| |
|
|
|
|
|
|
|
|
|
August 4, |
|
|
1999 through |
|
|
December 31, |
|
|
1999 |
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
29.8 |
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
61.9 |
|
|
|
|
|
|
|
|
Amortization of debt issuance costs |
|
|
2.7 |
|
|
|
|
|
|
|
|
Provision for doubtful accounts |
|
|
2.0 |
|
|
|
|
|
|
|
|
Loss on disposals of property, plant and equipment |
|
|
.7 |
|
|
|
|
|
|
|
|
Non-cash interest on junior subordinated note payable to Motorola |
|
|
3.8 |
|
|
|
|
|
|
|
|
Minority interests in earnings of consolidated subsidiaries |
|
|
1.1 |
|
|
|
|
|
|
|
|
Undistributed earnings of unconsolidated joint ventures |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
Deferred income taxes |
|
|
(17.6 |
) |
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(238.4 |
) |
|
|
|
|
|
|
|
Inventories |
|
|
10.5 |
|
|
|
|
|
|
|
|
Other assets |
|
|
(2.0 |
) |
|
|
|
|
|
|
|
Accounts payable |
|
|
84.1 |
|
|
|
|
|
|
|
|
Accrued expenses |
|
|
39.9 |
|
|
|
|
|
|
|
|
Income taxes payable |
|
|
31.8 |
|
|
|
|
|
|
|
|
Accrued interest |
|
|
30.1 |
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
1.7 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
40.7 |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(64.0 |
) |
|
|
|
|
|
|
Investment in joint ventures |
|
|
(4.9 |
) |
|
|
|
|
|
|
Loan to unconsolidated joint venture |
|
|
(28.3 |
) |
|
|
|
|
|
|
Proceeds from sales of property, plant and equipment |
|
|
1.8 |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(95.4 |
) |
|
|
|
|
|
|
Cash flows from financing activities (See Note 1): |
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock to an affiliate of Texas
Pacific Group |
|
|
187.5 |
|
|
|
|
|
|
|
Proceeds from issuance of redeemable preferred stock to an
affiliate of Texas Pacific Group |
|
|
150.0 |
|
|
|
|
|
|
|
Proceeds from borrowings under senior credit facilities |
|
|
800.5 |
|
|
|
|
|
|
|
Proceeds from issuance of senior subordinated notes |
|
|
400.0 |
|
|
|
|
|
|
|
Payment of debt issuance costs |
|
|
(52.6 |
) |
|
|
|
|
|
|
Repayment of joint venture debt |
|
|
(44.8 |
) |
|
|
|
|
|
|
Net cash payments to Motorola in connection with Recapitalization |
|
|
(1,258.7 |
) |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
181.9 |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(.4 |
) |
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
126.8 |
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
— |
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
126.8 |
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Background and Basis of Presentation
SCG Holding 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. prior to
its August 4, 1999 recapitalization. The Company held, and
continues to hold, through direct and indirect subsidiaries,
substantially all of the assets and operations of the
Semiconductor Components Group of Motorola’s Semiconductor
Products Sector. The Company recently began marketing its
products under its new trade name, ON Semiconductor™.
On August 4, 1999, the Company was recapitalized and certain
related transactions were effected (the
“Recapitalization”) pursuant to an agreement among SCG
Holding Corporation, its subsidiary, Semiconductor Components
Industries, LLC, Motorola and affiliates of Texas Pacific Group.
As a result of the Recapitalization, an affiliate of Texas
Pacific Group owns approximately 91% and Motorola owns
approximately 9% of the outstanding common stock of the Company.
In addition, as part of these transactions, Texas Pacific Group
received 1,500 shares and Motorola received 590 shares of the
Company’s mandatorily redeemable preferred stock with a
liquidation value of $209 million plus accrued and unpaid
dividends. Motorola also received a $91 million junior
subordinated note issued by Semiconductor Components Industries,
LLC, a wholly-owned subsidiary of the Company. Cash payments to
Motorola in connection with the Recapitalization were financed
through equity investments by affiliates of Texas Pacific Group
totaling $337.5 million, borrowings totaling $740.5 million under
the Company’s $875 million senior bank facilities and the
issuance of $400 million of 12% senior subordinated notes due
August 2009. Because Texas Pacific Group’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.
The accompanying consolidated financial statements include
information as of December 31, 1999 and for the period from
August 4, 1999 (the date of the Recapitalization) through
December 31, 1999.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements include the accounts of the
Company, its wholly-owned subsidiaries and the majority-owned
subsidiaries that it controls. An investment in a majority-owned
joint venture that the Company does not control as well as an
investment in a 50%-owned joint venture are accounted for on the
equity method. All material intercompany accounts and
transactions have been eliminated.
Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost, determined 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 accelerated
and straight-line methods.
F-7
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Expenditures for maintenance and repairs are charged to
operations in the year in which the expense is incurred.
Impairment of Long-Lived Assets
The Company reviews the carrying value of property, plant and
equipment for impairment by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows
associated with them. In cases where undiscounted expected future
cash flows are less than the carrying value, an impairment loss
is recognized for the amount by which the carrying value exceeds
the fair value of assets. The fair value is determined based on
the present value of estimated expected future cash flows using a
discount rate commensurate with the risks involved.
Debt Issuance Costs
In connection with the Recapitalization, the Company incurred
$52.9 million in costs relating to the establishment of its
senior bank facilities and the issuance of its senior
subordinated notes. These costs have been capitalized and are
being amortized on a straightline basis over the terms of the
underlying agreements. Other assets at December 31, 1999
includes $50.2 million of unamortized debt issuance costs.
Revenue Recognition
Revenues from the sale of semiconductor products and the
provision of foundry services are recognized when products are
shipped. Provisions for estimated returns and allowances are also
recorded at that time.
Research and Development Costs
Research and development costs are expensed as incurred.
Stock-Based Compensation
The Company measures compensation expense relating to employee
stock awards in accordance with Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to
Employees.” The Company measures compensation expense
relating to non-employee stock awards in accordance with
Statement of Financial Accounting Standards No. 123
“Accounting for Stock Based Compensation” (“SFAS
123”).
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 deferred tax assets
that are not expected to be recovered from future operations.
Foreign Currencies
The Company’s foreign subsidiaries utilize the U.S. dollar
as their functional currency, except for subsidiaries in Japan
and Western Europe where the local currency is used. For foreign
subsidiaries which use the U.S. dollar as the 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
F-8
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
operations. The net translation gains and losses for subsidiaries
using the local currency as the functional currency are included
as a component of accumulated other comprehensive income.
Earnings per Common Share
Basic earnings per share are computed by dividing net income
available for common stock (net income less dividends accrued on
the Company’s redeemable preferred stock) by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share incorporates the incremental 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. The weighted
average number of shares consists of the following (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
136.7 |
|
|
|
|
|
|
|
Dilutive effect of stock options |
|
|
7.9 |
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
144.6 |
|
|
|
|
|
|
Stock Splits
In connection with the Recapitalization, the Company issued
100,000 shares of its $.01 par value common stock. The
Company’s Board of Directors subsequently approved a
2,049-for-1 stock split effected in the form of a stock dividend.
On February 17, 2000, the Company’s Board of Directors
approved a 2-for-3 reverse stock split. Historical
stockholders’ equity (deficit), share and per share amounts
have been retroactively restated to reflect these stock splits as
of August 4, 1999. The par value of common stock has not
been changed as a result of these transactions.
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. Actual results could differ from these
estimates.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards No. 133 (“SFAS 133”), “Accounting
for Derivative Instruments and Hedging Activities,” which
establishes standards for the accounting and reporting for
derivative instruments, including derivative instruments embedded
in other contracts, and hedging activities. This statement
generally requires recognition of gains and losses on hedging
instruments based on changes in fair value. The Company is
currently evaluating the impact of adopting SFAS 133 but
does not expect it to be material. As issued, SFAS 133 was
effective for the first quarter of fiscal years beginning after
June 15, 1999. In June 1999, the FASB issued SFAS
No. 137, “Accounting for Derivative Instruments and
Hedging Activities — Deferral of the Effective Date of
FASB Statement No. 133 — An Amendment of FASB
Statement No. 133,” which deferred the effective date
of SFAS No. 133 so that it is now effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
F-9
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3: Balance Sheet Information
Balance sheet information as of December 31, 1999 follows
(in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
Receivables: |
|
|
|
|
|
|
|
|
|
|
Accounts Receivable |
|
$ |
251.7 |
|
|
|
|
|
|
|
Less allowance for doubtful accounts |
|
|
(2.0 |
) |
|
|
|
|
|
|
|
$ |
249.7 |
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
25.6 |
|
|
|
|
|
|
|
Work in process |
|
|
103.8 |
|
|
|
|
|
|
|
Finished goods |
|
|
76.8 |
|
|
|
|
|
|
|
|
|
206.2 |
|
|
|
|
|
|
|
Property, plant and equipment, net: |
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
12.0 |
|
|
|
|
|
|
|
Buildings |
|
|
257.9 |
|
|
|
|
|
|
|
Machinery and equipment |
|
|
1,287.3 |
|
|
|
|
|
|
|
Total property, plant and equipment |
|
|
1,557.2 |
|
|
|
|
|
|
|
Less accumulated depreciation |
|
|
(987.5 |
) |
|
|
|
|
|
|
|
$ |
569.7 |
|
|
|
|
|
|
Note 4: Investments in Joint Ventures
The Company has interests in joint ventures which are accounted
for using the equity method. The investment in each joint venture
approximates the Company’s underlying equity interest of
each joint venture. Investments in these joint ventures totaled
$40.4 million at December 31, 1999, while the related
earnings totaled $1.4 million for the period from August 4,
1999 through December 31, 1999. Summarized financial
information for the joint ventures is as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor |
|
|
|
|
Leshan-Phoenix |
|
Miniature |
|
|
|
|
Semiconductor |
|
Products |
|
|
|
|
Ltd. |
|
Malaysia |
|
Total |
|
|
|
|
|
|
|
|
Country location |
|
|
China |
|
|
|
Malaysia |
|
|
|
|
|
|
|
|
|
|
|
Percentage ownership |
|
|
51% |
|
|
|
50% |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 1999 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
16.2 |
|
|
$ |
15.0 |
|
|
$ |
31.2 |
|
|
|
|
|
|
|
Noncurrent assets |
|
|
61.1 |
|
|
|
109.0 |
|
|
|
170.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
77.3 |
|
|
$ |
124.0 |
|
|
$ |
201.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
11.1 |
|
|
$ |
37.8 |
|
|
$ |
48.9 |
|
|
|
|
|
|
|
Noncurrent liabilities |
|
|
28.3 |
|
|
|
45.1 |
|
|
|
73.4 |
|
|
|
|
|
|
|
Venture equity |
|
|
37.9 |
|
|
|
41.1 |
|
|
|
79.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
77.3 |
|
|
$ |
124.0 |
|
|
$ |
201.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4, 1999 through December 31, 1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
16.3 |
|
|
$ |
37.0 |
|
|
$ |
53.3 |
|
|
|
|
|
|
|
Gross profit |
|
|
2.2 |
|
|
|
7.6 |
|
|
|
9.8 |
|
|
|
|
|
|
|
Net income (loss) |
|
|
(.8 |
) |
|
|
3.6 |
|
|
|
2.8 |
|
F-10
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
In connection with the Recapitalization, the Company loaned
Leshan-Phoenix Semiconductor Ltd. (“Leshan”)
$28.3 million to refinance third-party non-recourse loans.
The Company’s loan to Leshan bears interest at 10.5% payable
quarterly and is included in other assets in the consolidated
balance sheet.
Note 5: Restructuring Charges
In June 1998, Motorola recorded a charge to cover
restructuring costs related to the consolidation of manufacturing
operations, the exit of non-strategic or poorly performing
businesses and a reduction in worldwide employment by 20,000
employees. Asset impairment and other charges were also recorded
for the write-down of assets which became impaired as a result of
current business conditions or business portfolio decisions. The
Company’s charges related to these actions totaled $189.8
million and consisted of $13.2 million relating to the
consolidation of manufacturing operations in Arizona and the
Philippines, $20.7 million for costs relating to the exit of
certain businesses, $102.0 million for separation costs
associated with the planned reductions of 3,900 employees and
$53.9 million for asset impairments that were charged directly
against property, plant and equipment.
As of the date of the Recapitalization, the Company had spent
$92.8 million in connection with the related restructuring
actions including $3.8 million for the consolidation of
manufacturing operations, $15.8 million for business exits and
$73.2 million for employee separations costs relating to
approximately 3,000 employees. In connection with the
Recapitalization, Motorola agreed to retain the remaining
employee separation reserve of $28.8 million to cover
approximately 900 employees who were to remain employees of and
be released by Motorola. At August 4, 1999, the Company had
remaining reserves of $9.4 million relating to the consolidation
of manufacturing operations and $4.9 million for business exits
for a total restructuring reserve of $14.3 million.
During the period from August 4, 1999 through
December 31, 1999, the Company spent approximately $.9
million in connection with restructuring actions relating to the
consolidation of manufacturing operations. In December 1999, the
Company completed a detailed evaluation of the costs to be
incurred to complete the remaining restructuring actions. Based
on this evaluation, the Company released $7.4 million of its
remaining 1998 restructuring reserve to income as a credit to
restructuring charges in the consolidated statement of operations
and comprehensive income. The Company’s remaining
restructuring reserve relating to the 1998 restructuring totaled
$6.0 million at December 31, 1999.
In December 1999, the Company recorded a restructuring
charge of $11.1 million, including $3.5 million to cover
separation costs relating to approximately 150 employees at
a manufacturing facility in Mesa, Arizona that was closed in
December as well as $7.6 million to cover equipment
write-downs at that facility and other non-cash business exit
costs that were charged directly against the related assets.
A summary of activity in the Company’s restructuring
reserves from August 4, 1999 through December 31, 1999
is as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
Balance, August 4, 1999. |
|
$ |
14.3 |
|
|
|
|
|
|
|
Plus: December 1999 employee separation charge |
|
|
3.5 |
|
|
|
|
|
|
|
Less: Payments charged against the reserve |
|
|
(.9 |
) |
|
|
|
|
|
|
Less: Reserve released to income |
|
|
(7.4 |
) |
|
|
|
|
|
|
Balance, December 31, 1999. |
|
$ |
9.5 |
|
|
|
|
|
|
F-11
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Restructuring charges during the period from August 4, 1999
through December 31, 1999 are summarized as follows (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
Reserve released to income |
|
$ |
(7.4 |
) |
|
|
|
|
|
|
December 1999 restructuring charge (including non-cash
portion) |
|
|
11.1 |
|
|
|
|
|
|
|
Total |
|
$ |
3.7 |
|
|
|
|
|
|
Note 6: Long-Term Debt
Long-term debt at December 31, 1999 consisted of the
following (dollars in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate at |
|
|
|
|
Amount |
|
December 31, |
|
|
|
|
of Facility |
|
1999 |
|
Balance |
|
|
|
|
|
|
|
|
Senior Bank Facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche A |
|
$ |
200.0 |
|
|
|
8.927 |
% |
|
$ |
125.5 |
|
|
|
|
|
|
|
Tranche B |
|
|
325.0 |
|
|
|
9.313 |
% |
|
|
325.0 |
|
|
|
|
|
|
|
Tranche C |
|
|
350.0 |
|
|
|
9.563 |
% |
|
|
350.0 |
|
|
|
|
|
|
|
Revolver |
|
|
150.0 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800.5 |
|
|
|
|
|
|
|
12% Senior Subordinated Notes due 2009 |
|
|
|
|
|
|
|
|
|
|
400.0 |
|
|
|
|
|
|
|
10% Junior Subordinated Note Payable to Motorola due 2011
(including accrued interest of $3.8) |
|
|
|
|
|
|
|
|
|
|
94.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,295.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under Tranche A, B and C facilities amortize within
six, seven and eight years, respectively. The Tranche A facility
includes a delayed-draw facility of $134.5 million of which $60.0
million had been borrowed as of December 31, 1999. The
Company’s ability to borrow under the delayed-draw facility
expired February 4, 2000. Although no amounts are
outstanding under the Company’s revolving bank facility as
of December 31, 1999, the amount available has been reduced
by $13.6 million for letters of credit issued on behalf of
the Company. The Company is obligated to pay a fee for unutilized
commitments at a rate of .50% per annum. Prepayment of
borrowings under the Tranche B and C facilities require a premium
of 2% of the principal amount prepaid prior to August 4,
2000 and 1% of the principal amount prepaid during the period
from August 4, 2000 to August 4, 2001.
Borrowings under the senior bank facilities bear interest,
payable quarterly, at rates selected by the Company based on
LIBOR or the alternate base rate defined in the related agreement
plus a spread as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
Alternate |
|
|
LIBOR |
|
Base Rate |
|
|
|
|
|
|
Tranche A |
|
|
+3.0 |
% |
|
|
+2.0 |
% |
|
|
|
|
|
|
Tranche B |
|
|
+3.5 |
% |
|
|
+2.5 |
% |
|
|
|
|
|
|
Tranche C |
|
|
+3.75 |
% |
|
|
+2.75 |
% |
|
|
|
|
|
|
Revolver |
|
|
+3.0 |
% |
|
|
+2.0 |
% |
Except as discussed 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. Up to 35% of the aggregate
principal amount of the senior subordinated notes may be redeemed
F-12
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
prior to August 4, 2002 with the net cash proceeds of a
public equity offering at a redemption price equal to 112% of the
principal amount redeemed.
The senior bank facilities as well as the senior subordinated
notes contain various covenants and restrictions, including
restrictions on the payment of dividends under certain
circumstances, and require that substantially all of the
Company’s assets be pledged as collateral.
Annual maturities of long-term debt are as follows (in millions):
| |
|
|
|
|
| Year ending December 31: |
|
|
|
|
|
|
2000 |
|
$ |
— |
|
|
|
|
|
|
|
2001 |
|
|
18.4 |
|
|
|
|
|
|
|
2002 |
|
|
41.8 |
|
|
|
|
|
|
|
2003 |
|
|
51.8 |
|
|
|
|
|
|
|
2004 |
|
|
37.3 |
|
|
|
|
|
|
|
Thereafter |
|
|
1,146.0 |
|
|
|
|
|
|
|
|
$ |
1,295.3 |
|
|
|
|
|
|
The Company and one of its domestic subsidiaries (collectively,
the “Issuers”) issued the senior subordinated notes due
2009. The Company’s other domestic subsidiaries
(collectively, the “Guarantor Subsidiaries”) have
jointly and severally, irrevocably and unconditionally guaranteed
the Issuers’ obligations under the senior subordinated
notes. The Guarantor Subsidiaries are holding companies whose net
assets consist primarily of investments in the Company’s
joint ventures in China, Malaysia and the Czech Republic as well
as nominal equity interests in certain of the Company’s
foreign subsidiaries. The joint ventures and foreign subsidiaries
(collectively, the “Non-Guarantor Subsidiaries”)
themselves are not guarantors of the senior subordinated notes.
The aggregate assets, liabilities, earnings and equity of the
Guarantor Subsidiaries, when combined with those of the Issuers,
are substantially equivalent to those of the Company on a
consolidated basis. The Company does not believe that the
separate financial statements and other disclosures concerning
the Guarantor Subsidiaries provide any additional information
that would be meaningful to investors in making an investment
decision.
F-13
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Condensed consolidating financial information for the Issuers,
the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as
of December 31, 1999 and for the period from August 4,
1999 through December 31, 1999 is as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
Guarantor |
|
Guarantor |
|
|
|
|
|
|
Issuers |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
$ |
251.9 |
|
|
$ |
— |
|
|
$ |
6.5 |
|
|
$ |
(8.7 |
) |
|
$ |
249.7 |
|
|
|
|
|
|
|
Inventories |
|
|
198.4 |
|
|
|
— |
|
|
|
7.8 |
|
|
|
— |
|
|
|
206.2 |
|
|
|
|
|
|
|
Other current assets |
|
|
177.7 |
|
|
|
— |
|
|
|
9.4 |
|
|
|
(5.9 |
) |
|
|
181.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
628.0 |
|
|
|
|
|
|
|
23.7 |
|
|
|
(14.6 |
) |
|
|
637.1 |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
505.3 |
|
|
|
— |
|
|
|
64.4 |
|
|
|
— |
|
|
|
569.7 |
|
|
|
|
|
|
|
Deferred income taxes |
|
|
289.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
289.0 |
|
|
|
|
|
|
|
Investments and other assets |
|
|
183.0 |
|
|
|
52.9 |
|
|
|
1.7 |
|
|
|
(116.6 |
) |
|
|
121.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,605.3 |
|
|
$ |
52.9 |
|
|
$ |
89.8 |
|
|
$ |
(131.2 |
) |
|
$ |
1,616.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
126.3 |
|
|
$ |
.6 |
|
|
$ |
4.6 |
|
|
$ |
(9.0 |
) |
|
$ |
122.5 |
|
|
|
|
|
|
|
Accrued expenses |
|
|
199.6 |
|
|
|
— |
|
|
|
5.4 |
|
|
|
(.2 |
) |
|
|
204.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
325.9 |
|
|
|
.6 |
|
|
|
10.0 |
|
|
|
(9.2 |
) |
|
|
327.3 |
|
|
|
|
|
|
|
Long-term debt and other |
|
|
1,307.5 |
|
|
|
— |
|
|
|
54.7 |
|
|
|
(54.7 |
) |
|
|
1,307.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,633.4 |
|
|
|
.6 |
|
|
|
64.7 |
|
|
|
(63.9 |
) |
|
|
1,634.8 |
|
|
|
|
|
|
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10.1 |
|
|
|
10.1 |
|
|
|
|
|
|
|
Redeemable preferred stock |
|
|
219.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
219.6 |
|
|
|
|
|
|
|
Stockholders’ equity (deficit) |
|
|
(247.7 |
) |
|
|
52.3 |
|
|
|
25.1 |
|
|
|
(77.4 |
) |
|
|
(247.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, minority interests, redeemable preferred stock and
stockholders’ equity (deficit) |
|
$ |
1,605.3 |
|
|
$ |
52.9 |
|
|
$ |
89.8 |
|
|
$ |
(131.2 |
) |
|
$ |
1,616.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Revenues |
|
$ |
796.9 |
|
|
$ |
— |
|
|
$ |
26.6 |
|
|
$ |
(24.8 |
) |
|
$ |
798.7 |
|
|
|
|
|
|
|
Cost of sales |
|
|
578.9 |
|
|
|
— |
|
|
|
19.2 |
|
|
|
(24.8 |
) |
|
|
573.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
218.0 |
|
|
|
— |
|
|
|
7.4 |
|
|
|
— |
|
|
|
225.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
75.2 |
|
|
|
— |
|
|
|
2.1 |
|
|
|
— |
|
|
|
77.3 |
|
|
|
|
|
|
|
Other operating expenses |
|
|
44.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
44.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
119.8 |
|
|
|
— |
|
|
|
2.1 |
|
|
|
— |
|
|
|
121.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
98.2 |
|
|
|
— |
|
|
|
5.3 |
|
|
|
— |
|
|
|
103.5 |
|
|
|
|
|
|
|
Interest expense |
|
|
(53.8 |
) |
|
|
— |
|
|
|
(2.1 |
) |
|
|
— |
|
|
|
(55.9 |
) |
|
|
|
|
|
|
Equity earnings |
|
|
2.5 |
|
|
|
1.8 |
|
|
|
— |
|
|
|
(2.9 |
) |
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes and minority interests |
|
|
46.9 |
|
|
|
1.8 |
|
|
|
3.2 |
|
|
|
(2.9 |
) |
|
|
49.0 |
|
|
|
|
|
|
|
Provision for income taxes |
|
|
(17.1 |
) |
|
|
(.7 |
) |
|
|
(.3 |
) |
|
|
— |
|
|
|
(18.1 |
) |
|
|
|
|
|
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1.1 |
) |
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
29.8 |
|
|
$ |
1.1 |
|
|
$ |
2.9 |
|
|
$ |
(4.0 |
) |
|
$ |
29.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
In connection with the Recapitalization, the Company refinanced
third-party non-recourse loans of the majority-owned joint
ventures located in the Czech Republic totaling $44.8 million
with intercompany loans.
Note 7: Income Taxes
Geographic sources of income before taxes and minority interests
for the period from August 4, 1999 through December 31,
1999 were as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
10.8 |
|
|
|
|
|
|
|
Foreign |
|
|
38.2 |
|
|
|
|
|
|
|
|
$ |
49.0 |
|
|
|
|
|
|
The provision for income taxes for the period from August 4,
1999 through December 31, 1999 was as follows (in
millions):
| |
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
12.3 |
|
|
|
|
|
|
|
State and local |
|
|
1.7 |
|
|
|
|
|
|
|
Foreign |
|
|
21.7 |
|
|
|
|
|
|
|
|
|
35.7 |
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(7.9 |
) |
|
|
|
|
|
|
State and local |
|
|
(1.1 |
) |
|
|
|
|
|
|
Foreign |
|
|
(8.6 |
) |
|
|
|
|
|
|
|
|
(17.6 |
) |
|
|
|
|
|
|
|
$ |
18.1 |
|
|
|
|
|
|
A reconciliation of the U.S. federal statutory income tax rate to
the Company’s effective income tax rate for the period from
August 4, 1999 through December 31, 1999 is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
U.S. federal statutory rate |
|
|
35.0 |
% |
|
|
|
|
|
|
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
|
|
State and local taxes, net of federal tax benefit |
|
|
1.1 |
|
|
|
|
|
|
|
Foreign withholding taxes |
|
|
1.4 |
|
|
|
|
|
|
|
Foreign rate differential |
|
|
(2.6 |
) |
|
|
|
|
|
|
Other |
|
|
2.1 |
|
|
|
|
|
|
|
|
|
37.0 |
% |
|
|
|
|
|
F-15
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Deferred tax assets (liabilities) at December 31, 1999 were
as follows (in millions):
| |
|
|
|
|
|
|
|
December 31, |
|
|
1999 |
|
|
|
|
Tax-deductible goodwill |
|
$ |
297.6 |
|
|
|
|
|
|
|
Reserves and accruals |
|
|
16.8 |
|
|
|
|
|
|
|
Inventories |
|
|
7.3 |
|
|
|
|
|
|
|
Other |
|
|
5.3 |
|
|
|
|
|
|
|
Deferred tax assets |
|
|
327.0 |
|
|
|
|
|
|
|
Depreciation |
|
|
(9.6 |
) |
|
|
|
|
|
|
Deferred tax liabilities |
|
|
(9.6 |
) |
|
|
|
|
|
|
|
$ |
317.4 |
|
|
|
|
|
|
Realization of deferred tax assets is dependent upon generating
sufficient taxable income in the future. Based on the
Company’s history of profitable operations, management has
concluded that it is more likely than not that the Company will
ultimately realize the full benefit of its deferred tax assets.
Accordingly, the Company has not provided a valuation allowance
for its net deferred tax assets.
Income taxes have not been provided on the Company’s share
($52.0 million) of undistributed earnings of foreign
manufacturing interests over which we have sufficient influence
to control the distribution of such earnings and have 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 U.S. entities, or if the Company sells its
stock in the subsidiaries. It is estimated that repatriation of
these foreign earnings would generate additional foreign tax
withholdings of $2.9 million and federal income tax, net of
foreign tax credits, of $9.2 million.
Note 8: Redeemable Preferred Stock
In connection with the Recapitalization, the Company issued 2,090
shares of its 12% mandatorily redeemable preferred stock with an
original liquidation value of $209 million. Dividends on the
preferred stock are payable quarterly and compound to the extent
not paid. The Company will be required to redeem all of the
shares of the preferred stock on the thirteenth anniversary of
the issue date at a price equal to the liquidation value plus all
accumulated dividends that have been applied to increase the
liquidation value. Shares of the preferred stock may be redeemed,
in whole or in part, at the option of the Company.
Optional redemption of the preferred stock is subject to, and
expressly conditioned upon, limitations under the Company’s
senior subordinated notes, its senior bank facilities and other
documents relating to the Company’s indebtedness. The
Company may also be required to offer to repurchase shares of the
preferred stock in other circumstances, including the occurrence
of a change of control of the Company, in each case subject to
the terms of the senior subordinated notes, senior bank
facilities and other documents relating to the Company’s
indebtedness. Holders of the preferred stock will not have any
voting rights, except with respect to specified actions that
might adversely affect the holders and except for such rights as
are provided under applicable law.
Note 9: Stock Options
1999 Founders Stock Option Plan
The Company has adopted the SCG Holding Corporation 1999 Founders
Stock Option Plan, an incentive plan for key employees,
directors and consultants. A total of 11,576,666 shares of the
Company’s
F-16
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
common stock have been reserved for issuance under the plan. The
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 price and vesting schedule of the
options. Prior to the existence of a public market for the
Company’s common stock, (as defined in the plan) fair market
value is determined by the Board of Directors. Following the
existence of a public market for the Company’s common stock,
fair market value will be based on the closing price for the
shares on the exchange on which the shares are listed.
As of December 31, 1999, options to purchase 10,101,333
shares of the Company’s common stock have been granted at an
exercise price of $1.50 per share. Generally, the options vest
over a period of four years, with approximately 8% becoming
immediately vested and exercisable on the grant date. All
outstanding options will vest automatically upon a change of
control (as defined in the plan) other than an initial public
offering, provided the option holder is employed by the Company
on the date of the change in control. 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). Prior
to the existence of a public market for the Company’s common
stock, if an employee’s employment terminates, the Company
generally has the right to purchase vested options from that
employee at a price equal to the excess of the fair market value
per share of the common stock over the exercise price per share
specified in the option. In addition, any shares acquired prior
to the existence of a public market will generally be subject to
the Company’s call right, as well as customary drag-along
and tag-along rights.
As permitted by Statement of Financial Accounting Standards
No. 123 “Accounting for Stock Based Compensation”
(“SFAS 123”), the Company measures compensation expense
in accordance with Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees”. Had the
Company determined compensation expense in accordance with SFAS
No. 123, the Company’s net income for the period from
August 4, 1999 through December 31, 1999 would have
been reduced to the pro-forma amount indicated below (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
29.8 |
|
|
|
|
|
|
|
Pro-forma |
|
|
29.5 |
|
The per share weighted-average fair value of the stock options
granted under the plan for the period from August 4, 1999
through December 31, 1999 was $.39 based on the date of the
grant using an appropriate option pricing model with the
following assumptions: expected dividend yield of 0%; expected
volatility of 0%; a risk free interest rate of 5.94%; and an
expected life of 5 years.
The Company paid its Chairman a consulting fee of $100,000 and
granted him an option to purchase 200,000 shares of common stock
for services rendered in connection with the Recapitalization.
The Company also paid an entity owned by one of its directors a
consulting fee of $1,750,000 and granted that director an option
to purchase 410,000 shares of common stock for services rendered
in connection with the Recapitalization. The options, which have
an exercise price of $1.50 per share, were recorded as a charge
to accumulated deficit at their estimated fair value of $600,000.
2000 Stock Incentive Plan
On February 17, 2000, the Company adopted the 2000 Stock
Incentive Plan to provide key employees, directors and
consultants with various equity-based incentives as described in
the plan. The Company reserved 3.0 million shares of common
stock for grants under this plan. The plan is administered by the
Board of Directors or 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 price
F-17
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
or performance criteria, if applicable, and vesting schedule.
Under the “On Ownership” portion of the plan, the Board
of Directors intends, subject to local legal requirements, to
grant an option to purchase shares of common stock to every
employee at the market price of the Company’s stock on the
date of the grant. Under this portion of the plan, options will
become exercisable from the grant date.
2000 Employee Stock Purchase Plan
On February 17, 2000, the Company also adopted the 2000
Employee Stock Purchase Plan to become effective upon completion
of the Company’s initial public offering. The Company
reserved 1.5 million shares of common stock under this plan.
Subject to local legal requirements, each of the Company’s
full-time employees will have the opportunity to have up to 10%
of their payroll applied towards the purchase of shares of the
Company’s common stock at a price equivalent 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.
Note 10: Financial Instruments
As a multinational business, the Company’s transactions are
denominated in a variety of currencies. 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 speculation on
financial instruments, trading in currencies for which there are
no underlying exposures, or entering into trades for any currency
to intentionally increase the underlying exposure.
The Company’s foreign exchange management strategy requires
that each foreign operation provide a forecast of their foreign
currency exposures. The Company then aggregates the forecasts and
enters into net hedge 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. The Company primarily hedges existing assets and
liabilities and cash flows associated with transactions currently
on its balance sheet.
At December 31, 1999, the Company had net outstanding
foreign exchange contracts with a notional amount of $128
million. Most of the hedge contracts, which are obtained through
Motorola, mature within three months with the longest maturity
extending six months. Management believes that these financial
instruments should not subject the Company to undue risk due to
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 five largest net foreign exchange hedge positions in
U.S. dollars at fair market value as of December 31,
1999 (in millions):
| |
|
|
|
|
|
|
Buy |
|
|
(Sell) |
|
|
|
|
Japanese Yen |
|
$ |
(94.0 |
) |
|
|
|
|
|
|
Mexico Peso |
|
|
47.0 |
|
|
|
|
|
|
|
British Pound |
|
|
(24.0 |
) |
|
|
|
|
|
|
Euro |
|
|
(19.0 |
) |
|
|
|
|
|
|
Malaysian Ringgit |
|
|
(18.0 |
) |
The Company is exposed to credit-related losses if counterparties
to financial instruments fail to perform their obligations.
Motorola is the counterparty for all of the Company’s
foreign exchange contracts, and no credit-related losses are
anticipated.
At December 31, 1999, the Company had an interest rate swap
which becomes effective in February 2000. This transaction,
required by the credit agreement relating to the senior bank
facilities, is a floating-to-fixed rate swap based on LIBOR with
quarterly rate resets. The notional principal amount of this swap
is $200 million and is used solely as the basis for which the
payment streams are calculated and exchanged. The
F-18
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
notional amount is not a measure of the exposure to the Company
through the use of the swap. The interest rate swap matures in
relationship to its existing long-term debt and has a final
expiration date of November 2004. The purpose of the
interest rate swap was to essentially modify the interest rate
characteristics of a portion of the Company’s debt from
floating to fixed rate. Amounts to be paid or received under the
contract are recorded as an adjustment to interest expense. The
Company is subject to market risk as interest rates fluctuate and
impact the interest payments due on the notional principal
amount. The fair value of the interest rate swap is determined
based on the difference between the contract rate of interest and
the rates currently quoted for contracts of similar terms and
maturities. The market value of the contract at December 31,
1999 was not significant.
At December 31, 1999, the Company had no outstanding
commodity derivatives, currency swaps or options relating to
either its debt instruments or investments. The Company does not
have any derivatives to hedge the value of its equity investments
in affiliated companies.
Note 11: Fair Value of Financial Instruments
For certain of the Company’s financial instruments,
including cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, the carrying amounts
approximate fair value due to their short maturities. The
carrying amounts and fair values of the Company’s other
financial instruments as of December 31, 1999 were as
follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
|
|
amount |
|
Fair value |
|
|
|
|
|
|
Long-term debt |
|
$ |
1,295.3 |
|
|
$ |
1,321.0 |
|
|
|
|
|
|
|
Forward foreign exchange contracts |
|
|
7.4 |
|
|
|
7.0 |
|
|
|
|
|
|
|
Redeemable preferred stock |
|
|
219.6 |
|
|
|
248.0 |
|
Note 12: Commitments and Contingencies
Leases
The following is a schedule by year of future minimum lease
obligations under noncancelable operating leases as of
December 31, 1999 (in millions):
| |
|
|
|
|
|
|
|
|
Year ending December 31: |
|
|
|
2000 |
|
|
$ |
9.4 |
|
|
|
|
|
|
|
2001 |
|
|
|
6.1 |
|
|
|
|
|
|
|
2002 |
|
|
|
2.7 |
|
|
|
|
|
|
|
2003 |
|
|
|
1.8 |
|
|
|
|
|
|
|
2004 |
|
|
|
4.1 |
|
|
|
|
|
|
|
Thereafter |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25.6 |
|
|
|
|
|
|
|
|
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
the period from August 4, 1999 through December 31,
1999 was $7.0 million.
F-19
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Legal Matters
The Company 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 the Company’s financial condition, results of
operations or cash flows.
On December 6, 1999, International Rectifier filed an action
against the Company in the United States District Court for the
Central District of California alleging that our power-MOS
products infringed eight of their patents. These power-MOS
products were previously manufactured by Motorola under a license
from International Rectifier that expired on December 31,
1999. The Company has not yet been served with process in this
litigation and is engaged in good faith discussions with
International Rectifier regarding a number of different aspects
of our continuing business relationship, including development of
a new license agreement. In the event that the Company is unable
to reach such agreements on acceptable terms and International
Rectifier pursues the pending litigation, the Company could be
adversely affected by the imposition of an injunction, the award
of damages or both.
Note 13: Employee Benefit Plans
Pension Plans
The Company has a noncontributory pension plan that covers most
U.S. employees after one year of service. 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 the Internal Revenue Code.
Benefits under the pension plan are valued based upon the
projected unit credit cost method.
Certain of the Company’s foreign subsidiaries provide
retirement plans for substantially all of their employees. The
plans conform to local practice in terms of providing minimum
benefits mandated by law, collective agreements or customary
practice. Benefits under all foreign pension plans are also
valued using the projected unit credit cost method.
The following is a summary of the status of the pension plans and
the net periodic pension cost as of December 31, 1999 and
for the period from August 4, 1999 through December 31,
1999 (dollars in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
Foreign |
|
|
|
|
Pension |
|
Pension |
|
|
|
|
Plan |
|
Plans |
|
Total |
|
|
|
|
|
|
|
|
Change in Benefit Obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at August 4, 1999 |
|
$ |
74.8 |
|
|
$ |
30.2 |
|
|
$ |
105.0 |
|
|
|
|
|
|
|
Service cost |
|
|
2.5 |
|
|
|
1.1 |
|
|
|
3.6 |
|
|
|
|
|
|
|
Interest cost |
|
|
2.4 |
|
|
|
.8 |
|
|
|
3.2 |
|
|
|
|
|
|
|
Plan curtailment |
|
|
(12.6 |
) |
|
|
— |
|
|
|
(12.6 |
) |
|
|
|
|
|
|
Actuarial gain (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
Benefits paid |
|
|
— |
|
|
|
(.1 |
) |
|
|
(.1 |
) |
|
|
|
|
|
|
Translation gain |
|
|
— |
|
|
|
2.3 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31, 1999 |
|
$ |
67.1 |
|
|
$ |
34.3 |
|
|
$ |
101.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
Foreign |
|
|
|
|
Pension |
|
Pension |
|
|
|
|
Plan |
|
Plans |
|
Total |
|
|
|
|
|
|
|
|
Change in Plan Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at August 4, 1999. |
|
$ |
60.5 |
|
|
$ |
13.4 |
|
|
$ |
73.9 |
|
|
|
|
|
|
|
Actual return on plan assets |
|
|
1.3 |
|
|
|
.3 |
|
|
|
1.6 |
|
|
|
|
|
|
|
Employer contributions |
|
|
— |
|
|
|
3.4 |
|
|
|
3.4 |
|
|
|
|
|
|
|
Benefits paid |
|
|
— |
|
|
|
(.1 |
) |
|
|
(.1 |
) |
|
|
|
|
|
|
Translation gain |
|
|
— |
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at December 31, 1999. |
|
$ |
61.8 |
|
|
$ |
18.3 |
|
|
$ |
80.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 1999: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefit obligation |
|
$ |
(67.1 |
) |
|
$ |
(34.3 |
) |
|
$ |
(101.4 |
) |
|
|
|
|
|
|
Fair value of plan assets |
|
|
61.8 |
|
|
|
18.4 |
|
|
|
80.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
|
(5.3 |
) |
|
|
(15.9 |
) |
|
|
(21.2 |
) |
|
|
|
|
|
|
Unrecognized net actuarial loss |
|
|
— |
|
|
|
.3 |
|
|
|
.3 |
|
|
|
|
|
|
|
Unrecognized prior service cost |
|
|
2.8 |
|
|
|
6.1 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost |
|
$ |
(2.5 |
) |
|
$ |
(9.5 |
) |
|
$ |
(12.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions as of December 31, 1999: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.80 |
% |
|
|
6.22 |
% |
|
|
|
|
|
|
|
|
|
|
Expected return on assets |
|
|
8.50 |
% |
|
|
5.15 |
% |
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase |
|
|
5.00 |
% |
|
|
7.91 |
% |
|
|
|
|
|
|
|
|
|
|
Components of net periodic pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
2.5 |
|
|
$ |
1.0 |
|
|
$ |
3.5 |
|
|
|
|
|
|
|
Interest cost |
|
|
2.4 |
|
|
|
.8 |
|
|
|
3.2 |
|
|
|
|
|
|
|
Expected return on assets |
|
|
(2.4 |
) |
|
|
(.5 |
) |
|
|
(2.9 |
) |
|
|
|
|
|
|
Amortization of prior service cost |
|
|
.5 |
|
|
|
.2 |
|
|
|
.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
|
3.0 |
|
|
|
1.5 |
|
|
|
4.5 |
|
|
|
|
|
|
|
Curtailment gain |
|
|
(.5 |
) |
|
|
— |
|
|
|
(.5 |
) |
|
|
|
|
|
|
Translation gain |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
2.5 |
|
|
$ |
1.5 |
|
|
$ |
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In November 1999, the Company’s U.S. pension 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. Benefit
accruals under the plan for all other employees will be
discontinued effective December 31, 2000. Employees will be
entitled to redirect their vested account balances into the
Company’s defined contribution plan described below or an
annuity contract or to receive a lump-sum distribution.
This plan curtailment resulted in a reduction in the plan’s
benefit obligation of $12.6 million. After recognition of the
related unrecognized prior service cost and other charges, the
Company recognized a net curtailment gain of $.5 million during
the period from August 4, 1999 through December 31,
1999.
F-21
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Defined Contribution Plans
The Company has a deferred compensation 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. For
the period from August 4, 1999 through December 31,
1999, there were no Company matching contributions to the plan,
however, U.S. employees were eligible for a profit sharing
contribution. Effective January 1, 2000, the Company will
match 100% of the first 4% of the employee contribution, and 50%
of the next 4% of the employee contribution, as defined in the
plan. Participants are at all times fully vested in their
contributions and the Company’s contributions. The Company
recognized $1.3 million expense for the profit sharing
feature of the plan for the period from August 4, 1999
through December 31, 1999.
Certain foreign subsidiaries have defined contribution plans in
which eligible employees participate. The Company recognized
compensation expense of $.4 million relating to these plans
during the period from August 4, 1999 through
December 31, 1999.
Note 14: Supplemental Disclosure of Cash Flow
Information
The Company’s non-cash financing activities and cash
payments for interest and income taxes were as follows for the
period from August 4, 1999 through December 31, 1999
(in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to Motorola |
|
$ |
17.5 |
|
|
|
|
|
|
|
Issuance of redeemable preferred stock to Motorola |
|
|
59.0 |
|
|
|
|
|
|
|
Issuance of junior subordinated note to Motorola |
|
|
91.0 |
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
20.7 |
|
|
|
|
|
|
|
Income taxes |
|
|
5.9 |
|
Note 15: Related Party Transactions
In connection with the Recapitalization, the Company paid Texas
Pacific Group a financial advisory fee in the amount of $25.0
million. The Company has also agreed to pay Texas Pacific Group
an annual management fee of up to $2.0 million. Management fees
payable to Texas Pacific Group for the period from August 4,
1999 through December 31, 1999 totaled $.8 million and are
included in general and administrative expense.
In connection with the Recapitalization, Motorola has assigned,
licensed and sublicensed to the Company intellectual property in
connection with the products the Company plans to offer
(including a limited use of the Motorola trade name for one year
and a transition statement, “formerly a division of
Motorola,” for an additional year thereafter). In addition,
Motorola has agreed to continue providing information technology,
human resources, supply management, logistics and finance
services for agreed upon periods of time while the Company
determines the most cost-effective means to obtain such services.
Motorola has also agreed to continue providing manufacturing and
assembly services, to continue using similar services the
Company provides to them, to continue selling to the Company
depreciated equipment to support the Company’s capacity
expansion 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. Each party has committed to minimum purchases under
these agreements. Subject to the Company’s right to cancel
upon six months’ written notice, the Company has minimum
commitments to purchase manufacturing services from Motorola of
approximately $88 million, $51 million, $41 million and $40
million in fiscal years 2000, 2001, 2002 and 2003, respectively.
Subject to its right to cancel upon six months’ written
notice, Motorola has minimum commitments to purchase
manufacturing
F-22
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
services from the Company of approximately $47 million in fiscal
year 2000 and has no purchase obligations thereafter.
Related party activity between the Company and Motorola the
period from August 4, 1999 through December 31, 1999
follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
Purchases of manufacturing services from Motorola |
|
$ |
101.3 |
|
|
|
|
|
|
|
Cost of other services, rent and equipment purchased from
Motorola |
|
|
21.2 |
|
Note 16: Segment Information
The Company operates in one industry segment and is engaged in
the design, development, manufacture and marketing of a wide
variety of semiconductor components for the semiconductor
industry and original equipment manufacturers. 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.
Property, plant and equipment by geographic location as of
December 31, 1999 is summarized as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
The Americas (primarily the U.S. and Mexico) |
|
$ |
221.4 |
|
|
|
|
|
|
|
Asia/ Pacific |
|
|
159.7 |
|
|
|
|
|
|
|
Europe |
|
|
89.0 |
|
|
|
|
|
|
|
Japan |
|
|
99.6 |
|
|
|
|
|
|
|
|
$ |
569.7 |
|
|
|
|
|
|
Total revenues to unaffiliated customers by geographic location,
including local sales and exports made by operations within each
area, for the period from August 4, 1999 through
December 31, 1999 are summarized as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
The Americas (primarily the U.S. and Mexico) |
|
$ |
375.4 |
|
|
|
|
|
|
|
Asia/ Pacific |
|
|
183.6 |
|
|
|
|
|
|
|
Europe |
|
|
144.9 |
|
|
|
|
|
|
|
Japan |
|
|
94.8 |
|
|
|
|
|
|
|
|
$ |
798.7 |
|
|
|
|
|
|
During the period from August 4, 1999 through
December 31, 1999, sales to Motorola and another customer
accounted for approximately 16% and 10%, respectively of the
Company’s total revenue.
Note 17: Subsequent Events (Unaudited)
On April 3, 2000, the Company acquired all of the
outstanding capital stock of Cherry Semiconductor Corporation for
approximately $250 million. The acquisition was financed with
cash on hand and borrowings of $220 million under the
Company’s senior credit facilities.
On April 6, 2000, the Company entered into a license
agreement with International Rectifier in connection with the
settlement of the pending litigation described in Note 12.
On April 21, 2000, the Board of Directors approved an
increase in the number of shares of common stock available under
the 2000 Stock Incentive Plan described in Note 9 from
3 million shares to 10 million shares.
F-23
INDEPENDENT AUDITORS’ REPORT
The Board of Directors
Motorola, Inc.:
We have audited the accompanying combined balance sheet of the
Semiconductor Components Group of Motorola, Inc. (“the
Company” or “the Business”) as of
December 31, 1998 and the accompanying combined statements
of revenues less direct and allocated expenses before taxes for
the period from January 1, 1999 through August 3, 1999
and each of the years in the two-year period ended
December 31, 1998. These combined statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these combined
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the statements. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying combined statements were prepared to comply with
the rules and regulations of the Securities and Exchange
Commission and on the basis of presentation as described in
Note 1. The accompanying combined statements present the
combined assets, liabilities and business equity and the related
combined revenues less direct and allocated expenses before taxes
of the Business, and are not intended to be a complete
presentation of the Business’ financial position, results of
operations or cash flows. The results of operations before taxes
are not necessarily indicative of the results of operations
before taxes that would be recorded by the Company on a
stand-alone basis.
In our opinion, the accompanying combined statements present
fairly, in all material respects, the combined assets,
liabilities and business equity of the Business as of
December 1998 and its combined revenues less direct and
allocated expenses before taxes for the period from
January 1, 1999 through August 3, 1999 and each of the
years in the two-year period ended December 31, 1998, on the
basis described in Note 1, in conformity with generally
accepted accounting principles.
|
|
| |
KPMG LLP |
Phoenix, Arizona
January 7, 2000
F-24
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
COMBINED BALANCE SHEET
| |
|
|
|
|
|
|
|
|
December 31, |
|
|
1998 |
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
209.5 |
|
|
|
|
|
|
|
Other |
|
|
23.0 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
232.5 |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
568.9 |
|
|
|
|
|
|
|
Other assets |
|
|
39.3 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
840.7 |
|
|
|
|
|
|
|
Liabilities and Business Equity |
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
12.5 |
|
|
|
|
|
|
|
Accrued expenses |
|
|
98.9 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
111.4 |
|
|
|
|
|
|
|
Non-current liabilities |
|
|
48.3 |
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
Business equity |
|
|
681.0 |
|
|
|
|
|
|
|
|
Total liabilities and business equity |
|
$ |
840.7 |
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-25
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
COMBINED STATEMENTS OF REVENUES LESS DIRECT AND
ALLOCATED EXPENSES BEFORE TAXES
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
Period from |
|
|
December 31, |
|
January 1, 1999 |
|
|
|
|
through |
|
|
1997 |
|
1998 |
|
August 3, 1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales — trade |
|
$ |
1,815.3 |
|
|
$ |
1,495.3 |
|
|
$ |
895.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct and allocated costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
1,112.3 |
|
|
|
1,060.0 |
|
|
|
620.3 |
|
|
|
|
|
|
|
Research and development |
|
|
65.7 |
|
|
|
67.5 |
|
|
|
34.3 |
|
|
|
|
|
|
|
Selling and marketing |
|
|
110.7 |
|
|
|
92.4 |
|
|
|
39.0 |
|
|
|
|
|
|
|
General and administrative |
|
|
243.1 |
|
|
|
205.7 |
|
|
|
89.4 |
|
|
|
|
|
|
|
Restructuring and other charges |
|
|
— |
|
|
|
189.8 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
1,531.8 |
|
|
|
1,615.4 |
|
|
|
783.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283.5 |
|
|
|
(120.1 |
) |
|
|
112.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings from joint ventures |
|
|
(.3 |
) |
|
|
5.7 |
|
|
|
2.4 |
|
|
|
|
|
|
|
Interest expense |
|
|
(11.7 |
) |
|
|
(19.8 |
) |
|
|
(9.1 |
) |
|
|
|
|
|
|
Minority interest in earnings of consolidated entities |
|
|
(1.5 |
) |
|
|
(2.1 |
) |
|
|
(.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net |
|
|
(13.5 |
) |
|
|
(16.2 |
) |
|
|
(7.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues less direct and allocated expenses before taxes |
|
$ |
270.0 |
|
|
$ |
(136.3 |
) |
|
$ |
104.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-26
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) Basis of Presentation
The Semiconductor Components Group (“SCG” or “the
Business”) is defined as the discrete and integrated
circuits standard products of the Semiconductor Products Sector
(“SPS”) of Motorola, Inc. (“Motorola”),
including Power BiPolar, Rectifiers, Thyristors, Zeners, TMOS,
Analog, ECL, Small Signal and Logic Products. Manufacturing
operations for the Business are primarily conducted in plants in
Guadalajara, Mexico, Carmona, Philippines, Seremban, Malaysia (2
Plants), Phoenix, Arizona, United States and Aizu, Japan
(collectively referred to as “SCG plants”). Certain
manufacturing operations related to SCG products are also
performed at other SPS plants. Similarly, certain SCG plants
perform manufacturing operations related to other SPS product
lines. SCG also has investments in various joint ventures which
are accounted for on the equity method.
The accompanying combined balance sheet does not include
Motorola’s or SPS’s sector assets or liabilities not
specifically identifiable to SCG. Motorola performs cash
management on a centralized basis and SPS processes receivables
and certain payables, payroll and other activity for SCG. Most of
these systems are not designed to track receivables, liabilities
and cash receipts and payments on a business specific basis.
Accordingly, it is not practical to determine certain assets and
liabilities associated with the business; therefore, such assets
and liabilities cannot be included in the accompanying combined
balance sheets. Given these constraints, certain supplemental
cash flow information is presented in lieu of a statement of cash
flows. (See Note 8.) Assets and liabilities not specifically
identifiable to the Business include:
|
|
| |
(A) Cash, cash equivalents and investments. Activity in SCG
cash balances is recorded through the business equity account. |
| |
| |
(B) Trade accounts receivable and related allowances for
bad debts and product returns. Trade receivable balances are
maintained by customer, not by the Business. Estimated allowances
for product returns are reflected in SCG net sales. Accounts
receivable related to SCG are allocated through the business
equity account. |
| |
| |
(C) Accounts payable related to trade purchases that are
made centrally by SPS in the United States. Such purchases
related to SCG are allocated to SCG through the business equity
account. |
| |
| |
(D) Certain accrued liabilities for allocated corporate
costs and environmental and pension costs which are allocated to
SCG through the business equity account. |
The combined statements of revenues less direct and allocated
expenses before taxes include all revenues and costs attributable
to the Business including an allocation of the costs of shared
facilities and overhead of Motorola and SPS. In addition, certain
costs incurred at SCG plants for the benefit of other SPS
product lines are allocated from SCG to the other SPS divisions.
All of the allocations and estimates in the combined statements
of revenues less direct and allocated expenses before taxes are
based on assumptions that management believes are reasonable
under the circumstances. However, these allocations and estimates
are not necessarily indicative of the costs that would have
resulted if the Business had been operated on a stand-alone
basis.
Transactions between the Business and other Motorola and SPS
operations have been identified in the combined statements as
transactions between related parties to the extent practicable
(See Note 2).
(2) Summary of Significant Accounting Policies
(a) Basis of Combination
All significant intercompany balances and transactions within the
Business have been eliminated.
F-27
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
(b) Revenue Recognition
Revenues from the sale of SCG semiconductor products is generally
recognized when shipped, with a provision for estimated returns
and allowances recorded at the time of shipment.
(c) Related Party Transactions
SCG manufactures products for other sectors of Motorola. Sales of
these products are treated as external sales and are reflected
in the accompanying combined statements of revenues less direct
and allocated expenses before taxes with the related cost of
sales. These sales totaled $76.1 million for the period from
January 1, 1999 through August 3, 1999, $126.9 million
and $105.7 million for the years ended December 31, 1997 and
1998, respectively.
SCG also manufactures products, at cost, for other SPS divisions
and these other divisions also manufacture products for SCG. The
gross amounts charged to/from SCG for these products are
summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
Years Ended |
|
1999 |
|
|
December 31, |
|
through |
|
|
|
|
August 3, |
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Manufacturing services performed by other SPS divisions on
behalf of SCG |
|
$ |
310.5 |
|
|
$ |
266.8 |
|
|
$ |
125.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing services performed by SCG and transferred at actual
production costs to other SPS divisions |
|
$ |
177.4 |
|
|
$ |
162.3 |
|
|
$ |
91.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A portion of manufacturing costs transferred from other SPS
divisions to SCG are capitalized into inventory at worldwide
standard cost and are recorded as cost of sales as related
product sales are recognized. Variations between worldwide
standard cost and the actual costs transferred from other SPS
divisions are considered period costs and are immediately charged
to operations.
Where it is possible to specifically identify other operating
costs with the activities of SCG or other SPS product lines,
these amounts have been charged or credited directly to SCG or
SPS product lines without allocation or apportionment. Although a
number of different approaches are used to allocate shared or
common costs, there is usually a predominant basis for each
expense category. Accordingly, research and development costs
have been allocated from SPS based predominately on dedicated
spending. Research and development from Motorola is first
allocated to SPS and then allocated 20% to SCG as SCG is one of
five divisions within SPS. Selling and marketing expenses from
SPS have been allocated 20% to SCG and general and administrative
expenses from Motorola and SPS have been allocated 20% to SCG.
Prior to changing to this allocation structure in July, 1997,
allocations to SCG for research and development, selling and
marketing, and general and administrative expenses were based on
budgeted sales volume. This change had an insignificant impact on
the amount of the allocated costs.
F-28
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
Total amounts allocated to SCG for research and development,
selling and marketing, and general and administrative expenses
were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
Years Ended |
|
1999 |
|
|
December 31, |
|
through |
|
|
|
|
August 3, |
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Research and development |
|
$ |
34.6 |
|
|
$ |
33.1 |
|
|
$ |
13.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
$ |
4.3 |
|
|
$ |
3.7 |
|
|
$ |
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
$ |
117.0 |
|
|
$ |
115.2 |
|
|
$ |
50.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These cost allocations are included in the accompanying combined
statements of revenues less direct and allocated expenses before
taxes but are not necessarily indicative of the costs that would
be incurred by the Business on a stand-alone basis.
(d) Inventories
Inventories are stated at the lower of worldwide standard cost,
which approximates actual cost on a first-in, first-out basis, or
market. The main components of inventories are as follows:
| |
|
|
|
|
|
|
|
December 31, |
|
|
1998 |
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Raw materials |
|
$ |
20.0 |
|
|
|
|
|
|
|
Work in process |
|
|
110.9 |
|
|
|
|
|
|
|
Finished goods |
|
|
78.6 |
|
|
|
|
|
|
|
Total Inventories |
|
$ |
209.5 |
|
|
|
|
|
|
(e) Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Many of these
assets are directly related to SCG and are included without
apportionment. SCG also shares certain property, plant, and
equipment with other SPS product lines. These shared assets have
been allocated to SCG based on sales volume for buildings, land,
and other general assets and units of production for machinery
and equipment.
Depreciation is computed over the following estimated useful
lives predominately on the straightline method:
| |
|
|
|
|
|
|
|
|
|
|
Buildings |
|
|
30-40 years |
|
|
|
|
|
|
|
Machinery and equipment |
|
|
3-8 years |
|
SCG has adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, which requires
recognition of impairment of long-lived assets whenever events or
changes in circumstances indicate the carrying value of such
assets exceeds the future undiscounted cash flows attributable to
such assets. During 1998, SCG incurred restructuring and other
charges which included impairment writedowns of $53.9 million
related to machinery and equipment (see Note 9).
F-29
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
December 31, |
|
|
1998 |
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Land |
|
$ |
13.0 |
|
|
|
|
|
|
|
Buildings |
|
|
440.5 |
|
|
|
|
|
|
|
Machinery and equipment |
|
|
1,220.8 |
|
|
|
|
|
|
|
Total property, plant and equipment |
|
|
1,674.3 |
|
|
|
|
|
|
|
Less accumulated depreciation |
|
|
1,105.4 |
|
|
|
|
|
|
|
|
$ |
568.9 |
|
|
|
|
|
|
(f) Interest Expense
Motorola had net interest expense on a consolidated basis for all
periods presented. These amounts have been allocated to SPS and
in turn to SCG in the amount of approximately $7.5 million for
the period from January 1, 1999 through August 3, 1999
and $11.0 million and $18.0 million for the years ended
December 31, 1997 and 1998, respectively, primarily on the
basis of net assets. SCG management believes this allocation is
reasonable, but it is not necessarily indicative of the cost that
would have been incurred if the Business had been operated on a
stand-alone basis.
(g) Currencies and Foreign Currency
Instruments
SCG’s functional currency for all foreign operations is the
U.S. dollar, except for Japan and Europe which is the local
currency. Accordingly, the net effect of gains and losses from
translation of foreign currency financial statements into U.S.
dollars is included in current operations. The net translation
gains and losses for Japan and Europe are not significant and are
included as a component of business equity. Gains and losses
resulting from foreign currency transactions are included in
current operations and were not significant for 1997, 1998 or the
period from January 1, 1999 through August 3, 1999.
(h) Use of Estimates in Preparation of
Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(3) Accrued Expenses
The components of accrued expenses are as follows:
| |
|
|
|
|
|
|
|
December 31, |
|
|
1998 |
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Payroll and employee related accruals |
|
$ |
7.7 |
|
|
|
|
|
|
|
Restructuring charges |
|
|
68.0 |
|
|
|
|
|
|
|
Other accruals |
|
|
23.2 |
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
98.9 |
|
|
|
|
|
|
F-30
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
(4) Employee Benefit Plans
Employees of SCG participate in several Motorola retirement,
employee benefit, and incentive plans. These include (1) a
profit sharing plan, (2) a stock bonus plan, (3) a
salary deferral 401(k) plan and (4) pension and healthcare
benefit plans. Motorola also has a stock option plan under which
key employees of SCG may be granted nonqualified or incentive
stock options to purchase shares of Motorola common stock.
Certain key employees and certain management of SCG also
participate in various incentive arrangements based on individual
performance and Motorola/ SPS/SCG profitability. The costs of
these programs were allocated from Motorola to SPS and then to
SCG on the basis of payroll costs and headcount and are not
necessarily indicative of the costs that would be incurred on a
stand-alone basis.
SCG employees in foreign countries participate in a retirement
plan within the country. In each case, the plan meets local and
legal requirements of that particular country and is based on
defined years of service. Each country’s plan is unfunded
and is accrued for in the accompanying combined balance sheets
based on actuarially determined amounts.
(5) Contingencies
Motorola is currently a defendant in certain legal actions
relating to SCG. In the opinion of management, the outcome of
such litigation will not have a material adverse effect on the
business equity, operations or liquidity of SCG.
Motorola is also involved in certain administrative and judicial
proceedings related to certain environmental matters at SCG
locations. Based on information currently available, management
believes that the costs of these matters are not likely to have a
material adverse effect on business equity, operations or
liquidity of SCG.
(6) Business Equity
Business equity represents Motorola’s ownership interest in
the recorded net assets of SCG. All cash transactions, accounts
receivable, accounts payable in the United States, other
allocations and intercompany transactions are reflected in this
amount. A summary of activity is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
Years Ended |
|
1999 |
|
|
December 31, |
|
through |
|
|
|
|
August 3, |
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
746.1 |
|
|
$ |
866.4 |
|
|
$ |
681.0 |
|
|
|
|
|
|
|
Revenues less direct and allocated expenses before taxes |
|
|
270.0 |
|
|
|
(136.3 |
) |
|
|
104.8 |
|
|
|
|
|
|
|
Net intercompany activity |
|
|
(149.7 |
) |
|
|
(49.1 |
) |
|
|
(83.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
866.4 |
|
|
$ |
681.0 |
|
|
$ |
701.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7) Industry and Geographic Information
The Business operates in one industry segment and is engaged in
the design, development, manufacture and marketing of a wide
variety of semiconductor products for the semiconductor industry
and original equipment manufacturers. SCG operates in various
geographic locations. In the information that follows, sales
include local sales and exports made by operations within each
area. To control costs, a substantial portion of SCG’s
products are transported between various SCG and SPS facilities
in the process of being manufactured
F-31
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
and sold. Accordingly, it is not meaningful to present
interlocation transfers between SCG facilities on a stand alone
basis. Sales to unaffiliated customers have little correlation
with the location of manufacture. It is, therefore, not
meaningful to present operating profit by geographical location.
SCG 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.
Property, plant and equipment by geographic location is
summarized as follows:
| |
|
|
|
|
|
|
|
December 31, |
|
|
1998 |
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
United States |
|
$ |
210.4 |
|
|
|
|
|
|
|
Malaysia |
|
|
102.7 |
|
|
|
|
|
|
|
Czech Republic |
|
|
48.1 |
|
|
|
|
|
|
|
Philippines |
|
|
40.1 |
|
|
|
|
|
|
|
Japan |
|
|
31.3 |
|
|
|
|
|
|
|
Mexico |
|
|
30.3 |
|
|
|
|
|
|
|
Other foreign countries |
|
|
106.0 |
|
|
|
|
|
|
|
Total |
|
$ |
568.9 |
|
|
|
|
|
|
Sales to unaffiliated customers by geographic location is
summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
Years Ended |
|
1999 |
|
|
December 31, |
|
through |
|
|
|
|
August 3, |
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
United States |
|
$ |
804.4 |
|
|
$ |
636.4 |
|
|
$ |
374.0 |
|
|
|
|
|
|
|
Germany |
|
|
107.7 |
|
|
|
108.0 |
|
|
|
61.2 |
|
|
|
|
|
|
|
Hong Kong |
|
|
117.1 |
|
|
|
107.4 |
|
|
|
78.0 |
|
|
|
|
|
|
|
Japan |
|
|
188.7 |
|
|
|
127.4 |
|
|
|
76.7 |
|
|
|
|
|
|
|
Singapore |
|
|
137.6 |
|
|
|
98.2 |
|
|
|
75.1 |
|
|
|
|
|
|
|
Taiwan |
|
|
81.9 |
|
|
|
71.0 |
|
|
|
33.9 |
|
|
|
|
|
|
|
Other foreign countries |
|
|
377.9 |
|
|
|
346.9 |
|
|
|
196.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,815.3 |
|
|
$ |
1,495.3 |
|
|
$ |
895.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 2, sales to other sectors of Motorola
are treated as sales to unaffiliated customers.
F-32
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
(8) Supplemental Cash Flow Information
As described in Note 1, Motorola’s cash management
system is not designed to track centralized cash and related
financing transactions to the specific cash requirements of the
Business. In addition, SPS’s transaction systems are not
designed to track receivables and certain liabilities and cash
receipts and payments on a business specific basis. Given these
constraints, the following data are presented to facilitate
analysis of key components of cash flow activity:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
Years Ended |
|
1999 |
|
|
December 31, |
|
through |
|
|
|
|
August 3, |
|
|
1997 |
|
1998 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues less direct and allocated expenses before taxes |
|
$ |
270.0 |
|
|
$ |
(136.3 |
) |
|
$ |
104.8 |
|
|
|
|
|
|
|
Depreciation |
|
|
134.7 |
|
|
|
133.9 |
|
|
|
77.4 |
|
|
|
|
|
|
|
Impairment write down on property, plant and equipment |
|
|
— |
|
|
|
53.9 |
|
|
|
— |
|
|
|
|
|
|
|
(Increase) decrease in inventories |
|
|
(95.6 |
) |
|
|
30.4 |
|
|
|
(27.5 |
) |
|
|
|
|
|
|
Decrease in other current assets |
|
|
(3.7 |
) |
|
|
(4.4 |
) |
|
|
2.2 |
|
|
|
|
|
|
|
Increase in other assets |
|
|
(19.9 |
) |
|
|
.7 |
|
|
|
(12.2 |
) |
|
|
|
|
|
|
Increase (decrease) in accounts payable and accrued expenses |
|
|
12.5 |
|
|
|
84.4 |
|
|
|
(23.6 |
) |
|
|
|
|
|
|
Increase (decrease) in non-current liabilities |
|
|
33.6 |
|
|
|
6.4 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities, excluding Motorola financing
and taxes |
|
|
331.6 |
|
|
|
169.0 |
|
|
|
123.5 |
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net of transfers |
|
|
(181.9 |
) |
|
|
(119.9 |
) |
|
|
(39.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net financing provided to Motorola* |
|
$ |
149.7 |
|
|
$ |
49.1 |
|
|
$ |
83.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
The difference between cash flow from operating
activities and investing activities does not necessarily
represent the cash flows of the Business, or the timing of such
cash flows, had it operated on a stand-alone basis. |
(9) Restructuring and Other Charges
In June 1998, Motorola recorded a charge to cover
restructuring costs related to the consolidation of manufacturing
operations, the exit of non-strategic or poorly performing
businesses and a reduction in worldwide employment by 20,000
employees. Asset impairment and other charges were also recorded
for the writedown of assets which had become impaired as a result
of current business conditions or business portfolio decisions.
Motorola recorded its charge in the following restructuring
categories:
Consolidation of Manufacturing Operations
Consolidation of manufacturing operations relates to the closing
of production and distribution facilities and selling or
disposing of the machinery and equipment that was no longer
needed and, in some cases, scrapping excess assets that had no
net realizable value. The buildings associated with these
production facilities, in many cases were sold to outside
parties. Also included in this restructuring category were costs
related to shutting down or reducing the capacity of certain
production lines. In most cases, older facilities with older
technologies or non-strategic products were closed. Machinery and
equipment write downs related to equipment that would no longer
be utilized comprised the majority of these costs. These assets
have been
F-33
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
deemed to be held for use until such time as they are removed
from service and, therefore, no longer utilized in manufacturing
products. An assessment was made as to whether or not there was
an asset impairment related to the valuation of these assets in
determining what the amount of the write down included in the
restructuring charge should be for this machinery and equipment.
This assessment utilized the anticipated future undiscounted cash
flows generated by the equipment as well as its ultimate value
upon disposition.
The charges in this restructuring category do not include any
costs related to the abandonment or sub-lease of facilities,
moving expenses, inventory disposals or write downs, or
litigation or environmental obligations.
As part of the consolidation of manufacturing operations, certain
SPS facilities in North Carolina, California, Arizona and the
Philippines are being closed as planned. SPS is consolidating its
production facilities into fewer integrated factories to achieve
economies of scale and improved efficiencies and to capitalize
on new technologies that should reduce operating costs.
Business Exits
Business exit costs include costs associated with shutting down
businesses that did not fit with Motorola’s new strategy. In
many cases, these businesses used older technologies that
produced non-strategic products. The long-term growth and margins
associated with these businesses were not in line with
Motorola’s expectations given the level of investment and
returns. Included in these business exit costs were the costs of
terminating technology agreements and selling or liquidating
interests in joint ventures that did not fit with the new
strategy of Motorola. Similar to consolidation of manufacturing
operations, the charges in this restructuring category did not
include any costs related to the abandonment or sublease of
facilities, moving expenses, inventory disposals or write downs,
or litigation or environmental obligations.
Employee Separations
Employee separation costs represent the costs of involuntary
severance benefits for the 20,000 positions identified as subject
to severance under the restructuring plan and special voluntary
termination benefits offered beginning in the third quarter of
1998. The special voluntary termination benefits provided for one
week of pay for each year of service between years 1-10,
two weeks of pay for each year of service between
years 11-19, and three weeks of pay for each year of service
for year 20 and greater. The majority of employees who
accepted special voluntary termination benefits did so by the end
of the year, although severance payments were not completed by
that time. The majority of the special voluntary termination
benefits expired at the end of the fourth quarter of 1998.
As of December 31, 1998, approximately 13,800 employees have
separated from Motorola through a combination of voluntary and
involuntary severance programs. Of the 13,800 separated
employees, approximately 8,200 were direct employees and 5,600
were indirect employees. Direct employees are primarily
non-supervisory production employees, and indirect employees are
primarily non-production employees and production managers.
Asset Impairments and Other Charges
As a result of current and projected business conditions,
Motorola wrote down operating assets that became impaired. The
majority of the assets written down were used manufacturing
equipment and machinery.
The amount of impairment charge for the assets written down was
based upon an estimate of the future cash flows expected from the
use of the assets, as well as upon their eventual disposition.
These undiscounted cash flows were then compared to the net book
value of the equipment, and impairment was determined based
F-34
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
on that comparison. Cash flows were determined at the facility
level for certain production facilities based upon anticipated
sales value of the products to be produced and the costs of
producing the products at those facilities. In cases in which
sufficient cash flows were not going to be generated by the
equipment at those facilities, the assets were written down to
their estimated fair value. These estimated fair values were
based upon what the assets could be sold for in a transaction
with an unrelated third party. Since the majority of these assets
were machinery and equipment, Motorola was able to utilize
current market prices for comparable equipment in the marketplace
in assessing what would be the fair value upon sale of the
equipment.
Building writedowns were based on marketability factors of the
building in the particular location.
Assets held for use continue to be depreciated based on an
evaluation of their remaining useful lives and their ultimate
values upon disposition. There were no assets held for sale at
December 31, 1998 nor were any impaired assets disposed of
prior to that date.
SCG’s Restructuring Charge
SCG’s charges related to these actions were $189.8 million
of which $53.9 million represented asset impairments charged
directly against machinery and equipment. SCG’s employment
reductions will total approximately 3,900 of which approximately
3,000 (1,800 direct employees and 1,200 indirect employees) had
separated from SCG as of August 3, 1999.
At December 31, 1998, $68.0 million of restructuring
accruals remain outstanding. The following table displays a
rollforward to December 31, 1998 of the accruals established
during the second quarter of 1998:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals at |
|
|
Initial |
|
Amounts |
|
December 31, |
|
|
Charges |
|
Used |
|
1998 |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Consolidation of manufacturing operations |
|
$ |
13.2 |
|
|
$ |
— |
|
|
$ |
13.2 |
|
|
|
|
|
|
|
Business exits |
|
|
20.7 |
|
|
|
9.4 |
|
|
|
11.3 |
|
|
|
|
|
|
|
Employee separations |
|
|
102.0 |
|
|
|
58.5 |
|
|
|
43.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring |
|
|
135.9 |
|
|
|
67.9 |
|
|
|
68.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairments and other charges |
|
|
53.9 |
|
|
|
53.9 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
189.8 |
|
|
$ |
121.8 |
|
|
$ |
68.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCG’s remaining accrual at December 31, 1998 of $13.2
million for the consolidation of manufacturing operations
represents the finalization of the plant closings in Arizona and
the Philippines. Within the business exits category, the
remaining accrual of $11.3 million at December 31, 1998
relates to costs of exiting two unprofitable product lines.
SCG’s remaining accrual of $43.5 million at
December 31, 1998 for employee separations relates to the
completion of severance payments in Japan, Asia, the U.K. and
Arizona.
SCG’s total amount used of $121.8 million through
December 31, 1998 reflects approximately $63.6 million in
cash payments and $58.2 million in write-offs. The remaining
$68.0 million accrual balance at December 31, 1998 is
expected to be liquidated via cash payments.
F-35
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
At August 3, 1999, $43.1 million of restructuring accruals
remain outstanding. The following table displays a rollforward
from December 31, 1998 to August 3, 1999, of the
accruals established during the second quarter of 1998:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals at |
|
1999 |
|
Accruals at |
|
|
December 31, |
|
Amounts |
|
August 3, |
|
|
1998 |
|
Used |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Consolidation of manufacturing operations |
|
$ |
13.2 |
|
|
$ |
3.8 |
|
|
$ |
9.4 |
|
|
|
|
|
|
|
Business exits |
|
|
11.3 |
|
|
|
6.4 |
|
|
|
4.9 |
|
|
|
|
|
|
|
Employee separations |
|
|
43.5 |
|
|
|
14.7 |
|
|
|
28.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring |
|
|
68.0 |
|
|
|
24.9 |
|
|
|
43.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairments and other charges |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
68.0 |
|
|
$ |
24.9 |
|
|
$ |
43.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCG’s remaining accrual at August 3, 1999 of $9.4
million for the consolidation of manufacturing operations
represents the finalization of the plant closings in Arizona and
the Philippines. Within the business exits category, the
remaining accrual of $4.9 million at August 3, 1999 relates
to costs of exiting two unprofitable product lines. SCG’s
remaining accrual of $28.8 million at August 3, 1999 for
employee separations relates to the completion of severance
payments in Japan, Asia, the U.K. and Arizona. Motorola retained
the employee separation accrual of $28.8 million as of
August 3, 1999, to cover approximately 900 employees who
will remain employees of, and be released by Motorola.
SCG’s total 1999 amount used of $24.9 million through
August 3, 1999 reflects cash payments. The remaining $43.1
million accrual balance at August 3, 1999 is expected to be
liquidated via cash payments.
(10) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107,
“Disclosure about Fair Value of Financial Instruments,”
requires that the Business disclose estimated fair values for
its financial instruments. The carrying amount of accounts
payable and accrued liabilities is assumed to be the fair value
because of the short-term maturity of these instruments.
(11) Investments in Unconsolidated Joint Ventures
SCG participates in joint ventures in China and Malaysia. The
joint ventures have been accounted for using the equity method.
The investment in each joint venture approximates the underlying
equity interest of such joint venture. Investments in these joint
ventures totaled $30.3 million at December 31, 1998 and are
included in other assets in the accompanying combined balance
sheet. Earnings from these joint ventures totaled $2.4 million
for the period from January 1, 1999 through August 3,
1999 and $(.3) million and $5.7 million for the years ended
December 31, 1997, and 1998, respectively.
F-36
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leshan- |
|
Semiconductor |
|
|
|
|
Phoenix |
|
Miniature |
|
|
|
|
Semiconductor |
|
Products |
|
|
| Joint Venture |
|
Ltd. |
|
Malaysia |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Country Location |
|
|
China |
|
|
|
Malaysia |
|
|
|
|
|
|
|
|
|
|
|
SCG Ownership %(Direct) |
|
|
55% |
|
|
|
50% |
|
|
|
|
|
|
|
|
|
|
|
For the period from January 1, 1999 through August
3, 1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
15.0 |
|
|
$ |
40.7 |
|
|
$ |
55.7 |
|
|
|
|
|
|
|
Gross profit |
|
$ |
5.7 |
|
|
$ |
7.3 |
|
|
$ |
13.0 |
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
4.4 |
|
|
$ |
1.4 |
|
|
$ |
5.8 |
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4.4 |
|
|
$ |
1.4 |
|
|
$ |
5.8 |
|
|
|
|
|
|
|
As of and for the year ended December 31, 1998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
5.4 |
|
|
$ |
7.8 |
|
|
$ |
13.2 |
|
|
|
|
|
|
|
Noncurrent assets |
|
|
45.9 |
|
|
|
84.3 |
|
|
|
130.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
51.3 |
|
|
$ |
92.1 |
|
|
$ |
143.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
2.0 |
|
|
$ |
4.3 |
|
|
$ |
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities |
|
$ |
24.5 |
|
|
$ |
54.4 |
|
|
$ |
78.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Venture’s equity |
|
$ |
24.8 |
|
|
$ |
33.4 |
|
|
$ |
58.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
21.5 |
|
|
$ |
56.7 |
|
|
$ |
78.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
6.5 |
|
|
$ |
20.3 |
|
|
$ |
26.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
5.6 |
|
|
$ |
5.6 |
|
|
$ |
11.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
5.6 |
|
|
$ |
5.3 |
|
|
$ |
10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 1997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
18.5 |
|
|
$ |
57.7 |
|
|
$ |
76.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
4.6 |
|
|
$ |
8.9 |
|
|
$ |
13.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
.7 |
|
|
$ |
(1.7 |
) |
|
$ |
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
.7 |
|
|
$ |
(1.4 |
) |
|
$ |
(.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(12) Business Transaction
On May 11, 1999, affiliates of the Texas Pacific Group
entered into an agreement with Motorola, providing for a
recapitalization of the Business and certain related
transactions, after which affiliates of Texas Pacific Group will
own approximately 91% and Motorola will own approximately 9% of
the outstanding voting stock of the Business. In addition, as
part of these transactions, Texas Pacific Group will receive
1,500 shares and Motorola will receive 590 shares of mandatorily
redeemable preferred stock of SCG Holding (“SCG Holding
Preferred Stock”) and Motorola will receive $91 million of
junior subordinated notes of SCI LLC (the “Junior
Subordinated Notes”). Cash payments to Motorola will be
financed through equity investments by affiliates of Texas
Pacific Group, borrowings under senior secured bank loan
facilities and the issuance of senior subordinated notes due
2009.
In connection with the recapitalization and related transactions,
it is anticipated that certain wholly-owned domestic
subsidiaries will be established to serve as guarantors of the
senior subordinated notes due
F-37
SEMICONDUCTOR COMPONENTS GROUP OF
MOTOROLA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
2009. Each guarantor will jointly and severally, irrevocably and
unconditionally guarantee the obligations of the issuers under
the notes. The net assets to be contributed to these guarantor
subsidiaries are expected to consist of SCG’s equity
interests in its unconsolidated joint ventures in China, Malaysia
and Eastern Europe, nominal interests in certain foreign
subsidiaries and a nominal amount of cash. The joint ventures and
foreign subsidiaries themselves are not expected to be
guarantors of the notes. The net assets to be contributed to the
guarantor subsidiaries approximated $46.8 million at
December 31, 1998 and generated related earnings of $2.4
million for the period from January 1, 1999 through
August 3, 1999 and $(.3) million and $5.7 million for the
years ended December 31, 1997 and 1998, respectively.
F-38
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
SCG Holding Corporation
Our audit of the consolidated financial statements referred to in
our report dated February 17, 2000 appearing in this Annual
Report on Form 10-K of SCG Holding Corporation also included an
audit of the financial statement schedule listed in Item 14(a)(2)
of this Form 10-K. 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 17, 2000
F-39
SCG HOLDING CORPORATION AND SUBSIDIARIES
(D/B/A ON SEMICONDUCTOR)
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Charged to |
|
Charged to |
|
|
|
Balance at |
|
|
August 4, |
|
costs and |
|
other |
|
Deductions/ |
|
December 31, |
|
|
1999 |
|
expenses |
|
accounts |
|
writeoffs |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
— |
|
|
$ |
2.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2.0 |
|
F-40
EXHIBIT INDEX
(23.1) Consent of KPMG, LLP, independent accountants
(23.2) Consent of Pricewaterhouse Coopers, LLP, independent
accountants
(27.1) Financial Data Schedule
1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-34130) of SCG Holding Corporation of our report
dated January 31, 2000 relating to the combined balance sheet of the
Semiconductor Components Group of Motorola, Inc. as of December 31, 1998 and the
related combined statements of revenues less direct and allocated expenses
before taxes for each of the years in the two-year period ended December 31,
1998 and the period from January 1, 1999 through August 3, 1999, which appears
in this Form 10-K.
KPMG LLP
Phoenix, Arizona
April 27, 2000
1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-34130) of SCG Holding Corporation of our
reports dated February 17, 2000 relating to the consolidated financial
statements and financial statement schedule, which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
---------------------------
PricewaterhouseCoopers LLP
Phoenix, Arizona
April 27, 2000
5
0001097864
SCG HOLDING CORPORATION
1,000,000,000
YEAR 7-MOS 2-MOS
DEC-31-1998 DEC-31-1999 DEC-31-1999
JAN-01-1998 JAN-01-1999 AUG-04-1999
DEC-31-1998 AUG-03-1999 DEC-31-1999
0 0 127
0 0 0
0 0 252
0 0 2
210 0 206
233 0 637
1,674 0 1,557
1,105 0 988
841 0 1,617
111 0 327
0 0 1,295
0 0 220
0 0 0
0 0 1
681 0 (249)
841 0 1,617
1,495 895 799
1,495 895 799
1,060 620 573
1,615 783 695
16 8 55
0 0 0
20 9 56
(136) 105 48
0 0 18
(136) 105 30
0 0 0
0 0 0
0 0 0
(136) 105 30
0 0 0
0 0 0
