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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

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FORM 8-K

 

CURRENT REPORT

 

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

January 2, 2004

Date of report (Date of earliest event reported)

 

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ON Semiconductor Corporation

 

(Exact name of registrant as specified in its charter)

 

Delaware		000-30419		36-3840979
(State or other jurisdiction of incorporation)		(Commission File Number)		(I.R.S. Employer Identification Number)

 

ON Semiconductor Corporation 5005 E. McDowell Road Phoenix, Arizona		85008
(Address of principal executive offices)		(Zip Code)

 

602-244-6600

(Registrant’s telephone number, including area code)

 

 

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Item 5. Other Events

 

Attached to this Current Report as Exhibit 99.1 are the audited consolidated financial statements (and related notes) of Semiconductor Components Industries, LLC, a wholly-owned subsidiary of ON Semiconductor Corporation, as of December 31, 2001 and 2002 and for the years ended December 31, 2000, 2001 and 2002 (including related report of the independent accountants of Semiconductor Components Industries, LLC), and the unaudited interim consolidated financial statements (and related notes) of Semiconductor Components Industries, LLC as of October 3, 2003 and for the nine months ended October 3, 2003 and September 27, 2002.

 

Attached to this Current Report as Exhibit 99.2 are the audited consolidated financial statements (and related notes) of ON Semiconductor Trading, Ltd., an indirect wholly-owned subsidiary of ON Semiconductor Corporation, as of December 31, 2001 and 2002, for the period from October 27, 2000 through December 31, 2000 and for the years ended December 31, 2001 and 2002 as restated for the matter described in Note 2 to those financial statements (including related report of the independent accountants of ON Semiconductor Trading, Ltd.), and the unaudited interim consolidated financial statements (and related notes) of ON Semiconductor Trading, Ltd. as of October 3, 2003 and for the nine months ended October 3, 2003 and September 27, 2002.

 

Attached to this Current Report as Exhibit 99.3 are the audited consolidated financial statements (and related notes) of SCG Malaysia Holdings Sdn. Bhd., an indirect wholly-owned subsidiary of ON Semiconductor Corporation, as of December 31, 2001 and 2002 and for the years ended December 31, 2000, 2001 and 2002 (including related report of the independent accountants of SCG Malaysia Holdings Sdn. Bhd.), and the unaudited interim consolidated financial statements (and related notes) of SCG Malaysia Holdings Sdn. Bhd. as of October 3, 2003 and for the nine months ended October 3, 2003 and September 27, 2002.

 

Attached to this Current Report as Exhibit 99.4 are the audited financial statements (and related notes) of SCG Philippines, Incorporated, an indirect wholly-owned subsidiary of ON Semiconductor Corporation, as of December 31, 2001 and 2002 and for the years ended December 31, 2000, 2001 and 2002 (including related report of the independent accountants of SCG Philippines, Incorporated), and the unaudited interim financial statements (and related notes) of SCG Philippines, Incorporated as of October 3, 2003 and for the nine months ended October 3, 2003 and September 27, 2002.

 

Attached to this Current Report as Exhibit 99.5 is a consent of the Independent Accountants of Semiconductor Components Industries, LLC, ON Semiconductor Trading, Ltd., SCG Malaysia Holdings Sdn. Bhd., and SCG Philippines, Incorporated.

 

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

 

(a)

Financial Statements of Businesses Acquired.

Not applicable.

 

(b)

Pro Forma Financial Information.

Not applicable.

 

2 

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(c)

Exhibits

 

 

3 

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SIGNATURES

 

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.

 

Date: January 2, 2004						ON SEMICONDUCTOR CORPORATION (Registrant)
						By:		/s/    DONALD COLVIN
								Donald Colvin Chief Financial Officer

 

 

4 

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EXHIBIT INDEX

 

 

5 

EXHIBIT 99.1

 

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

CONSOLIDATED FINANCIAL STATEMENTS

 

As of December 31, 2002 and 2001 and for

the Years Ended December 31, 2002, 2001 and 2000

and as of October 3, 2003 and for the

nine months ended October 3, 2003 and

September 27, 2002

 

1 

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REPORT OF INDEPENDENT ACCOUNTANTS

 

To The Board of Directors and Member

of Semiconductor Components Industries, LLC

 

In our opinion, the accompanying consolidated balance sheet and the related statements of operations, of member’s equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Semiconductor Components Industries, LLC and its subsidiaries (a wholly-owned subsidiary of ON Semiconductor Corporation) at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. 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 of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As described in Note 4 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets effective January 1, 2002 as well as its methods of accounting for sales to distributors, derivative financial instruments and hedging activities effective January 1, 2001.

 

As described in Note 18 to the consolidated financial statements, the Company has reclassified losses on debt prepayments within its consolidated statement of operations.

 

 

Phoenix, Arizona

February 5, 2003, except for

Note 8 for which the date is

March 3, 2003 and Note 18 for which the

date is September 2, 2003

 

2 

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC AND SUBSIDIARIES

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

CONSOLIDATED BALANCE SHEET

 

		December 31								October 3,
		2002				2001				2003
										(unaudited)
		(In millions)
ASSETS
Cash and cash equivalents		$	176.4			$	174.2			$	166.9
Receivables, net (including $4.7, $21.3 and $10.2 due from Motorola)			111.7				132.3				148.9
Inventories, net			155.0				180.2				172.7
Other current assets			33.0				33.4				30.0
Deferred income taxes			6.4				7.5				7.2
Total current assets			482.5				527.6				525.7
Property, plant and equipment, net			389.5				482.8				342.4
Deferred income taxes			—				0.4				2.0
Goodwill			77.3				77.3				77.3
Intangibles assets, net			26.7				38.6				—
Notes receivable from affiliates			130.6				131.1				112.0
Other assets			38.7				41.7				39.1
Total assets		$	1,145.3			$	1,299.5			$	1,098.5
LIABILITIES AND MEMBER’S EQUITY (DEFICIT)
Accounts payable (including $0.1, $3.3 and $0.8 payable to Motorola)		$	63.8			$	102.7			$	107.4
Accrued expenses (including $0.7, $11.7 and $0 payable to Motorola)			97.0				101.5				88.7
Due to affiliates, net			5.6				1.0				21.3
Income taxes payable			14.8				6.1				19.0
Accrued interest			43.6				13.4				22.2
Deferred income on sales to distributors			70.8				99.4				64.4
Current portion of long-term debt			9.3				12.4				3.9
Total current liabilities			304.9				336.5				326.9
Long-term debt (including $126.9, $115.2 and $136.7 payable to Motorola)			1,393.9				1,374.5				1,269.0
Other long-term liabilities			42.9				48.3				37.5
Deferred income taxes			2.2				—				—
Total liabilities			1,743.9				1,759.3				1,633.4
Commitments and contingencies (See Note 15)			—				—				—
Contributed capital			793.5				785.9				953.6
Accumulated other comprehensive income (loss)			(34.3	)			(32.8	)			(6.8	)
Accumulated deficit			(1,357.8	)			(1,212.9	)			(1,481.7	)
Total member’s equity (deficit)			(598.6	)			(459.8	)			(534.9	)
Total liabilities and member’s equity (deficit)		$	1,145.3			$	1,299.5			$	1,098.5

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3 

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC AND SUBSIDIARIES

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

CONSOLIDATED STATEMENT OF OPERATIONS

 

		Year Ended December 31,												Nine Months Ended
														October 3, 2003				September 27, 2002
		2002				2001				2000
														(unaudited)				(unaudited)
		(In millions)
Total revenues (including $87.7, $98.9, $206.0, $57.6 and $65.0 from Motorola)		$	1,084.0			$	1,213.3			$	2,070.2			$	797.0			$	818.3
Cost of sales			805.9				991.0				1,356.8				590.5				606.4
Gross profit			278.1				222.3				713.4				206.5				211.9
Operating expenses:
Research and development			67.9				80.9				69.2				51.3				50.4
Selling and marketing			61.2				74.8				100.1				46.6				44.7
General and administrative			102.9				133.8				233.4				60.7				79.7
Amortization of intangibles			11.9				22.6				16.8				5.9				9.0
Write-off of acquired in-process research and development			—				—				26.9				—				—
Restructuring, asset impairments and other			26.7				150.1				4.8				31.2				10.2
Total operating expenses			270.6				462.2				451.2				195.7				194.0
Operating income (loss)			7.5				(239.9	)			262.2				10.8				17.9
Interest expense, net			(138.1	)			(133.6	)			(131.2	)			(107.6	)			(107.7	)
Loss on debt prepayment			(6.5	)			—				(29.2	)			(6.4	)			(6.5	)
Foreign currency remeasurement gain on notes receivable from affiliate			—				—				—				6.4				—
Income (loss) before income taxes and cumulative effect of accounting change			(137.1	)			(373.5	)			101.8				(96.8	)			(96.3	)
Income tax provision			(7.8	)			(342.9	)			(34.8	)			(5.6	)			(9.8	)
Income (loss) before cumulative effect of accounting change			(144.9	)			(716.4	)			67.0				(102.4	)			(106.1	)
Cumulative effect of accounting change (net of income taxes of $38.8 in 2001 and $0 in 2003)			—				(116.4	)			—				(21.5	)			—
Net income (loss)		$	(144.9	)		$	(832.8	)		$	67.0			$	(123.9	)		$	(106.1	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4 

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC AND SUBSIDIARIES

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

CONSOLIDATED STATEMENT OF MEMBER’S EQUITY (DEFICIT)

 

		Contributed Capital			Accumulated Other Comprehensive Income (Loss)				Accumulated Deficit				Total
		(In millions)
Balance at December 31, 1999		$	359.5		$	2.7			$	(447.1	)		$	(84.9	)
Net capital contributions from Member			301.9											301.9
Comprehensive income (loss):
Net income			—			—				67.0				67.0
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment			—			(3.1	)			—				(3.1	)
Additional minimum pension liability			—			(0.3	)			—				(0.3	)
Other comprehensive loss						(3.4	)							(3.4	)
Comprehensive income						—								63.6
Balance at December 31, 2000			661.4			(0.7	)			(380.1	)			280.6
Net capital contributions from Member			124.5											124.5
Comprehensive income (loss):
Net loss			—			—				(832.8	)			(832.8	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment			—			(3.9	)			—				(3.9	)
Additional minimum pension liability			—			(13.5	)			—				(13.5	)
Cumulative effect of accounting change			—			(5.7	)			—				(5.7	)
Effects of cash flow hedges			—			(9.0	)			—				(9.0	)
Other comprehensive loss						(32.1	)							(32.1	)
Comprehensive loss						—								(864.9	)
Balance at December 31, 2001			785.9			(32.8	)			(1,212.9	)			(459.8	)
Net capital contributions from Member			7.6											7.6
Comprehensive income (loss), net of tax:
Net loss			—			—				(144.9	)			(144.9	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment			—			2.3								2.3
Additional minimum pension liability			—			(5.8	)							(5.8	)
Unrealized losses on deferred compensation plan investments			—			(0.6	)							(0.6	)
Effects of cash flow hedges			—			2.6								2.6
Other comprehensive loss						(1.5	)							(1.5	)
Comprehensive loss						—								(146.4	)
Balance at December 31, 2002			793.5			(34.3	)			(1,357.8	)			(598.6	)
Net capital contributions from Member (unaudited)			160.1											160.1
Comprehensive income (loss), net of tax (unaudited):
Net loss (unaudited)			—			—				(123.9	)			(123.9	)
Other comprehensive income (loss), net of tax (unaudited):
Foreign currency translation adjustment (unaudited)			—			2.8								2.8
Additional minimum pension liability (unaudited)			—			19.6								19.6
Unrealized losses on deferred compensation plan investments (unaudited)						(0.2	)							(0.2	)
Effects of cash flow hedges (unaudited)			—			5.3								5.3
Other comprehensive loss (unaudited)						27.5								27.5
Comprehensive loss (unaudited)						—								(96.4	)
Balance at October 3, 2003 (unaudited)		$	953.6		$	(6.8	)		$	(1,481.7	)		$	(534.9	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC AND SUBSIDIARIES

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Year Ended December 31,												Nine Months Ended
														October 3, 2003				September 27, 2002
		2002				2001				2000
														(unaudited)				(unaudited)
		(In millions)
Cash flows from operating activities:
Net income (loss)		$	(144.9	)		$	(832.8	)		$	67.0			$	(123.9	)		$	(106.1	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			122.3				153.5				149.4				78.7				89.5
Write-off of acquired in-process research and development			—				—				26.9				—				—
Loss on debt prepayment			6.5				—				29.2				6.0				6.5
Cumulative effect of accounting change			—				155.2				—				21.5				—
Amortization of debt issuance costs and debt discount			8.7				6.0				5.9				6.9				5.7
Provision for excess inventories			12.1				50.9				44.1				8.4				12.5
Non-cash impairment of property, plant and equipment			11.5				56.2				—				10.5				8.4
Non-cash interest on junior subordinated note payable to Motorola			11.7				10.7				9.6				9.8				8.6
Non-cash write down of intangible asset			—				—				—				20.8				—
Stock compensation expense			4.5				5.0				0.7				0.1				1.2
Foreign currency remeasurement gain on notes receivable from affiliate			—				—				—				(6.4	)			—
Deferred income taxes			5.2				318.5				(9.1	)			(4.4	)			2.9
Other			(0.8	)			(2.2	)			(0.7	)			(2.1	)			0.7
Changes in assets and liabilities:
Receivables			22.8				135.0				0.2				(35.2	)			5.5
Inventories			13.4				17.7				(76.0	)			(26.1	)			13.2
Other assets			(3.6	)			(2.0	)			(27.6	)			(0.8	)			(2.3	)
Accounts payable			(39.2	)			(54.3	)			31.9				43.2				(23.8	)
Accrued expenses			(7.7	)			(63.0	)			46.4				(9.5	)			(9.7	)
Due to affiliates			4.9				(10.2	)			13.7				15.7				5.0
Income taxes payable			8.7				(11.6	)			(13.7	)			4.2				10.2
Accrued interest			19.2				5.7				(12.2	)			(21.4	)			33.7
Deferred income on sales to distributors			(28.6	)			(82.8	)			—				(6.4	)			(26.8	)
Other long-term liabilities			0.1				5.4				(3.8	)			(3.8	)			(15.1	)
Net cash provided by (used in) operating activities			26.8				(139.1	)			281.9				(14.2	)			19.8
Cash flows from investing activities:
Purchases of property, plant and equipment			(23.9	)			(109.4	)			(176.2	)			(37.3	)			(18.3	)
Investment in business, net of cash acquired			—				—				(253.2	)			—				—
Other investments			—				(0.5	)			(2.3	)			—				—
Loans to affiliates			—				(5.0	)			(43.1	)			—				—
Proceeds from repayment of loans to affiliates			0.5				—				—				25.0				0.5
Proceeds from sales of property, plant and equipment			4.8				13.8				18.1				13.2				2.2
Net cash provided by (used in) investing activities			(18.6	)			(101.1	)			(456.7	)			0.9				(15.6	)
Cash flows from financing activities:
Net capital contributions from Member			2.6				119.5				301.2				161.3				1.9
Proceeds from debt issuance			290.7				—				—				290.4				290.7
Proceeds from senior credit facilities and other borrowings			—				125.0				226.1				—				—
Payment of capital lease obligation			(1.1	)			(1.9	)			—				—				(1.1	)
Payment of debt issuance costs			(12.1	)			(5.1	)			(3.2	)			(14.2	)			(11.6	)
Repayment of senior credit facilities, including prepayment penalty in 2000			(287.1	)			(5.6	)			(131.5	)			(434.7	)			(283.3	)
Repayment of senior subordinated notes, including prepayment penalty			—				—				(156.8	)			—				—
Net cash provided by (used in) financing activities			(7.0	)			231.9				235.8				2.8				(3.4	)
Effect of exchange rate changes on cash and cash equivalents			1.0				0.8				(0.1	)			1.0				0.8
Net increase (decrease) in cash and cash equivalents			2.2				(7.5	)			60.9				(9.5	)			1.6
Cash and cash equivalents, beginning of period			174.2				181.7				120.8				176.4				174.2
Cash and cash equivalents, end of period		$	176.4			$	174.2			$	181.7			$	166.9			$	175.8

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6 

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1:    Background and Basis of Presentation

 

Semiconductor Components Industries, LLC (“SCI LLC” or the “Company”) is a wholly-owned subsidiary of ON Semiconductor Corporation (“ON Semiconductor”). The Company is one of the largest independent suppliers of semiconductor components in the world. Formerly known as the Semiconductor Components Group of the Semiconductor Products Sector of Motorola, Inc., ON Semiconductor was a wholly-owned subsidiary of Motorola Inc. (“Motorola”) prior to its August 4, 1999 recapitalization (the “Recapitalization”). ON Semiconductor continues to hold, through direct and indirect subsidiaries, substantially all the assets and operations of the Semiconductor Components Group of Motorola’s Semiconductor Products Sector.

 

On August 4, 1999, ON Semiconductor was recapitalized and certain related transactions were effected pursuant to an agreement among ON Semiconductor, the Company, Motorola and affiliates of Texas Pacific Group (“TPG”). As a result of the Recapitalization, an affiliate of TPG owned approximately 91% and Motorola owned approximately 9% of the outstanding common stock of ON Semiconductor. In addition, as part of these transactions, TPG received 1,500 shares and Motorola received 590 shares of ON Semiconductor’s mandatorily redeemable preferred stock with a liquidation value of $209 million plus accrued and unpaid dividends. Motorola also received a $91 million junior subordinated note issued by the Company. Cash payments to Motorola in connection with the Recapitalization were financed through equity investments by affiliates of TPG totaling $337.5 million, borrowings totaling $740.5 million under the Company’s $875 million senior bank facilities and the issuance of $400 million of 12% senior subordinated notes due August 2009. Because TPG’s affiliate did not acquire substantially all of ON Semiconductor’s common stock, the basis of ON Semiconductor’s assets and liabilities for financial reporting purposes was not impacted by the Recapitalization.

 

The accompanying unaudited financial statements as of October 3, 2003 and for the nine months ended September 27, 2002 and October 3, 2003, respectively, have been prepared in accordance with generally accepted accounting principles for interim financial information and on the same basis of presentation as the audited financial statements. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements. In the opinion of the Company’s management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The footnote disclosures related to the interim financial information included herein are also unaudited.

 

Note 2:    Liquidity

 

During the nine months ended October 3, 2003, ON Semiconductor incurred a net loss of $124.3 million compared to a net loss of $102.3 million for the nine months ended September 27, 2002. ON Semiconductor’s net loss included charges for restructuring, asset impairments and other of $31.3 million for the nine months ended October 3, 2003, as compared to $10.2 million for the nine months ended September 27, 2002. ON Semiconductor’s net loss for the first nine months of 2003 also included a charge of $21.5 million relating to a change in accounting principle described in Note 4. Net cash provided by operating activities was $17.9 million in the nine months ended October 3, 2003 as compared to net cash provided by operating activities of $34.3 million for the nine months ended September 27, 2002.

 

At October 3, 2003, ON Semiconductor had $183.6 million in cash and cash equivalents, net working capital of $207.0 million, term or revolving debt of $1,292.9 million and a stockholders’ deficit of $603.9 million. ON Semiconductor’s long-term debt includes $367.9 million under its senior bank facilities; $292.3 million (net of discount) of its 13% second lien senior secured notes due 2008; $191.4 million (net of discount) of its 12% first lien senior secured notes due 2010; $260.0 million of its 12% senior subordinated notes due 2009;

 

7 

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

$136.7 million under a 10% junior subordinated note payable to Motorola due 2011; $23.6 million under a note payable to a Japanese bank due 2010; $20.0 million under a loan facility with a Chinese bank and $1.0 million under a capital lease obligation. ON Semiconductor was in compliance with all of the covenants contained in its various debt agreements as of October 3, 2003 and expects to remain in compliance over the next twelve months.

 

During the year ended December 31, 2002, ON Semiconductor incurred a net loss of $141.9 million compared to a net loss of $831.4 million in 2001 and net income of $71.1 million in 2000. ON Semiconductor’s net results included restructuring, asset impairments and other of $27.7 million, $150.4 million and $4.8 million in 2002, 2001 and 2000, respectively, as well as interest expense of $149.5 million, $139.6 million and $135.3 million, respectively. ON Semiconductor’s operating activities provided cash of $46.4 million in 2002 and $312.2 million in 2000 and used cash of $116.4 million in 2001.

 

At December 31, 2002, ON Semiconductor had $190.4 million in cash and cash equivalents, net working capital of $195.2 million, term or revolving debt of $1,423.2 million and a stockholders’ deficit of $662.1 million. ON Semiconductor’s long-term debt includes $701.6 million under its senior bank facilities; $291.4 million (net of discount) of its 12% senior secured notes due 2008; $260.0 million of its 12% senior subordinated notes due 2009; $126.9 million under a 10% junior subordinated note payable to Motorola due 2011; $20.0 million loan facility with a Chinese bank; and, $23.3 million under a note payable to a Japanese bank due 2010.

 

ON Semiconductor’s ability to service its long-term debt, to remain in compliance with the various covenants and restrictions contained in its credit agreements and to fund working capital, capital expenditures and business development efforts will depend on its ability to generate cash from operating activities which is subject to, among other things, its future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may beyond its control.

 

If ON Semiconductor fails to generate sufficient cash from operations, it may need to raise additional equity or borrow additional funds to achieve its longer term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to ON Semiconductor. Management believes that cash flow from operating activities coupled with existing cash balances will be adequate to fund ON Semiconductor’s operating and capital needs as well as enable it to maintain compliance with its various debt agreements through October 3, 2004. To the extent that results or events differ from ON Semiconductor’s financial projections or business plans, the Company’s liquidity may be adversely impacted.

 

Note 3:    Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Investments in companies that represent less than 20% of the related voting stock are accounted for on the cost basis as the Company does not exercise significant influence. All material intercompany accounts and transactions have been eliminated.

 

Reclassifications

 

Certain amounts have been reclassified to conform with the current year presentation.

 

8

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Use of Estimates

 

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates have been used by management in conjunction with the measurement of valuation allowances relating to receivables, inventories and deferred tax assets; reserves for customer incentives, restructuring charges and pension obligations; the fair values of financial instruments (including derivative financial instruments); and future cash flows associated with long-lived assets. Actual results could differ from these estimates.

 

Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

Inventories

 

Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis), or market. The Company records provisions for slow moving inventories based upon a regular analysis of inventory on hand compared to historical and projected end user demand. Projected end user demand is generally based on sales during the prior twelve months.

 

These provisions can influence results from operations. For example, when demand for a given part falls, all or a portion of the related inventory is reserved, impacting cost of sales and gross profit. If demand recovers and the parts previously reserved are sold, a higher than normal margin will generally be recognized. General market conditions as well as the Company’s design activities can cause certain of its products to become obsolete.

 

Property, Plant and Equipment

 

Property, plant and equipment are recorded at cost and are depreciated over estimated useful lives of 30-40 years for buildings and 3-20 years for machinery and equipment using accelerated and straight-line methods. Expenditures for maintenance and repairs are charged to operations in the year in which the expense is incurred. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations in the period realized.

 

The Company evaluates the recoverability of the carrying amount of its property, plant and equipment whenever events or changes in circumstances indicate that the related carrying amount of an asset may not be recoverable. Impairment is assessed when the undiscounted expected cash flows derived for an asset are less than its carrying amount. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an impaired asset. The dynamic economic environment in which the Company operates and the resulting assumptions used to estimate future cash flows impact the outcome of these impairment tests.

 

Goodwill and Other Intangible Assets

 

Goodwill represents the excess of the purchase price of the Cherry acquisition (described in Note 6 “Acquisition”) over the estimated fair value of the net assets acquired and was being amortized on a straight line

 

9

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

basis over its estimated useful life of ten years until January 1, 2002 when the Company adopted Statement of Financial Accounting Standards (“SFAS”) 142, “Goodwill and Other Intangible Assets.” The Company also acquired a certain intangible asset in the Cherry acquisition that until July 5, 2003 was being amortized on a straight line basis over its estimated useful life of five years. As described in Note 5, the Company wrote-off the remaining carrying value of the intangible asset in the second quarter of 2003 and will no longer incur amortization of $12.0 million annually.

 

Under SFAS 142, goodwill is evaluated for potential impairment on an annual basis or whenever events or circumstances indicate that an impairment may have occurred. SFAS 142 requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the estimated fair value of the reporting unit containing goodwill with the related carrying amount. If the estimated fair value of the reporting unit exceeds its carrying amount, the reporting unit’s goodwill is not considered to be impaired and the second step of the impairment test is unnecessary. If the reporting unit’s carrying amount exceeds its estimated fair value, the second step test must be performed to measure the amount of the goodwill impairment loss, if any. The second step test compares the implied fair value of the reporting unit’s goodwill, determined in the same manner as the amount of goodwill recognized in a business combination, with the carrying amount of such goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company performs its annual impairment analysis during the fourth quarter of each year.

 

Debt Issuance Costs

 

Debt issuance costs are capitalized and amortized over the terms of the underlying agreements. Upon prepayment of debt, the related unamortized debt issuance costs are charged to operations. Amortization of debt issuance costs is included in interest expense while the unamortized balance is included in other assets.

 

Revenue Recognition

 

The Company generates revenue from sales of its semiconductor products to original equipment manufacturers, distributors and electronic manufacturing service providers. The Company recognizes revenue on sales to original equipment manufacturers and electronic manufacturing service providers when title passes to the customer net of provisions for related sales returns and allowances.

 

Prior to January 1, 2001, the Company recognized revenue on distributor sales when title passed to the distributor. Provisions were also recorded at that time for estimated sales returns as well as for other related sales costs and allowances. Effective January 1, 2001, the Company changed its revenue recognition policy with respect to distributor sales so that the related revenues are now deferred until the distributor resells the product to the end user. This change eliminated the need to provide for estimated sales returns from distributors. Title to products sold to distributors typically passes at the time of shipment by the Company so the Company records accounts receivable for the amount of the transaction, reduces its inventory for the products shipped and defers the related margin in the consolidated balance sheet. The Company recognizes the related revenue and margin when the distributor sells the products to the end user. Although payment terms vary, most distributor agreements require payment within 30 days.

 

Research and Development Costs

 

Research and development costs are expensed as incurred.

 

10

---

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Stock-Based Compensation

 

The Company accounts for employee stock options relating to the common stock of ON Semiconductor accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and provides the pro forma disclosures required by SFAS No. 123 “Accounting for Stock Based Compensation” (“SFAS No. 123”). The Company measures compensation expense relating to non-employee stock awards in accordance with SFAS No. 123.

 

Had the Company determined employee stock compensation expense in accordance with SFAS No. 123, the Company’s net income (loss) for the years ended December 31, 2002, 2001, and 2000 and the nine months ended October 3, 2003, and September 27, 2002 would have been reduced (increased) to the pro forma amounts indicated below (in millions):

 

		Year Ended December 31,												Nine Months Ended
														October 3, 2003				September 27, 2002
		2002				2001				2000
														(unaudited)				(unaudited)
Net income (loss), as reported		$	(144.9	)		$	(832.8	)		$	67.0			$	(123.9	)		$	(106.1	)
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects			4.5				3.7				0.5				0.1				1.2
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(15.4	)			(17.9	)			(7.1	)			(10.9	)			(10.5	)
Pro forma net income (loss)		$	(155.8	)		$	(847.0	)		$	60.4			$	(134.7	)		$	(115.4	)

 

The fair value of each option grant has been estimated at the date of grant while the fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan has been estimated at the beginning of each of the respective offering periods, both using a Black-Scholes option-pricing model with the following weighted-average assumptions:

 

											Nine Months Ended
Employee Stock Options		2002			2001			2000			October 3, 2003			September 27, 2002
											(unaudited)			(unaudited)
Expected life (in years)		5			5			5			5			5
Risk-free interest rate		4.15	%		4.82	%		6.41	%		3.05	%		4.49	%
Volatility		0.70			0.70			0.60			0.73			0.70
											Nine Months Ended
Employee Stock Purchase Plan		2002			2001			2000			October 3, 2003			September 27, 2002
											(unaudited)			(unaudited)
Expected life (in years)		0.25			0.25			0.33			0.25			0.25
Risk-free interest rate		1.71	%		4.26	%		6.20	%		1.10	%		1.75	%
Volatility		0.70			0.70			0.60			0.79			0.70

 

The weighted-average estimated fair value of employee stock options granted during 2002, 2001 and 2000 was $1.83, $3.25 and $8.67 per share, respectively. The weighted-average estimated fair value of the discount on

 

11

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

the shares sold under the 2000 Employee Stock Purchase Plan during 2002, 2001 and 2000 was $0.60, $1.24 and $3.73, respectively.

 

The weighted-average estimated fair value of employee stock options granted during the first nine months of 2003 and 2002 was $0.96 and $2.14 per share, respectively. The weighted-average estimated fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan during the first nine months of 2003 and 2002 was $0.46 and $0.71 per share, respectively.

 

Income Taxes

 

Income taxes are accounted for using the asset and liability method and are determined on a separate return basis. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these 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. A valuation allowance is provided for those deferred tax assets for which it is more likely than not that the related benefits will not be realized.

 

In determining the amount of the valuation allowance, estimated future taxable income as well as feasible tax planning strategies in each taxing jurisdiction are considered. If all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if the Company will ultimately be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be released to income as a credit to income tax expense. In the fourth quarter of 2001, a valuation allowance was established for the majority of the Company’s deferred tax assets. Additionally, throughout 2002, no incremental deferred tax benefits were recognized. The Company’s ability to utilize its deferred tax assets and the continuing need for a related valuation allowance are monitored on an ongoing basis.

 

Foreign Currencies

 

Most of the Company’s foreign subsidiaries deal primarily in U.S. dollars and as a result, utilize the dollar as their functional currency. For the translation of financial statements of these subsidiaries, assets and liabilities that are receivable or payable in cash are translated at current exchange rates while inventories and other non-monetary assets are translated at historical rates. Gains and losses resulting from the translation of such financial statements are included in the operating results, as are gains and losses incurred on foreign currency transactions. The Company’s remaining foreign subsidiaries utilize the local currency as their functional currency. The assets and liabilities of these subsidiaries are translated at current exchange rates while revenues and expenses are translated at the average rates in effect for the period. The related translation gains and losses are included in accumulated other comprehensive income (loss) within member’s equity (deficit).

 

Defined Benefit Plans

 

The Company maintains pension plans covering certain of its employees. For financial reporting purposes, net periodic pension costs are calculated based upon a number of actuarial assumptions, including a discount rate for plan obligations, assumed rate of return on pension plan assets and assumed rate of compensation increase for plan employees. All of these assumptions are based upon management’s judgement, considering all known trends

 

12

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

and uncertainties. Actual results that differ from these assumptions would impact the future expense recognition and cash funding requirements of our pension plans.

 

Recent Accounting Pronouncements

 

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” Under this standard, asset retirement obligations will be recognized when incurred at their estimated fair value. In addition, the cost of the asset retirement obligation will be capitalized as a part of the assets’ carrying valued and depreciated over the assets’ remaining useful life. The Company will be required to adopt SFAS No. 143 effective January 1, 2003. The Company’s adoption of SFAS No. 143 did not impact its financial condition or results of operations.

 

The Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” effective January 1, 2002. SFAS No. 144 requires that all long-lived assets (including discontinued operations) that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company’s adoption of SFAS No. 144 did not impact its financial condition or results of operations.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost as defined in EITF No. 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated by the Company after December 31, 2002.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment to FAS 123.” SFAS No. 148 provides alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in annual and interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for the Company’s fiscal year 2002. The interim disclosure requirements are effective for the first quarter of fiscal year 2003 and are included in Note 3, “Significant Accounting Policies.” The Company has no plans to change to the fair value based method of accounting for stock-based employee compensation.

 

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 also expands the disclosures required to be made by a guarantor about its obligations under certain guarantees that it has issued. Initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified. The disclosure requirements are effective immediately and such disclosures have been included in Note 7 “Balance Sheet Information”. The Company’s adoption of FIN No. 45 did not impact its financial condition or results of operations.

 

13

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “ Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created to acquired prior to February 1, 2003, the provisions of FIN 46 must be applied to the first interim or annual period beginning after June 15, 2003. The Company’s adoption of FIN 46 did not impact its financial condition or results of operations.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 specifies that freestanding financial instruments within its scope constitute obligations of the issuer that must be classified as liabilities. Such freestanding financial instruments include mandatorily redeemable financial instruments, obligations to repurchase the issuer’s equity shares by transferring assets, and certain obligations to issue a variable number of shares. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS No. 150 is effective at the beginning of the third quarter of 2003. The Company does not currently have any financial instruments that fall within the scope of SFAS No. 150.

 

Note 4:    Accounting Changes

 

Defined Benefit Pension Obligations

 

The Company changed its method of accounting for unrecognized net actuarial gains or losses relating to its defined benefit pension obligations. Historically, the Company amortized its net unrecognized actuarial gains or losses over the average remaining service lives of active plan participants, to the extent that such net gains or losses exceeded the greater of 10% of the related projected benefit obligation or plan assets. The Company will no longer defer actuarial gains or losses but will recognize such gains and losses during the fourth quarter of each year, which is the period the Company’s annual pension plan actuarial valuations are prepared. Management believes that this change is to a preferable accounting method as actuarial gains or losses will be recognized currently in income rather than being deferred.

 

The impact of this change for periods prior to January 1, 2003 is a charge of $21.5 million, both before and after income taxes, and has been reflected as the cumulative effect of a change in accounting principle in the Company’s consolidated statement of operations for the nine months ended October 3, 2003. The effect of the change on the nine months ended October 3, 2003 was to decrease the loss before cumulative effect of accounting change by $4.8 million, both before and after income taxes, and to increase the net loss by $16.7 million, both before and after income taxes. Absent the accounting change, the $21.5 million of net unrecognized actuarial losses at December 31, 2002 would have been recognized as an operating expense in future periods.

 

14

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The pro forma effects of the accounting change for the years ended December 31, 2002, 2001 and 2000, respectively are as follows (in millions):

 

		Year Ended December 31,
		2002				2001				2000
As reported:
Net income (loss) before cumulative effect of accounting change		$	(144.9	)		$	(716.4	)		$	67.0
Net income (loss)		$	(144.9	)		$	(832.8	)		$	67.0
Pro forma amounts reflecting the accounting change applied retroactively:
Net income (loss) before cumulative effect of accounting change		$	(149.3	)		$	(726.6	)		$	60.4
Net income (loss)		$	(149.3	)		$	(843.0	)		$	60.4

 

The effect of the accounting change on the nine months ended September 27, 2002 is as follows (in millions):

 

		(Pro forma)
		(unaudited)
Reported loss before cumulative effect of accounting change		$	(106.1	)
Add back: Amortization of actuarial losses			3.7
Loss before cumulative effect of accounting change			(102.4	)
Cumulative effect of accounting change			—
Net loss		$	(102.4	)

 

Goodwill and Other Intangible Assets

 

Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”. The provisions of SFAS 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and require that such assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired), require that reporting units be identified for the purpose of assessing potential future impairments of goodwill and remove the forty-year limitation on the amortization period of intangible assets that have finite lives.

 

The Company’s goodwill at January 1, 2002 totaled $77.3 million and relates to the Cherry acquisition described in Note 6. As a result of the adoption of SFAS No. 142, the Company discontinued amortization of the Cherry goodwill at the beginning of 2002. During the first quarter of 2002, the Company identified its various reporting units, which correspond with its four product lines, and allocated its assets and liabilities to such reporting units. The goodwill relating to the Cherry acquisition was specifically identified with and included in the Company’s Power Management and Standard Analog reporting unit. During the second quarter of 2002, the Company completed the first step of its transitional goodwill impairment test and determined that the estimated fair value of the Power Management and Standard Analog reporting unit as of January 1, 2002 exceeded the reporting unit’s carrying amount by a substantial amount. As a result, an impairment of the Cherry goodwill as of that date was not indicated and completion of the second step test was not required. The Company updated its goodwill impairment analysis during the fourth quarter of 2002 and determined that a related impairment did not exist.

 

15

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table, with comparable actual amounts, sets forth the pro forma effects on net income (loss) assuming that the Company had adopted the provisions of SFAS No. 142 at the date of the Cherry acquisition in April 2000:

 

		Year Ended December 31,
		As Reported 2002				As Reported 2001				Pro Forma 2001				As Reported 2000			Pro Forma 2000
Reported net income (loss) before cumulative effect of accounting change		$	(144.9	)		$	(716.4	)		$	(716.4	)		$	67.0		$	67.0
Add Back: Goodwill amortization, net of tax											10.7							7.7
Pro forma net income (loss) before cumulative effect of accounting change										$	(705.7	)					$	74.7
Reported net income (loss)		$	(144.9	)		$	(832.8	)		$	(832.8	)		$	67.0		$	67.0
Add Back: Goodwill amortization, net of tax											10.7							7.7
Pro forma net income (loss)										$	(822.1	)					$	74.7

 

Revenue Recognition

 

Sales are made to distributors under agreements that allow certain rights of return and price protection on products that are not resold by such distributors. Prior to January 1, 2001, the Company recognized revenue on distributor sales when title passed to the distributor. Provisions were also recorded at that time for estimated sales returns from our distributors on these unsold products. Effective January 1, 2001, the Company changed its revenue recognition method on sales to distributors so that such revenues are recognized at the time the distributor sells the Company’s products to the end customer. Title to products sold to distributors typically passes at the time of shipment by the Company so the Company records accounts receivable for the amount of the transaction, reduces its inventory for the products shipped and defers the related margin in the consolidated balance sheet. The Company recognizes the related revenue and margin when the distributor sells the products to the end user. Although payment terms vary, most distributor agreements require payment within 30 days.

 

Management believes that this accounting change was to a preferable method because it better aligns reported results with, focuses the Company on, and allows investors to better understand end user demand for the products the Company sells through distribution.

 

Additionally, the timing of revenue recognition is no longer influenced by the distributor’s stocking decisions. This revenue recognition policy and manner of presentation is commonly used in the semiconductor industry.

 

The impact of the accounting change for periods prior to 2001 was a charge of $155.2 million ($116.4 million, net of income taxes) and is reflected as the cumulative effect of change in accounting principle in the Company’s consolidated statement of operations and comprehensive loss in 2001. The accounting change resulted in an increase in revenues of $116.6 million and a reduction in net loss of $53.1 million for the year ended December 31, 2001.

 

16

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The estimated pro forma effects of the accounting change for the year ended December 31, 2000 are as follows (in millions):

 

		Year Ended December 31, 2000
As reported:
Revenues		$	2,070.2
Net income			67.0
Pro forma effects reflecting the accounting change applied retroactively:
Revenues		$	1,955.0
Net income			26.7

 

Derivatives Instruments and Hedging Activities

 

The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which establishes standards for the accounting and reporting for derivative instruments, including derivative instruments embedded in other contracts, and hedging activities effective January 1, 2001.

 

Upon adoption, the Company recorded an after-tax charge of approximately $3.4 million to accumulated other comprehensive income (loss). This charge consisted of an approximate $2.1 million adjustment to record the Company’s interest rate swaps in the consolidated balance sheet at their estimated fair values as well as the write-off of an approximate $3.5 million deferred charge relating to the payment made in December 2000 for the early termination of an interest rate protection agreement relating to a portion of the amounts outstanding under the Company’s senior bank facilities, both before income taxes of approximately $2.2 million.

 

The Company uses forward foreign currency contracts to reduce its overall exposure to the effects of foreign currency fluctuations on its results of operations and cash flows. The fair value of these derivative instruments are recorded as assets or liabilities with gains and losses offsetting the losses and gains on the underlying assets or liabilities. The adoption of SFAS 133 did not impact the Company’s accounting and reporting for these derivative instruments.

 

17

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 5:    Restructuring, Asset Impairments and Other

 

The activity related to the Company’s restructuring, asset impairments and other is as follows (in millions):

 

		Reserve Balance at 12/31/2000			2001 Charges			2001 Usage				Reserve Balance at 12/31/2001			2002 Charges			2002 Usage				2002 Adjustments				Reserve Balance at 12/31/2002			2003 Charges			2003 Usage				2003 Adjustments				Reserve Balance at 10/3/03
																													(unaudited)			(unaudited)				(unaudited)				(unaudited)
		$	0.7		$	—		$	(0.7	)		$	—			—		$	—			$	—			$	—		$	—		$	—			$	—			$	—
September 2003
Cash employee separation charges			—			—			—				—			—			—				—				—			1.3			(0.2	)			—				1.1
September 2003 Restructuring reserve balance																																									1.1
June 2003
Cash employee separation charges			—			—			—				—			—			—				—				—			0.4			(0.4	)			—				—
Cash exit costs			—			—			—				—			—			—				—				—			1.4			(1.4	)			—				—
Non-cash fixed asset write-offs			—			—			—				—			—			—				—				—			10.5			(10.5	)			—				—
Non-cash impairment of other long-lived assets			—			—			—				—			—			—				—				—			21.3			(21.3	)			—				—
December 2002 Restructuring
Cash employee separation charges			—			—			—				—			10.1			(0.2	)			—				9.9			—			(6.2	)			—				3.7
Cash exit costs			—			—			—				—			1.8			—				—				1.8			—			(1.1	)			—				0.7
December 2002 Restructuring reserve balance			—										—														11.7														4.4
June 2002 Restructuring
Cash employee separation charges			—			—			—				—			2.9			(2.5	)			—				0.4			—			(0.4	)							—
Cash exit costs			—			—			—				—			2.8			(1.3	)			—				1.5			—							1.0				2.5
Non-cash fixed asset write-offs			—			—			—				—			8.4			(8.4	)			—				—			—			—				—				—
Non-cash stock compensation charges			—			—			—				—			1.0			(1.0	)			—				—			—			—				—				—
June 2002 Restructuring reserve balance			—										—														1.9														2.5
March 2002 Restructuring
Cash employee separation charges			—			—			—				—			7.0			(4.3	)			0.3				3.0			—			(2.3	)			0.1				0.8
Non-cash stock compensation charges			—			—			—				—			0.2			(0.2	)			—				—			—			—				—				—
March 2002 Restructuring reserve balance			—										—														3.0														0.8
December 2001 Restructuring
Cash employee separation charges			—			4.0			(1.8	)			2.2			—			(2.1	)			—				0.1			—							(0.1	)			—
Non-cash fixed asset write-offs			—			11.1			(11.1	)			—			—			—				—				—			—			—				—				—
Non-cash stock compensation and pension charges			—			1.5			(1.5	)			—			—			—				—				—			—			—				—				—
December 2001 Restructuring reserve balance			—										2.2														0.1														—
June 2001 Restructuring
Cash employee separation charges			—			36.1			(29.3	)			6.8			—			(5.7	)			(1.1	)			—			—											—
Cash exit costs			—			10.0			—				10.0			—			(8.1	)			0.9				2.8			—			(1.9	)			(0.1	)			0.8
Non-cash fixed asset write-offs			—			42.2			(42.2	)			—			—			—				—				—			—			—				—				—
Non-cash stock compensation and pension charges			—			7.2			(7.2	)			—			—			—				—				—			—			—				—				—
June 2001 Restructuring reserve balance			—										16.8														2.8														0.8
March 2001 Restructuring
Cash employee separation charges			—			31.3			(30.5	)			0.8			—			(0.7	)			(0.1	)			—			—			—				—				—
Non-cash fixed asset write-offs			—			2.9			(2.9	)			—			—			—				—				—			—			—				—				—
March 2001 Restructuring reserve balance			—										0.8														—														—
		$	0.7		$	146.3		$	(127.2	)		$	19.8		$	34.2		$	(34.5	)		$	(0.0	)		$	19.5		$	34.9		$	(45.7	)		$	0.9			$	9.6

 

18

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table reconciles the restructuring, asset impairments and other activity in the tables above to the “Restructuring, asset impairments and other” caption on the Statement of Operations for the years ended December 31, 2002 and 2001, respectively (in millions):

 

		Year Ended December 31, 2002
2002 restructuring, asset impairments and other		$	34.2
Plus: Additional charges related to Guadalajara and France			1.2
Less: Reserves released during the period			(1.2	)
Plus: Other charges related to the termination of executive officers (December 2002)			4.9
Less: Motorola gain			(12.4	)
Restructuring and other		$	26.7
		Year Ended December 31, 2001
2001 restructuring, asset impairments and other		$	146.3
Plus: Other charges related to the termination of an executive officer (March 2001)			3.8
Restructuring, asset impairments and other		$	150.1

 

The following table reconciles the restructuring, asset impairments and other activity to the “Restructuring, asset impairments and other” caption on the statement of operations for the nine months ended October 3, 2003, and September 27, 2002, respectively (in millions):

 

		Nine Months Ended October 3, 2003
2003 restructuring, asset impairments and other		$	34.9
2003 adjustments to prior restructurings			0.9
Less: Gain on sale of Guadalajara facility			(4.6	)
Restructuring, asset impairments and other		$	31.2
		Nine Months Ended September 27, 2002
2002 restructuring, asset impairments and other		$	22.3
Plus: Additional charges related to Guadalajara			1.6
Less: Reserves released during the period			(1.3	)
Less: Motorola gain			(12.4	)
Restructuring, asset impairments and other		$	10.2

 

19

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

September 2003 Restructuring Program and Other

 

In September 2003, the Company recorded a $4.6 million gain in connection with the sale of the Guadalajara, Mexico facility. This gain was partially offset by charges totaling $1.3 million associated with worldwide restructuring programs to cover employee separation costs relating to the termination of approximately 36 employees, reflecting further reductions in manufacturing and general and administrative personnel in France, Germany, the Czech Republic, Hong Kong and the United States. The Company also recorded a $0.2 million reversal of amounts previously recorded in connection with the Company’s June 2001 and December 2001 restructuring programs as described below and an additional $0.1 million charge associated with its March 2002 restructuring program.

 

As of the end of the third quarter of 2003, all impacted employees had been terminated, and the Company currently expects to pay the $1.1 million of remaining employee severance costs by December 2004.

 

June 2003 Restructuring, Asset Impairments and Other

 

In June 2003, the Company recorded charges totaling $13.3 million associated with its worldwide restructuring programs. The charges include $0.4 million to cover employee separation costs relating to the termination of approximately 16 employees, $1.4 million of lease and contract termination exit costs, $10.5 million of asset impairments and an additional $1.0 million associated with a supply contract that was terminated as part of the June 2002 restructuring program.

 

The employee separation costs reflected further reductions in general and administrative staffing levels primarily in the United States. As of the end of the third quarter of 2003, all impacted employees had been terminated, and the Company had made all related severance payments.

 

The lease and contract termination exit costs relate to the exit of certain sales and administrative offices in Bermuda and Europe and the termination of other purchase and supply agreements.

 

The $10.5 million of asset impairments included $3.3 million associated with an assembly and test packaging production line in Malaysia which was written down to estimated fair value based on its future net discounted cash flows. Additionally, the Company identified certain buildings, machinery, software and equipment that would no longer be used internally due to the continued consolidation of manufacturing and general and administrative functions primarily in the United States and recorded a charge of $7.2 million to write-down the remaining carrying value of these assets to their net realizable value.

 

In the second quarter of 2003, the Company also recorded non-cash impairment charges totaling $21.3 million including $20.8 million relating to the write-off of the developed technology intangible asset associated with the April 2000 purchase of Cherry Semiconductor Corporation and a $0.5 million write-off of a cost basis investment. Sustained price declines in certain product lines triggered an impairment analysis of the carrying value of the developed technology and resulted in the Company recording an impairment charge of $20.8 million. The Company measured the amount of the impairment charge by comparing the carrying value of the developed technology to its estimated fair value. The Company estimated future net cash flows associated with the developed technology using price, volume and cost assumptions that management considered to be reasonable in the circumstances. The Company will no longer incur amortization expense of approximately $3.0 million per quarter related to this intangible asset. As a result of the impairment of the developed technology, the Company evaluated the recoverability of the related goodwill that arose in connection with the

 

20

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

acquisition of Cherry Semiconductor Corporation. The Company determined that the estimated fair value of the reporting unit containing the goodwill exceeded its related carrying amount. Accordingly, the goodwill was not considered to be impaired.

 

December 2002 Restructuring

 

In December 2002, the Company recorded a $11.6 million (net of a $0.6 adjustment) restructuring charge. The charge included $10.1 million to cover employee separation costs relating the termination of approximately 300 employees and approximately $1.8 million in expected lease termination and other exit costs associated with the decommissioning of certain assets. The headcount reductions began in the first quarter of 2003 and are expected to be completed by December 2003 and will impact both manufacturing and non-manufacturing personnel mainly in the United States. The charge also included an additional $0.3 million reserve related to headcount reduction in Toulouse, France that was part of the March 2002 restructuring program. The $0.6 adjustment related to release of previous reserves associated with the June 2001 restructuring programs due to the Company’s analysis of estimated costs to complete those programs. As of October 3, 2003, the remaining liability relating to this restructuring was $4.4 million.

 

In December 2002, the Company also recorded a $4.9 million charge to cover the costs associated with the separation of two of its executive officers. In connection with the separation, the Company reserved $2.0 million related to the cash portion of the related separation agreements. In addition, the Company agreed to modify the vesting and exercise period for a portion of the executives’ stock options. This modification resulted in a non-cash stock compensation charge of $2.9 million with an offsetting credit to additional paid-in capital.

 

June 2002 Restructuring, Asset Impairments and Other

 

In June 2002, the Company recorded charges totaling $16.7 million for costs associated with its worldwide restructuring programs. The charges included $3.9 million to cover employee separation costs associated with the termination of 79 U.S. employees, $2.8 million for exit costs consisting primarily of manufacturing equipment and supply contract termination charges, and $8.4 million for equipment write-offs that were charged directly against the related assets. An additional $1.0 million in exit costs and $0.6 million in employee separation costs were accrued relating to the closure of the Company’s Guadalajara, Mexico manufacturing facility that was part of the June 2001 restructuring described below.

 

The employee separation costs reflected further reductions in general and administrative staffing levels and included $1.0 million of non-cash stock compensation charges associated with the modification of stock options for certain terminated employees. As of July 4, 2003, all impacted employees had been terminated and employee separation costs had been paid.

 

As a result of continuing economic conditions, the Company determined that certain manufacturing equipment purchase and supply agreements were no longer economical to complete and accrued estimate termination charges of $2.8 million during the second quarter of 2002 and an additional $1.0 in the second quarter of 2003. As of October 3, 2003, the Company is in discussions to settle its remaining obligations.

 

During the second quarter of 2002, the Company identified certain manufacturing equipment that would no longer be used internally and recorded a charge of $7.0 million to write-down the remaining carrying value to its estimated net realizable value. Additionally, the Company determined that it would not invest the capital required to complete an equipment project and recorded a charge of $1.4 million to write-off the carrying value of the related project.

 

21

---

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

During the second quarter of 2002, the Company reached a settlement of various contractual issues with Motorola in exchange for a cash payment from Motorola of $10.6 million which resulted in a related gain of $12.4 million. The Company also recorded a $1.2 million reversal of amounts previously provided in connection with its June 2001 restructuring program as a result of favorable negotiated contract termination costs.

 

March 2002 Restructuring

 

In March 2002, the Company recorded a $7.1 million (net of a $0.1 million adjustment to the March 2001 restructuring program) charge to cover employee separation costs relating to the termination of approximately 72 employees. Approximately $5.0 million of this charge is attributable to employee terminations resulting from the Company’s decision to relocate its European administrative functions from Toulouse, France to Roznov, Czech Republic and Piestany, Slovakia. The relocation of these functions is currently expected to be completed by June 30, 2003. The remaining $2.2 million relates to reductions in selling, general and administrative functions primarily in the U.S. The March 2002 charge also included $0.2 million of non-cash employee stock compensation expense associated with the modification of stock options for certain terminated employees. The Company recorded an additional $0.3 million in employee separation costs relating to the relocation of the administrative functions in Toulouse, France during the fourth quarter of 2002 as a result of its reevaluation of remaining costs to be incurred. The remaining restructuring reserve of $0.8 million at October 3, 2003 relates to the unpaid separation costs associated with terminated employees under the program. The Company currently expects that the remaining severance payments will be completed by June 2004.

 

December 2001 Restructuring and Asset Impairments

 

In December 2001, the Company recorded charges totaling $16.6 million for costs associated with its worldwide restructuring programs. The charges included $5.5 million to cover employee separation costs associated with the terminations of 50 employees as well as $11.1 million for property and equipment write-offs that were charged directly against the related assets.

 

The employee separation costs reflected reductions in selling, general and administrative staffing levels in the U.S., United Kingdom, Germany, France and Singapore and included $0.2 million of non-cash charges associated with the modification of stock options for certain terminated employees as well as $1.3 million for additional pension charges relating to the terminated employees. (The additional pension charge is reflected in the Company’s accrued pension liability in the consolidated balance sheet.) As of October 3, 2003, all impacted employees had been terminated and the Company released the remaining reserve of $0.1 million during the third quarter of 2003.

 

The $11.1 million charge related the write-off of certain property and equipment located in Phoenix, Arizona that would no longer be utilized as a result of the Company’s restructuring activities.

 

June 2001 Restructuring, Asset Impairments and Other

 

In June 2001, the Company recorded charges totaling $95.5 million for costs associated with its worldwide restructuring programs. These programs were in response to rapidly changing economic circumstances requiring the Company to rationalize its manufacturing and distribution operations to meet declining customer demand. The programs included the phasing out of manufacturing operations at the Company’s Guadalajara, Mexico facility by June 2002, transferring certain manufacturing activities performed at the Company’s Aizu, Japan and Seremban, Malaysia facilities to other Company-owned facilities or to third party contractors by June 2002 and

 

22

---

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

December 2001, respectively, the shutdown of the Hong Kong Distribution Center and transfer of related functions to its Singapore Distribution Center. The charge included $36.1 million to cover employee separation costs associated with the termination of approximately 3,000 employees, $1.1 million of non-cash charges associated with the modification of stock options for certain terminated employees and $6.1 million for additional pension charges related to the terminated employees. (The additional pension charge is reflected in the Company’s accrued pension liability in the consolidated balance sheet.) As of December 31, 2002, all employees have been terminated under the program and all severance payments have been made.

 

The planned discontinuation of manufacturing activities triggered an impairment analysis to the carrying value of the related assets and resulted in the Company recording asset impairment charges totaling $42.2 million. This charge included $31.6 million related to the Guadalajara manufacturing facility, $4.2 million related to the Aizu, Japan 4-inch wafer fabrication line and $2.2 million related to the Seremban assembly and test facility. The Company measured the amount of each asset impairment by comparing the carrying value of the respective assets to the related estimated fair value. The Company estimated future net cash flows for the period of continuing manufacturing activities (June 2002 for Guadalajara and Aizu, December 31, 2001 for Seremban) for each group of assets using price, volume, cost, capital and salvage value assumptions that management considered to be reasonable in the circumstances. The impairment charges were recorded for the amount by which the carrying value of the respective assets exceeded their estimated fair value. The related assets have been sold to third parties at amounts that approximated their estimated fair values, were transferred to other manufacturing facilities at their previously existing carrying values or are currently held for sale. The only remaining assets to be disposed of under this restructuring program are the land and building at the Guadalajara manufacturing facility. The Company is currently evaluating offers for these assets and, based on these offers, expects that the carrying value will be fully realized. The charge also included $4.2 million for the write-off of assets that will no longer be used by the Company as a result of this restructuring program.

 

The June 2001 charge also included $10.0 million to cover certain exit costs relating facility closure and contract terminations. This charge included $2.8 for expected facility clean up activities, $1.0 million for equipment disposal fees, $2.0 million for equipment purchase cancellations and $4.2 million for other contract cancellations. As discussed previously, the Company recorded an additional $1.0 million in exit costs and $0.6 million in employee separation costs relating to the Guadalajara manufacturing facility during the second quarter of 2002 as a result of its reevaluation of remaining costs to be incurred with respect to the closure of that facility. In 2003 the Company released $0.1 million of this reserve based on its estimate of the remaining exit costs. This reserve is expected to be utilized by June 2004. As of October 4, 2003 the remaining liability relating to this restructuring program was $0.8 million.

 

March 2001 Restructuring, Asset Impairments and Other

 

In March 2001, the Company recorded charges totaling $34.2 million for costs associated with its worldwide restructuring programs. The charges included $31.3 million to cover employee separation costs associated with the termination of 1,100 employees as well as $2.9 million for equipment write-offs that were charged directly against the related assets.

 

The employee separation costs reflected further reductions in manufacturing, selling, general and administrative staffing levels in the U.S., Mexico, the Philippines and Malaysia as well as non-cash charges associated with the modification of stock options for certain terminated employees. All impacted employees had

 

23

---

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

been terminated and the Company released the remaining $0.1 million reserve to income during the second quarter of 2002.

 

The March 2001 charge included property and equipment write downs of $2.9 million relating to assets at the previously mentioned locations that could not be utilized or transferred to other locations.

 

Also in March 2001, the Company recorded a $3.8 million charge to cover costs associated with the separation of one of the Company’s executive officers. In connection with the separation, the Company paid the former executive officer $1.9 million. In addition, the Company agreed to accelerate the vesting of the remaining stock options to purchase common stock and to allow such options to remain exercisable for the remainder of their ten-year term. The Company recorded a non-cash charge of $1.9 million related to modification of these options with an offsetting credit to additional paid-in capital.

 

2000 Restructuring

 

During 2000, the Company recorded a $5.6 million charge to cover costs associated with a restructuring program at its manufacturing facility in Guadalajara, Mexico. The charge included $3.2 million to cover employee separation costs associated with the termination of approximately 500 employees and $2.4 million for asset impairments that were charged directly against the related assets. In September 2000, the Company completed its evaluation of the costs to be incurred and released $0.8 million of the remaining reserve for employee separation costs to income. As of December 31, 2001, there was no remaining liability relating to the 2000 restructuring program.

 

Note 6:    Acquisition

 

On April 3, 2000, the Company acquired all of the outstanding capital stock of Cherry Semiconductor Corporation (“Cherry”) for approximately $253.2 million in cash (including acquisition related costs), which was financed with cash on hand and borrowings of $220.0 million under the Company’s senior bank facilities. Cherry, which was renamed Semiconductor Components Industries of Rhode Island, Inc., designs and manufactures analog and mixed signal integrated circuits for the power management and automotive markets, and had revenues for its fiscal year ended February 29, 2000 of $129.1 million.

 

The Cherry acquisition was accounted for using the purchase method of accounting and, as a result, the purchase price and related costs were allocated to the estimated fair value of assets acquired and liabilities assumed at the time of the acquisition based on management estimates as follows (in millions):

 

Fair value of tangible net assets		$	71.3
Developed technology			59.3
In-process research and development			26.9
Assembled workforce			10.0
Excess of purchase price over estimated fair value of net assets acquired (goodwill)			85.7
		$	253.2

 

Developed technology was being amortized on a straight-line basis over an estimated useful life of five years prior to being written off in the second quarter of 2003 as described in Note 5, “Restructuring, Asset Impairments and Other.” Goodwill was being amortized on a straight-line basis over an estimated useful life of

 

24

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

ten years; however, as mentioned previously, such amortization was discontinued January 1, 2002 upon the adoption of SFAS 142. Additionally, assembled workforce was being amortized over an estimated useful life of five years, however assembled workforce does not meet the requirements for an intangible asset apart from goodwill. Accordingly, upon adoption of SFAS 142, the Company reclassified the unamortized balance of assembled workforce to goodwill and the related amortization was discontinued.

 

The fair value of acquired in-process research and development was determined using the income approach, which discounts expected future cash flows to present value. Significant assumptions that had to be made in using this approach included revenue and operating margin projections and determination of the applicable discount rate. The fair value of acquired in-process research and development was based on sales forecasts and cost assumptions projected to be achievable by Cherry on a stand-alone basis. Operating margins were based on cost of goods sold and selling, general and administrative expenses as a percentage of revenues. All projected revenue and cost information was based on historical results and trends and did not include any synergies or cost savings that may result from the acquisition. The rate used to discount future projected cash flows resulting from the acquired in-process research and development was 20%, which was derived from a weighted average cost of capital analysis increased to reflect additional risks inherent in the development life cycle.

 

At the date of acquisition, in-process research and development consisted of sixty-five projects that had not yet reached technological feasibility and for which no alternative future uses had been identified. Accordingly, the estimated fair value of these projects was expensed as of the acquisition date. Such projects were approximately 70% to 80% complete at the date of the acquisition. The estimated cost to complete these projects at that date was approximately $4.1 million. Of the sixty-five projects in process at the date of acquisition, the Company completed thirty-one projects, abandoned twenty-nine projects and are in the process of completing the remaining five projects, which have an estimated completion cost of $0.5 million. Subsequent to the acquisition date, the Company experienced an industry downturn that required it to scale back research and development activities. Due to the decline in product demand subsequent to the acquisition, 2002 revenues associated with the completed projects were approximately $12.5 million, or 30% of the amount originally forecasted for all acquired in-process research and development projects at the date of acquisition.

 

25

---

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 7:    Balance Sheet Information

 

Balance sheet information is as follows (in millions):

 

		December 31,								October 3,
		2002				2001				2003
										(unaudited)
Receivables, net:
Accounts receivable		$	113.5			$	134.2			$	151.1
Less: Allowance for doubtful accounts			(1.8	)			(1.9	)			(2.2	)
		$	111.7			$	132.3			$	148.9
Inventories, net:
Raw materials		$	12.3			$	12.1			$	16.8
Work in process			104.6				138.4				110.2
Finished goods			81.5				79.9				85.2
Total inventories			198.4				230.4				212.2
Less: Inventory reserves			(43.4	)			(50.2	)			(39.5	)
		$	155.0			$	180.2			$	172.7
Property, plant and equipment, net:
Land		$	11.7			$	11.4			$	12.4
Buildings			302.4				379.9				294.0
Machinery and equipment			818.9				959.4				808.2
Total property, plant and equipment			1,133.0				1,350.7				1,114.6
Less: Accumulated depreciation			(743.5	)			(867.9	)			(772.2	)
		$	389.5			$	482.8			$	342.4
Goodwill, net:
Goodwill		$	95.7			$	95.7			$	95.7
Less: Accumulated amortization			(18.4	)			(18.4	)			(18.4	)
		$	77.3			$	77.3			$	77.3
Intangible asset, net (See Note 5):
Developed technology		$	59.3			$	59.3			$	—
Less: Accumulated amortization			(32.6	)			(20.7	)			—
		$	26.7			$	38.6			$	—
Other assets:
Debt issuance costs		$	33.7			$	35.2			$	36.4
Other			5.0				6.5				2.7
		$	38.7			$	41.7			$	39.1
Accrued expenses:
Accrued payroll		$	27.5			$	28.2			$	29.6
Sales related reserves			14.1				15.0				17.9
Restructuring reserves			19.5				19.8				9.6
Other			35.9				38.5				31.6
		$	97.0			$	101.5			$	88.7
Other long-term liabilities:
Accrued retirement benefits		$	33.7			$	25.0			$	30.4
Cash flow hedge liability			8.2				12.5				5.9
Other			1.0				10.8				1.2
		$	42.9			$	48.3			$	37.5
Other comprehensive loss:
Foreign currency translation adjustments		$	(2.0	)		$	(4.3	)		$	0.8
Additional minimum pension liability			(19.6	)			(13.8	)			—
Net unrealized losses and adjustments related to cash flow hedges			(12.1	)			(14.7	)			(6.8	)
Unrealized losses on deferred compensation plan investments			(0.6	)			—				(0.8	)
		$	(34.3	)		$	(32.8	)		$	(6.8	)

 

26

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Depreciation expense totaled $105.1 million, $122.8 million and $126.3 million for 2002, 2001 and 2000, respectively. Amortization expense related to the developed technology totaled $11.9, $11.6, and $9.1 million in 2002, 2001 and 2000, respectively.

 

The activity related to the Company’s allowance for doubtful accounts, inventory reserves, allowance for deferred tax assets and warranty reserves for 2000, 2001 and 2002 follows:

 

Description		Balance at Beginning of Period			Charged to Costs and Expenses				Charged to Other Accounts				Deductions/ Writeoffs			Balance at End of Period
Allowance for doubtful accounts
Year ended December 31, 2000		$	2.0		$	0.8			$	1.4	(1)		$	1.7		$	2.5
Year ended December 31, 2001		$	2.5		$	0.5			$	—			$	1.1		$	1.9
Year ended December 31, 2002		$	1.9		$	0.2			$	—			$	0.3		$	1.8
Inventory reserves
Year ended December 31, 2000		$	28.2		$	44.1			$	—			$	49.8		$	22.5
Year ended December 31, 2001		$	22.5		$	50.9			$	—			$	23.2		$	50.2
Year ended December 31, 2002		$	50.2		$	12.1			$	—			$	18.9		$	43.4
Allowance for deferred tax assets
Year ended December 31, 2000		$	—		$	—			$	—			$	—		$	—
Year ended December 31, 2001		$	—		$	366.8			$	83.8	(2)		$	—		$	450.6
Year ended December 31, 2002		$	450.6		$	1.0			$	86.3	(3)		$	—		$	537.9
Warranty reserves
Year ended December 31, 2000		$	2.1		$	2.4			$	—			$	1.0		$	3.5
Year ended December 31, 2001		$	3.5		$	0.1			$	—			$	0.6		$	3.0
Year ended December 31, 2002		$	3.0		$	0.1			$	—			$	0.4		$	2.7
Nine months ended October 3, 2003 (unaudited)		$	2.7		$	(0.9	)		$	—			$	0.3		$	1.5

---

(1)

Represents allowance recorded in connection with the acquisition of Cherry Semiconductor.

(2)

Represents the valuation allowance related to the 2001 portion of the net operating loss that was not recognized during the year.

(3)

Represents the valuation allowance related to the 2002 net operating loss that was not recognized during the year.

 

27

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 8: Long-Term Debt

 

Long-term debt consists of the following (dollars in millions):

 

		December 31, 2002							December 31, 2001							October 3, 2003
		Interest Rate			Balance				Interest Rate			Balance				Interest Rate			Balance
Senior Bank Facilities:
Tranche A		6.4375	%		$	6.6			8.4375	%		$	17.0			6.5000	%		$	—
Tranche B		6.4375	%			209.9			8.4375	%			312.5			6.5000	%			5.7
Tranche C		6.4375	%			226.0			8.4375	%			336.5			6.5000	%			164.9
Tranche D		6.4375	%			134.1			8.4375	%			197.7			6.5000	%			197.3
Revolver		6.4375	%			125.0			8.4375	%			125.0			6.5000	%			—
						701.6							988.7							367.9
First-Lien Senior Secured Notes due 2010, 12% interest payable semi-annually, net of debt discount of $8.8						—							—							191.4
Second-Lien Senior Secured Notes due 2008, 13% interest effective February 2003 payable semi-annually, net of debt discount of $8.6 and $8.0						291.4							—							292.3
12% Senior Subordinated Notes due 2009, interest payable semi-annually						260.0							260.0							260.0
10% Junior Subordinated Note to Motorola due 2011, interest compounded semi-annually, payable at maturity						126.9							115.2							136.7
2.3% Note payable to Japanese bank due 2010						23.3							21.9							23.6
Capital lease obligation						—							1.1							1.0
						1,403.2							1,386.9							1,272.9
Less: Current maturities						(9.3	)						(12.4	)						(3.9	)
					$	1,393.9						$	1,374.5						$	1,269.0

 

In September 2003, the Company amended its senior bank facilities to, among other things:

 

•

Provide the Company with additional Tranche D term loans under its senior bank facilities aggregating $100 million, the entire amount of which was borrowed simultaneously with the completion of the equity offering described below;

 

•

Permit the Company to apply the net proceeds from equity offerings by ON Semiconductor or any of its subsidiaries (including the equity offering described below) and borrowings under the additional Tranche D term loans to prepay scheduled principal installments of all term loan borrowings outstanding under its senior bank facilities in chronological order;

 

•

Reduce from 75% to 50% the percentage of net proceeds from future equity offerings by ON Semiconductor, the Company or any of its subsidiaries that is required to be applied to prepay term loan borrowings outstanding under its senior bank facilities; and,

 

•

Provide the Company with a new $25 million revolving facility that will mature on August 4, 2006, provide for the issuance of letters of credit in currencies other than U.S. dollars that are to be specified and, in all other respects, have terms substantially similar to those of its existing revolving facility.

 

28

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The proceeds of the borrowing under the additional Tranche D term loans (which were issued at a discount of $0.5 million) were used to prepay senior credit facility borrowings as described below. Excluding this discount, costs incurred in connection with this debt refinancing totaled $3.8 million, of which $0.4 million was paid to third parties. Such third-party costs were expensed as incurred and included in loss on debt prepayment in the Company’s consolidated statement of operations and comprehensive loss for the nine months ended October 3, 2003.

 

On September 23, 2003 ON Semiconductor completed a public offering of common stock registered pursuant to its shelf registration statement originally filed with the Securities and Exchange Commission on April 24, 2002 (as amended on March 14, 2003). In connection with this offering, ON Semiconductor issued approximately 37.0 million shares (including approximately 2.2 million shares issued in connection with the underwriters’ exercise of their option to cover over-allotments) at a price of $4.50 per share. The net proceeds from this offering were $156.5 million after deducting the underwriting discount of $8.2 million ($0.225 per share) and estimated offering expenses of $1.7 million (including $1.6 million that were unpaid as of October 3, 2003). ON Semiconductor contributed these proceeds to the Company, which were used to prepay $152.7 million of its senior bank facilities and to cover $3.8 million of costs associated with the amendment to its senior bank facilities. In connection with this prepayment, the Company wrote off $2.5 million of debt issuance costs.

 

Senior Bank Facilities

 

Borrowings under the senior bank facilities, which bear interest at rates selected by the Company based on either LIBOR or an alternative base rate, as defined, plus an interest rate spread, amortize within three to five years. As of December 31, 2002, the senior bank facilities contained a $150.0 million revolving line of credit. Borrowings of $125.0 million and letters of credit totaling $17.1 million were outstanding against the line of credit at December 31, 2002 leaving $7.9 million of availability at that date. As discussed below, $62.5 million of borrowings outstanding under the revolving line of credit were converted to a new Tranche R term loan in February 2003 pursuant to amendments to the senior bank facilities made in connection with the issuance of the Company’s 12% first-lien senior secured notes due 2010 described below (the “First-Lien Notes”.) Additionally, the Company used $180.9 million of the net cash proceeds from the issuance of the First-Lien Notes to prepay a portion of the senior bank facilities, including $25.0 million of which proceeds were used to repay borrowings then outstanding under the revolving line of credit and permanently reduce the commitments thereunder by such amount. As described in Note 12, the Company hedges a portion of the interest rate risk associated with the senior bank facilities.

 

At June 29, 2001, the Company was not in compliance with the interest expense coverage and leverage ratio requirements under its senior bank facilities. On August 13, 2001, the Company received a waiver in respect to such non-compliance at June 29, 2001 and in respect of any future non-compliance with such covenants through December 31, 2002. In connection with such waiver, the Company amended its senior bank facilities to, among other things, reduce interest expense coverage and leverage ratio requirements through December 31, 2005, add minimum cash and EBITDA level covenants through December 31, 2002, require the Company to obtain $100 million through an equity investment from TPG, increase the required interest rate spreads applicable to outstanding borrowings (“supplemental interest”), and, to revise certain mandatory prepayment provisions contained in the original agreement.

 

In connection with the issuance of $300 million principal amount of 12% second-lien senior secured notes due 2008 (the “Second-Lien Notes”) described below, the Company amended its senior bank facilities on April 17, 2002 to, among other things, permit the issuance of the Second-Lien Notes, eliminate interest expense coverage and leverage ratio requirements through December 31, 2003 and to reduce the minimum interest expense coverage ratio requirement and increase the maximum leverage ratio requirements for the period from January 1, 2004 through June 30, 2006, extend the minimum cash and EBITDA level covenants through

 

29

---

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

December 31, 2003, permit the redemption of up to 35% of the Second-Lien Notes with net proceeds of any equity offerings on or prior to May 15, 2005, allow certain asset sales and to permit borrowings of up to $100.0 million by or for the benefit of the Company’s Leshan joint venture so long as the related proceeds are used to prepay loans under the senior bank facilities. The Company was in compliance with the various covenants and other requirements contained in its senior bank facilities, as amended, through December 31, 2002.

 

In connection with the issuance of the First-Lien Notes described below, the Company amended its senior bank facilities effective as of February 14, 2003 to, among other things, permit the issuance of the First-Lien Notes, eliminate the interest expense and leverage coverage ratio requirements, reduce the minimum EBITDA level covenant (as defined) to $140.0 million for any four consecutive fiscal quarters until the final maturity of the senior bank facilities, reduce permitted annual capital expenditures to $100.0 million (subject to increases in certain circumstances), permit the redemption of up to 35% of the First-Lien Notes with net proceeds of any equity offerings on or prior to March 15, 2006 and to convert $62.5 million of the amounts outstanding under the revolving credit facility to a new Tranche R term loan. Although there can be no assurances, the Company believes that it will be able to comply with the various covenants and other requirements contained in its senior bank facilities, as amended, through December 31, 2003.

 

Second-Lien Notes

 

On May 6, 2002, ON Semiconductor and SCI LLC, (collectively, the “Issuers”) issued $300.0 million principal amount of Second-Lien Notes in a private offering that was exempt from the registration requirements of the federal securities laws. The Second-Lien Notes, which are callable after four years, were issued at 96.902% of par value and generated net proceeds of $278.6 million after such discount and the payment of issuance costs. The net proceeds were used to prepay a portion of the amounts outstanding under the Company’s senior bank facilities. Because the amount outstanding under the senior bank facilities was reduced below $750.0 million, the supplemental interest charges were reduced from 3.0% to 1.0%. The Company has the option to terminate the supplemental interest charges by paying the entire accrued balance of supplemental interest charges on March 31, 2003. Alternatively, the Company can elect to pay 50% of the existing accrued balance at March 31, 2003 and continue accruing supplemental interest charges through June 30, 2003, at which time all remaining supplemental interest is due. Approximately $25.7 million of supplemental interest charges had been accrued as of December 31, 2002. In connection with this prepayment, the Company wrote off $6.5 million of debt issuance costs which is reflected as an extraordinary loss in the Company’s consolidated statement of operations for the year ended December 31, 2002. The Second-Lien Notes accrued interest at the rate of 12% until February 6, 2003, when the related annual interest increased to 13%. The increased interest rate will remain in effect unless on or prior to August 6, 2003 the Company issues $100.0 million of its common stock or certain convertible preferred stock to financial sponsors and uses the net proceeds to prepay additional amounts outstanding under its senior bank facilities or under any other credit facility secured by a first-priority lien and permanently reduces the related loan commitments in an amount equal to the amount prepaid. Interest on Second-Lien Notes is payable semi-annually on May 15 and November 15.

 

The Second-Lien Notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by the Company’s domestic restricted subsidiaries that are also guarantors under the 12% Senior Subordinated Notes Due 2009 (the “Senior Subordinated Notes”) described below. In addition, the Second-Lien Notes and the related guarantees are secured on a second-priority basis by the capital stock or other equity interests of the Company’s domestic subsidiaries, 65% of the capital stock or other equity interests of the Company’s first-tier foreign subsidiaries and substantially all other assets, in each case that are held by the Company or any of the guarantors, but only to the extent that obligations under its senior bank facilities are secured by a first-priority lien thereon.

 

30

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Issuers filed an exchange offer registration statement on October 1, 2002 relating to the Second-Lien Notes pursuant to a registration rights agreement. The registration statement was declared effective by the Securities and Exchange Commission on January 27, 2003, and the exchange offer was consummated on February 28, 2003.

 

First-Lien Notes

 

On March 3, 2003, the Issuers issued $200.0 million principal amount of First-Lien Notes in a private offering that was exempt from the registration requirements of the federal securities laws. The First-Lien Notes, which are callable after four years, were issued at 95.467% of par value and generated net proceeds of approximately $180.9 million after taking into consideration the discount and the payment of expected issuance costs. The net proceeds were used to prepay a portion of the amounts outstanding under the Company’s senior bank facilities, including $25.0 million relating to the Company’s revolving credit facility. In connection with the prepayment, the Company wrote off $3.5 million of debt issuance costs in the first quarter of 2003.

 

The First-Lien Notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by the Company’s domestic restricted subsidiaries. In addition, the First-Lien Notes and related guarantees are secured on a first-priority basis by the assets that secure the senior bank facilities and they rank equal in right of payment with all of the Company’s and the guarantors’ existing and future senior indebtedness and senior to the Company’s and the guarantors’ existing and future senior subordinated and subordinated indebtedness and effectively junior to all of the liabilities of the Company’s subsidiaries that have not guaranteed such notes.

 

Senior Subordinated Notes

 

In connection with the Recapitalization described in Note 1, the Company and ON Semiconductor co-issued $400.0 million principal amount of its 12% senior subordinated notes (the “Senior Subordinated Notes”) due 2009. Except as described below, the Senior Subordinated Notes may not be redeemed prior to August 1, 2004. Redemption prices range from 106% of the principal amount if redeemed in 2004 to 100% if redeemed in 2008 or thereafter. The Company was able to redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes prior to August 4, 2002 with the proceeds of a public equity offering at a redemption price of 112% of the amount redeemed. On May 3, 2000, ON Semiconductor completed its initial public offering (IPO) of its common stock and a portion of the proceeds was used to redeem $140.0 million of the Company’s Senior Subordinated Notes.

 

Japanese Loan

 

In 2000, the Company’s Japanese subsidiary entered into a yen-denominated note agreement with a Japanese bank to finance the expansion of its manufacturing facilities. The loan, which has a balance of $23.3 million at December 31, 2002 (based on the yen-to-dollar exchange rate in effect at that date) and bears interest at an annual rate of 2.25%, requires semi-annual principal and interest payments through September 2010 of approximately $1.9 million (based on the yen-to-dollar exchange rate at December 31, 2002.) The note is unsecured, however, the bank has rights under the agreement to obtain collateral in certain circumstances. In addition, the note is guaranteed by SCI LLC the Company’s primary domestic operating subsidiary.

 

Debt Issuance Costs

 

In connection with the Recapitalization, the Company incurred $52.6 million in costs relating to the establishment of its senior bank facilities and the issuance of its Senior Subordinated Notes. During 2002, 2001

 

31

---

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

and 2000, the Company incurred $12.1 million, $5.1 million and $3.2 million, respectively, relating to amendments under its senior bank facilities or additional borrowings. The Company wrote-off $6.5 million and $11.9 million of debt issuance costs in 2002 and 2000, respectively, in connection with the various prepayments as outlined above. Other assets at December 31, 2002 and 2001 includes $33.7 million and $35.2 million, respectively, of unamortized debt issuance costs.

 

Annual maturities relating to the Company’s long-term debt as of December 31, 2002 are as follows (in millions):

 

		Actual Maturities
2003		$	9.3
2004			11.8
2005			236.9
2006			280.9
2007			176.8
Thereafter			687.5
Total		$	1,403.2

 

Annual maturities relating to the Company’s long-term debt as of October 3, 2003 are as follows (in millions):

 

		Actual Maturities
		(unaudited)
Remainder of 2003		$	0.1
2004			3.9
2005			3.7
2006			132.2
2007			242.7
Thereafter			890.3
Total		$	1,272.9

 

Note 9:    Note Receivable from Affiliates

 

In connection with the Recapitalization, the Company loaned certain affiliates $83.0 million to refinance third-party non-recourse loans. During 2000 and 2001, the Company loaned these affiliates an additional $43.1 million and $5.0 million, respectively, to finance facility expansion. Such loans totaled $130.6 and $131.1 at December 31, 2002 and 2001, respectively, bear interest at rates ranging from at 7.0%-10.5%, payable quarterly, and mature at various dates through December 31, 2006. These loans are with the following affiliates (in millions):

 

				December 31,						October 3, 2003
Company Name		Country		2002			2001
										(unaudited)
ON Semiconductor Czech Republic, a.s. (formerly Tesla Sezam, a.s. and Terosil a.s.)		Czech Republic		$	67.3		$	67.8		$	59.7
Leshan-Phoenix Semiconductor Company Limited		China			63.3			63.3			52.3
				$	130.6		$	131.1		$	112.0

 

32

---

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The loans outstanding to Leshan-Phoenix Semiconductor Company Limited were renegotiated during the third quarter of 2002 to reduce the interest rate from 7.0% to 3.5% per annum to better align the interest rate with market rates for similar instruments in China.

 

Note 10:    Income Taxes

 

Geographic sources of income (loss) before income taxes, extraordinary loss and cumulative effect of accounting change are as follows (in millions):

 

		Year Ended December 31,
		2002				2001				2000
United States		$	(227.9	)		$	(196.6	)		$	63.3
Foreign			97.3				(176.9	)			67.7
		$	(130.6	)		$	(373.5	)		$	131.0

 

The provision for income taxes is as follows (in millions):

 

		Year Ended December 31,
		2002			2001				2000
Current
Federal		$	—		$	(19.5	)		$	26.8
State and local			0.1			0.1				3.2
Foreign			3.9			5.6				15.4
			4.0			(13.8	)			45.4
Deferred
Federal			—			315.8				(8.7	)
State and local			—			39.5				(1.3	)
Foreign			3.8			1.4				(0.6	)
			3.8			356.7				(10.6	)
		$	7.8		$	342.9			$	34.8

 

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:

 

		Year Ended December 31,
		2002			2001			2000
U.S. federal statutory rate		(35.0	)%		(35.0	)%		35.0	%
Increase (decrease) resulting from:
State and local taxes, net of federal tax benefit		(8.9	)		(3.5	)		2.4
Foreign withholding taxes		1.3			1.5			2.8
Foreign rate differential		(22.1	)		11.0			(6.1	)
Change in valuation allowance		68.5			117.6			—
Other		2.1			0.2			0.1
		5.9	%		91.8	%		34.2	%

 

 

33

---

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Deferred tax assets are as follows (in millions):

 

		Year Ended December 31,
		2002				2001
Tax-deductible goodwill		$	235.2			$	255.4
Reserves and accruals			24.2				31.7
Inventories			14.8				29.3
Property, plant and equipment			14.9				28.3
Net operating loss and tax credit carryforwards			234.8				94.2
Other			18.2				19.6
Gross deferred tax assets			542.1				458.5
Valuation allowance			(537.9	)			(450.6	)
Net deferred tax asset		$	4.2			$	7.9

 

A valuation allowance has been recorded against the Company’s deferred tax assets, with the exception of deferred tax assets at certain foreign subsidiaries, as management believes it is more likely than not that these assets will not be realized.

 

As of December 31, 2002, the Company’s federal, state, and foreign net operating loss carryforwards were $540.1 million, $606.9 million, and $44.9 million, respectively. If not utilized, these net operating losses will expire in varying amounts from 2006 through 2023. The Company’s ability to utilize its federal net operating loss carryforwards may be limited in the future if the Company experiences an ownership change as defined by the Internal Revenue Code.

 

Income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries (approximately $50.9 million at December 31, 2002) over which it has sufficient influence to control the distribution of such earnings and has determined that such earnings have been reinvested indefinitely. These earnings could become subject to federal income tax if they are remitted as dividends, if foreign earnings are loaned to any of the Company’s domestic subsidiaries, or if the Company sells its investment in such subsidiaries. The Company estimates that repatriation of these foreign earnings would generate additional foreign withholding taxes of $11.6 million.

 

Note 11:    Employee Benefit Plans

 

Defined Benefit Plans

 

In connection with the Recapitalization, the Company established the ON Semiconductor pension plan (the “Plan”) that, after one year of service, covered most U.S. employees who were also formerly employees of Motorola. The Plan’s benefit formula was dependent upon employee’s earnings and years of service. Benefits under the Plan are valued utilizing the projected unit credit cost method. The Company’s policy is to fund its defined benefit plans in accordance with the requirements and regulations of the Internal Revenue Code.

 

In November 1999, the Plan was amended so that benefit accruals under the Plan will be discontinued effective December 31, 2004 for those employees whose combined age and years of service (in complete years) equaled or exceeded 65 at August 4, 1999 (the “Grandfathered Employees”). Benefit accruals under the plan for all other employees were discontinued effective December 31, 2000. Upon termination or retirement, employees

 

34

---

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

may elect to receive their benefits in the form of either an annuity contract or a lump-sum distribution. In 2000, the ON Semiconductor Grandfathered Pension Plan (the “Grandfathered Plan”) was established and the assets and accumulated benefits related to the Grandfathered Employees were transferred to the Grandfathered Plan.

 

Effective April 15, 2001, the Company terminated the Plan in a standard termination, which requires plan assets be sufficient to provide all benefits for participants and beneficiaries of deceased participants. Substantially all accrued benefits under the Plan were distributed to participants by December 31, 2001.

 

Certain of the Company’s foreign subsidiaries provide retirement plans for substantially all of their employees. Such plans conform to local practice in terms of providing minimum benefits mandated by law, collective agreements or customary practice. Benefits under all foreign pension plans are also valued using the projected unit credit cost method.

 

35

---

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following is a summary of the status of the Company’s various pension plans and the net periodic pension cost (dollars in millions):

 

		2002												2001
		U.S. Pension Plans				Foreign Pension Plans				Total				U.S. Pension Plans				Foreign Pension Plans				Total
Assumptions used to value the Company’s pension obligations are as follows:
Rate of compensation increase			3.00	%			3.17	%							3.00	%			3.77	%
Discount rate			5.00	%			4.40	%							7.40	%			5.08	%
Benefit obligation, beginning of period		$	41.5			$	22.3			$	63.8			$	77.4			$	32.8			$	110.2
Service cost			1.8				1.3				3.1				2.1				2.2				4.3
Interest cost			3.0				0.8				3.8				2.4				1.6				4.0
Curtailment gain			—				(0.3	)			(0.3	)			—				(0.2	)			(0.2	)
Actuarial (gain) loss			5.3				1.2				6.5				18.0				(0.5	)			17.5
Benefits paid			(4.8	)			(6.7	)			(11.5	)			(58.4	)			(11.7	)			(70.1	)
Translation (gain) loss			—				0.7				0.7				—				(1.9	)			(1.9	)
Benefit obligation, end of period		$	46.8			$	19.3			$	66.1			$	41.5			$	22.3			$	63.8
Change in Plan Assets:
Fair value, beginning of period		$	10.1			$	9.1			$	19.2			$	60.5			$	18.1			$	78.6
Actual return on plan assets			(1.1	)			0.3				(0.8	)			0.4				(0.6	)			(0.2	)
Employer contributions			13.0				1.3				14.3				7.6				4.4				12.0
Benefits paid			(4.8	)			(6.7	)			(11.5	)			(58.4	)			(11.7	)			(70.1	)
Translation gain (loss)			—				—				—				—				(1.1	)			(1.1	)
Fair value, end of period		$	17.2			$	4.0			$	21.2			$	10.1			$	9.1			$	19.2
Balances, end of period:
Pension benefit obligation		$	(46.8	)		$	(19.3	)		$	(66.1	)		$	(41.5	)		$	(22.3	)		$	(63.8	)
Fair value of plan assets			17.2				4.0				21.2				10.1				9.1				19.2
Funded status			(29.6	)			(15.3	)			(44.9	)			(31.4	)			(13.2	)			(44.6	)
Unrecognized net actuarial loss (gain)			20.0				1.5				21.5				17.3				(0.2	)			17.1
Unrecognized prior service cost			0.9				1.9				2.8				1.3				2.2				3.5
Net liability recognized end of period		$	(8.7	)		$	(11.9	)		$	(20.6	)		$	(12.8	)		$	(11.2	)		$	(24.0	)
The net amounts recognized in the consolidated balance sheet consist of the following:
Accrued expenses		$	(6.4	)		$	(2.0	)		$	(8.4	)		$	(13.0	)		$	(1.3	)		$	(14.3	)
Other long-term liabilities			(22.0	)			(11.8	)			(33.8	)			(14.9	)			(9.9	)			(24.8	)
Intangible asset			0.8				1.2				2.0				1.3				—				1.3
Accumulated other comprehensive income (loss)			18.9				0.7				19.6				13.8				—				13.8
Net liability recognized, end of period		$	(8.7	)		$	(11.9	)		$	(20.6	)		$	(12.8	)		$	(11.2	)		$	(24.0	)

 

36

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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

		2002												2001												2000
		U.S. Pension Plans				Foreign Pension Plans				Total				U.S. Pension Plans				Foreign Pension Plans				Total				U.S. Pension Plans				Foreign Pension Plans				Total
Assumptions used to determine pension costs are as follows:
Discount rate			7.40	%			5.08	%							6.80	%			5.76	%							6.80	%			6.22	%
Expected return on assets			8.50	%			3.17	%							8.50	%			7.46	%							8.50	%			5.15	%
Rate of compensation increase			3.00	%