Exhibit 99.2
ON SEMICONDUCTOR TRADING LTD
(An Indirect Wholly-Owned Subsidiary of
ON Semiconductor Corporation)
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2000 and 2001 and for the Period from October 27, 2000 (inception) through December 31, 2000 and for the Year Ended December 31, 2001
Report of Independent Accountants
To The Board of Directors and
Stockholder of ON Semiconductor Trading, LTD.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholder’s equity (deficit) and cash flows present fairly, in all material respects, the financial position of ON Semiconductor Trading LTD and its subsidiaries (an indirect wholly-owned subsidiary of ON Semiconductor Corporation) at December 31, 2001 and 2000, and the results of their operations and their cash flows for the year ended December 31, 2001 and for the period from October 27, 2000 through December 31, 2000 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 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 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 our management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The Company has extensive transactions and relationships with ON Semiconductor Corporation and its affiliates. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.
As described in Note 4 to the consolidated financial statements, the Company changed its method of accounting for sales to distributors effective January 1, 2001.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Phoenix, Arizona
February 5, 2002
ON SEMICONDUCTOR TRADING LTD
(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
December 31, | December 31, | September 27, | |||||||||||
2000 | 2001 | 2002 | |||||||||||
(unaudited) | |||||||||||||
ASSETS | |||||||||||||
Cash and cash equivalents | $ | 57.7 | $ | 33.5 | $ | 44.2 | |||||||
Receivables, net | 146.1 | 68.5 | 92.2 | ||||||||||
Inventories, net | 211.8 | 152.3 | 121.5 | ||||||||||
Other current assets | 5.1 | 3.9 | 16.2 | ||||||||||
Due from affiliates | — | 96.7 | — | ||||||||||
Deferred income taxes | 4.5 | 3.6 | 6.0 | ||||||||||
Total current assets | 425.2 | 358.5 | 280.1 | ||||||||||
Property and equipment, net | 18.8 | 15.1 | 9.7 | ||||||||||
Deferred income taxes | 2.2 | 1.8 | 1.4 | ||||||||||
Other assets | 3.0 | 0.1 | 0.1 | ||||||||||
Total assets | $ | 449.2 | $ | 375.5 | $ | 291.3 | |||||||
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT) | |||||||||||||
Accounts payable | $ | 61.4 | $ | 46.2 | $ | 39.3 | |||||||
Accrued expenses | 69.8 | 11.2 | 20.3 | ||||||||||
Due to affiliates | 67.3 | — | 31.8 | ||||||||||
Income taxes payable | 13.7 | 0.3 | — | ||||||||||
Deferred income on sales to distributors | — | 61.4 | 54.9 | ||||||||||
Total current liabilities | 212.2 | 119.1 | 146.3 | ||||||||||
Other long-term liabilities | 2.2 | 2.4 | 2.6 | ||||||||||
Notes payable to parent | 172.4 | 367.9 | 201.7 | ||||||||||
Total liabilities | 386.8 | 489.4 | 350.6 | ||||||||||
Commitments and contingencies | — | — | — | ||||||||||
Common stock ($1.00 par value, 50,000 shares authorized, 12,000 shares issued and outstanding) | — | — | — | ||||||||||
Additional paid-in capital | 40.4 | 40.4 | 40.4 | ||||||||||
Accumulated other comprehensive income | 0.6 | 0.5 | 0.5 | ||||||||||
Retained earnings (accumulated deficit) | 21.4 | (154.8 | ) | (100.2 | ) | ||||||||
Total stockholder’s equity (deficit) | 62.4 | (113.9 | ) | (59.3 | ) | ||||||||
Total liabilities and stockholder’s equity (deficit) | $ | 449.2 | $ | 375.5 | $ | 291.3 | |||||||
See accompanying notes to consolidated financial statements.
2
ON SEMICONDUCTOR TRADING LTD
(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions)
October 27, | ||||||||||||||||||
2000 | ||||||||||||||||||
(inception) | Nine Months Ended | |||||||||||||||||
through | Year Ended | |||||||||||||||||
December 31, | December 31, | September 28, | September 27, | |||||||||||||||
2000 | 2001 | 2001 | 2002 | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
Revenues: | ||||||||||||||||||
External revenues | $ | 202.2 | $ | 744.4 | $ | 577.7 | $ | 513.2 | ||||||||||
Revenues from affiliates | 106.3 | 272.9 | 228.2 | 218.8 | ||||||||||||||
Total revenues | 308.5 | 1,017.3 | 805.9 | 732.0 | ||||||||||||||
Cost of sales: | ||||||||||||||||||
External cost of sales | 141.1 | 598.6 | 406.1 | 356.2 | ||||||||||||||
Cost of sales to affiliates | 95.9 | 341.0 | 288.3 | 219.8 | ||||||||||||||
Total cost of sales | 237.0 | 939.6 | 689.4 | 576.0 | ||||||||||||||
Gross profit | 71.5 | 77.7 | 116.5 | 156.0 | ||||||||||||||
Operating expenses: | ||||||||||||||||||
Research and development | 2.3 | 72.4 | 53.5 | 40.5 | ||||||||||||||
Selling and marketing | 6.9 | 28.6 | 21.7 | 18.1 | ||||||||||||||
General and administrative | 40.8 | 43.3 | 29.8 | 25.8 | ||||||||||||||
Restructuring and other charges | — | 16.0 | 13.7 | 6.0 | ||||||||||||||
Total operating expenses | 50.0 | 160.3 | 118.7 | 90.4 | ||||||||||||||
Operating income (loss) | 21.5 | (82.6 | ) | (2.2 | ) | 65.6 | ||||||||||||
Interest expense | (0.8 | ) | (13.3 | ) | (9.7 | ) | (10.1 | ) | ||||||||||
Income (loss) before income taxes and cumulative effect of accounting change | 20.7 | (95.9 | ) | (11.9 | ) | 55.5 | ||||||||||||
Income tax benefit (provision) | 0.7 | 1.2 | 6.4 | (0.9 | ) | |||||||||||||
Income (loss) before cumulative effect of accounting change | 21.4 | (94.7 | ) | (5.5 | ) | 54.6 | ||||||||||||
Cumulative effect of accounting change | — | (81.5 | ) | (81.5 | ) | — | ||||||||||||
Net income (loss) | $ | 21.4 | $ | (176.2 | ) | $ | (87.0 | ) | $ | 54.6 | ||||||||
See accompanying notes to consolidated financial statements.
3
ON SEMICONDUCTOR TRADING LTD
(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)
CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY (DEFICIT)
(in millions)
Accumulated | Retained | ||||||||||||||||
Additional | Other | Earnings | |||||||||||||||
Paid-In | Comprehensive | (Accumulated | |||||||||||||||
Capital | Income (Loss) | Deficit) | Total | ||||||||||||||
Contribution of interests in affiliated companies from Parent at inception | $ | 40.4 | $ | — | $ | — | $ | 40.4 | |||||||||
Comprehensive income: | |||||||||||||||||
Net income | — | — | 21.4 | 21.4 | |||||||||||||
Foreign currency translation adjustment | — | 0.6 | — | 0.6 | |||||||||||||
Comprehensive income | 0.6 | 21.4 | 22.0 | ||||||||||||||
Balance at December 31, 2000 | 40.4 | 0.6 | 21.4 | 62.4 | |||||||||||||
Comprehensive loss: | |||||||||||||||||
Net loss | — | — | (176.2 | ) | (176.2 | ) | |||||||||||
Foreign currency translation adjustment | — | (0.1 | ) | — | (0.1 | ) | |||||||||||
Comprehensive loss | (0.1 | ) | (176.2 | ) | (176.3 | ) | |||||||||||
Balance at December 31, 2001 | 40.4 | 0.5 | (154.8 | ) | (113.9 | ) | |||||||||||
Comprehensive income (unaudited): | |||||||||||||||||
Net income (unaudited) | — | — | 54.6 | 54.6 | |||||||||||||
Comprehensive income (unaudited) | — | 54.6 | 54.6 | ||||||||||||||
Balance at September 27, 2002 (unaudited) | $ | 40.4 | $ | 0.5 | $ | (100.2 | ) | $ | (59.3 | ) | |||||||
See accompanying notes to consolidated financial statements.
4
ON SEMICONDUCTOR TRADING LTD
(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
October 27, 2000 | Nine Months Ended | ||||||||||||||||||
(inception) | Year Ended | ||||||||||||||||||
through | December 31, | September 28, | September 27, | ||||||||||||||||
December 31, 2000 | 2001 | 2001 | 2002 | ||||||||||||||||
(unaudited) | (unaudited) | ||||||||||||||||||
Cash flows from operating activities: | |||||||||||||||||||
Net income (loss) | $ | 21.4 | $ | (176.2 | ) | $ | (87.0 | ) | $ | 54.6 | |||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||||||||||
Depreciation and amortization | 0.5 | 7.1 | 5.3 | 3.6 | |||||||||||||||
Cumulative effect of accounting change | — | 81.5 | 81.5 | — | |||||||||||||||
Provision for excess inventories | 4.7 | 42.4 | 34.1 | 13.6 | |||||||||||||||
Provision for doubtful accounts | — | (0.3 | ) | (0.3 | ) | — | |||||||||||||
Net (gain) loss on disposals of property and equipment | — | (0.6 | ) | (0.2 | ) | 0.9 | |||||||||||||
Non-cash write-down of property and equipment | — | 2.7 | 1.4 | 0.2 | |||||||||||||||
Deferred income taxes | (3.0 | ) | 1.3 | (6.0 | ) | (2.0 | ) | ||||||||||||
Changes in assets and liabilities: | |||||||||||||||||||
Receivables | (12.2 | ) | 78.4 | 57.2 | (23.7 | ) | |||||||||||||
Inventories | (4.6 | ) | 17.1 | (67.3 | ) | 17.2 | |||||||||||||
Other assets | (2.6 | ) | 1.1 | (14.9 | ) | (12.3 | ) | ||||||||||||
Due from affiliates | — | (93.7 | ) | — | 96.7 | ||||||||||||||
Accounts payable | 6.9 | (15.2 | ) | 6.7 | (6.9 | ) | |||||||||||||
Accrued expenses | 9.9 | (44.5 | ) | (35.8 | ) | 9.1 | |||||||||||||
Due to affiliates | (20.6 | ) | (71.1 | ) | (75.8 | ) | 32.8 | ||||||||||||
Income taxes payable | 2.5 | (13.4 | ) | (9.0 | ) | (0.3 | ) | ||||||||||||
Deferred income on sales to distributors | — | (34.3 | ) | (27.0 | ) | (6.5 | ) | ||||||||||||
Other long-term liabilities | 0.3 | 0.2 | 0.3 | 0.2 | |||||||||||||||
Net cash provided by (used in) operating activities | 3.2 | (217.5 | ) | (136.8 | ) | 177.2 | |||||||||||||
Cash flows from investing activities: | |||||||||||||||||||
Purchases of property, plant and equipment | (1.3 | ) | (2.5 | ) | (2.4 | ) | (0.3 | ) | |||||||||||
Proceeds from sales of property and equipment | — | 0.3 | 0.2 | — | |||||||||||||||
Net cash used in investing activities | (1.3 | ) | (2.2 | ) | (2.2 | ) | (0.3 | ) | |||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Cash received in connection with contribution of interests in affiliated companies from Parent at inception | 31.9 | — | — | — | |||||||||||||||
Proceeds from borrowings from Parent | 58.7 | 515.5 | 354.3 | 169.9 | |||||||||||||||
Repayment of borrowings from Parent | (34.8 | ) | (320.0 | ) | (247.6 | ) | (336.1 | ) | |||||||||||
Net cash provided by (used in) financing activities | 55.8 | 195.5 | 106.7 | (166.2 | ) | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 57.7 | (24.2 | ) | (32.3 | ) | 10.7 | |||||||||||||
Cash and cash equivalents, beginning of period | — | 57.7 | 57.7 | 33.5 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 57.7 | $ | 33.5 | $ | 25.4 | $ | 44.2 | |||||||||||
See accompanying notes to consolidated financial statements.
5
Note 1: Background and Basis of Presentation
ON Semiconductor Trading Ltd. (the “Company” or “ON Trading”), located in Hamilton, Bermuda, is a wholly-owned subsidiary of Semiconductor Components Industries, LLC (“SCI LLC” or “Parent”), which is a wholly-owned subsidiary of ON Semiconductor Corporation (“ON Semiconductor”). ON Trading is responsible for selling ON Semiconductor’s products outside the United States, Mexico, Brazil and Puerto Rico. ON Trading performs certain functions related to sales, procurement, data aggregation, inventory management, research and development, and managing distribution scheduling. In order to function in this capacity, ON Trading entered into a cost sharing agreement with SCI, LLC during 2000. This cost sharing arrangement essentially provided ON Trading with the right to use ON Semiconductor’s intellectual property for the purpose of manufacturing, selling, importing and exporting property outside of the United States, Mexico, Brazil and Puerto Rico.
In October 2000, SCI LLC transferred the ownership of certain of its wholly-owned subsidiaries to the Company in exchange for 12,000 shares of the Company’s common stock which represents the entire ownership in the Company. These transactions were accounted for as the combination of companies under common control and have been reflected in the accompanying financial statements on the historical cost basis. The book value of the net assets transferred, which included $31.9 million of cash, was $40.4 million.
The accompanying unaudited financial statements as of September 27, 2002 and for the nine months ended September 28, 2001 and September 27, 2002, 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 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 2001, the Company incurred a net loss of $176.2 million, and the Company’s operating activities utilized $217.5 million of cash. At December 31, 2001, the Company had $33.5 million in cash and cash equivalents, a net working capital of $239.4 million, notes payable to parent of $367.9 million and a stockholder’s deficit of $113.9 million.
The Company’s ability to fund working capital, capital expenditures, research and development efforts and strategic initiatives will depend on its ability to generate cash in the future, which is subject to, among other things, its future operating performance and to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond its control. The Company has extensive transactions and relationships with its affiliates and is also dependant on their operating performance to generate cash in the future.
The Company’s primary cash needs, both in the short term and in the long term will focus on working capital. Although there can be no assurances, management believes that cash flow from operations coupled with existing cash and cash equivalent balances will be adequate to fund the Company’s operating and cash flow needs through December 31, 2002. To the extent that actual results or events differ from the Company’s financial projections and business plans, the Company will be reliant upon SCI LLC and ON Semiconductor, to provide additional funding.
Note 3: Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated.
6
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 and inventories; reserves for customer incentives and restructuring charges; and, the fair values of financial instruments (including derivative financial instruments). 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 cost on a first-in, first-out basis), or market. The Company reserves for potentially obsolete or slow moving inventories based upon a regular analysis of inventory levels on hand compared to historical and projected end user demand. General market conditions as well as the Company’s design activities can cause certain of its products to become obsolete.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over estimated useful lives of 3-20 years 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.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable by comparing the carrying amount of such assets to the estimated undiscounted future cash flows associated with them. In cases where the estimated undiscounted future cash flows are less than the related carrying amount, an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value of the assets. The fair value is determined based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved.
Revenue Recognition
The Company generates revenue from the sales of its semiconductor products to third party original equipment manufacturers, distributors and electronic manufacturing service providers as well as to affiliated companies. Revenues generated from sales to affiliated companies are based on intercompany pricing agreements and recognized when title and risk of loss has passed to the affiliate. As further described in Note 4, “Accounting Change”, prior to January 1, 2001, the Company recognized revenue on all semiconductor sales when title passed to the customer. Provisions were also recorded at that time for estimated sales returns from distributors 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. Deferred income on sales to distributors as reflected in the Company’s consolidated balance sheet represents the net margin (deferred revenue less associated costs of sales) on inventory on hand at our distributors at the end of the period.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
The Company is based in Bermuda, which does not levy taxes on income. Income taxes in the accompanying consolidated financial statements relate to the Company’s wholly-owned subsidiaries operating outside of Bermuda.
7
Income taxes are accounted for using the asset and liability method. 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.
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 the local currency financial statements of these subsidiaries into the functional currency, 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 instruments are included in the operating results, as are gains and losses incurred on foreign currency transactions. Certain 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 stockholder’s equity (deficit).
Related Party Transactions
The Company has extensive transactions and relationships with ON Semiconductor and its affiliates which include intercompany pricing agreements, an intellectual property royalty agreement and general and administrative and research and development cost sharing agreements. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.
Recent Accounting Pronouncements
In June 2001, the 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 value and depreciated over the assets’ remaining useful life. The Company will be required to adopt SFAS 143 effective January 1, 2003. The Company does not expect the implementation of SFAS 143 to have a material effect on its financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS 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 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. SFAS 144 was effective for the Company as of January 1, 2002. The implementation of SFAS 144 did not have a material effect on the Company’s financial condition or results of operations.
Note 4: Accounting Change
Sales are made to distributors under agreements that allow certain rights of return and price protections 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 $81.5 million and is reflected a cumulative effect of change in accounting principle in the Company’s consolidated statement of operations and comprehensive loss for 2001. The change in accounting resulted in a reduction in the Company’s net loss for the year ended December 31, 2001 of $29.5 million. The accounting change also resulted in an increase in revenues of $55.7 million for the year ended December 31, 2001.
8
The estimated pro forma effects of the accounting change are as follows (in millions):
October 27, 2000 | |||||||||
(inception) | |||||||||
through | Year Ended | ||||||||
December 31, | December 31, | ||||||||
2000 | 2001 | ||||||||
As reported: | |||||||||
Revenues | $ | 308.5 | $ | 1,017.3 | |||||
Net income (loss) | 21.4 | (176.2 | ) | ||||||
Pro forma effects of reflecting the accounting | |||||||||
change applied retroactively: | |||||||||
Revenues | $ | 300.1 | $ | 1,017.3 | |||||
Net income (loss) | 18.3 | (176.2 | ) |
Note 5: Restructuring and Other Charges
The activity related to the Company’s restructuring reserve is as follows (in millions):
Reserve | Reserve | Reserve | ||||||||||||||||||||||||||||||||||
Balance at | 2001 | 2001 | Balance at | 2002 | 2002 | Balance at | ||||||||||||||||||||||||||||||
12/31/2000 | Charges | Usage | Adjustments | 12/31/2001 | Charges | Usage | Adjustments | 9/27/2002 | ||||||||||||||||||||||||||||
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
June 2002 Restructuring Program | ||||||||||||||||||||||||||||||||||||
Cash employee separation charges | — | — | — | — | — | 0.6 | (0.2 | ) | — | 0.4 | ||||||||||||||||||||||||||
Non-cash fixed asset write-offs | — | — | — | — | — | 0.2 | (0.2 | ) | — | — | ||||||||||||||||||||||||||
March 2002 Restructuring Program | ||||||||||||||||||||||||||||||||||||
Cash employee separation charges | — | — | — | — | — | 5.3 | (1.4 | ) | — | 3.9 | ||||||||||||||||||||||||||
December 2001 Restructuring Program | ||||||||||||||||||||||||||||||||||||
Cash employee separation charges | — | 1.1 | (0.3 | ) | — | 0.8 | — | (0.5 | ) | — | 0.3 | |||||||||||||||||||||||||
Non-cash fixed asset write-offs | — | 1.3 | (1.3 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
June 2001 Restructuring Program | ||||||||||||||||||||||||||||||||||||
Cash employee separation charges | — | 4.8 | (4.7 | ) | (0.1 | ) | — | — | — | — | — | |||||||||||||||||||||||||
Cash exit costs | — | 1.3 | — | — | 1.3 | — | (0.9 | ) | — | 0.4 | ||||||||||||||||||||||||||
Non-cash fixed asset write-offs | — | 1.4 | (1.4 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
Non-cash stock compensation and pension charges | — | 0.5 | (0.5 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
March 2001 Restructuring Program | ||||||||||||||||||||||||||||||||||||
Cash employee separation charges | — | 5.7 | (5.4 | ) | — | 0.3 | — | (0.2 | ) | (0.1 | ) | — | ||||||||||||||||||||||||
$ | — | $ | 16.1 | $ | (13.6 | ) | $ | (0.1 | ) | $ | 2.4 | $ | 6.1 | $ | (3.4 | ) | $ | (0.1 | ) | $ | 5.0 | |||||||||||||||
The following tables reconcile the restructuring charges in the tables above to the “Restructuring and other charges” caption on the Statements of Operations and Comprehensive Loss for the year ended December 31, 2001 and the nine months ended September 28, 2001 and September 27, 2002, respectively (in millions):
Year Ended | |||||
December 31, 2001 | |||||
2001 restructuring charges | $ | 16.1 | |||
Less: Reserves released during the period | (0.1 | ) | |||
Restructuring and other charges | $ | 16.0 | |||
Nine Months Ended | |||||
September 28, 2001 | |||||
2001 restructuring charges | $ | 16.1 | |||
Less: Q4 restructuring charge | (2.4 | ) | |||
Restructuring and other charges | $ | 13.7 | |||
Nine Months Ended | |||||
September 27, 2002 | |||||
2002 restructuring charges | $ | 6.1 | |||
Less: Reserves released during the period | (0.1 | ) | |||
Restructuring and other charges | $ | 6.0 | |||
9
June 2002 Restructuring Program
In June 2002, the Company recorded charges totaling $0.8 million for costs associated with its restructuring activities including $0.6 million to cover employee separation costs associated with the termination of two employees and $0.2 million for equipment write-offs that were charged directly against the related assets. The employee separation costs reflected further reductions in general and administrative staffing levels. As of September 27, 2002, the two employees had been terminated and the Company currently expects that remaining reserve of $0.4 million as of that date will be paid out by June 30, 2003.
March 2002 Restructuring Program
In March 2002, the Company recorded a $5.3 million charge to cover employee separation costs relating to the termination of 62 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 $0.3 million relates to reductions in selling, general and administrative functions primarily in the United Kingdom. As of September 27, 2002, 25 employees have been terminated under this program and the remaining reserve of $3.9 million is expected to be paid out by June 30, 2003.
December 2001 Restructuring Program
In December 2001, the Company recorded charges totaling $2.4 million for costs associated with its worldwide restructuring programs. The charges included $1.1 million to cover employee separation costs associated with the terminations of 5 employees as well as $1.3 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. As of September 27, 2002, all impacted employees had been terminated and the Company currently expects that remaining reserve of $0.3 million as of that date will be paid out by December 31, 2002.
The $1.3 million charge related the write-off of certain property and equipment located in France and Slovakia that would no longer be utilized as a result of the Company’s restructuring activities.
June 2001 Restructuring Program
In June 2001, the Company recorded charges totaling $8.0 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 operations to meet declining customer demand. The charge included $4.8 million to cover employee separation costs associated with the termination of approximately 175 employees and $0.5 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 September 27, 2002, all of the employees had been terminated under this restructuring program.
The Company identified certain manufacturing equipment that would no longer be used internally and recorded a charge of $1.4 million to write-off the assets.
The June 2001 charge also included $1.3 million to cover certain exit costs relating to contract terminations. All exit activities have been completed and the Company expects the remaining payments to be completed by March 31, 2003.
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March 2001 Restructuring Program
In March 2001, the Company recorded charges totaling $5.7 million for costs associated with its worldwide restructuring programs. The charges of $5.7 million cover employee separation costs associated with the termination of approximately 80 employees. The employee separation costs reflected reductions in selling, general and administrative staffing. As of September 27, 2002, all of the employees had been terminated under this restructuring program.
Note 6: Balance Sheet Information
Balance sheet information is as follows (in millions):
December 31, | |||||||||
2000 | 2001 | ||||||||
Receivables, net: | |||||||||
Accounts receivable | $ | 147.1 | $ | 69.2 | |||||
Less: Allowance for doubtful accounts | (1.0 | ) | (0.7 | ) | |||||
$ | 146.1 | $ | 68.5 | ||||||
Inventories: | |||||||||
Raw materials | $ | 1.2 | $ | 5.2 | |||||
Work in process | 145.5 | 131.4 | |||||||
Finished goods | 82.4 | 59.3 | |||||||
Total inventories | 229.1 | 195.9 | |||||||
Less: Inventory reserves | (17.3 | ) | (43.6 | ) | |||||
$ | 211.8 | $ | 152.3 | ||||||
Property and equipment, net: | |||||||||
Buildings | $ | 1.0 | $ | 0.8 | |||||
Machinery and equipment | 67.9 | 41.4 | |||||||
Total property and equipment | 68.9 | 42.2 | |||||||
Less: Accumulated depreciation | (50.1 | ) | (27.1 | ) | |||||
$ | 18.8 | $ | 15.1 | ||||||
Accrued expenses: | |||||||||
Accrued payroll | $ | 5.3 | $ | 5.5 | |||||
Warranty and other sales related reserves | 31.8 | 2.5 | |||||||
Restructuring reserve | — | 2.4 | |||||||
Other | 32.7 | 0.8 | |||||||
$ | 69.8 | $ | 11.2 | ||||||
As of September 27, 2002, inventory consisted of raw materials of $3.1 million, work in process of $101.7 million, finished goods of $61.1 million and inventory reserves of $44.4 million.
Depreciation expense totaled $0.5 million for the period from October 27, 2000 (inception) through December 31, 2000 and $7.1 million for the year ended December 31, 2001.
Note 7: Income Taxes
Geographic sources of income (loss) before income taxes and cumulative effect of accounting change are as follows (in millions):
October 27, 2000 | ||||||||
(inception) | ||||||||
through | Year ended | |||||||
December 31, | December 31, | |||||||
2000 | 2001 | |||||||
Bermuda | $ | 32.3 | $ | (93.3 | ) | |||
Other foreign countries | (11.6 | ) | (2.6 | ) | ||||
$ | 20.7 | $ | (95.9 | ) | ||||
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The provision (benefit) for income taxes for the period from October 27, 2000 (inception) and for the year ended December 31, 2001, all of which relates to operations outside of Bermuda, is as follows (in millions):
October 27, 2000 | ||||||||
(inception) | ||||||||
through | Year ended | |||||||
December 31, | December 31, | |||||||
2000 | 2001 | |||||||
Current | $ | 2.9 | $ | (2.1 | ) | |||
Deferred | (3.6 | ) | 0.9 | |||||
$ | (0.7 | ) | $ | (1.2 | ) | |||
Deferred tax assets are as follows (in millions):
December 31, | ||||||||
2000 | 2001 | |||||||
Tax-deductible goodwill | $ | 1.9 | $ | 1.7 | ||||
Reserves and accruals | 3.2 | 1.9 | ||||||
Inventories | 1.2 | 0.1 | ||||||
Fixed assets | 0.2 | — | ||||||
Other | 0.2 | — | ||||||
Net operating loss and tax credit carryforwards | — | 2.3 | ||||||
Gross deferred tax assets | 6.7 | 6.0 | ||||||
Valuation allowance | — | (0.6 | ) | |||||
Net deferred tax asset | $ | 6.7 | $ | 5.4 | ||||
Note 8: Related Party Transactions
At October 27, 2000 (inception), December 31, 2000 and 2001, the total aggregate amount outstanding under various loan agreements between the Company and its Parent was $148.5 million, $172.4 million and $367.9 million, respectively. The loan agreements expire on December 31, 2004, bear interest at a weighted average rate of 4.73% and are unsecured.
The Company consigns inventory to affiliates to perform all semiconductor manufacturing activities. The Company is charged for these activities based on intercompany pricing agreements with the respective affiliates and records the related costs in inventory. Finished goods are either sold to third-party customers outside the United States or to affiliates. Sales to affiliates are also based on intercompany transfer pricing agreements.
SCI LLC also incurs certain general and administrative and research and development costs that directly benefit the Company. General and administrative expenses that directly benefit the Company are specifically identified by management and charged to the Company by SCI LLC. Research and development costs are allocated and charged based on the percent of the Company’s third-party sales to total ON Semiconductor third-party sales. Additionally, SCI LLC charges the Company a royalty fee for the use of ON Semiconductor’s intellectual property. The royalty fee is a minimum of $10.0 million annually and is based on a percentage of the Company’s third-party sales, such percentage determined based on the overall annual gross margin percentage of ON Semiconductor. The allocations utilized in arriving at the amounts reflected in the accompanying consolidated financial statements are based on assumptions that management believes are reasonable in the circumstances; however, such allocations are not necessarily indicative of the costs that would have been incurred by the Company had it operated as a stand-alone entity.
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Related party activity between the Company and its affiliates is as follows (in millions):
October 27, | |||||||||||||||||||
2000 | |||||||||||||||||||
(inception) | Nine Months Ended | ||||||||||||||||||
through | Year Ended | ||||||||||||||||||
December 31, | December 31, | September 28, | September 27, | ||||||||||||||||
2000 | 2001 | 2001 | 2002 | ||||||||||||||||
(unaudited) | (unaudited) | ||||||||||||||||||
Purchases of manufacturing services from affiliates | $ | 447.6 | $ | 814.0 | $ | 486.7 | $ | 341.4 | |||||||||||
Expense allocations from SCI LLC: | |||||||||||||||||||
General and administrative expenses | |||||||||||||||||||
Royalties | $ | 8.5 | $ | 10.0 | $ | 7.5 | $ | 7.5 | |||||||||||
Other | 3.3 | 22.0 | 16.5 | 18.7 | |||||||||||||||
$ | 11.8 | $ | 32.0 | $ | 24.0 | $ | 26.2 | ||||||||||||
Research and development | $ | 8.0 | $ | 59.6 | $ | 42.9 | $ | 33.4 | |||||||||||
Note 9: Employee Benefit Plans
Defined Benefit Plans
Certain of the Company’s foreign subsidiaries provide retirement plans for substantially all of their employees. The plans conform to local practice in terms of providing minimum benefits mandated by law, collective agreements or customary practice. Benefits under these pension plans are valued using the projected unit credit cost method.
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The following is a summary of the status of the pension plans and the net periodic pension cost (dollars in millions):
October 27, 2000 | |||||||||
(inception) | |||||||||
through | |||||||||
December 31, | December 31, | ||||||||
2000 | 2001 | ||||||||
Assumptions used to value the Company’s pension obligations are as follows: | |||||||||
Expected return on plan assets | 6.00 | % | 5.75 | % | |||||
Discount rate | 6.00 | % | 5.50 | % | |||||
Change in Benefit Obligation: | |||||||||
Benefit obligation, beginning of period | $ | 2.7 | $ | 2.6 | |||||
Service cost | — | 0.2 | |||||||
Interest cost | — | 0.1 | |||||||
Actuarial gain | — | (0.4 | ) | ||||||
Translation gain | (0.1 | ) | (0.1 | ) | |||||
Benefit obligation, end of period | $ | 2.6 | $ | 2.4 | |||||
Change in Plan Assets: | |||||||||
Fair value, beginning of period | $ | 0.3 | $ | 0.3 | |||||
Actuarial return on plan assets | — | 0.1 | |||||||
Fair value, end of period | $ | 0.3 | $ | 0.4 | |||||
Balances, end of period: | |||||||||
Pension benefit obligation | $ | (2.6 | ) | $ | (2.4 | ) | |||
Fair value of plan assets | 0.3 | 0.4 | |||||||
Funded status | (2.3 | ) | (2.0 | ) | |||||
Unrecognized net actuarial gain | — | (0.4 | ) | ||||||
Unrecognized prior service cost | 0.5 | 0.5 | |||||||
Net liability recognized (included in other long term liabilities in the accompanying balance sheet), end of period | $ | (1.8 | ) | $ | (1.9 | ) | |||
Assumptions used to determine pension costs are as follows: | |||||||||
Discount rate | 6.00 | % | 6.00 | % | |||||
Expected return on assets | 6.00 | % | 6.00 | % | |||||
Rate of compensation increase | 3.00 | % | 3.00 | % | |||||
Components of net periodic pension cost: | |||||||||
Service cost | $ | — | $ | 0.2 | |||||
Interest cost | — | 0.1 | |||||||
Expected return on assets | — | — | |||||||
Amortization of prior service cost | — | 0.1 | |||||||
Net periodic pension cost | $ | — | $ | 0.4 | |||||
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Defined Contribution Plans
Certain foreign subsidiaries have defined contribution plans in which eligible employees participate. The Company recognized compensation expense of $0.1 million and $0.3 million for the period from October 27, 2000 (inception) through December 31, 2000 and the year ended 2001, respectively, relating to these plans.
Note 10: Stock Options
Certain employees of the Company participate in ON Semiconductor stock option plans.
Generally, the options granted under these plans vest over a period of four years. Upon the termination of an option holder’s employment, all unvested options will immediately terminate and vested options will generally remain exercisable for a period of 90 days after date of termination (one year in the case of death or disability).
Information with respect to the activity of the stock option plans as it relates to the employees of the Company is as follows (in millions, except per share data):
2000 | 2001 | ||||||||||||||||
Weighted- | Weighted- | ||||||||||||||||
Average | Average | ||||||||||||||||
Number of | Exercise | Number of | Exercise | ||||||||||||||
Shares | Price | Shares | Price | ||||||||||||||
Outstanding at beginning of year | 1.0 | $ | 1.50 | 1.5 | $ | 7.57 | |||||||||||
Grants | 0.6 | 16.75 | 1.1 | 5.22 | |||||||||||||
Exercises | (0.1 | ) | 1.50 | (0.1 | ) | 1.50 | |||||||||||
Cancellations | — | — | (0.2 | ) | 6.62 | ||||||||||||
Outstanding at end of year | 1.5 | $ | 7.57 | 2.3 | $ | 6.72 | |||||||||||
Exercisable at end of year | 0.2 | $ | 3.77 | 0.5 | $ | 6.11 | |||||||||||
Weighted average fair value of share options granted during the year | $ | 9.67 | $ | 3.23 |
The following tables summarize options outstanding and options exercisable at December 31, 2001:
Outstanding Options | ||||||||||||
Weighted | Weighted | |||||||||||
Average | Average | |||||||||||
Range of Exercise | Number of | Contractual | Exercise | |||||||||
Prices | Shares | Life (in years) | Price | |||||||||
$1.45-$3.86 | 1.2 | 8.34 | $ | 2.32 | ||||||||
$5.50-$7.00 | 0.5 | 9.19 | 6.24 | |||||||||
$9.03-$16.00 | 0.4 | 8.37 | 15.52 | |||||||||
$17.37-$21.38 | 0.2 | 8.55 | 20.25 | |||||||||
Totals | 2.3 | $ | 6.72 | |||||||||
Exercisable Options | ||||||||||||
Weighted | Weighted | |||||||||||
Average | Average | |||||||||||
Range of Exercise | Number of | Contractual | Exercise | |||||||||
Prices | Shares | Life (in years) | Price | |||||||||
$1.50-$1.50 | 0.4 | 7.69 | $ | 1.50 | ||||||||
$9.03-$16.00 | 0.1 | 8.36 | 15.60 | |||||||||
Totals | 0.5 | |||||||||||
These options will expire if not exercised at specific dates through November 2011.
15
2000 Employee Stock Purchase Plan
Eligible employees also participate in ON Semiconductor’s 2000 Employee Stock Purchase Plan. Subject to local legal requirements, each of the Company’s full-time employees has the right to elect to have up to 10% of their payroll applied towards the purchase of shares of On Semiconductor common stock at a price equal to 85% of the fair market value of such shares as determined under the plan. Employees are limited to purchases of the lesser of 2,000 shares or $25,000 under this plan. During 2000, and 2001, employees purchased approximately 104,000 and 188,000 shares under the plan.
Fair Value of Stock Options
As permitted by Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), the Company measures employee stock compensation expense in accordance with Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”). Had the Company determined employee stock compensation expense in accordance with SFAS 123, the Company’s net income (loss) for period from October 27, 2000 (inception) through December 31, 2000 and for the year ended December 31, 2001 would have been reduced (increased) to the pro forma amounts indicated below (in millions):
October 27, 2000 | |||||||||
(inception) | |||||||||
through | Year ended | ||||||||
December 31, 2000 | December 31, 2001 | ||||||||
Net income (loss) | |||||||||
As reported | $ | 21.4 | $ | (176.2 | ) | ||||
Pro-forma | 20.3 | (178.1 | ) |
The fair value of each option grant has been estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Employee Stock Options | 2000 | 2001 | ||||||
Expected life (in years) | 5 | 5 | ||||||
Risk-free interest rate | 6.45 | % | 4.83 | % | ||||
Volatility | 0.60 | 0.70 |
Employee Stock Purchase Plan | 2000 | 2001 | ||||||
Expected life (in years) | 0.33 | 0.25 | ||||||
Risk-free interest rate | 6.20 | % | 4.26 | % | ||||
Volatility | 0.60 | 0.70 |
The weighted-average estimated fair value of employee stock options granted during 2000 and 2001 was $9.67 and $3.23 per share, respectively. The weighted-average estimated fair value of shares sold under the 2000 Employee Stock Purchase Plan during 2000 and 2001 was $3.82 and $1.24, respectively.
16
Note 11: Foreign Currency Exchange Contracts
The Company’s foreign currency exposures are included in ON Semiconductor’s worldwide foreign currency exposure management program. ON Semiconductor aggregates the forecasted foreign currency exposures for each of its subsidiaries on a monthly basis and enters into forward currency contracts in order to reduce its overall exposure to the effects of currency fluctuations on its results of operations and cash flows. Prior to January 1, 2001, the Company entered into its own foreign currency contracts. The Company’s net foreign currency transaction gains (losses) included in the accompanying consolidated statement of operations for the period October 27, 2000 (inception) through December 31, 2000 and for the year ended December 31, 2001 are $(0.1) million and $1.3 million, respectively. The following schedule shows the notional amounts of net foreign exchange positions in U.S. dollars as of December 31, 2000 (in millions):
2000 | ||||
Buy (Sell) | ||||
Japanese Yen | $ | (20.1 | ) | |
Euro | �� | 4.7 | ||
British Pound | (1.5 | ) | ||
Singapore Dollar | 2.3 | |||
Hong Kong Dollar | 1.5 | |||
Canadian Dollar | (7.0 | ) | ||
$ | (20.1 | ) | ||
Note 12: Commitments and Contingencies
Operating Leases
The following is a schedule by year of future minimum lease obligations under non-cancelable operating leases as of December 31, 2001 (in millions):
2002 | $ | 2.2 | ||
2003 | 1.2 | |||
2004 | 0.3 | |||
2005 | 0.2 | |||
2006 | 0.2 | |||
Thereafter | 1.6 | |||
$ | 5.7 | |||
Legal Matters
ON Semiconductor is currently involved in a variety of legal matters that arose in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters will have a material adverse effect on ON Semiconductor’s financial condition, results of operations or cash flows.
Common Stock Collateral Pledge
On May 6, 2002, ON Semiconductor issued $300 million of notes pursuant to a Rule 144A Regulation S offering that was exempt from registration requirements of the Federal Securities laws. The notes are jointly and severally guaranteed on a senior basis by ON Semiconductor’s domestic restricted subsidiaries that are also guarantors under its senior subordinated notes. In addition, the notes and guarantees are secured on a second priority basis by the capital stock or other equity interests of ON Semiconductor’s domestic subsidiaries, 65% of the capital stock or other equity interests of its foreign subsidiaries, which includes the Company and certain of its affiliates, and substantially all other assets, in each case that are held by ON Semiconductor 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.
17
Note 13: Fair Value of Financial Instruments
The Company uses the following methods to estimate the fair values of its financial instruments:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short-term maturities of such instruments.
Notes Payable to Parent
Due to the related party nature of the notes payable to Parent, it was not practicable to estimate their fair values due to the inability to obtain quoted market prices or determine current market rate for similar related party notes payable. At December 31, 2000 and 2001, the carrying value of the notes payable to Parent was $172.4 million and $367.9 million, respectively.
Foreign Currency Exchange Contracts
Forward foreign exchange contracts are valued at current foreign exchange rates for contracts with similar maturities.
Note 14: Supplemental Disclosure of Cash Flow Information
Cash payments for interest and income taxes for the period from October 27, 2000 (inception) through December 31, 2000 and for the year ended December 31, 2001 are as follows (in millions):
2000 | 2001 | ||||||||
Cash (received) paid for: | |||||||||
Interest | $ | 0.4 | $ | 13.7 | |||||
Income taxes | 0.7 | (10.4 | ) |
18