for
this plan in the accompanying financial statements.
Reclassification
Certain 1996 and 1995 balances have been reclassified to
conform with the current year presentation.
(Continued)
12[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
(3) Financial Statement Details
May 25, May 26,
1997 1996
(In millions)
Inventories
Raw materials $ 8.8 11.2
Work in process 43.4 58.1
Finished goods 20.9 23.8
Total inventories $ 73.1 93.1
Prepaid expenses and other current assets
Prepaid expenses $ 1.8 1.2
Non-trade receivable from manufacturing
subcontractor 14.8 9.6
$ 16.6 10.8
Property, plant and equipment
Land $ 1.2 1.2
Buildings 144.3 133.7
Machinery and equipment 526.8 476.2
Construction in progress 16.1 54.3
Total property, plant and equipment 688.4 665.4
Less accumulated depreciation 393.4 347.1
$ 295.0 318.3
Accrued expenses
Payroll and employee related accruals $ 14.9 13.2
Accrued interest 10.8 -
Income taxes payable, primarily foreign 2.0 -
Other 14.3 5.7
$ 42.0 18.9
(4) Long-Term Debt
Long-term debt consists of the following at May 25, 1997:
(In millions)
Tranche A term loan payable at 8.5% $ 75.0
Tranche B term loan payable at 9.0% 45.0
Senior subordinated notes payable at 10-1/8% 300.0
Note payable to National Semiconductor at 11.74% 77.0
Total long-term debt 497.0
Less current portion 11.0
Long-term portion $ 486.0
(Continued)
13[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
On March 11, 1997, the Company entered into a Senior Credit
Facilities agreement with a syndicate of financial
institutions. The Senior Credit Facilities consist of a
Senior Term Facility in an aggregate principal amount of
$120 million, and a $75 million Revolving Credit Facility.
No amounts were outstanding under the Revolving Credit
Facility at May 25, 1997.
Borrowings under the Senior Term Facility are segregated into
two tranches: $75 million of Tranche A Term Loans and $45
million of Tranche B Term Loans. The Tranche A Term Loans
are scheduled to mature on March 11, 2002 and are subject
to quarterly principal payments ranging from $2.5 million
to $6.5 million, commencing May 30, 1997. The Tranche B
Term Loans are scheduled to mature on March 11, 2003 and
are subject to quarterly principal payments of $250,000
through February 2002, commencing May 30, 1997, with an
additional four quarterly payments of $10 million due
through March 11, 2003, commencing May 31, 2002. The
Revolving Credit Facility is scheduled to mature on March
11, 2002.
The Senior Credit Facilities accrue interest based on either
the bank's base rate or the Eurodollar rate, at the option
of the Company. The interest rate was 8.5% for the
Tranche A term loan and 9.0% for the Tranche B term loan
at May 25, 1997. The Company pays a commitment fee of
0.5% per annum of the unutilized commitments under the
Revolving Credit Agreement. All borrowings are secured by
substantially all assets of the Company.
On March 11, 1997, Fairchild issued $300 million of 10-1/8%
Senior Subordinated Notes (the "Notes") at face value.
The Notes pay interest on March 15 and September 15 of
each year commencing September 15, 1997. The Notes are
unsecured and are subordinated to all existing and future
senior indebtedness of the Company. The Notes are
redeemable by the Company, in whole or in part, on or
after March 15, 2002 at redemption prices ranging from
100% to approximately 105% of the principal amount. The
Company is required to redeem $150 million principal
amount of Notes on March 15, 2005 and $75 million
principal amount of Notes on March 15, 2006 and 2007,
respectively, in each case at a redemption price of 100%
of the principal amount plus accrued interest to the date
of redemption.
The payment of principal and interest on the Senior Credit
Facilities and the Notes is fully and unconditionally
guaranteed by Fairchild Holdings. Fairchild Holdings
currently conducts no business and has no significant
assets other than the capital stock of Fairchild. No
subsidiaries of Fairchild Holdings are guarantors on
either the Senior Credit Facilities or the Notes.
Included in the accompanying consolidated balance sheet at
May 25, 1997 is approximately $76.2 million of net assets
related to the Company's foreign subsidiaries.
(Continued)
14[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
On March 11, 1997, the Company issued a promissory note ("PIK
Note") in the principal amount of approximately $77
million to National Semiconductor as part of the
consideration for all of the capital stock of Fairchild.
The PIK Note bears interest at 11.74% per annum and
matures in 2008. To the extent any Fairchild Holdings
senior indebtedness prohibits Fairchild Holdings from
paying interest due on the PIK Note in cash, such interest
shall be paid by adding such interest to the then
outstanding principal amount of the PIK Note. Such amount
shall accrue interest as a portion of the principal amount
of the PIK Note from the applicable interest payment date.
The PIK Note is subordinated to both the Senior Credit
Facilities and the Notes.
The Senior Credit Facilities, the indenture under which the
Notes were issued, and the PIK Note contain certain
restrictive financial and operating covenants, including
limitation on the payment of dividends, with which the
Company was in compliance with at May 25, 1997.
Aggregate maturities of long-term debt for each of the five
succeeding years are as follows:
(In millions)
1998 $ 11.0
1999 11.0
2000 14.0
2001 17.0
2002 27.0
In May 1997, the Company entered into an interest rate swap
agreement to reduce the impact of changes in interest
rates on its Senior Credit Facilities described above.
The interest rate under the swap agreement fixed the
interest rate on 50% of the Senior Term Facility at 9.26%
for the Tranche A term loan and 9.76% for the Tranche B
term loan. In accordance with certain covenants under the
Senior Credit Facilities, the Company has entered into its
existing interest rate swap arrangement with BankBoston
through May 31, 2000. The notional face amount of the
interest rate swap agreement is $60.0 million initially,
decreasing to $42.0 million at May 31, 2000. The swap
agreement is cancelable without penalty at the option of
the Company after May 26, 1999.
The Company is exposed to credit loss in the event of
nonperformance by the other party to the interest rate
swap agreement, however, the Company does not anticipate
nonperformance under the agreement.
(Continued)
15[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
(5) Income Taxes
As discussed in Note 1, the Business did not pay income taxes
directly or file separate income tax returns prior to the
Recapitalization, and therefore, no provision for income
taxes has been recorded in the accompanying consolidated
financial statements for the period ended March 10, 1997
and for the years ended May 26, 1996 and May 28, 1995.
The provision for income taxes included in the
accompanying 1997 consolidated statement of operations is
for the period March 11 through May 25, 1997, and
consisted of the following:
Current Deferred Total
(In millions)
Federal $ - 1.9 1.9
State - 0.5 0.5
Foreign 1.4 - 1.4
$ 1.4 2.4 3.8
For the period from March 11 through May 25, 1997, the
domestic and foreign components of earnings before income
taxes were $7.2 million and $2.5 million, respectively.
Income tax expense for that period amounted to $3.8
million. The actual expense for 1997 differs from the
"expected" tax expense (computed by applying the statutory
U.S. federal corporate tax rate of 35% to earnings before
income taxes) as follows:
Computed "expected" tax expense $ 3.4
State taxes, net of federal benefit 0.4
$ 3.8
As discussed in Note 1, the Recapitalization was accounted
for as a leveraged recapitalization whereby the Company
retained the carrying value of assets and liabilities of
the Business. For income tax reporting purposes, the
Recapitalization was treated as a taxable transaction
resulting in a step up of the assets and liabilities to
fair value at March 11, 1997. As such, gross deferred tax
assets of $53.7 million and related valuation allowance of
$30.7 million were established on March 11, 1997 with an
offsetting credit to Business equity.
(Continued)
16[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
At May 25, 1997, deferred income tax assets result from
temporary differences in the recognition of income and
expense for tax and financial reporting purposes. The
sources and tax effects of these temporary differences are
presented below:
Deferred tax assets:
Reserves, primarily for distributor allowances,
customers returns and inventory $ 2.0
Accrued expenses 4.1
Additional purchase price of assets acquired from
National Semiconductor:
Plant and equipment 19.9
Intangibles, primarily intellectual property and
software 25.3
45.2
Total gross deferred tax assets 51.3
Less valuation allowance 30.7
Net deferred tax assets $20.6
In assessing the realizability of deferred tax assets, the
Company considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.
Deferred income taxes have not been provided for the
undistributed earnings of the Company's foreign
subsidiaries which aggregated approximately $1.1 million
at May 25, 1997. The Company plans to reinvest all such
earnings for future expansion. If such earnings were
distributed, taxes would be increased by approximately
$0.2 million.
(6) Stock-Based Compensation
Effective March 1997, the Company adopted the 1997 Stock
Option Plan (the "Plan"), which is described below.
Statement of Financial Accounting Standards ("SFAS") No.
123, Accounting for Stock-Based Compensation, requires
companies to either (a) record an expense related to its
stock option plans based on the estimated fair value of
stock options as of the date of the grant or (b) disclose
pro forma net income and earnings per share data as if the
Company had recorded an expense. The Company has elected
to continue to apply APB Opinion 25 and related
Interpretations in accounting for this plan and to comply
with the SFAS No. 123 disclosure requirements.
Accordingly, no compensation cost has been recognized for
its stock option plan in the accompanying financial
statements. Had compensation cost for such plan been
determined based on the fair value at the grant dates for
awards under these plans, pro forma 1997 revenue less
direct and allocated expenses and income taxes would
approximate reported 1997 revenue less direct and
allocated expenses and income taxes of $16.7 million.
(Continued)
17[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
The weighted average fair value per share of options granted
during 1997 was $.15. The Company estimates the fair
value of each option as of the date of grant using a
Black-Scholes pricing model with the following weighted
average assumptions:
Expected volatility 42.1%
Dividend yield -
Risk-free interest rate 6.17%
Expected life 2.6 years
Forfeiture rate 5%
Under the Plan, the Company may grant options for up to
821,000 shares of Class A common stock. Options granted
under the Plan may be either (a) options intended to
constitute incentive stock options ("ISOs") under the
Internal Revenue Code or (b) non-qualified stock options.
Options may be granted under the Plan to regular salaried
officers and key employees of the Company and its
subsidiaries.
The purchase price of each option granted under the Plan
shall be as determined by a committee of the Board of
Directors (the "Committee"), but shall in no instance be
less than 100% of fair market value on the date of grant.
The maximum term of any option shall be ten years from
the date of grant for incentive stock options and ten
years and one day from the date of grant for non-qualified
stock options. Options granted under the Plan are
exercisable at the determination of the Committee,
currently vesting ratably over approximately 4.5 years.
Employees receiving options under the Plan may not receive
in any one year period options to purchase more than
50,000 shares of common stock.
A summary of the status of the Company's stock option plan as
of May 25, 1997, and changes during the year then ending
is presented below:
Weighted
Average
Exercise
Shares Price
Outstanding at beginning of year - $ -
Granted 524,200 .50
Outstanding at end of year 524,200 $ .50
Exercisable at end of year - -
Shares reserved at end of year 821,000 -
All stock options outstanding at May 25, 1997 have an
exercise price of $.50 and a remaining weighted average
contractual life of 9.8 years.
(Continued)
18[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
(7) Retirement Plans
Effective March 11, 1997, the Company sponsors the Fairchild
Personal Savings and Retirement Plan (the "Retirement
Plan"), a contributory savings plan which qualifies under
section 401(k) of the Internal Revenue Code. The
Retirement Plan covers substantially all employees in the
United States. The Company provides a matching
contribution equal to 50% of employee elective deferrals
up to a maximum of 6% of an employee's annual
compensation. The Company also maintains a non-qualified
Benefit Restoration Plan, under which employees who have
otherwise exceeded annual IRS limitations for elective
deferrals can continue to contribute to their retirement
savings. The Company matches employee elective deferrals
to the Benefit Restoration Plan on the same basis as the
Retirement Plan. Total expense recognized under these
plans was $1.1 million for the year ended May 25, 1997.
Employees in Malaysia participate in a defined contribution
plan. The Company has funded accruals for this plan in
accordance with statutory regulations in Malaysia. The
net pension cost for the year ended May 25, 1997 and the
accrued pension cost at May 25, 1997 are not material to
the financial statements.
Employees in the Philippines participate in a defined benefit
plan that was assumed by the Company from National
Semiconductor as part of the Recapitalization. The
benefits are based on years of service and a multiple of
the employee's final monthly salary. The Company's
funding policy is to contribute annually the amount
necessary to maintain the plan on an actuarially sound
basis. Contributions are intended to provide not only for
benefits attributed to service to date but also for those
expected to be earned in the future. The net pension cost
for the year ended May 25, 1997 and the accrued pension
cost at May 25, 1997 are not material to the financial
statements.
Prior to the Recapitalization, employees of the Business
participated in several National Semiconductor retirement,
employee benefit, and incentive plans. No liabilities
related to retirement and similar plans, other than those
disclosed above, were assumed by the Company.
(8) Lease Commitments
Rental expense related to certain facilities and equipment of
the Company's plants was $5.0 million, $4.8 million, and
$3.0 million for the fiscal years ended 1997, 1996 and
1995, respectively.
Future minimum lease payments under noncancelable operating
leases are as follows:
(In millions)
1998 $ 6.5
1999 6.0
2000 5.4
2001 4.1
2002 1.7
Thereafter 5.0
$28.7
(Continued)
19[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
(9) Redeemable Preferred Stock
Concurrent with the Recapitalization, the Company authorized
70,000 shares of redeemable preferred stock at a par value
of $.01, all of which are designated as 12% Series A
cumulative compounding preferred stock. The redeemable
preferred stock has a stated value of $1,000 per share and
is entitled to annual dividends when, as and if declared,
which dividends will be cumulative, whether or not earned
or declared, and will accrue at a rate of 12%, compounding
annually. At May 25, 1997, 70,000 shares were issued and
outstanding. See Note 10.
The redeemable preferred stock is mandatorily redeemable in
2009. The Company may optionally redeem, in whole or in
part, the redeemable preferred stock at any time at a
price per share of $1,000, plus accrued and unpaid
dividends to the date of redemption.
At the option of the Company, the redeemable preferred stock
may be exchanged for junior subordinated debentures of the
Company. The face value of such junior subordinated
debentures shall be $1,000 per share. Their maturity date
will be the same as the mandatory redemption date of the
redeemable preferred stock, and they shall bear interest
at a rate equal to the lesser of 12% and the maximum
interest rate permitted to be deducted as accrued under
the relevant provisions of the Internal Revenue Code of
1986.
(10) Common Equity
Concurrent with the Recapitalization, the Company authorized
60,000,000 shares of common stock at a par value of $.01
per share, divided into two classes consisting of
30,000,000 shares of Class A stock and 30,000,000 shares
of Class B stock. The holders of Class A stock are
entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. Except
as required by law, the holders of Holdings Class B stock
have no voting rights. A holder of either class of common
stock may convert any or all of his shares into an equal
number of shares of the other class of common stock
provided that in the case of a conversion from Class B
stock, which is nonvoting, into Class A stock, which is
voting, such conversion would be permitted only to the
extent that the holder of shares to be converted would be
permitted under applicable law to hold the total number of
shares of Class A stock which would be held after giving
effect to the conversion. At May 25, 1997, 7,191,120
shares of Class A and 8,408,880 shares of Class B common
stock were issued and outstanding.
On March 11, 1997, National Semiconductor consummated the
Recapitalization under which the following transactions
occurred:
(i) National Semiconductor, pursuant to an Asset Purchase
Agreement, transferred all of the assets and
liabilities of the Business to Fairchild and its
subsidiaries in exchange for demand purchase notes of
Fairchild and its subsidiaries in the aggregate
principal amount of $401.6 million (the "Purchase Price
Notes");
(ii) National Semiconductor transferred all of the
capital stock of Fairchild and approximately $12.8
million in cash to the Company in exchange for shares
of redeemable preferred stock, shares of Class A voting
and Class B non-voting common stock, and a promissory
PIK Note of the Company in the principal amount of
approximately $77.0 million;
(Continued)
20[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
(iii) The Company issued redeemable preferred stock and
common stock in the aggregate amount of approximately
$65.0 million;
(iv) The Company contributed cash in the amount of
approximately $77.8 million to the capital of
Fairchild;
(v) Fairchild borrowed $120.0 million under term bank loans
and issued $300.0 million of 10 1/8% Senior
Subordinated Notes due 2007 (as described in Note 4).
The proceeds from these borrowings were used to repay
the Purchase Price Notes and certain debt acquisition
costs as described in Note 2.
The transaction was accounted for as a leveraged
recapitalization whereby the Company assumed the
historical operating results of the Business.
Accordingly, the repayment of the Purchase Price Notes of
$401.6 and issuance of the PIK Note of $77.0 million were
included in the statements of equity as a distribution to
National Semiconductor by Fairchild and the Company,
respectively.
(11) Restructuring
In June 1996, National Semiconductor announced a
restructuring of its operations and the intent to pursue a
sale or partial financing of the Business. In connection
with the restructuring, the Business recorded a $5.3
million non-recurring charge related to work force
reductions. During the year ended May 25, 1997, $5.3
million of severance was paid to terminated employees.
(12) Related Party Transactions
Related party activity between the Company and National
Semiconductor is summarized as follows:
Period from Period from
March 11, 1997 May 27, 1996 Years ended
through through May 26, May 28,
May 25, 1997 March 10, 1997 1996 1995
(In millions)
Manufacturing services performed by
National Semiconductor plants or
purchased from third parties $ 2.8 34.3 73.9 78.1
Headquarters, freight, duty, warehousing
and other elements of cost of sales - 41.8 58.5 61.3
$ 2.8 76.1 132.4 139.4
Cost of business support services provided
by National Semiconductor $ 15.3 - - -
Operating costs allocated to the Business
by National Semiconductor $ - 63.9 108.6 120.9
Operating costs allocated to National
Semiconductor by the Business $ - 9.6 27.1 19.4
Amounts receivable from National Semiconductor at May 25,
1997, included in accounts receivable, totaled $19.9
million. Amounts payable to National Semiconductor at May
25, 1997, included in accounts payable, totaled $22.6
million.
(Continued)
21[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
(13) Contingencies
The Company's facilities in South Portland, Maine, Salt Lake
City, Utah, Cebu, Philippines, and Penang, Malaysia have
ongoing remediation projects to respond to certain
releases of hazardous substances that occurred prior to
the Recapitalization. Pursuant to the Asset Purchase
Agreement, National Semiconductor has agreed to indemnify
the Company for the future costs of these projects. The
costs incurred to respond to these conditions were not
material to the combined financial statements of the
Business during fiscal years 1997, 1996 and 1995.
In addition, in the normal course of business, the Company is
subject to proceedings, lawsuits and other claims,
including proceedings under laws and regulations related
to environmental and other matters. All such matters are
subject to uncertainties and outcomes that are not
predictable with assurance. Consequently, the Company is
unable to ascertain the ultimate aggregate amount of
monetary liability or financial impact with respect to
these matters at May 25, 1997. It is management's opinion
that after final disposition, any monetary liability or
financial impact to the Company would not be material to
the Company's financial position, or annual results of
operations or cash flows.
(14) Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, accounts
payable and accrued expenses approximates fair value
because of the short maturity of these instruments.
The fair value of the Company's long-term debt instruments
are based on the amount of future cash flows associated
with each instrument discounted using the Company's
current borrowing rate for similar debt instruments of
comparable maturity. The fair value of the Senior Credit
Facilities approximates the carrying value due to the
variable interest cost on these instruments. At May 25,
1997, the fair value of the Notes and the PIK Note
approximates the carrying value due to the proximity of
the issuance date of these instruments to the current
reporting date.
The fair value of interest rate swaps is the amount at which
they could be settled, based on estimates from dealers.
The amount of payment required to settle outstanding
interest rate swaps at May 25, 1997 approximated $0.2
million.
(15) Industry and Geographic Segment Information
The Company operates in one industry segment and is engaged
in the design, development, manufacture and marketing of a
wide variety of semiconductor products for the
semiconductor industry and original equipment
manufacturers. The Company operates in three main
geographic areas. In the information that follows, sales
include local sales and exports made by operations within
each area. To control costs, a substantial portion of the
Company's products are transported between various
facilities in the Americas, Asia and Europe in the process
of being manufactured and sold. Accordingly, it is not
meaningful to present interlocation transfers between the
Company's facilities on a stand alone basis. Sales to
unaffiliated customers have little correlation with the
location of manufacture. It is, therefore, not meaningful
to present operating profit by geographic area.
(Continued)
22[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
The Company conducts a substantial portion of its operations
outside of the U.S. and is subject to risks associated
with non-U.S. operations, such as political risks,
currency controls and fluctuations, tariffs, import
controls and air transportation.
Americas Europe Asia Consolidated
(In millions)
1997:
Sales to unaffiliated customers $ 222.7 117.1 247.3 587.1
Total assets $ 363.2 14.9 176.9 555.0
1996:
Sales to unaffiliated customers $ 260.3 161.3 266.2 687.8
Total assets $ 267.9 0.8 164.0 432.7
1995:
Sales to unaffiliated customers $ 238.2 149.9 241.5 629.6
Total assets $ 212.2 1.9 109.1 323.2
(16) Supplemental Cash Flow Information
As described in Note 1, National Semiconductor's cash
management system was not designed to trace centralized
cash and related financing transactions to the specific
cash requirements of the Business. In addition, National
Semiconductor's corporate transaction systems are not
designed to track receivables and certain liabilities and
cash receipts and payments on a business specific basis.
Given these constraints, the following data are presented
to facilitate analysis of key components of cash flow
activity:
Years ended
May 25, May 26, May 28,
1997 1996 1995
(In millions)
Operating activities:
Revenues less expenses $ 15.5 72.3 74.3
Depreciation and amortization 77.1 64.2 44.7
Deferred taxes (20.6) - -
Loss on disposal of equipment,
molds and tooling 1.0 2.0 0.2
Increase in accounts receivable (79.6) - -
Decrease (increase) in inventories 20.0 (24.3) (7.9)
Decrease (increase) in prepaid expenses
and other current assets (5.8) 11.1 (8.4)
Increase in other assets 0.9 - -
Increase (decrease) in accounts
payable 12.5 (5.2) 19.2
Increase (decrease) in accrued
expenses and other liabilities 23.5 (1.3) (1.8)
Net financing provided from (to)
National Semiconductor* (25.4) 43.7 (2.2)
Cash provided by operating activities 19.1 162.5 118.1
(Continued)
23[PAGE]
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
Years ended
May 25, May 26, May 28,
1997 1996 1995
(In millions)
Investing activities:
Capital expenditures (47.1) (153.9) (112.9)
Purchase of molds and tooling (7.2) (8.6) (5.2)
Cash used by investing activities (54.3) (162.5) (118.1)
Financing activities:
Issuance of long-term debt 420.0 - -
Debt acquisition costs (20.3) - -
Issuance of common stock 7.8 - -
Issuance of preferred stock 70.0 - -
Distribution to National Semiconductor (401.6) - -
Cash provided by financing activities 75.9 - -
Net change in cash and cash equivalents 40.7 - -
Cash and cash equivalents at beginning
of year - - -
Cash and cash equivalents at end of year $40.7 - -
Cash paid for interest by the Company totaled $0.1 million
for the period from March 11, 1997 through May 25, 1997.
The Business did not make any cash payments for interest
prior to March 11, 1997, as discussed in note 2. No cash
payments were made for income taxes for any period
presented.
During the year ended May 25, 1997, the Company issued a note
to National Semiconductor in the principal amount of
approximately $77.0 million as additional purchase
consideration for the capital stock of Fairchild. The
Company recorded the note as an increase to long-term debt
and accumulated deficit. For the period from March 11
through May 25, 1997, the Company accumulated dividends on
the redeemable preferred stock of approximately $1.8
million. The Company recorded the accumulated dividends
as an increase to the carrying value of the redeemable
preferred stock and accumulated deficit.
* Net financing provided from (to) National Semiconductor
does not necessarily represent the cash flows of the
Business, or the timing of such cash flows, had it
operated on a stand alone basis.
24[PAGE]
Schedule II - Valuation and Qualifying Accounts
Additions
Balance at Charged Charged to Balance at
May 26, to other Costs and May 25,
Description 1996 Accounts Expenses Deductions 1997
(in millions)
Distributor/
Allowance $ - 12.8 (1) 2.7 - $15.5
Deferred Tax
Valuation Allowance $ - 30.7 (1) - - $30.7
(1) Upon the consummation of the Recapitalization on March 11, 1997 these
accounts were established and charged to Business Equity.
25[PAGE]
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FSC SEMICONDUCTOR CORPORATION
By: /s/ Kirk P. Pond
Kirk P. Pond
Chairman of the Board of
Directors, President and Chief
Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Date Title
/s/ Kirk P. Pond 8/15/97 Chairman of the Board of
Kirk P. Pond Directors, President and Chief
Executive Officer (principal
executive officer)
/s/ Joseph R. Martin 8/15/97 Executive Vice President,
Joseph R. Martin Chief Financial Officer and
Director (principal financial
and accounting officer)
/s/ Brian L. Halla 8/25/97 Director
Brian L. Halla
/s/ William N. Stout 8/20/97 Director
William N. Stout
/s/ Richard M. Cashin 8/21/97 Director
Richard M. Cashin, Jr.
/s/ Paul C. Schorr IV 8/18/97 Director
Paul C. Schorr IV
26[PAGE]