ON Semiconductor 10K/A 2003 Annual report (amended)

ON Semiconductor (ON) 10-K/A2003 FY Annual report (amended)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

(Amendment No. 1)

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

000-30419

(Commission File Number)

ON Semiconductor Corporation

(Exact name of registrant as specified in its charter)


Delaware		36-3840979
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5005 E. McDowell Road

Phoenix, AZ 85008

(602) 244-6600

(Address and telephone number of principal executive offices)

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

Common stock, par value $0.01 per share

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained therein, and will not be contained to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes þ No ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2. Yes þ No ¨

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was $139,263,824 as of June 30, 2003, based on the closing sale price of such stock on the Nasdaq National Market on that date. Shares held by executive officers, directors and persons owning directly or indirectly more than 10% of the outstanding common stock have been excluded from the preceding number because such persons may be deemed to be affiliates of the registrant.

The number of shares of the registrant’s common stock outstanding at March 1, 2004 was 252,832,460.

Documents Incorporated by Reference

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 19, 2004 are incorporated by reference into Part III hereof.

EXPLANATORY NOTE

This amendment to the Form 10-K for ON Semiconductor Corporation for the fiscal year ended December 31, 2003, amends our original Form 10-K (“Original Form 10-K”) filed on March 10, 2004. This amendment is filed to correct a typographical error included in the Report of Independent Auditors on page 80 in Part IV, Item 15. “Exhibits, Financial Statement Schedules and Reports on Form 8-K.”

Any reference to this Annual Report on Form 10-K means the Annual Report on Form 10-K as amended. This amendment continues to reflect circumstances as of the date of the filing of the Original Form 10-K and does not reflect events occurring after the filing of the Original Form 10-K or modify or update those disclosures in any way.

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as part of this Annual Report on Form 10-K:

(1) Consolidated Financial Statements:


		Page
ON Semiconductor Corporation and Subsidiaries Consolidated Financial Statements:
Report of Management		79
Report of Independent Auditors		80
Consolidated Balance Sheet as of December 31, 2003 and December 31, 2002		81
Consolidated Statement of Operations for the years ended December 31, 2003, 2002 and 2001		82
Consolidated Statement of Stockholders’ Equity (Deficit) for the years ended December 31, 2003, 2002 and 2001		83
Consolidated Statement of Cash Flows for the years ended December 31, 2003, 2002 and 2001		84
Notes to Consolidated Financial Statements		85

(2) Consolidated Financial Statement Schedules:


		Page
Report of Independent Auditors on Financial Statement Schedule		135
Schedule II — Valuation and Qualifying Accounts and Reserves		136
Semiconductor Components Industries, LLC and Subsidiaries Consolidated Financial Statements as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001		137
ON Semiconductor Trading Ltd and Subsidiaries Consolidated Financial Statements as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001		182
SCG Malaysia Holdings Sdn. Bhd. and Subsidiaries Consolidated Financial Statements as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001		207
SCG Philippines, Incorporated Financial Statements as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001		224
SCG (China) Holding Corporation and Subsidiaries Consolidated Financial Statements as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001		242

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or related notes.

(3) Exhibit Index:


Exhibit No.		Exhibit Description
2.1		Reorganization Agreement, dated as of May 11, 1999, among Motorola, Inc., SCG Holding Corporation and Semiconductor Components Industries LLC. (incorporated by reference from Exhibit 2.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)†

2.2		Agreement and Plan of Recapitalization and Merger, as amended, dated as of May 11, 1999, among SCG Holding Corporation, Semiconductor Components Industries, LLC, Motorola, Inc., TPG Semiconductor Holdings LLC, and TPG Semiconductor Acquisition Corp. (incorporated by reference from Exhibit 2.2 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)†

2.3		Amendment No. 1 to Agreement and Plan of Recapitalization and Merger, dated as of July 28, 1999, among SCG Holding Corporation, Semiconductor Components Industries, LLC, Motorola, Inc., TPG Semiconductor Holdings LLC, and TPG Semiconductor Acquisition Corp. (incorporated by reference from Exhibit 2.3 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)†

3.1(a)		Amended and Restated Certificate of Incorporation of ON Semiconductor Corporation as of August 1, 2002 (incorporated by reference from Exhibit 3.1(a) of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)

3.1(b)		Certificate Designations relating to the Series A Cumulative Convertible Preferred Stock (incorporated by reference from Exhibit 3.1(b) of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)

3.2		Amended and Restated Bylaws of ON Semiconductor Corporation(1)

4.1		Specimen of share certificate of Common Stock, par value $.01, ON Semiconductor Corporation(1)

4.2		Certificate of Designations relating to the Series A Cumulative Convertible Preferred Stock (incorporated by reference from Exhibit 3.1 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001)

4.3		Specimen of Share Certificate of Series A Cumulative Convertible Preferred Stock (incorporated by reference from Exhibit 4.1 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001)

4.4		Purchase Agreement, dates as of August 4, 1999, SCG Holding Corporation, Semiconductor Components Industries, LLC, Chase Securities Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc. (incorporated by reference from Exhibit 10.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)

4.5		Investment Agreement, dated as of September 7, 2001, between TPG ON Holdings LLC and ON Semiconductor Corporation (incorporated by reference from Exhibit 4.2 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001)

4.6		Registration Rights Agreement, dated as of September 7, 2001, between TPG ON Holdings LLC and ON Semiconductor Corporation (incorporated by reference from Exhibit 4.3 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001)

4.7		Subordination Agreement, dated as of September 7, 2001, by and between TPG ON Holdings LLC and ON Semiconductor Corporation, for the benefit of Senior Creditors (incorporated by reference from Exhibit 4.4 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001)

4.8		Warrant Agreement dated as of October 11, 2001, between ON Semiconductor Corporation and Bain & Company, Inc. (incorporated by reference from Exhibit 4.7 to the Corporation’s Form 10-K filed with the Commission on March 29, 2002)


Exhibit No.		Exhibit Description

4.9		Indenture, dated as of August 4, 1999 among SCG Holding Corporation, Semiconductor Components Industries, LLC, the Note Guarantors named therein and State Street Bank and Trust Company, as trustee, relating to the 12% Senior Subordinated Notes due 2009 (incorporated by reference from Exhibit 4.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)
4.10		Form of 12% Senior Subordinated Note due 2009 of SCG Holding Corporation and Semiconductor Components Industries, LLC (“Initial Note”) (included as Exhibit A to the Indenture filed as Exhibit 4.8 herein & incorporated by reference from Exhibit 4.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)

4.11		Form of 12% Senior Subordinated Note due 2009 of SCG Holding Corporation and Semiconductor Components Industries, LLC (“Exchange Note”) (included as Exhibit B to the Indenture filed as Exhibit 4.8 herein & incorporated by reference from Exhibit 4.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)

4.12		Exchange Offer and Registration Rights Agreement, dated August 4, 1999, Semiconductor Components Industries, LLC, SCG Holding Corporation, the subsidiary guarantors of SCG Holding Corporation (incorporated by reference from Exhibit 4.5 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)

4.13		Purchase Agreement, dated May 1, 2002, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, Credit Suisse First Boston Corporation, Morgan Stanley & Co., Incorporated, J.P. Morgan Securities Inc., and Salomon Smith Barney Inc., relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 4.1 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)

4.14		Indenture, dated as of May 6, 2002, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc., and Semiconductor Components Industries International of Rhode Island, Inc., and Wells Fargo Bank Minnesota, National Association, as trustee, relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 4.2 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)

4.15		Form of 12% Senior Secured Note due 2008 of ON Semiconductor Corporation and Semiconductor Components Industries, LLC (“Initial Note”) (included as Exhibit A and Appendix A to the Indenture filed as Exhibit 4.2) (incorporated by reference from Exhibit 4.3 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)

4.16		Form of 12% Senior Secured Note due 2008 of ON Semiconductor Corporation and Semiconductor Components Industries, LLC (“Exchange Note”) (included as Exhibit B and Appendix A to the Indenture filed as Exhibit 4.2) (incorporated by reference from Exhibit 4.4 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)

4.17		Registration Rights Agreement, dated May 6, 2002, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc., and Semiconductor Components Industries International of Rhode Island, Inc., Credit Suisse First Boston Corporation, Morgan Stanley & Co., Incorporated, J.P. Morgan Securities Inc., and Salomon Smith Barney Inc., relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 4.5 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)


Exhibit No.		Exhibit Description

4.18		Purchase Agreement, dated February 26, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, Salomon Smith Barney Inc., Credit Suisse First Boston LLC, J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated, relating to the 12% Senior Secured Notes due 2010 (incorporated by reference from Exhibit 4.17 of Fourth Quarter 2002 Form 10-K filed with the Commission on March 25, 2003)

4.19		Indenture, dated as of March 3, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc., and Semiconductor Components Industries International of Rhode Island, Inc., and Wells Fargo Bank Minnesota, National Association, as trustee, relating to the 12% Senior Secured Notes due 2010 (incorporated by reference from Exhibit 4.18 of Fourth Quarter 2002 Form 10-K filed with the Commission on March 25, 2003)

4.20		Form of 12% Senior Secured Note due 2010 of ON Semiconductor Corporation and Semiconductor Components Industries, LLC (“Initial Note”) (included as Exhibit A and Appendix A to the Indenture filed as Exhibit 4.18 hereto) (incorporated by reference from Exhibit 4.19 of Fourth Quarter 2002 Form 10-K filed with the Commission on March 25, 2003)

4.21		Form of 12% Senior Secured Note due 2010 of ON Semiconductor Corporation and Semiconductor Components Industries, LLC (“Exchange Note”) (included as Exhibit B and Appendix A to the Indenture filed as Exhibit 4.18 hereto) (incorporated by reference from Exhibit 4.20 of Fourth Quarter 2002 Form 10-K filed with the Commission on March 25, 2003)

4.22		Registration Rights Agreement, dated March 3, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc., and Semiconductor Components Industries International of Rhode Island, Inc., Salomon Smith Barney Inc., Credit Suisse First Boston LLC, J.P. Morgan Securities Inc., and Morgan Stanley & Co. Incorporated, relating to the 12% Senior Secured Notes due 2010 (incorporated by reference from Exhibit 4.21 of Fourth Quarter 2002 Form 10-K filed with the Commission on March 25, 2003)

10.1		Guarantee Agreement, dated as of August 4, 1999, among SCG Holding Corporation, the subsidiary guarantors of SCG Holding Corporation that are signatories thereto, and The Chase Manhattan Bank, as collateral agent (incorporated by reference from Exhibit 10.3 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)

10.2		Stock Purchase Agreement dated March 8, 2000 among Semiconductor Components Industries, LLC, SCG Holding Corporation and The Cherry Corporation (incorporated by reference from Exhibit 10.3 to Registration Statement No. 333-30670 filed with the Commission on April 7, 2000)

10.3		Amended and Restated Intellectual Property Agreement, dated August 4, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.5 to Registration Statement No. 333-90359 filed with the Commission on January 11, 2000)††

10.4	��	Transition Services Agreement, dated August 4, 1999, among Motorola, Inc., SCG Holding Corporation, and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.6 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)

10.5		Employee Matters Agreements, as amended, dated July 30, 1999, among Semiconductor Components Industries, LLC, SCG Holding Corporation and Motorola, Inc. (incorporated by reference from Exhibit 10.7 to Registration Statement No. 333-90359 filed with the Commission on January 11, 2000)


Exhibit No.		Exhibit Description
10.6		Motorola Assembly Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.8 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)††

10.7		SCG Assembly Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.9 Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)††

10.8		Motorola Foundry Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.10 Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)††

10.9		SCG Foundry Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.11 Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)††

10.10		Equipment Lease and Repurchase Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.12 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)

10.11		Equipment Passdown Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.13 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)††

10.12		SCG Holding Corporation 1999 Founders Stock Option Plan (incorporated by reference from Exhibit 10.14 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2)

10.13(a)		Lease for 52nd Street property, dated July 31, 1999, among Semiconductor Components Industries, LLC as Lessor, and Motorola Inc. as Lessee (incorporated by reference from Exhibit 10.16 Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)

10.13(b)		First Lease Amendment to Lease for 52nd Street property, dated April 19, 2000, between Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.14(b) to the Corporation’s Form 10-K filed with the Commission on March 29, 2002)

10.14		Lease for U.S. Locations (Mesa, Chandler, 56th Street and Tempe), dated July 31, 1999, among Motorola, Inc. as Lessor, and Semiconductor Components Industries, LLC as Lessee (incorporated by reference from Exhibit 10.15 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)

10.15		Declaration of Reciprocal Covenants, Easement of Restrictions and Options to Purchase and Lease, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.17 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)

10.16(a)		Employment Agreement, dated as of October 27, 1999, between Semiconductor Components Industries, LLC and Steve Hanson (incorporated by reference from Exhibit 10.18 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2)

10.16(b)		Amendment to Employment Agreement effective as of April 15, 2002, between ON Semiconductor Corporation and Semiconductor Components Industries, LLC and Steve Hanson (incorporated by reference from Exhibit 10.2 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2)


Exhibit No.		Exhibit Description
10.16(c)		Separation Agreement, made as of November 21, 2002, by and among Steven Hanson, ON Semiconductor Corporation and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.19(c) of Fourth Quarter 2002 Form 10-K filed with the Commission on March 25, 2003)(2)

10.16(d)		Amendment to Separation Agreement, dated as of February 25, 2003, by and between Steven Hanson, ON Semiconductor Corporation and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.19(d) to Registration Statement No. 333-104927 filed with the Commission on May 1, 2003)(2)

10.17(a)		Employment Agreement, dated as of September 13, 1999, between Semiconductor Components Industries, LLC and Michael Rohleder (incorporated by reference from Exhibit 10.19 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2)

10.17(b)		Termination Agreement made as of January 29, 2002, between Michael Rohleder and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.1(a) of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2)

10.18(a)		Employment Agreement, dated as of November 8, 1999, between Semiconductor Components Industries, LLC and James Thorburn (incorporated by reference from Exhibit 10.20 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2)

10.18(b)		Amendment No. 1 to Employment Agreement for James Thorburn, dated as of July 20, 2000 (incorporated by reference from Exhibit 10.2 of Third Quarter 2000 Form 10-Q filed with the Commission on November 14, 2000)(2)

10.18(c)		Separation Letter Agreement dated February 28, 2001 (with attached General Release and Waiver dated March 10, 2001), between James Thorburn and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.2 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001)(2)

10.19(a)		Employment Agreement, dated as of October 27, 1999, between Semiconductor Components Industries, LLC and William George (incorporated by reference from Exhibit 10.21 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2)

10.19(b)		Amendment to Employment Agreement, dated as of October 1, 2001, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC and William George (incorporated by reference from Exhibit 10.20(b) to the Corporation’s Form 10-K filed with the Commission on March 29, 2002)(2)

10.19(c)		Amendment to Employment Agreement, dated as of August 5, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC and William George (incorporated by reference from Exhibit 10.1 of Third Quarter 2003 Form 10-Q filed with the Commission on November 7, 2003)(2)

10.20(a)		Employment Agreement, dated as of October 27, 1999, between Semiconductor Components Industries, LLC and Dario Sacomani (incorporated by reference from Exhibit 10.22 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2)

10.20(b)		Amendment to Employment Agreement, dated as of November 28, 2001, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC and Dario Sacomani (incorporated by reference from Exhibit 10.21(b) to the Corporation’s Form 10-K filed with the Commission on March 29, 2002)(2)

10.20(c)		Termination Agreement made as of May 3, 2002, between Semiconductor Components Industries, LLC and Dario Sacomani (incorporated by reference from Exhibit 10.5 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2)


Exhibit No.		Exhibit Description
10.21(a)		Pledge and Security Agreement, dated as of November 8, 1999, between Semiconductor Components Industries, LLC and James Thorburn (incorporated by reference from Exhibit 10.23 to Registration Statement No. 333-90359 filed with the Commission on January 11, 2000)(2)

10.21(b)		Deed of Trust, dated as of July 20, 2000, with James Thorburn as Trustee and Semiconductor Components Industries, LLC as Beneficiary (incorporated by reference from Exhibit 10.3 of Third Quarter 2000 Form 10-Q filed with the Commission on November 14, 2000)(2)

10.22(a)		Promissory Note/ Security Interest, dated as of November 8, 1999, from James Thorburn to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.24 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2)

10.22(b)		Promissory Note, dated July 21, 2000, from James Thorburn to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.2 of Third Quarter 2000 Form 10-Q filed with the Commission on November 14, 2000)(2)

10.22(c)		Amendment to Promissory Note, dated March 10, 2001, from James Thorburn and Jacqueline Thorburn to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.1 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001)(2)

10.23(a)		ON Semiconductor Amended and Restated Executive Deferred Compensation Plan (incorporated by reference from Exhibit 10.31 to Registration Statement No. 333-30670 filed with the Commission on April 25, 2000)(2)

10.23(b)		First Amendment to the ON Semiconductor Corporation (fka SCG Holding Corporation) Executive Deferred Compensation Plan, as previously amended, dated September 19, 2000 (incorporated by reference from Exhibit 4.2 to Registration Statement No. 333-107895 filed with the Commission on August 12, 2003)(2)

10.23(c)		Second Amendment to the ON Semiconductor Amended and Restated Executive Deferred Compensation Plan effective January 1, 2002 (incorporated by reference from Exhibit 10.7 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2)

10.24		Junior Subordinated Note Due 2011(1)

10.25(a)		2000 Stock Incentive Plan amended and restated as of May 21, 2003 (incorporated by reference from Exhibit 10.1 of Second Quarter 2003 Form 10-Q filed with the Commission on August 13, 2003)(2)

10.25(b)		2000 Stock Incentive Plan — ON Ownership program grant agreement (incorporated by reference from Exhibit 10.33(b) to Registration Statement No. 333-30670 filed with the Commission on April 25, 2000)(2)

10.25(c)		2000 Stock Incentive Plan — incentive stock option agreement (incorporated by reference from Exhibit 10.35(c) to Registration Statement No. 333-30670 filed with the Commission on March 24, 2000)(2)

10.25(d)		2000 Stock Incentive Plan — non-qualified stock option agreement (incorporated by reference from Exhibit 10.35(d) to Registration Statement No. 333-30670 filed with the Commission on March 24, 2000)(2)

10.26		2000 Employee Stock Purchase Plan amended and restated as of May 23, 2001 (incorporated by reference from Exhibit 10.5 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001)(2)

10.27		ON Semiconductor Director Deferred Compensation Plan (incorporated by reference from Exhibit 10.35 to Registration Statement No. 333-30670 filed with the Commission on April 25, 2000)(2)

10.28		Form of Master Trust Agreement for the ON Semiconductor Deferred Compensation Plans (incorporated by reference from Exhibit 10.36 to Registration Statement No. 333-30670 filed with the Commission on April 25, 2000)(2)


Exhibit No.		Exhibit Description
10.29		2000 ON Semiconductor Executive Council Bonus Incentive Plan (incorporated by reference from Exhibit 10.37 of Fourth Quarter 2000 Form 10-K filed with the Commission on March 30, 2001)(2)

10.30		2000 Key Contributor Incentive Plan (incorporated by reference from Exhibit 10.38 of Fourth Quarter 2000 Form 10-K filed with the Commission on March 30, 2001)(2)

10.31(a)		Promissory Note, dated March 9, 2001, from Michael Rohleder and Roxanne Rohleder to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.3 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001)(2)

10.31(b)		Deed of Trust, dated March 7, 2001, from Michael Rohleder and Roxanne Rohleder to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.4 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001)(2)

10.31(c)		Amendment to Promissory Note dated March 18, 2002, from Michael Rohleder and Roxanne Rohleder to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.1(b) of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2)

10.32(a)		Loan Facility Agreement, between Leshan-Phoenix Semiconductor Company Limited and Industrial & Commercial Bank of China, Leshan City Branch, for loan in an amount up to $20 million, dated November 17, 2000 (incorporated by reference from Exhibit 10.1 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001)

10.32(b)		Letter for Loan Extension Application for a loan in an amount up to $20 million, dated November 5, 2003, from Leshan-Phoenix Semiconductor Co. Ltd. to ICBC, Leshan City Branch(1)

10.32(c)		Loans Renewal Agreement between Leshan Phoenix Semiconductor Co. Ltd. and Industrial and Commercial Bank of China, Leshan City Branch for a loan in an amount up to $20 million, dated March 5, 2004(1)

10.33(a)		Loan Agreement between SCG Japan Ltd. and Development Bank of Japan, for loan in an amount up to $26.1 million, dated October 27, 2000 (incorporated by reference from Exhibit 10.2 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001)

10.33(b)		Guaranty Agreement, executed by Semiconductor Components Industries, LLC on October 27, 2000, in connection with Loan Agreement between SCG Japan Ltd. and Development Bank of Japan, for loan in an amount up to $26.1 million (incorporated by reference from Exhibit 10.3 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001)

10.34(a)		Offer Letter dated February 15, 2002, from ON Semiconductor Corporation and Semiconductor Components Industries, LLC to John T. Kurtzweil (incorporated by reference from Exhibit 10.3 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2)

10.34(b)		Separation Agreement, dated as of March 31, 2003, by and among John Kurtzweil, ON Semiconductor Corporation and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.38(b) to Registration Statement No. 333-104927 filed with the Commission on May 1, 2003)(2)

10.35(a)		Employment Agreement effective as of March 28, 2002, between Semiconductor Components Industries, LLC and William Bradford (incorporated by reference from Exhibit 10.4 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2)

10.35(b)		Amendment No. 1 to Employment Agreement for William Bradford, executed on March 20, 2003, by and between Semiconductor Components Industries, LLC and William Bradford (incorporated by reference from Exhibit 10.39(b) to Registration Statement No. 333-104927 filed with the Commission on May 1, 2003)(2)

10.36		Offer Letter effective as of April 1, 2002, to Syrus Madavi from ON Semiconductor Corporation (incorporated by reference from Exhibit 10.6 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002(2)


Exhibit No.		Exhibit Description
10.37		Employee Incentive Plan, January 2002 (incorporated by reference from Exhibit 10.8 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2)

10.38		ON Semiconductor 2002 Executive Incentive Plan (incorporated by reference from Exhibit 10.1 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)(2)

10.39		Employee Incentive Plan January 2002 (incorporated by reference from Exhibit 10.2 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)(2)

10.40		Intercreditor Agreement, dated as of May 6, 2002, among J.P. Morgan Chase Bank, as credit agent, Wells Fargo Bank Minnesota, National Association, as trustee, ON Semiconductor Corporation and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.4 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)

10.41		Security Agreement, dated as of May 6, 2002, among Semiconductor Components Industries, ON Semiconductor Corporation, the subsidiary guarantors of ON Semiconductor Corporation that are signatories thereto, and Wells Fargo Bank Minnesota, National Association, as trustee and collateral agent, relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 10.5 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)

10.42		Pledge Agreement, dated as of May 6, 2002, among Semiconductor Components Industries, LLC, ON Semiconductor Corporation, the subsidiary pledgors of ON Semiconductor Corporation that are signatories thereto, and Wells Fargo Bank Minnesota, National Association, as trustee and collateral agent, relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 10.6 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)

10.43		Collateral Assignment, dated as of May 6, 2002, between Semiconductor Components Industries, LLC and Wells Fargo Bank Minnesota, National Association, as trustee and collateral agent, relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 10.7 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)

10.44		Joint Venture Contract for Leshan-Phoenix Semiconductor Company Limited, amended on June 25, 2002, among SCG (China) Holding Corporation, Leshan Radio Company Ltd, and Motorola (China) Investment Limited (incorporated by reference from Exhibit 10.8 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)

10.45(a)		Employment Agreement, dated as of November 10, 2002, between ON Semiconductor Corporation and Keith Jackson (incorporated by reference from Exhibit 10.50(a) of Fourth Quarter 2002 Form 10-K filed with the Commission on March 25, 2003)(2)

10.45(b)		Letter Agreement dated as of November 19, 2002, between ON Semiconductor Corporation and Keith Jackson (incorporated by reference from Exhibit 10.50(b) of Fourth Quarter 2002 Form 10-K filed with the Commission on March 25, 2003)(2)

10.46		Collateral Sharing Agreement dated as of March 3, 2003, among JPMorgan Chase Bank, as Collateral Agent, Wells Fargo Bank Minnesota, National Association, as Trustee, ON Semiconductor Corporation and Semiconductor Components Industries, LLC, relating to the 12% Senior Secured Notes due 2010 (incorporated by reference from Exhibit 10.53 of Fourth Quarter 2002 Form 10-K filed with the Commission on March 25, 2003)

10.47		Security Agreement dated as of August 4, 1999, as amended and restated as of March 3, 2003, among Semiconductor Components Industries, LLC, ON Semiconductor Corporation, the subsidiary guarantors of ON Semiconductor Corporation that are signatories thereto, and JPMorgan Chase Bank, as collateral agent for the Secured Parties, relating to the 12% Senior Secured Notes due 2010 (incorporated by reference from Exhibit 10.54 of Fourth Quarter 2002 Form 10-K filed with the Commission on March 25, 2003)


Exhibit No.		Exhibit Description
10.48		Pledge Agreement, dated as of August 4, 1999, as amended and restated as of March 3, 2003, among Semiconductor Components Industries, LLC, ON Semiconductor Corporation, the subsidiary guarantors of ON Semiconductor Corporation that are signatories thereto, and JPMorgan Chase Bank, as collateral agent for the Secured Parties, relating to the 12% Senior Secured Notes due 2010 (incorporated by reference from Exhibit 10.55 of Fourth Quarter 2002 Form 10-K filed with the Commission on March 25, 2003)

10.49		Collateral Assignment dated as of August 4, 1999, as amended and restated as of March 3, 2003, between Semiconductor Components Industries, LLC and JPMorgan Chase Bank, as collateral agent for the Secured Parties, relating to the 12% Senior Secured Notes due 20102010 (incorporated by reference from Exhibit 10.56 of Fourth Quarter 2002 Form 10-K filed with the Commission on March 25, 2003)

10.50		Employment Offer Letter dated March 14, 2003, between Semiconductor Components Industries, LLC and Donald Colvin (incorporated by reference from Exhibit 10.57 of Fourth Quarter 2002 Form 10-K filed with the Commission on March 25, 2003)(2)

10.51		Letter Agreement relating to the employment of Peter Zdebel, dated as of March 31, 2003, by and between Semiconductor Components Industries, LLC and Peter Zdebel (incorporated by reference from Exhibit 10.58 to Registration Statement No. 333-104927 filed with the Commission on May 1, 2003)(2)

10.52		Supplement No. 1, dated as of September 23, 2003, to the Security Agreement dated as of August 4, 1999 as amended and restated as of March 3, 2003, by and among Semiconductor Components Industries, LLC, the borrower, ON Semiconductor Corporation, and the subsidiary guarantors of ON Semiconductor that are signatories thereto, in favor of JPMorgan Chase Bank, as collateral agent for certain secured parties (incorporated by reference from Exhibit 10.5 of Third Quarter 2003 Form 10-Q filed with the Commission on November 7, 2003)

10.53		Amendment and Restatement Agreement, dated as of November 25, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, as borrower, and JPMorgan Chase Bank, as administrative agent, under the Credit Agreement dated as of August 4, 1999, as amended and restated as of February 14, 2003 (as amended, supplemented and modified and in effect on the date hereof), among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, as borrower, the lenders party thereto, and the administrative agent(1)

10.54		Amended and Restated Credit Agreement, dated as of August 4, 1999, as amended and restated as of November 25, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, as borrower, the lenders party hereto, and JPMorgan Chase Bank as administrative agent, collateral agent and syndication agent (Exhibit A to the Amendment and Restatement Agreement filed as Exhibit 10.64 hereto)(1)

10.55		Reaffirmation Agreement, dated as of November 25, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, the subsidiary guarantors of ON Semiconductor that are signatories thereto, and JPMorgan Chase Bank, as administrative agent, issuing bank and collateral agent for the benefit of the lenders(1)

10.56(a)		Loan Agreement executed on December 12, 2003, between China Construction Bank Sichuan Branch and Leshan-Phoenix Semiconductor Company LTD, for a loan in an amount up to $48 million(1)

10.56(b)		Mortgage Agreement executed on December 12, 2003, between China Construction Bank, Sichuan Branch and Leshan-Phoenix Semiconductor Company Ltd. relating to the loan in an amount up to $48 million(1)

10.56(c)		Confirmation for Extension of Tranche B Loan, in an amount up to $24 million, dated as of January 3, 2004, from China Construction Bank, Sichuan Branch to Leshan-Phoenix Semiconductor Company Ltd.(1)


Exhibit No.		Exhibit Description
10.57		Waiver and Amendment, dated as of January 16, 2004 to the Credit Agreement dated as of August 4, 1999, as amended and restated as of November 25, 2003 (as amended, supplemented or otherwise modified from time to time prior to the date hereof) among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, the Lenders party thereto, and JPMorgan Chase Bank, as administrative agent(1)

14		ON Semiconductor Corporation Code of Business Conduct(1)

18		Letter from PricewaterhouseCoopers LLP re Change in Accounting Principles (incorporated by reference from Exhibit 18 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001)

21.1		List of Significant Subsidiaries(1)

23.1		Consent of PricewaterhouseCoopers LLP, independent accountants(1)

24.1		Powers of Attorney(1)

31.1		Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

31.2		Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

32		Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)

99.1		Stockholders Agreement dated as of August 4, 1999 among SCG Holding Corporation, TPG Semiconductor Holdings, LLC and Motorola, Inc. (incorporated by reference from Exhibit 99.5 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)

(1)	Filed herewith.

(2)	Management contract or compensatory plan, contract or arrangement.

†	Schedules or other attachments to these exhibits not filed herewith shall be furnished to the Commission upon request.

††	Portions of these exhibits have been omitted pursuant to a request for confidential treatment

(b) Reports on Form 8-K:

During the fourth quarter of 2003 we filed or furnished three reports on Form 8-K (1) dated October 29, 2003 and furnished on October 30, 2003, (2) dated November 25, 2003 and filed November 26, 2003, and (3) dated December 3, 2003 and filed December 4, 2003.

The October 30, 2003 report was furnished pursuant to Items 9 and 12, reported the announcement of our results for the quarter ended October 3, 2003, and included as an exhibit a news release dated October 29, 2003, titled “ON Semiconductor Reports Third Quarter 2003 Results.” The discussion under Items 9 and 12 of this Form 8-K and the attached exhibit were furnished to, but not filed with, the Securities and Exchange Commission.

The November 26, 2003 report was filed pursuant to Items 5 and 7, reported our refinancing of approximately $369 million of term loans under our senior bank facilities at an interest rate of LIBOR plus 325 basis points as compared to the previous rate of LIBOR plus 400 basis points, and included as an exhibit a news release dated November 26, 2003 titled “ON Semiconductor Refinances $369 Million Credit Facilities.”

The December 4, 2003 report was filed pursuant to Items 5 and 7, reported its decision to phase out manufacturing operations at its facility in East Greenwich, Rhode Island by the end of 2004, and an expected

restructuring, asset impairment and other charge of $15 to $20 million in the fourth quarter of 2003 as a result of that decision, and included as an exhibit a news release dated December 3, 2003 titled “ON Semiconductor to Phase Out Manufacturing in East Greenwich.”

(d) See Item 15(a)(2) above.

REPORT OF MANAGEMENT

To the Stockholders of ON Semiconductor Corporation:

The consolidated financial statements of ON Semiconductor Corporation published in this Annual Report on Form 10-K were prepared by Company management, who is responsible for their integrity and objectivity. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. The financial information elsewhere in this Annual Report on Form 10-K is consistent with the consolidated financial statements.

ON Semiconductor maintains a system of internal control adequate to provide reasonable assurance that its transactions are appropriately recorded and reported, its assets are protected and its established policies are followed. This system is enforced by written policies and procedures, effective internal audit and a qualified financial staff.

Our independent auditors, PricewaterhouseCoopers LLP, provide an objective independent review by audit of ON Semiconductor’s consolidated financial statements and issuance of a report thereon. Their audit is conducted in accordance with generally accepted auditing standards.

The audit committee of the board of directors, comprised solely of outside directors, meets periodically and privately with the independent auditors, internal auditors and representatives from management to appraise the adequacy and effectiveness of the audit functions, control systems and quality of our financial accounting and reporting.

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

of ON Semiconductor Corporation

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of ON Semiconductor Corporation and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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 unrecognized net actuarial gains or losses relating to its defined benefit pension obligations effective January 1, 2003 and its method of accounting for goodwill and other intangible assets effective January 1, 2002.

As also described in Note 4 the Company has restated its consolidated financial statements to reflect the consolidation of its investment in Leshan-Phoenix Semiconductor Company Limited upon adoption of Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.

PricewaterhouseCoopers LLP

Phoenix, Arizona

February 2, 2004, except for the third paragraph

of Note 2 and the third paragraph of Note 11 for

which the date is February 9, 2004.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions, except share data)


	December 31,
	2003			2002
Assets
Cash and cash equivalents	$	186.6		$	190.4
Receivables, net (including $7.7 and $4.7 due from Motorola)		136.1			115.4
Inventories, net		171.6			163.5
Other current assets		25.7			39.4
Deferred income taxes		2.7			6.4

Total current assets		522.7			515.1
Property, plant and equipment, net		499.1			585.3
Deferred income taxes		1.3			—
Goodwill		77.3			77.3
Intangible asset, net		—			26.7
Other assets		61.0			54.0

Total assets	$	1,161.4		$	1,258.4

Liabilities, Minority Interests, Redeemable
Preferred Stock and Stockholders’ Equity (Deficit)
Accounts payable (including $0.4 and $0.1 payable to Motorola)	$	115.7		$	74.1
Accrued expenses (including $0.7 and $0.7 payable to Motorola)		89.9			100.6
Income taxes payable		1.7			1.9
Accrued interest		25.3			43.6
Deferred income on sales to distributors		66.2			70.8
Current portion of long-term debt		11.4			19.8

Total current liabilities		310.2			310.8
Long-term debt (including $139.9 and $126.9 payable to Motorola)		1,291.5			1,403.4
Other long-term liabilities		58.2			67.0
Deferred income taxes		—			2.2

Total liabilities		1,659.9			1,783.4

Commitments and contingencies (See Note 16)		—			—

Minority interests in consolidated subsidiaries		26.4			27.0

Series A cumulative, convertible, redeemable preferred stock ($0.01 par value 100,000 shares authorized, 10,000 shares issued and outstanding; 8% annual dividend rate; redemption value — $131.7 and $110.9		119.7			110.1

Common stock ($0.01 par value, 500,000,000 shares authorized, 217,299,893 and 176,439,900 shares issued and outstanding)		2.2			1.8
Additional paid-in capital		891.3			737.4
Accumulated other comprehensive loss		(4.4	)		(34.3	)
Accumulated deficit		(1,533.7	)		(1,367.0	)

Total stockholders’ equity (deficit)		(644.6	)		(662.1	)

Total liabilities, minority interests, redeemable preferred stock and stockholders’ equity (deficit)	$	1,161.4		$	1,258.4

See accompanying notes to consolidated financial statements.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share data)


	Year Ended December 31,
	2003			2002			2001
Revenues (including $77.9, $88.3 and $100.9 from Motorola)	$	1,069.1		$	1,093.7		$	1,223.2
Cost of sales		768.1			795.6			997.7

Gross profit		301.0			298.1			225.5

Operating expenses:
Research and development		85.5			81.5			94.5
Selling and marketing		63.0			61.2			74.8
General and administrative		64.9			88.8			115.5
Amortization of goodwill and intangibles		5.9			11.9			22.6
Restructuring, asset impairments and other, net		61.2			27.7			150.4

Total operating expenses		280.5			271.1			457.8

Operating income (loss)		20.5			27.0			(232.3	)

Other income (expenses):
Interest expense		(151.1	)		(152.5	)		(143.6	)
Interest income		2.0			2.4			4.0
Gain on sale of investment in joint venture		—			—			3.1
Loss on debt prepayment		(7.7	)		(6.5	)		—

Other income (expenses), net		(156.8	)		(156.6	)		(136.5	)

Loss before income taxes, minority interests and cumulative effect of accounting change		(136.3	)		(129.6	)		(368.8	)
Income tax provision		(7.7	)		(9.5	)		(345.8	)
Minority interests		(1.2	)		(2.8	)		(0.4	)

Loss before cumulative effect of accounting change		(145.2	)		(141.9	)		(715.0	)
Cumulative effect of accounting change (net of income taxes of $0 in 2003 and $38.8 in 2001)		(21.5	)		—			(116.4	)

Net loss		(166.7	)		(141.9	)		(831.4	)
Less: Accretion to redemption value of convertible redeemable preferred stock		(0.5	)		—			—
Less: Accretion of beneficial conversion feature relating to convertible redeemable preferred stock		—			—			(13.1	)
Less: Convertible redeemable preferred stock dividends		(9.2	)		(8.5	)		(2.4	)

Net loss applicable to common stock	$	(176.4	)	$	(150.4	)	$	(846.9	)

Loss per common share:
Basic:
Net loss applicable to common stock before cumulative effect of accounting change	$	(0.83	)	$	(0.86	)	$	(4.21	)
Cumulative effect of accounting change		(0.11	)		—			(0.67	)

Net loss applicable to common stock	$	(0.94	)	$	(0.86	)	$	(4.88	)

Diluted:
Net loss applicable to common stock before cumulative effect of accounting change	$	(0.83	)	$	(0.86	)	$	(4.21	)
Cumulative effect of accounting change		(0.11	)		—			(0.67	)

Net loss applicable to common stock	$	(0.94	)	$	(0.86	)	$	(4.88	)

Weighted average common shares outstanding:
Basic		187.4			175.6			173.6

Diluted		187.4			175.6			173.6

See accompanying notes to consolidated financial statements.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in millions, except per share data)


	Common Stock			Additional Paid- In Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total
	Number of Shares	At Par Value		Additional Paid- In Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total
Balances at December 31, 2000	172,746,435		1.7		730.4			(0.7	)		(393.7	)		337.7
Stock option exercises	648,132		—		0.9			—			—			0.9
Tax benefit of stock option exercises	—		—		0.7			—			—			0.7
Stock compensation expense	—		—		5.0			—			—			5.0
Redeemable preferred stock dividends	—		—		(2.4	)		—			—			(2.4	)
Shares issued under the employee stock purchase plan	1,259,019		—		4.2			—			—			4.2
Beneficial conversion feature relating to convertible redeemable preferred stock	—		—		13.1			—			—			13.1
Accretion of beneficial conversion feature relating to convertible redeemable preferred stock	—		—		(13.1	)		—			—			(13.1	)
Comprehensive income (loss):
Net loss	—		—		—			—			(831.4	)		(831.4	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	—		—		—			(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	—		—		—			—			—			(863.5	)

Balances at December 31, 2001	174,653,586		1.7		738.8			(32.8	)		(1,225.1	)		(517.4	)
Stock option exercises	757,185		0.1		1.1			—			—			1.2
Tax benefit of stock option exercises	—		—		0.1			—			—			0.1
Stock compensation expense	—		—		4.5			—			—			4.5
Redeemable preferred stock dividends	—		—		(8.5	)		—			—			(8.5	)
Shares issued under the employee stock purchase plan	1,029,129		—		1.4			—			—			1.4
Comprehensive income (loss), net of tax:
Net loss	—		—		—			—			(141.9	)		(141.9	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	—		—		—			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	—		—		—			—			—			(143.4	)

Balances at December 31, 2002	176,439,900		1.8		737.4			(34.3	)		(1,367.0	)		(662.1	)
Issuance of common stock, net of issuance costs	36,996,000		0.4		156.4			—			—			156.8
Stock option exercises	1,924,030		—		4.2			—			—			4.2
Tax benefit of stock option exercises	—		—		0.3			—			—			0.3
Stock compensation expense	—		—		0.1			—			—			0.1
Redeemable preferred stock dividends	—		—		(9.2	)		—			—			(9.2	)
Accretion to redemption value of convertible redeemable preferred stock	—		—		(0.5	)		—			—			(0.5	)
Shares issued under the employee stock purchase plan	689,963		—		1.2			—			—			1.2
Warrant exercises	1,250,000		—		1.4			—			—			1.4
Comprehensive income (loss), net of tax:
Net loss	—		—		—			—			(166.7	)		(166.7	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	—		—		—			3.7			—			3.7
Additional minimum pension liability adjustment	—		—		—			19.6			—			19.6
Unrealized losses on deferred compensation plan investments	—		—		—			(0.2	)		—			(0.2	)
Effects of cash flow hedges	—		—		—			6.8			—			6.8

Other comprehensive loss	—		—		—			29.9			—			29.9

Comprehensive loss	—		—		—			—			—			(136.8	)

Balances at December 31, 2003	217,299,893	$	2.2	$	891.3		$	(4.4	)	$	(1,533.7	)	$	(644.6	)

See accompanying notes to consolidated financial statements.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions, except per share data)


	Year Ended December 31,
	2003			2002			2001
Cash flows from operating activities:
Net loss	$	(166.7	)	$	(141.9	)	$	(831.4	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		127.8			148.0			177.1
Cumulative effect of accounting change		21.5			—			155.2
Loss on debt prepayment		7.7			6.5			—
Amortization of debt issuance costs and debt discount		8.7			8.1			6.0
Provision for excess inventories		13.0			16.0			50.9
Non-cash impairment of property, plant and equipment		30.7			12.4			56.2
Non-cash impairment of intangible and other assets		25.1			—			—
Non-cash interest on junior subordinated note payable to Motorola		13.0			11.7			10.7
Gain on sale of investment in joint venture		—			—			(3.1	)
Deferred income taxes		0.3			7.1			317.1
Stock compensation expense		0.1			4.5			5.0
Other		0.6			3.0			1.2
Changes in assets and liabilities:
Receivables		(20.8	)		22.4			134.5
Inventories		(21.0	)		6.4			23.0
Other assets		5.0			3.2			(4.2	)
Accounts payable		41.3			(35.9	)		(63.2	)
Accrued expenses		(16.2	)		(6.3	)		(62.3	)
Income taxes payable		(0.1	)		(11.2	)		(16.4	)
Accrued interest		(18.3	)		19.8			5.7
Deferred income on sales to distributors		(4.6	)		(28.6	)		(82.8	)
Other long-term liabilities		(1.4	)		1.2			4.4

Net cash provided by (used in) operating activities		45.7			46.4			(116.4	)

Cash flows from investing activities:
Purchases of property, plant and equipment		(59.8	)		(40.5	)		(149.0	)
Deposits for purchases of property, plant and equipment		(6.8	)		—			—
Proceeds from sale of investment in joint venture		—			—			20.4
Proceeds from sales of property, plant and equipment		13.2			4.5			13.8
Other		(1.8	)		—			(0.6	)

Net cash used in investing activities		(55.2	)		(36.0	)		(115.4	)

Cash flows from financing activities:
Proceeds from debt issuance, net of discount		338.4			290.7			134.5
Proceeds from issuance of common stock under the employee stock purchase plan		1.2			1.4			4.2
Proceeds from exercise of stock options and warrants		5.6			1.2			0.9
Proceeds from issuance of convertible, redeemable preferred stock, net of issuance costs		—			—			99.2
Proceeds from issuance of common stock, net of issuance costs		157.2			—			—
Payment of capital lease obligation		(0.2	)		(1.1	)		(1.9	)
Payment of debt issuance costs		(15.3	)		(12.1	)		(5.1	)
Repayment of senior credit facilities		(482.5	)		(287.1	)		(5.6	)

Net cash provided by (used in) financing activities		4.4			(7.0	)		226.2

Effect of exchange rate changes on cash and cash equivalents		1.3			1.0			0.8

Net increase (decrease) in cash and cash equivalents		(3.8	)		4.4			(4.8	)
Cash and cash equivalents, beginning of period		190.4			186.0			190.8

Cash and cash equivalents, end of period	$	186.6		$	190.4		$	186.0

See accompanying notes to consolidated financial statements.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Background and Basis of Presentation

ON Semiconductor Corporation, together with its wholly and majority-owned subsidiaries (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., the Company was a wholly-owned subsidiary of Motorola Inc. (“Motorola”) prior to its August 4, 1999 recapitalization (the “Recapitalization”). The Company 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, the Company was recapitalized and certain related transactions were effected pursuant to an agreement among ON Semiconductor Corporation, its principal domestic operating subsidiary, Semiconductor Components Industries, LLC (“SCI LLC”), Motorola and affiliates of Texas Pacific Group (“TPG”). Because TPG’s affiliate did not acquire substantially all of the Company’s common stock, the basis of the Company’s assets and liabilities for financial reporting purposes was not impacted by the Recapitalization.

Note 2: Liquidity

During the year ended December 31, 2003, the Company incurred a net loss of $166.7 million compared to net losses of $141.9 million and $831.4 million in 2002 and 2001, respectively. The Company’s net results included restructuring, asset impairments and other, net of $61.2 million, $27.7 million and $150.4 million in 2003, 2002 and 2001, respectively, as well as interest expense of $151.1 million $152.5 million and $143.6 million, respectively. The Company’s operating activities provided cash of $45.7 million in 2003 and $46.4 million in 2002 and used cash of $116.4 million in 2001.

At December 31, 2003, the Company had $186.6 million in cash and cash equivalents, net working capital of $212.5 million, term or revolving debt of $1,302.9 million and a stockholders’ deficit of $644.6 million. The Company’s long-term debt includes $320.1 million under its senior bank facilities; $191.6 million (net of discount) of its 13% senior secured notes due 2010; $292.6 million (net of discount) of its 12% senior secured notes due 2008; $260.0 million of its 12% senior subordinated notes due 2009; $139.9 million under a 10% junior subordinated note payable to Motorola due 2011; $48.0 million under a loan facility with a Chinese bank due 2013; $24.3 million under a note payable to a Japanese bank due 2010; $20.0 million under a loan facility with a Chinese bank due 2006; and $6.4 million under a capital lease obligations. The Company was in compliance with all of the covenants contained in its various debt agreements at December 31, 2003 and expects to remain in compliance over the next twelve months.

In February 2004, the Company completed a public offering of common stock resulting in net proceeds of $226.7 million. The net proceeds are expected to be used to redeem $70.0 million principal amount of the Company’s 13% senior secured notes due 2010 and $105.0 million principal amount of the 12% senior secured notes due 2008 at a redemption price of 112% of the principal amount of such notes. The remaining proceeds will be used for general corporate purposes.

The Company’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.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

If the Company 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 the Company. Management believes that cash flow from operating activities coupled with existing cash balances will be adequate to fund the Company’s operating and capital needs as well as enable it to maintain compliance with its various debt agreements through December 31, 2004. To the extent that results or events differ from the Company’s financial projections or business plans, its liquidity may be adversely impacted.

Note 3: Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company, as well as its wholly-owned and majority-owned subsidiaries. Investments in companies that represent less than 20% of the related voting stock are accounted for on the cost basis. All material intercompany accounts and transactions have been eliminated.

In the second quarter of 2003, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, (“FIN No. 46”). FIN No. 46 requires that certain variable interest entities (“VIE’s”) be consolidated by the primary beneficiary, as that term is defined in FIN No. 46. The Company determined that its investment in Leshan-Phoenix Semiconductor Company Limited (“Leshan”) meets the definition of a VIE and that the Company is the primary beneficiary; therefore, the investment in Leshan should be consolidated under FIN No. 46. The Company had previously accounted for its investment in Leshan using the equity method. While consolidation of the Company’s investment in Leshan did not impact the previously reported net income (loss) or stockholders’ equity (deficit), financial information of prior periods has been revised for comparative purposes as allowed by FIN No. 46.

Reclassifications

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

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, warranties, 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.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 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. A vast majority of the machinery and equipment currently in use is depreciated on a straight-line basis over a useful life of 5 years. 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 carrying amount of an asset may not be fully 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 over the estimated fair value of the net assets acquired in the Company’s April 2000 acquisition of Cherry Semiconductor Corporation (Cherry). The Cherry goodwill was being amortized on a straight-line 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 another intangible asset in the Cherry acquisition that were being amortized on a straight-line basis over their estimated useful lives. In the second quarter of 2003, that intangible asset was determined to be impaired and was written-off. See Note 5 “Restructuring, Asset Impairments and Other, net”.

Under SFAS No. 142, goodwill is evaluated for potential impairment on an annual basis or whenever events or circumstances indicate that an impairment may have occurred. SFAS No. 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

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 as of the first day of the fourth quarter of each year.

Debt Issuance Costs

Debt issuance costs are capitalized and amortized over the term of the underlying agreements using the effective interest method. Upon prepayment of debt, the related unamortized debt issuance costs are charged to expense. Amortization of debt issuance costs is included in interest expense while the unamortized balance is included in other assets. Capitalized debt issuance costs totaled $34.7 million and $33.7 million at December 31, 2003 and 2002, respectively.

Revenue Recognition

The Company generates revenue from sales of its semiconductor products to original equipment manufacturers, electronic manufacturing service providers, and distributors. 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 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 for 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.

Stock-Based Compensation

The Company accounts for employee stock options relating to its common stock in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations (“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.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Had the Company determined employee stock compensation expense in accordance with SFAS No. 123, the Company’s net loss for 2003, 2002, and 2001 would have been increased to the pro forma amounts indicated below (in millions except share data):


	Year ended December 31,
	2003			2002			2001
Net loss, as reported	$	(166.7	)	$	(141.9	)	$	(831.4	)
Add: Stock-based employee compensation expense included in report net loss, net of related tax effects		0.1			4.5			3.7
Less: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(15.1	)		(14.5	)		(11.4	)

Pro-forma net loss		(181.7	)		(151.9	)		(839.1	)
Less: Accretion to redemption value of convertible redeemable preferred stock		(0.5	)		—			—
Less: Accretion of beneficial conversion feature relating to convertible redeemable preferred stock		—			—			(13.1	)
Less: Convertible redeemable preferred stock dividends		(9.2	)		(8.5	)		(2.4	)

Pro-forma net loss applicable to common stock	$	(191.4	)	$	(160.4	)	$	(854.6	)

Loss per share:
Basic — as reported	$	(0.94	)	$	(0.86	)	$	(4.88	)
Basic — pro-forma	$	(1.02	)	$	(0.91	)	$	(4.92	)
Diluted — as reported	$	(0.94	)	$	(0.86	)	$	(4.88	)
Diluted — pro-forma	$	(1.02	)	$	(0.91	)	$	(4.92	)

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 On Semiconductor 2000 Employee Stock Purchase Plan has been estimated at the beginning of the respective offering periods, both using the Black-Scholes option-pricing model with the following weighted-average assumptions:


Employee Stock Options	2003		2002		2001
Expected life (in years)	5		5		5
Risk-free interest rate	3.07	%	4.15	%	4.82	%
Volatility	0.78		0.70		0.70

Employee Stock Purchase Plan	2003		2002		2001
Expected life (in years)	0.25		0.25		0.25
Risk-free interest rate	1.07	%	1.71	%	4.26	%
Volatility	0.83		0.70		0.70

The weighted-average estimated fair value of employee stock options granted during 2003, 2002 and 2001 was $1.50, $1.91 and $3.25 per share, respectively. The weighted-average estimated fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan during 2003, 2002 and 2001 was $0.62, $0.60 and $1.24, respectively.

Income Taxes

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 the related benefits will likely not be realized.

Foreign Currencies

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 stockholder’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 increases for plan employees. All of these assumptions are based upon management’s judgment, considering all known trends and uncertainties. As described in Note 4, “Accounting Changes,” the Company changed its method of accounting for net unrecognized actuarial gains or losses relating to its defined benefit pension obligations effective January 1, 2003.

Convertible Redeemable Preferred Stock

The Company accounts for the difference between the carrying amount of its convertible redeemable preferred stock and the redemption value by increasing the carrying amount for periodic accretion so that the carrying amount equals the redemption value at the earliest available redemption date. The periodic accretion amount changes as the Company’s stock price changes and as additional dividends accrue. Based on the average closing price of the Company’s common stock over the last 30 trading days preceding December 31, 2003 of $6.19 the accretion charge for the fourth quarter of 2003 was $0.5 million.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Contingencies

The Company is involved in a variety of legal matters that arise in the normal course of business. Based on information available, management evaluates the relevant range and likelihood of potential outcomes. In accordance with SFAS No. 5, “Accounting for Contingencies”, management records the appropriate liability when the amount is deemed probable and estimable.

Recent Accounting Pronouncements

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No 149 amends and clarifies the accounting guidance on derivative instruments (including certain derivative instruments embedded in other contracts) and hedging activities that fall within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not impact the Company’s 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 and carried at liquidation value. 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. Equity securities of consolidated entities that meet the definition of a mandatorily redeemable security by virtue of having a finite life (“mandatorily redeemable minority interests”) are included in the scope of SFAS No. 150. The minority interest associated with the Company’s investment in Leshan is a mandatorily redeemable minority interest within the scope of SFAS No. 150 by virtue of Leshan’s finite life of 50 years as specified in its organizational documents. In November 2003, the FASB issued Staff Position No. 150-3 which deferred the measurement and classification provisions of SFAS No. 150 relating to Leshan pending further action by the FASB. The Company is required to disclose the liquidation value of the Leshan minority interest which the Company believes approximates the related carrying value of $26.0 million at December 31, 2003. The Company’s adoption of the other provisions of SFAS No. 150 in 2003 did not impact its financial condition or results of operations.

In December 2003, the FASB issued SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003),” SFAS No. 132 revises employers’ disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132 which also requires new disclosures for Interim periods beginning after December 15, 2003, is effective for fiscal years ending after December 15, 2003. The Company adopted this Statement for the year ended December 31, 2003 and has included the required disclosures in Note 13 “Employee Benefit Plans”.

Note 4: Accounting Changes

Defined Benefit Plans

The Company changed its method of accounting for net unrecognized actuarial gains or losses relating to its defined benefit pension obligations. Historically, the Company amortized such 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. Effective January 1, 2003, the Company no longer defers actuarial gains or losses but recognizes such gains and losses during the

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 was a charge of $21.5 million or $0.11 per share, 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 year ended December 31, 2003. The effect of the change in 2003 was to decrease the loss before cumulative effect of accounting change by $5.5 million or $0.03 per share, both before and after income taxes, and to increase the net loss by $16.0 million or $0.09 per share, 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.

The estimated pro forma effects of the accounting change on the Company’s results of operations for the years ended December 31, 2002 and 2001 were as follows (in millions, except share data):


	Year Ended December 31,
	2002			2001
As reported:
Net loss before cumulative effect of accounting change	$	(141.9	)	$	(715.0	)
Net loss	$	(141.9	)	$	(831.4	)
Basic net loss before cumulative effect of accounting change per share	$	(0.86	)	$	(4.21	)
Basic net loss per share	$	(0.86	)	$	(4.88	)
Diluted net loss before cumulative effect of accounting change per share	$	(0.86	)	$	(4.21	)
Diluted net loss per share	$	(0.86	)	$	(4.88	)

Pro forma amounts reflecting the accounting change applied retroactively:
Net loss before cumulative effect of accounting change	$	(146.3	)	$	(725.2	)
Net loss	$	(146.3	)	$	(841.6	)
Basic net loss per share before cumulative effect of accounting change	$	(0.88	)	$	(4.27	)
Basic net loss per share	$	(0.88	)	$	(4.94	)
Diluted net loss per share before cumulative effect of accounting change	$	(0.88	)	$	(4.27	)
Diluted net loss per share	$	(0.88	)	$	(4.94	)

Goodwill and Other Intangible Assets

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 prohibits the amortization of goodwill and indefinite-lived intangible assets and requires that such assets be tested for impairment on an annual basis or whenever events or circumstances indicate that the related carrying value may be impaired, requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill and removes 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 related to the acquisition of Cherry in April 2000. As a result of the adoption of SFAS No. 142, the Company discontinued amortization of the Cherry goodwill at the beginning of 2002. The Company has no other indefinite-lived intangible assets.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The following table, with comparable actual amounts for the year ended December 31, 2001, sets forth the pro forma effects on net loss and loss per share assuming that the Company had adopted the provisions of SFAS No. 142 as of January 1, 2001:


	As reported 2001			Pro forma 2001
Reported net loss before cumulative effect of accounting change	$	(715.0	)	$	(715.0	)

Add back: Goodwill amortization, net of tax					10.7

Pro forma net loss before cumulative effect of accounting change				$	(704.3	)

Reported net loss	$	(831.4	)	$	(831.4	)

Add back: Goodwill amortization, net of tax					10.7

Pro forma net loss				$	(820.7	)

Reported basic loss per share before cumulative effect of accounting change	$	(4.21	)	$	(4.21	)

Add back: Goodwill amortization, net of tax					0.06

Pro forma basic loss per share before cumulative effect of accounting change				$	(4.15	)

Reported basic loss per share	$	(4.88	)	$	(4.88	)

Add back: Goodwill amortization, net of tax					0.06

Pro forma basic loss per share				$	(4.82	)

Reported diluted loss per share before cumulative effect of accounting change	$	(4.21	)	$	(4.21	)

Add back: Goodwill amortization, net of tax					0.06

Pro forma diluted loss per share before cumulative effect of accounting change				$	(4.15	)

Reported diluted loss per share	$	(4.88	)	$	(4.88	)

Add back: Goodwill amortization, net of tax					0.06

Pro forma diluted loss per share				$	(4.82	)

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 distributors on 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.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The impact of the accounting change for periods prior to 2001 was a charge of $155.2 million ($116.4 million or $0.67 per share net of income taxes) and is reflected as the cumulative effect of change in accounting principle in the Company’s consolidated statement of operations for the year ended December 31, 2001. The accounting change resulted in an increase in revenues of $116.6 million and a reduction in net loss of $53.1 million ($0.30 per share) for the year ended December 31, 2001.

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 the adoption, the Company recorded a charge of approximately $5.7 million to accumulated other comprehensive income (loss). This charge consisted of an approximate $2.2 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.

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.

Variable Interest Entities

In the second quarter of 2003, the Company adopted FASB Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. FIN No. 46 requires that certain variable interest entities (“VIE’s”) be consolidated by the primary beneficiary, as that term is defined in FIN No. 46. The Company determined that its investment in Leshan-Phoenix Semiconductor Company Limited (“Leshan”) meets the definition of a VIE and that it is the primary beneficiary of this VIE; therefore, its investment in Leshan should be consolidated under FIN No. 46. The Company had previously accounted for our investment in Leshan using the equity method. While consolidation of the its investment in Leshan did not impact the Company’s previously reported net income (loss) or stockholders’ equity (deficit), financial information of prior periods has been revised for comparative purposes as allowed by FIN No. 46.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 5: Restructuring, Asset Impairments and Other, net

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


	Reserve Balance at December 31, 2002		2003 Charges		2003 Usage			2003 Adjustments			Reserve Balance at December 31, 2003
*December 2003*
Cash employee separation charges	$	—	$	5.2		—			—		$	5.2
Cash exit costs		—		0.4		—			—			0.4
Non-cash impairment of property, plant and equipment		—		20.2		(20.2	)		—			—
Write-down of long-term receivable and investment		—		4.3		(4.3	)		—			—

		—										5.6

*September 2003*
Cash employee separation charges		—		1.4		(0.9	)		—			0.5

*June 2003*
Cash employee separation charges		—		0.4		(0.4	)		—			—
Cash exit costs		—		1.4		(1.4	)		—			—
Non-cash impairment of property, plant and equipment		—		10.5		(10.5	)		—			—
Non-cash impairment of intangible asset		—		20.8		(20.8	)		—			—
Write-down of investment		—		0.5		(0.5	)		—			—

		—										—

*December 2002*
Cash employee separation charges		9.9		—		(6.7	)		(0.1	)		3.1
Cash exit costs		1.8		—		(1.1	)		—			0.7

		11.7										3.8

*June 2002*
Cash employee separation charges		0.4		—		(0.4	)		—			—
Cash exit costs		1.5		—		—			1.0			2.5

		1.9										2.5

*March 2002*
Cash employee separation charges		3.0		—		(2.8	)		0.1			0.3

*December 2001*
Cash employee separation charges		0.1		—		—			(0.1	)		—

*June 2001*
Cash exit costs		2.8		—		(2.2	)		(0.2	)		0.4

	$	19.5	$	65.1	$	(72.2	)	$	0.7		$	13.1

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


	Reserve Balance at December 31, 2001		2002 Charges		2002 Usage			2002 Adjustments			Reserve Balance at December 31, 2002
*December 2002*
Cash employee separations charges				10.1		(0.2	)		—			9.9
Cash exit costs				1.8		—			—			1.8
Non-cash impairment of property, plant and equipment				1.0		(1.0	)		—			—

		—										11.7

*June 2002*
Cash employee separations charges		—		2.9		(2.5	)		—			0.4
Cash exit costs		—		2.8		(1.3	)		—			1.5
Non-cash impairment of property, plant and equipment		—		8.4		(8.4	)		—			—
Non-cash stock compensation charges		—		1.0		(1.0	)		—			—

		—										1.9

*March 2002*
Cash employee separations charges		—		7.0		(4.3	)		0.3			3.0
Non-cash stock compensation charges		—		0.2		(0.2	)		—			—

		—										3.0

*December 2001*
Cash employee separations charges		2.2		—		(2.1	)		—			0.1

*June 2001*
Cash employee separations charges		6.8		—		(5.7	)		(1.1	)		—
Cash exit costs		10.0		—		(8.1	)		0.9			2.8

		16.8										2.8

*March 2001*
Cash employee separations charges		0.8		—		(0.7	)		(0.1	)		—

	$	19.8	$	35.2	$	(35.5	)	$	—		$	19.5

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


	Reserve Balance at December 31, 2000		2001 Charges		2001 Usage			Reserves released to income		Reserve Balance at December 31, 2001
	$	0.7	$	—	$	(0.7	)	$	—	$	—
*December 2001*
Cash employee separations charges		—		4.0		(1.8	)		—		2.2
Non-cash impairment of property, plant and equipment		—		11.1		(11.1	)		—		—
Non-cash stock compensation and pension charges		—		1.5		(1.5	)		—		—

		—									2.2

*June 2001*
Cash employee separations charges		—		36.4		(29.6	)		—		6.8
Cash exit costs		—		10.0		—			—		10.0
Non-cash impairment of property, plant and equipment		—		42.2		(42.2	)		—		—
Non-cash stock compensation and pension charges		—		7.2		(7.2	)		—		—

		—									16.8

*March 2001*
Cash employee separations charges		—		31.3		(30.5	)		—		0.8
Non-cash impairment of property, plant and equipment		—		2.9		(2.9	)		—		—

		—									0.8

	$	0.7	$	146.6	$	(127.5	)	$	—	$	19.8

As of December 31, 2003, the reserve balance of $13.1 million was comprised of employee severance charges of $9.1 million and exit costs of $4.0 million. A reconciliation of the activity in the tables above to the “Restructuring, asset impairments and other, net” caption on the statement of operations for the years ended December 31, 2003, 2002 and 2001, is as follows (in millions):


	2003
2003 Charges	$	65.1
Less: adjustments to prior year charges		0.7
Less: Gain on sale of Guadalajara facility*		(4.6	)

	$	61.2


	2002
2002 Charges	$	35.2
Plus: Charges related to Guadalajara (June 2001) and France (March 2002)		1.9
Less: Reserves released during the period		(1.9	)
Plus: Charges related to the termination of executive officers (December 2002)*		4.9
Less: Motorola settlement gain*		(12.4	)

	$	27.7


	2001
2001 Charges	$	146.6
Plus: Charges related to the termination of an executive officer (March 2001)*		3.8

	$	150.4

*	Not included in above tables

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

December 2003

In December 2003, the Company recorded $30.1 million in restructuring, asset impairment and other, net charges. These charges included $5.2 million to cover employee separation costs, $0.4 million of lease and contract costs and $20.2 million of asset impairments associated with the Company’s restructuring programs, and $4.3 million of other charges associated with the write-down of certain other assets. The Company also recorded a $0.2 million reversal of amounts previously recorded in connection with the Company’s June 2001 and December 2002 restructuring programs described below.

The employee separation costs of $5.2 million reflect the phase-out of manufacturing operations at the Company’s East Greenwich, Rhode Island facility, the shutdown of the Company’s back-end manufacturing lines in Roznov, Czech Republic, and further reductions in general and administrative staffing levels in the United States and Western Europe. The employee separation charges for East Greenwich totaled $3.8 million for approximately 325 employees. The Czech Republic employee separation charge of $0.5 million represents a portion of the total severance charges for approximately 460 employees. Additional severance cost of approximately $1.6 million related to the Czech Republic will be recognized ratably over 2004. The remaining $0.9 million charge relates to severance benefits for approximately 10 employees in general and administrative functions in the United States and Europe. All terminations and associated severance payments related to this charge are expected to be completed by the second quarter of 2005.

The lease and contract termination costs of $0.4 million reflect costs incurred in connection with the consolidation of sales, distribution and administrative facilities in North America.

The $20.2 million of asset impairments include $15.3 million associated with the East Greenwich, Rhode Island facility and $4.9 million associated the closure of the back-end manufacturing lines in Roznov, Czech Republic. The planned discontinuation of manufacturing activities triggered an impairment analysis of the carrying value of the related assets and resulted in the Company recording asset impairment charges of $15.3 million associated with the East Greenwich, Rhode Island facility and $4.9 million associated with the back-end manufacturing lines in Roznov, Czech Republic. The Company measured the amount of each asset impairment by comparing the carrying values of the respective assets to their related estimated fair values. The Company estimated future net cash flows for the period of continuing manufacturing activities (December 2004 for East Greenwich and Roznov) for each group of assets using price, volume, cost and salvage value assumptions that management considered 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 $4.3 million of other charges consist of a $2.3 million write-off of a long-term note receivable and a $2.0 million write-down of a cost basis investment. The note receivable was created in connection with the sale of certain equipment in 2001 and was fully reserved during the fourth quarter of 2003 when the counterparty defaulted on the obligation. The Company continues to attempt to collect this note. The cost basis investment relates to a semiconductor start-up company that was written down in the fourth quarter of 2003 based on the Company’s operating performance and liquidity concerns.

September 2003

In September 2003, the Company recorded a $4.6 million gain in connection with the sale of its Guadalajara, Mexico facility. This gain was partially offset by charges totaling $1.4 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

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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.

All impacted employees have been terminated, and the Company currently expects to pay out the remaining employee severance costs by September 2004.

June 2003

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. All impacted employees have been terminated, and the Company has made all severance payments.

The lease and contract termination exit costs relate to the exit of certain sales and administrative offices and the termination of other purchase and supply agreements. All associated exit costs have been paid.

The $10.5 million of asset impairments include $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.

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 Cherry acquisition 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 intangible asset 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 intangible asset 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 $12.0 million per year related to this intangible asset.

December 2002

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

included an additional $0.3 million reserve related to a 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 our March 2001 and June 2001 restructuring programs due the Company’s analysis of estimated costs to complete those programs. As pf December 31, 2003, there were 56 employees remaining to be terminated during 2004 and the related unpaid severance payments of $3.1 million are expected to be paid by June 2004. As of December 31, 2003 the remaining liability relating to exit costs was $0.7 million and is expected to be paid out by June 2005.

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

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 exits 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. All impacted employees have been terminated and the related severance costs were paid during 2003.

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 recorded estimated termination charges of $2.8 million during the second quarter of 2002. As of December 31, 2003, the Company had settled certain of these obligations with payments of $1.3 million. In June 2003, the Company recorded an additional $1.0 million associated with a supply contract that was terminated as part of the June 2002 restructuring program. As of December 31, 2003, all employees had been terminated under the restructuring program. The Company is currently in discussions to settle the 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.

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 (see Note 17 “Related Party Transactions” for further details of the Motorola settlement). The Company also recorded a $1.2 million reversal of amounts previously provided in connection with the June 2001 restructuring program as a result of favorable negotiated contract termination costs.

100

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

March 2002

In March 2002, the Company recorded a $7.1 million (net of a $0.1 million adjustment) 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 was completed in 2003. The remaining $2.2 million relates to reductions in selling, general and administrative personnel 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. As discussed previously, 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 and $0.1 million during 2003 as a result of its reevaluation of remaining costs to be incurred. As of December 31, 2003, all employees have been terminated under this program. As of December 31, 2003 the remaining liability relating to this restructuring was $0.3 million and will be paid by June 2004.

December 2001

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 termination 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 related to the terminated employees. (The additional pension charge is reflected in the Company’s accrued pension liability in the consolidated balance sheet.) All impacted employees have been terminated and the related severance amounts have been paid.

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

June 2001

In June 2001, the Company recorded charges totaling $95.8 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 December 2001, respectively, and the shutdown of the Company’s Hong Kong Distribution Center and the transfer of related functions to its Singapore Distribution Center. The charge included $36.4 million to cover employee separation costs associated with the termination of approximately 3,200 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 terminated employees. (The additional pension charge is reflected in the Company’s accrued pension liability in the consolidated balance sheet). All employees have been terminated under the June 2001 restructuring program. Manufacturing operations in Guadalajara ceased in June 2002 as originally planned; however, various administrative activities were not completed until 2003.

101

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The planned discontinuation of manufacturing activities triggered an impairment analysis of 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 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. As previously mentioned, the Company sold the Mexico facility in the third quarter of 2003. 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 the June 2001 restructuring program.

The June 2001 charge also included $10.0 million to cover certain exit costs relating to facility closure and contract terminations including $2.8 million 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 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. As of December 31, 2003 the remaining liability relating to this restructuring program was $0.4 million of miscellaneous exit costs which are expected to be paid by April 2004.

March 2001

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 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 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.

102

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 6: Balance Sheet Information

Balance sheet information is as follows (in millions):


	December 31,
	2003			2002
Receivables, net:
Accounts receivable	$	138.5		$	117.3
Less: Allowance for doubtful accounts		(2.4	)		(1.9	)

	$	136.1		$	115.4

Inventories, net:
Raw materials	$	15.2		$	15.5
Work in process		111.7			109.8
Finished goods		87.1			81.9

Total inventory		214.0			207.2
Less: Inventory reserves		(42.4	)		(43.7	)

	$	171.6		$	163.5

Property, plant and equipment, net:
Land	$	16.1		$	15.0
Buildings		350.5			357.4
Machinery and equipment		1,022.2			1,055.0

Total property, plant and equipment		1,388.8			1,427.4
Less: Accumulated depreciation		(889.7	)		(842.1	)

	$	499.1		$	585.3

Goodwill, net:
Goodwill	$	95.7		$	95.7
Less: Accumulated amortization		(18.4	)		(18.4	)

	$	77.3		$	77.3

Intangible asset, net:
Developed technology	$	—		$	59.3
Less: Accumulated amortization		—			(32.6	)

	$	—		$	26.7

Accrued expenses:
Accrued payroll	$	29.6		$	27.9
Sales related reserves		17.1			14.2
Restructuring reserves		13.1			19.5
Other		30.1			39.0

	$	89.9		$	100.6

Other comprehensive loss:
Foreign currency translation adjustments	$	1.7		$	(2.0	)
Additional minimum pension liability		—			(19.6	)
Net unrealized losses and adjustments related to cash flow hedges		(5.3	)		(12.1	)
Unrealized losses on deferred compensation plan investments		(0.8	)		(0.6	)

	$	(4.4	)	$	(34.3	)

103

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Depreciation expense for property, plant and equipment totaled $116.7 million, $129.0 million and $145.5 million for 2003, 2002 and 2001, respectively. Amortization expense related to the developed technology intangible asset totaled $5.9 million, $11.9 million and $11.6 million in 2003, 2002 and 2001, respectively.

The activity related to our warranty reserves for 2001, 2002 and 2003 follows:


Balance as of December 31, 2000	$	3.5
Provision		0.1
Usage		(0.6	)

Balance as of December 31, 2001		3.0

Provision		0.1
Usage		(0.4	)

Balance as of December 31, 2002		2.7

Provision		—
Usage		(0.2	)
Reserved released		(0.9	)

Balance as of December 31, 2003	$	1.6

104

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 7: Long-Term Debt

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


	December 31, 2003					December 31, 2002
	Interest Rate		Balance			Interest Rate		Balance
Senior Bank Facilities:
Tranche A	—	%	$	—		6.4375	%	$	6.6
Tranche B	—			—		6.4375			209.9
Tranche C	—			—		6.4375			226.0
Tranche D	—			—		6.4375			134.1
Tranche E	4.4375			320.1		—			—
Revolver	—			—		6.4375			125.0

				320.1					701.6

First-Lien Senior Secured Notes due 2010, 13% interest payable semi-annually, net of debt discount of $8.4				191.6					—

Second-Lien Senior Secured Notes due 2008, 13% interest effective February 2003 payable semi-annually, net of debt discount of $7.4 and $8.6				292.6					291.4

12% Senior Subordinated Notes due 2009, interest payable semi-annually				260.0					260.0

10% Junior Subordinated Note due 2011, interest compounded semi-annually, payable at maturity				139.9					126.9

2.3% Note payable to Japanese bank due 2010, interest payable semi-annually				24.3					23.3

Loan with a Chinese bank due 2006, interest payable quarterly at 3.1% and 3.5%, respectively				20.0					20.0

Loan with a Chinese bank, interest payable quarterly at 2.7%				48.0					—

Capital lease obligation				6.4					—

				1,302.9					1,423.2
Less: Current maturities				(11.4	)				(19.8	)

			$	1,291.5				$	1,403.4

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, 2003, after consideration of the amendments to the credit agreement described below, the senior bank facilities contained a $25.0 million revolving line of credit. Letters of credit totaling $12.6 million were outstanding against the line of credit at December 31, 2003 leaving $12.4 million of availability at that date. As described in Note 14, the Company hedges a portion of the interest rate risk associated with the senior bank facilities.

105

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 increase 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 (See Note 10), increase the required interest rate spreads applicable to outstanding borrowings (“supplemental interest”), and, revise certain mandatory prepayment provisions contained in the original agreement.

In connection with the issuance of the 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 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 Leshan so long as the related proceeds were used to prepay loans under the senior bank facilities.

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 in the credit agreement) 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.

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 in Note 11 “Common Stock”;

•

Permit the Company to apply the net proceeds from equity offerings by it or any of its subsidiaries (including the equity offering described in Note 11) 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 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.

106

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 for the year ended December 31, 2003. The remaining $3.4 million of debt refinancing costs were capitalized and are being amortized using the effective interest method.

In November 2003, the Company refinanced $368.5 million of term loans under its senior bank facilities. The Company replaced its tranche B, tranche C and tranche D term loan facilities under its senior bank facilities with a single new tranche E term loan facility with terms, other than the interest rate, that are identical to those of the tranche D term loan facility. The new tranche E is due throughout 2006 and 2007, ending in 2007. The Company also reduced the interest rate on its term loans by 0.75% per annum. Costs incurred in connection with this refinancing totaled $1.0 million, of which $0.2 million were expensed as incurred while the remaining $0.8 million of such costs were capitalized and are being amortized using the effective interest method

In December 2003, the Company refinanced approximately $48 million of the term loans under its senior bank facilities with the proceeds from a new loan provided to Leshan by the China Construction Bank, the terms of which are described below.

The Company was in compliance with the various covenants and other requirements contained in its senior bank facilities, as amended, through December 31, 2003. Management believes that the Company will be able to comply with the various covenants and other requirements contained in its senior bank facilities, as amended, through December 31, 2004.

First-Lien Notes

On March 3, 2003, the Company and SCI LLC, (collectively, 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 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. Interest accrues on the First-Lien Notes at a rate of 12% per annum. Interest on the First-Lien Notes is payable semi-annually in March and September. The First-Lien Notes will mature on March 15, 2010.

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.

The Issuers filed an exchange offer registration statement on May 1, 2003 relating to the First-Lien Notes pursuant to a registration rights agreement. The registration statement was declared effective by the Securities and Exchange Commission on May 8, 2003.

Second-Lien Notes

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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. In connection with this prepayment, the Company wrote off $6.5 million of debt issuance costs in the second quarter of 2002. Because the amount outstanding under the senior bank facilities was reduced below $750.0 million, supplemental interest charges under the credit agreement relating to the senior bank facilities were reduced from 3.0% to 1.0%. The Company exercised its option to terminate the supplemental interest charges by paying the entire accrued balance of supplemental interest charges during the first quarter of 2003. Interest accrues on the Second-Lien Notes at the rate of 12% per annum until February 6, 2003, when the related annual interest increased to 13%. Interest on the Second-Lien Notes is payable semi-annually in May and November in cash. The Second-Lien Notes will mature on May 15, 2008.

The Second-Lien Notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by the Company’s domestic restricted subsidiaries. In addition, the Second-Lien Notes and the related guarantees are secured on a second-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.

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.

Senior Subordinated Notes

In connection with the Recapitalization described in Note 1, the Company issued $400.0 million principal amount of 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, the Company completed its initial public offering (IPO) of its common stock and used a portion of the proceeds to redeem $140.0 million of the 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 had a balance of $24.3 million at December 31, 2003 (based on the yen-to-dollar exchange rate in effect at that date), bears interest at an annual rate of 2.25% and 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, 2003.) 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.

Chinese Loans

The Company’s long-term debt includes a $20 million loan facility between Leshan and a Chinese Bank. Aggregate loans under this facility, which was entered into in November 2000, are comprised of $16 million of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

borrowings denominated in U.S. dollars and $4 million of borrowings denominated in Chinese Renminbi (based on year-end exchange rates). Interest on these loans is payable quarterly and accrues at a variable rate based on published market rates in China for six-year term loans. During the fourth quarter of 2003, the Company exercised its ability to extend the maturity of this loan for three years under the same terms and conditions, thereby extending scheduled principal payments to $10.5 million due in the fourth quarter of 2006 and $9.5 million due in the first quarter of 2007.

The Company’s long-term debt also includes a $48 million loan facility between Leshan and another Chinese Bank. The loan facility is comprised of two $24 million tranches. The first tranche has a 10-year term with a balloon payment due December 2013; the second tranche has a three year term with scheduled principal payments through December 2006 extendible for an additional three years under certain circumstances. Each tranche bears interest at a rate of LIBOR plus 1.5% per annum, payable quarterly.

Annual maturities relating to the Company’s long-term debt as of December 31, 2003 are as follows (in millions):


	Actual Maturities
2004	$	11.4
2005		11.0
2006		152.1
2007		226.2
2008		297.5
Thereafter		604.7

Total	$	1,302.9

The Company and SCI LLC are co-issuers of the First-Lien Notes (issued in March 2003), the Second-Lien Notes, and the Senior Subordinated Notes (collectively, “the Notes”.) The Company’s other domestic subsidiaries (collectively, the “Guarantor Subsidiaries”) fully and unconditionally guarantee on a joint and several basis, the Issuers’ obligations under the Notes. The Guarantor Subsidiaries include Semiconductor Components Industries of Rhode Island, Inc, an operating subsidiary, as well as holding companies whose net assets consist primarily of an investment in the Leshan joint venture and nominal equity interests in certain of the Company’s other foreign subsidiaries. The Company’s remaining subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) are not guarantors of the Notes. Prior to the fourth quarter of 2003, the Guarantor Subsidiaries also owned an investment in the Company’s Czech subsidiaries which was subsequently sold to a Non-Guarantor Subsidiary. Because this transaction was a transfer between entities under common control, the Company has accounted for this transaction in a manner similar to a pooling of interests and has restated all historical Guarantor and Non-Guarantor Subsidiary financial information to reflect the current ownership structure.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The Company does not believe that the separate financial statements and other disclosures concerning the Guarantor Subsidiaries provide any additional information that would be material to investors in making an investment decision. Condensed consolidating financial information for the Issuers, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries is as follows (in millions):


	Issuers
	ON Semi- conductor Corporation (3)			SCI LLC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Eliminations			Total
As of December 31, 2003
Cash and cash equivalents	$	—		$	118.9		$	—		$	67.7	$	—		$	186.6
Receivables, net		—			31.5			—			104.6		—			136.1
Inventories, net		—			21.1			2.2			184.3		(36.0	)		171.6
Other current assets		—			3.8			0.1			24.5		—			28.4

Total current assets		—			175.3			2.3			381.1		(36.0	)		522.7

Deferred income tax, non current		—			—			—			1.3		—			1.3
Property, plant and equipment, net		—			94.3			15.9			388.9		—			499.1
Goodwill		—			8.1			69.2			—		—			77.3
Investments and other assets		(732.8	)		91.7			40.5			39.2		622.4			61.0

Total assets	$	(732.8	)	$	369.4		$	127.9		$	810.5	$	586.4		$	1,161.4

Accounts payable	$	—		$	29.8		$	1.8		$	84.1	$	—		$	115.7
Accrued expenses and other current liabilities		—			86.2			5.2			37.2		(0.3	)		128.3
Deferred income on sales to distributors		—			19.2			—			47.0		—			66.2

Total current liabilities		—			135.2			7.0			168.3		(0.3	)		310.2

Long-term debt (1)		743.2			1,207.1			—			84.4		(743.2	)		1,291.5
Other long-term liabilities		—			41.1			—			15.1		2.0			58.2
Intercompany (1)		(951.1	)		(448.9	)		143.2			308.1		948.7			—

Total liabilities		(207.9	)		934.5			150.2			575.9		207.2			1,659.9
Minority interests in consolidated subsidiaries		—			—			—			—		26.4			26.4
Redeemable preferred stock		119.7			—			—			—		—			119.7
Stockholders’ equity (deficit)		(644.6	)		(565.1	)		(22.3	)		234.6		352.8			(644.6	)

Liabilities, minority interests and stockholders’ equity (deficit)	$	(732.8	)	$	369.4		$	127.9		$	810.5	$	586.4		$	1,161.4

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


	Issuers
	ON Semi- conductor Corporation (3)			SCI LLC			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Total
As of December 31, 2002
Cash and cash equivalents	$	—		$	121.5		$	—	$	68.9	$	—		$	190.4
Receivables, net		—			38.2			—		77.2		—			115.4
Inventories, net		—			25.4			0.5		180.3		(42.7	)		163.5
Other current assets		—			7.1			0.1		38.6		—			45.8

Total current assets		—			192.2			0.6		365.0		(42.7	)		515.1

Property, plant and equipment, net		—			104.4			33.5		447.4		—			585.3
Goodwill and other intangibles, net		—			8.1			95.9		—		—			104.0
Investments and other assets		(596.3	)		83.1			35.7		16.1		515.4			54.0

Total assets	$	(596.3	)	$	387.8		$	165.7	$	828.5	$	472.7		$	1,258.4

Accounts payable	$	—		$	25.3		$	1.7	$	47.1	$	—		$	74.1
Accrued expenses and other current liabilities		—			113.0			1.6		51.4		(0.1	)		165.9
Deferred income on sales to distributors		—			32.3			—		38.5		—			70.8

Total current liabilities		—			170.6			3.3		137.0		(0.1	)		310.8

Long-term debt (1)		551.4			1,372.2			—		31.2		(551.4	)		1,403.4
Other long-term liabilities		—			50.3			—		16.8		2.1			69.2
Intercompany (1)		(595.7	)		(617.6	)		158.9		465.0		589.4			—

Total liabilities		(44.3	)		975.5			162.2		650.0		40.0			1,783.4
Minority interests in consolidated subsidiaries		—			—			—		—		27.0			27.0
Redeemable preferred stock		110.1			—			—		—		—			110.1
Stockholders’ equity (deficit)		(662.1	)		(587.7	)		3.5		178.5		405.7			(662.1	)

Liabilities, minority interests and stockholders’ equity (deficit)	$	(596.3	)	$	387.8		$	165.7	$	828.5	$	472.7		$	1,258.4

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


	Issuers
	ON Semi- conductor Corporation (3)			SCI LLC			Guarantor Subsidiaries				Non- Guarantor Subsidiaries			Eliminations			Total
For the year ended December 31, 2003
Revenues	$	—		$	480.2		$	92.9			$	1,407.7		$	(911.7	)	$	1,069.1
Cost of sales		—			455.5			44.4				1,186.7			(918.5	)		768.1

Gross profit		—			24.7			48.5				221.0			6.8			301.0

Research and development		—			25.1			13.6				46.8			—			85.5
Selling and marketing		—			34.9			0.5				27.6			—			63.0
General and administrative		—			14.9			0.2				49.8			—			64.9
Amortization of goodwill and other intangibles		—			—			5.9				—			—			5.9
Restructuring, asset impairments and other, net		—			11.3			39.9				10.0			—			61.2

Total operating expenses		—			86.2			60.1				134.2			—			280.5
										��
Operating income (loss)		—			(61.5	)		(11.6	)			86.8			6.8			20.5
Interest expense, net		—			(100.3	)		(19.0	)			(29.8	)		—			(149.1	)
Loss on debt prepayment		—			(7.7	)		—				—			—			(7.7	)
Equity in earnings		(166.7	)		24.8			4.8				(1.0	)		138.1			—

Income (loss) before income taxes, minority interests and cumulative effect of accounting change		(166.7	)		(144.7	)		(25.8	)			56.0			144.9			(136.3	)
Income tax provision		—			(6.5	)		—				(1.2	)		—			(7.7	)
Minority interests		—			—			—				—			(1.2	)		(1.2	)

Income (loss) before cumulative effect of accounting change		(166.7	)		(151.2	)		(25.8	)			54.8			143.7			(145.2	)
Cumulative effect of accounting change		—			(20.0	)		—				(1.5	)		—			(21.5	)

Net income (loss)	$	(166.7	)	$	(171.2	)	$	(25.8	)		$	53.3		$	143.7		$	(166.7	)

Net cash provided by (used in) operating activities	$	—		$	(69.0	)	$	6.6			$	108.1		$	—		$	45.7

Cash flows from Investing activities:
Purchases of property, plant and equipment		—			(21.6	)		(6.6	)			(31.6	)		—			(59.8	)
Deposits for purchases of property, plant and equipment		—			(6.8	)		—				—			—			(6.8	)
Other		—			(1.8	)		—				—			—			(1.8	)
Proceeds from sales of property, plant and equipment		—			—			—				13.2			—			13.2

Net cash used in investing activities		—			(30.2	)		(6.6	)			(18.4	)		—			(55.2	)

Cash flows from financing activities:
Intercompany loans		—			(301.8	)		—				301.8			—			—
Intercompany loan repayments		—			442.0			—				(442.0	)		—			—
Proceeds from debt issuance, net of discount		—			290.4			—				48.0			—			338.4
Payment of debt issuance costs		—			(15.3	)		—				—			—			(15.3	)
Repayment of long term debt		—			(482.7	)		—				—			—			(482.7	)
Proceeds from Issuance of common stock		—			157.2			—				—			—			157.2
Proceeds from Issuance of common stock under the employee stock purchase plan		—			1.2			—				—			—			1.2
Proceeds from stock option exercise		—			5.6			—				—			—			5.6

Net cash provided by (used in) financing activities		—			96.6			—				(92.2	)		—			4.4

Effect of exchange rate changes on cash and cash equivalents		—			—			—				1.3			—			1.3

Net increase in cash and cash equivalents		—			(2.6	)		—				(1.2	)		—			(3.8	)
Cash and cash equivalents, beginning of period		—			121.5			—				68.9			—			190.4

Cash and cash equivalents, end of period	$	—		$	118.9		$	—			$	67.7		$	—		$	186.6

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


	Issuers
	ON Semi- conductor Corporation (3)			SCI LLC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Total
For the year ended December 31, 2002
Revenues	$	—		$	534.5		$	72.0		$	1,326.4		$	(839.2	)	$	1,093.7
Cost of sales		—			470.9			55.1			1,099.8			(830.2	)		795.6

Gross profit		—			63.6			16.9			226.6			(9.0	)		298.1

Research and development		—			36.0			13.6			31.9			—			81.5
Selling and marketing		—			32.1			1.6			27.5			—			61.2
General and administrative		—			47.2			(0.6	)		42.2			—			88.8
Amortization of goodwill and other intangibles		—			—			11.9			—			—			11.9
Restructuring, asset impairments and other, net		—			25.7			(1.1	)		3.1			—			27.7

Total operating expenses		—			141.0			25.4			104.7			—			271.1

Operating income (loss)		—			(77.4	)		(8.5	)		121.9			(9.0	)		27.0
Interest expense, net		—			(89.6	)		(18.9	)		(41.6	)		—			(150.1	)
Loss on debt prepayment and other (2)		—			(46.9	)		—			40.4			—			(6.5	)
Equity earnings		(141.9	)		72.1			4.5			4.8			60.5			—

Income (loss) before income taxes and minority interests		(141.9	)		(141.8	)		(22.9	)		125.5			51.5			(129.6	)
Income tax benefit (provision)		—			(4.6	)		—			(4.9	)		—			(9.5	)
Minority interests		—			—			—			—			(2.8	)		(2.8	)

Net income (loss)	$	(141.9	)	$	(146.4	)	$	(22.9	)	$	120.6		$	48.7		$	(141.9	)

Net cash provided by (used in) operating activities	$	—		$	(187.9	)	$	0.4		$	238.9		$	(5.0	)	$	46.4

Cash flows from investing activities:
Purchases of property, plant and equipment		—			(6.7	)		(0.5	)		(33.3	)		—			(40.5	)
Equity injections from Parent		—			(0.5	)		—			—			0.5			—
Proceeds from sales of property, plant and equipment		—			2.3			—			2.2			—			4.5

Net cash used in investing activities		—			(4.9	)		(0.5	)		(31.1	)		0.5			(36.0	)

Cash flows from financing activities:
Intercompany loans		—			(233.0	)		—			233.0			—			—
Intercompany loan repayments		—			429.4			—			(429.4	)		—			—
Proceeds from debt issuance, net of closing costs and discount		—			278.6			—			—			—			278.6
Payments on capital lease obligation		—			(1.1	)		—			—			—			(1.1	)
Dividends paid to affiliate		—			—			—			(5.0	)		5.0			—
Equity injections from Parent		—			—			—			0.5			(0.5	)		—
Repayment of long term debt		—			(287.1	)		—			—			—			(287.1	)
Proceeds from exercise of stock options and issuance of common stock under the employee stock purchase plan		—			2.6			—			—			—			2.6

Net cash provided by financing activities		—			189.4			—			(200.9	)		4.5			(7.0	)

Effect of exchange rate changes on cash and cash equivalents		—			—			—			1.0			—			1.0

Net increase (decrease) in cash and cash equivalents		—			(3.4	)		(0.1	)		7.9			—			4.4
Cash and cash equivalents, beginning of period		—			124.9			0.1			61.0			—			186.0

Cash and cash equivalents, end of period	$	—		$	121.5		$	—		$	68.9		$	—		$	190.4

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


	Issuers
	ON Semi- conductor Corporation (3)			SCI LLC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Total
For the year ended December 31, 2001
Revenues	$	—		$	639.6		$	97.5		$	1,459.4		$	(973.3	)	$	1,223.2
Cost of sales		—			641.7			71.3			1,282.9			(998.2	)		997.7

Gross profit		—			(2.1	)		26.2			176.5			24.9			225.5

Research and development		—			26.5			3.8			64.2			—			94.5
Selling and marketing		—			39.1			4.3			31.4			—			74.8
General and administrative		—			30.4			—			85.1			—			115.5
Amortization of goodwill and other intangibles		—			—			22.6			—			—			22.6
Restructuring, asset impairment and other, net		—			56.4			2.5			91.5			—			150.4

Total operating expenses		—			152.4			33.2			272.2			—			457.8

Operating income (loss)		—			(154.5	)		(7.0	)		(95.7	)		24.9			(232.3	)
Interest expense, net		—			(71.5	)		(18.9	)		(49.2	)		—			(139.6	)
Gain on the sale of investment in joint venture		—			—			3.1			—			—			3.1
Equity earnings		(831.4	)		(239.5	)		4.0			0.2			1,066.7			—

Income (loss) before income taxes and minority interests		(831.4	)		(465.5	)		(18.8	)		(144.7	)		1,091.6			(368.8	)
Income tax benefit (provision)		—			(325.5	)		(14.8	)		11.7			(17.2	)		(345.8	)
Minority interests		—			—			—			—			(0.4	)		(0.4	)
Cumulative effect of accounting change		—			(44.1	)		—			(72.3	)		—			(116.4	)

Net income (loss)	$	(831.4	)	$	(835.1	)	$	(33.6	)	$	(205.3	)	$	1,074.0		$	(831.4	)

Net cash provided by (used in) operating activities	$	—		$	(38.2	)	$	2.3		$	(80.5	)	$	—		$	(116.4	)

Cash flows from investing activities:
Purchases of property, plant and equipment		—			(50.4	)		(1.1	)		(97.5	)		—			(149.0	)
Other		—			(0.5	)		—			(0.1	)		—			(0.6	)
Proceeds from sale of investment in joint venture		—			20.4			—			—			—			20.4
Proceeds from sales of property, plant and equipment		—			4.8			—			9.0			—			13.8

Net cash used in investing activities		—			(25.7	)		(1.1	)		(88.6	)		—			(115.4	)

Cash flows from financing activities:
Intercompany loans		—			(218.5	)		—			218.5			—			—
Intercompany loan repayments		—			145.7			—			(145.7	)		—			—
Proceeds from senior credit facilities and other borrowings		—			125.0			—			9.5			—			134.5
Payments on capital lease obligation		—			(1.9	)		—			—			—			(1.9	)
Proceeds from convertible redeemable preferred stock		—			99.2			—			—			—			99.2
Repayment of debt issuance costs		—			(5.1	)		—			—			—			(5.1	)
Repayment of long term debt		—			(5.6	)		—			—			—			(5.6	)

Proceeds from exercise of stock options and issuance of common stock under the employee stock purchase plan		—			5.1			—			—			—			5.1

Net cash provided by financing activities		—			143.9			—			82.3			—			226.2

Effect of exchange rate changes on cash and cash equivalents		—			—			—			0.8			—			0.8

Net increase (decrease) in cash and cash equivalents		—			80.0			1.2			(86.0	)		—			(4.8	)
Cash and cash equivalents, beginning of period		—			44.9			(1.1	)		147.0			—			190.8

Cash and cash equivalents, end of period	$	—		$	124.9		$	0.1		$	61.0		$	—		$	186.0

114

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(1)

For purposes of this presentation, the Senior Subordinated Notes, Second-Lien Notes, and First-Lien Notes have been reflected in the condensed balance sheets of both the Company and SCI LLC with the appropriate offset reflected in the eliminations column. Interest expense and debt discount amortization has been allocated to SCI LLC only.

(2)	Includes the effects of a $40.4 million intercompany loan write-off in connection with the closure of the Company’s Guadalajara, Mexico facility.

(3)	The Company is a holding company and has no operations apart from those of its operating subsidiaries. Additionally, the Company does not maintain a bank account; rather, SCI LLC, its primary operating subsidiary, processes all of its cash receipts and disbursements on its behalf.

Note 8: Investments in Joint Ventures

The Company had a 50% interest in Semiconductor Miniatures Products Malaysia Sdn. Bhd. (“SMP”), a joint venture with Semiconductors International B.V. (“Philips”) which operates a back-end manufacturing facility in Seremban, Malaysia. Pursuant to the terms of the joint venture agreement, the Company sold its interest in SMP to Philips on February 1, 2001, effective December 31, 2000, for $20.4 million resulting in a pre-tax gain of $3.1 million.

Note 9: Income Taxes

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


	Year ended December 31,
	2003			2002			2001
United States	$	(190.0	)	$	(233.2	)	$	(190.7	)
Foreign		53.7			103.6			(178.1	)

	$	(136.3	)	$	(129.6	)	$	(368.8	)

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


	Year ended December 31,
	2003			2002		2001
Current
Federal	$	—		$	—	$	(16.5	)
State and local		(0.1	)		0.1		0.5
Foreign		7.1			3.0		6.7

		7.0			3.1		(9.3	)

Deferred
Federal		—			—		315.8
State and local		—			—		39.6
Foreign		0.7			6.4		(0.3	)

		0.7			6.4		355.1

	$	7.7		$	9.5	$	345.8

115

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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,
	2003		2002		2001
U.S. federal statutory rate	(35.0	)%	(35.0	)%	(35.0	)%
Increase (decrease) resulting from:
State and local taxes, net of federal tax benefit	(8.8	)	(9.0	)	(3.4	)
Foreign withholding taxes	0.5		1.3		1.5
Foreign rate differential	(15.3	)	(25.5	)	10.9
Change in valuation allowance	67.4		73.6		119.1
Other	(3.2	)	1.9		0.6

	5.6	%	7.3	%	93.7	%

Deferred tax assets as of December 31, 2003 and December 31, 2002 are as follows (in millions):


	Year ended December 31,
	2003			2002
Net operating loss and tax credit carryforwards	$	348.9		$	259.6
Tax-deductible goodwill		220.7			235.2
Reserves and accruals		23.0			24.3
Property, plant and equipment		26.0			16.2
Inventories		13.7			15.1
Other		7.9			18.2

Gross deferred tax assets	$	640.2		$	568.6
Valuation allowance		(636.2	)		(564.4	)

Net deferred tax asset	$	4.0		$	4.2

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, 2003, the Company’s federal, state, and foreign net operating loss carryforwards were $787.8 million, $854.5 million, and $22.9 million, respectively. If not utilized, these net operating losses will expire in varying amounts from 2006 through 2024. 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 certain foreign subsidiaries (approximately $127.5 million at December 31, 2003) over which the Company 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 $16.4 million.

116

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Other assets include $6.0 million and $3.0 million of French income tax refunds receivable and $9.7 million and $10.4 million of Malaysian income tax refunds receivable at December 31, 2003 and 2002, respectively.

The Company files income tax returns with the taxing authorities in the various jurisdictions in which it operates. Certain of these income tax returns remain subject to audit by the local tax authorities. Management believes that the resolution of any issues raised by such taxing authorities, including application of any related determinations to subsequent open years, will not have an adverse effect on the Company’s financial condition or results of operations.

Note 10: Redeemable Preferred Stock

On September 7, 2001, the Company issued 10,000 shares of its Preferred stock (“the preferred stock”) with a stated value of $100 million to an affiliate of TPG. Net proceeds from the sale after deducting issuance costs were approximately $99.2 million. As of the issuance date, the preferred stock was convertible into 35,460,993 shares of the Company’s common stock at a price of $2.82 per share (subject to specified anti-dilution provisions) and is redeemable at the holder’s option any time after September 7, 2009. The preferred stock has a cumulative dividend payable quarterly in cash, at the rate of 8.0% per annum (or, if greater during the relevant quarterly period, in an amount equal to the value of the dividends that would be paid on the common stock then issuable upon conversion of the preferred stock), compounded to the extent not paid, and subject to restrictions under the Company’s senior bank facilities, the 12% Senior Subordinated Notes due in 2009 and other documents relating to the Company’s indebtedness.

The per share price of the Company’s common stock on the date of issuance was $3.19, which was $0.37 higher than the conversion price of $2.82, resulting in a beneficial conversion feature (“BCF”) of approximately $13.1 million. The BCF was originally recorded as a discount against the preferred shares with an offsetting increase to additional paid-in capital. However, since the preferred shares were convertible immediately and have no stated redemption date, the discount was accreted in full on the date of issuance effectively eliminating the originally recorded discount. The net loss applicable to common shareholders in 2001 was increased by the $13.1 million accretion for purposes of calculating earnings per share.

At any time after September 7, 2009, the holders may require that the Company redeem their shares at a redemption price equal to the greater of (i) the stated value of the preferred stock plus all accrued and unpaid dividends thereon or (ii) 50% of the then current market price of the common stock (based upon the average closing price of the common stock over the preceding 30 trading days) and other assets and property, if any, into which one share of preferred stock is then convertible. Upon a change of control, the holders of the preferred stock may “put” their shares to the Company at 101% of the stated value plus accumulated and unpaid dividends. The holders of the preferred stock were also granted registration rights in respect of the common stock underlying the preferred stock.

The Company is required to accrete the value of the preferred stock to its redemption value and records such accretion using a straight-line method over the remaining period until the earliest available redemption date of September 7, 2009. Such accretion, which is influenced by changes in the market price of the Company’s common stock, reduces net income applicable to common stock. Based on the market prices of the Company’s common stock, the Company recorded accretion charges of $0.5 million, $0, and $0 for the years ended December 31, 2003, 2002 and 2001, respectively. Based on the average closing price of the Company’s common stock over the last 30 trading days preceding December 31, 2003 of $6.19, the redemption value of the Preferred Stock would have been $131.7 million.

117

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The holder’s right to require the Company to redeem the preferred stock is subject to, and expressly conditioned upon, limitations under the Company’s various debt agreements. The holders of the preferred stock will be entitled to vote with the holders of the Company’s common stock as a single class. As of the issuance date, each share of preferred stock was entitled to approximately 3,135 votes, subject to certain adjustments for accumulated dividends and those made in accordance with anti-dilution provisions contained in the underlying agreements.

Note 11: Common Stock

On May 3, 2000, the Company completed the initial public offering of its common stock, selling 34.5 million shares with an issue price of $16 per share. Net proceeds from the IPO (after deducting issuance costs) were approximately $514.8 million. The net proceeds were used to redeem all of the preferred stock then outstanding (including accrued dividends), redeem a portion of the 12% Senior Subordinated Notes due in 2009 and prepay a portion of the loans outstanding under the senior bank facilities. In connection with this debt prepayment, the Company incurred prepayment penalties and redemption premiums of $17.3 million and wrote off $11.9 million of debt issuance costs.

On September 23, 2003, the Company completed a public offering (the “September 2003 Equity 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, the Company 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 $156.8 million after deducting the underwriting discount of $8.2 million ($0.225 per share) and estimated offering expenses of $1.4 million (including $0.4 million that were unpaid as of December 31, 2003). The Company used the net proceeds to prepay $152.7 million of its senior bank facilities and to pay $3.8 million of costs associated with the amendment to its senior bank facilities as described in Note 7: “Long-Term Debt”. In connection with this prepayment, the Company wrote off $2.5 million of debt issuance costs.

On February 9, 2004, the Company and its principal stockholder, Texas Pacific Group, completed a public offering (the “February 2004 Equity Offering”) of common stock registered pursuant to a shelf registration statement originally filed with the Securities and Exchange Commission on January 2, 2004. In connection with this offering, the Company issued approximately 34.4 million shares (including approximately 0.4 million shares issued in connection with the underwriters’ exercise of their option to cover over-allotments) at a price of $6.98 per share. The net proceeds from this offering received by the Company were $226.7 million after deducting the underwriting discount of $10.8 million ($0.3141 per share) and estimated offering expenses of $2.4 million. The Company did not receive any of the proceeds from the sale of shares by the selling stockholder. The Company intends to use the net proceeds to redeem $70.0 million outstanding principal amount of the first lien senior secured notes and $105 million outstanding principal amount of the second lien senior secured notes, in each case on March 10, 2004 at a redemption price of 112.0% of the principal amount of the notes to be redeemed, together with accrued interest to the redemption date. The Company intends to use the remaining net proceeds for general corporate purposes. In connection with this redemption, the Company intends to write off $12.0 million of debt issuance costs. In connection with the February 2004 Equity Offering, the Company obtained an amendment and waiver under the credit agreement relating to its senior bank facilities that permits the redemption, waives the requirement that 50% of the net proceeds of the offering be used to prepay loans under the senior bank facilities and amends the credit agreement to permit sale and leaseback transactions involving real or personal property with an aggregate fair value of up to $15.0 million (and to permit the asset sales in connection therewith) and to provide that net proceeds from asset sales in connection with such transactions will not be required to be used to prepay loans under the senior bank facilities.

118

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Loss per share calculations for 2003, 2002 and 2001 are as follows (in millions, except per share data):


	2003			2002			2001
Net loss before cumulative effect of accounting change	$	(145.2	)	$	(141.9	)	$	(715.0	)
Less: Accretion of beneficial conversion feature relating to convertible redeemable preferred stock		—			—			(13.1	)
Less: Accretion to redemption value of convertible redeemable preferred stock		(0.5	)		—			—
Less: Convertible redeemable preferred stock dividends		(9.2	)		(8.5	)		(2.4	)

Net loss applicable to common stock before cumulative effect of accounting change		(154.9	)		(150.4	)		(730.5	)
Cumulative effect of accounting change		(21.5	)		—			(116.4	)

Net loss applicable to common stock	$	(176.4	)	$	(150.4	)	$	(846.9	)

Basic weighted average common shares outstanding		187.4			175.6			173.6
Add: Incremental shares for :
Dilutive effect of stock options		—			—			—
Convertible redeemable preferred stock		—			—			—

Diluted weighted average common shares outstanding		187.4			175.6			173.6

Loss per share
Basic:
Net loss applicable to common stock before cumulative effect of accounting change	$	(0.83	)	$	(0.86	)	$	(4.21	)
Cumulative effect of accounting change		(0.11	)		—			(0.67	)

Net loss applicable to common stock	$	(0.94	)	$	(0.86	)	$	(4.88	)

Diluted:
Net loss applicable to common stock before cumulative effect of accounting change	$	(0.83	)	$	(0.86	)	$	(4.21	)
Cumulative effect of accounting change		(0.11	)		—			(0.67	)

Net loss applicable to common stock	$	(0.94	)	$	(0.86	)	$	(4.88	)

Basic loss per share is computed by dividing net loss adjusted for the accretion of the beneficial conversion feature the accretion to redemption value and dividends all related to the Company’s redeemable preferred stock by the weighted average number of common shares outstanding during the period. Diluted loss per share generally assumes the conversion of the convertible redeemable preferred stock into common stock if dilutive and also incorporates the incremental impact of shares issuable upon the assumed exercise of stock options. The number of incremental shares from the assumed exercise of stock options is calculated by applying the treasury stock method. For 2003, 2002 and 2001, the effect of stock option shares were not included as the related impact would have been anti-dilutive as the Company generated a net loss in those periods. Had the Company generated net income in 2003, 2002 and 2001, the assumed exercise of stock options would have resulted in an additional 5.5 million, 3.5 million and 5.1 million shares of diluted weighted average common shares outstanding in 2003, 2002 and 2001, respectively. This computation excludes an additional 11.2 million, 13.3 million and 8.8 million of options outstanding at December 31, 2003, 2002 and 2001 as their exercise price exceeds the average fair market value during those years. For 2003, 2002 and 2001, the assumed conversion of 42.6 million, 39.4 million and 36.4 million shares, respectively, of the redeemable preferred stock was also excluded in determining diluted earnings per share as the related impact would have been anti-dilutive.

119

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 12: Stock Options

The Company adopted the ON Semiconductor 1999 Founders Stock Option Plan (“the 1999 Plan”), which is an incentive plan for key employees, directors and consultants. A total of 11.6 million shares of the Company’s common stock have been reserved for issuance under the 1999 Plan. The 1999 Plan is administered by the Board of Directors or a committee thereof, which is authorized to, among other things, select the key employees, directors and consultants who will receive grants and determine the exercise prices and vesting schedules of the options. Prior to the existence of a public market for the Company’s common stock, the Board of Directors determined fair market value.

On February 17, 2000, the Company adopted the 2000 Stock Incentive Plan (“the 2000 Plan”) which provides key employees, directors and consultants with various equity-based incentives as described in the plan document. During 2001, stockholders voted to amend the 2000 Plan to increase the number of shares of the Company’s common stock issuable thereunder by 3.0 million (to an aggregate of 13.0 million shares). The 2000 Plan is administered by the Board of Directors or a committee thereof, which is authorized to determine, among other things, the key employees, directors or consultants who will receive awards under the plan, the amount and type of award, exercise prices or performance criteria, if applicable, and vesting schedules.

Generally, the options granted under both plans vest over a period of four years. Under the 1999 Plan, all outstanding options and under the 2000 Plan certain outstanding options vest automatically upon a change of control, as defined, provided the option holder is employed by the Company on the date of the change in control. Under the 2000 Plan, certain other outstanding options vest upon a change of control if the Board of Directors of the Company, at its discretion, provides for acceleration of the vesting of said options. 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).

There was an aggregate of 10.4 million, 6.3 million and 4.7 million shares of common stock available for grant under the 1999 Plan and the 2000 Plan at December 31, 2003, 2002 and 2001, respectively.

Additional information with respect to the activity of the Company’s stock option plans is as follows (in millions, except per share data):


	2003				2002				2001
	Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price
Outstanding at beginning of year	22.4		$	4.63	18.7		$	5.91	14.4		$	6.46
Grants	6.0			2.17	9.0			3.12	8.4			5.26
Exercises	(1.9	)		1.79	(0.8	)		1.50	(0.6	)		1.50
Cancellations	(3.1	)		5.60	(4.5	)		7.47	(3.5	)		7.42

Outstanding at end of year	23.4		$	4.11	22.4		$	4.63	18.7		$	5.91

Exercisable at end of year	10.5		$	5.04	8.8		$	4.90	4.6		$	4.65

Weighted average fair value of options granted during the period			$	1.50			$	1.91			$	3.25

120

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The following tables summarize options outstanding and options exercisable at December 31, 2003:


	Outstanding Options
	Number Shares	Weighted Average Contractual Life (in years)	Weighted Average Exercise Price
Range of Exercise Prices
$ 1.03-$ 1.50	9.3	7.44	$	1.38
$ 1.65-$ 2.71	2.1	8.86		1.93
$ 3.06-$ 4.96	5.8	8.09		3.54
$ 5.19-$ 9.03	4.2	7.88		6.21
$10.88-$21.38	2.0	6.39		15.92

Totals	23.4		$	4.11


	Exercisable Options
	Number Shares	Weighted Average Contractual Life (in years)	Weighted Average Exercise Price
Range of Exercise Prices
$ 1.03-$ 1.50	4.7	5.86	$	1.49
$ 1.65-$ 2.71	0.5	8.86		1.91
$ 3.06-$ 4.96	2.0	7.95		3.68
$ 5.19-$ 9.03	1.6	7.16		6.54
$10.88-$21.38	1.7	6.38		15.93

Totals	10.5		$	5.04

These options will expire if not exercised at specific dates through December 2013.

In 2002, the Company recorded charges totaling $4.1 million related to the modification of option terms for employees terminated under various restructuring programs as well as the separation of an executive officer. These charges are included in restructuring, asset impairments and other, net in the consolidated statement of operations with an offsetting credit to additional paid-in capital. In 2002, the Company also recorded $0.4 million of compensation expense related to stock options issued to consultants and other stock option modifications to certain employees.

In 2001, the Company issued warrants to purchase 1,250,000 shares of common stock to consultants for services rendered during 2001. These warrants, which have an exercise price of $1.90 per share, were recorded at their estimated fair value of $1.3 million as a charge to general and administrative expense with an offsetting credit to additional paid-in capital. These warrants vested at the date of grant and were exercised during 2003.

On February 17, 2000, the Company adopted the 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 the Company’s common stock at a price equal to 85% of the fair market value of such shares as determined under the plan. Employees will be limited to annual purchases of $25,000 under this plan. In addition, during each quarterly offering period, employees may not purchase stock exceeding the lesser of (i) 500 shares, or (ii) the number of shares equal to $6,250 divided by the fair market value of the stock on the first day of the offering period. During 2003, 2002 and 2001, employees purchased approximately 0.7 million, 1.0 million and 1.3 million shares under the plan. During 2001, shareholders voted to amend the 2000 Employee Stock Purchase Plan to increase the number of shares of the Company’s common stock issuable thereunder by 4.0 million (to an aggregate of 5.5 million shares).

121

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 13: Employee Benefit Plans

Defined Benefit Plans

Benefits under all of the Company’s plans 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. The Company expects to contribute $12.4 million in 2004 based on its current assessment of the economic environment and projected benefit payments. The Company’s measurement date for determining its defined benefit obligations for all plans is December 31 of each year.

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 each employee’s earnings and years of service. 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 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 and substantially all accrued benefits were distributed to participants by December 31, 2001.

The assets of the Company’s domestic plans were invested in short-term fixed income securities at December 31, 2003 and 2002. This asset allocation is based on the anticipated timing of benefit payments, historical returns on similar assets and the current economic environment.

In regards to the Grandfathered Plan, the Company reevaluated its current assumptions in light of the actual returns experienced, current annuity rates and the expected discontinuation of benefits as of December 31, 2004 with the subsequent payment of benefits in 2005. The discount rate used to determine the pension obligation at December 31, 2002 and to determine future expense was lowered to 5.0% at December 31, 2002 from 7.4% at December 31, 2001. In addition, the expected return on plan assets used to determine future expense was lowered to 2.5%, reflecting the Company’s change in investment policy regarding the assets of the Grandfathered Plan. Upon the termination of the Grandfathered Plan, the Company is obligated to ensure that the plan has assets sufficient to pay accrued benefits.

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.

As described in Note 4 “Accounting Changes,” effective January 1, 2003, 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.

122

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

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):


	Year Ended December 31,
	2003									2002									2001
	U.S. Pension Plan			Foreign Pension Plans			Total			U.S. Pension Plans			Foreign Pension Plans			Total			U.S. Pension Plans			Foreign Pension Plans			Total
Service cost	$	1.7		$	1.3		$	3.0		$	1.8		$	1.3		$	3.1		$	2.1		$	2.2		$	4.3
Interest cost		2.4			0.9			3.3			3.0			0.8			3.8			2.4			1.6			4.0
Expected return on plan assets		(0.5	)		(0.3	)		(0.8	)		(1.2	)		(0.3	)		(1.5	)		(1.4	)		(1.0	)		(2.4	)
Amortization of prior service cost		0.1			0.3			0.4			0.1			0.3			0.4			0.2			0.4			0.6
Settlement losses		—			—			—			0.4			—			0.4			9.9			2.3			12.2
Curtailment gain		—			—			—			—			(0.3	)		(0.3	)		—			—			—
Cumulative effect of accounting change		20.0			1.5			21.5			—			—			—			—			—			—
Other losses (gains)		(0.9	)		—			(0.9	)		4.9			—			4.9			0.3			—			0.3

Total net periodic pension cost	$	22.8		$	3.7		$	26.5		$	9.0		$	1.8		$	10.8		$	13.5		$	5.5		$	19.0

Weighted average assumptions
Discount rate		5.00	%		4.40	%					7.40	%		5.08	%					6.80	%		5.76	%
Expected return on plan assets		2.50	%		5.73	%					8.50	%		3.17	%					8.50	%		7.46	%
Rate of compensation increase		3.00	%		3.17	%					3.00	%		3.77	%					3.00	%		3.77	%

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	December 31,
	2003									2002
	U.S. Pension Plans			Foreign Pension Plans			Total			U.S. Pension Plans			Foreign Pension Plans			Total
Change in projected benefit obligation
Projected benefit obligation at the beginning of the year	$	46.8		$	19.3		$	66.1		$	41.5		$	22.3		$	63.8
Service cost		1.7			1.3			3.0			1.8			1.3			3.1
Interest cost		2.4			0.9			3.3			3.0			0.8			3.8
Net actuarial (gain) or loss		(1.1	)		(0.1	)		(1.2	)		5.3			1.2			6.5
Cutailment gain		—			—			—			—			(0.3	)		(0.3	)
Benefits paid		(10.3	)		(0.5	)		(10.8	)		(4.8	)		(6.7	)		(11.5	)
Translation loss		—			1.7			1.7			—			0.7			0.7

Projected benefit obligation at the end of the year	$	39.5		$	22.6		$	62.1		$	46.8		$	19.3		$	66.1

Accumulated benefit obligation at the end of the year	$	38.8		$	18.7		$	57.5		$	45.7		$	16.0		$	61.7

Change in plan assets
Fair value of plan assets at the beginning of the year	$	17.2		$	4.0		$	21.2		$	10.1		$	9.1		$	19.2
Actual return on plan assets		0.4			0.3			0.7			(1.1	)		0.3			(0.8	)
Benefits paid		(10.3	)		(0.5	)		(10.8	)		(4.8	)		(6.7	)		(11.5	)
Employer contributions		6.4			1.6			8.0			13.0			1.3			14.3
Translation gain		—			0.4			0.4			—			—			—

Fair value of plan assets at the end of the year	$	13.7		$	5.8		$	19.5		$	17.2		$	4.0		$	21.2

Net amount recognized
Funded status	$	(25.8	)	$	(16.8	)	$	(42.6	)	$	(29.6	)	$	(15.3	)	$	(44.9	)
Unrecognized prior service cost		0.7			1.8			2.5			0.9			1.9			2.8
Unrecognized net actuarial loss		—			—			—			20.0			1.5			21.5

Net amount recognized	$	(25.1	)	$	(15.0	)	$	(40.1	)	$	(8.7	)	$	(11.9	)	$	(20.6	)

Amounts recognized in the statement of financial position
Accrued benefit liability	$	(10.9	)	$	(1.5	)	$	(12.4	)	$	(6.4	)	$	(2.0	)	$	(8.4	)
Other long-term liabilities		(14.2	)		(13.6	)		(27.8	)		(22.0	)		(11.8	)		(33.8	)
Intangible asset		—			0.1			0.1			0.8			1.2			2.0
Accumulated other comprehensive income		—			—			—			18.9			0.7			19.6

Net amount recognized	$	(25.1	)	$	(15.0	)	$	(40.1	)	$	(8.7	)	$	(11.9	)	$	(20.6	)

Weighted average assumptions at the end of the year
Discount rate		5.16	%		4.29	%					5.00	%		4.40	%
Rate of compensation increases		3.00	%		3.18	%					3.00	%		3.17	%

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $59.4 million, $56.5 million, and $17.7 million, respectively, as of December 31, 2003 and $63.8 million, $56.8 million, and $19.6 million, respectively as of December 31, 2002.

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The Company recognizes a minimum liability in its financial statements for its underfunded pension plans. The total accrued pension liability of $40.2 million and $42.2 million at December 31, 2003 and 2002, respectively, including additional minimum pension liability of $0.1 million and $21.6 million, respectively. The additional minimum liability was offset by a $0.1 million intangible asset at December 31, 2003 compared with a $2.0 million intangible asset and a $19.6 million increase to stockholders’ deficit at December 31, 2002. The decrease in the additional minimum liability relates to the previously described accounting change.

Defined Contribution Plans

The Company has a deferred compensation plan (“the Savings Plan”) for all eligible U.S. employees established under the provisions of Section 401(k) of the Internal Revenue Code. Eligible employees may contribute a percentage of their salary subject to certain limitations. Effective January 1, 2000, the Company began a matching contribution of 100% of the first 4% of employee contributions, and 50% of the next 4% of employee contributions, as defined in the Savings Plan.

Effective March 1, 2001 the Company amended the Savings Plan to make the matching contribution discretionary. A discretionary matching contribution was offered through April 2001, resulting in $2.2 million of related expense in 2001. Effective January 1, 2002, the Company reinstated a discretionary matching contribution of 100% of the first 3% of employee contributions and, if certain financial goals are achieved, an additional 50% of the next 6% of employee contributions. The Company recognized $3.3 million and $4.0 million of expense relating to matching contributions in 2003 and 2002, respectively.

Certain foreign subsidiaries have defined contribution plans in which eligible employees participate. The Company recognized compensation expense of $0.9 million, $0.4 million and $0.6 million relating to these plans for the years ended 2003, 2002 and 2001, respectively.

Note 14: Financial Instruments

Foreign Currencies

As a multinational business, the Company’s transactions are denominated in a variety of currencies. When appropriate, the Company uses forward foreign currency contracts to reduce its overall exposure to the effects of currency fluctuations on its results of operations and cash flows. The Company’s policy prohibits trading in currencies for which there are no underlying exposures, or entering into trades for any currency to intentionally increase the underlying exposure.

Prior to the fourth quarter of 2003, the Company’s foreign subsidiaries provided forecasts of their foreign currency exposures. The Company then aggregated the forecasted amounts and entered into foreign currency contracts in order to create an offset to the underlying exposures. Losses or gains on the underlying cash flows or investments offset gains or losses on the financial instruments. Beginning in the fourth quarter of 2003, the Company modified its foreign exchange management program so that aggregate foreign currency exposures are compared against bank forecasted foreign currency exchange rates for the next three months. If the forecasted movements are unfavorable, the Company may decide to hedge all or a portion of the applicable foreign currency exposure. The Company primarily hedges existing assets and liabilities and cash flows associated with transactions currently on its balance sheet.

At December 31, 2003 and 2002, the Company had net outstanding foreign exchange contracts with notional amounts of $3.0 million and $19.5 million, respectively. Such contracts were obtained through financial institutions and were scheduled to mature within three months. Management believes that these financial

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instruments should not subject the Company to increased risks from foreign exchange movements because gains and losses on these contracts, should offset losses and gains on the assets, liabilities and transactions being hedged. The following schedule shows the Company’s net foreign exchange positions in U.S. dollars as of December 31, 2003 and 2002 (in millions):


	December 31,
	2003 Buy (Sell)		2002 Buy (Sell)
	2003 Buy (Sell)		2002 Buy (Sell)
Japanese Yen	$	—	$	(16.3	)
Czech Koruna		—		2.7
Euro		2.6		(11.4	)
Philippine Peso		—		1.8
Mexican Peso		—		0.3
British Pound		—		5.0
Singapore Dollar		—		1.8
Swedish Krona		—		1.5
Taiwan Dollar		—		(4.9	)
Slovakian Koruna		0.4		—

	$	3.0	$	(19.5	)

The Company is exposed to credit-related losses if counterparties to its foreign exchange contracts fail to perform their obligations. At December 31, 2003, the counterparties on the Company’s foreign exchange contracts are two highly rated financial institutions and no credit-related losses are anticipated. Amounts payable or receivable under the contracts are included in other current assets or accrued expenses in the accompanying consolidated balance sheet. For 2003, 2002 and 2001, aggregate foreign currency transaction gains total $4.7 million, $0.1 million and $1.2 million, respectively.

Interest Rate Agreements

At December 31, 2003, the Company had an interest rate swap with a notional amount of $100.0 million. The interest rate swap is a floating-to-fixed rate agreement based on LIBOR with quarterly interest rate resets. The $100.0 million swap has a fixed rate of 5.9% and expires in December 2004. During 2003, the Company also had a $55.0 million swap with a fixed rate of 6.8% that expired in September 2003. The notional amounts are used solely as the basis for which the payment streams are calculated and exchanged. The notional amount is not a measure of the exposure to the Company through the use of the swaps. Amounts to be paid or received under each contract were recorded in either other current assets or accrued expenses in the accompanying consolidated balance sheet and as an adjustment to interest expense.

Other

At December 31, 2003, the Company had no outstanding commodity derivatives, currency swaps or options relating to either its debt instruments or investments. The Company does not hedge the value of its equity investments in its subsidiaries or affiliated companies.

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Note 15: 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.

Long-term Debt

The fair values of the Company’s long-term borrowings are determined by obtaining quoted market prices if available or market prices for comparable debt instruments.

Foreign Currency Exchange Contracts

Forward foreign exchange contracts are valued at current foreign exchange rates for contracts with similar maturities.

Interest Rate Agreements

The fair values of the Company’s interest rate swaps represent the amounts at which they could be settled and are estimated by obtaining quotes from brokers.

Series A Cumulative Convertible Redeemable Preferred Stock

The fair value of the Company’s cumulative convertible redeemable preferred stock as of December 31, 2003 and 2002 were estimated as the sum of the present value of the related future cash flows discounted at a rate for a financial instrument with similar characteristics plus the estimated fair value of the conversion option using the Black Scholes option-pricing model.

The carrying amounts and fair values of the Company’s financial instruments at December 31, 2003 and 2002 are as follows (in millions):


	December 31, 2003				December 31, 2002
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt	(1,291.5	)	(1,426.2	)	(1,403.4	)	(1,009.4	)
Foreign currency exchange contracts	0.9		0.9		(0.3	)	(0.3	)
Interest rate agreements	(4.6	)	(4.6	)	(10.5	)	(10.5	)
Series A preferred stock	(119.7	)	(280.8	)	(110.1	)	(93.1	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 16: Commitments and Contingencies

Leases

The following is a schedule by year of future minimum lease obligations under non-cancelable operating leases as of December 31, 2003 (in millions):


Year ending December 31,
2004	$	8.4
2005		5.3
2006		2.1
2007		0.4
2008		0.1
Thereafter		0.1

Total	$	16.4

The Company’s existing leases do not contain significant restrictive provisions; however, certain leases contain renewal options and provisions for payment by the Company of real estate taxes, insurance and maintenance costs. Total rent expense for 2003, 2002 and 2001 was $13.3 million, $12.3 million and $11.0 million, respectively.

The Company also enters into various capital purchase obligations, supply agreements and service agreements with various vendors. The obligations for these types of agreements are as follows as of December 31, 2003:


	Total		2004		2005		2006		2007		2008		Thereafter
Capital purchase obligations	$	9.6	$	9.6	$	—	$	—	$	—	$	—	$	—
Foundry and inventory purchase obligations		31.3		31.3		—		—		—		—		—
Mainframe support		17.7		8.6		7.4		1.7		—		—		—
Various information technology and communication services		17.9		15.5		1.2		1.1		—		—		0.1
Other		4.3		3.0		1.0		0.3		—		—		—

	$	80.8	$	68.0	$	9.6	$	3.1	$	—	$	—	$	0.1

At December 31, 2003, the Company has a letter of credit totaling $2.6 million to partially secure a service agreement with an information technology vendor. A downgrade in the Company’s debt rating could trigger acceleration of remaining amounts due under this agreement, a portion of which would be satisfied by the letters of credit. The agreement expires in 2006. The letter of credit is renewable annually until 2005 when it expires.

Other Contingencies

The Company’s manufacturing facility in Phoenix, Arizona is located on property that is a “Superfund” site, a property listed on the National Priorities List and subject to clean-up activities under the Comprehensive Environmental Response, Compensation, and Liability Act. Motorola is actively involved in the cleanup of on-site solvent contaminated soil and groundwater and off-site contaminated groundwater pursuant to consent decrees with the State of Arizona. As part of the August 4, 1999 recapitalization, Motorola has retained responsibility for this contamination, and has agreed to indemnify the Company with respect to remediation costs and other costs or liabilities related to this matter.

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Legal Matters

The Company is involved in a variety of legal matters that arise in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters, including the matters described below will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

During the period July 5, 2001 through July 27, 2001, the Company was named as a defendant in three shareholder class action lawsuits that were filed in federal court in New York City against the Company and certain of its former officers, current and former directors and the underwriters for its initial public offering. The lawsuits allege violations of the federal securities laws and have been docketed in the U.S. District Court for the Southern District of New York as: Abrams v. ON Semiconductor Corp., et al., C.A. No. 01- CV-6114; Breuer v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6287; and Cohen v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6942. On April 19, 2002, the plaintiffs filed a single consolidated amended complaint that supersedes the individual complaints originally filed. The amended complaint alleges, among other things, that the underwriters of the Company’s initial public offering improperly required their customers to pay the underwriters excessive commissions and to agree to buy additional shares of the Company’s common stock in the aftermarket as conditions of receiving shares in its initial public offering. The amended complaint further alleges that these supposed practices of the underwriters should have been disclosed in the Company’s initial public offering prospectus and registration statement. The amended complaint alleges violations of both the registration and antifraud provisions of the federal securities laws and seeks unspecified damages. We understand that various other plaintiffs have filed substantially similar class action cases against approximately 300 other publicly traded companies and their public offering underwriters in New York City, which have all been transferred, along with the case against us, to a single federal district judge for purposes of coordinated case management. The Company believes that the claims against it are without merit and has defended, and intends to continue to defend, the litigation vigorously. The litigation process is inherently uncertain, however, and the Company cannot guarantee that the outcome of these claims will be favorable.

On July 15, 2002, together with the other issuer defendants, the Company filed a collective motion to dismiss the consolidated, amended complaints against the issuers on various legal grounds common to all or most of the issuer defendants. The underwriters also filed separate motions to dismiss the claims against them. In addition, the parties have stipulated to the voluntary dismissal without prejudice of our individual current and former officers and directors who were named as defendants in our litigation, and they are no longer parties to the lawsuit. On February 19, 2003, the Court issued its ruling on the motions to dismiss filed by the underwriter and issuer defendants. In that ruling the Court granted in part and denied in part those motions. As to the claims brought against the Company under the antifraud provisions of the securities laws, the Court dismissed all of these claims with prejudice, and refused to allow plaintiffs the opportunity to re-plead these claims. As to the claims brought under the registration provisions of the securities laws, which do not require that intent to defraud be pleaded, the Court denied the motion to dismiss these claims as to the Company and as to substantially all of the other issuer defendants as well. The Court also denied the underwriter defendants’ motion to dismiss in all respects.

In June 2003, upon the determination of a special independent committee of our Board of Directors, the Company elected to participate in a proposed settlement with the plaintiffs in this litigation. If ultimately approved by the Court, this proposed settlement would result in a dismissal, with prejudice, of all claims in the litigation against the Company and against any of the other issuer defendants who elect to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. The proposed settlement does not provide for the resolution of any claims against the underwriter defendants, and the litigation against those defendants is continuing. The proposed

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

settlement provides that the class members in the class action cases brought against the participating issuer defendants will be guaranteed a recovery of $1 billion by the participating issuer defendants. If recoveries totaling less than $1 billion are obtained by the class members from the underwriter defendants, the class members will be entitled to recover the difference between $1 billion and the aggregate amount of those recoveries from the participating issuer defendants. If recoveries totaling $1 billion or more are obtained by the class members from the underwriter defendants, however, the monetary obligations to the class members under the proposed settlement will be satisfied. In addition, the Company and any other participating issuer defendants will be required to assign to the class members certain claims that they may have against the underwriters of our initial public offerings.

The proposed settlement contemplates that any amounts necessary to fund the settlement or settlement-related expenses would come from participating issuers’ directors and officers’ liability insurance policy proceeds as opposed to funds of the participating issuer defendants themselves. A participating issuer defendant could be required to contribute to the costs of the settlement if that issuer’s insurance coverage were insufficient to pay that issuer’s allocable share of the settlement costs. The Company expects that its insurance proceeds will be sufficient for these purposes and that the Company will not otherwise be required to contribute to the proposed settlement. Consummation of the proposed settlement is conditioned upon, among other things, negotiating, executing, and filing with the Court final settlement documents, and final approval by the Court. Formal settlement documents for submission to the Court are currently being drafted. If the proposed settlement described above is not consummated, however, the Company intends to continue to defend the litigation vigorously. While the Company can make no promises or guarantees as to the outcome of these proceedings, the Company believes that the final result of these actions will have no material effect on its consolidated financial condition, results of operations or cash flows.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 17: Related Party Transactions

The Company agreed to pay TPG an annual management fee of up to $2.0 million. In connection with the Cherry acquisition the Company paid TPG a $2.0 million advisory fee in-lieu of the annual management fee for 2000. The payment of the annual management fees to TPG has been waived until certain conditions are met under the Company’s amended debt agreements and no such annual management fees were incurred in 2001, 2002 or 2003. Management fees may be paid to TPG in cash or with the Company’s common stock or warrants.

In connection with the Recapitalization, Motorola assigned, licensed or sublicensed intellectual property to the Company relating to certain of the Company’s products. Motorola also agreed to continue providing manufacturing and assembly services, to continue using similar services the Company provides to them and to lease real estate to the Company. The manufacturing and assembly services that the Company and Motorola have agreed to continue to provide to each other are at prices intended to approximate each party’s cost of providing the services and are fixed throughout the term of the agreements. As of December 31, 2003, the Company has no minimum commitments to purchase manufacturing services from Motorola in 2004. Related party activity between the Company and Motorola is as follows (in millions):


	Year ended December 31,
	2003		2002		2001
Cash paid for:
Purchases of manufacturing services from Motorola	$	8.9	$	14.3	$	87.4

Cost of other services, rent and equipment purchased from Motorola	$	0.8	$	1.5	$	17.7

Cash received for:
Freight sharing agreement with Motorola	$	—	$	21.4	$	21.9

Rental of property and equipment to Motorola	$	5.6	$	9.1	$	11.2

Product sales to Motorola	$	74.9	$	99.5	$	94.3

On April 8, 2002, the Company and Motorola, Inc. reached agreement regarding certain post-closing payments to be made under agreements entered into in connection with the August 1999 Recapitalization. Pursuant to the agreement, Motorola paid the Company $10.6 million during the second quarter of 2002. As a result, the Company recognized a related gain of $12.4 million, which is included in restructuring, asset impairments and other, net in the consolidated statement of operations for the year ended December 31, 2002.

As part of the recapitalization, Motorola agreed to provide the Company with worldwide freight services through August 4, 2002. This agreement resulted in better prices than the Company could obtain from third parties.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 18: Supplemental Disclosure of Cash Flow Information

The Company’s non-cash financing activities and cash payments for interest and income taxes are as follows (in millions):


	Year ended December 31,
	2003			2002			2001
Non-cash financing activities:
Equipment acquired through capital leases	$	6.6		$	—		$	3.0
Cash (received) paid for:
Interest income	$	(2.4	)	$	(6.5	)	$	(1.2	)
Interest expense		146.1			110.3			119.3
Income taxes		—			1.8			(1.3	)

Note 19: Segment Information

The Company is engaged in the design, development, manufacture and marketing of a wide variety of semiconductor components and operates in one segment. The Company operates in various geographic locations. Sales to unaffiliated customers have little correlation with the location of manufacture. It is, therefore, not meaningful to present operating profit by geographic location. The Company conducts a substantial portion of its operations outside of the United States and is subject to risks associated with non-U.S. operations, such as political risks, currency controls and fluctuations, tariffs, import controls and air transportation.

Revenues by geographic location and product line, including local sales and exports made by operations within each area, are summarized as follows (in millions):


	Year ended December 31,
	2003		2002		2001
United States	$	319.5	$	393.1	$	430.6
The Other Americas		4.0		8.2		55.1
Asia/Pacific		493.0		425.7		385.4
Europe		189.3		201.7		264.0
Japan		63.3		65.0		88.1

	$	1,069.1	$	1,093.7	$	1,223.2


	Year ended December 31,
	2003		2002		2001
Power Management and Standard Analog	$	333.4	$	362.7	$	365.4
MOS Power Devices		152.5		138.7		146.7
High Frequency Clock and Data Management		80.5		72.0		118.5
Standard Components		502.7		520.3		592.6

	$	1,069.1	$	1,093.7	$	1,223.2

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Property, plant and equipment by geographic location is summarized as follows (in millions):


	December 31,
	2003		2002
China	$	119.2	$	131.2
United States		94.3		104.4
Europe		89.4		97.4
Malaysia		78.7		103.1
Japan		71.7		72.6
The Other Asia/Pacific		25.7		32.6
The Other Americas		20.1		44.0

	$	499.1	$	585.3

Sales to Motorola and two other customers accounted for approximately 7%, 9% and 13%, respectively of the Company’s total revenue during 2003 compared to approximately 8%, 10% and 10%, respectively during 2002, and approximately 7%, 8% and 8%, respectively during 2001.

Note 20: Selected Quarterly Financial Data (unaudited):

Consolidated quarterly financial information for 2003 and 2002 follows (in millions, except per share data):


	Quarter ended 2003
	Apr. 4 (3)			July 4 (4)			Oct. 3 (5)			Dec. 31 (6)
Total revenues	$	269.5		$	256.2		$	264.8		$	278.6
Gross profit		74.4			73.4			74.1			78.4
Net loss before cumulative effect of accounting change		(29.0	)		(57.5	)		(16.3	)		(42.4	)
Net loss		(50.5	)		(57.5	)		(16.3	)		(42.4	)
Diluted net loss before cumulative effect of accounting change per common share	$	(0.18	)	$	(0.34	)	$	(0.10	)	$	(0.21	)
Diluted net loss per common share	$	(0.30	)	$	(0.34	)	$	(0.10	)	$	(0.21	)

	Quarter ended 2002
	Mar. 29			June 28 (1)			Sept. 27			Dec. 31 (2)
Total revenues	$	271.0		$	280.6		$	273.6		$	268.5
Gross profit		61.9			82.1			79.0			74.8
Net loss		(50.0	)		(31.8	)		(20.5	)		(39.6	)
Diluted net loss per common share	$	(0.30	)	$	(0.19	)	$	(0.13	)	$	(0.24	)

(1)

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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 and recorded a related gain of $12.4 million.

(2)

In December 2002, the Company recorded $12.6 million (net of a $0.6 adjustment) of restructuring, asset impairments and other charges. The charges included $10.1 million to cover employee separation costs relating the termination of approximately 300 employees, $1.0 million of asset impairments and approximately $1.8 million in expected lease termination and other exit costs associated with the decommissioning of certain assets. The Company also recorded a $4.9 million charge to cover the costs associated with the separation of two of the Company’s executive officers including $2.9 million of non-cash stock compensation relating to the modification of the vesting and exercise period for a portion of the executives’ stock options.

(3)

Effective January 1, 2003, the Company changed its method of accounting for net unrecognized actuarial gains or losses related to its defined benefit pension obligations. The cumulative effect of this accounting change for the periods prior to January 1, 2003 was a charge of $21.5 million both before and after income taxes.

(4)

In June 2003, the Company recorded charges totaling $13.3 million associated with its worldwide restructuring programs. The charges included $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. Also during the second quarter of 2003, the Company recorded non-cash impairment charges totaling $21.3 million consisting of $20.8 million related 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.

(5)

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 $1.4 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 and an additional $0.1 million charge associated with its March 2002 restructuring program.

(6)

In December 2003, the Company recorded $29.9 million of restructuring, asset impairments and other charges. These charges included $5.2 million to cover employee separation costs for East Greenwich of $3.8 million for approximately 325 employees and a portion of the total severance charges for approximately 460 employees in the Czech Republic of $0.5 million and a remaining $0.9 million charge relates to severance benefits for approximately 10 employees in general and administrative functions in the United States and Europe. The December 2003 restructuring also included $0.4 million of lease and contract termination exit costs, $20.2 million of asset impairments associated with the Company’s restructuring programs, and $4.3 million of other charges associated with the write-down of certain other assets. The Company also recorded a $0.2 million reversal of amounts previously recorded in connection with the Company’s June 2001 and December 2002 restructuring programs.

134

REPORT OF INDEPENDENT AUDITORS ON

FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders of

ON Semiconductor Corporation

Our audits of the consolidated financial statements referred to in our report dated February 2, 2004, except for the third paragraph of Note 2 and the third paragraph of Note 11 for which the date is February 9, 2004, also included an audit of the accompanying financial statement schedule. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers, LLP

Phoenix, Arizona

February 2, 2004

135

ON SEMICONDUCTOR CORPORATION

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES


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, 2001	$	3.1	$	0.5	$	—		$	1.3	$	2.3

Year ended December 31, 2002	$	2.3	$	—	$	—		$	0.4	$	1.9

Year ended December 31, 2003	$	1.9	$	0.5	$	—		$	—	$	2.4

Inventory reserves
Year ended December 31, 2001	$	22.9	$	50.9	$	—		$	22.5	$	51.3

Year ended December 31, 2002	$	51.3	$	16.0	$	—		$	23.6	$	43.7

Year ended December 31, 2003	$	43.7	$	13.0	$	—		$	14.3	$	42.4

Allowance for deferred tax assets
Year ended December 31, 2001	$	—	$	366.8	$	83.8	(1)	$	—	$	450.6

Year ended December 31, 2002	$	450.6	$	1.0	$	112.8	(2)	$	—	$	564.4

Year ended December 31, 2003	$	564.4	$	—	$	71.8		$	—	$	636.2

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

(2)	Represents the valuation allowance related to the 2002 portion of the net operating loss that was not recognized during the year.

136

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2003 and 2002 and for

the Years Ended December 31, 2003, 2002 and 2001

137

REPORT OF INDEPENDENT AUDITORS

To The Board of Directors and Member

of Semiconductor Components Industries, LLC

In our opinion, the accompanying consolidated balance sheet and the related consolidated 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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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.

PRICEWATERHOUSECOOPERS LLP

Phoenix, Arizona

February 2, 2004, except for the

third paragraph of Note 2

for which the date is February 9, 2004

138

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC AND SUBSIDIARIES

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED BALANCE SHEET

(in millions)


	December 31,
	2003			2002
ASSETS
Cash and cash equivalents	$	181.7		$	182.4
Receivables, net (including $7.7 and $4.7 due from Motorola)		131.9			111.9
Inventories, net		167.6			160.0
Other current assets		23.9			36.3
Deferred income taxes		2.7			6.4

Total current assets		507.8			497.0
Property, plant and equipment, net		379.9			454.1
Deferred income taxes		1.3			—
Goodwill, net		77.3			77.3
Intangibles assets, net		—			26.7
Notes receivable from affiliates		—			63.3
Other assets		61.0			54.0

Total assets	$	1,027.3		$	1,172.4


LIABILITIES, MINORITY INTEREST AND MEMBER’S EQUITY (DEFICIT)
Accounts payable (including $0.4 and $0.1 payable to Motorola)	$	104.4		$	67.2
Accrued expenses (including $0.7 and $11.7 payable to Motorola)		88.8			99.9
Due to affiliates, net		12.4			0.2
Income taxes payable		1.7			1.9
Accrued interest		25.3			43.6
Deferred income on sales to distributors		66.2			70.8
Current portion of long-term debt		6.6			9.3

Total current liabilities		305.4			292.9
Long-term debt (including $139.9 and $126.9 payable to Motorola)		1,228.3			1,393.9
Other long-term liabilities		58.2			67.0
Deferred income taxes		—			2.2

Total liabilities		1,591.9			1,756.0

Commitments and contingencies (See Note 14)		—			—

Minority interests in consolidated subsidiary		0.5			4.1

Contributed capital		1,029.6			865.7
Accumulated other comprehensive loss		(4.4	)		(34.3	)
Accumulated deficit		(1,590.3	)		(1,419.1	)

Total member’s equity (deficit)		(565.1	)		(587.7	)

Total liabilities, minority interest and member’s equity (deficit)	$	1,027.3		$	1,172.4

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

139

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC AND SUBSIDIARIES

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED STATEMENT OF OPERATIONS

(in millions)


	Year Ended December 31,
	2003			2002			2001
Revenues (including $77.9, $87.7 and $98.9 from Motorola)	$	1,060.9		$	1,084.5		$	1,214.6
Cost of sales		771.2			798.7			1,001.8

Gross profit		289.7			285.8			212.8

Operating expenses:
Research and development		85.5			81.5			94.5
Selling and marketing		63.0			61.2			74.8
General and administrative		64.9			88.8			115.5
Amortization of goodwill and intangibles		5.9			11.9			22.6
Restructuring, asset impairments and other, net		61.2			27.7			150.4

Total operating expenses		280.5			271.1			457.8

Operating income (loss)		9.2			14.7			(245.0	)
Interest expense		(150.5	)		(151.7	)		(142.4	)
Interest income		4.1			5.9			8.9
Loss on debt prepayment		(7.7	)		(6.5	)		—

Loss before income taxes, minority interest and cumulative effect of accounting change		(144.9	)		(137.6	)		(378.5	)
Income tax provision		(6.8	)		(8.8	)		(342.3	)
Minority interest		2.0			—			2.1

Loss before cumulative effect of accounting change		(149.7	)		(146.4	)		(718.7	)
Cumulative effect of accounting change (net of income taxes of $0 in 2003 and $38.8 in 2001)		(21.5	)		—			(116.4	)

Net loss	$	(171.2	)	$	(146.4	)	$	(835.1	)

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

140

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC AND SUBSIDIARIES

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED STATEMENT OF MEMBER’S EQUITY (DEFICIT)

(in millions)


	Contributed Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total
Balance at December 31, 2000		732.1			(0.7	)		(437.6	)		293.8

Net capital contributions from Member		130.5									130.5
Comprehensive income (loss):
Net loss		—			—			(835.1	)		(835.1	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		—			(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					—						(867.2	)

Balance at December 31, 2001		862.6			(32.8	)		(1,272.7	)		(442.9	)

Net capital contributions from Member		3.1									3.1
Comprehensive income (loss):
Net loss		—			—			(146.4	)		(146.4	)
Other comprehensive income (loss):
Foreign currency translation adjustments		—			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					—						(147.9	)

Balance at December 31, 2002		865.7			(34.3	)		(1,419.1	)		(587.7	)

Net capital contributions from Member		180.0									180.0
Distribution to Member		(16.1	)		—			—			(16.1	)
Comprehensive income (loss):
Net loss		—			—			(171.2	)		(171.2	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		—			2.5			—			2.5
Additional minimum pension liability		—			19.6			—			19.6
Unrealized losses on deferred compensation plan investments		—			(0.2	)		—			(0.2	)
Effects of cash flow hedges		—			8.0			—			8.0

Other comprehensive loss					29.9						29.9

Comprehensive loss					—						(141.3	)

Balance at December 31, 2003	$	1,029.6		$	(4.4	)	$	(1,590.3	)	$	(565.1	)

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

141

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC AND SUBSIDIARIES

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)


	Year Ended December 31,
	2003			2002			2001
	(In millions)
Cash flows from operating activities:
Net loss	$	(171.2	)	$	(146.4	)	$	(835.1	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		111.1			133.4			165.8
Loss on debt prepayment		7.7			6.5			—
Cumulative effect of accounting change		21.5			—			155.2
Amortization of debt issuance costs and debt discount		8.7			8.1			6.0
Provision for excess inventories		13.0			12.1			50.9
Non-cash impairment of property, plant and equipment		30.7			12.4			56.2
Non-cash interest on junior subordinated note payable to Motorola		13.0			11.7			10.7
Non-cash writedown of other long-lived assets		25.6			—			—
Stock compensation expense		0.1			4.5			5.0
Deferred income taxes		0.2			7.8			317.0
Other		(3.0	)		(0.2	)		(3.0	)
Changes in assets and liabilities:
Receivables		(20.1	)		22.7			135.4
Inventories		(20.5	)		11.9			23.1
Other assets		4.6			6.5			(1.7	)
Accounts payable		36.9			(38.6	)		(56.6	)
Accrued expenses		(15.8	)		(8.1	)		(51.5	)
Due to and due from affiliates		12.2			4.8			(11.9	)
Income taxes payables		(0.2	)		(11.3	)		(19.9	)
Accrued interest		(18.3	)		19.2			(4.5	)
Deferred income on sales to distributors		(4.6	)		(28.6	)		(82.8	)
Other long-term liabilities		(1.4	)		2.1			3.6

Net cash provided by (used in) operating activities		30.2			30.5			(138.1	)

Cash flows from investing activities:
Purchases of property, plant and equipment		(56.1	)		(26.5	)		(117.9	)
Deposits for purchases of property, plant and equipment		(6.8	)
Other		(1.8	)		—			(0.6	)
Purchase of affiliated company from Member		(18.5	)		—			—
Loans to affiliates		—			—			(5.0	)
Proceeds from repayment of loans to affiliates		63.3			—			—
Proceeds from sales of property, plant and equipment		13.2			4.5			13.8

Net cash provided by (used in) investing activities		(6.7	)		(22.0	)		(109.7	)

Cash flows from financing activities:
Net capital contributions from Member		182.1			2.7			125.5
Proceeds from debt issuance		290.4			290.7			—
Proceeds from senior credit facilities and other borrowings		—			—			125.0
Payment of capital lease obligation		—			(1.1	)		(1.9	)
Payment of debt issuance costs		(15.3	)		(12.1	)		(5.1	)
Repayment of senior credit facilities		(482.7	)		(287.1	)		(5.6	)

Net cash provided by (used in) financing activities		(25.5	)		(6.9	)		237.9

Effect of exchange rate changes on cash and cash equivalents		1.3			1.0			0.8

Net increase (decrease) in cash and cash equivalents		(0.7	)		2.6			(9.1	)
Cash and cash equivalents, beginning of period		182.4			179.8			188.9

Cash and cash equivalents, end of period	$	181.7		$	182.4		$	179.8

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

142

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”). 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.

In the fourth quarter of 2003, ON Semiconductor transferred the ownership of a majority-owned subsidiary to the Company in exchange for $18.5 million in cash. The transaction was accounted for as the combination of companies under common control and has been reflected in the accompanying consolidated financial statements retroactively on a historical cost basis.

The book value of the net assets transferred was $2.4 million. The excess of the purchase price over the historical cost of the net assets acquired of $16.1 million has been reflected as a distribution to ON Semiconductor in the accompanying consolidated financial statements. Concurrent with this transaction, ON Semiconductor made a capital contribution to the Company equal to the amount of the purchase price.

Note 2: Liquidity

During the year ended December 31, 2003, ON Semiconductor incurred a net loss of $166.7 million compared to net losses of $141.9 and $831.4 million in 2002 and 2001, respectively. ON Semiconductor’s net results included restructuring, asset impairments and other, net of $61.2 million, $27.7 million and $150.4 million in 2003, 2002 and 2001, respectively, as well as interest expense of $151.1, $152.5 million and $143.6 million, respectively. ON Semiconductor’s operating activities provided cash of $45.7 million in 2003 and $46.4 million in 2002 and used cash of $116.4 million in 2001.

At December 31, 2003, ON Semiconductor had $186.6 million in cash and cash equivalents, net working capital of $212.5 million, term or revolving debt of $1,302.9 million and a stockholders’ deficit of $644.6 million. ON Semiconductor’s long-term debt includes $320.1 million under its senior bank facilities; $191.6 million (net of discount) of its 13% senior secured notes due 2010; $292.6 million (net of discount) of its 12% senior secured notes due 2008; $260.0 million of its 12% senior subordinated notes due 2009; $139.9 million under a 10% junior subordinated note payable to Motorola due 2011; $48.0 million under a loan facility with a Chinese bank due 2013; $24.3 million under a note payable to a Japanese bank due 2010; $20.0 million under a loan facility with a Chinese bank due 2007; and $6.4 million under a capital lease obligations. ON Semiconductor was in compliance with all of the covenants contained in its various debt agreements at December 31, 2003 and expects to remain in compliance over the next twelve months.

143

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

of ON Semiconductor’s 13% senior secured notes due 2010 and $105.0 million principal amount of the 12% senior securied notes due 2008 at a redemption price of 112% of the principal amount of such notes. The remaining proceeds will be used for general corporate purposes.

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 December 31, 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 and majority-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.

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.

144

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 over the estimated fair value of the net assets acquired in ON Semiconductor’s April 2000 acquisition of Cherry Semiconductor Corporation (Cherry). The Cherry goodwill was being amortized on a straight-line 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 another intangible asset in the Cherry acquisition that until July 5, 2003 was being amortized on a straight-line basis over its estimated useful life. In the second quarter of 2003, that intangible asset was determined to be impaired and was written-off. See Note 5 “Restructuring, Asset Impairments and Other, net”.

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,

145

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 as of the first day of the fourth quarter of each year.

Debt Issuance Costs

Debt issuance costs are capitalized and amortized over the terms of the underlying agreements using the effective interest method. Upon prepayment of debt, the related unamortized debt issuance costs are charged to expense. Amortization of debt issuance costs is included in interest expense while the unamortized balance is included in other assets. Capitalized debt issuance costs totaled $34.7 million and $33.7 million at December 31, 2003 and 2002, respectively.

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.

146

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 in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations (“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 loss for the years ended December 31, 2003, 2002, and 2001 would have been increased to the pro forma amounts indicated below (in millions):


	Year ended December 31,
	2003			2002			2001
Net loss, as reported	$	(171.2	)	$	(146.4	)	$	(835.1	)
Add: Stock-based employee compensation expense included in report net loss, net of related tax effects		0.1			4.5			3.7
Less: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(14.8	)		(13.9	)		(17.9	)

Pro-forma net loss		(185.9	)		(155.8	)		(849.3	)

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 ON Semiconductor 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:


Employee Stock Options	2003		2002		2001
Expected life (in years)	5		5		5
Risk-free interest rate	3.07	%	4.09	%	4.82	%
Volatility	0.78		0.70		0.70

Employee Stock Purchase Plan	2003		2002		2001
Expected life (in years)	0.25		0.25		0.25
Risk-free interest rate	1.07	%	1.71	%	4.26	%
Volatility	0.83		0.70		0.70

The weighted-average estimated fair value of employee stock options granted during 2003, 2002 and 2001 was $1.50, $1.85 and $3.25 per share, respectively. The weighted-average estimated fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan during 2003, 2002 and 2001 was $0.62, $0.60 and $1.24, 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

147

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 domestic deferred tax assets and a portion of the Company’s foreign deferred tax assets. Additionally, throughout 2002 and 2003, no incremental domestic 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 conduct business 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 increases for plan employees. All of these assumptions are based upon management’s judgement, considering all known trends and uncertainties. As described in Note 4, “Accounting Changes”, the Company changed its method of accounting for net unrecognized actuarial gains or losses relating to its defined benefit pension obligations effective January 1, 2003.

Contingencies

148

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Recent Accounting Pronouncements

In the second quarter of 2003, the Company adopted FASB Interpretation No. 46 (“FIN No. 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. FIN No. 46 requires that certain variable interest entities (VIE’s) be consolidated by the primary beneficiary, as that term is defined in FIN No. 46. The adoption of FIN No. 46 did not impact the Company’s financial condition or results of operations.

In December 2003, the FASB issued SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003)”. SFAS No. 132 revises employers’ disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132, which also requires new disclosures for interim periods beginning after December 15, 2003, is effective for fiscal years ending after December 15, 2003 except for certain disclosures associated with foreign plans which are required for years ended after June 15, 2004. The Company adopted this Statement for the year ended December 31, 2003 and has included the required disclosures in Note 10 “Employee Benefit Plans”.

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 such 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 was 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 year ended December 31, 2003. The effect of the change

149

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

on the year ended December 31, 2003 was to decrease the loss before cumulative effect of accounting change by $5.5 million, both before and after income taxes, and to increase the net loss by $16.0 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.

The estimated pro forma effects of the accounting change on the Company’s results of operations for the years ended December 31, 2002 and 2001 were as follows (in millions):


	Year Ended December 31,
	2002			2001
As reported:
Net loss before cumulative effect of accounting change	$	(146.4	)	$	(718.7	)
Net loss	$	(146.4	)	$	(835.1	)
Pro forma amounts reflecting the accounting change applied retroactively:
Net loss before cumulative effect of accounting change	$	(150.8	)	$	(728.9	)
Net loss	$	(150.8	)	$	(845.3	)

Goodwill and Other Intangible Assets

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS 142 prohibits the amortization of goodwill and indefinite-lived intangible assets and requires that such assets be tested for impairment on an annual basis or whenever events or circumstances indicate that the related carrying value may be impaired, requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill, and removes the forty-year limitation on the amortization period of intangible assets that have finite lives.

The following table, with comparable actual amounts for the year ended December 31, 2001, sets forth the pro forma effects on net loss assuming that the Company had adopted the provisions of SFAS No. 142 as of January 1, 2001:


	As reported 2001			Pro forma 2001
Reported net loss before cumulative effect of accounting change	$	(718.7	)	$	(718.7	)

Add back: Goodwill amortization, net of tax					10.7

Pro forma net loss before cumulative effect of accounting change				$	(708.0	)

Reported net loss	$	(835.1	)	$	(835.1	)

Add back: Goodwill amortization, net of tax					10.7

Pro forma net loss				$	(824.4	)

150

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subisidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Revenue Recognition

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.

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 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.

Derivatives Instruments and Hedging Activities

Upon adoption, the Company recorded a charge of approximately $5.7 million to accumulated other comprehensive income (loss). This charge consisted of an approximate $2.2 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.

151

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, Net

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


	Reserve Balance at December 31, 2002		2003 Charges		2003 Usage			2003 Adjustments			Reserve Balance at December 31, 2003
*December 2003*
Cash employee separation charges	$	—	$	5.2		—			—		$	5.2
Cash exit costs		—		0.4		—			—			0.4
Non-cash impairment of property, plant and equipment		—		20.2		(20.2	)		—			—
Write-down of long-term receivable and investment		—		4.3		(4.3	)		—			—

	$	—										5.6

*September 2003*
Cash employee separation charges		—		1.4		(0.9	)		—			0.5

*June 2003*
Cash employee separation charges		—		0.4		(0.4	)		—			—
Cash exit costs		—		1.4		(1.4	)		—			—
Non-cash impairment of property, plant and equipment		—		10.5		(10.5	)		—			—
Non-cash impairment of intangible asset		—		20.8		(20.8	)		—			—
Write down of investment		—		0.5		(0.5	)		—			—

		—										—

*December 2002*
Cash employee separation charges		9.9		—		(6.7	)		(0.1	)		3.1
Cash exit costs		1.8		—		(1.1	)		—			0.7

		11.7										3.8

*June 2002*
Cash employee separation charges		0.4		—		(0.4	)		—			—
Cash exit costs		1.5		—		—			1.0			2.5

		1.9										2.5

*March 2002*
Cash employee separation charges		3.0		—		(2.8	)		0.1			0.3

*December 2001*
Cash employee separation charges		0.1		—		—			(0.1	)		—

*June 2001*
Cash exit costs		2.8		—		(2.2	)		(0.2	)		0.4

	$	19.5	$	65.1	$	(72.2	)	$	0.7		$	13.1

152

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


	Reserve Balance at December 31, 2001		2002 Charges		2002 Usage			2002 Adjustments			Reserve Balance at December 31, 2002
*December 2002*
Cash employee separations charges	$	—	$	10.1	$	(0.2	)	$	—		$	9.9
Cash exit costs		—		1.8		—			—			1.8
Non-cash impairment of property, plant and equipment				1.0		(1.0	)		—			—

		—										11.7

*June 2002*
Cash employee separations charges		—		2.9		(2.5	)		—			0.4
Cash exit costs		—		2.8		(1.3	)		—			1.5
Non-cash impairment of property, plant and equipment		—		8.4		(8.4	)		—			—
Non-cash stock compensation charges		—		1.0		(1.0	)		—			—

		—										1.9

*March 2002*
Cash employee separations charges		—		7.0		(4.3	)		0.3			3.0
Non-cash stock compensation charges		—		0.2		(0.2	)		—			—

		—										3.0

*December 2001*
Cash employee separations charges		2.2		—		(2.1	)		—			0.1

*June 2001*
Cash employee separations charges		6.8		—		(5.7	)		(1.1	)		—
Cash exit costs		10.0		—		(8.1	)		0.9			2.8

		16.8										2.8

*March 2001*
Cash employee separations charges		0.8		—		(0.7	)		(0.1	)		—

	$	19.8	$	35.2	$	(35.5	)	$	(0.0	)	$	19.5

153

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


	Reserve Balance at December 31, 2000		2001 Charges		2001 Usage			Reserve Balance at December 31, 2001
Prior restructuring programs	$	0.7	$	—	$	(0.7	)	$	—

*December 2001*
Cash employee separations charges		—		4.0		(1.8	)		2.2
Non-cash impairment of property, plant and equipment		—		11.1		(11.1	)		—
Non-cash stock compensation and pension charges		—		1.5		(1.5	)		—

		—							2.2

*June 2001*
Cash employee separations charges		—		36.4		(29.6	)		6.8
Cash exit costs		—		10.0		—			10.0
Non-cash impairment of property, plant and equipment		—		42.2		(42.2	)		—
Non-cash stock compensation and pension charges		—		7.2		(7.2	)		—

		—							16.8

*March 2001*
Cash employee separations charges		—		31.3		(30.5	)		0.8
Non-cash impairment of property, plant and equipment		—		2.9		(2.9	)		—

		—							0.8

	$	0.7	$	146.6	$	(127.5	)	$	19.8


	2003
2003 Charges	$	65.1
Less: Adjustments to prior year charges		0.7
Less: Gain on sale of Guadalajara facility*		(4.6	)

	$	61.2


	2002
2002 Charges	$	35.2
Plus: Charges related to Guadalajara (June 2001) and France (March 2002)		1.9
Less: Reserves released during the period		(1.9	)
Plus: Charges related to the termination of executive officers (December 2002)*		4.9
Less: Motorola settlement gain*		(12.4	)

	$	27.7


	2001
2001 Charges	$	146.6
Plus: Charges related to the termination of an executive officer ( March 2001)*		3.8

	$	150.4

*	Not included in above tables

154

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

December 2003

In December 2003, the Company recorded $30.1 million in restructuring, asset impairment and other charges. These charges included $5.2 million to cover employee separation costs, $0.4 million of lease and contract termination exit costs and $20.2 million of asset impairments associated with the Company’s restructuring programs, and $4.3 million of other charges associated with the write-down of certain other assets. The Company also recorded a $0.2 million reversal of amounts previously recorded in connection with the Company’s June 2001 and December 2002 restructuring programs described below.

The employee separation costs of $5.2 million reflect the phase-out of manufacturing operations of the Company’s East Greenwich, Rhode Island facility, the shutdown of the Company’s back-end manufacturing lines in Roznov, Czech Republic, and further reductions in general and administrative staffing levels in the United States and Western Europe. The employee separation charges for East Greenwich totaled $3.8 million for approximately 325 employees. The Czech Republic employee separation charge of $0.5 million represents a portion of the total severance charges for approximately 460 employees. The additional severance cost of approximately $1.6 related to the Czech Republic will be recognized ratably over 2004. The remaining $0.9 million charge relates to severance benefits for approximately 10 employees in general and administrative functions in the United States and Europe. All terminations and associated severance payments related to this charge are expected to be completed by the second quarter of 2005.

The lease and contract termination costs of $0.4 million reflect costs incurred in connection with the consolidation of sales, distribution and administrative facilities in North America.

The $20.2 million of asset impairments include $15.3 million associated with the East Greenwich, Rhode Island facility and $4.9 million associated with the closure of the back-end manufacturing lines in Roznov, Czech Republic. The Company measured the amount of each asset impairment by comparing the carrying values of the respective assets to their related estimated fair values. The Company estimated future net cash flows for the period of continuing manufacturing activities (December 2004 for East Greenwich and Roznov) for each group of assets using price, volume, cost and salvage value assumptions that management considered 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 $4.3 million of other charges consist of the $2.3 million write-off of a long-term note receivable and a $2.0 million write-down of a cost basis investment. The note receivable was created in connection with the sale of certain equipment in 2001 and was fully reserved during the fourth quarter of 2003 when the counterparty defaulted on the obligation. We continue to attempt to collect this note. The cost basis investment relates to a semiconductor start-up company that was written down in the fourth quarter of 2003 based on that company’s operating performance and liquidity concerns.

September 2003

155

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

with its March 2002 restructuring program. All impacted employees have been terminated, and the Company currently expects to pay out the remaining employee severance costs by September 2004.

June 2003

December 2002

In December 2002, the Company recorded $12.6 million (net of a $0.6 adjustment) restructuring, asset impairments and other charges including $10.1 million for employee separation costs relating the termination of approximately 300 employees, $1.0 million of asset impairments 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 June 2004 and impacted both manufacturing and non-manufacturing personnel mainly in the United States. The asset impairments relate to the closure of a production line and an abandoned capital equipment project in the Czech Republic. The charge also included an additional $0.3 million reserve related to a 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 our March 2001 and June 2001 restructuring programs due the Company’s analysis of estimated costs to complete those programs. At December 31, 2003, 56 employees included under this program remain and are

156

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

expected to be terminated in 2004 and the related unpaid severance payments of $3.1 million are expected to be paid by June 2004. At December 31, 2003 the remaining liability relating to exit costs was $0.7 million and is expected to be paid out by June 2005.

June 2002

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 recorded estimated termination charges of $2.8 million during the second quarter of 2002. As of December 31, 2003, the Company had settled certain of these obligations with payments of $1.3 million. In June 2003, the Company recorded an additional $1.0 million associated with a supply contract that was terminated as part of the June 2002 restructuring program. At December 31, 2003, all employees had been terminated under the restructuring program. The Company is currently in discussions to settle its remaining obligations.

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 (see Note 15 “Related Party Transactions” for further details of the Motorola settlement). The Company also recorded a $1.2 million reversal of amounts previously provided in connection with the June 2001 restructuring program as a result of favorable negotiated contract termination costs.

157

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

March 2002

In March 2002, the Company recorded a $7.1 million (net of a $0.1 million adjustment) 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 was completed in 2003. The remaining $2.2 million relates to reductions in selling, general and administrative personnel 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. As discussed previously, 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 and $0.1 million during 2003 as a result of its reevaluation of remaining costs to be incurred. At December 31, 2003, all employees have been terminated under this program. At December 31, 2003 the remaining liability relating to this restructuring was $0.3 million and will be paid by June 2004.

December 2001

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 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, 2003, all impacted employees had been terminated and the related severance amounts had been paid.

June 2001

In June 2001, the Company recorded charges totaling $95.8 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 December 2001, respectively, and the shutdown of the Company’s Hong Kong Distribution Center and the transfer of related functions to its Singapore Distribution Center. The charge included $36.4 million to cover employee separation costs associated with the termination of approximately 3,200 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 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 had been terminated under the June 2001 restructuring program. Manufacturing operations in Guadalajara ceased in June 2002 as originally planned; however, various administrative activities were not completed until 2003.

158

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The planned discontinuation of manufacturing activities triggered an impairment analysis of 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 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 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 the June 2001 restructuring program. As previously mentioned, the Company sold the Guadalajara, Mexico facility in the third quarter of 2003.

March 2001

159

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 6: Balance Sheet Information

Balance sheet information is as follows (in millions):


	December 31,
	2003			2002
Receivables, net:
Accounts receivable	$	134.3		$	113.8
Less: Allowance for doubtful accounts		(2.4	)		(1.9	)

	$	131.9		$	111.9

Inventories, net:
Raw materials	$	15.2		$	15.5
Work in process		107.8			106.3
Finished goods		87.0			81.9

Total inventory		210.0			203.7
Less: Inventory reserves		(42.4	)		(43.7	)

	$	167.6		$	160.0

Property, plant and equipment, net:
Land	$	12.8		$	11.7
Buildings		325.8			449.6
Machinery and equipment		874.0			793.3

Total property, plant and equipment		1,212.6			1,254.6
Less: Accumulated depreciation		(832.7	)		(800.5	)

	$	379.9		$	454.1

Goodwill, net:
Goodwill	$	95.7		$	95.7
Less: Accumulated amortization		(18.4	)		(18.4	)

	$	77.3		$	77.3

Intangible asset, net:
Developed technology	$	—		$	59.3
Less: Accumulated amortization		—			(32.6	)

	$	—		$	26.7

Accrued expenses:
Accrued payroll	$	29.2		$	27.5
Sales related reserves		17.1			14.1
Restructuring reserves		13.1			19.5
Other		29.4			38.8

	$	88.8		$	99.9

Other comprehensive loss:
Foreign currency translation adjustments	$	1.7		$	(2.0	)
Additional minimum pension liability		—			(19.6	)
Net unrealized losses and adjustments related to cash flow hedges		(5.3	)		(12.1	)
Unrealized losses on deferred compensation plan investments		(0.8	)		(0.6	)

	$	(4.4	)	$	(34.3	)

160

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Depreciation expense for property, plant and equipment totaled $101.1 million, $115.2 million and $135.0 million for 2003, 2002 and 2001, respectively. Amortization expense related to the developed technology intangible asset totaled $5.9, $11.9, and $11.6 million in 2003, 2002 and 2001, respectively.

The activity related to the Company’s allowance for doubtful accounts, inventory reserves, allowance for deferred tax assets and warranty reserves for 2001, 2002, and 2003 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, 2001	$	2.5	$	0.5	$	—		$	1.1	$	1.9

Year ended December 31, 2002	$	1.9	$	0.3	$	—		$	0.3	$	1.9

Year ended December 31, 2003	$	1.9	$	0.5	$	—		$	—	$	2.4

Inventory reserves
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

Year ended December 31, 2003	$	43.4	$	13.0	$	—		$	14.0	$	42.4

Allowance for deferred tax assets
Year ended December 31, 2001	$	—	$	366.8	$	83.8	(1)	$	—	$	450.6

Year ended December 31, 2002	$	450.6	$	1.0	$	112.8	(2)	$	—	$	564.4

Year ended December 31, 2003	$	564.4	$	—	$	71.8		$	—	$	636.2

Warranty reserves
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

Year ended December 31, 2003	$	2.7	$	—	$	(0.9	)	$	0.2	$	1.6

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

(2)	Represents the valuation allowance related to the 2002 portion of the net operating loss that was not recognized during the year.

161

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 7: Long-Term Debt

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


	December 31, 2003					December 31, 2002
	Interest Rate		Balance			Interest Rate		Balance
Senior Bank Facilities:
Tranche A	—	%	$	—		6.4375	%	$	6.6
Tranche B	—			—		6.4375			209.9
Tranche C	—			—		6.4375			226.0
Tranche D	—			—		6.4375			134.1
Tranche E	4.4375			320.1		—			—
Revolver	—			—		6.4375			125.0

				320.1					701.6
First-Lien Senior Secured Notes due 2010, 13% interest payable semi-annually, net of debt discount of $8.4				191.6					—
Second-Lien Senior Secured Notes due 2008, 13% interest effective February 2003 payable semi-annually, net of debt discount of $7.4 and $8.6				292.6					291.4
12% Senior Subordinated Notes due 2009, interest payable semi-annually				260.0					260.0
10% Junior Subordinated Note to Motorola due 2011, interest compounded semi-annually, payable at maturity				139.9					126.9
2.3% Note payable to Japanese bank due 2010 interest payable quarterly				24.3					23.3
Capital lease obligation				6.4					—

				1,234.9					1,403.2
Less: Current maturities				(6.6	)				(9.3	)

			$	1,228.3				$	1,393.9

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, 2003, after consideration of the amendments to the credit agreement described below, the senior bank facilities contained a $25.0 million revolving line of credit. Letters of credit totaling $12.6 million were outstanding against the line of credit at December 31, 2003 leaving $12.4 million of availability at that date. As described in Note 11, 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 increase 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

162

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

to outstanding borrowings (“supplemental interest”), and, revise certain mandatory prepayment provisions contained in the original agreement.

In connection with the issuance of the 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 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 Leshan-Phoenix Semiconductor Company Limited (“Leshan”) so long as the related proceeds were used to prepay loans under the senior bank facilities.

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

•

Permit the Company to apply the net proceeds from equity offerings by it or any of its subsidiaries (including the equity offering described in Note 2) 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;

•

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 above. 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 for the year ended December 31, 2003. The remaining $3.4 million of debt refinancing costs were capitalized and are being amortized using the effective interest method.

163

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 $156.8 million after deducting the underwriting discount of $8.2 million ($0.225 per share) and estimated offering expenses of $1.4 million (including $0.4 million that were unpaid as of December 31, 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.

In November 2003, the Company refinanced $368.5 million of term loans under its senior bank facilities. The Company replaced its Tranche B, Tranche C and Tranche D term loan facilities under its senior bank facilities with a single new Tranche E term loan facility with terms, other than the interest rate, that are identical to those of the Tranche D term loan facility. The Company also reduced the interest rate on its term loans by 0.75% per annum. Costs incurred in connection with this refinancing totaled $1.0 million, of which $0.2 million which were expensed as incurred while the remaining $0.8 million of such costs were capitalized and are being amortized using the effective interest method

In December 2003, the Company refinanced approximately $48 million of the term loans under its senior bank facilities with the proceeds from the repayment of a note receivable from an affiliate.

First-Lien Notes

On March 3, 2003, ON Semiconductor and SCI LLC, (collectively, 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 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. Interest accrues on the First-Lien Notes at a rate of 12% per annum. Interest on First-Lien Notes is payable semi-annually in March and September. The First-Lien Notes will mature on March 15, 2010.

The Issuers filed an exchange offer registration statement on relating to the First-Lien Notes pursuant to a registration rights agreement. The registration statement was declared effective by the Securities and Exchange Commission on May 8, 2003.

164

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Second-Lien Notes

On May 6, 2002, 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. In connection with this prepayment, the Company wrote off $6.5 million of debt issuance costs in the second quarter of 2002. Because the amount outstanding under the senior bank facilities was reduced below $750.0 million, supplemental interest charges under the credit agreement relating to the senior bank facilities were reduced from 3.0% to 1.0%. The Company exercised its option to terminate the supplemental interest charges by paying the entire accrued balance of supplemental interest charges during the first quarter of 2003. Interest accrues on the Second-Lien Notes at the rate of 12% per annum until February 6, 2003, when the related annual interest increased to 13%. Interest on the Second-Lien Notes is payable semi-annually in May and November in cash. The Second-Lien Notes will mature on May 15, 2008.

Senior Subordinated Notes

Japanese Loan

165

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Annual maturities relating to the Company’s long-term debt as of December 31, 2003 are as follows (in millions):


	Actual Maturities
2004	$	6.6
2005		6.6
2006		113.7
2007		215.5
2008		296.5
Thereafter		596.0

Total	$	1,234.9

Note 8: Note Receivable from Affiliates

In connection with the Recapitalization, the Company loaned to Leshan, an affiliated company, $58.3 million to refinance third-party non-recourse loans. During 2001, the Company loaned Leshan an additional $5.0 million to finance facility expansion. During 2003, Leshan repaid the $63.3 million note receivable.

Note 9: Income Taxes

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


	Year Ended December 31,
	2003			2002			2001
United States	$	(190.0	)	$	(233.2	)	$	(193.8	)
Foreign		45.1			95.6			(184.7	)

	$	(144.9	)	$	(137.6	)	$	(378.5	)

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


	Year Ended December 31,
	2003			2002		2001
Current
Federal	$	0.2		$	—	$	(19.9	)
State and local		(0.1	)		0.1		0.5
Foreign		6.1			2.3		6.6

		6.2			2.4		(12.8	)

Deferred
Federal		—			—		315.8
State and local		—			—		39.6
Foreign		0.6			6.4		(0.3	)

		0.6			6.4		355.1

	$	6.8		$	8.8	$	342.3

166

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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,
	2003		2002		2001
U.S. federal statutory rate	(35.0	)%	(35.0	)%	(35.0	)%
Increase (decrease) resulting from:
State and local taxes, net of federal tax benefit	(8.4	)	(8.7	)	(3.4	)
Foreign withholding taxes	0.4		1.2		1.5
Foreign rate differential	(9.8	)	(22.5	)	11.2
Change in valuation allowance	60.2		69.3		116.0
Other	(2.7	)	2.1		0.1

	4.7	%	6.4	%	90.4	%

Deferred tax assets are as follows (in millions):


	Year Ended December 31,
	2003			2002
Tax-deductible goodwill	$	220.7		$	235.2
Reserves and accruals		23.0			24.3
Inventories		13.7			15.1
Property, plant and equipment		26.0			16.2
Net operating loss and tax credit carryforwards		348.9			259.6
Other		7.9			18.2

Gross deferred tax assets		640.2			568.6
Valuation allowance		(636.2	)		(564.4	)

Net deferred tax asset	$	4.0		$	4.2

As of December 31, 2003, the Company’s federal, state, and foreign net operating loss carryforwards were $787.8 million, $854.5 million, and $22.9 million, respectively. If not utilized, these net operating losses will expire in varying amounts from 2006 through 2024. As a result of the recent sales of ON Semiconductor’s common stock as discussed in Note 2 of the consolidated financial statements, the amount of federal net operating loss carryforwards that may be used in any one year will be limited.

Income taxes have not been provided on the undistributed earnings of certain foreign subsidiaries (approximately $103.1 million at December 31, 2003) over which the Company 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 $13.0 million.

167

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 10: Employee Benefit Plans

Defined Benefit Plans

Benefits under all of the Company’s plans 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. The Company expects to contribute $12.4 million in 2004 based on current assessment of the economic environment and projected benefit payments. The Company’s measurement date for determining its defined benefit obligations for all plans is December 31 of each year.

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. 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 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, and substantially all accrued benefits were distributed to participants by December 31, 2001.

The assets of the Company’s domestic plans were invested in fixed income securities at December 31, 2003 and 2002. This asset allocation is based on the anticipated timing of benefit payments, historical returns on similar assets and the current economic environment.

In regards to the Grandfathered Plan, the Company reevaluated its current assumptions in light of the actual returns experienced, current annuity rates and the expected discontinuation of benefits as of December 31, 2004 with the subsequent payment of benefits in 2005. The discount rate used to determine the pension obligation at December 31, 2002 and to determine future expense was lowered to 5.0% from 7.4% in the previous year. In addition, the expected return on plan assets used to determine future expense was lowered to 2.5%, reflecting the Company’s change in investment policy regarding the assets of the Grandfathered Plan. Upon the termination of the Grandfathered Plan, the Company is obligated to ensure that the plan has assets sufficient to pay accrued benefits.

168

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

As described in Note 4 “Accounting Changes,” the Company changed its method of accounting for unrecognized actuarial gains or losses 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 following is a summary of the status of the Company’s various pension plans and the net periodic pension cost (dollars in millions):


	Year Ended December 31,
	2003									2002									2001
	U.S. Pension Plans			Foreign Pension Plans			Total			U.S. Pension Plans			Foreign Pension Plans			Total			U.S. Pension Plans			Foreign Pension Plans			Total
Service cost	$	1.7		$	1.3		$	3.0		$	1.8		$	1.3		$	3.1		$	2.1		$	2.2		$	4.3
Interest cost		2.4			0.9			3.3			3.0			0.8			3.8			2.4			1.6			4.0
Expected return on plan assets		(0.5	)		(0.3	)		(0.8	)		(1.2	)		(0.3	)		(1.5	)		(1.4	)		(1.0	)		(2.4	)
Amortization of prior service cost		0.1			0.3			0.4			0.1			0.3			0.4			0.2			0.4			0.6
Settlement losses		—			—			—			0.4			—			0.4			9.9			2.3			12.2
Curtailment gain		—			—			—			—			(0.3	)		(0.3	)		—			—			—
Cumulative effect of accounting change		20.0			1.5			21.5			—			—			—			—			—			—
Other losses		(0.9	)		—			(0.9	)		4.9			—			4.9			0.3			—			0.3

Total net periodic pension cost	$	22.8		$	3.7		$	26.5		$	9.0		$	1.8		$	10.8		$	13.5		$	5.5		$	19.0

Weighted average assumption
Discount rate		5.00	%		4.40	%					7.40	%		5.08	%					6.80	%		5.76	%
Expected return on plan assets		2.50	%		5.73	%					8.50	%		3.17	%					8.50	%		7.46	%
Rate of compensation increase		3.00	%		3.17	%					3.00	%		3.77	%					3.00	%		3.77	%

169

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


	December 31,

	2003									2002
	U.S. Pension Plans			Foreign Pension Plans			Total			U.S. Pension Plans			Foreign Pension Plans			Total
Change in projected benefit obligation
Projected benefit obligation at the beginning of the year	$	46.8		$	19.3		$	66.1		$	41.5		$	22.3		$	63.8
Service cost		1.7			1.3			3.0			1.8			1.3			3.1
Interest cost		2.4			0.9			3.3			3.0			0.8			3.8
Net actuarial (gain) or loss		(1.1	)		(0.1	)		(1.2	)		5.3			1.2			6.5
Cutailment gain		—			—			—			—			(0.3	)		(0.3	)
Benefits paid		(10.3	)		(0.5	)		(10.8	)		(4.8	)		(6.7	)		(11.5	)
Translation loss		—			1.7			1.7			—			0.7			0.7

Projected benefit obligation at the end of the year	$	39.5		$	22.6		$	62.1		$	46.8		$	19.3		$	66.1

Accumulated benefit obligation at the end of the year	$	38.8		$	18.7		$	57.5		$	45.7		$	16.0		$	61.7

Change in plan assets
Fair value of plan assets at the beginning of the year	$	17.2		$	4.0		$	21.2		$	10.1		$	9.1		$	19.2
Actual return on plan assets		0.4			0.3			0.7			(1.1	)		0.3			(0.8	)
Benefits paid		(10.3	)		(0.5	)		(10.8	)		(4.8	)		(6.7	)		(11.5	)
Employer contributions		6.4			1.6			8.0			13.0			1.3			14.3
Translation gain		—			0.4			0.4			—			—			—

Fair value of plan assets at the end of the year	$	13.7		$	5.8		$	19.5		$	17.2		$	4.0		$	21.2

Net amount recognized
Funded status	$	(25.8	)	$	(16.8	)	$	(42.6	)	$	(29.6	)	$	(15.3	)	$	(44.9	)
Unrecognized prior service cost		0.7			1.8			2.5			0.9			1.9			2.8
Unrecognized net actuarial loss		—			—			—			20.0			1.5			21.5

Net amount recognized	$	(25.1	)	$	(15.0	)	$	(40.1	)	$	(8.7	)	$	(11.9	)	$	(20.6	)

Amounts recognized in the statement of financial position
Accrued benefit liability	$	(10.9	)	$	(1.5	)	$	(12.4	)	$	(6.4	)	$	(2.0	)	$	(8.4	)
Other long-term liabilities		(14.2	)		(13.6	)		(27.8	)		(22.0	)		(11.8	)		(33.8	)
Intangible asset		—			0.1			0.1			0.8			1.2			2.0
Accumulated other comprehensive income		—			—			—			18.9			0.7			19.6

Net amount recognized	$	(25.1	)	$	(15.0	)	$	(40.1	)	$	(8.7	)	$	(11.9	)	$	(20.6	)

Weighted average assumptions at the end of the year
Discount rate		5.16	%		4.29	%					5.00	%		4.40	%
Rate of compensation increases		3.00	%		3.18	%					3.00	%		3.17	%

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $59.4 million, $56.5 million, and $17.7 million, respectively as of December 31, 2003 and $63.8 million, $56.8 million and $19.6 million, respectively as of December 31, 2002.

170

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

respectively, includes an additional minimum liability of $0.1 million and $21.6 million, respectively. The additional minimum liability was offset by a $0.1 million intangible asset at December 31, 2003 compared with a $2.0 million intangible asset and a $19.6 increase to stockholders’ deficit at December 31, 2002. The decrease in the additional minimum liability relates to the previously described accounting change.

Defined Contribution Plans

The Company recognized $7.1 million of expense relating to matching contributions in 2000. Effective March 1, 2001 the Company amended the Savings Plan to make the matching contribution discretionary. A discretionary matching contribution was offered through April 2001, resulting in $2.2 million of related expense in 2001. Effective January 1, 2002, the Company reinstated a discretionary matching contribution of 100% of the first 3% of employee contributions and, if certain financial goals are achieved, an additional 50% of the next 6% of employee contributions. The Company recognized $3.3 million and $4.0 million of expense relating to matching contributions in 2003 and 2002, respectively.

Certain foreign subsidiaries have defined contribution plans in which eligible employees participate. The Company recognized compensation expense of $0.4 million, $0.6 million and $1.0 million relating to these plans for the years ended 2003, 2002 and 2001, respectively.

Note 11: Financial Instruments

Foreign Currencies

171

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


	December 31,
	2003 Buy (Sell)		2002 Buy (Sell)
Japanese Yen	$	—	$	(16.3	)
Czech Koruna		—		2.7
Euro		2.6		(11.4	)
Philippine Peso		—		1.8
Mexican Peso		—		0.3
British Pound		—		5.0
Singapore Dollar		—		1.8
Swedish Krona		—		1.5
Taiwan Dollar		—		(4.9	)
Slovakian Koruna		0.4		—

	$	3.0	$	(19.5	)

Interest Rate Agreements

Other

172

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 12: 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 Receivable from Affiliate

Due to the related party nature of the notes receivable from affiliate, it was not practicable to estimate their fair values due to the inability to obtain quoted market prices or determine current market rates for similar instruments. At December 31, 2002 the carrying value of the notes receivable from affiliate was $63.3 million. The affiliate repaid the notes during 2003.

Long-term Debt

The fair values of the Company’s long-term borrowings are determined by obtaining quoted market prices if available or market prices for comparable debt instruments.

Foreign Currency Exchange Contracts

Forward foreign exchange contracts are valued at current foreign exchange rates for contracts with similar maturities.

Interest Rate Agreements

The fair values of the Company’s interest rate swaps represent the amounts at which they could be settled and are estimated by obtaining quotes from brokers.

The carrying amounts and fair values of the Company’s financial instruments at December 31, 2003 and 2002 are as follows (in millions):


	December 31, 2003				December 31, 2002
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt	(1,228.3	)	(1,363.0	)	(1,393.9	)	(999.9	)
Foreign currency exchange contracts	0.9		0.9		(0.3	)	(0.3	)
Interest rate agreements	(4.6	)	(4.6	)	(10.5	)	(10.5	)

Note 13: Stock Options

Certain employees of the Company participate in the ON Semiconductor 1999 Founders Stock Option Plan (“the 1999 Plan”), which is an incentive plan for key employees, directors and consultants. A total of 11.6 million shares of ON Semiconductor’s common stock have been reserved for issuance under the 1999 Plan. The 1999 Plan is administered by the ON Semiconductor Board of Directors or a committee thereof, which is authorized to, among other things, select the key employees, directors and consultants who will receive grants and determine the exercise prices and vesting schedules of the options. Prior to the existence of a public market for ON Semiconductor’s common stock, ON Semiconductor’s Board of Directors determined the fair market value.

173

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Company employees also participate in ON Semiconductor’s 2000 Stock Incentive Plan (“the 2000 Plan”) which provides key employees, directors and consultants with various equity-based incentives as described in the plan document. During 2001, ON Semiconductor stockholders voted to amend the 2000 Plan to increase the number of shares of its common stock issuable thereunder by 3.0 million (for an aggregate of 13.0 million). The 2000 Plan is administered by the ON Semiconductor Board of Directors or a committee thereof, which is authorized to determine, among other things, the key employees, directors or consultants who will receive awards under the plan, the amount and type of award, exercise prices or performance criteria, if applicable, and vesting schedules.

Generally, the options granted under both plans vest over a period of four years. Under the 1999 Plan, all outstanding options and under the 2000 Plan certain outstanding options vest automatically upon a change of control, as defined, provided the option holder is employed by the Company on the date of the change in control. Under the 2000 Plan, certain other outstanding options vest upon a change of control if the Board of Directors of ON Semiconductor, at its discretion, provides for acceleration of the vesting of said options. 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).

There was an aggregate of 10.4 million, 6.3 million and 4.7 million shares of common stock available for grant under the 1999 Plan and the 2000 Plan at December 31, 2003, 2002 and 2001, respectively.

Additional 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):


	2003				2002				2001
	Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price
Outstanding at beginning of year	22.9		$	4.55	18.2		$	5.87	13.8		$	6.49
Grants	6.0			2.16	8.0			3.00	8.4			5.26
Exercises	(1.9	)		1.79	(0.7	)		1.50	(0.5	)		1.50
Cancellations	(4.4	)		4.63	(2.6	)		9.99	(3.5	)		7.42

Outstanding at end of year	22.6		$	4.13	22.9		$	4.55	18.2		$	5.87

Exercisable at end of year	10.0		$	5.13	7.9		$	4.95	4.4		$	4.74

Weighted average fair value of options granted during the period			$	1.50			$	1.83			$	3.25

174

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The following tables summarize options outstanding and options exercisable at December 31, 2003 (shares in millions):


	Outstanding Options
	Number Shares	Weighted Average Contractual Life (in years)	Weighted Average Exercise Price
Range of Exercise Prices
$ 1.03-$ 1.50	8.9	7.52	$	1.38
$ 1.65-$ 2.71	2.5	8.87		1.91
$ 3.06-$ 4.96	5.4	8.07		3.50
$ 5.19-$ 9.03	4.2	7.88		6.21
$10.88-$21.38	1.6	6.41		15.77

Totals	22.6			4.13


	Exercisable Options
	Number Shares	Weighted Average Contractual Life (in years)	Weighted Average Exercise Price
Range of Exercise Prices
$1.03-$1.50	4.3	5.87	$	1.49
$1.65-$2.71	0.4	8.86		1.91
$3.06-$4.96	2.0	7.94		3.69
$5.19-$9.03	1.6	7.15		6.65
$10.88-$21.38	1.7	6.38		15.80

Totals	10.0			5.13

These options will expire if not exercised at specific dates through December 2013.

In 2002, the Company recorded charges totaling $4.1 million related to the modification of option terms for employees terminated under various restructuring programs as well as the separation of an executive officer. These charges are recorded in restructuring, asset impairments and other, net in the consolidated statement of operations with an offsetting credit to additional paid-in capital. In 2002, the Company also recorded $0.4 million of compensation expense related to stock options issued to consultants and other stock option modifications to certain employees.

In 2001, ON Semiconductor, on behalf of the Company, issued warrants to purchase 1,250,000 shares of common stock to consultants for services rendered during 2001. These warrants, which have an exercise price of $1.90 per share, were recorded at their estimated fair value of $1.3 million as a charge to general and administrative expense and with an offsetting credit to contributed capital. These warrants vested at the date of grant and expire in October 2005.

During 2000, an employee of the Company was granted 80,000 stock appreciation rights under the 2000 Plan with a reference price of $16.00.

175

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The Company’s employees participate in the 2000 Employee Stock Purchase Plan sponsored by ON Semiconductor. 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’s 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 annual purchases of $25,000 under this plan. In addition, during each quarterly offering period, employees may not purchase stock exceeding the lesser of (i) 500 shares, or (ii) the number of shares equal to $6,250 divided by the fair market value of the stock on the first day of the offering period. During 2003, 2002 and 2001, employees purchased approximately 0.7 million, 1.0 million and 1.3 million shares under the plan. During 2001, shareholders voted to amend the 2000 Employee Stock Purchase Plan to increase the number of shares of ON Semiconductor’s common stock issuable thereunder by 4.0 million (for an aggregate of 5.5 million shares).

Note 14: Commitments and Contingencies

Leases

The following is a schedule by year of future minimum lease obligations under non-cancelable operating leases as of December 31, 2003 (in millions):


Year ending December 31,
2004	$	8.4
2005		5.3
2006		2.1
2007		0.4
2008		0.2

Total	$	16.4

Other Obligations

The Company also enters into various capital purchase obligations, supply agreements and service agreements with various vendors. The obligations for these type of agreements are as follows as of December 31, 2003:


	Total		2004		2005		2006		2007		2008		Thereafter
Capital purchase obligations	$	7.4	$	7.4	$	—	$	—	$	—	$	—	$	—
Foundry and inventory purchase obligations		31.3		31.3		—		—		—		—		—
Mainframe support		17.7		8.6		7.4		1.7						—
Various information technology and communication services		17.9		15.5		1.2		1.1		—		—		0.1
Other		4.3		3.0		1.0		0.3		—		—		—

	$	78.6	$	65.8	$	9.6	$	3.1	$	—	$	—	$	0.1

176

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Other Contingencies

Commitments with Affiliate

Leshan-Phoenix Semiconductor Company Limited (“Leshan”), operates a back-end manufacturing facility in Leshan, China. ON Semiconductor owns a majority of the outstanding equity interests of Leshan. Pursuant to the joint venture agreement, requests for production capacity are made to the board of directors of Leshan by each shareholder. These requests represent a purchase commitment by the respective shareholder of the Leshan joint venture; however, each shareholder may elect to pay the cost associated with the unused capacity (which is generally equal to the fixed cost of the capacity), in lieu of the commitment. The Company provides forecasted needs to Leshan on a periodic basis, an approximate six-month cycle, which are used to establish pricing over the forecasted period, and, as described above, the Company is responsible for underutilized capacity cost due to variations from our forecasted needs. The Company committed to purchase 82%, 85% and 81% of the total products produced by Leshan in 2003, 2002 and 2001, respectively, and is currently committed to purchase 86% of the product produced by Leshan in 2004. Because the Company purchased less than its committed amounts in 2003, 2002 and 2001, it incurred $0.5 million, $1.5 million and $6.4 million in underutilization charges, respectively.

Legal Matters

The Company and ON Semiconductor are involved in a variety of legal matters that arise in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters, including the matters described below, will have a material adverse effect on the Company or ON Semiconductor’s financial condition, results of operations or cash flows.

During the period July 5, 2001 through July 27, 2001, ON Semiconductor was named as a defendant in three shareholder class action lawsuits that were filed in federal court in New York City against ON Semiconductor and certain of its former officers, current and former directors and the underwriters for its initial public offering. The lawsuits allege violations of the federal securities laws and have been docketed in the U.S. District Court for the Southern District of New York as: Abrams v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6114; Breuer v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6287; and Cohen v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6942. On April 19, 2002, the plaintiffs filed a single consolidated amended complaint that supersedes the individual complaints originally filed. The amended complaint alleges, among other things, that the underwriters of ON Semiconductor’s initial public offering improperly required their customers to pay the underwriters excessive commissions and to agree to buy additional shares of ON Semiconductor’s common stock in the aftermarket as conditions of receiving shares in its initial public offering. The amended complaint further alleges that these supposed practices of the underwriters should have been disclosed in ON Semiconductor’s initial public offering prospectus and registration statement. The amended complaint alleges violations of both the registration and antifraud provisions of the federal securities laws and seeks unspecified damages. We understand that various other plaintiffs have filed substantially similar class action cases against approximately

177

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

300 other publicly traded companies and their public offering underwriters in New York City, which along with the cases against ON Semiconductor have all been transferred to a single federal district judge for purposes of coordinated case management. ON Semiconductor believes that the claims against it are without merit and has defended, and intends to continue to defend, the litigation vigorously. The litigation process is inherently uncertain, however, and ON Semiconductor cannot guarantee that the outcome of these claims will be favorable.

On July 15, 2002, together with the other issuer defendants, ON Semiconductor filed a collective motion to dismiss the consolidated, amended complaints against the issuers on various legal grounds common to all or most of the issuer defendants. The underwriters also filed separate motions to dismiss the claims against them. In addition, the parties have stipulated to the voluntary dismissal without prejudice of our individual current and former officers and directors who were named as defendants in our litigation, and they are no longer parties to the lawsuit. On February 19, 2003, the Court issued its ruling on the motions to dismiss filed by the underwriter and issuer defendants. In that ruling the Court granted in part and denied in part those motions. As to the claims brought against ON Semiconductor under the antifraud provisions of the securities laws, the Court dismissed all of these claims with prejudice, and refused to allow plaintiffs the opportunity to re-plead these claims. As to the claims brought under the registration provisions of the securities laws, which do not require that intent to defraud be pleaded, the Court denied the motion to dismiss these claims as to ON Semiconductor and as to substantially all of the other issuer defendants as well. The Court also denied the underwriter defendants’ motion to dismiss in all respects.

In June 2003, upon the determination of a special independent committee of our Board of Directors, ON Semiconductor elected to participate in a proposed settlement with the plaintiffs in this litigation. If ultimately approved by the Court, this proposed settlement would result in a dismissal, with prejudice, of all claims in the litigation against ON Semiconductor and against any of the other issuer defendants who elect to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. The proposed settlement does not provide for the resolution of any claims against the underwriter defendants, and the litigation against those defendants is continuing. The proposed settlement provides that the class members in the class action cases brought against the participating issuer defendants will be guaranteed a recovery of $1 billion by the participating issuer defendants. If recoveries totaling less than $1 billion are obtained by the class members from the underwriter defendants, the class members will be entitled to recover the difference between $1 billion and the aggregate amount of those recoveries from the participating issuer defendants. If recoveries totaling $1 billion or more are obtained by the class members from the underwriter defendants, however, the monetary obligations to the class members under the proposed settlement will be satisfied. In addition, ON Semiconductor and any other participating issuer defendants will be required to assign to the class members certain claims that they may have against the underwriters of our initial public offerings.

The proposed settlement contemplates that any amounts necessary to fund the settlement or settlement-related expenses would come from participating issuers’ directors and officers’ liability insurance policy proceeds as opposed to funds of the participating issuer defendants themselves. A participating issuer defendant could be required to contribute to the costs of the settlement if that issuer’s insurance coverage were insufficient to pay that issuer’s allocable share of the settlement costs. ON Semiconductor expects that its insurance proceeds will be sufficient for these purposes and that ON Semiconductor will not otherwise be required to contribute to the proposed settlement. Consummation of the proposed settlement is conditioned upon, among other things, negotiating, executing, and filing with the Court final settlement documents, and final approval by the Court. Formal settlement documents for submission to the Court are currently being drafted. If the proposed settlement described above is not consummated, however, ON Semiconductor intends to continue to defend the litigation vigorously. While ON Semiconductor can make no promises or guarantees as to the

178

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

outcome of these proceedings, ON Semiconductor believes that the final result of these actions will have no material effect on its consolidated financial condition, results of operations or cash flows.

Note 15: Related Party Transactions

The Company agreed to pay TPG an annual management fee of up to $2.0 million. In connection with the Cherry acquisition described in Note 3, the Company paid TPG a $2.0 million advisory fee in-lieu of the annual management fee for 2000. The payment of the annual management fee to TPG has been waived until certain conditions are met and no such management fees were incurred in 2001, 2002 or 2003. Management fees may be paid to TPG in cash or with the ON Semiconductor’s common stock or warrants.

In connection with the Recapitalization, Motorola assigned, licensed or sublicensed intellectual property to the Company relating to certain of the Company’s products. Motorola also agreed to continue providing manufacturing and assembly services, to continue using similar services the Company provides to them and to lease real estate to the Company. The manufacturing and assembly services that the Company and Motorola have agreed to continue to provide to each other are at prices intended to approximate each party’s cost of providing the services and are fixed throughout the term of the agreements. As of December 31, 2003, the Company has no minimum commitments to purchase manufacturing services from Motorola in 2004.Related party activity between the Company and Motorola is as follows (in millions):


	Year ended December 31,
	2003		2002		2001
Cash paid for:
Purchases of manufacturing services from Motorola	$	8.9	$	14.3	$	87.4

Cost of other services, rent and equipment purchased from Motorola	$	0.8	$	1.5	$	17.7

Cash received for:
Freight sharing agreement with Motorola	$	—	$	21.4	$	21.9

Rental of property and equipment to Motorola	$	5.6	$	9.1	$	11.2

Product sales to Motorola	$	74.9	$	99.5	$	94.3

179

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 16: Supplemental Disclosure of Cash Flow Information

The Company’s non-cash financing activities and cash payments for interest and income taxes are as follows (in millions):


	Year Ended December 31,
	2003	2002			2001
Non-cash financing activities:
Equipment acquired through capital leases	6.6	$	—		$	3.0
Cash (received) paid for:
Interest	141.7		103.8			113.3
Income taxes	1.8		(0.6	)		(1.3	)

Note 17: Segment Information

Revenues by geographic location and product line, including local sales and exports made by operations within each area, are summarized as follows (in millions):


	Year ended December 31,
	2003		2002		2001
United States	$	319.5	$	393.1	$	430.6
The Other Americas		4.0		8.2		55.1
Asia/Pacific		484.8		416.5		376.8
Europe		189.3		201.7		264.0
Japan		63.3		65.0		88.1

	$	1,060.9	$	1,084.5	$	1,214.6


	Year ended December 31,
	2003		2002		2001
Power Management and Standard Analog	$	333.4	$	362.7	$	365.4
MOS Power Devices		152.6		138.7		146.7
High Frequency Clock and Data Management		80.5		72.0		118.5
Standard Components		494.4		511.1		584.0

	$	1,060.9	$	1,084.5	$	1,214.6

180

SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Property, plant and equipment by geographic location is summarized as follows (in millions):


	December 31,
	2003		2002
United States	$	94.3	$	104.4
Europe		89.4		97.4
Malaysia		78.7		103.1
Japan		71.7		72.6
The Other Asia/Pacific		25.7		32.6
The Other Americas		20.1		44.0

	$	379.9		$454.1

181

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2003 and 2002 and for the Years Ended December 31, 2003, 2002 and 2001

182

REPORT OF INDEPENDENT AUDITORS

To The Board of Directors and Stockholder

of ON Semiconductor Trading Ltd.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholder’s equity (deficit) and of 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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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 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.

PRICEWATERHOUSECOOPERS LLP

Phoenix, Arizona

February 2, 2004, except for the

third paragraph of Note 2

for which the date is February 9, 2004

183

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED BALANCE SHEET


	December 31,
	2003			2002
	(in millions, except share data)
ASSETS
Cash and cash equivalents	$	28.1		$	30.8
Receivables, net		99.1			73.0
Inventories, net		147.6			138.1
Other current assets		9.7			16.3
Deferred income taxes		1.8			2.8

Total current assets		286.3			261.0
Property, plant and equipment, net		6.1			8.8
Deferred income taxes		0.9			1.3
Other assets		7.6			4.2

Total assets	$	300.9		$	275.3

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Accounts payable	$	48.5		$	24.0
Accrued expenses		28.8			21.2
Due to affiliates		73.0			76.7
Income taxes payable		1.4			0.7
Deferred income on sales to distributors		47.0			52.9

Total current liabilities		198.7			175.5
Other long-term liabilities		3.5			2.0
Notes payable to parent		104.7			160.3

Total liabilities		306.9			337.8

Commitments and contingencies (See Note 12)		—			—

Common stock ($1.00 par value, 50,000 shares authorized, 12,000 shares issued and outstanding)		—			—
Additional paid-in capital		40.4			40.4
Accumulated other comprehensive income		0.6			0.5
Accumulated deficit		(47.0	)		(103.4	)

Total stockholder’s equity (deficit)		(6.0	)		(62.5	)

Total liabilities and stockholder’s equity (deficit)	$	300.9		$	275.3

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

184

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED STATEMENT OF OPERATIONS


	Year Ended December 31,
	2003			2002			2001
	(in millions)
Revenues:
External revenues	$	741.6		$	690.0		$	744.4
Revenues from affiliates		252.4			230.3			272.9

Total revenues		994.0			920.3			1,017.3

Cost of sales:
External cost of sales		537.0			521.6			619.7
Cost of sales to affiliates		252.9			240.0			290.4

Total cost of sales		789.9			761.6			910.1

Gross profit		204.1			158.7			107.2

Operating expenses:
Research and development		74.8			55.1			72.4
Selling and marketing		24.7			24.6			28.6
General and administrative		36.5			37.7			43.3
Restructuring, asset impairments and other, net		3.3			6.0			16.0

Total operating expenses		139.3			123.4			160.3

Operating income (loss)		64.8			35.3			(53.1	)
Interest expense, net		(7.5	)		(12.1	)		(13.3	)

Income (loss) before income taxes and cumulative effect of accounting change		57.3			23.2			(66.4	)
Income tax benefit (provision)		(0.9	)		(1.3	)		1.2

Income (loss) before cumulative effect of accounting change		56.4			21.9			(65.2	)
Cumulative effect of accounting change, net of tax		—			—			(81.5	)

Net income (loss)	$	56.4		$	21.9		$	(146.7	)

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

185

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY (DEFICIT)


	Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total
	(in millions)
Balance at December 31, 2000	$	—	$	40.4	$	0.6		$	21.4		$	62.4

Comprehensive loss:
Net loss				—		—			(146.7	)		(146.7	)
Foreign currency translation adjustments				—		(0.1	)		—			(0.1	)

Comprehensive loss						(0.1	)		(146.7	)		(146.8	)

Balance at December 31, 2001		—		40.4		0.5			(125.3	)		(84.4	)

Comprehensive income:
Net income				—		—			21.9			21.9

Comprehensive income						—			21.9			21.9

Balance at December 31, 2002		—		40.4		0.5			(103.4	)		(62.5	)

Comprehensive income:
Net income				—		—			56.4			56.4
Foreign currency translation adjustments				—		0.1			—			0.1

Comprehensive income						0.1			56.4			56.5

Balance at December 31, 2003	$	—	$	40.4	$	0.6		$	(47.0	)	$	(6.0	)

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

186

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED STATEMENT OF CASH FLOWS


	Year Ended December 31,
	2003			2002			2001
	(in millions)
Cash flows from operating activities:
Net income (loss)	$	56.4		$	21.9		$	(146.7	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		4.1			4.7			7.1
Cumulative effect of accounting change		—			—			81.5
Provision for excess inventories		8.0			13.2			42.4
Non-cash impairment of property, plant and equipment		0.3			0.2			2.7
Deferred income taxes		1.9			1.5			0.9
Other		(0.3	)		0.7			(0.5	)

Changes in assets and liabilities:
Receivables		(26.3	)		(23.9	)		78.4
Inventories		(17.5	)		30.5			(12.4	)
Other assets		3.2			(12.3	)		1.1
Due from affiliates		—			106.4			(93.7	)
Accounts payable		24.5			(7.4	)		(8.7	)
Accrued expenses		7.6			10.0			(44.5	)
Due to affiliates		(4.6	)		72.2			(77.6	)
Income taxes payable		0.7			(2.5	)		(11.4	)
Deferred income on sales to distributors		(5.9	)		(8.5	)		(34.3	)
Other long-term liabilities		1.5			(1.7	)		(1.8	)

Net cash provided by (used in) operating activities		53.6			205.0			(217.5	)

Cash flows from investing activities:
Purchases of property, plant and equipment		(0.8	)		(0.3	)		(2.5	)
Proceeds from sales of property, plant and equipment	��	—			0.2			0.3

Net cash used in investing activities		(0.8	)		(0.1	)		(2.2	)

Cash flows from financing activities:
Proceeds from borrowings from Parent		236.6			206.3			515.5
Repayment of borrowings from Parent		(292.2	)		(413.9	)		(320.0	)

Net cash provided by (used in) financing activities		(55.6	)		(207.6	)		195.5

Effect of exchange rate changes on cash and cash equivalents		0.1			—			—

Net decrease in cash and cash equivalents		(2.7	)		(2.7	)		(24.2	)
Cash and cash equivalents, beginning of period		30.8			33.5			57.7

Cash and cash equivalents, end of period	$	28.1		$	30.8		$	33.5

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

187

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, which 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.

Note 2: Liquidity

During the year ended December 31, 2003, ON Semiconductor incurred a net loss of $166.7 million compared to net losses of $141.9 and 831.4 million in 2002 and 2001, respectively. ON Semiconductor’s net results included restructuring, asset impairments and other, net of $61.2 million, $27.7 million and $150.4 million in 2003, 2002 and 2001, respectively, as well as interest expense of $151.1, $152.5 million and $143.6 million, respectively. ON Semiconductor’s operating activities provided cash of $45.7 in 2003 and $46.4 million in 2002 and used cash of $116.4 million in 2001.

In February 2004, ON Semiconductor completed a public offering of common stock resulting in net proceeds of $226.7 million. The net proceeds are expected to be used to redeem $70.0 million principal amount of ON Semiconductor’s 13% senior secured notes due 2010 and $105 million principal amount of the 12% senior securied notes due 2008 at a redemption price of 112% of the principal amount of such notes. The remaining proceeds will be used for general corporate purposes.

188

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

adequate to fund ON Semiconductor’s operating and capital needs as well as enable it to maintain compliance with its various debt agreements through December 31, 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. All material intercompany accounts and transactions have been eliminated.

Use of Estimates

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; the future cash flows associated with long-lived assets; and, the fair values of 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

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 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.

189

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

recoverable. Impairment is assessed when the undiscounted expected cash flows derived from 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.

Revenue Recognition

The Company generates revenue from the sales of its semiconductor products to original equipment manufacturers, distributors and electronic manufacturing service providers as well as to affiliated companies. 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 costs and allowances. 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.

Prior to January 1, 2001, the Company recognized revenue on all distributor sales when title passed to the distributor. 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. 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.

190

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Stock-Based Compensation

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, 2003, 2002, and 2001 would have been reduced (increased) to the pro forma amounts indicated below (in millions):


	Year Ended December 31,
	2003			2002			2001
Net income (loss), as reported	$	56.4		$	21.9		$	(146.7	)
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1.9	)		(1.9	)		(1.5	)

Pro forma net income (loss)	$	54.5		$	20.0		$	(148.2	)

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:


Employee Stock Options	2003		2002		2001
Expected life (in years)	5		5		5
Risk-free interest rate	3.09	%	4.28	%	4.83	%
Volatility	0.79		0.70		0.70

Employee Stock Purchase Plan	2003		2002		2001
Expected life (in years)	0.25		0.25		0.25
Risk-free interest rate	1.07	%	1.71	%	4.26	%
Volatility	0.82		0.70		0.70

The weighted-average estimated fair value of employee stock options granted during 2003, 2002 2001 was $1.59, $1.93, and $3.23 per share, respectively. The weighted-average estimated fair value of the discount on the shares sold under ON Semiconductor’s 2000 Employee Stock Purchase Plan during 2003, 2002 and 2001 was $0.60, $0.62 and $1.24, respectively.

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.

191

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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

Reclassifications

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

Contingencies

The Company is involved in a variety of legal matters that arise in the normal course of business. Based on information available, management evaluates the relevant range and likelihood of potential outcomes. In accordance with SFAS No. 5, “Accounting for Contingencies”, the Company records the appropriate liability when the amount is deemed probable and estimable.

192

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 December 2003, the FASB issued SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003)”. SFAS No. 132 revises employers’ disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132, which also requires new disclosures for interim periods beginning after December 15, 2003, is effective for fiscal years ending after December 15, 2003, except for certain disclosures associated with foreign plans which are required for years ended after June 15, 2004, the Company has included the required disclosures in Note 9 “Employee Benefit Plans”.

Note 4: Accounting Changes

193

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 as the cumulative effect of change in accounting principle in the Company’s consolidated statement of operations for 2001. The accounting change resulted in an increase in revenues of $55.7 million and a reduction in net loss of $29.5 million for the year ended December 31, 2001.

The Company changed its method of accounting for unrecognized net actuarial gains or losses relating to its defined benefit pension obligations effective January 1, 2003. Historically, the Company amortized such 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. This change did not have a material impact on the Company’s financial position or results of operations.

194

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 5: Restructuring, Asset Impairments and Other, Net

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


	Reserve Balance at December 31, 2002		2003 Charges		2003 Usage			Adjustments			Reserve Balance at December 31, 2003
*December 2003*
Cash employee separation charges	$	—	$	0.6	$	—		$	—		$	0.6

*September 2003*
Cash employee separation charges		—		0.8		(0.5	)		—			0.3

*June 2003*
Cash exit costs		—		1.2		(1.2	)		—			—
Non-cash impairment of property, plant and equipment		—		0.2		(0.2	)		—			—

		—										—

*June 2002*
Cash employee separation charges		0.4		—		(0.4	)		—			—

*March 2002*
Cash employee separation charges		2.9		—		(2.8	)		0.5			0.6

	$	3.3	$	2.8	$	(5.1	)	$	0.5		$	1.5


	Reserve Balance at December 31, 2001		2002 Charges		2002 Usage			Adjustments			Reserve Balance at December 31, 2002
*June 2002*
Cash employee separation charges	$	—	$	0.6	$	(0.2	)	$	—		$	0.4
Non-cash impairment of property, plant and equipment		—		0.2		(0.2	)		—			—

		—										0.4

*March 2002*
Cash employee separation charges		—		5.3		(2.7	)		0.3			2.9

*December 2001*
Cash employee separation charges		0.8		—		(0.8	)		—			—

*June 2001*
Cash exit costs		1.3		—		(0.9	)		(0.4	)		—

*March 2001*
Cash employee separation charges		0.3		—		(0.3	)		—			—

	$	2.4	$	6.1	$	(5.1	)	$	(0.1	)	$	3.3

195

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


	Reserve Balance at December 31, 2000		2001 Charges		2001 Usage			Adjustments			Reserve Balance at December 31, 2001
*December 2001*
Cash employee separation charges	$	—	$	1.1	$	(0.3	)	$	—		$	0.8
Non-cash impairment of property, plant and equipment		—		1.3		(1.3	)		—			—

		—										0.8

*June 2001*
Cash employee separation charges		—		4.8		(4.7	)		(0.1	)		—
Cash exit costs		—		1.3		—			—			1.3
Non-cash impairment of property, plant and equipment		—		1.4		(1.4	)		—			—
Non-cash stock compensation and pension charges		—		0.5		(0.5	)		—			—

		—										1.3

*March 2001*
Cash employee separation charges		—		5.7		(5.4	)		—			0.3

	$	—	$	16.1	$	(13.6	)	$	(0.1	)	$	2.4

The following table reconciles the restructuring activity in the tables above to the “Restructuring, asset impairments and other, net” caption on the Statements of Operations for the years ended December 31, 2003, 2002 and 2001, (in millions):


	Year Ended December 31, 2003
2003 Charges	$	2.8
Plus: Additional net charges related to employee separation costs (March 2002)		0.5

	$	3.3


	Year Ended December 31, 2002
2002 Charges	$	6.1
Less: Reserves released during the period		(0.1	)

	$	6.0


	Year Ended December 31, 2001
2001 Charges	$	16.1
Less: Reserves released during the period		(0.1	)

	$	16.0

196

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

December 2003

In December 2003, the Company recorded a $0.6 million charge, associated with worldwide restructuring programs to cover employee separation costs relating to the termination of 5 employees, reflecting further reductions in selling, general and administrative personnel in France, Germany and the United Kingdom. As of December 31, 2003, all impacted employees had been notified but not yet terminated, and the Company currently expects to terminate all employees and pay the entire balance of employee severance costs by December 2004.

September 2003

In September 2003, the Company recorded a $1.0 million charge, associated with worldwide restructuring programs to cover employee separation costs relating to the termination of 7 employees, reflecting further reductions in general and administrative personnel in France, Germany and Hong Kong. The charge included an additional $0.2 million charge associated with the March 2002 restructuring program described below.

All impacted employees had been terminated, and the Company currently expects to pay the remaining $0.3 million of employee severance costs by December 2004.

June 2003

In June 2003, the Company recorded charges totaling $1.7 million associated with its restructuring programs. The charges include $1.2 million of lease and contract termination costs, $0.2 million of asset impairments and an additional $0.3 million associated with employee separation costs included in March 2002 restructuring program.

The lease and contract termination costs relate to the exit of certain sales and administrative offices in Bermuda and Europe and the termination of other purchase and supply agreements. As of December 31, 2003, all exit costs related to these charges have been paid.

The Company identified certain buildings, machinery, software and equipment that would no longer be used internally due to the continued consolidation of general and administrative functions and recorded an asset impairment charge of $0.2 million to write-down the remaining carrying value of these assets to their net realizable value.

June 2002

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 December 31, 2003, all impacted employees had been terminated and the related severance payments had been made.

March 2002

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

197

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Toulouse, France to Roznov, Czech Republic and Piestany, Slovakia. The remaining $0.3 million relates to reductions in selling, general and administrative functions primarily in the United Kingdom. The Company recorded an additional $0.3 in employee separation costs relating to the relocation of the administrative functions in Toulouse, France during 2003 as a result of its reevaluation of remaining costs to be incurred. As of December 31, 2003, the remaining liability relating to this restructuring was $0.6 million and the Company expects that the remaining severance benefits will be paid by June 2004.

December 2001

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 December 31, 2002, all impacted employees had been terminated. 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

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. As of December 31, 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. During 2002, the Company recorded a $0.4 adjustment to release reserves associated with the June 2001 restructuring programs due to the Company’s analysis of estimated costs to complete those programs. As of December 31, 2002, all exit activities have been completed.

March 2001

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 December 31, 2002, all of the employees had been terminated under this restructuring program.

198

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 6: Balance Sheet Information

Balance sheet information is as follows (in millions):


	December 31,
	2003			2002
Receivables, net:
Accounts receivable	$	99.8		$	73.6
Less: Allowance for doubtful accounts		(0.7	)		(0.6	)

	$	99.1		$	73.0

Inventories, net
Raw materials	$	5.4		$	3.7
Work in process		105.2			108.4
Finished goods		75.0			67.2

Total inventories		185.6			179.3
Less: Inventory reserves		(38.0	)		(41.2	)

	$	147.6		$	138.1

Property, plant and equipment, net:
Buildings	$	0.4		$	0.6
Machinery and equipment		25.4			31.3

Total property, plant and equipment		25.8			31.9
Less: Accumulated depreciation		(19.7	)		(23.1	)

	$	6.1		$	8.8

Accrued expenses:
Accrued payroll	$	9.2		$	5.9
Other taxes payable		2.0			6.6
Sales related reserves		14.7			3.1
Restructuring reserve		1.5			3.3
Other		1.4			2.3

	$	28.8		$	21.2

Accumulated other comprehensive income:
Foreign currency translation adjustments	$	0.6		$	0.5

Depreciation expense totaled $4.1 million, 4.7 million and $7.1 million for the years ended December 31, 2003, 2002 and 2001, respectively.

199

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The activity related to the Company’s inventory reserves and warranty reserves for the years ended December 31, 2001, 2002 and 2003 follows:


Description	Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts			Deductions/ Writeoffs			Balance at End of Period
*Inventory reserves*
Year ended December 31, 2001	$	17.3	$	42.4				$	(16.1	)	$	43.6

Year ended December 31, 2002	$	43.6	$	13.2				$	(15.6	)	$	41.2

Year ended December 31, 2003	$	41.2	$	8.0				$	(11.2	)	$	38.0

*Warranty reserves*
Year ended December 31, 2001	$	1.1	$	—				$	(0.4	)	$	0.7

Year ended December 31, 2002	$	0.7	$	0.1				$	(0.1	)	$	0.7

Year ended December 31, 2003	$	0.7	$	0.1				$	—		$	0.8

*Allowance for deferred tax assets*
Year ended December 31, 2001	$	—	$	—	$	0.6	(1)	$	—		$	0.6

Year ended December 31, 2002	$	0.6	$	1.0	$	1.5	(2)	$	—		$	3.1

Year ended December 31, 2003	$	3.1	$	—	$	(0.5	)	$	—		$	2.6

Note 7: Income Taxes

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


	Year Ended December 31,
	2003		2002		2001
Bermuda	$	43.5	$	18.4	$	(63.8	)
Other foreign countries		13.7		4.8		(2.6	)

	$	57.2	$	23.2	$	(66.4	)

The provision (benefit) for income taxes for the years ended December 31, 2003, 2002 and 2001, all of which relates to operations outside of Bermuda, is as follows (in millions):


	Year Ended December 31,
	2003			2002			2001
Current	$	(1.0	)	$	(0.2	)	$	(2.1	)
Deferred		1.9			1.5			0.9

	$	0.9		$	1.3		$	(1.2	)

200

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

A reconciliation of the Bermuda statutory income tax rate to the Company’s effective income tax rate is as follows:


	Year Ended December 31,
	2003		2002		2001
Bermuda statutory rate	—	%	—	%	—	%
Increase (decrease) resulting from:
Foreign rate differential	2.5		(5.2	)	(2.8	)
Change in valuation allowance	(0.9	)	10.8		1.0

	1.6	%	5.6	%	(1.8	)%

Deferred tax assets are as follows (in millions):


	December 31,
	2003			2002
Tax-deductible goodwill	$	0.9		$	1.3
Reserves and accruals		1.4			1.5
Inventories		0.1			0.1
Net operating loss and tax credit carryforwards		2.9			4.2
Other		—			0.1

		5.3			7.2
Gross tax asset valuation allowance		(2.6	)		(3.1	)

Net deferred tax asset	$	2.7		$	4.1

A valuation allowance has been recorded against the portion of the Company’s deferred tax assets that management believes is more likely than not that the related tax benefits will not be realized.

As of December 31, 2003 and 2002, the Company’s foreign net operating loss carryforwards were $7.7 million and $13.0 million, respectively. If not utilized, these net operating losses will expire in varying amounts through 2008.

Other assets include $6.0 million and $3.0 million of French income tax refunds receivable at December 31, 2003 and 2002, respectively. The Company files income tax returns with the taxing authorities in the various jurisdictions in which it operates. Certain of these income tax returns remain subject to audit by the local tax authorities. Management believes that the resolution of any issues raised by such taxing authorities, including application of any related determinations to subsequent open years, will not have an adverse effect on the Company’s financial condition or results of operations.

Note 8: Related Party Transactions

At December 31, 2003 and 2002, the total aggregate amount outstanding under various loan agreements between the Company and its Parent was $104.7 million and $160.3 million, respectively. The loan agreements expire on December 31, 2004, bear interest at a weighted average rate of 4.97% 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

201

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

and records the related costs in inventory. Finished goods are either sold to third-party customers outside the United States, Mexico, Brazil and Puerto Rico or to affiliates. Sales to affiliates are based on intercompany transfer pricing agreements.

SCI LLC 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.

Related party activity between the Company and its affiliates is as follows (in millions):


	Year Ended December 31, 2003		Year Ended December 31, 2002		Year Ended December 31, 2001
Purchases of manufacturing services from affiliates	$	797.7	$	719.4	$	814.0
Expense allocations from SCI LLC:
General and administrative expenses
Royalties	$	10.0	$	10.0	$	10.0
Other		20.0		22.9		22.0

	$	30.0	$	32.9	$	32.0

Research and development	$	60.8	$	45.0	$	59.6

Note 9: Employee Benefit Plans

Defined Benefit Plans

Certain of the Company’s 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. The Company does not expect to make contributions to its pension plans in 2004.

202

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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


	December 31, 2003			December 31, 2002			December 31, 2000
Service cost	$	0.2		$	0.1		$	—
Interest cost		0.3			0.1			—
Amortization of net gain		(0.2	)		—			—
Amortization of prior service cost		—			0.1			—
Curtailment gain		—			(0.3	)		—

Net periodic pension cost	$	0.3		$	—		$	—

Weighted average assumptions
Discount rate		5.50	%		5.50	%		6.00	%
Expected return on assets		6.00	%		5.75	%		6.00	%
Rate of compensation increase		3.00	%		3.00	%		3.00	%


	December 31, 2003			December 31, 2002
Change in projected benefit obligation:
Projected benefit obligation at the beginning of the period	$	3.0		$	2.4
Service cost		0.2			0.1
Interest cost		0.3			0.1
Curtailment gain		—			(0.3	)
Actuarial (gain) loss		(0.1	)		0.3
Translation loss		0.6			0.4

Projected benefit obligation at the end of the period	$	4.0		$	3.0

Accumulated benefit obligation at the end of the period	$	3.2		$	2.6

Change in Plan Assets:
Fair value of plan assets at the beginning of the period	$	0.5		$	0.4
Actual return on plan assets		0.1			0.1

Fair value of plan assets at the end of the period	$	0.6		$	0.5

Balances, end of period:
Pension benefit obligation	$	(4.0	)	$	(3.0	)
Fair value of plan assets		0.6			0.5

Funded status		(3.4	)		(2.5	)
Unrecognized net actuarial gain		—			(0.1	)
Unrecognized prior service cost		0.4			0.4

Net liability recognized, end of period	$	(3.0	)	$	(2.2	)

Amounts recognized in the statement of financial position:
Accrued expenses	$	—		$	(0.4	)
Other long-term liabilities		(3.0	)		(1.8	)

Net liability recognized, end of period	$	(3.0	)	$	(2.2	)

Assumptions used to value the Company’s pension obligations are as follows:
Discount rate		5.50	%		5.50	%
Rate of compensation increase		3.00	%		3.00	%

203

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Defined Contribution Plans

Certain subsidiaries have defined contribution plans in which eligible employees participate. The Company recognized compensation expense of $0.4 million, $0.1 million and $0.3 million for the years ended December 31, 2003, 2002 and 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):


	2003				2002				2001
	Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price
Outstanding at beginning of year	2.6		$	5.53	2.3		$	6.72	1.5		$	7.57
Grants	0.8			2.27	0.7			3.16	1.1			5.22
Exercises	(0.2	)		2.12	(0.1	)		1.50	(0.1	)		1.50
Cancellations	(0.5	)		5.54	(0.3	)		9.57	(0.2	)		6.62

Outstanding at end of year	2.7		$	4.80	2.6		$	5.53	2.3		$	6.72

Exercisable at end of year	1.0		$	5.98	0.9		$	5.81	0.5		$	6.11

Weighted average fair value of options granted during the period			$	1.60			$	1.93			$	3.23

The following tables summarize options outstanding and options exercisable at December 31, 2003:


	Outstanding Options
	Number Shares	Weighted Average Contractual Life (in years)	Weighted Average Exercise Price
Range of Exercise Prices
$1.25-$ 2.71	1.1	7.63	$	1.43
$3.06-$ 6.95	1.3	8.00		4.39
$9.03-$20.25	0.3	6.41		16.78

Totals	2.7			4.80

204

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


	Exercisable Options
	Number Shares	Weighted Average Contractual Life (in years)	Weighted Average Exercise Price
Range of Exercise Prices
$1.25-$ 2.71	0.5	5.71	$	1.50
$3.06-$ 6.95	0.3	7.54		4.52
$9.03-$20.25	0.2	6.41		16.94

Totals	1.0			5.98

These options will expire if not exercised at specific dates through November 2013.

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 eligible earnings 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. During each quarterly offering period, employees may not purchase stock exceeding the lesser of (i) 500 shares, or (ii) the number of shares equal to $6,250 divided by the fair market value of the stock on the first day of the offering period. During 2003, 2002, and 2001, employees purchased approximately 47,000, 122,000 and 188,000 shares, respectively, under the plan.

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 years ended December 31, 2003, 2002 and 2001 are $4.0 million, $2.4 million, and $1.3 million, respectively.

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, 2003 (in millions):


2004		3.7
2005		1.9
2006		1.3
2007		0.2
2008		0.1

	$	7.2

205

ON SEMICONDUCTOR TRADING LTD

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 and SCI LLC (collectively, the “Issuers”) issued $300 million principal amount of second lien notes due 2008. The notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by ON Semiconductor’s domestic restricted subsidiaries that are 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.

On March 3, 2003, the Issuers issued $200.0 million principal amount of first-lien senior secured notes due 2010. The notes are fully and unconditionally guaranteed on a joint and several basis by each of the domestic subsidiaries of ON Semiconductor Corporation (other than SCI LLC). The notes and guarantees are secured on a first-priority basis 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.

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 instruments. At December 31, 2003 and 2002, the carrying value of the notes payable to Parent was $104.7 million and $160.3 million, respectively.

Note 14: Supplemental Disclosure of Cash Flow Information

Cash payments for interest and income taxes for the years ended December 31, 2003, 2002 and 2001 are as follows (in millions):


	2003			2002		2001
Cash (received) paid for:
Interest	$	7.7		$	14.2	$	13.7
Income taxes		(0.1	)		3.2		(10.4	)

206

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2003 and 2002 and for

the Years Ended December 31, 2003, 2002 and 2001

207

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholder

of SCG Malaysia Holdings Sdn. Bhd.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholder’s equity and of cash flows present fairly, in all material respects, the financial position of SCG Malaysia Holdings Sdn. Bhd. and its subsidiary (an indirect wholly-owned subsidiary of ON Semiconductor Corporation) at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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 management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

Phoenix, Arizona

February 2, 2004, except for the

third paragraph of Note 2 for

which the date is February 9, 2004

208

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED BALANCE SHEET


	December 31,
	2003			2002
	(in millions, except share data)
ASSETS
Cash and cash equivalents	$	10.0		$	10.7
Inventories, net		0.8			0.8
Other current assets		2.5			3.5
Due from affiliates, net		20.5			17.0
Deferred income taxes		0.7			0.6

Total current assets		34.5			32.6
Property, plant and equipment, net		78.7			103.1
Income taxes receivable		9.7			10.4
Deferred income taxes		1.6			—

Total assets	$	124.5		$	146.1

LIABILITIES AND STOCKHOLDER’S EQUITY
Accounts payable	$	9.7		$	6.1
Accrued expenses		1.8			1.6

Total current liabilities		11.5			7.7
Other long-term liabilities		5.0			4.4
Notes payable to affiliate		70.0			89.4
Deferred income taxes		—			1.6

Total liabilities		86.5			103.1

Commitments and contingencies (See Note 10)		—			—

Common stock ($0.2630 par value, 200,000,000 authorized 147,517,167 shares issued and outstanding)		38.8			38.8
Additional paid-in capital		14.1			11.9
Accumulated deficit		(14.9	)		(7.7	)

Total stockholder’s equity		38.0			43.0

Total liabilities and stockholder’s equity	$	124.5		$	146.1

See accompanying notes to consolidated financial statements.

209

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED STATEMENT OF OPERATIONS


	Year Ended December 31,
	2003			2002			2001
	(in millions)
Sales to affiliates	$	91.6		$	89.1		$	99.1
Cost of sales		84.5			78.7			86.6

Gross profit		7.1			10.4			12.5

Operating expenses:
General and administrative		6.5			8.0			8.8
Restructuring, asset impairment and other, net		4.2			(1.9	)		9.4

Total operating expenses		10.7			6.1			18.2

Operating income (loss)		(3.6	)		4.3			(5.7	)
Interest expense, net		(7.3	)		(8.2	)		(8.4	)

Loss before income taxes		(10.9	)		(3.9	)		(14.1	)
Income tax benefit		3.7			1.0			3.9

Net loss	$	(7.2	)	$	(2.9	)	$	(10.2	)

See accompanying notes to consolidated financial statements.

210

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY


	Common Stock (shares)	Common Stock		Additional Paid-In Capital		Accumulated Deficit			Total
	(in millions, except share data)
Balance at December 31, 2000	147,517,167	$	38.8	$	7.2	$	5.4		$	51.4

Contributed services by Parent			—		2.8		—			2.8
Comprehensive loss:
Net loss			—		—		(10.2	)		(10.2	)

Balance at December 31, 2001	147,517,167		38.8		10.0		(4.8	)		44.0

Contributed services by Parent			—		1.9		—			1.9
Comprehensive loss:
Net loss			—		—		(2.9	)		(2.9	)

Balance at December 31, 2002	147,517,167		38.8		11.9		(7.7	)		43.0

Contributed services by Parent			—		2.2		—			2.2
Comprehensive loss:
Net loss			—		—		(7.2	)		(7.2	)

Balance at December 31, 2003	147,517,167	$	38.8	$	14.1	$	(14.9	)	$	38.0

See accompanying notes to consolidated financial statements.

211

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED STATEMENT OF CASH FLOWS


	Year Ended December 31,
	2003			2002			2001
	(in millions)
Cash flows from operating activities:
Net loss	$	(7.2	)	$	(2.9	)	$	(10.2	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		27.2			31.9			32.7
Non-cash impairment of property, plant and equipment		4.2			—			0.9
Non-cash support costs provided by Parent		2.2			1.9			2.8
Deferred income taxes		(3.3	)		1.5			(3.1	)
Other		—			0.2			5.6
Changes in assets and liabilities:
Inventories		—			(0.4	)		4.0
Other assets		1.0			2.3			1.0
Due from affiliates		(3.5	)		(0.7	)		(13.6	)
Accounts payable		3.6			(11.3	)		3.0
Accrued expenses		0.2			(2.2	)		0.4
Income taxes receivable		0.7			(3.3	)		(3.0	)
Other long-term liabilities		0.6			0.3			(1.0	)

Net cash provided by operating activities		25.7			17.3			19.5

Cash flows from investing activities:
Purchases of property, plant and equipment		(7.0	)		(8.1	)		(47.4	)
Proceeds from sales of property, plant and equipment		—			0.1			1.2

Net cash used in investing activities		(7.0	)		(8.0	)		(46.2	)

Cash flows from financing activities:
Repayment of borrowings to affiliate		(19.4	)		—			(25.0	)

Net cash used in financing activities		(19.4	)		—			(25.0	)

Net increase (decrease) in cash and cash equivalents		(0.7	)		9.3			(51.7	)
Cash and cash equivalents, beginning of period		10.7			1.4			53.1

Cash and cash equivalents, end of period	$	10.0		$	10.7		$	1.4

See accompanying notes to consolidated financial statements.

212

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Background and Basis of Presentation

SCG Malaysia Holdings Sdn. Bhd. (the “Company” or “SCG Malaysia”) 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”.) The Company and its wholly-owned subsidiary, SCG Industries Malaysia Sdn. Bhd., are located in Seremban, Malaysia and are engaged in the manufacture of semiconductor products. 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. The Company was capitalized by the issuance of 147,517,167 shares of common stock to SCI LLC in connection with the Recapitalization.

SCI LLC incurs certain manufacturing and information technology support costs that directly benefit its various manufacturing affiliates including the Company. Although such costs are not recorded in the Company’s local statutory accounts and are not deductible for local tax purposes, they have been allocated to the Company and reflected in the accompanying consolidated financial statements as cost of sales with an offsetting capital contribution from SCI LLC. 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.

Note 2: Liquidity

During the year ended December 31, 2003, ON Semiconductor incurred a net loss of $166.7 million compared to net losses of $141.9 million and $831.4 million in 2002 and 2001, respectively. ON Semiconductor’s net results included restructuring, asset impairments and other, net of $61.2 million, $27.7 million and $150.4 million in 2003, 2002 and 2001, respectively, as well as interest expense of $151.1 million, $152.5 million and $143.6 million, respectively. ON Semiconductor’s operating activities provided cash of $45.7 million in 2003 and $46.4 million in 2002 and used cash of $116.4 million in 2001.

On February 9, 2004, ON Semiconductor completed a public offering of common stock resulting in net proceeds of $226.7 million. The net proceeds are expected to be used to redeem $70.0 million principal amount of ON Semiconductor’s 13% senior secured notes due 2010 and $105.0 million principal amount of the 12% senior secured notes due 2008 at a redemption price of 112% of the principal amount of such notes. The remaining proceeds will be used for general corporate purposes.

213

Note 3: Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All material intercompany accounts and transactions have been eliminated.

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 inventories; restructuring charges and pension obligations; future cash flows associated with long-lived assets; and, the fair values of 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 consist of raw materials and are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis), or market.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and are depreciated over useful lives of 30-40 years for buildings and 3-20 years for machinery and equipment using straight-line and accelerated 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.

214

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Revenue Recognition

The Company recognizes revenue when assembly and test services are completed on inventory consigned in from affiliates and the related products are shipped to the affiliated company. Revenues include the cost of wafers purchased from third-parties and the cost of assembly and test services performed plus a markup based on an intercompany transfer pricing agreement.

Stock-Based Compensation

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


	Year Ended December 31,
	2003			2002			2001
Net loss, as reported	$	(7.2	)	$	(2.9	)	$	(10.2	)
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(0.5	)		(0.6	)		(0.7	)

Pro forma net loss	$	(7.7	)	$	(3.5	)	$	(10.9	)

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 ON Semiconductor’s 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:


Employee Stock Options	2003		2002		2001
Expected life (in years)	5		5		5
Risk-free interest rate	3.09	%	4.40	%	4.81	%
Volatility	0.72		0.70		0.70

Employee Stock Purchase Plan	2003		2002		2001
Expected life (in years)	0.25		0.25		0.25
Risk-free interest rate	1.08	%	1.70	%	4.26	%
Volatility	0.82		0.70		0.70

215

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The weighted-average estimated fair value of employee stock options granted during 2003, 2002 and 2001 was $0.94, $1.98 and $3.18 per share, respectively. The weighted-average estimated fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan during 2003, 2002 and 2001 was $0.61, $0.59 and $1.09, respectively.

Income Taxes

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

The Company utilizes the U.S. dollar as its functional currency. The net effects of gains and losses from foreign currency transactions and from the translation of foreign currency financial statements into U.S. dollars are included in current operations.

Related Party Transactions

The Company has extensive transactions and relationships with ON Semiconductor and its affiliates including intercompany pricing agreements and certain manufacturing and information technology support 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.

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 judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact the future expense recognition and cash funding requirements of our pension plans.

Reclassifications

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

Contingencies

The Company is involved in a variety of legal matters that arise in the normal course of business. Based on information available, management evaluates the relevant range and likelihood of potential outcomes. In accordance with SFAS No. 5, “Accounting for Contingencies”, the Company records the appropriate liability when the amount is deemed probable and estimable.

216

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Recent Accounting Pronouncements

The Company adopted FASB Interpretation No. 46 (“FIN No. 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. FIN No. 46 requires that certain variable interest entities (VIE’s) be consolidated by the primary beneficiary, as that term is defined in FIN No. 46. The adoption of FIN No. 46 did not impact the Company’s financial condition or results of operations.

In December 2003, the FASB issued SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003)”. SFAS No. 132 revises employers’ disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132, which also requires new disclosures for interim periods beginning after December 15, 2003, is effective for fiscal years ending after December 15, 2003, except for certain disclosures associated with foreign plans which are required for years ended after June 15, 2004. The Company has included the required disclosures in Note 7 “Employee Benefit Plans”.

Note 4: Property, Plant and Equipment

Property, plant and equipment consists of the following at December 31, 2003 and 2002 (in millions):


	December 31,
	2003			2002
Property, plant and equipment, net:
Buildings	$	46.8		$	46.6
Machinery and equipment		244.0			243.9

Total property, plant and equipment		290.8			290.5
Less: Accumulated depreciation		(212.1	)		(187.4	)

	$	78.7		$	103.1

Depreciation expense totaled $27.2 million, $31.9 million and $32.7 million for the years ended December 31, 2003, 2002 and 2001, respectively.

217

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 5: Notes Payable to Affiliate

In conjunction with the Recapitalization, the Company entered into notes payable with an affiliate totaling $114.4 million. Borrowings under the notes payable bear interest at 9.3% (payable monthly) and are due July 31, 2011. As of December 31, 2003 and 2002, $70.0 million and $89.4 million were outstanding under these notes payable. During 2003 the Company repaid $19.4 million of the note payable, resulting in $70.0 million outstanding at December 31, 2003.

Cash paid for interest was $7.4 million, $8.7 million and $8.4 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Note 6: Income Taxes

The income tax benefit is as follows (in millions):


	Year Ended December 31,
	2003			2002			2001
Current	$	(0.3	)	$	(2.6	)	$	(0.8	)
Deferred		(3.4	)		1.6			(3.1	)

	$	(3.7	)	$	(1.0	)	$	(3.9	)

A reconciliation of the Malaysian statutory income tax rate to the Company’s effective income tax is as follows:


	Year Ended December 31,
	2003		2002		2001
Malaysian statutory rate	(28.0	)%	(28.0	)%	(28.0	)%
Increase (decrease) resulting from:
Reinvestment allowances	—		—		(9.6	)
Non-deductible corporate expense allocation	5.7		22.6		3.0
Income taxes of prior years	(4.2	)	(35.9	)	0.4
Foreign currency remeasurement	0.6		14.0		6.7
Other	(8.0	)	1.7		(0.2	)

	(33.9	)%	(25.6	)%	(27.7	)%

Deferred tax assets (liabilities) at December 31, 2003 and 2002 are as follows (in millions):


	Year Ended December 31,
	2003		2002
Reserves and accruals	$	0.3	$	0.3
Property, plant and equipment		0.3		(2.9	)
Other		1.7		1.6

Net deferred tax asset (liability)	$	2.3	$	(1.0	)

218

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

For the year ended December 31, 2003, income tax refunds totaling $1.1 million were received. Cash paid for income taxes was $0.8 million and $2.2 million for the years ended December 31, 2002 and 2001, respectively.

Long-term income tax receivables totaled $9.7 million and $10.4 million at December 31, 2003 and 2002, respectively, relating to tax credits due to the Company under Section 110 of the Malaysian income tax system.

Note 7: Employee Benefit Plans

The Company has a noncontributory pension plan that covers most employees. The benefit formula is dependent upon employee earnings and years of service. The Company’s policy is to fund the plan in accordance with the requirements and regulations of Malaysian labor laws. Benefits under the pension plan are valued using the projected unit credit method. The Company contributes to the pension plan to the extent necessary to pay plan benefits.

In 2003, 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 no longer defers 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 with a measurement date of December 31. 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. This change did not have a material impact on the Company.


	December 31,
	2003			2002			2001
Service cost	$	0.4		$	0.4		$	0.5
Interest cost		0.3			0.2			0.3
Translation loss		0.1			—			—
Curtailment gain		—			—			(0.3	)

Total net periodic pension cost	$	0.8		$	0.6		$	0.5

Weighted average assumption
Discount rate		5.50	%		5.50	%		7.00	%
Rate of compensation increase		5.50	%		5.50	%		7.00	%

219


	December 31,
	2003			2002
Change in projected benefit obligation
Projected benefit obligation at the beginning of the year	$	4.6		$	4.1
Service cost		0.4			0.4
Interest cost		0.3			0.2
Actuarial (gain) or loss		(0.1	)		0.2
Benefits paid		(0.2	)		(0.3	)

Projected benefit obligation at the end of the year	$	5.0		$	4.6

Accumulated benefit obligation at the end of the year	$	4.5		$	4.1

Change in plan assets
Fair value of plan assets at the beginning of the year	$	—		$	—
Benefits paid		(0.2	)		(0.3	)
Employer contributions		0.2			0.3

Fair value of plan assets at the end of the year	$	—		$	—

Net amount recognized
Funded status	$	(5.0	)	$	(4.6	)
Unrecognized net (gain) or loss		—			0.2

Net amount recognized	$	(5.0	)	$	(4.4	)

Amounts recognized in the statement of financial position:
Other long-term liabilities	$	(5.0	)	$	(4.4	)

Weighted average assumptions at the end of the year
Discount rate		5.50	%		5.50	%
Rate of compensation increase		5.50	%		5.50	%

Note 8: 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. The Company’s net foreign currency transaction losses included in the accompanying consolidated statement of operations for the years ended December 31, 2003, 2002 and 2001 are $0.8 million, $0.0 million and $0.2 million, respectively.

Note 9: 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.

220

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Notes Payable to Affiliates

Due to the related party nature of the notes payable to affiliates, 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 instruments. At December 31, 2003 and 2002, the carrying values of the notes payable to affiliates were $70.0 million and $89.4 million, respectively.

Note 10: Commitments and Contingencies

Legal Matters

Common Stock Collateral Pledge

On May 6, 2002, ON Semiconductor and SCI LLC (collectively, the “Issuers”) issued $300 million principal amount of second lien notes due in 2008. The notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by ON Semiconductor’s domestic restricted subsidiaries that are 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.

On March 3, 2003, the Issuers issued $200.0 million principal amount of first-lien senior secured notes due 2010. The notes are fully and unconditionally guaranteed on a joint and several basis by each of the domestic subsidiaries of ON Semiconductor (other than SCI LLC). The notes and guarantees are secured on a first-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.

Note 11: Restructuring, Asset Impairments and Other, Net

June 2003

In June of 2003, the Company recorded a non-cash asset impairment charge totaling $4.2 million. The charge included $3.3 million associated with the assembly and test production line which was written down to fair value based on its future discounted cash flows. Additionally, the Company identified certain machinery and equipment that would no longer be utilized and recorded a charge of $0.9 million to write-down the remaining carrying value of these assets to their net realizable value.

June 2001

In June 2001, the Company recorded charges totaling $5.9 million for costs associated with its restructuring programs. These programs were in response to rapidly changing economic circumstances requiring the Company

221

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

to rationalize its manufacturing operations to meet declining customer demand. The programs included the transfer of certain manufacturing operations at the Company’s facility to other ON Semiconductor-owned facilities or to third party contractors by December 2001. The charge included $4.4 million to cover employee separation costs associated with the termination of approximately 700 employees. All impacted employees had been terminated and the Company released the remaining $1.7 million reserve to income during the second quarter of 2002.

The planned discontinuation of certain manufacturing activities triggered an impairment analysis of the carrying value of the related assets and resulted in the Company recording asset impairment charges totaling $0.9 million. This charge included $0.9 million related to the Seremban assembly and test facility.

The June 2001 charge also included $0.6 million to cover certain exit costs relating facility closure. All facility closure activities were completed and the Company released the remaining $0.2 million reserve to income during the third quarter of 2002.

March 2001

In March 2001, the Company recorded charges totaling $3.5 to cover employee separation costs associated with the termination of approximately 350 employees. The employee separation costs reflected further reductions in manufacturing, general and administrative staffing levels in Malaysia. All impacted employees were terminated under this restructuring program.

Note 12: 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):


	2003				2002				2001
	Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price
Outstanding at beginning of year	0.7		$	6.12	0.6		$	6.94	0.5		$	8.00
Grants	0.2			1.47	0.2			3.24	0.2			5.14
Exercises	(0.1	)		1.69	—			—	—			—
Cancellations	(0.1	)		5.76	(0.1	)		5.38	(0.1	)		12.08

Outstanding at end of year	0.7		$	5.24	0.7		$	6.12	0.6		$	6.94

Exercisable at end of year	0.3		$	7.88	0.3		$	8.17	0.1		$	1.57

Weighted average fair value of options granted during the period			$	0.94			$	1.98			$	3.18

222

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

SCG MALAYSIA HOLDINGS SDN. BHD.

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The following tables summarize options outstanding and options exercisable at December 31, 2003:


	Outstanding Options
Range of Exercise Prices	Number Shares	Weighted Average Contractual Life (in years)	Weighted Average Exercise Price
$ 1.25-$ 1.50	0.3	7.80	$	1.35
$ 2.71-$ 4.26	0.2	8.04		3.33
$ 5.23-$ 6.95	0.1	7.33		6.16
$13.06-$16.00	0.1	6.33		15.99

Totals	0.7			5.24


	Exercisable Options
Range of Exercise Prices	Number Shares	Weighted Average Contractual Life (in years)	Weighted Average Exercise Price
$ 1.25-$ 1.50	0.1	5.69	$	1.50
$ 2.71-$ 4.26	0.1	7.90		3.43
$ 5.23-$ 6.95	—	7.16		6.14
$13.06-$16.00	0.1	6.33		15.99

Totals	0.3			7.88

These options will expire if not exercised at specific dates through December 2013.

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. During each quarterly offering period, employees may not purchase stock exceeding the lesser of (i) 500 shares, or (ii) the number of shares equal to $6,250 divided by the fair market value of the stock on the first day of the offering period. During 2003, 2002 and 2001, employees purchased approximately 117,000, 185,000 and 89,000 shares under the plan, respectively.

223

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of

ON Semiconductor Corporation)

FINANCIAL STATEMENTS

As of December 31, 2003 and 2002 and for

the Years Ended December 31, 2003, 2002 and 2001

224

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholder

of SCG Philippines, Incorporated

In our opinion, the accompanying balance sheet and the related statements of operations, of stockholder’s equity and of cash flows present fairly, in all material respects, the financial position of SCG Philippines, Incorporated (an indirect wholly-owned subsidiary of ON Semiconductor Corporation) at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, 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 management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

Phoenix, Arizona

February 2, 2004, except for

the third paragraph of Note 2 for

which the date is February 9, 2004

225

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

BALANCE SHEET


	December 31,
	2003			2002
	(in millions)
ASSETS
Cash and cash equivalents	$	3.0		$	4.6
Other current assets		1.5			2.4
Due from affiliates		15.0			7.0

Total current assets		19.5			14.0
Property, plant and equipment, net		24.8			31.0
Income taxes receivable		0.5			—
Other assets		0.3			0.3

Total assets	$	45.1		$	45.3

LIABILITIES AND STOCKHOLDER’S EQUITY
Accounts payable	$	3.0		$	2.6
Accrued expenses		0.5			0.5
Due to affiliates		0.1			0.2
Income taxes payable		—			0.4
Deferred income taxes		0.2			—

Total current liabilities		3.8			3.7
Other long-term liabilities		0.3			0.2
Deferred income taxes		0.4			0.6

Total liabilities		4.5			4.5

Commitments and contingencies (See Note 10)		—			—

Common stock		69.1			68.2
Accumulated deficit		(28.5	)		(27.4	)

Total stockholder’s equity		40.6			40.8

Total liabilities and stockholder’s equity	$	45.1		$	45.3

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

226

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

STATEMENT OF OPERATIONS


	Year Ended December 31,
	2003			2002			2001
	(in millions)
Sales to affilates	$	31.7		$	34.1		$	32.4
Cost of sales to affiliates		29.1			31.0			28.0

Gross profit		2.6			3.1			4.4

Operating expenses:
General and administrative		2.6			2.7			3.3
Restructuring, asset impairments and other, net		0.1			2.3			2.1

Total operating expenses		2.7			5.0			5.4

Operating loss		(0.1	)		(1.9	)		(1.0	)
Interest income		—			0.1			—

Loss before income taxes		(0.1	)		(1.8	)		(1.0	)
Income tax benefit (provision)		(1.0	)		(1.4	)		1.0

Net loss	$	(1.1	)	$	(3.2	)	$	(0.0	)

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

227

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

STATEMENT OF STOCKHOLDER’S EQUITY


	Common Stock	Accumulated Deficit		Total
	(in millions)
Balance at December 31, 2000	66.3	2.4		68.7

Contributed services by Parent	1.1	—		1.1
Dividends paid	—	(20.6	)	(20.6	)
Comprehensive loss:
Net loss	—	—		—

Balance at December 31, 2001	67.4	(18.2	)	49.2

Contributed services by Parent	0.8	—		0.8
Dividends paid	—	(6.0	)	(6.0	)
Comprehensive loss:
Net loss	—	(3.2	)	(3.2	)

Balance at December 31, 2002	68.2	(27.4	)	40.8

Contributed services by Parent	0.9	—		0.9
Comprehensive loss:
Net loss	—	(1.1	)	(1.1	)

Balance at December 31, 2003	69.1	(28.5	)	40.6

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

228

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

STATEMENT OF CASH FLOWS


	Year Ended December 31,
	2003				2002			2001
	(in millions)
Cash flows from operating activities:
Net loss	$	(1.1	)		$	(3.2	)	$	—
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		7.2				10.0			10.9
Write-off of receivable from Motorola		—				2.3			—
Non-cash impairment write-down of property, plant and equipment		0.1				—			0.6
Non-cash support costs provided by Parent		0.9				0.8			1.1
Deferred income taxes		—				—			(1.0	)
Other		0.4				(0.6	)		1.0
Changes in assets and liabilities:
Income taxes receivable		(0.5	)			0.4			(0.4	)
Other assets		—				2.8			(0.4	)
Due from affiliates		(8.0	)			(4.1	)		(2.8	)
Accounts payable		0.4				(0.3	)		(1.4	)
Accrued expenses		—				0.2			(1.6	)
Due to affiliates		(0.1	)			(0.1	)		0.2
Income taxes payable		(0.4	)			0.4			—
Other long-term liabilities		0.1				0.1			0.1

Net cash provided by (used in) operating activities		(1.0	)			8.7			6.3

Cash flows from investing activities:
Purchases of property, plant and equipment		(0.6	)			(1.6	)		(1.5	)

Net cash used in investing activities		(0.6	)			(1.6	)		(1.5	)

Cash flows from financing activities:
Payment of dividends		—				(6.0	)		(20.6	)

Net cash used in financing activities		—				(6.0	)		(20.6	)

Net increase (decrease) in cash and cash equivalents		(1.6	)			1.1			(15.8	)
Cash and cash equivalents, beginning of period		4.6				3.5			19.3

Cash and cash equivalents, end of period	$	3.0			$	4.6		$	3.5
				��

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

229

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Background and Basis of Presentation

SCG Philippines, Incorporated (the “Company”) 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”). The Company is located in Carmona, Philippines and is engaged in the manufacture of semiconductor products. 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. The Company’s common stock consists of 3,000,000 authorized shares, 2,250,000 shares of which were issued to SCI LLC in connection with the Recapitalization and remain outstanding.

SCI LLC incurs certain manufacturing and information technology support costs that directly benefit its various manufacturing affiliates including the Company. Although such costs are not recorded in the Company’s local statutory accounts and are not deductible for local tax purposes, they have been allocated to the Company and reflected in the accompanying financial statements as cost of sales with an offsetting capital contribution from SCI LLC. The allocations utilized in arriving at the amounts reflected in the accompanying 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.

Note 2: Liquidity

During the year ended December 31, 2003, ON Semiconductor incurred a net loss of $166.7 million compared to net losses of $141.9 and $831.4 million in 2002 and 2001, respectively. ON Semiconductor’s net results included restructuring, asset impairments and other, net of $61.2 million, $27.7 million and $150.4 million in 2003, 2002 and 2001, respectively, as well as interest expense of $151.1 million $152.5 million and $143.6 million, respectively. ON Semiconductor’s operating activities provided cash of $45.7 in 2003 and $46.4 million in 2002 and used cash of $116.4 million in 2001.

At December 31, 2003, ON Semiconductor had $186.6 million in cash and cash equivalents, net working capital of $212.5 million, term or revolving debt of $1,302.9 million and a stockholders’ deficit of $644.6 million. ON Semiconductor’s long-term debt includes $320.1 million under its senior bank facilities; $191.6 million (net of discount) of its 13% senior secured notes due 2010; $292.6 million (net of discount) of its 12% senior secured notes due 2008; $260.0 million of its 12% senior subordinated notes due 2009; $139.9 million under a 10% junior subordinated note payable to Motorola due 2011; $48.0 million under a loan facility with a Chinese bank due 2013; $24.3 million under a note payable to a Japanese bank due 2010; $20.0 million under a loan facility with a Chinese bank due 2006; and $6.4 million under a capital lease obligations. ON Semiconductor was in compliance with all of the covenants contained in its various debt agreements at December 31, 2003 and expects to remain in compliance over the next twelve months.

230

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 December 31, 2004. To the extent that results or events differ from ON Semiconductor’s financial projections and business plans, the Company’s liquidity may be adversely impacted.

Note 3: Significant Accounting Policies

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; restructuring charges and pension obligations; and future cash flows associated with long-lived assets. Actual results could differ from these estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value due to the short-term maturities of such instruments.

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 from 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.

231

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Revenue Recognition

The Company recognizes revenue when assembly and test services are completed on inventory consigned in from affiliates and the related products are shipped to the affiliated company. Revenues include the cost of assembly and test services performed plus a markup based on an intercompany transfer pricing agreement.

Stock-Based Compensation

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


	Year Ended December 31,
	2003			2002			2001
Net loss, as reported	$	(1.1	)	$	(3.2	)	$	(0.0	)
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(0.3	)		(0.3	)		(0.2	)

Pro forma net loss	$	(1.4	)	$	(3.5	)	$	(0.2	)


Employee Stock Options	2003		2002		2001
Expected life (in years)	5		5		5
Risk-free interest rate	3.11	%	4.35	%	4.93	%
Volatility	0.89		0.70		0.70

Employee Stock Purchase Plan	2003		2002		2001
Expected life (in years)	0.25		0.25		0.25
Risk-free interest rate	1.09	%	1.68	%	4.26	%
Volatility	0.80		0.70		0.70

The weighted-average estimated fair value of employee stock options granted during 2003, 2002 and 2001 was $2.73, $1.94 and $3.26 per share, respectively. The weighted-average estimated fair value of the discount on the shares sold under ON Semiconductor’s 2000 Employee Stock Purchase Plan during 2003, 2002 and 2001 was $0.58, $0.51 and $1.11 per share, respectively.

232

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Income Taxes

Foreign Currencies

Defined Benefit Plan

The Company has a defined benefit pension plan that covers most 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 and uncertainties. Actual results that differ from these assumptions would impact the future expense recognition and cash funding requirements of the pension plan.

Related Party Transactions

Contingencies

The Company is involved in a variety of legal matters that arise in the normal course of business. Based on information available, management evaluates the relevant range and likelihood of potential outcomes. In accordance with SFAS No. 5, “Accounting for Contingencies”, the Company records the appropriate liability when the amount is deemed probable and estimable.

Recent Accounting Pronouncements

233

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

In January 2003, the FASB issued Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. FIN No. 46 requires certain variable interest entities (“VIE’s”) be consolidated by the primary beneficiary, as that term is defined in FIN No. 46. The Company’s adoption of FIN No. 46 did not impact its financial condition or results of operations.

In December 2003, the FASB issued SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003)”. SFAS No. 132 revises employers’ disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132, which also requires new disclosures for interim periods beginning after December 15, 2003, is effective for fiscal years ending after December 15, 2003. The Company adopted this Statement for the year ended December 31, 2003 and has included the required disclosures in Note 7 “Employee Benefit Plans”.

Note 4: Restructuring, Asset Impairments and Other, net

June 2003

In June 2003, the Company identified certain machinery and equipment that would no longer be utilized and recorded a charge of $0.1 million to write-down the remaining carrying value of these assets to their net realizable value.

June 2002

During the second quarter of 2002, ON Semiconductor and Motorola reached a settlement of various contractual issues in exchange for a cash payment from Motorola of $10.6 million which resulted in a related gain to ON Semiconductor of $12.4 million. Because the majority of the contractual issues were between SCI LLC and Motorola, the related gain was recorded entirely on the books of SCI LLC. As a part of the settlement included forgiveness of a receivable due from Motorola, the Company recorded a $2.3 million write-off, which is included in restructuring, asset impairments and other, net in the statement of operations for the year ended December 31, 2002.

June 2001

In June 2001, the Company recorded charges totaling $0.6 million to cover employee separation costs associated with the termination of approximately 30 employees. All impacted employees were terminated and the Company released the remaining $0.3 million reserve to income during the fourth quarter of 2001 as the actual severance costs were less than originally estimated.

234

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

March 2001

In March 2001, the Company recorded charges totaling $1.8 million for costs associated with a restructuring program. The charges included $1.2 million to cover employee separation costs associated with the termination of approximately 100 employees as well as $0.6 million to write off equipment that could no longer be utilized.

The employee separation costs reflected reductions in the Company’s manufacturing, general and administrative staffing levels. All impacted employees have been terminated under this restructuring program.

Note 5: Balance Sheet Information

Balance sheet information is as follows (in millions):


	December 31,
	2003			2002
Other current assets:
Value added tax receivable	$	0.7		$	1.3
Other		0.8			1.1

	$	1.5		$	2.4

Property, plant and equipment, net:
Buildings	$	27.0		$	27.0
Machinery and equipment		59.5			65.7

Total property, plant and equipment		86.5			92.7
Less: Accumulated depreciation		(61.7	)		(61.7	)

	$	24.8		$	31.0

Accrued expenses:
Current portion of pension liability	$	0.2		$	0.2
Accrued payroll		0.3			0.2
Other		—			0.1

	$	0.5		$	0.5

Depreciation expense for property, plant and equipment totaled $6.3 million, $10.0 million and $10.9 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Note 6: Income Taxes

The income tax provision (benefit) is as follows (in millions):


	Year Ended December 31,
	2003		2002			2001
Current	$	1.0	$	1.5		$	0.1
Deferred		—		(0.1	)		(1.1	)

	$	1.0	$	1.4		$	(1.0	)

235

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

A reconciliation of the Philippines statutory income tax rate to the Company’s effective income tax rate is as follows:


	Year Ended December 31,
	2003		2002		2001
Philippines federal statutory rate	(32.0	)%	(32.0	)%	(32.0	)%
Increase (decrease) resulting from:
Tax holiday	—		—		(33.1	)
Foreign currency remeasurement	750.7		98.9		72.9
Non-deductible corporate allocation	288.0		14.2		28.3
Prior year taxes	—		—		(125.4	)
Other	(6.7	)	(1.9	)	(6.3	)

	1,000.0	%	79.2	%	(95.6	)%

Deferred tax assets (liabilities) are as follows (in millions):


	Year Ended December 31,
	2003			2002
Unrealized foreign exchange gains	$	—		$	(0.1	)
Reserves and accruals		—			0.3
Depreciation		(0.8	)		(1.0	)
Other		0.2			0.2

Net deferred tax liability	$	(0.6	)	$	(0.6	)

Cash paid for income taxes was $1.9 million, $0.6 million and $0.2 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Note 7: Employee Benefit Plan

Defined Benefit Plan

The Company has a pension plan that covers most employees. The benefit formula is dependent upon employee years of service. The Company’s policy is to fund the plan in accordance with the requirements and regulations of Philippine labor laws. Benefits under this pension plan are valued using the projected unit credit cost method. The Company expects to contribute $0.2 million to the pension plan in 2004 based on its current assessment of the economic environment.

236

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

such net gains or losses exceeded the greater of 10% of the related projected benefit obligation or plan assets. The Company no longer defers 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 with a measurement date of December 31. 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. This change did not have a material impact on the Company.

237

SCG PHILIPPINES, INCORPORATED

(An Indirect 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 pension plan and the net periodic pension cost (dollars in millions):


	Year Ended December 31,
	2003			2002			2001
Service cost	$	0.2		$	0.2		$	0.2
Interest cost		0.2			0.3			0.3
Expected return on plan assets		(0.1	)		(0.2	)		(0.2	)
Amortization of prior service cost		—			0.1			—

Total net periodic pension cost	$	0.3		$	0.4		$	0.3

Weighted average assumption
Discount rate		11.00	%		12.00	%		12.00	%
Expected return on plan assets		10.00	%		12.00	%		12.00	%
Rate of compensation increase		9.00	%		10.00	%		10.00	%


	December 31,
	2003			2002
Change in projected benefit obligation
Projected benefit obligation at the beginning of the year	$	2.2		$	2.0
Service cost		0.2			0.2
Interest cost		0.2			0.3
Actuarial gain		—			(0.1	)
Benefits paid		—			(0.1	)
Translation gain		—			(0.1	)

Projected benefit obligation at the end of the year		2.6			2.2

Accumulated benefit obligation at the end of the year		1.0			0.7

Change in plan assets
Fair value of plan assets at the beginning of the year	$	1.4		$	1.2
Actual return on plan assets		0.2			0.1
Benefits paid		—			(0.1	)
Employer contributions		0.2			0.3
Translation gain		—			(0.1	)

Fair value of plan assets at the end of the year		1.8			1.4

Net amount recognized
Funded status		(0.8	)		(0.8	)
Unrecognized prior service cost		0.3			0.4

Net amount recognized		(0.5	)		(0.4	)

Amounts recognized in the statement of financial position
Accrued benefit liability		(0.2	)		(0.2	)
Other long-term liabilities		(0.3	)		(0.2	)

Net amount recognized		(0.5	)		(0.4	)

Weighted average assumptions at the end of the year
Discount rate		10.00	%		11.00	%
Rate of compensation increase		8.00	%		9.00	%

238

Note 8: 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. The Company’s net foreign currency transaction losses included in the accompanying statement of operations for the years ended December 31, 2003, 2002 and 2001 are $0.1 million, $0.0 million and $0.4 million, respectively.

Note 9: Stock Options

Certain employees of the Company participate in ON Semiconductor stock option plans.

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):


	2003				2002			2001
	Number of Shares		Weighted- Average Exercise Price		Number of Shares	Weighted- Average Exercise Price		Number of Shares	Weighted- Average Exercise Price
Outstanding at beginning of year	0.4		$	6.15	0.3	$	7.26	0.2	$	9.04
Grants	0.2			3.69	0.1		3.17	0.1		5.27
Exercises	—			1.65	—		—	—		—
Cancellations	(0.1	)		4.47	—		—	—		—

Outstanding at end of year	0.5		$	5.70	0.4	$	6.15	0.3	$	7.26

Exercisable at end of year	0.1		$	9.62	0.1	$	8.13	0.1	$	5.06

Weighted average fair value of options granted during the period			$	2.73		$	1.94		$	3.26

239

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

The following tables summarize options outstanding and options exercisable at December 31, 2003:


	Outstanding Options
	Number Shares	Weighted Average Contractual Life (in years)	Weighted Average Exercise Price
Range of Exercise Prices
$1.25-$2.71	0.1	8.78	$	1.30
$3.22-$6.95	0.3	8.69		4.74
$13.063-$16.00	0.1	6.40		15.41

Totals	0.5			5.70


	Exercisable Options
	Number Shares	Weighted Average Contractual Life (in years)	Weighted Average Exercise Price
Range of Exercise Prices
$1.25-$2.71	—	5.80	$	1.55
$3.22-$6.95	—	7.52		4.64
$13.063-$16.00	0.1	6.41		15.38

Totals	0.1			9.62

These options will expire if not exercised at specific dates through November 2013.

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. During each quarterly offering period, employees may not purchase stock exceeding the lesser of (i) 500 shares, or (ii) the number of shares equal to $6,250 divided by the fair market value of the stock on the first day of the offering period. During 2003, 2002 and 2001, employees purchased approximately 11,000, 13,000 and 11,300 shares under the plan, respectively.

240

SCG PHILIPPINES, INCORPORATED

(An Indirect Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 10: Commitments and Contingencies

Leases

The following is a schedule by year of future minimum lease obligations under non-cancelable operating leases as of December 31, 2003 (in millions):


Year ending December 31, 2003:
2004	$	0.5
2005		0.3
2006		0.1

	$	0.9

Legal Matters

Common Stock Collateral Pledge

On May 6, 2002, ON Semiconductor and SCI LLC (collectively, the “Issuers”) issued $300 million principal amount of second lien notes due 2008. The notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by ON Semiconductor’s domestic restricted subsidiaries that are 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 first-tier foreign subsidiaries, including the Company, 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.

On March 3, 2003, the Issuers issued $200.0 million principal amount of first-lien senior secured notes due 2010. The notes are fully and unconditionally guaranteed on a joint and several basis by each of the domestic subsidiaries of ON Semiconductor (other than SCI LLC). The notes and guarantees are secured on a first-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 first-tier foreign subsidiaries, including the Company, 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.

241

SCG ( CHINA ) HOLDING CORPORATION

(A Wholly-Owned Subsidiary of

ON Semiconductor Corporation)

CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2003 and 2002 and for

the Years Ended December 31, 2003, 2002 and 2001

242

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholder

of SCG (China) Holding Corporation

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholder’s equity and of cash flows present fairly, in all material respects, the financial position of SCG (China) Holding Corporation and subsidiary (a wholly-owned subsidiary of ON Semiconductor Corporation) at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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 management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

Phoenix, Arizona

February 2, 2004, except for the

third paragraph of Note 2 for which

the date is February 9, 2004

243

SCG ( CHINA ) HOLDING CORPORATION

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED BALANCE SHEET


	December 31,
	2003		2002
	(in millions)
ASSETS
Cash and cash equivalents	$	4.9	$	8.0
Receivables		4.2		3.4
Inventories		4.3		3.5
Other current assets		1.8		3.1
Due from affiliates		21.7		0.3

Total current assets		36.9		18.3
Property, plant and equipment, net		119.2		131.2

Total assets	$	156.1	$	149.5

LIABILITIES, MINORITY INTEREST AND STOCKHOLDER’S EQUITY
Accounts payable	$	11.3	$	6.9
Accrued expenses		1.1		0.8
Due to affiliates		9.2		—
Current portion of long-term debt		4.8		10.5

Total current liabilities		26.4		18.2
Notes payable to affiliate		—		63.3
Long-term debt		63.2		9.5

Total liabilities		89.6		91.0

Commitments and contingencies ( See Note 7 )		—		—

Minority interest in consolidated subsidiary		26.0		22.8

Common stock ($0.01 par value, 1,000 shares authorized, 1,000 shares issued and outstanding)		—		—
Additional paid-in capital		24.2		24.2
Retained earnings		16.3		11.5

Total stockholder’s equity		40.5		35.7

Total liabilities, minority interest and stockholder’s equity	$	156.1	$	149.5

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

244

SCG ( CHINA ) HOLDING CORPORATION

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED STATEMENT OF OPERATIONS


	Year Ended December 31,
	2003			2002			2001
	(in millions)
Revenues:
External revenues	$	8.2			9.2			8.7
Revenues from affiliates		116.6		$	88.8		$	52.0

Total revenues		124.8			98.0			60.7

Cost of sales		112.8			85.4			47.7

Gross profit		12.0			12.6			13.0

Operating expenses:
General and administrative		0.4			0.3			0.3

Total operating expenses		0.4			0.3			0.3

Operating income		11.6			12.3			12.7

Interest expense		(2.7	)		(4.3	)		(6.1	)
Other income		—			0.5			—

Other expenses, net		(2.7	)		(3.8	)		(6.1	)

Income before income taxes and minority interest		8.9			8.5			6.6
Income tax provision		(0.9	)		(0.9	)		(0.1	)
Minority interest		(3.2	)		(2.8	)		(2.5	)

Net income		4.8			4.8			4.0

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

245

SCG ( CHINA ) HOLDING CORPORATION

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY


	Common Stock		Additional Paid-In Capital		Retained Earnings			Total
	(in millions)

Balance at December 31, 2000	$	—	$	24.2	$	3.0		$	27.2

Comprehensive income
Net income		—		—		4.0			4.0

Balance at December 31, 2001		—		24.2		7.0			31.2

Dividends paid		—		—		(0.3	)		(0.3	)
Comprehensive income
Net income		—		—		4.8			4.8

Balance at December 31, 2002		—		24.2		11.5			35.7

Comprehensive income
Net income		—		—		4.8			4.8

Balance at December 31, 2003	$	—	$	24.2	$	16.3		$	40.5

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

246

SCG ( CHINA ) HOLDING CORPORATION

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

CONSOLIDATED STATEMENT OF CASH FLOWS


	Year Ended December 31,
	2003			2002			2001
	(in millions)
Cash flows from operating activities:
Net income	$	4.8		$	4.8		$	4.0
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		16.7			14.6			11.3
Minority interest		3.2			2.8			2.5
Other		0.1			—			—
Changes in assets and liabilities:
Receivables		(0.8	)		(0.3	)		(0.5	)
Inventories		(0.8	)		(1.6	)		(0.1	)
Other assets		0.2			(2.2	)		(1.6	)
Due from affiliates		(21.4	)		(0.3	)		7.3
Accounts payable		4.4			2.7			(6.6	)
Accrued expenses		0.3			0.3			(0.1	)
Due to affiliates		9.2			(4.7	)		4.7

Net cash provided by operating activities		15.9			16.1			20.9

Cash flows from investing activities:
Purchases of property, plant and equipment		(3.7	)		(14.0	)		(31.1	)

Net cash used in investing activities		(3.7	)		(14.0	)		(31.1	)

Cash flows from financing activities:
Proceeds from debt issuance		48.0			—			9.5
Proceeds from intercompany long term debt		—			—			5.0
Repayment of intercompany long term debt		(63.3	)		—			—
Dividend to Parent		—			(0.3	)		—

Net cash provided by (used in) financing activities		(15.3	)		(0.3	)		14.5

Net increase (decrease) in cash and cash equivalents		(3.1	)		1.8			4.3
Cash and cash equivalents, beginning of period		8.0			6.2			1.9

Cash and cash equivalents, end of period	$	4.9		$	8.0		$	6.2

Cash paid for:
Interest	$	2.7		$	4.3		$	6.0
Income taxes		0.2			1.3			—

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

247

SCG ( CHINA ) HOLDING CORPORATION

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Background and Basis of Presentation

SCG (China) Holding Corporation (the “Company”) is a wholly-owned subsidiary of ON Semiconductor Corporation (“ON Semiconductor” or “Parent”). The Company’s primary asset is its majority ownership in Leshan-Phoenix Semiconductor Company Limited (“Leshan”), a joint venture with Leshan Radio Company, Ltd., (“LRC”) located in Leshan, China that is engaged in the manufacture of semiconductor products. Leshan purchases die from ON Semiconductor as well as third parties, converts such die into semiconductor products and the sells such products to ON Semiconductor and LRC.Pursuant to the related agreement, requests for production capacity are made to the board of directors of Leshan by ON Semiconductor and LRC. These requests represent purchase commitments of ON Semiconductor and LRC; however, each may elect to pay the cost associated with the unused capacity (which is generally equal to the fixed cost of the capacity), in lieu of the commitment. ON Semiconductor committed to purchase 82%, 85% and 81% of Leshan’s production capacity in 2003, 2002 and 2001, respectively, and is currently committed to purchase 86% of expected 2004 production. In 2003, 2002 and 2001, ON Semiconductor purchased 90%, 76% and 43%, respectively, of Leshan’s production. Because ON Semiconductor purchased less than it’s committed amounts in certain months in 2003, 2002 and 2001, it incurred $0.5 million, $1.5 million and $6.4 million in underutilization charges, respectively. ON Semiconductor and LRC have guaranteed Leshan a fixed return on equity (15% in 2003, 2002 and 2001) and its related sales prices have been determined accordingly.

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. The Company was capitalized by the issuance of 1,000 shares of common stock to ON Semiconductor in connection with the Recapitalization.

In the second quarter of 2003, the Company adopted FASB Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. FIN No. 46 requires that certain variable interest entities (“VIE’s”) be consolidated by the primary beneficiary, as that term is defined in FIN No. 46 The Company determined that its investment in Leshan meets the definition of a VIE and that the Company (through its relationship with ON Semiconductor) is the primary beneficiary; therefore, the investment in Leshan is consolidated in accordance with FIN No. 46. The Company had previously accounted for its investment in Leshan using the equity method. While consolidation of the its investment in Leshan did not impact the Company’s net income (loss) or stockholders’ equity (deficit), financial information of prior periods has been revised for comparative purposes as allowed by FIN No. 46.

Note 2: Liquidity

During the year ended December 31, 2003, ON Semiconductor incurred a net loss of $166.7 million compared to net losses of $141.9 and $831.4 million in 2002 and 2001, respectively. ON Semiconductor’s net results included restructuring, asset impairments and other, net of $61.2 million, $27.7 million and $150.4 million in 2003, 2002 and 2001, respectively, as well as interest expense of $151.1 million, $152.5 million and $143.6 million, respectively. ON Semiconductor’s operating activities provided cash of $45.7 in 2003 and $46.4 million in 2002 and used cash of $116.4 million in 2001.

248

SCG ( CHINA ) HOLDING CORPORATION

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

million (net of discount) of its 13% senior secured notes due 2010; $292.6 million (net of discount) of its 12% senior secured notes due 2008; $260.0 million of its 12% senior subordinated notes due 2009; $139.9 million under a 10% junior subordinated note payable to Motorola due 2011; $48.0 million under a loan facility with a Chinese bank due 2013; $24.3 million under a note payable to a Japanese bank due 2010; $20.0 million under a loan facility with a Chinese bank due 2006; and $6.4 million under a capital lease obligations. ON Semiconductor was in compliance with all of the covenants contained in its various debt agreements at December 31, 2003 and expects to remain in compliance over the next twelve months.

On February 9, 2004, ON Semiconductor completed a public offering of common stock resulting in net proceeds of $226.7 million. The net proceeds are expected to be used to redeem $70.0 million principal amount of the Company’s 13% senior secured notes due 2010 and $105.0 million principal amount of the 12% senior secured notes due 2008 at a redemption price of 112% of the principal amount of such notes. The remaining proceeds will be used for general corporate purposes.

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 December 31, 2004. To the extent that results or events differ from ON Semiconductor’s financial projections and business plans, the Company’s liquidity may be adversely impacted.

Note 3: Significant Accounting Policies

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; future cash flows associated with long-lived assets; and, the fair values of financial instruments. Actual results could differ from these estimates.

Cash and Cash Equivalents

Property, Plant and Equipment

249

SCG ( CHINA ) HOLDING CORPORATION

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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 from 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.

Revenue Recognition

The Company recognizes revenue when semiconductor products are shipped to affiliated companies or third parties. Revenues from affiliates include the cost of raw materials and assembly and test services performed plus a markup based on an intercompany transfer pricing agreement.

Stock-Based Compensation

The Company accounts for employee stock options relating to the common stock of ON Semiconductor in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related pronouncements (“APB 25”) and provides the pro forma disclosures required by Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock Based Compensation”. 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 for 2003 and 2002 would not have been materially different from the net income reported.

The fair value of each option grant has been estimated at the date of grant using a Black-Scholes option-pricing model with weighted-average assumptions of a 5 year expected life in both 2003 and 2002, 3.14% and 4.40% risk-free interest rate and 1.01 and 0.7 volatility in 2003 and 2002, respectively.

Certain employees of the Company participate in ON Semiconductor stock option plans. During 2003, there were 4,000 options granted to such employees with a weighted average fair value of $3.98. As of December 31, 2003, there were 27,135 shares of options outstanding of which 5,844 were exerciseable. There were no stock option grants in 2001. 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).

The weighted-average estimated fair value of employee stock options granted during 2003 and 2002 was $3.98 and $1.97 per share, respectively.

250

SCG ( CHINA ) HOLDING CORPORATION

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Income Taxes

Foreign Currencies

Related Party Transactions

Contingencies

The Company is involved in a variety of legal matters that arise in the normal course of business. Based on information available, management evaluates the relevant range and likelihood of potential outcomes. In accordance with SFAS No. 5, “Accounting for Contingencies”, the Company records the appropriate liability when the amount is deemed probable and estimable.

Recent Accounting Pronouncements

251

SCG ( CHINA ) HOLDING CORPORATION

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

No. 150. The minority interest associated with the Company’s investment in Leshan is a mandatorily redeemable minority interest within the scope of SFAS No. 150 by virtue of Leshan’s finite life of 50 years as specified in its organizational documents. In November 2003, the FASB issued Staff Position No. 150-3 which deferred the measurement and classification provisions of SFAS No. 150 relating to Leshan pending further action by the FASB. The Company is required to disclose the liquidation value of the Leshan minority interest which the Company believes approximates the related carrying value of $26.0 million as of December 31, 2003. The Company’s adoption of the other provisions of SFAS No. 150 in 2003 did not impact its financial condition or results of operations.

Note 4: Balance Sheet Information

Balance sheet information is as follows (in millions):


	December 31,
	2003			2002
Inventories
Work-in-process	$	4.2		$	3.5
Finished goods		0.1			—

	$	4.3		$	3.5

Other current assets:
Value added tax receivable	$	0.5		$	2.2
Other		1.3			0.9

	$	1.8		$	3.1

Property, plant and equipment, net:
Land	$	3.3		$	3.3
Buildings		24.7			23.9
Machinery and equipment		148.2			145.6

Total property, plant and equipment		176.2			172.8
Less: Accumulated depreciation		(57.0	)		(41.6	)

	$	119.2		$	131.2

Depreciation expense related to property, plant and equipment totaled $15.6 million, $13.8 million and $10.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Note 5: Income Taxes

Geographic source of income (loss) before income taxes and minority interest are as follows (in millions):


	Year Ended December 31,
	2003		2002		2001
United States	$	—	$	0.6	$	—
Foreign		8.9		7.9		6.6

	$	8.9	$	8.5	$	6.6

252

SCG ( CHINA ) HOLDING CORPORATION

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

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


	Year Ended December 31,
	2003		2002		2001
Current	$	0.9	$	0.9	$	0.1
Deferred		—		—		—

	$	0.9	$	0.9	$	0.1

A reconciliation of the China statutory income tax rate to the Company’s effective income tax rate is as follows:


	Year Ended December 31,
	2003		2002		2001
U.S federal statutory rate	35.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
Foreign rate differential	(25.0	)	(25.0	)	(25.0	)
Other	0.1		0.6		(8.5	)

	10.1	%	10.6	%	1.5	%

Income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries (approximately $35.7 million at December 31, 2003) 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 additional tax if they were remitted as dividends, if foreign earnings were lent to any of the Company’s subsidiaries, or if the Company sells its investment in such subsidiaries. The Company estimates that repatriation of these foreign earnings would generate additional foreign tax withholdings of $7.3 million. Cash paid for income taxes was $0.2 million, $1.3 million and $0.0 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Note 6: Long Term Debt

In connection with the Recapitalization described in Note 1, ON Semiconductor loaned the Company $28.3 million, at an interest rate of 3.5%, to refinance third-party non-recourse loans. During 2001 and 2000, ON Semiconductor loaned the Company an additional $5.0 million and $30.0 million, respectively, to finance facility expansion. The loan of $63.3 was fully repaid by the Company in 2003.

The Company’s long-term debt includes a $20.0 million loan facility from a Chinese bank. Aggregate loans under this facility, which was entered into in November 2000, are comprised of $16 million of borrowings denominated in U.S. dollars and $4 million of borrowings denominated in Chinese Renminbi (based on year-end exchange rates). Interest on these loans is payable quarterly and accrues at a variable rate based on published market rates in China for six-year term loans. During the fourth quarter of 2003, the Company exercised its

253

SCG ( CHINA ) HOLDING CORPORATION

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

ability to extend the maturity of this loan for three years under the same terms and conditions, thereby extending scheduled principal payments to $10.5 million due in the fourth quarter of 2006 and $9.5 million due in the first quarter of 2007. The effective interest rate for loan denominated in U.S dollars is 2.63% and 2.94% at December 31, 2003 and December 31, 2002, respectively. The effective interest rate for loan denominated in Chinese Renminbi is 5.06% and 5.76% at December 31, 2003 and December 31, 2002, respectively.

The Company’s long-term debt also includes a $48.0 million loan facility from another Chinese Bank. The loan facility was entered into in the fourth quarter of 2003 and is comprised of two $24.0 million tranches. The first tranche has a 10-year term with a maturity in December 2013; the second tranche has a three year term with scheduled principal payments through December 2006 extendible for an additional three years under certain circumstances. Each tranche bears interest at a rate of LIBOR plus 1.5% per annum, payable quarterly. The effective interest rate is 2.72% at December 31, 2003.

Note 7: Commitment and Contingencies

Legal Matters

Common Stock Collateral Pledge

On May 6, 2002, ON Semiconductor and Semiconductor Components Industries, LLC (“SCI LLC”) (collectively, the “Issuers”) issued $300 million principal amount of second lien notes due 2008. The notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by ON Semiconductor’s domestic restricted subsidiaries that are 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 including the Company, 65% of the capital stock or other equity interests of its first-tier foreign subsidiaries 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.

On March 3, 2003, the Issuers issued $200.0 million principal amount of first-lien senior secured notes due 2010 (the “First-Lien Notes”) . The notes are fully and unconditionally guaranteed on a joint and several basis by each of the domestic subsidiaries of ON Semiconductor (other than SCI LLC). In addition, the notes and guarantees are secured on a first-priority basis by the capital stock or other equity interests of ON Semiconductor’s domestic subsidiaries including the Company, 65% of the capital stock or other equity interests of its first-tier foreign subsidiaries including the Company, 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.

Purchase Obligations

As of December 31, 2003, the Company had $2.2 million of capital purchase commitments.

254

SCG ( CHINA ) HOLDING CORPORATION

(A Wholly-Owned Subsidiary of ON Semiconductor Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Note 8: Fair Value of Financial Instruments

The Company uses the following methods to estimate the fair value 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 Affiliate

Due to the related-party nature of the notes payable to affiliate, it was not practicable to estimate their fair values due to the inability to obtain quoted market prices to determine current market rates for similar instruments. At December 31, 2002, the carrying value of the notes payable to affiliate was $63.3 million.

Long-term Debt

The fair values of the Company’s long-term borrowings are determined based on market prices for comparable debt instruments. The carrying value of long-term debt approximates fair value at December 31, 2003 and 2002.

255

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

March 22, 2004


ON SEMICONDUCTOR CORPORATION

By:		/s/ KEITH D. JACKSON

		Name: Keith D. Jackson
		Title: President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Titles	Date

/s/ KEITH D. JACKSON Keith D. Jackson	President, Chief Executive Officer and Director (Principal Executive Officer)	March 22, 2004

/s/ DONALD COLVIN Donald A. Colvin	Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)	March 22, 2004

* J. Daniel McCranie	Chairman of the Board of Directors	March 22, 2004

* Richard W. Boyce	Director	March 22, 2004

* Kevin Burns	Director	March 22, 2004

* Justin T. Chang	Director	March 22, 2004

* Curtis Crawford	Director	March 22, 2004

* William A. Franke	Director	March 22, 2004

* Jerome N. Gregoire	Director	March 22, 2004

* Emmanuel T. Hernandez	Director	March 22, 2004

* John W. Marren	Director	March 22, 2004

*By: /s/ DONALD COLVIN	Attorney in Fact	March 22, 2004

EXHIBIT INDEX


Exhibit No.		Exhibit Description

23.1		Consent of PricewaterhouseCoopers LLP, independent accountants(1)

24.1		Powers of Attorney (incorporated by reference from Exhibit 24.1 to the Corporation’s Form 10-K filed with the Commission March 10, 2004)

31.1		Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

31.2		Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

32		Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)

(1)	Filed herewith.

/s/ KEITH D. JACKSON

/s/ DONALD COLVIN

President and Chief Executive Officer

Senior Vice-President, Chief Financial Officer and Treasurer

February 2, 2004

February 2, 2004